An excerpt from a Barrons On line interview with Scott Minerd, chief investment officer of Guggenheim Partners. Asset inflation—and then what?

THESE ARE TURBULENT TIMES, as evidenced by the huge gains forged by the Republicans in last week’s mid-term elections. For some perspective on a host of economic and investing matters—including suggestions on tax policy and asset allocation—Barron’s spoke with Scott Minerd, chief investment officer at Guggenheim Partners. The firm, based in New York and Chicago, has about $84 billion under management, the majority of it in fixed income for institutional and wealthy clients. Minerd, 51, a CPA who graduated from the University of Pennsylvania’s Wharton School, has a deep understanding of the fixed-income world, having been an early player in areas like structured-credit products. He’s overseen fixed-income credit trading in the U.S., Europe and Asia at Credit Suisse; he was also a managing director at Morgan Stanley. Among his related interests: financial history and macro economics.

Minerd: Mark Twain said that history doesn’t repeat itself, it just rhymes. And the events we are experiencing today look a lot like the same experiences that we had in the 1930s. There are lessons to be taken away from the 1930s that are useful in evaluating both policy and markets today. The lesson that we learned in the 1930s was not to run a restrictive monetary policy and not to allow protective barriers to go up against trade. Those have been the two things that I have kept my eye on throughout the ongoing financial crisis.

And what are you seeing?

There is no doubt that the chairman of the Federal Reserve, Ben Bernanke, is a student of history himself and is very aware of the monetary accidents of the 1930s. And as the chairman of the Federal Reserve during this period, his worst nightmare would be for the United States to fall into a debt-deflation spiral. Therefore, he is engaging in a series of policies that are creating excess liquidity in the system, relative to the mistake that was made in the 1930s. That will probably be sufficient to keep the United States from falling back into a recession. However, he is also setting the stage for events, both in the near term and the long term, that will have a dramatic impact, ultimately, on a lot of things in the United States, including asset prices and interest rates.

That sounds very ominous.

Well, in the near term, with so much liquidity available, asset prices will rise for a number of categories, particularly financial assets like stocks and bonds and commodities. That’s a bull market, which most people enjoy. But in the long run, after an extended period with low interest rates, which I believe the Fed will be able to engineer, the question becomes: How do you reverse this aggressive monetary policy without having a financial accident? And I don’t believe that the Fed will be able to pull that off successfully without some sort of a massive problem down the road. It is the problem that will occur in the next decade. And, in all likelihood, the ultimate outcome will be a paradigm shift in the way we view money. There have been five paradigm shifts in the last century on the definition of money. And it is not unusual for central banks and governments to make a shift when the problems become so big that they can’t resolve them within the financial system they created.

So you see a very tough decade ahead?

I actually think this decade is a great opportunity for investing—that is, for people who buy high-quality stocks and investments in select categories of fixed income, especially areas like high yield, and in commodities. The bull market in gold, as George Soros has said, is the mother of all bubbles, and we are still in the early stages of a bull market that will probably go on for another decade. So there are lots of opportunities for people to make money. But in most of the asset classes where people could make money, investors are afraid to get involved. That includes equities.

So while you see trouble longer term, in the meantime there are some good opportunities to make money for now?

Right. I ultimately call this the anti-currency trade. What you really don’t want to do is, at the end of the day, get stuck holding a lot of financial assets. But in the near term, because the rising tide of liquidity from the Federal Reserve is lifting all the boats—except for the boats with the holes in them, which I refer to as real estate—you can take advantage of this liquidity shift to make a lot of money over the next five to 10 years.

What is your assessment of the Federal Reserve’s decision last week to purchase $600 billion of U.S. government bonds, otherwise known as Quantitative Easing 2?

QE2 is a very blunt instrument. It is an attempt on the part of the Fed to raise asset prices in the categories where it can re-inflate. The wealth effect of increasing asset prices should help stimulate consumer demand. There’s also the incremental disposable income which can come from mortgage refinancings, if rates remain low. So in some ways the Fed essentially is handing out a subsidy or a tax cut.

Presumably financial assets worry you over the long term?

If you believe that we could ultimately end up in an inflationary spiral, any financial asset becomes a concern to me.

Where should the rest of the portfolio be?

The balance should be split between equities and certain categories of fixed income. In equities, we like U.S. large-cap, dividend-paying companies, with maybe about 10% of your equity holdings allocated to emerging markets.

Why the emphasis on U.S. equities, as opposed to emerging markets?

From a value standpoint, equities are very attractive. When you look at the earnings yield on equities relative to bonds, U.S. equities are exceptionally cheap. There is also a pretty solid uptrend in earnings growth in the United States. And given that the dollar is so cheap, this is probably not the pivotal moment to be diversifying away from the dollar. But it would be imprudent not to have an allocation to the emerging markets, because within the next 20 to 30 years China, India and Brazil are likely to account for a much larger percentage of the world market-cap.