Given the many complexities and extremes that exist, understanding risk is an important first step, one that is sadly out of style. If we look at the charts of margin debt (loans taken against one’s investment portfolio), we can see that they are at all-time highs…
While bets on the market falling is at an all-time low …
We also have no idea what role inflation or deflation could play. Is it going to be arithmetic, like 1 + 1 = 2 + 1 = 3, and so on? 1 + 1 = 2 + 2 = 4 + 4 = 8 + 8 = 16?
Is the government in complete charge of all variables, or are they assuming arithmetic functions while geometric functions exist?
A small amount of inflation or deflation is acceptable and manageable by the government, but geometric inflation or deflation jeopardizes the entire financial system, including government finances.
There is a distinction to be made between panic and a prepared response.
In their paper, “When Diversification Fails,” the authors find that when the market declines “diversification seems to disappear when investors need it the most.”
They recommend, “tail-risk hedging (with equity put options or proxies), risk factors that embed short positions or defensive momentum strategies, and dynamic risk-based strategies.”
To see the details of a prudent momentum approach, read the attached: