Just how bad is the current inflation environment and what does it mean for stocks? finews.asia talks to an economist who puts it into context.

Jan Loeys is not that easy to lure out of his reserve in his area of expertise and when asked about rapidly climbing inflation in the US, he responds that «it was worse in the 1970s,» and the bear market for stocks is «just a hiss.» Calm words in an environment where so much ink has been spilled by journalists and analysts writing about the current situation.

Even a looming recession is not the end of the world, because «recessions come and go and should be seen as buying opportunities,» says Loeys with the caveat of «respecting that a lot of people get hurt during a recession.»

Career Forged During Inflationary Crucible

Born in Belgium and having spent most of his long professional life in the UK and US, it's easy to see that he's cool in the best sense of the word, and not without reason. He can speak so calmly about inflation 50 years ago because he experienced it first-hand. He received his doctorate in economics in 1981, and in the early 1980s, he was working as an economist for the Federal Reserve District Bank in Philadelphia known as the «Philly Fed». This was a time when inflation-fighting legend Paul Volcker was chairman of the Federal Reserve. In 1986 Loeys joined Wall Street bank JP Morgan, where he has been ever since.

Loeys would have retired some time ago, to make room for «fresh talent» but JP Morgan didn't want to let him go. Now he applies his talents looking into the future for the institute's largest investment clients, far ahead it turns out, as a «long-term strategist» advising investors on their strategic asset allocations. His task is to help pension funds and asset managers to decide what their average asset allocation for billions of dollars should look like over the next ten years, giving him a new challenge at the age of 65.

He explains his role by saying «investors have become very large and market liquidity has not kept up. They are like oil tankers and can change direction only very slowly. They cannot move in and out of the market in size and thus need to invest for the long term.»

Peering Beyond the Business Cycle

«Ten years is a somewhat arbitrary choice for the long term,» admits the stock market veteran, but does makes it possible to look beyond the next business cycle and forecast asset returns with a higher degree of accuracy. «Financial markets are noisy and full of distractions,» and mathematical calculations help him to see through the noise, he says.

Empirically, «the income from coupons balances out the price movements of US bonds for ten years, and today’s yield is thus the return you will get over the next ten years,» and explains «that is quite easy.» In the case of equities, however, the probability of deviations in price forecasts is significantly greater, he points out. «But compared to the volatility on the stock exchanges, it is still surprisingly low. Here, too, we stick to simple valuation figures and are not distracted by estimates of the company's future profits.»

The Secret Sauce

Therein lies the secret of the long-term strategist. He doesn't make any predictions about the near-term stock market situation, the economy, interest rates, or geopolitics, rather calculating only how much return securities can generate on average over the next ten years.

«Predictions that determine the long-term goals of an asset allocation must be precise,» emphasizes the economist, who has risen to the rank of managing director. Loeys only relies on current and past price data, and «...by that I mean, things that we know for sure. We leave all economic forecasts aside,» he adds.

The promise is that his team will achieve a high degree of accuracy. «We don't use the word 'if'. Instead, we set a long-term return target with the customer and explain the allocation with which (they) will achieve this.»

So what does that mean? «If I only look at the price development, then I know that stocks will make up their current losses in the next ten years. We expect an average nominal return of 6.5 percent per year,» says Loeys. With bonds, however, one will be able to earn a maximum of 2 percent in the euro area over the next ten years and 3.5 percent in US dollars.

With cash, on the other hand, there is a high probability that it will be less profitable than bonds in the long term, and «anyone who has enough money to withstand market slumps should primarily invest in stocks,» he recommends.

What About Crypto?

And what does the long-term strategist say about the young phenomenon of crypto investments? This is a sensitive issue. JP Morgan CEO Jamie Dimon declared in 2017 that he would fire any investment banker who deals in Bitcoin. «Personally, I believe that you have to understand an investment completely in order to put money on it,» says Loeys. «For me, this is not the case with crypto - I'm either too old or not smart enough to understand its properties.»

So Loeys is leaving cryptos to the younger generations.