Think, Invest! by

Tuesday, May 22, 2007

To my hedge fund friend

Here's what I wrote to my hedge fund friend who thinks that everything is hunky dorry. We'll see if he write me back:

Regarding inflation, if we are in a prolonged period in which commodity inflation should, has, and will outstrip core inflation, is core inflation really meaningful? The reason that everyone points to core inflation, I believe, is because of the experience in the 70s when labor inflation signaled the core of inflation. But aren't we in a different time, characterized by global labor forces and global commodity demand, when the real signal of core inflation is commodities, in my view then lagged by workforce inflation? Could it be that people are having trouble seeing a new paradigm, wherein the core of inflation is the inverse of our previsious experience? Those who rely on rear-view investing will miss this new paradigm and all its significance.

Those who benefit from leverage - hedge funds, banks, private equity, even the Fed and the government to some extent - will, undoubtedly, have an emotionally negative reaction to the above statements. Those who are open-minded and erudite might pause to think.


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