Cause for Pause

Now I'm towing my car, there's a hole in the roof
My possessions are causing me suspicion but there's no proof
In the paper today, tales of war and of waste
But you turn right over to the TV page
--Crowded House

Masterpiece by Mr Practical today that advises staying focused on the big picture rather than the noise and misinformation that pervades deflationary situations such as ours. He suggests that individuals reduce risk so that they are better positioned to capitalize on opportunities down the road.

While I have heard and heeded Mr P's call for risk reduction to some degree, I'm far from 'out of the market.' In fact, the last couple of months has found me increasing risk such that I'm currently carrying lower cash levels than I have in a while. Current cash stands at about 48% of liquid assets. Not exactly illiquid but down significantly from a ~2/3 cash position at end of Q1.

Bureaucratic interventions over the past couple of months that ultimately seem dollar destructive have led me to assign a higher probability to hyperinflationary outcomes than I had previously. Currently, my scenario analysis looks like this:

Hyperinflation (30% chance--up from 20%)
'Normal' inflation (20%)
Deflation (50% down from 60%)

What makes it tough is that I'm 'seeing' greater chance of either extreme than the middle of the road case. And the actions for coping with hyperinflation vs deflation are diametrically opposed to each other. Because the chances of extreme inflation have upticked in my mind, I've been acting accordingly by adding risky assets that might benefit from, or offset, dollar devaluation--such as select decently valued pharma stocks such as Pfizer (PFE) and various commodities.

But Mr P's continued voice of reason has given me pause, and is causing me to once again re-examine my asset allocation. Should this nascent rally have legs, I'll likely be looking for opportunities to reduce my risk profile.

position in PFE, commodities