Which measure? Tight or not tight
It is crazy to think we are either a little bit restrictive, or, wildly restrictive, based on the below graph. Remember, each measure is one that someone very clever believes is valid, reflective.
To explain the graph we have natural rates (proxy for where the long run real rate that is commensurate with a happy economy, called natural rates, or r*) and actual rates.
If actual rates are above long run real rates we say policy is tight.
People much smarter than me spend their whole lives coming up with the model that spits out values for r* (well, I exaggerate a touch, but it is their thing).
And yet, either actual rates (2yr TIPS) is moderately tight (relative to some r* versions) or, crazy-tight-will-definately-sink-the-economy-tight (look to the HLW measure, or the Fed’s medium run measure).
Clearly, which one you think “is the real one true measure to look at” determines your asset allocation.
In our view, it is simply too risky to go all in on either. We are very slightly underweight international equities, more meaningfully underweight Australian (where we see more risk), with slight overweights to property and infrastructure.
We don’t have much commodities on, fearing if we really are late cycle those commodity prices could easily halve quite quickly, and within our direct equities we are in the defensives (stocks that should do okay regardless of what the economy does).
The problem of course with this kind of diversification is you feel “undercooked” no matter what happens. Things go okay; “why didn’t you have more equities, more commodities”.
Things go badly; “why were you market weight international, underweight would have been better, and those property and infrastructure assets did not diversify!”.
The goggles, they do nothing.
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