So what to do here, folks? For those of you who are still fans of the old American pastime – in this case capitalism and the making of money as opposed to baseball – how do you play on this rather unstable field of our own making? Which pitch do you swing at? Well, commonsensically, in an unstable global economy that is increasingly difficult to stabilize, an investor should seek out the most stable of assets. At the extreme, that would be cash in the world’s most stable currency. But whether dollars, euros, or pounds be your first choice (ours being dollars), cash or overnight deposits in any of them yield next to nothing. So say you want something but don’t want to lose your money either; a modern day Will Rogers. More concerned about the return of your money than on your money but still a little greedy (or perhaps just needy) too. Well, some say stocks – the only game in town. But I don’t know. When the Fed stops the QE game, it seems that stocks might be at risk. After all, haven’t they more than doubled in price since 2009 in part because of it? Without Big Government deficits and Big Bank check writing and with the advancing risks posed by Big Regulation and the technical whimsy of Big Investor, the safest pitch to swing at may not be stocks but the asset that will soon be the nearly sole focus of central banks. Instead of QE, central bankers are shifting to “forward guidance” which, if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns. If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark, Pete Rose notwithstanding. While low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options such as duration, credit or currency. With Big Investor unsure or perhaps unable to catch stock, long bond or currency fly balls in today’s afternoon sun, it’s perhaps best to field boring slow-rolling grounders based on policy rate stability for “an extended period of time.” Recall as well that the result of Minsky’s “Big Government” and “Big Bank” policies has always been accelerating inflation at some future time. We recommend longer-dated TIPS as insurance against just such an outcome.
Baseball’s old saw pleads to “buy me some peanuts and Cracker Jack, I don’t care if I never get back.” Jack or Jacks aside, getting back to the old normal Minsky world of stabilization via Big Government and Big Bank is now being challenged, as are the investment choices and future returns dependent on them. Grab for the prize at Jack’s bottom if you will, but the safer and perhaps most rewarding treat lies at the top with those front-end yields and inflation-protected securities based on our evolving age of central bank “forward guidance.” I have a hunch that even Pete Rose would bet on this one.
Seventh Inning Speed Read
1) Hyman Minsky’s hoped-for “Stability in an Unstable Economy” must be updated for the exhaustion of Big Government and Big Bank
2) Private market technicals can temporarily overwhelm fundamental considerations
3) Bond investors should focus on “safer” front-end positions in Treasuries or credit space because of the Fed’s shift to forward guidance
4) Don’t bet on baseball games. Bookies take too much, plus it’s boring!