Headline: Unraveling the 2011 Asset Performance Puzzle: A Look at Discounted Growth and Inflation Premiums

The Enigma of 2011's Financial Performance In spite of a deteriorating global economy and heightened deleveraging, financial assets have surprisingly thrived this year. But the performance varies significantly among asset classes due to their exposure to economic growth shifts.

Understanding Asset Pricing and Returns Through an All Weather Lens Bridgewater Associates explains that asset returns can be best understood when viewed through the lens of discounted economic scenarios, with returns derived from how events transpire in relation to what was discounted and how these discounted scenarios evolve.

The Impact of Discounted Growth and Inflation on Asset Returns The decline in discounted growth has had a substantial impact on assets this year (approximately 15% for a 10% volatility asset), while the effect of discounted inflation has been relatively minor (around 2%). The positive or negative outcome depends on the nature of the asset.

Performance by Asset Class Assets biased towards favorable economic environments have underperformed, while others have excelled. For instance, US equities are down 0.1%, non-US equities are off by 10.3%, corporate spreads are down 1.6%, and US bonds have climbed 7.8%. On the other hand, oil has gained 18.6%, gold is up 20.9%, and a balanced mix of commodities is up with gold outperforming industrial commodities.

The Role of Risk Premiums in Asset Returns While changes in discounted growth and inflation tend to even out across assets, their long-term duration results in significant present value impact on prices due to money's tightness, perceived risk, financial system leverage, or money creation. This year, a falling risk premium has supported asset prices.

Portfolio and Investment Implications Taking into account each asset's structural exposure to these forces, they collectively explain the return of each asset class this year. For example, stocks, bonds, and corporate spreads have been impacted differently by discounted growth, discounted inflation, and risk premium shifts.

Actionable Insight By understanding the drivers of asset returns as explained through Bridgewater's All Weather lens, investors can make more informed decisions and potentially optimize their portfolios to better navigate various economic scenarios.