Articles on investing and capital management, with a quantitative focus.

#bigpicture - Big picture thoughts

What Happens Next?


Market analysts and commentators love to make appearances in the media and share their predictions about what will happen next. Often, they make convincing and passionate arguments.

Some personalities argue that a great crash is coming. Others argue that historically unprecedented money-printing is sure to destroy the value of the dollar, and make stocks and gold soar.

In reality, these people are just sharing theories and wild guesses. Here's a nice quote from Harry Browne, the creator of the Permanent Portfolio:

For every example cited of an investment forecast that came true, I can point to five that didn't — some of which may have come from the same forecaster.

Let's review some possible scenarios.

Possible Future: Inflation

This is currently a very popular belief. The argument is that the US Federal Reserve and other central banks are printing a lot of money. This could devalue the US dollar and other currencies while boosting asset prices.

An investor who expects this future will want stocks and gold, but not bonds.

Possible Future: Deflation

The economy has been hit with an enormous shock, and entire industries have virtually stopped operating. There are huge job losses and decreases in disposable income. In his recent video, Ben Felix of PWL Capital says that central bank stimulus is misunderstood, and "deflation is likely to be a bigger concern" (see 14:51 in the video). He points out that current forms of monetary policy are not necessarily effective under today's conditions.

An investor who expects this future will want bonds, but nothing else.

Possible Future: Crash and Depression

A more dramatic spin on deflation: forced deleveraging and panic, perhaps triggered by some negative surprise, cause aggressive selling of everything. Asset prices crash, morale is ruined, and nobody wants to take any risk. The economy remains depressed for many years.

An investor who expects this future will want bonds and gold, but not stocks.

Possible Future: Good Economy

And of course it's possible that the economy normalizes and bounces back to normal, perhaps quicker than we expect. This might happen with normal and mild inflation (nothing dramatic).

An investor who expects this future will want stocks and bonds, but not gold.

So which will it be?

Nobody knows! But consider how the assets are likely to respond to these possible futures, where 'X' shows a good response.

Possible future Stocks Bonds Gold
Inflation X X
Deflation X
Crash and Depression X X
Good Economy X X

I think this table makes a strong case for holding stocks, bonds, and gold. Any of these possible futures can happen, and so I hold all of the above. Gold isn't required, though; stocks and bonds also cover all the above cases.

Jem Berkes