Speaking of important posts, your post trigerred a thought sequence this morning that I think provides huge insight for anyone interested in steady, long-term market success. It started me thinking about the whole inflation/deflation argument again. Staring at my K-wave charts, I realized something that hadn't hit me before: the whole inflation/deflation argument is misstated. The four seasons are characterized by inflation/disinflation/deflation/reflation. The issue is not deflation vs. inflation, it's deflation vs. reflation.
It is clear that we have left the disinflationary Fall season. What seems to be in question is whether we are still in deflationary Winter, or whether monetary policy will be successful in short-circuiting the season and bringing an early reflationary Spring.
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SUMMER FALL WINTER SPRING
BONDS - 0 + + + 0 - -
STOCKS - + - +
COMMODITIES + 0 - - - 0 + +
So I know I'm on to something. If you can eliminate Summer and Fall as potential "seasons", there must be some advantage to this information. But how to use it?
After some more pondering, I realized why it is so difficult to invest now. If you are in Spring or Summer or the transition between (reflation or inflation), commodities perform well regardless of which of the two it is. If you are in Fall or Winter (disinflation or deflation), bonds perform well regardless of which of the two it is. So, for 75% of the cycle, you can easily identify an asset class that performs well in the season you think you are in, in addition to the season that is coming.
However, during the Winter/Spring transition, and the Summer/Fall transition, there is no such asset class. That is why investing is so challenging right now.
The other thing that I realized is that if you suspect you know which of two seasons you are in, you can then monitor which season it is by looking at the correlation of the long-term trends of the three asset classes.
Of course, my immediate reaction to anything that seems to work so well is to ask
1. What would happen if everybody did it?
2. How could a responsible monetary authority use such information to benefit society?
Haven't answered those yet!
Curious to hear thoughts on this. Have I just been sniffing my paint fumes too long? (house remodel <g>)
I know this belongs after hours, but I hope the thread will excuse my present rambling!
BC |
