Forecasting the world after Covid-19
As we move past 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 to a new normal. Because we are dealing with an unprecedented crisis, the forecasts of how the world will look like in the next several years diverge to an extreme degree.
One of the most common forecasts that are currently being made is that the monetary and fiscal stimulus that we have seen this year will lead to an inflation shock later in. Have we not learned anything from the aftermath of the financial crisis? Admittedly, after the financial crisis, I was in the camp of people who thought that inflation would rise, once the crisis was over. Twelve years after the crisis, we still haven’t had any problems with rising consumer price inflation. Quite the opposite, we have struggled with stubbornly low inflation.
As far as I can tell, the fiscal and monetary stimulus we have seen so far was just more of the same medication we prescribed in 2008 and 2009. So, if you expect a different outcome this time, then you have to think deeply and clearly what is different this time. As we know, the definition of insanity is to do the same thing over and over again, expecting a different outcome. At the moment, we have done the same thing as twelve years ago, so expecting a different outcome this time seems unreasonable to me.
One of the things that might change after the Covid-19 pandemic that investors point to is that companies will onshore more of their production and abandon China. But as I have pointed out here, the evidence from natural disasters is not encouraging. 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 China or other developing markets, pandemic or not.
In times of high uncertainty, it is even more important than normal to revisit my ten rules of forecasting that I have first published here. I implore every investor to go and re-read them today. Keep these rules in mind when you see “experts” make forecasts about the future. In the current environment, rules 2 (Don’t make extreme forecasts) and 4 (We are creatures of habit) are particularly important to heed. We live 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, there were forecasts of banks being broken up or nationalised, 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 and sometimes even the spectre of hyperinflation was used to scare people. 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 no longer want to live in 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 may well change. But the one prediction I am confident to make right now is that fewer things will change than we currently expect.