No Crystal Ball
With all the current market turmoil, rapid changes to interest rates and foreign exchange rates, everyone seems to have an opinion on what the Fed did wrong or is doing wrong. There are multiple predictions on what will happen next, when the stock market will bottom, when the Fed will pivot, and the course for interest rates over the next 2 years.
I don’t know what’s going to happen or when. If I did know I could probably make a fortune trading that knowledge on the futures derivatives market. What I do know for certain is that none of the forecasters actually know either.
“There are two kinds of forecaster: those who don’t know, and those who don’t know they don’t know”
- John Kenneth Galbraith
In order to make a forecast on the future you must make predictions on thousands of interdependent inputs. Get any single one of these inputs wrong, then the knock on effect to the ultimate outcome will be way off. This would be difficult enough if you only had to predict a binary outcome of each input, but throw into the mix the totally unpredictable, random, and emotional behaviors of humans, then you have a stew of potential outcomes.
Forecasting is routinely incorrect. When random events such as wars, pandemics, or unexpected election results occur, they are often dismissed as “outliers” that couldn’t be predicted. Therein lies the problem; forecasting is inherently incorrect due to the randomness of life.
Much is being said today about how the Fed has got things wrong, and that they are now doing too much to make up for being slow to raise rates earlier. Inside the Fed there are 400 Ph.D. economists working on forward guidance. Based on what I’ve said above, their predictions on future outcomes might be as valuable and reliable as my own guesswork! However, they do have access to much more data than I could ever imagine or want to read. I have to assume they have been acting on the best information that was at their disposable at any given moment in time. That being said, most data is backward looking and is then used to extrapolate an inference of future outcomes. Again, predictions on the future randomness of events.
I don’t envy the Fed’s task at having to react to current events and trying to corral the economy to its preferred course. It’s easy to sit here and prognosticate on what they should do, and what they got wrong leading up to this point. It seems obvious to look back and conclude that the current events were inevitable and other actions should have been taken sooner.
What I remember from being back in the midst of the onset of the pandemic was a world in crisis where everything was shutting down. There was no precedent for it and we were looking at every economy grinding to a full halt. Central Banks around the world took extraordinary measures to breathe life into their economies by lowering rates, buying assets, and printing money. The desired outcome was achieved, and economies appeared to weather the storm. However, such heavy measures are not without consequences and the real economic aftershock of the pandemic is only being felt now. The hangover is now kicking in. Low interest rates, asset purchases, and money printing inflated all asset values and created high demand. This is very inflationary.
Perhaps the Fed should have increased rates and stopped asset purchases sooner. They came to the conclusion last year that the inflation being created was transitory and caused by supply chain issues due to the worldwide shutdown. Their view was that this would soon be resolved. We are still experiencing major supply chain issues, and on top of that, we also now have a war in Europe. This has increased the cost of energy, a major cost component to everything we consume from food to materials. There is nothing the Fed can do to control supply chains or the cost of energy. Their tools are limited to influencing the cost of capital, which they can use to try and dampen down the demand side of the inflation equation.
I have read various articulate predictions, one is a soft landing with inflation tempered down by year end to be followed by a Fed pivot and reduced interest rates 18-months from now. The other is a more extreme scenario of a hard landing whereby the economy careers off a cliff to be followed by 10-years of mediocre growth.
I don’t know what’s going to happen, and I don’t believe anyone else does either, regardless of their confidence or acumen. The best one can do in uncertain times is to double down on your own due diligence and make the best investment decisions based on the current facts of the day. Put more weight in your decisions on the micro (say the property you are considering buying), and put less emphasis on the potential macro (economic) outcomes. Great opportunities tend to exist in uncertain times, which only become obvious in hindsight.
As the Oracle of Omaha, Warren Buffet, likes to say (who incidentally has always put most emphasis on the micro and little on the macro):
“be fearful when others are greedy, and greedy when others are fearful”
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