Mean Reversion: Investors are currently enjoying the fruits of an extreme event

Investors are currently enjoying the fruits of an extreme event. Let's begin with a quote from an excellent interview given by Ken Henry to Fairfax media recently. When asked about investors' current preference for yield, and the consequences of this behaviour, Henry responded first by noting that the popularity of yield chasing is typical of periods of low inflation and high rates of savings. He added however, ... it is also worth recalling earlier episodes of investor herd behaviour. Recalling the unfolding of the tech boom, Henry noted that the period was also one marked by high savings and low inflation but one where hoped-for productivity improvements turned out to be illusory. Furthermore, Henry noted that the years prior to the GFC were similarly characterised by low inflation and high savings, triggering a pursuit for yield (in securities backed by subprime loans) that turned out not to be there. This article highlights some of the underlying factors worth keeping front of mind in the current environment: (VIEW LINK)

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