by Ben Hunt
As I write this email, 10-year Treasury yields have spiked to 1.08% and stocks are at all-time highs, even though yesterday we saw a record number of Covid deaths in the United States and a mob storming the Capitol.
Why? Because our common knowledge – what everyone knows that everyone knows – is that enormous fiscal stimulus is coming soon (bullish!), and with that will come inflation (bullish?), and with that will come … something … that will impact our portfolios in a major way.
Every investor in the world is now trying to figure out that something. Every investor in the world is now trying to figure out what inflation means for their portfolio.
Here’s how it will play out in your own head.
Your first instinct will be to try to figure out on your own what inflation really and truly means for your portfolio. You will read about the history of inflation and think really hard about it. You will have some ideas and, depending on your ego, more or less confidence in those ideas. But then, on reflection, you will decide that you want to understand what everyone else thinks inflation really and truly means for your portfolio. You will do this by watching CNBC and reading Bloomberg Opinion articles and brokerage research reports and portfolio manager letters and the like. You will call this “doing your research” and “listening to smart people”. Over time you will begin to recognize a common thread running through what you hear and what you read. You will call this common thread an “investment thesis”, and you will find yourself nodding your head by the fourth or fifth time you recognize this common thread on what inflation really and truly means for your portfolio. You will begin to recognize this common thread in more and more of what you hear and read, and you will provide positive feedback in one form or another to the creators of this content. You will congratulate yourself on being smart enough to tease out this common thread from your “research” and you will begin to implement your “investment thesis” in your portfolio. Soon you will have conversations with other smart investors who have similarly identified this investment thesis from their research, and you will take great comfort in that. You will increase your position in the investment thesis.
I am not saying that your investment thesis is wrong. I am not saying that you will lose money with your investment thesis. On the contrary, if you are early with your investment thesis and that thesis evolves into common knowledge, I think you’ll do very well.
I am saying that what you call an investment thesis is, in truth, a narrative.
I am saying that the business of Wall Street and financial media is to create an investment thesis that makes you nod your head. I am saying that you will always find an investment thesis that makes you nod your head, and that this process of selling you an investment thesis that makes you nod your head is as predictable and as regular as the sun rising in the east and setting in the west.
Right now, Wall Street is trying to identify which inflation narrative will be an investment thesis that makes lots of people nod their heads.
This is what it looks like when common knowledge – what everyone knows that everyone knows – is being formed.
Recognizing THAT – and maybe even trying to get ahead of THAT – is how you play the game of markets successfully.