Our societies produce a great abundance of Chicken Littles – those highly obnoxious deviants who run around screaming that “The sky is falling! The sky is falling!” at any and every opportune moment. The sky is almost never falling, so why we keep listening to them is beyond me. Siren calls may sound so sweet, but please.
It’s almost never as bad as you think and the world is not “inevitably” collapsing this time either. In financial markets, this is the paradox of prediction: you’re almost never right making tail-risk predictions, and when you are it’s inseparable from what the rest of us call ‘being lucky.’ This means that you can’t make money from deviant forecasts more than by accident.
In the climate change arena, we’ve played the Chicken Little game for decades. Long have we heard predictions of an imminent ice-free Arctic; still, ice there is. By 2020 there was to be no more snow in the Alps and malaria rampant in Spain, but that didn’t happen either. That doesn’t mean those stories and the evidence that point to them are wrong, mind you, but that their proponents exaggerated – honestly or maliciously – how bad it would be.
Presented with counter-evidence, you can always ad hoc chant that your premature prediction was overshadowed by some unforeseen circumstance and that it still remains intact for the future. Maybe so, but then come back in the future. The list of predicted end-times, for example – a tad more serious than our current uptick in inflation numbers – is long and astonishing.
Over the last year, the fear-mongering, sky-falling utterances came mostly through Covid-mania: wipe hands, kids, and groceries with disinfectants; double-mask, triple-mask, mask your dog, and then don’t go outside, even though that’s the safest and healthiest place for you to be.
In the middle of pandemic panic last year, I wrote
Gauging the future is tricky business, a business filled with well-meaning and serious commentators drowned out by pranksters and ideologically committed imbeciles. Despite being wholly unequipped for the task of divining the future, most political pundits and financial commentators are revered as saints for their extraordinary abilities to misjudge the future.
Still, we’re hellbent on not learning, and so when the April inflation numbers came out a little higher than expected this week, the Chicken Littles caught a scent of dawn. They have called (hyper)inflation for months, years, and sometimes decades without success but decimal-points on a single month’s CPI numbers surely means that the time has come. Get ready, boys.
The bond market, instead of freaking out – dumping Treasuries, and plunging into inflation-proof assets like TIPS, gold, or other assets that traditionally do well in inflationary environments – mostly yawned.
What’s so bizarre about this particular “Told ya, the sky is falling!” is the many sober warnings we have had all year: “The CPI is going to give us a false reading (‘look bad’) for the next few months,” said George Calhoun at Forbes. “Markets should see past inflation pick-up,” said Tiffany Wilding in the Financial Times. I hate to agree with Paul Krugman, but even he was on the reasonable side of this already in March:
“We’ll probably see a number of transitory price increases, not just because the economy is booming, but also because the lingering effects of the pandemic have produced some unusual disruptions — for example, a global shortage of shipping containers.”
The Economist, the week before this scary announcement, while commenting on commodity prices, raised the gaze a little and concluded:
“The view of central bankers is that today’s supply shortages are likely to be temporary and inflation will prove transitory. Recent history is on their side. Supply shocks have generally washed out of inflation quickly.”
For months popular macro analyst and strategic investor Lyn Alden, a friend of the otherwise bearish, inflation-mongering bitcoin crowd and often hailed as one of theirs, has cautioned us that inflation numbers will come in a little higher for a while.
But I guess none of that makes for juicy headlines or angry, vindicated Tweets.
Judy Shelton, too, had a tactful addition to the Chicken chattering: don’t take your eyes off the ball – and these minor inflation numbers are not the ball. Insanely-sized government packages, decades-long Fed activism, central bank credit footprints, and a pricing mania in every sort of asset – those are our more immediate macroeconomic concerns. We should talk about our monetary regimes, their targets, the credibility of our central banks, their politicization and calls for expanded activism (climate change; racial inequality; crypto frenzy – really?) Considering that we have bigger fish to fry, who cares if a one-month inflation number overshoots by even hundred basis points? Call me if it happens every month from now on – or God forbid, accelerates.
Pete Boettke, Dan Smith, and Alex Salter have the right approach in their timely-released book Money and the Rule of Law: the scope of monetary policy is expanding, rapidly and massively, and it probably shouldn’t. Salter nails it in a balanced article for National Review: “Everyone should take a deep breath. Chances are that things will be fine.”
Qualification: Can I confidently say that we won’t have serious inflation overshoot, later this year or later this decade? No, I cannot. There are too many moving parts, too many ways things that can go wrong, and too many incompetent technocrats wielding too much power. With that, there is always a background risk that things go really, really wrong.
Is it not the case that elites have been disastrously wrong before, that the establishment for a good fourteen months has demonstrated little but cluelessness and megalomania? Is this one of those times where the elites and the establishment are clueless and the man in the street is right?
Possibly, but I’m guessing not. Then, markets were with you, and the elites discarded them as bubbles, fads, and stupidities. This time, elites are talking sense and the markets are against you: market indicators of inflation for the next few years hover at 2.5-3%. A betting man, if he wants to remain a betting man, updates his priors. So, I side with Jason Bloom at the asset manager Invesco:
“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend.”
I will make a different sort of prediction, though: no matter what the future holds, the Chickens will be there to squawk about it.
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