Tag Archives: Inflation

Are analysts’ opinions anti-correlated with the market?

This time 2 years ago, we were still riding high on the post-pandemic surge, and analysts were expecting the S&P could break 5,000. This time last year, we were still in what felt like the 2022 doldrums and analysts were predicting a recession. This time 3 months ago, people were declaring inflation was whipped. And then a few days ago, CPI and PPI came in hot.

I’ve written before about how the Efficient Market Hypothesis may imply that there is *no* correlation between analyst opinion and the stock market. Analysts are just as likely to be wrong as right, but people only remember the examples which agree with their biases. On the other hand, I read an article recently (I’m sorry I cannot find it to link) arguing that analyst opinion is in fact *anti*-correlated. That is, the Short Cramer ETF is correct, and analysts are so stupid you should do the opposite of what they say.

Speaking of, the Short Cramer ETF “SJIM” is down about 20% from when it began. But no matter, should you do the opposite of what analysts say or is that as irrational as following their advice?

One argument is that analysts are inherently *backward-looking*, they generally assume trends will continue forever. Some are perma-bulls or perma-bears, but on average when the market is down analysts predict a down year, and when it’s up they predict an up year. In this case, if the market is a random walk then it’s very unlikely to simply continue it’s current trend, thus an analyst is more likely to be wrong than right.

On the other hand, shouldn’t wisdom of the crowds have an affect? On the aggregate, many gamblers who bet on real world events (either sports of politics) are betting on what they *want* to happen, and many have no real knowledge whatsoever. Yet Nate Silver and others have argued that betting markets are often more accurate than not, whether it’s politics, sports or what have you. Some how, a million idiots adds up to something better than our smartest mind.

If that’s the case why don’t all the analysts of the market add up to something smart?

It just reminds me to be humble, because all too often I’ve seen people caught out badly by a trend. The late 2023 “inflation is beaten, start thanking Joe Biden” narrative won’t seem as smart if inflation stays persistently hot, any more than the “recession around the corner” narrative of 2023. Overconfidence when you really know nothing is the hallmark of an analyst, and maybe that’s why they’re so often wrong.

Corporate Greed is over, now comes corporate generosity

If you’ve been to the grocery store recently, you have probably seen an incredible sight. Eggs are now selling for less than they did in 2022. Walmart says they’ll sell me eggs for 1.19$ a dozen, and Target will sell them for 0.99$ with a special discount. Considering that at the beginning of 2023, eggs were selling for as much as 5$ a dozen, this comedown is remarkable.

It gets to the heart of a discussion about the origins of inflation though. The classical definition of inflation is too much money chasing too few goods. That means that when either the money supply is increased or their is a shortage of goods, we should expect to see inflation. This thesis does seem to have played out in 2021-2023. The money supply was increased enormously in 2020 and 2021, while COVID restrictions meant the supply of goods was constrained and could not rise quickly to meet it.

But that isn’t the definition that has been gaining traction. Recently folks have pointed to corporate greed as the primary driver of inflation. Under this thesis, inflation is not driven by the money supply or the goods supply, but by corporate greed in and of itself. If corporations weren’t greedy, they wouldn’t raise prices. But if prices go up because corporations are greedy, doesn’t that mean they go down because corporations are generous?

I’d like to see someone like Bernie Sanders explain the fall in egg prices. Why aren’t Walmart and Target just being greedy like all the other companies? If it’s so easy to raise egg prices by being greedy, then what mechanism could possibly make prices fall? What possible reason could their be for a fundamentally greedy company to willingly lower prices and receive less money?

For that matter, why is Exxon-Mobile being so damn generous? Over the past year, crude oil prices have gone from 100$ to just 70$. Exxon-Mobile was public enemy number 1 when gas prices were high, and was blamed for being too greedy. Have they now become generous instead? Have all the oil companies become generous? Why are the oil companies so much more generous than all the other companies?

It gets to the heart of the problem, inflation isn’t driven by corporate greed. Corporate greed is a constant, I’d go so far as to say human greed is a constant. Corporations (on average) demand the highest possible price for their goods that the market will bear. Laborers (again on average) also demand the highest possible price for their labor that the market will bear. No one ever willingly takes a pay cut without good reason, good reason usually being they have no other choice.

If corporations want to raise their prices above what the market will accept, then they’d be like me walking up to my boss and demanding a million dollar salary. They won’t get what they want no matter how hard they try. If Walmart raises the price of eggs, then Target can steal all of their business by keeping its egg prices low. People stop buying eggs at Walmart, they instead buy eggs from Target or from one of the hundreds of small and independent retailers that still dot America. Grocery stores are not a monopoly in our country, they do not have the power to set prices on their own. They are always in competition with each other and prices reflect that competition.

