Hindsight is a helluva thing. If time travel were possible, hindsight would be tantamount to perfect foresight. And, as noted here last week, there’s a lot of money to be made in the fortune-telling business for the first person who proves it’s viable.

The problem is that absent a working McFly DeLorean, hindsight is of limited use. In a broad context, we can, and should, learn from history (lest we should repeat it), but in the narrower context of markets, investors are famous for trading the last crisis. Just like policymakers are famous for fighting the proverbial last war. That often leads to fruitless trades and bad decision making.

At the same time, “known unknowns” (e.g., the CRE story in 2023) tend to become very well socialized, which, in one way or another, tends to lessen the risk. Or at least reduce the reward on offer for associated trades.

If CRE risk blows up the financial universe later this year, it’ll be the first time in my life that everyone with even a passing interest in markets knew, ahead of time, where the next crisis was coming from. Things just don’t work like that. It’s not so much that the next crisis isn’t identifiable. Rather, it’s that it’s always “hiding in plain sight” and very few people are looking in the right place.

Anyway, that’s a bit of a tangent. Coming quickly back to the hindsight point, I wanted to highlight the figure below, from Goldman, which shows you optimal balanced portfolio weights across different macro and market regimes. More simply: It shows what you would’ve done if you knew then what you know now.

“Based on historical efficient frontiers, during the 1970s stagflation an allocation to real assets would have materially improved a standard 60/40 strategy in risk-adjusted terms [but] extreme allocation shifts would have been required — in hindsight, the optimal portfolio would have been entirely invested in real assets,” Goldman’s Cecilia Mariotti wrote, in a note published Monday.

She went on to say that “even outside extreme scenarios, owning real assets has been attractive over the long run.” Specifically, Goldman’s work shows that an optimal allocation since 1950 would’ve included a near 30% weight, including REITs and infrastructure equities.

All of the above (including my tangent) is extremely relevant in the current macro context. Virtually everyone you care to consult insists we’ve entered a new macro regime, and that even if direct comparisons to the 70s aren’t possible or advisable, the odds favor a larger allocation to so-called “inflation assets,” with some strategists arguing for replacing 60/40 with 25/25/25/25 (split between equities, bonds, hard assets and cash, for example).

I agree with that assessment. One potential problem is that so does everybody else. I think it’s fair to suggest that a majority now suspects the macro regime has shifted durably, and that the biggest risk going forward is related to asset allocators under-appreciating the ramifications for portfolio strategy. What concerns me is the extent to which we’re relying on the 70s parallel (trading the last crisis) and implicitly suggesting we all know, ahead of time, what the biggest risk is.