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Wednesday, February 11, 2015
Jim Rickards: Central Bank Policies Call for Barbell Strategy
This new article by Jim Rickards is interesting. For one thing, it ties into a major theme we have on the blog here. That theme is that we are looking at a very uncertain future with more than one reasonable scenario as to how things may turn out. Because different scenarios require different investment planning, it would not be wise to go "all in" on just one scenario (at least for now). In this article, Jim Rickards contrasts the Inflation vs. Deflation struggle now underway and admits that none of us can be sure which will prevail over the long term.
Another interesting aspect of this article is that you see Jim stepping back and reviewing his own forecast based on new information. This is another point we try to emphasize here. Getting locked in to a point of view no matter what facts emerge is not the best plan. A better plan is to stay alert and informed as facts and events unfold. We try to help with that here. A few quotes, then some comments.
"What you need to do – what analysts and investors need to do — is have a thesis to guide them. Don’t pick one at random, but have a well thought out thesis. Then use the data to test that thesis. There’s a name for this: it’s called “inverse probability”. You use subsequent data to test your original idea."
"That method is is different from a lot of science where you actually get a bunch of data and then you come up with an idea. Here, however, you have an idea and you come up with data to test it. There is no better way of approaching the markets because nobody has a crystal ball."
. . . . .
"I recently had occasion to spend two hours one-on-one with one of the ultimate Fed insiders. Sometimes, when you do these things, you agree not to mention names so, I won’t mention any names here. But this was a guy who was in the room for every FOMC vote for the past two and a half years. Nobody’s closer to Bernanke and Yellen than this individual I spoke to."
"He’s a PhD economist, a very well regarded scholar but not a very well known name because he’s not actually on the FOMC. Yet he’s been invited into the room to help them figure these things out. And what he said was that we’re not really going to know if the Fed’s policies worked as intended for another 50 years." . . . .
"In other words, they’re admitting that they don’t know what they’re doing. They’re admitting this is kind of a big science experiment. What does that mean for us as investors, portfolio managers and people trying to make smart decisions?"
"It means that we have to be nimble, and we have to watch the data. We can’t put a stake in the ground around one particular outcome because the chance of getting blindsided by something coming up from behind is pretty high."
. . . .
"I’ve said a number of times – and it continues to be my view – that the Fed is not going to raise rates this year. And yet, here comes this particular employment report and you say: hold on. This would certainly push the Fed in the direction of raising rates when you have that kind of job creation and real wages going up. Does that change the thesis?"
. . . .
"I spent the better part of the weekend thinking about that because we do have to be alert to these trends."
If want to see Jim Rickards answer to his own question, "Does that change the thesis?", just read the full article. The key point to make here is that things change over time. Facts emerge that may or may not be what we are expecting. If the Fed doesn't know if what they are doing will work or not, how are we supposed to have any idea?
A dogged refusal to consider all the facts can lead to poor decision making. Here Jim Rickards acknowledges that recent economic reports gave him pause to reconsider his basic thesis. This is something we encourage readers to do on a regular basis. We will try to continue to present the best information and facts we can find so that readers can be in position to make better decisions. It's really the only choice we have.