We wanted to share a noteworthy piece of research discussing a scenario warranting much higher asset valuations.
We highly respect Gavekal’s Anatole Kaletsky who has an outstanding track record of getting big regime changes right. He turned bearish before the Financial Crisis crash in late 2008 then became bullish in early 2009. He maintained his bullish stance for the entirety of that bull market but reversed his position in 2022 calling for investors to “sell the rally” due to inflationary concerns. Anatole now questions his bearish position, and says that if inflation continues to fall, much higher valuations would be warranted.
In a piece last week titled “What If I’m Wrong About Inflation?” Anatole says that if June’s inflation decline continues in August, he will conclude he’s wrong. In this scenario, “asset valuations that were widely viewed as unsustainable in the long run will likely be priced even higher because the ideal financial conditions of low inflation and near-zero real interest rates would have been empirically established as scientific law of economics and permanent facts of life”.
We haven’t seen anyone else posit the possibility that MUCH HIGHER VALUATIONS could be justified. Thus, we thought it was noteworthy. Inflation breakevens, Truflation, and sticky price CPI all suggest inflation should continue to normalize making Anatole’s scenario more likely. The disinflationary forces that were underestimated for most of the last decade could continue to be at play. That would help explain the monster moves we’ve seen this year in some of the biggest tech companies.
Read the full article by Anatole Kaletsky of Gavekal Research for more details
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