Nobody Knows Nothing

““An unbiased appreciation of uncertainty is a cornerstone of rationality – but it is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.”

Daniel Kahneman1

When it comes to markets, bonds are the brains of the operation. Stocks react emotionally to events, but bonds (and currencies, which are a derivative of the interest rates that drive bond prices) focus on the deeper economic forces driving asset values. The current post-election rally is likely to prove a case in point. Stocks are rallying strongly while bonds are selling off equally sharply and the dollar is rallying (though it is off its highs) as currencies like the Chine yuan, Japanese yen, the euro and their emerging market cousins take it on their collective chins. Equity investors believe that President Trump’s pro-growth fiscal policies will raise stock prices (and are also massively relieved that Barack Obama and his anti-growth policies will soon be reversed). Bonds, on the other hand, understand that higher growth will bring higher inflation. Leaving aside for the moment that real-world inflation is much higher than phony government statistics portray, the prospect of higher inflation is (and should be) terrifying… Continue reading

December Edition


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