Eric King: “Rob, you were a seller of U.S. stocks as they surged to new all-time highs and people were euphoric. You were cutting positions there and you’ve been adding more aggressively into the carnage in these emerging markets, which is why you massively outperform over the long term. But you also know what’s in front of us. You’ve hinted a couple of times to King World News that QE4 is coming. You know the playbook, which is that Western governments have to inflate their way out of their massive debts. How do you position your clients when the Fed initiates QE4? Is there a change you will make when you see them actually start to run the printing presses again?”
Rob Arnott: “Not so much. You want to be well-positioned ahead of when that happens. And what generally happens is that when quantitative easing begins, you get rewarded for a ‘risk-on’ portfolio. ‘Risk on’ doesn’t have to mean U.S. stocks. It can mean emerging market stocks and bonds. It can mean commodities.
In QE1 and QE2 these diversifying markets performed beautifully. In QE3 they didn’t, and that was because of the flight to safety in the United States. But right now the break-even inflation, which is the rate of inflation that 10-year TIPS and 10-year Treasuries will have, the same 10-year return, the break-even inflation rate is 1.5 percent. That means that the market is telling us that they expect 1.5-percent inflation.
But we have central bankers all over the globe who say, ‘No, we want 2 percent inflation,’ and they happen to own printing presses. So they can get 2 percent inflation if they try hard enough.
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