06/18/2019 - RALLC: Beware of MMT and how MMT could affect investing and trading

“Don’t dismiss Modern Monetary Theory (MMT) as unlikely to influence policy. This heterodox economic doctrine advocates sharply increased fiscal expenditures backed by money creation. An alluring promise of MMT is that it directly confronts a perceived flaw in today’s conduct of monetary policy: pumping liquidity into financial markets as the standard response to stock market and economic turbulence inflates asset price bubbles and thereby exacerbates income inequality …

Real assets provide a measure of inflation protection. TIPS, commodities, and REITs may appreciate as and when investors attempt to reposition for an inflationary regime. Unfortunately, today TIPS provide real yields below 1%, commodities pay no real yield at all, and REIT prices are highly correlated with the US stock market.

Repositioning portfolios to hold capital assets domiciled in countries with more conservative policies provides an alternative approach to protecting portfolios from inflation. Such protection comes at a cost. The premium the wealthy are willing to pay to protect real purchasing power at least partly explains the current negative real interest rates charged on Swiss bank deposits.

One way or the other, a return to high and volatile inflation can be expected to depress future capital market returns. Informed investors can prepare by paring back positions in mainstream stocks and bonds, diversifying into real assets, and revising down future real return expectations.”

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