August 2022
IN THIS ISSUE
More disconnects
Inflation Recession
Here’s Nassim Taleb on inflation:
Let me repear, "inflation" is largely a jammed supply chain problem, largely from capacity reduction in 2020. The CRB index is BELOW where it was in 2005!
— Nassim Nicholas Taleb (@nntaleb) June 24, 2022
Add to it an asset price inflation from low interest rates driving a speculative demand for real estate linked goods. pic.twitter.com/odp8ou3fQP
And here is Mark Spitznagel, founder and president of Universa, and incidentally where Nassim Taleb is a “Distinguished Scientific Adviser”: Mark Spitznagel says we should expect inflation to be 'elevated forever.'
"I do think that we're going to probably see it [inflation] come down a little bit, but I think we should expect it to be elevated. Frankly, I think we should expect it to be elevated forever, like basically forever," Spitznagel said.
Taleb argues that inflation is a temporary pandemic-induced supply chain problem, implying that inflation will recede once supply chains recover. Spitznagel argues that inflation will be “elevated forever”, implying that not even recovered supply chains will normalize inflation. Taleb’s case is “temporary inflation” (the term “transitory inflation” became politicized and has fallen out of favor of course but nevertheless remains descriptive). Spitznagel’s case is structural inflation, as in “permanent” and decidedly “not transitory”.
I always remain open to quality counterevidence. What I have not heard, however, is a convincing case that the root causes of inflation are in fact permanent. If we accept Taleb’s assessment of jammed supply chains as the primary cause of surging inflation, for example, then Spitznagel’s “elevated forever” argument means that currently constrained supply chains will remain constrained forever. There is just too long of a history of market forces adapting to changing supply and demand for me to think that today’s supply chain constraints are structural and permanent in nature. Rising prices attract new entrants in the competitive marketplace, spurs innovations that reduce the need for raw materials in short supply, lead to behavioral downshifting among consumers to products in greater supply, and countless other balancing effects that make market-based economies work so well - and revert inflation back to its roughly 2% long term stable level.
Thinking in Likelyhoods means staying focused on quality evidence and a superior process, even when prevailing narratives swing the other way. I have written and written and written and written and written that inflation is Likely to be “transitory”, meaning temporary and not structural. Ron Insana of CNBC has been standing by the transitory case also:
June 2nd: Policymakers should stop apologizing. Inflation really was 'transitory'
August 12th: The Fed may have retired 'transitory' too soon to describe inflation
August 26th: Inventory gluts offer evidence that the Fed’s push to quash inflation is working
Of course the debate has now morphed away from “transitory or not” and into “recession or not”: Are we in a recession? It doesn't matter, Fed official says: 'I'm focused on the inflation data'.
Market participants are learning that not all inflation is created equal: The US and Europe Have Different Inflation Problems.
Economic ships turn slowly, and there are early signs of peaking inflation, including this analysis from the Federal Reserve Economic Data showing that inflation perhaps peaked in January/February: Measuring inflation trends | FRED Blog
Every market participant is aware of inflation and the Fed’s well-signaled inflation-taming policy moves. Even if we are either currently in or headed into an inflation-induced recession, it is Likely not a typical recession.
ONE MORE THING…
More disconnects. Follow-up to last month’s Likelyhoods on disconnects between markets and the economy. Stocks Are Divorced From the Economy—but Won’t Be Forever - WSJ
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