By the same token, if I demand a million dollar salary, my boss just won’t pay it. If I say I’ll quit if I don’t get it, he’ll show me the door. I am competing with hundreds of other workers in my field and so I cannot raise the price of my labor over and above what others are charging or else I’ll get replaced. It is a fact that many people ignore, but there is a market for labor just as their is a market for any other good. And the labor market has sellers (workers) and buyers (employers) just like any other. So when trying to answer questions about (say) the egg market, it’s useful to first think about how it works in the labor market. We are probably all more familiar the labor market with since if you’re reading this blog you’ve likely worked in your life.

So, in the labor market, can the sellers of labor (the workers) raise their prices just by being greedy? No, of course not. Without some decrease in supply or increase in demand, the price (salary) of laborers doesn’t go up, and workers who refuse to work for the market raise simply won’t receive job offers. It’s the same with corporations and it’s the same with goods inflation. Prices of goods aren’t driven by greed. They’re driven by supply shortages and a glut of money, both of which are in part exacerbated by government policies.

The current administration has continued Trump’s protectionist trade policies, which prevent American companies from being forced to compete with overseas companies. And both congressional spending and the Federal Reserve’s balance sheet have expanded considerably, bringing more and more money into the money supply. Too much money chasing too few goods, that is what causes inflation.

The Chapwood Index is a very silly model of inflation

With inflation nearing double digits this year, so called “experts” have been crawling out of the woodwork to proclaim the Death of the Dollar and how they always said inflation would kill us all.  Most of these people make claims with no regard to reality, inflation is bad today and they say it will kill us all.  But 10 years ago when inflation was miniscule they also said inflation was bad and would kill us all.  The facts don’t matter, only the hatred of inflation.  Inflation is high?  We’re all gonna die.  Inflation is low?  It’s actually high.

I can understand the feeling of course, it doesn’t feel good knowing that year after year your money loses value.  But that feeling doesn’t translate much into reality, most Americans gained wealth in real terms from 2010 to 2020 (a trend only reversed around 2021).  So when your feelings of inflation conflict with the reality of inflation, what do you do?  If you’re Ed Butowsky (inventor of the Chapwood Index), you declare reality to be wrong.  You instead make up your own basket of goods (the Chapwood basket) and send open ended surveys asking people to track the changes in those prices.  And if your basket is unusually weighted towards such things as golf club memberships and financial planner’s fees, then yes you could show some strangely high inflation between 2010 and 2020 as the price of those things went up.  But the much larger and more representative basket from the Federal Reserve showed enough price drops in other things that it evened out into low inflation.

In the last decade you might have repeatedly heard calls about how the Fed and the Government are lying about the true rate of inflation, how everything is getting more expensive by double digits and how it’s destroying American wealth.  In the same breath these people probably tried to sell you gold, but that’s neither here nor there.  The point is that many people have tried to argue that the Federal Reserve is lying about the economy and that everything is going to hell in a handbasket, only “secretly” so that none of us plebs realize it.  This year as the economy has actually been rocked by inflation, those voices have been completely overwhelmed, because it’s very clear that genuinely high inflation feels nothing like the low-inflation period that characterized the last 10 years.

Basically the Chapwood Index (and indices like it) was designed to “prove” the point that America had super high inflation, to the tune to 10%, yet the index was completely ridiculous on the face of it.  If America experienced double digit inflation from 2010 to 2020, and if the nominal GDP numbers were accurate, then we would have experienced a real GDP decrease of around 50%.  That means 50% less total everything produced by the economy, 50% less cars, vegetables, and doctor’s appointments.  Yet this flies in the face of actual evidence showing a moderate increase in American production over that time frame.  Simple put, the evidence isn’t consistent with a prolonged decrease in real output.  Again, compare this to 2022 when America is experiencing actual inflation: nominal GDP is up by near double digits, but since inflation is also up by nearly that amount, the total American economy may have contracted slightly by the end of the year.  Super high inflation has been coupled to super high nominal GDP, and it’s still an open question as to whether inflation or GDP will win the year, but it’s clear that this year feels different than all the years from the last decade when people screamed about hidden inflation and buying gold.

Basically what I’m saying is inflation isn’t really missable, if it’s there it’s there and people know it.  Everyone knew the price of goods was increasing in 2021, but the Fed and the government acted slowly because they predicted the increase would be small and “transitory.”  But when inflation jumped to 4% and now nears 8%, it was obvious and didn’t require creating a whole new index just to see it.