The popular slogan today is "Believe in science." It’s often used as a weapon against people who reject not science in principle but rather one or another prominent scientific proposition, whether it be about the COVID-19 vaccine, climate change, nutrition (low-fat versus low-carb eating), to mention a few. My purpose here is not to defend or deny any particular scientific position but to question the model of science that the loudest self-declared believers in science seem to work from. Their model makes science seem almost identical to what they mean by, and attack as, religion. If that’s the case, we ought not to listen to them when they lecture the rest of us about heeding science.
The clearest problem with the admonition to "believe in science" is that it is of no help whatsoever when well-credentialed scientists–that is, bona fide experts–are found on both (or all) sides of a given empirical question. Dominant parts of the intelligentsia may prefer we not know this, but dissenting experts exist on many scientific questions that some blithely pronounce as "settled" by a "consensus," that is, beyond debate. This is true regarding the precise nature and likely consequences of climate change and aspects of the coronavirus and its vaccine. Without real evidence, credentialed mavericks are often maligned as having been corrupted by industry, with the tacit faith that scientists who voice the established position are pure and incorruptible. It’s as though the quest for government money could not in themselves bias scientific research. Moreover, no one, not even scientists, are immune from group-think and confirmation bias.
So the "believe the science" chorus gives the credentialed mavericks no notice unless it’s to defame them. Apparently, under the believers' model of science, truth comes down from a secular Mount Sinai (Mount Science?) thanks to a set of anointed scientists, and those declarations are not to be questioned. The dissenters can be ignored because they are outside the elect. How did the elect achieve its exalted station? Often, but not always, it was through the political process: for example, appointment to a government agency or the awarding of prestigious grants. It may be that a scientist simply has won the adoration of the progressive intelligentsia because his or her views align easily with a particular policy agenda.
But that’s not science; it’s religion, or at least it’s the stereotype of religion that the "science believers" oppose in the name of enlightenment. What it yields is dogma and, in effect, accusations of heresy.
In real science no elect and no Mount Science exists. Real science is a rough-and-tumble process of hypothesizing, public testing, attempted replication, theory formation, dissent and rebuttal, refutation (perhaps), revision (perhaps), and confirmation (perhaps). It’s an unending process, as it obviously must be. Who knows what’s around the next corner? No empirical question can be declared settled by consensus once and for all, even if with time a theory has withstood enough competent challenges to warrant a high degree of confidence. (In a world of scarce resources, including time, not all questions can be pursued, so choices must be made.) The institutional power to declare matters settled by consensus opens the door to all kinds of mischief that violate the spirit of science and potentially harm the public financially and otherwise.
The weird thing is that "believers in science" sometimes show that they understand science correctly. Some celebrity atheists, for example, use a correct model of science when they insist to religious people that we can never achieve "absolute truth," by which they mean infallibility is beyond reach. But they soon forget this principle when it comes to their pet scientific propositions. Then suddenly they sound like the people they were attacking in the previous hour.
Another problem with the dogmatic "believers in science" is that they assume that proper government policy, which is a normative matter, flows seamlessly from "the science," which is a positive matter. If one knows the science, then one knows what everyone ought to do–or so the scientific dogmatists think. It’s as though scientists were uniquely qualified by virtue of their expertise to prescribe the best public-policy response.
But that is utterly false. Public policy is about moral judgment, trade-offs, and the justifiable use of coercion. Natural scientists are neither uniquely knowledgeable about those matters nor uniquely capable of making the right decisions for everyone. When medical scientists advised a lockdown of economic activity because of the pandemic, they were not speaking as scientists but as moralists (in scientists’ clothing). What are their special qualifications for that role? How could those scientists possibly have taken into account all of the serious consequences of a lockdown–psychological, domestic, social, economic, etc.–for the diverse individual human beings who would be subject to the policy? What qualifies natural scientists to decide that people who need screening for cancer or heart disease must wait indefinitely while people with an officially designated disease need not? (Politicians issue the formal prohibitions, but their scientific advisers provide apparent credibility.)
Here’s the relevant distinction: while we ought to favor science, we ought to reject scientism, the mistaken belief that the only questions worth asking are those amenable to the methods of the natural sciences and therefore all questions must either be recast appropriately or dismissed as gibberish. F. A. Hayek, in The Counter-Revolution of Science, defined scientism as the "slavish imitation of the method and language of Science."
I like how the philosopher Gilbert Ryle put it in The Concept of Mind: "Physicists may one day have found the answers to all physical questions, but not all questions are physical questions. The laws they have found and will find may, in one sense of the metaphorical verb, govern everything that happens, but they do not ordain everything that happens. Indeed they do not ordain anything that happens. Laws of nature are not fiats."
