I recently attended an investment conference. These types of conference are typically structured with daily group sessions, interspersed with breakout sessions allowing attendees to explore ideas they find of particular interest.
I’m always amused at the general and often unintended themes of these types of big events. In 2007, everyone wanted to talk about real estate, in 2010, it was bonds and in 2012, it was social media. This year everyone wanted to talk about interest rates and stocks. It seemed all had concluded bonds could only go down (interest rates go up) and stocks could only go up from here, the trend was just so obvious.
That is until the last breakout, on the last day. You know the meeting having about a 20 percent attendance rate (yes I’m the geek that goes to the last meeting)? This particular speaker impressed me immediately. He had made his name trading bonds and futures on Wall Street; he was there to talk about analyzing macro market trends. He was clearly smart.
His opening premise, “I’ve been hanging out here for three days, everyone is absolutely sure interest rates are soon going up. Well any time 90 percent of the world takes something for granted, I’ve made a good living taking the other side of that trade”.
When I tell this story, people think I’m talking about being a contrarian. I’m not. I’m talking about being open-minded, I’m talking about reacting to the trend happening in front of you, instead of the trend you expected to happen in front of you.
I’ve learned it is seldom the risk you’re totally positioned for that ends up biting you; it’s usually the risk you didn’t see coming, the unknown unknowns if you will.
The world, me included, has been intently focused on the inflation in our future. Remember all that analysis about central banks printing money, and how these extreme policies were going to drive our dollar down and cause inflation? I do. I wrote some of it.
The trend was obvious, right? It was only a matter of time. Well this may be true, it may not, but we also may have other issues to deal with first.
The money-printing central banks may be less concerned about potential inflation, because they are actually more concerned about the underlying trend of deflation.
Deflation is the trend of generally declining prices, including the value of financial assets.
In the case of consumer prices, deflation can occur as a result of competition, globalization or enhanced productivity, and it can be a good thing.
With financial assets however, history shows deflation is linked to changing societal demographics and largely because of the burden of societal debt. And in the case of deflating financial assets, the results can be a disaster.
I’m not saying just because oil or gold prices were crushed this week that deflation is an imminent threat, but do think after 2008, deflation has remained a concern and that smart investors have strategies in place to hedge all risks, not just the obvious ones.