In determining where to allocate funds, there must be an understanding of the interaction of asset classes given certain scenarios. Outcomes can be vastly different from one scenario to the next. Understanding the interactions between asset classes is a bit like discovering puzzle pieces in a random box and trying to fit them together without really knowing what the finished puzzle is supposed to look like, because there is no finished picture to reference.
Right now, there are essentially two primary scenarios and most analysts and theorists are stating some version of these scenarios.
Scenario 1: Dollar decline, lower bond prices, higher stock prices, higher commodity prices, higher gold
Scenario 2: Dollar rises (as of function of deleveraging), higher bond prices, lower stock prices, lower commodity prices (as a function of a reduction in global demand.)
These two scenarios are conventional wisdom in the marketplace. Some believe scenario 1 is happening right now. Some believe scenario 1 has already occurred and is currently in the end stages before scenario 2 prevails. Some believe scenario 2 will be coming shortly, followed by scenario 1. So far the scenario 1 camp has been right, but what comes next? More of 1 or the beginning of 2?
It is a little troublesome when there seems to be such confidence in each of the opposing camps. Essentially, these sides represent the extremes for each scenario - one side the hyperinflationary theorists; and on the other are the deflationary depression forecasters. The reality is that we likely find a path somewhere in between. We could even move between the two scenarios for various periods of time. How the pieces of the puzzle come together will ultimately determine asset class selection.
