I’ve been worried for a long long time about financial stability, those that have worked with me will tell you, I see bogeymen everywhere — and for years I have been wrong. Central banks have ensured that and the ever upward trajectory of financial assets.
So, health warning, I could continue to be wrong. The 2% a year we spent in hedge premia from 2014 onwards feels cheap today, but equally necessary.
After 2008 the game changed, central banks were no longer passive ‘put’ters, but active market participants. Lending, buying, manipulating.
So as we sit here in early Q4 2021, and the conversation turns to tapering, and inflation remedy, I dust off my old playbooks and search for resilient investments.
In the world of a balance sheet contraction, we will surely see investors continue to focus on growth, but perhaps earning over topline. That should mean long duration gets hurt, as investors cycle towards ‘solid’ if not ‘sexy’ businesses.
In a world of rising rates, fixed borrowers benefit as debt costs evaporate, variable borrowers hit the wall like bugs on a windscreen.
Social conscience is a good thing, but it will be sacrificed at the alter of cost and expediency if conditions tighten. Food on the table becomes much more important than the packaging it arrives in, or where it was grown. The same is true for energy.
Governments have much to balance. We need to move back to an equilibrium of enough pain, which might mean an over correction to too much (from a period of too little perhaps?)
…but i wonder if we have spent too long in the twilight land of no pain, and if governments are really ready for the necessary recycling of capital to efficient productivity. If that is the case, then we will see tempered taperings with mico-hikes.
