A Little food for thought

As investors, we have to think through the possible scenarios and adjust our portfolios accordingly. Here is my very crude attempt to delineate the possible scenarios, with permutations of real growth/inflation:

	Real Economic Growth
Inflation	High	Moderate	Low/Negative
High	Negative for bonds Mildly positive for stocks	Negative for bonds Negative for stocks	Negative  for bonds Negative for stocks
Moderate/Low	Negative for bonds Positive for stocks	Negative for bonds Mild positive for stocks	Neutral/ Positive for bonds Negative for stocks
Deflation	Neutral for bonds Positive for stocks	Neutral for bonds Negative for stocks	Positive for bonds Negative for stocks

There are two things to note about these scenarios. The first that some of these scenarios are more likely than others, though I am sure that opinions will vary about which one. For instance, the soft landing scenario, favoured by many economists/investors today, sees moderate growth with low inflation, one that is negative for bonds (because interest rates will start creeping back towards the fundamental growth rate) and mildly positive for stocks. I think that the high real growth/deflation scenario is unlikely, since it is difficult to see the economy growing at a robust rate and prices falling at the same time (especially given monetary policy over the last few years). I also have to believe (and perhaps hope is winning out here) that the negative real growth/deflation scenario has a low chance of occurring, and it would be very negative for stocks, though it will help bond holders. The second is that there are far more scenarios which are negative for bonds than positive, a direct result of interest rates being at historic lows and the Fed running low on ammunition.