Skip to main content

Market's Inflationary Expectations


Image result for eric j. weigel

Investors in the spring of 2016 could have gotten ahead of events by aligning their portfolios to “a world of lower expected capital market returns and higher forward volatility.” That, at any rate, was the upshot of a thoughtful analysis by Eric J. Wiegel of Global Focus Capital, a Boston based asset allocation advisor. Why does Wiegel think so? Because the market’s inflationary expectations are/were too low.
With the benefit of a year of hindsight ... was Wiegel right?
So far as I can tell ... no. In particular, the market's inflationary expectations as of the spring of 2016 for the following year were accurate, and following Wiegel's effort to outguess the market would nought have availed. There was no upsurge in inflation numbers in the months after Wiegel wrote, and in fact investors have since then benefitted by higher than expected capital market returns.

In the five months before and contemporaneous with Wiegel's article, the inflation rate (annualized, that is, multiplied by 12 in each case) was: 1.4, 1.0, 0.9, 1.1, and 1.0.

In the following five months, the inflation rate was: 1.0, 0.8, 1.1, 1.5. and 1.6. As you may already have noticed, there was a slow upward trend in that sequence, but it wasn't really anything out of line with market expectations as of the spring.  

Inflation continued to tick up until February of this year, when it hit 2.7, an altitude it hadn't seen for five years. But since then it has headed back down again: 2.4 in March and 2.2 in April. None of this qualifies as an inflation surge of the sort Wiegel seemed to have in mind. 

Volatility?  I've just quoted Wiegel's observation that IF there had been an inflation surge, "higher forward volatility" would result. It probably would have. But in fact, volatility is at a 23 year low.

None of this is to criticize Wiegel. Economic forecasting is a tricky business, and even the most careful and scholarly analysis can go wrong. Perhaps that is the take-away from this little reality check.

Comments

Popular posts from this blog

Great Chain of Being

One of the points that Lovejoy makes in the book of that title I mentioned last week is the importance, in the Neo-Platonist conceptions and in the later development of the "chain of being" metaphor, of what he calls the principle of plenitude. This is the underlying notion that everything that can exist must exist, that creation would not be possible at all were it to leave gaps.

The value of this idea for a certain type of theodicy is clear enough.

This caused theological difficulties when these ideas were absorbed into Christianity.  I'll quote a bit of what Lovejoy has to say about those difficulties:

"For that conception, when taken over into Christianity, had to be accommodated to very different principles, drawn from other sources, which forbade its literal interpretation; to carry it through to what seemed to be its necessary implications was to be sure of falling into one theological pitfall or another."

The big pitfalls were: determinism on the on…

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge.



We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a majestic wate…