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The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground

The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground

Francois Trahan, Katherine Krantz, Robert Doll (Foreword by)

ISBN: 978-1-118-13409-2

Jul 2011

256 pages

Select type: E-Book

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Macroeconomic Investment Strategies for an Era of Economic Uncertainty

“Over the years, François’ insightful analyses of the business cycle has led to market calls that have both benefitted investors on the upside and (more important to many) protected them from losses on the downside. François’ incredible track record in successfully interpreting the trends that can be found in leading indicators and other macroeconomic data have also led to his well deserved reputation as an expert in sector rotation - providing investors on both the long and short side of the market opportunities to profit from his ideas. In my opinion, his most important and influential macro prediction to date was his call in the middle of the last decade when he predicted that the worst housing crisis in American history would soon be upon us, and that it would have far-ranging implications for both the global economy and world financial markets.”

From the foreword by Robert Doll, Vice Chairman & CIO of Global Equities, Blackrock Advisors, LLC

“François Trahan is an insightful observer and student of market forces. His research has identified key drivers of stock market performance over decades in various cycles of inflation, credit growth, and economic developments. In his new book, François tries to sort out and explain for market participants the dynamics that brought us to this point and what he sees as the future path of economic and market developments. It is an essential read for anyone participating in or interested in the stock market.”

Robert Soros, Chairman, Soros Fund Management

The Era of Uncertainty is terrific. It challenges conventional Wall Street wisdom, gives investors the necessary tools to successfully navigate the new world order and has policy prescriptions to get the U.S. economy on the right track.”

Consuelo Mack, Anchor & Managing Editor, Consuelo Mack WealthTrack

“Valuation is not everything. An important lesson from the global financial crisis is that macro matters. In The Era of Uncertainty, François Trahan and Katharine Krantz show how macroeconomic analysis can be incorporated into the investment process and provide a road map for investing in the difficult times ahead.”

Edward Chancellor, Author of Devil Take the Hindmost: A History of Financial Speculation and member of GMO's Asset Allocation team

“François consistently sets a high bar for strategist and thought leaders in the markets, and I can safely say he’s done it yet again with this book.  Always insightful, and willing to challenge the ‘stale’ thinking of the establishment on The Street, François' thoughts and analysis are appropriate for anyone who cares not only about markets, but the future of our world.”

Jeff deGraaf, Chairman, Renaissance Macro Research, LLC

With macro forces governing the post-credit crisis world, and most likely to remain dominant for some time to come, the power of the business cycle is once again in the spotlight. In this type of environment, stock picking will have far less impact on portfolio returns than getting the "big picture" right. And using the last twenty years as a playbook will prove costly to investors.

The Era of Uncertainty provides a new way of thinking about investing in a dynamic, macro-driven world. In it, François Trahan and Katherine Krantz discuss the importance of macroeconomic perspectives in an unstable global economy.  They go on to cover three possible future scenarios: inflation, deflation, or the middle ground. With each scenario the authors discusses the likely causes and consequences as well as the best strategies for investing profitably.

  • Draws on the experiences of prior credit-driven deleveraging cycles to develop a dynamic framework for investing in an era of economic uncertainty

  • Contains insights on the future of the financial industry

  • Provides fascinating anecdotes from Trahan's time at Bear Stearns prior to its collapse and sale
  • Includes interactive digital tool for users to determine investment strategies based on personal predictions

If you intend on succeeding in today's economic environment you can't follow yesterday's investment strategies. The Era of Uncertainty reveals what it will take to make it in such a different market and how you can incorporate new strategies into your everyday investment endeavors.

The book comes with an interactive digital tool allowing users to make their own predictions about the economic future and receive asset allocation and sector allocation advice.

Foreword xiii

Preface xvii

Acknowledgments xxi

Part I Why “Macro Matters” 1

Chapter 1 What Is Macro, and Why Should Investors Care? 3

Macro Explains More Than 70 Percent of Equity Returns 5

Macro’s Role in Bubble-Mania 7

Chapter Summary 14

Chapter 2 The Ever-Changing Macro Landscape 17

Macro in the Age of Globalization 17

The Increasing Role of Macro in the Years Ahead 22

Learning from Macro-Driven Markets of the Past 28

Chapter Summary 33

Chapter 3 Harnessing the Power of the Business Cycle in Investing 35

Macro Is the Bedrock of Successful Investing 37

Chapter Summary 42

Chapter 4 The Pitfalls of Ignoring Macro Influences: Accidental Success 43

Macro Lessons Are Learned through Experience 44

Chapter Summary 48

Part II The Roots of the New Era of Uncertainty: The Credit Crisis 49

Chapter 5 A View from the Front Lines 51

The Bubble Intensifies 55

Slaying of the Bear 57

Chapter Summary 58

Chapter 6 In the Weeds 61

The Fog of War 62

The Bubble Was Predictable! 67

And the End Was Foreseeable . . . Macro Could Have Helped 71

Chapter Summary 76

Part III Current Policies Are Leading Us Down an Unsustainable Path 79

Chapter 7 No More Tools in the Toolbox 81

A Breakdown in the Traditional Economic Model of the United States 83

It’s All About the Consumer! 85

Exports Are Not Enough 89

Chapter Summary 93

Chapter 8 The Government’s Un-Safety Net 95

Inflation Enters the Picture 97

Spinning Our Wheels 98

Nowhere Fast 101

Chapter Summary 103

Chapter 9 Kicking the Can Down the Road 105

QE Was an Experiment 105

We’re All Keynesians Now…Unfortunately? 108

Uncertainty Kills Growth 111

The State and Local Time Bomb 114

The Privatization Option 118

No Short-Term Fixes 120

Chapter Summary 122

Chapter 10 Threats to Righting the Path of Policy 125

Mobility Threatens Austerity 125

Inequality and Protectionism 128

Business Cycle Trends Could Exacerbate the Policy Conundrum 130

Chapter Summary 131

Part IV Investing for an Uncertain Future 133

Chapter 11 A Closer Look at Inflation 135

Anatomy of Inflation in the United States 136

The Consumer IS Exposed to Food and Energy 140

Policies to Avoid Deflation Often Lead to Inflation 142

Pushing on a String 147

Inflation has Social and Political Consequences 150

Market Indications of Inflation 153

Chapter Summary 156

Chapter 12 Strategies for Investing in Inflationary and Deflationary Environments 159

Conventional Wisdom—Hedging for Higher Infl ation 160

Making the Turn—Hedging for Slower Growth 165

Policy Responses Bring About Extremes 170

Disinflation versus Deflation 171

Mild Deflation versus Deflationary Spiral 173

Fixed Income Is a Deflationary Safe Haven 177

The Middle Ground 178

Goldilocks in the Emerging Markets 180

Chapter Summary 181

Part V Unintended Consequences and Creative Solutions 183

Chapter 13 Unintended Consequences 187

QE = WMD? 187

Chapter Summary 193

Chapter 14 Creative Alternatives for the Future 195

The War on the Deficit 196

Chapter Summary 202

Epilogue: The Financial Services Industry in the Era of Uncertainty 205

Notes 207

About the Authors 215

About the Digital Companion 217

Index 219

Era of Uncertainty Digital Companion