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Twelve Blind Men and the Elephant
By Morgan Christen There is an ancient Indian parable passed down through generations entitled, Twelve Blind Men and an Elephant. I may have talked about it in the past, but it is worth revisiting. The parable talks to human perception and the need to acknowledge diverse perspectives. As the story goes, twelve blind men live in a village where they heard about elephants but never encountered one. They were curious about this creature, and one day an elephant was brought to the village. As these men were blind, their experience with the elephant relied purely on their other senses. |
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As each of the men surrounded the elephant, that had access to different parts of the elephant’s body. One man touched the elephant’s side and thought it was a wall, another grabbed its tusk and believed it was a spear, and so on. Each had an experience completely different to the other. They began to argue as to what indeed was an elephant. All their diverse perceptions were correct, but they could not be reconciled with one another. As most parables go, a wise sage intervened and offered insight. He let them know they had all touched only one part of the elephant and thus only had a part of the entire truth. |
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How does this apply today? Let’s start with what most consumers see as a major impact on their lives, which are higher costs to live - also known as inflation. The chart from the Bureau of Labor Statistics shows a steady increase in consumer prices (as measured by an index of a basket of certain goods and services paid by consumers) until 2020, when the index makes a dramatic spike to the upside. Remember the jump in the price of eggs from 2022 – 2023? |
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Then let’s review what economists and policymakers look at, they talk about the year-over-year change in inflation. Same basket but indexed to reflect year-over-year changes. Doesn’t look as bad as the prior chart and it has declined quite precipitously. Consumers and economist/policymakers are touching totally different parts of the US economic elephant. Both are correct. Consumers are being told things are better, but their grocery bill tells another story. |
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This divergence has led economists to talk about a K-shape economic recovery. When an economy turns down, the usual recovery takes the shape of a “V” or a “U.” The V-shaped, much like the letter, has a steep decline followed by a rapid recovery. The U-shaped recovery sees the economy wallow at the bottom for a while before turning up. But in both the V and U-shaped recoveries, most constituents feel the down and the subsequent up. The K-shaped recovery is not equally distributed, as different cohorts are on varying rates of recovery. The process created winners and losers. If you have assets and a well-paying job this is a wonderful economy to live in. Yes, you are paying more for items but your income more than makes up for it, and your assets are on fire. Home values are through the roof, and that feels good. Your savings account is now earning money, so no need to chase returns. If you do not have assets and your income is modest, this is a tough environment to live in. You need to make tough decisions, wants versus needs. Fixing your car or paying medical bills? Even Old McDonald is becoming out of reach. This cohort is grabbing at a tusk while the policy makers are talking about this flowing fan that is the elephant’s ear. Disconnected. |
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The wise sages will need to see that a significant portion of the population is not fully participating in this economic recovery, and some are touching different parts of the elephant. What does that mean for policy in the future? What about consumer spending? The elephant parable offers us a lesson in perspective; as we look out on the investment horizon, we try to be cognizant of the differences so that we can construct long-run strategies. Inflation is not going away, as the last mile is the hardest. Recently, Chairman Powell said the central bank is in no rush to reduce rates. So, it will be higher for longer, good for savers, not so good for consumers. The stock market seems to have adjusted to higher rates. Investors are hopeful the new administration will lower tax rates, reduce regulations and keep the markets on an uptrend. We do not anticipate making any changes to your portfolios at present. We will be reviewing our global macroeconomic views as we end the year. We thank you for your continued support and look forward to speaking with you. |
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Disclaimer: Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics. The Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL) is a price index of a basket of goods and services paid by urban consumers. Percent changes in the price index measure the inflation rate between any two time periods. The most common inflation metric is the percent change from one year ago. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force. The CPIs are based on prices for food, clothing, shelter, and fuels; transportation fares; service fees (e.g., water and sewer service); and sales taxes. Prices are collected monthly from about 4,000 housing units and approximately 26,000 retail establishments across 87 urban areas. To calculate the index, price changes are averaged with weights representing their importance in the spending of the particular group. The index measures price changes (as a percent change) from a predetermined reference date. In addition to the original unadjusted index distributed, the Bureau of Labor Statistics also releases a seasonally adjusted index. The unadjusted series reflects all factors that may influence a change in prices. However, it can be very useful to look at the seasonally adjusted CPI, which removes the effects of seasonal changes, such as weather, school year, production cycles, and holidays. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes. The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. |