Inflation: Absence of Evidence was not Evidence of Absence
The phrase “black swan” is derived from a Latin expression, first credited to the second century poet Juvenal, when he penned rara vid in terries nigroque simillima cyngo (“a rare bird in the lands and very much like a black swan”). You see, once upon a time, well into the 17th century, Juvenal’s phrase was a common expression in England for an impossibility – that is, black swans simply did not exist. In fact, western mankind, for hundreds and hundreds of years, believed that all swans had white feathers since all empirical evidence declared swans possessed white feathers. Thus, the term “black swan” came to represent an impossibility.
This changed in 1697, when Dutch explorer Willem de Vlamingh visited New Holland (today known as Australia), and recorded the first European sighting of a black swan. The sighting was significant in Europe, since “all swans are white” had long been used as a standard example of a well-known truth. From that point forward, the term metamorphosed to denote that a perceived impossibility might later be disproven.
The reality is that all of Europe mistook the absence of evidence as the evidence of absence.
The Black Swan illustrates a limit to our learning from observations and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. Black Swan logic makes what you don’t know far more relevant that what you do know.
A small number of Black Swans explain almost everything in our world, from the success of ideas, to the dynamics of historical events, to elements of our own personal lives. The effects of Black Swans have been increasing – the pace began to accelerate during the industrial revolution.
Just imagine how little your understanding of the world on the eve of the events of 1939 would have helped you guess what was to happen next. How about the hurried ending of the Soviet Union? Or the horrible events of September 11th? How about the market crash of 2008? Or most recently, the COVID pandemic? All follow these Black Swan undercurrents. Literally, just about everything of significance around you might qualify.
A few years ago, I wrote that the Black Swan was inflation. There was no evidence of inflation – the consumer price index, the producer price index, and other common measures of inflation confirmed that there was no evidence of inflation. Milton Friedman, the famous Noble Prize-winning economist from the University of Chicago, famously said that inflation is always a monetary phenomenon. If the Fed prints more money but the supply of goods and services remain constant, then the cost of those goods and services must go up. Common sense, right? We had a situation in which, for years, the main economic powers in the world were printing money without increasing the supply of goods and services.
Investors began to behave like the only color of swan in the world was the white swan. For years investors were locking in 10-year bonds or CDs at historically low interest rates of just over 1%. The yields between inflation-protected securities and treasuries were at levels that we believed indicated complacency about inflation. Why? Because there was an absence of evidence regarding inflation.
I wrote: “Do not make the mistake of thinking that the absence of evidence of inflation is evidence of absence of inflation.” Today, investors are beginning to realize that “white” isn’t the only color of a swan.
In preparation for our current environment, we urged patience with investments that helped protect against inflation, to avoid the cleaver of inflation. Today, we continue to strategically and tactically allocate in our client’s tailored investment portfolios to maximize the probability of success of their financial plan.
DISCLOSURE
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP’s express prior written consent.