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

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.

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about stock speculation
  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about Hedge Inflation

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

April 9, 2021 |

April 9, 2021

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