Eras of political and economic consensus define the risk characteristics of assets; what is risky and what is safe depends on the regime we are living in. As an example, the Cold War era produced very different return profiles and correlations to the ‘neo-liberal’ phase that has characterised most of our working lives.
The last twelve months have been dominated by profound disruption of the political order around the world and this has taken place alongside a deep challenge to prevailing economic ideology. I have written about these issues with regards to Donald Trump’s election victory and the Italian referendum and ‘post truth’ politics, while Stuart has discussed how the polarised nature of discourse can impact investors’ decision making.
In this video I explore possible implications for the regime in more detail and in particular how a move towards returning decision making to the nation state (and the reaction against ‘globalisation’) can result in a de-correlation of asset price changes and volatility characteristics. This will have significant implications for how we value assets, and how we seek diversification within portfolios.
The interview with Daniel Kahneman I refer to in the video can be found here.