198 THE BiG DROP
just end up getting whipped around.
What you need to do — what analysts and investors need
to do — is have a thesis to guide them. Don’t pick one at ran-
dom, but have a well thought out thesis. Then use the data
to test that thesis. There’s a name for this: it’s called “inverse
probability”. You use subsequent data to test your original idea.
That method is different from a lot of science where you ac-
tually get a bunch of data and then you come up with an idea.
Here, however, you have an idea and you come up with data
to test it. There is no better way of approaching the markets
because nobody has a crystal ball.
Our thesis has a number of elements. One of them is that
there is a tug-of-war going on between inflation and deflation,
which I’ve written about in these pages before (In the short-
term, I believe deflation has the upper hand).
That confuses a lot of people because they understand one
or the other, but it’s challenging for them to keep both things
in mind at the same time.
For your investment portfolio, that means taking a “barbell
approach”, which means have some protection at both ends.
Have your deflation protection and your inflation protection,
and some cash in the middle all at the same time because that’s
the best you can do with this kind of uncertainty.
The uncertainty is caused by central bank policy. We are
in unprecedented times. And that’s not just my opinion. If you
listen to Janet Yellen or members of the FOMC or members of
the Board of Governors of the Federal Reserve, leading econo-
mists and policy makers, they all say the same thing. They say
these are completely unprecedented times.
I recently had occasion to spend two hours one-on-one
with one of the ultimate Fed insiders. Sometimes, when you
do these things, you agree not to mention names so, I won’t
mention any names here. But this was a guy who was in the
room for every FOMC vote for the past two and a half years.