It’s no secret that I think people in general are way too fixated on myopic, short-term outlooks. They’re not patient or disciplined enough to take a deep breath, get a broad perspective, and just chill – especially when conditions are volatile and a little unclear.
Nowhere is this shortcoming more prevalent than in the financial profession. Speculators abound and myopia rules the day.
And in the current climate, all the media and a great many of our politicians also have a deeply vested interest in keeping us feeling anxious and afraid – acting on emotions – rather than informing and leading us in a calm, measured manner.
These feelings are contagious. Just look around.
Here are a few big picture thoughts I’d offer as a possible counterbalance to the current mood.
First, remember that just over two years ago, the US economy was suddenly and artificially shut down and put into a deep coma – an unprecedented occurrence in history. That action alone provoked all manner of drastic changes in our collective thoughts and behavior.
But not long thereafter, an equally sudden and unprecedented dose of adrenaline was injected straight into its main arteries. That event too provoked a whole host of other drastic changes in our collective thoughts and behavior.
Those combined shock waves are still playing out, and we should not be surprised at the gyrations they triggered, or that they might continue to play out for some time.
As an analogy for that overall experience, think about what happens if I have a 100’ extension cord plugged into a wall socket in my garage. Imagine I’m on the other end of the cord at the far end of my driveway, and that I throw a wave of energy down that cord in order to get it freed from some obstruction it has become snagged on in between…
That wave will travel down the whole extension cord, transferring massive energy all along the entire length, so that each successive foot of that long cord first jumps sharply, and then drops back down suddenly as the wave moves through and onward towards the far end…
(The trick, as you might imagine, is to give that wave just enough power to free my extension cord from wherever it’s stuck, but not so much that I jerk it out of the wall socket in the garage 100’ away. That is no easy trick for me when I’m blowing leaves out of my long driveway*, and it is no easy trick for the Fed now…)
Nevertheless, I think that’s the phenomenon we’re seeing play out right now. The wave of energy created by the events of 2020 is still traveling down the cord. It hasn’t played out yet. But huge numbers of people are feeling surprised and panicked. Their old models aren’t “working,” and they haven’t developed a new mental map for the environment, so they are freaking out at the drastic changes they’re seeing right now in whatever short section of the cord they’re myopically staring at (or supposedly “analyzing”.) And they’re missing the bigger picture context…
Now keep in mind that much of the inflation “information” being breathlessly reported in this hyperbolic environment concerns changes to year-over-year data. As a result, it tends to highlight the outsized changes between, for instance, May of 2020 and May of 2021, and then between May of 2021 and May of 2022. And the data being reported is specific to one or another particular sector.
And – because of the wave – in plenty of cases those particular months represented either unusually deep troughs or unusually high crests for the fortunes of each of those individual sectors of the economy, depending on how we were all reacting at that particular point in time.
Just ponder your own experience and picture the troughs and crests of the various waves you have ridden through (and maybe participated in) during the last couple of years.
First came the sudden lockdown, forced social isolation, and huge economic uncertainty. We all got fearful, primal even, and we hoarded toilet paper…
Then came massive stimulus payments, and concerted business retooling. But without vaccines, we were still isolated – so we focused all that money on transforming our homes and our virtual offices.
We scrambled to buy new computers, scanners, and cameras, and we learned how to go to church or host a meeting on Zoom. Many folks transacted business through e-signatures for the first time. We bought patio furniture, remodeled the back bedroom into a home gym, bought Peloton bikes, and subscribed to Netflix. Those businesses and sectors suddenly boomed like never before.
But other businesses and sectors suddenly cratered. Restaurants were shuttered and nobody was going out. We quit traveling, so hotel rooms were empty. Cruise ships sat idle, car rental companies sold off all their unused fleets, and airlines and airline employees suffered like never before because nobody wanted to fly.
But the wave eventually passed through. Now everybody in this country who wants a vaccine has had one. Restaurants are packed. “Revenge travel” is now the hot topic. Oppositional defiance to the pandemic is evident everywhere you look. Pent-up demand is so insistent that people are prepared to pay way up for airline tickets, cruises, and rental cars while they endure miserable service.
And at the same time, Peloton bike sales have cratered, Netflix is losing subscribers, and Zoom and DocuSign stock prices have fallen precipitously…
Ask yourself, “didn’t many of these attitudinal and behavioral extremes ultimately prove to be ‘transitory’?
“And what if the current inflation anxieties ultimately prove to be similar?”
We shouldn’t be surprised at all by a continuation of this extension cord effect, and we shouldn’t panic because we continue to experience variations that fall outside the norm in all kinds of data for a while. In fact, we should expect it.
And I think we would do well to acknowledge the possibility that recent months may yet prove to be high points in reported inflation numbers in the grand scheme, and that eventually the crest of this wave also may pass through…
Only time will tell, but in the last couple of weeks we’ve started to see bond yields falling, commodity prices softening, energy prices starting to decline, wage inflation slowing, and a noticeable tempering in economic expectations across the entire spectrum.
These developments could actually be harbingers of emerging disinflationary forces.
And if that were the case, the Fed might not have to keep tightening as much as almost everybody now believes.
And that sudden change in perspective could prove to be very good news for financial markets.
It is something to ponder. And it’s a good reason to stay invested and keep a long-term perspective.
Thank you for your continued confidence and trust.
Thomas G. Twombly
*Yes, I’m an “old school” fiscally conservative guy who still uses a perfectly good 22-year-old leaf blower that requires an extension cord, instead of spending money I’d rather be investing on a cordless one…