Today’s post will be a little bit of a rant, but I am hopeful that even amongst my complaining, there will be a lesson in here.
Much attention is paid to the supposed four D’s of investing in today’s environment.
Yeah, I get it. These are definitely valid themes to consider when designing your portfolio. And don’t mistake my push back - I don’t have any problem with the assertion that debt, deflation, and demographics, are the most important factors affecting the current financial environment. My issues lie with the part on the right hand side of the equal sign.
Recently ZeroHedge wrote a terrific piece that highlighted the always insightful David Rosenberg’s commentary about the “single most important thing for the market over the next decade.” I am stealing a few charts from the presentation, but I recommend you read the whole thing.
Rosy correctly identifies the tidal wave of changes that are about to be unleashed with the Baby Boomer generation entering their golden years.
And he notes that the public has saved precious little to fund this retirement.
Which brings Rosy to his conclusion that deflation, or at least low inflation combined with low interest rates, is a trend that will not be displaced anytime soon.
Rosenberg is by no means alone in this analysis. Many strategists have looked at the massively over indebted financial system, added in the over capacity built by China during the past decade, topped it off with the slowing population growth in developed markets, and concluded that these three D’s - debt, deflation, and demographics equals a destiny of lower rates for longer, with little inflation.
Yet I am not as sure that this conclusion is quite as obvious as many of these strategists assert. Yes, there is no doubt that these will be meaningful factors affecting the financial system in coming years and decades. But how can they be so confident about the outcome?
By claiming a “lower for longer” result, aren’t they assuming that both monetary and fiscal policy are impotent? Aren’t they concluding that regardless of where the Federal Reserve sets monetary policy, or how much the US government spends and borrows, officials are powerless to change this destiny?
I don’t buy it. I don’t think governments and Central Banks are irrelevant by any means. And in fact, I would argue that their response to these three D’s are what will determine the destiny, not the other way round....MORE