Date: 2015-09-12
Thought on the recent correction
The discrepancy between the asset price movement and the real economic activities has much to do with inflation. Especially when nominal effect is accompanied by turnaround in the investor sentiment, asset prices are formed at an elevated level. While I consider the recent correction as an over-reaction (particularly in the US) due to my view that the magnitude of tightening, whether it comes now or later, is minuscule compare to the easing that has been done for the last 7 years (also, Jan 2015's consensus view was Fed's tightening and weak financial market performance - correction which everybody waits tends to arrive less meaningfully), investors' concerns over the direction of the future Fed policy is not groundless.
I have met some people who argue as if the disconnect between the asset prices and the real economic activities is sustainable because the historical correlation between the two is 'weak.' I believe that they fell into the trap of mistakenly limiting the observed time frame; many events that occur in different points of time are related. Understanding the real economic activities is essential in investments, as it adds value to the investors by providing the direction of the next tail scenarios. While I find it extremely challenging to time the market, it is certainly useful to have some confidence in what many call an 'end-game.' While the term is misleadingly named because life goes on most of the time, I cannot think of an alternative to this term, so.. oh well, my limit shows. A good way to express the end-game view is: having no direct exposure to the segment which is likely to be the epicenter of the next big meltdown, rather than: betting aggressively on the end-game scenario (against the ongoing trend, in many cases) because you need to survive in order to thrive. Focusing on a very promising niche market is another option, while it does not necessarily provide a great protection against macro-wide adverse investment flow.
In fact, one country that stands out in the discussion of real versus nominal performance in recent 3 years is Japan. Although I expect there to be a plenty of time until the next adjustment (it is difficult to time these things so we never know? maybe it will happen pretty soon), it will be very interesting to see what happens in Japan in the period of meaningful monetary tightening and commodity price hike. I am very curious to see what will happen in the world when the inflation expands its territory to the consumer prices, because I expect to see sets of spikes rather than a gradual rise.