“The herd can be right and can change its mind often. We need to be open-minded about the macro uncertainty over the path for growth, inflation and labor costs. In this environment we can expect many scenarios to be priced in next year: inflation, stagflation, disinflation, policy errors, stalling growth and Covid 4.0. The key to navigation is to update your core scenario as the facts move, assess where market pricing differs with you, and then invest. This entails taking advantage of the herd’s oscillations, so it works in your favor.”
“If inflationary impulses linger for the next six to twelve months then the bond/equity correlations could switch and therefore the ‘free lunch’ regarding diversification is over. The beauty of diversification is that the correlation between equities and bonds will always bail you out; if stocks fall, then so do bond yields, and the portfolio benefits from that instead. If this no longer holds true once rates start rising, then investing in other asset classes such as commodities or inflation-linked infrastructure will allow us to replace this diversification.”
“We’ll stay true to what we think the economic outcome is going to be, though things do move from one side to the other very quickly; we might face a deflation scare next year. If we start to get things priced in that we don't believe in, then that's where we would be looking to be more contrarian. One should keep an open mind about which inflation scenario unfolds, while overall macroeconomic uncertainty is still elevated from an historical perspective. That means that you could see big swings in markets that we can benefit from in 2022.”