Make sure you get this one right

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This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.

As investors we are faced with the consequences of our decisions every single day; however, as my old mentor at Goldman Sachs frequently reminded me, in your life time, you won’t have to get more than a handful of key decisions correct – everything else is just noise. One of those defining moments came about in August 1979 when inflation was out of control and global stock markets were being punished. Paul Volcker was handed the keys to the executive office at the Fed. The rest is history.

Now, fast forward to July 2009 and we (and that includes you, dear reader!) are faced with another one of those “make or break” decisions which will effectively determine returns over the next many years. The question is a very simple one:

Are we facing a deflationary spiral or will the monetary and fiscal stimulus ultimately create (hyper) inflation?

Unfortunately, the answer is less straightforward. There is no question that, in a cash based economy, printing money (or “quantitative easing” as it is named these days) is inflationary. But what actually happens when credit is destroyed at a faster rate than our central banks can print money?

Let’s begin by setting the macro-economic frame for the discussion. I have been quite bearish for a while, suspecting that the growing optimism which has characterised the last few months would eventually fade again as reality began to sink in that this is no ordinary recession and that “less bad” doesn’t necessarily translate into a quick recovery. I still believe there is a good chance of enjoying one, maybe two, positive quarters later this year or early next; however, a crisis of this magnitude doesn’t suddenly fade into obscurity, just because the economy no longer shrinks at an annual rate of 6-8%.

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* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.

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More on this topic (What's this?) Read more on Taikisha, Inflation at Wikinvest
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1 comment to Make sure you get this one right

  • Frank W

    It seems like every other day I get an article or newsletter advising me that it is absolutely certain that inflation is just around the corner or that it is absolutely certain that deflation is just around the corner. I am fairly full up on them. In fact, I quit reading them, because the large majority have no substance. I only read this one because it came from Jensen. I must say that this is possibly the best article that I have read on the subject and it is arguably the best article he has ever written. I mean his argument draws support from multiple sources and they are intelligent and compelling.

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