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.
Labels:

Comments

Post a Comment

Popular posts from this blog

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 maj...
9 comments
Read more

Searle: The Chinese Room

John Searle has become the object of accusations of improper conduct. These accusations even have some people in the world of academic philosophy saying that instructors in that world should try to avoid teaching Searle's views. That is an odd contention, and has given rise to heated exchanges in certain corners of the blogosphere.  At Leiter Reports, I encountered a comment from someone describing himself as "grad student drop out." GSDO said: " This is a side question (and not at all an attempt to answer the question BL posed): How important is John Searle's work? Are people still working on speech act theory or is that just another dead end in the history of 20th century philosophy? My impression is that his reputation is somewhat inflated from all of his speaking engagements and NYRoB reviews. The Chinese room argument is a classic, but is there much more to his work than that?" I took it upon myself to answer that on LR. But here I'll tak...
17 comments
Read more

Recent Controversies Involving Nassim Taleb, Part I

I've written about Nassim Taleb on earlier occasions in this blog. I'll let you do the search yourself, dear reader, for the full background. The short answer to the question "who is Taleb?" is this: he is a 57 year old man born in Lebanon, educated in France, who has been both a hedge fund manager and a derivatives trader. He retired from active participation from the financial world sometime between 2004 and 2006, and has been a full-time writer and provocateur ever since. Taleb's writings for the general public began where one might expect -- in the field where he had made his money -- and he explained certain financial issues to a broad audiences in a very dramatic non-technical way. Since then, he has widened has fields of study, writing about just about everything, applying the intellectual tools he honed in that earlier work. As you might have gather from the above, I respect Taleb, though I have sometimes been critical of him when my own writing ab...
4 comments
Read more