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Investors assume deflation will not be permitted

Investors assume deflation will not be permitted

Published: August 5 2009 03:00 | Last updated: August 5 2009 03:00

From Mr Andrew Gundlach.

Sir, I would guess that the key reason so few investors predict deflation is not (as Gillian Tett writes) because they have never seen it, but rather that they assume, in a fiat money system, that governments elected democratically by a multitude of the population would never permit sustained deflation (“Investors are floundering in post-traumatic syndrom”, Insight July 24). Not a bad bet to make, except perhaps when the multitude of the electorate consists of retirees and pensioners.

Also, I think there is a reason that investors “panic” once they no longer “dare assume that the world is benign”. The money management industry considers itself as stock pickers focused on the fundamentals, who claim that the global macro is not part of their core mandate. It works most of the time, except when big sea changes occur in the international political economy. As Larry Summers famously said at Davos a few years ago (borrowing from Niall Ferguson’s work), the European bond market displayed no volatility and traded within tight spread ranges even six months after the Austrian archduke was shot in Sarajevo on the eve of the first world war. Are investors any different today, or just as myopic to the bigger picture?

No question – we live in a very uncertain world with the potential for extreme outcomes. Policy choices today and through the next years will determine where we go, and cases can be made for both inflationary and deflationary outcomes. There are certain investments that ought to do well in both environments (or at least better than other investments), and that is where to focus, in my view.

Andrew Gundlach,
Director,
Arnhold and S. Bleichroeder Advisers,
New York, NY, US