As we move past what we hope is the peak of the COVID-19 pandemic, the focus of investors is shifting from the immediate economic damage to the way out of lockdown and on to a new normal. Since this is an unprecedented crisis, the forecasts of what the world will look like in the next several years diverge to an extreme degree.
One of the most common forecasts is that this year’s monetary and fiscal stimulus will lead to an inflation shock later on.
Ahem. Have we not learned anything from the aftermath of the global financial crisis (GFC)? Post-GFC, I, too, was in the camp of people who thought that inflation would rise once the emergency was past.
But 12 years later, we still haven’t seen any inflation at all. Quite the opposite, we have struggled with stubbornly low inflation.
As far as I can tell, the fiscal and monetary stimulus thus far is just more of the same medication we prescribed and administered in 2008 and 2009. So if we expect a different outcome this time, then we have to think deeply and clearly about what is different this time. The definition of insanity, after all, is doing the same thing over and over again and expecting a different outcome. At the moment, we have done the same thing over and over again. So to expect a different outcome than what we saw after the GFC seems unreasonable to me.
Another common post–COVID-19 forecast is the so-called onshoring of production as companies transfer their facilities out of East Asia. Of course, the evidence from previous natural disasters does not suggest that this is a particularly likely scenario. People — and business leaders are just people, after all — are creatures of habit and have an obligation to run their businesses in a cost-effective manner. Thus, if the costs of relocating production to Europe or the United States are too high, production will remain in East Asia and other developing markets, pandemic or not.
In times of high uncertainty, it is even more important to revisit and remember my 10 Rules for Forecasting. I implore every investor to go and re-read them today. And keep them in mind when “experts” make forecasts about the future.
In the current environment, two rules — 2. “Don’t make extreme forecasts” and 4. “We are creatures of habit” — are particularly critical to heed.
We are living through an unprecedented crisis, just like we did in 2008. And in extreme circumstances, people are inclined to make extreme forecasts and discount the force of long-established habits. In 2008, many predicted the break up or nationalization of the big banks, the end of massive bonuses for high-profile bankers, a housing market crash that would take decades to recover from due to the massive oversupply, high inflation gripping the global economy, or even the specter of hyperinflation.
But once the crisis was over in the second half of 2009, our collective reaction was: Never mind.
So if you hear someone predict inflation, or that we will abandon global supply chains, or that we will pack up and leave the cities, or that we will work more from home in the future, ask yourself: Where is the empirical evidence that shows that this is going to be more than just a marginal or short-term effect?
This is not to say that things won’t be different this time. Some things will undoubtedly change.
But the one prediction I am confident in making right now is that fewer things will change than we currently expect.
For more from Joachim Klement, CFA, don’t miss 7 Mistakes Every Investor Makes (And How to Avoid Them) and Risk Profiling and Tolerance, and sign up for his Klement on Investing commentary.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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Joachim Klement, CFA, is a trustee of the CFA Institute Research Foundation and offers regular commentary at Klement on Investing. Previously, he was CIO at Wellershoff & Partners Ltd., and before that, head of the UBS Wealth Management Strategic Research team and head of equity strategy for UBS Wealth Management. Klement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland, and Madrid, Spain, and graduated with a master’s degree in mathematics. In addition, he holds a master’s degree in economics and finance.