‘A Perfect Storm For Volatility’
"Our track record at understanding inflation is really, really bad."
That rather stark admission, from David Romer, was included in a summary of the American Economic Association's annual meeting, which wrapped up two days ago. It was the first in-person gathering since the pandemic.
In addition to underscoring my long-standing contention that inflation may look disconcertingly stochastic in the years ahead, Romer's remarks spoke to another, more controversial, claim I'm fond of -- namely that
Thanks for delving into this.
It’s human nature to look and hope for some kind of structure in so many aspects of our lives. That includes economics.
I entered trading markets in 1976 and as the years passed, I’ve come to share many of the conclusions expressed by Chairman Powell and the others you cited. Bravo Powell!
That extends over to the idea of using earnings to value stocks in the aggregate.
The dominant narrative seems to be an orderly disinflation with perhaps a long tail. Nice to have the reminder that just as very few correctly mapped the ascent, we likely won’t get it right on the way down either. China’s reopening is likely the largest wrench thrown in the mix. The Economist thinks China will account for 2/3 of global growth this year. China (usually) consumes 1/5 of the world’s oil, over 1/2 of copper, nickel and zinc, and 3/5 of iron ore. Goldman recently reported that Chinese metal inventories are the lowest in 15 years. These will need to be (rapidly) replaced if economic activity picks up. LNG purchases will pick up too, giving Europe some competition. Despite the forecast global downturn, commodity strength may return. Inflation may have a long tail indeed.
The US currently consumes 20-25% of the earth’s major resources with ~ 4% of the world’s population. China has more than 4 times our population which means our current resource consumption is grossly unsustainable. Even if China were to achieve a standard of living equal to half of that in the US, we will soon be overwhelmed in the market for resources, including food. Much of our food comes from sources off-shore, Chile, Peru, Mexico, and many other places. China gets food from those places also. China is a growing competitor and constantly accusing them of lying about their data will not ameliorate any problems we will have in this inevitably growing competition. Of the top four largest meat producers in the US, JBS, top beef producer, is a Brazilian firm and Smithfield, top pork producer, is now controlled by its Chinese parent co. Context will become an increasingly important factor controlling the management of our economy. As we become a smaller player in terms of our “economic market” share, it will harder to manage our outcomes. Keeping up that leading reserve currency thingy will be a top priority.
A tip of the hat to your writing style on this one. Managing to fit these things together coherently, that’s something. Kocic’s quadrants deserve reflection. Unwinding should be its own field of study.
“Unwinding should be its own field of study.” Brilliant observation! I don’t know who the top teachers will be but right now I see very few, if any, standout candidates for top brain.
The key for me is avoid false reassurance. Whether I see it or not, there is always a high degree of risk, uncertainty and ignorance. You have to have some ground rules, and you have to admit when they aren’t the keys to success. The source of good judgement is experience, and the source of experience is bad judgement….