Friends,
As of this evening, FiveThirtyEight is giving Biden a 90% chance of taking the White House. While over at PredictIt, Biden is trading at 65%. Forecast, the new prediction market app from Facebook, has "Trump will concede within one month" trading at 68.
In spite of our respect and admiration for Nate Silver (the founder of FiveThirtyEight, who's work on baseball over at Baseball Prospectus in the mid 2000s was a big influence on me getting into data science), we have to go with the markets here.
As we like to say around these parts: #DontTrustMachines.
"Trump to win" at 10:1 seems cheap, given the uncertainty inherent in mail-in voting during a pandemic and the lessons of 2016. "Trump causes chaos in November" seems even cheaper. Will be interesting to see how foreign demand for ever-more US bond issuance holds up if we get a couple of months of legal shenanigans coming out of the election.
With that in mind, we wanted to send you our thoughts on 200 years of inflation data.
Seriously.
See, we at Black Snow Capital think it's times like these where one can really see the value in going back and looking at history. Value in asking - in a year that's historically scared, sick, stressed, and on fire - "How weird can things get?"
Our view, contained in this note, is simple:
1. What we are experiencing is something the world has experienced in the past, and will experience again in the future.
2. This crisis unfolded, and was reacted to by policymakers, much faster than previous ones.
3. The forces of deflation still linger, though against a backdrop that is increasingly inflationary. For the time being, COVID, and what looks to be another lockdown, will likely act as a strong deflationary force, capping inflation. This deflation, ironically, enables monetary policies that explicitly (though unintentionally) promote asset bubbles. These bubbles, when popped, require more easing, which then pushes up asset prices further. This process continues ad infinitum unless brought to an end by the onset of inflation and monetary tightening.
4. Over long periods of time, the biggest driver of inflation in the developed world is actually conflict, not left-right politics or fiscal conservatism. This was our most surprising finding, and something we believe underappreciated by both modern investors and academics.
5. Consistent with inflationary pressures building in both the medium-term (via the shift to deficit monetization) and long-term (via the shift into a neo-Cold War), we recommend investors with large government bond exposures shift some (or more) of that exposure into gold.
Never before have you been rewarded so little for lending money so long...while the spectre of inflation rumbles slowly to life.