Macro Aware & The Need for KCR’s Equity Duration Tool

A Critical New Metric to Estimate Risk & Return:

• KCR does not make macro forecasts, but we are “macro aware” – inflation has never been more topical
• Our piece reviewing the US’ last Great Inflation offers a quick preview of inflation’s impact on equities
• The first two bars in the chart show that in periods of higher inflation, Growth & Value show no meaningful separation
• For a terrific paper on how duration between growth and value is closer than assumed, this piece by GMO is superb
• The last two bars in the chart show that the Kailash Duration tool successfully identifies which firms are likely to LOSE & WIN if rates rise to combat high inflation

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For allocators, portfolio managers, and investors, the Kailash Duration Product is a valuable addition to your toolbox in understanding a risk factor that has arguably not been more relevant since 1969. To learn more please read our latest paper on Equity Duration or contact us here.

The Great Inflation Compared to Today:

The United States has gone through an incredibly benign period of price stability. Despite central banks and the federal reserve enabling and often running deficits in the double digits, higher prices simply did not emerge. Yet rates of inflation are soaring today. As oil prices rise and increases in the price of everything from food to electronics rears its head, the world is still operating as if this is all transitory.

The truth is, nobody knows. The literature on macro forecasting is unforgiving. Nobody can do it well. Reach out if you would like some of the literature on the failure of micro and macro forecasting.

That, then, is why we believe the equity duration tool is so important today. While the Federal Reserve Bank is telling us things are transitory all anyone can really know is that it might be transitory inflation. With budget deficits at levels last seen during WWII and the unemployment rate all over the place as the federal reserve system pumps liquidity into markets at a furious pace, we think the risks are NOT priced in.

With bonds offering negligible yields and lots of duration risk, we know the market is assuming the bureau of labor statistics data is wrong. We explained how this phenomenon was present in equity market valuations in our duration work. Stocks today carry more interest rate risk than almost any time in history.

Great Inflations Do Not Come with a Warning

Without realizing it, a typical investment portfolio of stocks and bonds is effectively “short” inflation despite numbers that we have not seen since the Vietnam War. We encourage investors to tread carefully and contemplate the risks they are taking.