Inflation is everywhere-in the markets. Stocks keep ticking up to stretched levels accompanied by record low volatility. Bond are being pushed to record low yields as Central Banks expand to over $14 Thousand Billion. Risk asset inflation is the real inflation that central bankers created with their good intentions.
In other words, it has becoming more expensive to be prudent.
This is evident across the pond, where investors are willing to pay corporations to borrow from them, often locking up their money for years. Money intended to boost the prices of goods, services and wages has been put to work in investments. In an effort to combat this misappropriation, fiscal reflation has been the hopeful buzzword of the day. Tax reform talk has boosted Treasury yields over the past few trading days in hopes of real inflation in the future.
Back to the idea of prudence. When it becomes expensive to be safe, is that a good time to accept more risk? Well, Warren Buffet has said something along the lines of “be fearful when others are greedy, and greedy when others are fearful”, but is that ideology warranted in an environment when everything seems heady? If, for a moment, you consider that stocks and bonds may be more correlated than in past scenarios going forward, we may have to look at the world differently.
If stocks and bonds are capable, and likely, to face stress at the same time, and because they are both in an apparent state of excess valuation, risk may need to be redefined in the context of the portfolio. This may be why gold has been brought up by a few prominent investors lately. Many will argue against it’s merits as an investment or as money, and their case makes sense in many ways, but when it becomes ever more costly to protect capital due to asset-specific inflationary flows, looking for alternative ways to diversify may be an important option.
So, perhaps we should be greedy when others are fearful, fearful when others are greedy yet also creative when in doubt about the penalties of Central Bank sorcery.