Simple thinking in complicated times

I am still worried about inflation and the failure of the humanities

Photo by K. Mitch Hodge on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter where both investing and landings are always hard.

Inflation is coming down. Will it stay there?

Check out those PCE numbers! We are practically at 2% inflation. But the more it seems likely that a soft landing is happening, the more I worry we will face a recession. Not for any good reason or specific number; I am just superstitious. Actually, I do have a reason. Inflation does appear to be nearing 2%. But another indicator suggests we are not out of the woods yet. In my book, a soft landing means a return to low and stable inflation. I am not convinced it is so stable.

The best predictor of future inflation is inflation expectations (they are actually not great predictors, but it is better than anything else). And while median forecasts from surveys point to well-anchored expectations that anticipate a return to the happy low/stable pre-pandemic inflation world we once knew, if you look at the second moment, things look dicier. The range of estimates is still very high and has barely budged in the last year.

This means there is more uncertainty and less confidence in estimates. And that matters.

1.     It means expectations are less stable — a spike in prices or any number of shocks can be interpreted as a return to inflation and that can be self-fulfilling.

2.     More inflation uncertainty means higher risk premiums, and that means higher term premiums, which keeps long-term bond yields high even if inflation returns to 2%.

3.     Uncertainty is bad for households. A fixed return asset, all else equal, is worth more than a variable return asset. So even if inflation falls, you still have uncertainty around prices, and you are still worse off. Because in risk terms, a dollar is worth less (no wonder people are unhappy).

Before 2020, many people had no concept of high and uncertain inflation. Expectations were not only low but there was little variability around them. Now that innocence is gone. And even if inflation falls further, the odds of it returning are higher. And that’s bad.

The humanities fail

My education is lacking in the humanities. I’ve pretty much only studied economics (math and statistics) from the time I was 16. So I always viewed the humanities, history, philosophy, English, and the like with some awe. I assumed they study the big important questions, have a deep and nuanced knowledge of the past, and have a sophisticated framework to make sense of things. Now not so much. Instead, it seems they adopted and now teach a reductive view of the world and abandoned rigor. They have embraced dogma and rejected the debate, free inquiry, and empiricism that are the foundation of liberalism. Everything can be classified by a person’s immutable characteristics, and this gives them power or status.

It is tempting to look at what is happening on college campuses these days and chock it up to youthful ignorance. We all had some terrible and ill-informed opinions at some time in our life. That’s how it goes when we had more passion than knowledge. But the rot is much deeper. Some of the most offensive and ignorant statements and letters come from the professors—almost all from the humanities and social sciences. These are the people who are supposed to teach a moral framework and know history. And in these complicated times, the people who study morality and are supposed to know history should be guiding us and offering a framework to make sense of the world.

Lots of people find this troubling, and it has been going on for a long time. October 7 just made it more clear to everyone. Meanwhile, enrollment in the humanities is dropping, and more Americans are skeptical of the value of a college degree. Perhaps that’s not just because people want more vocational skills and want more value for money; it is also because the humanities are not teaching what they are supposed to: how to think critically instead of pushing a bunch of politicized hooey.  

This is not only bad for our society and democracy. It fails to prepare students for the world. A big structural change to work is already underway with technology. It means no job is guaranteed. But we do know from the past, when it comes to change, the winners can work with technology rather than be replaced by it. That means complementing what AI can do. Or, critical thinking skills and the ability to make sense of novel information will be really valuable. If you think decolonization can explain everything, a robot will replace you.

I still believe most students are smart, open, curious, and looking to learn. And a few people at elite schools should not color our view of a generation. I reviewed a book for The Wall Street Journal that makes the obvious point that needs to be shouted from the rooftops. The author researched students at mid-tier state schools and found that getting your first job is really a matter of luck. Does your interviewer like you or think you remind him of himself? That’s what really matters. Getting in on that first rung of the corporate ladder is a fairly random process. And it turns out it is not an elite rat race after all. Of course, the book only considered business school students at a mid-tier state school. Maybe it is different if you studied the humanities.

In other news

The passing of Charlie Munger should remind us all that he had a truly unique talent. Investing is really hard, and only a few people a generation can do it that well for that many years.

Until next time, Pension Geeks!

Allison