Thursday, August 14, 2014
Past Performance Does Not Guarantee Future Results
We’ve all read the distilled disclaimer above a thousand times before. And yet, with full frontal cognizance of its universal truth, we ignore the warning for the sake of the still waters of current market conditions and our behavioral predisposition to follow. Follow leaders, trends – follow performance. It’s a hardwired survival trait built into all of us, and generally speaking – exposes our achilles heel at times, when it comes to bends in the road and future expectations.
Coming into the home stretch of the year we expect the current pulse of inflation to continue higher as the Fed walks away and foresee the chirping hawk choir grow louder and more emboldened with each reassurance by Yellen that she’ll stand pat longer with lower. From our perspective, the double edge sword that Yellen needs to gingerly step between is a damned if she does and damned if she doesn’t mentality with tightening, since the risk becomes that rising inflation could hit the brakes in the economy for her, reinforcing the belief that the Fed was foolishly behind the curve. At the same time, if they raise rates too soon the scenario laid out below could have the same outcome – but perhaps even sooner.
– The nightmare scenario she wants to avoid is hiking rates only to see financial markets and the economy take such a hit that she has to backtrack. Until the Fed has gotten rates up from the current level near zero to more normal levels, it would have little room to respond if the economy threatened to head into another recession. – Reuters 8/12/14
All things considered, we tend to agree with Pimco’s Paul McCulley that believes “behind the curve” is precisely where the Fed wants to be – for now. Trading more time for inflation risk – that we would argue poses a less long-term threat than many of the hawks continue to posture as severe. With that said and as pragmatic participants, this dynamic should bolster a rising interest in the precious metals sector and commodities – that should benefit from inflationary tendencies and a broad distrust of the Fed as they navigate another difficult policy chapter.
1994, 1999 – 2004. What do they all have in common besides rate tightening cycles ? A broad respect and lionization by participants of Fed policy and their Maestro that conducted the show. Does that sound like today? While we do find great utility in thoughtful comparative reasoning when it comes to market cycles – the fact remains that past performance never guarantees future results. Especially, when the comparisons are so far off the mark.