FHPS Q&A
Here are answers to questions from previous financial history classes. Submit questions.
All I can say to this is that it's impossible to predict the future with certainty, but the prospects don't look good. And what you see on this chart is first a line graph that's linked to the left axis. The blue line shows the trailing 12-month inflation rate for the 37 months since the end of World War I and the Great Influenza in December of 1918. The blue bars, which are linked to the right axis, show the cumulative interest rate increases by the Federal Reserve. You can see that inflation—and the economy, which we'll get to—went off a cliff after 20 months.
Now, the red line shows the trailing 12-month inflation rate for the 17 months since the end of COVID-19, the peak period of quarantine in April 2021. The red bars show the cumulative interest rate increases by the Federal Reserve so far. Right now, we are right about at the point where disinflation startsand the economy enters a recession. This is a pretty ominoussign. My personal opinionis that it's highly likely that we will enter a recession soon.
This is actually a pretty good question. It’s one I’ve thought about a lot. But the answer is that markets can snap down or snap back so fast and so unpredictably that even if you have a good sense of where the market is going, it can be really difficult, if not impossible, to get the timing right. And you have toget it right twice. You have toget it right when you get out of the market, and you have toget it right when you get back in.
Commenting on just how difficult this process is, Paul Volcker himself had a great quote to explain how hard it is to time the market. He said, “There is a prudent maxim of the economic forecaster’s trade that is too often ignored: Pick a number or pick a date, but never both.” And to illustrate this, there's a chart at the bottom of the page that shows the total return of the S&P 500 from 1930 to 2020, so 90 years, and what you would get if you just were in the market the entire time, which is a pretty enormouscumulative return—almost 18,000%—and what you would have gotten if you missed just the 10 best days of the decade. And you basically got nothing, at 28% return over that period.
So, this just illustrates the potential impact of tactical allocation. Obviously, you're not just going to miss the 10 best days. But the point is, markets can move very, very quickly, and it's very hard to time the market even if you do have a better sense of what's coming in the future. So, that is my quick and dirty answer to the question of tactical allocation, and those are the three main questions that I've been receiving over the past few months.
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HISTORICAL PRECEDENTS TO POST-COVID INFLATION AND FEDERAL RESERVE POLICY 1 CE CREDIT
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