Inflated Prices and Inflated Certainty


Few topics of economic concern have driven recent markets as much as inflation. Quantitative easing, extended Bush-era tax cuts, a historically low federal funds rate, global food shortages, and the appreciating cost of oil have all played a role. The promise of mass inflation is on the front page of almost every investment publication, and in the mind of almost any investor. The U.S. Dollar is depreciating, with no end in sight.

It is indeed logical that investors and portfolio managers are scrutinizing the greenback — running from it and anything related. But this making of an absolute and unwavering prediction is all too familiar; advisors and their clientele grasping to the most popular scenario as if they had a secret, a proprietary crystal ball.

Despite what is being hyped, the fact remains that there are myriad possible outcomes for inflation. Granted, that talking about ad nauseam is a possibility, it is certainly not a guaranteed outcome. Ponder just a few factors that, although not spoken of often by today’s pundits, could combat inflation: continued resource slack, a Fed change of course regarding stimulus, sharply rising interest rates, war, an earthquake, a terror attack, unexpectedly quick and decisive cuts to government spending, tax increases, the elimination of tax loopholes or government subsidies, a significant downturn in equity markets, the devaluing of foreign currencies, global decline in gold and other commodities, and particularly investor sentiment. Any of these forces and many more could play a role in completely shifting the outlook. Disturbingly, the conversation on inflation could turn on a dime, changing course without warning – as was evidenced by the deflationary alarm which sounded so loud (and incorrectly) in late 2008 and into 2009.

Additionally, one writing about the economic potential of inflation must provide the fiduciary input that some inflation is actually good. Slow and steady inflation is not only healthy, but critical to the long-term economic success of our economy and the ability of our central bank to influence the course of growth. Inflation actually enables us to better impact and maintain a healthier course for GDP, wages, the balance of trades, and employment.

In markets, any form of prediction — no matter how certain — is dangerous. In fact, it is all too often that the more certain the prediction, the bigger the fallacy. Today, as we look back at several years of market growth concurrent to Fed stimulus, a depreciating dollar, and enlarging Federal debt levels, it is simply easy to make the inflation claim. What takes discipline and thought is objectively evaluating all potential outcomes and not betting the house on any one of them.

Ironically, recent times have seen momentous inflation not in the dollar, but in investor sureness. The reality, however, is that no one knows the answer despite how much conviction they convey. Plainly, this investment professional turned author is not saying mass inflation will not happen, but it certainly is not a certainty.

Jonathan Citrin is founder and CEO of CitrinGroup, an investment advisory firm located in Birmingham, MI. He is an adjunct faculty of finance in the School of Business at Wayne State University.

Founded in 2003, CitrinGroup specializes in portfolio management and advises clients on investment planning.

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