The Great Reflation: How Investors Can Profit from the New World of Money

Chapter 7. Asset Allocation: Investing in a Turbulent World

The greatest enemy of a good plan is the dream of a perfect plan.

—Carl von Clausewitz^[45]

The Great Reflation is an experiment, a point we cannot emphasize strongly enough. The program was thrown together piecemeal in response to a great crisis, much as people stick fingers into holes in a leaking ship. There is never much thought of the future when the ship is sinking. As in all experiments, the consequences and final outcome are unknown and investors are faced with great uncertainty and risks that cannot be remotely quantified.

Wealth preservation over the next five years should be the single most important investment objective of almost everyone. This requires a plan, serious study and thought, patience, objectivity, prudence, and a strong resistance to running with the herd. There is a lot of money sloshing around the world as a result of the Great Reflation, and periodically this will find a home in various asset markets, pushing prices to unsustainable levels, as we discussed in the preceding chapter. However, the underlying footings of the economy will remain weak, and asset prices cannot levitate indefinitely on hope and momentum alone. Severe shakeouts will be a fact of life. Gains will be difficult to keep, and losses easy to come by. Living standards and wealth could be under pressure for years.

The bubble of 1982 to 2008, as described in Part I, was created by wildly excessive money and credit inflation and fiscal ...