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Biggest ‘Tail Risk’ for Markets is Inflation, not Covid

Tail Risk
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EDITOR NOTE: A large majority of investors are expecting inflation to rise along with economic growth. A few are expecting inflation to potentially rise more than three standard deviations above the “norm,” however then conceive that level. This marks the difference between mainstream and smart money. It’s not a matter of being right or wrong about a "tail risk". It’s a matter of making the right bet, minimizing the negative payoff in order to let the positive payoff, from a zero outcome to an oversized advantage, run as it may. If one doesn’t hedge against inflation, and it stays within the norm nothing major happens. But if one remains unhedged and inflation turns out to be disastrous in severity and length, then one gets hit by its full impact. The reverse scenario happens with those prudent enough to take action. And that’s why we invest in non-CUSIP gold and silver. It’s not about predicting the future. It’s not even about being right. It’s about taking the bet with the smallest negative payoff in order to maximize the largest possible positive payoff in an uncertain scenario. Plus, it's only to your advantage to hold real money, as inflation’s erosive presence has become evident.

Despite assurances from the Federal Reserve that the current spate of price increases is temporary, professional investors see inflation as the biggest threat to their portfolios, according to the closely watched Bank of America Global Fund Manager Survey.

A record 69% of respondents to the monthly reading see above-trend growth and inflation as the most likely scenario ahead.

What’s more, inflation is seen by 35% as the biggest “tail risk,” or unlikely event that could cause substantial damage.

Originally posted on CNBC

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