"The future is no place to put your better days"
- Dave Matthews Cry Freedom
Tuning in for a few of the many "Year in Review/2014 Projection" shows, I caught the undertow of a theme. "Move away from risk", "Reduce exposure", "Shift allocations" all new euphemisms for "Take profits." That the taking of the profits and the increasing of the cash was also the recommendation in 2012 and Spring of 2013 was not brought up by the anchors. To be alive in the world is to take on risk.
We continue to marvel at the idea that the best of America is behind us and what lies ahead balances precariously between modest and tragic. The "Reduce Exposure" crowd hangs its (cone shaped) hat on the idea that tapering LSAPs equates to tapering risk. The portfolio channel effect fine tuned in an age of optimal control. The objective of monetary policy is economic traction, however, not asset allocation.
QE in the era of high speed computing power and low (no) transaction costs has promulgated the idea that money and capital are the same. The interesting take away from the QE experiment is how little money morphed into actual capital. The price of the equity increased dramatically but capital investment has been small because there's so damn much of it. Thus, the idea that participants can/should request their money back (at the serendipitous higher rate of exchange) has become the theme of the institutions whose revenues come from an abundance of those low cost transactions.
We see this as living in a Nominal World. The quantitative regime is the cornerstone of nominal living and its not ending, yet. The Nominal Economy exists in name only, in economic terms, its "not real". We think 2014 will be the year that re-establishes the distinction between the two. The Fed's perverse goal of higher inflation will set the course. Living nominally (inflated) has proved difficult in a world awash in excess capacity and productive abundance. The forgotten variable is time. We believe that time is upon us.