Personal Wealth Management / Expert Commentary

Ken Fisher Examines What Investors Got Wrong About Inflation

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses why many investors—himself included—failed to accurately foresee inflation rates this year. Ken says this is partly due to historical approaches of measuring money supply being less accurate in today’s world, as there are now a myriad of “near money” alternatives that can be difficult to account for. He also points to how the dramatic increase in money supply from central banks to help with COVID-19 economic stress didn’t create immediate inflation problems—surprising investors.

Ken thinks inflation was slower to appear because the increase in money supply quickly dissipated into “near money” initially, such as US Treasuries. However, Ken says “near money” has reconverted into money and crept into the system, which contributed to this year’s high inflation. Looking forward, Ken believes there are many signs inflation should grind lower—including slower money supply growth, falling commodity prices, and easing supply chain pressures—but it’s difficult to predict when. Ken says inflation will be slowly digested—akin to a snake eating a large rodent—and ultimately prove to be transitory despite lasting longer than most expected.



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Ken Fisher doing hand gestures time to time explaining.


Ken Fisher: Many people, me included, have failed to accurately foresee inflation rates this year. And, obvious question is why.

And one of the things that people talk about a lot in that is changes in the quantity of money—so called money supply—and then the so-called velocity of money.

So, in the 19th century, there's a famous formula created in theory, never actually used in practicality, called MVP equals PQ, which is the quantity of money times how many times it turns over in a year, equals the price of goods times the quantity of the goods. And this concept, MVPQ model, was a theoretical construct which was never successfully applied.

In the 1960s, Milton Friedman with his ground-breaking work, A Monetary History of the United States, with a lot of data in a big fat tome, laid out the history of movements in seeming velocity and seeming quantity of money, that basically led you to the conclusion that he would teach when I was young. Which was that they should control the quantity of money and not try to predict what would happen to the velocity of money because they didn't know how. And that over time, the velocity of money would mean-revert, come back to what it is normally on average, they just keep the quantity of money growing smoothly.

The problem that's occurred, and I've spoken about this before at other times and places and written about it. That the problem that's occurred in more recent years, is that world in which he lived then and articulated that well, was a simpler world in that there was basically two kinds of money that you could measure, and no others. There was that which sat in green bills and checking accounts, and then there were savings accounts. That was pretty much it. It was easier to measure.

Today, there are myriad near monies, and it's hard to tell what's actually money. People often don't sit in money, it pays no interest. And they get out of the money into a near money, like treasury bill, which is not money, but you can sell it like that to get money. And it's hard to tell what's money, what's not, so, it's hard to measure.

When COVID came along, central banks in the world, more so in America than outside, but central banks, largely increased the quantity of money in a big rush thinking that

this would be a protective device against COVID. And then, with time, that didn't immediately create any seeming inflation problems. People expected it to, but it didn't. And I think that, but I can't prove that, is that most of it dissipated off into near monies really quickly because they paid interest or something like interest. And then later, some of that seeped back into the world and creates the inflation problem we have.

Now if you've heard me before, you might have heard my snake and the rodent analogy. Which is that when a snake eats a large rodent, the rodent is actually dead the moment it's inside the snake, maybe even before. But that large rodent inside the snake creates a bulge, makes the snake a little sluggish, but it doesn't make the snake sick. The snake digests the rodent and eventually there's no more bulge.

In that process, we as a culture, in my opinion, ate a lot of inflation. But it's really hard to figure the timing of how it moves through, the rodent, our digestion of it through the economy.

We have the supply chain problems that we used to hear a lot about—there's still some, but they're much better than they were. The quantity of money now, as best as it can be measured, is growing moderately. But we still have all this inflation. And I think part of that is because you can't measure the quantity of money very accurately today. And, we're digesting the inflation we've already eaten.

You can actually see many of the leading indicators of future inflation having come down. Most commodity prices are way down from where they were earlier in the year. Shipping costs are down because supply chain snarfles are unsnarffling—all of those features. But predicting the timing of it is treacherous.

I'm going to be facetious here. The Fed, themselves, have never been very good at predicting things. And they said, if you recall late last year, that the rise in inflation was transitory. The fact is, it kind of depends how you define what transitory is. And the way most people interpreted that, they interpret it to mean a few months.

But the fact is, inflation has gone on longer than that. And if you think of transitory as maybe it just takes longer to get, the rodent, to get through the belly of the snake, that's a different form of transitory.

As the commodity prices are coming down, the supply chain snarfles are being undone. And we don't create money at an exceptional rate, and we don't have new huge government spending programs, and all of those things that might be government spending programs perhaps financed by debt, and perhaps that debt created by bank lending, or with bank lending, creating increases in the quantity of money.

As long as those there isn't new inflation to eat, the inflation will work to the snake, and it is transitory. It's just a matter that it's difficult to predict the timing of how long that digestion works.

So, I just want you to think of that, that inflation appears to be—we think of inflation in our own personal lives tied to what we buy, which tends to be end goods and services, which is the end of the process.

But the beginning of the process, which includes things like changes in commodity prices and increases in the quantity of money and all that stuff, the earlier indicators, they're all behaving better. It's just a question of how long it takes.

If that were not true, long-term interest rates would be much higher than they are. The fact of the matter is with inflation where it is, if inflation were to stay at those levels for very long, if it were not somewhat transitory, whether you mean transitory being this long or this long, long-term interest rates would be much higher.

I want you to think of this a lot like the snake eating the large rodent and think about inflation that way. And it's just a matter of timing until that inflation moves the other direction.

I do appreciate you listening to this long rant of mine. Thank you very much.


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A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.



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