Arrow Insights (AI) conducts research for the weekly InFocus. AI reviews economic and market factors relevant to specific financial markets. Each InFocus examines asset classes and index performance within an asset allocation context. The primary or secondary objectives are hedging Inflation, deflation, or both. Each InFocus reviews a portfolio strategy model or index relevant to this process.

Asset allocation results depend on inflation risks structurally rooted in shifts in global trade and global financialization (open border capital flows). Ramifications from the Ukraine War—geopolitical risks and easy money policies since 2008—will prevent a return “set it and forget it” portfolios optimized by benign interest rates. We are in the early stages of a long secular period of inflation that has stayed above the U.S. Consumer Price Index’s (CPI’s) mean near 3% since 1919. Why? Future economic factors are less likely to foster a 50-year-plus period of declining inflation rates that lifted bonds well above their historic mean real returns (net of inflation). The experiment with zero-risk-free rates is over!    

The Dorsey Wright Global Tactical Allocation Model (DWTA) is InFocus. DWTA is currently positioned to hedge “HIGH” Inflation Risk (Figure 1).  The portfolio holds zero bonds, and its model sold U.S. dollars for silver (Figure 2). DWTA also holds a 21% allocation in energy stocks and basic materials and 30% in foreign stocks, boosting its ability to hedge high inflation.