I am wondering if anyone predicted the huge bull market in March 2020 say nearly 15 months ago. Even if anyone did, I am sure he would have been laughed at. And yet, here we are.
A confluence of factors like government stimulus, trillions of dollars’ worth of capital injection and central bank action has not only avoided a 1930s like depression but also set the capital markets on fire. In fact, it’s now a worry of the opposite kind that has gripped most stock market experts.
Have we overplayed our hand? Is the excess stimulus and money printing setting the stage for an era of high inflation? Are we in a massive stock market bubble that’s about to burst anytime now? Well, our three-word answer to this question would be we don’t know. Warren Buffett once said that for a piece of information to be desirable, it has to satisfy two criteria.
It has to be important and it has to be knowable.
Macroeconomic events like high inflation and high interest rates are definitely important. They’re two of the most important factors that will determine the future of stock prices. However, we have no qualms in admitting they’re not knowable in advance.
Of course, some expert may get it right occasionally. But to be consistently correct and figure out the stock market’s reaction to these developments, is impossible.
You don’t have to go too far back to find proof in support of my argument. How many economists predicted the post-pandemic recovery of 2020-21 and the way inflation and interest rates would behave? None.
Also, as Howard Marks rightly observes, for years central bankers in the US, Europe, and Japan have targeted a 2% rate of inflation, but none of them have been able to produce it.
This despite continuous economic growth, significant budget deficits, rapid expansion of the money supply through quantitative easing, and low interest rates – all of which are supposed to be inflationary.
In fact, there are examples galore where economists have had eggs on their faces whenever they have tried to make big, macroeconomic predictions. Therefore, Buffett is indeed right on money. These events are definitely important but in no way knowable in advance.
This brings us to a very important point.
If very important macro indicators like inflation and interest rates cannot be predicted with a high degree of reliability, how should one go about investing? What if we invest based on a low inflation or a low interest rate world and suddenly the opposite happens i.e. we witness significantly high levels of inflation?
Well, the key to investing under these circumstances and in fact most others, is one should always prepare and not predict.