The discrepancy between official headline inflation and its underlying components is perplexing, and its implications for monetary policy (i.e., accommodative) suggest inflated asset prices and lower forward-looking returns....
Four market conditions now parallel the extremes last experienced in December 1998, setting up 1999 as the first year in a decade of outperformance by inflation-fighting and diversifying assets. Now is the time to rotate into these unloved asset classes....
Recently enacted NIRP in several major developed economies means not only lower current yields but also lower future expected returns—and thus lower accumulated wealth—for investors investing in these markets....
The Fed’s inflation model relies heavily on consumer and market-based expectations, both notoriously poor predictors. We propose an alternative bottom-up approach that analyzes the components of CPI, and arrive at a forecast very close to the Fed’s target rate....
According to Hsu and Cornell, active fundamental managers, as agents of the end investor, drive asset prices through the discount rate used in their asset pricing models. The model itself, as a means to estimate the rate, then becomes a determinant of expected returns....
The value-oriented investor, still in the throes of a long harsh winter, should be heartened in the knowledge that summer will inevitably arrive on the predictable warm breeze of mean-reverting valuations....
Optimized minimum variance strategies are a proven approach to low volatility investing. The optimization must be constrained, however, to build investable portfolios. Among other side effects, the constraints result in higher volatility and less diversification....
If investors don’t wise up soon that rising valuations are responsible for most of the “alpha” produced by smart beta, the inevitable mean reversion to historical valuation norms threatens to unleash a smart beta crash....
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