Market dynamics

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The author is the co-founder and co-chairman of Oaktree Capital Management

As an investor who has seen multiple market cycles, I learned to treat macro forecasts with skepticism. Such predictions are usually either unhelpful consensus expectations or non-consensus predictions that are rarely correct.But as I explained in a recent article memorandum For investors, they should not be completely ignored, especially now.

Why? Conversely, Warren Buffett once told me that the macro future may be unknowable, but it does matter. Since the collapse of the technology bubble in 2000, the market seems to consider less about events related to individual companies and stocks, and more about economic, monetary and fiscal policies, and world events. This has been even more true since the 2008 financial crisis.

Macro considerations certainly dominate, mainly focusing on the theme of inflation. In the past 16 months, the Federal Reserve, the Treasury Department, and Congress have spent a lot of money to support, subsidize, and stimulate workers, businesses, the overall economy, capital markets, and securities markets. (In fact, I think 2020 will be the year when the term “trillion” enters daily use.) One of the results is concerns about rising inflation.

Whether this phenomenon is permanent or temporary, there are endless debates. There are many answers, because accelerating price increases will undoubtedly lead to higher interest rates, thereby reducing asset values ??and the need to cool the economy. There are smart people on both sides of the argument, but I believe there is no such thing as “knowing” what the result will be.

Consider the limitations known to the Fed. For many years, central bank officials in the United States, Europe, and Japan have set an inflation rate target of 2%, but no one has been able to achieve this goal. Despite sustained economic growth, huge budget deficits, and rapid expansion of the money supply through quantitative easing and low interest rates-all of these should be inflationary.

Today, by maintaining its high level of easing, the Fed has indicated that it is more worried about economic weakness than inflation. But even if the former is more risky-who would disagree with the Fed and insist that it is not-the risk of continued high inflation still exists.

In addition, Fed leaders often hold different views on this phenomenon, and some even admit that they are not 100% sure that they are right. This is the candid speech we need. But it is clear that we cannot draw the conclusion that “we have the answer” on inflation. .. There is even an “answer”.

What about the market? What do they know? Although markets are usually good “observers” and are very sensitive to current developments, their reactions to events can be erratic. They are also rarely good “predictors” in the sense of knowing what will happen next.

Rising inflation and the associated fear of rising interest rates have been used to explain most of what has happened in the stock market in the past few months.

However, in June, we experienced several rounds of stock market weakness, reportedly due to concerns about inflation, but bond prices are also rising (and yields are falling), which seems to be based on bond buyers’ belief that a weak economy will curb inflation. We have seen a decline in gold, a classic anti-inflation tool. The way the market behaves usually has little or no long-term significance.

The fact is that we know very little about inflation, including its causes and treatments. I describe it as “mysterious”, so I think we should predict price increases less than other areas.

If we don’t know whether today’s inflation is temporary or will last for a while, what can investors do?The answer is in the title memorandum I wrote in 2001: “You cannot predict. You can prepare.”

No one can confidently predict whether we are entering an era of inflation, but the consequences of doing so will be huge. Therefore, I think it is reasonable for investors to recognize the possibility of rising inflation, but do not drastically reverse asset allocation in response to macro expectations that may or may not be accurate.

We all have views on the future, but as we said at Oaktree Capital: “It is one thing to have an opinion, but it is completely different if it is assumed to be correct and bet on it.” We usually don’t bet on macro development.