A lot of investors and pundits have been and remained bearish throughout the course of the last few years. Within this bear camp there have been two distinct groups – the deflationists and the inflationists. The market action in the last few weeks has shown one of these two groups to be only marginally better than a full blown permabull. Since the recent downturn began on April 26th an inflationist portfolio has actually performed worse than a standard 60/40 stock/bond portfolio.
Obviously, there is no standard inflation or deflation portfolio, but the general claims from the inflationists have been that the next big downturn would be the result of a crushing debt burden from a U.S. government that has spent too much and printed more money than the economy can bear. This would all result in the demise of the dollar, spiking interest rates, soaring gold prices, soaring hard assets and soaring commodities. Since the recent downturn began on April 26th a simple inflation portfolio that was evenly short trade weighted US Dollars, short US Treasuries, long gold, long commodities (GS Commodity Index), and long oil has returned -9.29%. An aggressive gold bug portfolio (50% gold) has done better though still performed poorly over the last few weeks with a -3.75% total return. A lazy stock/bond portfolio has actually outperformed BOTH portfolios with a -3.6% return. Meanwhile, a portfolio positioned for deflation has returned +6.75% over the last month. Even the ultimate deflationary portfolio (100% cash) has outperformed.
Now, clearly I’m cherry picking the assets to some extent to prove a point, but it’s a very important one in my opinion – if you’ve missed the analysis you’ve missed the move in your portfolio. There are a lot of impostors out there who have been right in theory and wrong in practice. The overwhelming majority of bears have been expecting an inflationary period on the back of the out of control “printing” by the Fed. But just as in 2008, this inflationary strategy has been fantastically wrong. If you’re not familiar with monetary operations and the resulting impact on the economy then your analysis and portfolio performance has been entirely off the mark. The inability to connect the dots and understand the true underlying fundamentals in the economy has been a very destructive lesson in being bearish. In fact, you would practically have been better off just being a full blown bull….
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