Here in the West, we now call market deflation “volatility,” as in “major market indices suffered from volatility today,” where a down day is treated as something akin to the common cold. You can’t be in favor of volatility, surely. It’s a bad thing, almost on a par with smoking. No, we want good things and good words, like “wealth effect” and “accommodation” and “stability.”

The more I see today’s policy impact on markets described in utility-like terms—words like “stability” and notions like “volatility is bad and a thing to be fixed”—the more confident I am that the TVA political experience of the 1930s is coming soon to the capital markets of today.

Scratch that. It’s already here.

Here’s the problem with this political “solution” for investors. If you’re raising the floor on what you might suffer in the way of asset price deflation, you are also lowering the ceiling on what you might enjoy in the way of asset price inflation. That’s what investing in a utility means—you’re probably not going to lose money, but you’re not going to make a lot of money, either. So to all of those public pension funds wringing their hands at this fiscal year’s meager returns, well below what they need to stay afloat without raising contributions, I say get used to it: All of your capital market assumptions are now at risk, subject to the tsunami force of status quo politicians with their backs up against the debt wall.

Their market-as-utility solution isn’t likely to go bust in a paroxysm of global chaos, any more than it’s likely to spark a glorious age of reinvigorated global growth. We’re in for a long gray slog where a recession is as unthinkable as a 4% growth rate, and that’s a very stable political equilibrium. Sorry.

So what’s an investor or allocator to do in the face of a politically popular shift in the meaning of markets, other than become a grumpy old man? The hardest thing in the world is to recognize structural change when you’re embedded in the structure, so just asking questions about the relationship between State and Market is more than half the battle.

Beyond that, it’s time for some good new thinking on some good old ideas like diversification. It’s time to recognize the world as it is rather than lose ourselves in nostalgia for the world that was. Most of all, it’s time to call things by their proper names and stop demonizing words like “leverage” and “volatility.” These are tools, neither good nor bad in and of themselves, and they’re tools we are all going to need to learn how to use if we want to be survivors in the Golden Age of the Central Banker.

W. Ben Hunt, Ph.D., is the chief risk officer at Salient Partners and the author of the weekly publication Epsilon Theory.

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