Avoiding the equity trap

Americans are optimists. One I had coffee with last week felt sure equities were about to take off. I didn’t agree, arguing I didn’t know where the earnings were coming from given the prospective environment which would be starved of growth and with deleveraging reaching further down the feeding chain. Overall a dis-inflationary environment I would argue.

However, not wishing to appear rude I then turned and supported his view – because one thing is for sure: if the US (and the UK for that matter) can inflate away its massive debt overhang- it will. And that means owning real assets like houses or proxies like, yes, equities.

But hold on! That sounds like buying into a bubble -multiples not supported by earnings- and that’s at the root of our current mess.

So what may make sense?

Michel thinks owning Australian index-linked treasuries while buying an out-of-the-money option on the S&P 500 might be a sensible position to take.



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