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THE WORLD’S BEST GAMBLERS.Inflation risk management.

Copy of a LinkedIN post, 2020


Inflation risk management.

It is time to stop forecasting and utilize KNOWN/PUBLISHED inflation.

The key question to ask when developing an inflation risk management protocol for debt instruments – for both the borrower and lender – is ‘How much more do I know than all other participants and stakeholders in this asset class, and what is the strength of that conviction?’

That leads to ‘What is my budget and what am I willing to expend in labor, capital, variability/volatility, hedging costs, with unknown future outcomes to prove I am better at forecasting than others?’

With the availability of a method to match known REAL payments and receipts to the experienced and to-be-published future inflation measures, while matching the REAL debit and credit cash flows of any project for any length of time, why do we forecast and battle windmills?

The central bankers, sovereign treasuries, political subdivisions, corporate treasures and individuals are stating, with forceful conviction, that they are the best gamblers in the economic world. Should we not be investors, stewards and fiduciaries?

A small percentage of a portfolio utilizing a “trade” is diversification. A portfolio utilizing much of its capabilities in a “trade” is reckless.

Currently, these market participants are saying they accurately, efficiently and cost-effectively forecast inflation, its inflection points in time, magnitude, delta, longevity and will deliver free-alpha continuously. And they manage their risks with hedges, futures, derivatives, contracts, re-financings, with variability/volatility of outcomes; products that guarantee only a NOMINAL future payment and whose payment or receipt is in a serial, term, bullet or annuitized format and combined with poor correlations to the REAL required. Those results may or may not instill comfort and confidence with stable earnings and credit ratings.

Before a loss of stability and faith rolls thru, it is time to step up our risk management tools, it is time to stop forecasting and utilize KNOWN/PUBLISHED inflation.

For background, may I suggest the historical Inflation work of Wolfgang Hammes, Ph. D and works in Behavioral Finance by Jason Zweig.


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