In financial markets, craziness creates opportunity. It affects only prices, not values. And one of the craziest afflictions I know of is our faith in our ability to see the future. Indeed, there isn’t even an appropriate opposite to the word ‘foresight’ in the English language. So I’m going to make one up. And rather than build a portfolio based on the pretence we have foresight, let’s explore some ideas for building one that is robust to our fore-blindness.
Here are some things I think are true:
- developed economy governments are insolvent
- Japan is the highest risk developed market (DM) to an inflation crisis (though it might be Greece)
- there is too much debt around
- China’s economic model is biased towards misallocating resources
- every country which has industrialized has experienced nasty bumps on the way
- China and the US are in the early stages of an arms race
- demographic trends suggest more conflict in the oil rich regions of the world
- bottlenecks are developing in key commodity markets
- the only thing central banks are good at is blowing the bubbles that cause the crashes which are used to justify their existence
- market prices only reflect fair value by accident and in passing
- most people don’t think these things are important
- they might be right.
Here are some things I know are true:
- perceived uncertainty causes emotional discomfort which isn’t conducive to good decision making all the above situations have the potential to cause significant asset price volatility
- I have no idea when.
So keeping the discussion open what to do ?