One might legitimately say exactly the same thing about poor Léon Walras. If economics had never become a discipline suffering from physics envy, in which erroneous and inappropriate models were applied to the micro and macro economy, we might never have had developments like subprime mortgages, CDOs, quantitative trading, credit ratings agencies, economists, economic forecasting, and the mother of all credit bubbles. But we are where we are, and we just have to make the best of it.

Where we are might not be a particularly happy place. In an interview with Fortune, strategist David Rosenberg suggests that we remain in a secular bear market, wherein rallies “are to be rented and not owned” and in which the prevailing market characteristic is “wrenching volatility”. For proof of the latter, if it were needed, look no further than the performance of the hedge fund industry during May, where it looks as if no single strategy generated a positive return. Odey European is believed to have lost 11% during the month, and there are numerous other high profile casualties.

That said, it also looks increasingly as if the hedge fund community and its marketers have managed to infantilize investors into believing that high returns are compatible with no losing months. The reality is surely that the financial world, beset not least by random political posturing and interference, and the longer term impact of an ongoing banking and fiscal crisis, is experiencing such profound stresses that the objective of meaningful positive long-run investment returns is simply unachievable without a measure of short-term negative volatility, and to believe otherwise would be dangerously naive.

David Rosenberg is asked whether, given that the Federal Reserve’s balance sheet has risen from $850 billion in 2007 to $2.3 trillion today, runaway inflation is the inevitable outcome. The deflation  / inflation debate remains the most pressing one in finance. Rosenberg’s view:

“Ordinarily [the expansion of the Federal Reserve’s balance sheet and the US monetary base] would be inflationary, but because banks are not relending that money, it has not been. In fact, overall credit is declining. If and when we embark on the next credit creation cycle – which is probably many years away – this monetary inflation will probably result in real inflation. But not until money moves off of bank balance sheets and into the real economy.”

Rosenberg’s asset allocation conclusion is extraordinarily defensive: 30% equities, 50% bonds, and 20% cash. But notwithstanding his views on inflation or the apparent lack thereof, Rosenberg also maintains a $3000 target for gold. This forecast is itself trumped by that of strategist Harry Schultz, who maintains a $6000 price target. Speaking to Peter Brimelow of MarketWatch, Schultz, addressing the deflation / inflation debate, suggests that

“We (collectively) are poised at a heart-stopping moment in economic times. On the one extreme side, the world is on the edge of massive deflation and depression. At the other extreme.. hyperinflation. My view is: both these extremes are possible. Certainly deflation is, on balance, in play today and gaining ground as money supply is actually declining ! Hyperinflation seems impossible when there is not much inflation in most economies. But.. hyperinflation is a monetary event, not an economic one, and will happen on an overnight basis, not via a general uptrend in inflation data.”

Given the peculiarly bi-polar nature of the investment outlook, investors need, effectively, protection against both deflationary and (hyper-)inflationary forces. The extraordinary uncertainty warrants some form of portfolio compromise, as a hedge against what BP CEO Tony Hayward has referred to as “low probability, high impact” outcomes. The highest quality bonds cater to the former requirement, and gold caters to the latter. Beyond that, all is supposition. Economists may claim to have more precise answers but – in our view – since their discipline with its presumptions is partly the cause of the problem, it is unlikely that they will bring the solution.