Tags: nobel laureate | myron scholes | smart | money | inflation

Nobel Laureate Myron Scholes: 'Smart Money' Pessimistic, Betting on Inflation

Nobel Laureate Myron Scholes: 'Smart Money' Pessimistic, Betting on Inflation
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By    |   Thursday, 17 October 2019 09:25 AM

Nobel laureate Myron Scholes reportedly claimed the “smart money” is getting nervous.

“Right now for the smart money, the way ahead is pessimistic,” Scholes, chief investment strategist at Janus Henderson Investors, said at the annual Sohn San Francisco Investment Conference, CNBC reported.

Smart money is commonly defined as the capital that is being invested or withdrawn from the market by knowledgeable financial professionals.

“If you believe that market prices are giving us information about the road ahead ... Basically the market is saying the downside risk for the S&P 500 is about 11% and upside is only around 10% so the distribution is skewed to the downside,” Scholes said. “The same thing is true if you look at all the sectors of the S&P 500 except the material sector.”

Scholes said he is bullish on inflation assets such as natural gas, oil, gold, silver and agricultural commodities.

Scholes won a Nobel Prize in economics in 1997 with Robert Merton for research into the pricing of options and derivatives that formed the basis for the widely used Black-Scholes pricing model.

Meanwhile, Chicago Fed President Charles Evans said Wednesday that a low interest rate environment sets limits on what the Federal Reserve can accomplish with monetary policy, making it important for the Fed to "proactively" cut rates when risks appear to provide a buffer for the economy,

Evans said that when inflation is low, providing "too much accommodation" can help the U.S. central bank reach its inflation target sooner. In contrast, not acting strongly enough can cause inflation expectations to be anchored at low levels, Reuters reoorted.

"In my view, these differences mean we need to err on the side of providing aggressive enough accommodation to get inflation moving up with some momentum," Evans said at an event hosted here by the Greater Peoria Economic Development Council.

Speaking to an audience of local politicians and business leaders, Evans stressed the importance of responding quickly to downside risks, making the case that the Fed could raise rates later if needed.

"Engineering a modest overshoot of our inflation objective better guarantees that we would actually meet our inflation target in the future," Evans said. "Any excessive overshooting could be controlled with modest rate hikes."

However, Bloomberg reported that bets against U.S. stocks haven’t been this low since last October -- just before the deepest sell-off in a decade.

Short sales in the SPDR S&P 500 ETF Trust as a percentage of shares outstanding fell to just 2.6% this week, according to data from IHS Markit Ltd., signaling optimism that American equities can push back toward all-time highs. But the setup has some investors on edge.

“Is it another sign of complacency? Smells like it,” said Yousef Abbasi, global market strategist at INTL FCStone. “The market is being stubbornly optimistic in the face of several headwinds. It does feel dangerous.”

There’s certainly reason for optimism. Evidence that two of the largest market overhangs -- a U.S.-China trade war and Brexit -- could be resolved has pushed U.S. equities within 1% of a record. The S&P 500 added 0.4% as of 11:22 a.m. in New York.

“Cyclicals have room to move higher relative to defensives in 4Q,” Evercore ISI’s Dennis Debusschere, the firm’s head of portfolio strategy, wrote in a note to clients Wednesday. “A strong equity market showing in 4Q is more dependent on investors discounting lower odds of a recession rather than a material increase in expectations for economic growth.”

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Nobel laureate Myron Scholes reportedly claimed the “smart money” is getting nervous.
nobel laureate, myron scholes, smart, money, inflation
Thursday, 17 October 2019 09:25 AM
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