"How should we live?" is not one of those questions which natural scientists are specially qualified to answer, but it is certainly worth asking. Likewise, "What risks should you or I take or avoid?" There is a world of difference between a medical expert’s saying, "Vaccine X is generally safe and effective" and "Vaccination should be mandatory." (One of the great critics of scientism was Thomas Szasz, M.D., who devoted his life to battling the medical profession’s, and especially psychiatry’s, crusade to recast moral issues as medical issues and thereby control people in the name of disinterested science.)
Most people are unqualified to judge most scientific conclusions, but they are qualified to live their lives reasonably. I’m highly confident the earth is a sphere and that a water molecule is two parts hydrogen and one part oxygen. But I do not know how to confirm those propositions. So we all need to rely on scientific and medical authorities–not in the sense of power but in the sense of expertise and reputation. (Even authorities in one area rely on authorities in others.)
But we must also remember that those authorities’ empirical claims are defeasible; that is, they are in principle open to rebuttal and perhaps refutation, that is, the scientific process. Aside from the indispensable and self-validating axioms of logic, all claims are open in this sense. That process is what gets us to the truth. As John Stuart Mill pointed out in On Liberty, even a dissenter who holds a demonstrably wrong view on a question might know something important on that very question that has been overlooked. To our peril do we shut people up or shout them down as heretics. That’s dogma, not science.
Use Caution As the Pullback Could Continue for Ethereum
After making it back near $4,000 per token, Ethereum (CCC:ETH-USD) prices have pulled back in the past few weeks.
Mainly, the pullback…
After making it back near $4,000 per token, Ethereum (CCC:ETH-USD) prices have pulled back in the past few weeks.Source: shutterstock
Mainly, the pullback was a result of the crypto flash-crash experienced on Sept. 7. But profit taking by traders who bought the popular altcoin before it surged due to the launch of its London Hard fork may have also played a role as well.
No matter the reason, one thing’s for sure. Don’t assume this latest pullback will be short-lived. Yes, with its increasing utility and institutional interest, Ethereum’s chances of hitting $4,000 again look high. So too, do its prospects of ultimately rallying to five-digit price levels.
Yet such a move may take time to happen. For now, with the concerns with crypto overall I’ve highlighted previously still on the table, and the likelihood that this rising uncertainty compels more traders to take profit, you can expect Ethereum to remain on its current downward trajectory.
Trading for around $3,100 as of this writing, a move back below $3,000 may be in the cards. For cryptocurrency investors with a long-time horizon, possible short-term volatility may not be a big issue. Buying now may still be worthwhile.
If you’re looking for a quick profit, however, you should hold off for now.
It May Be a While Before Ethereum Surges Again
Rival altcoins like Cardano (CCC:ADA-USD) could eventually give Ethereum a run for its money. But for now, ETH remains the main crypto used in DeFi, or decentralized finance, transactions. Recent and upcoming improvements could help it hold onto this dominance. I’m talking about last month’s hard-fork upgrades, plus its planned switch from running on proof-of-work (PoW) to running on proof-of-stake (PoS).
This bodes well for prices in the long term, assuming DeFi continues making its way toward getting critical mass, and starts to truly disrupt the traditional fiat-based financial system. What also bodes well for Ethereum is increasing enthusiasm for it by institutional investors.
For instance, growth stock guru and Ark Invest head Cathie Wood has become more vocal in her bullishness on Ethereum. But unlike with Bitcoin (CCC:BTC-USD), which she predicts will hit $500,000 within the next five years, Wood has not provided a definite number as to where this crypto is headed during the same timeframe.
Nevertheless, one crypto market commentator has taken her recent shilling of ETH, along with the large amount of Ethereum leaving exchanges, as a sign it’s fast heading to $10,000 as institutional investors dive into it with full force.
So, does this mean it’s high time to buy the dip, locking down a position before it makes a quick trip to five-digit prices? Not so fast! While there may be a path for it to ultimately hit such levels, it’s likely not happening soon.
Still Plenty in Play to Send It Back Below $3,000
Investors bullish on Ethereum may be on the money about its eventual move to substantially higher prices. Yet in the short term, there’s just too much going on to push it lower. First, there’s the increasing call for crypto market regulation. Admittedly, this is an existing issue, and one market participants have so far ignored.
Even so, that may not continue to be the case. At first, possible regulation by the U.S. may appear to be a sign that this asset class is ready for prime time, to be followed by a large inflow of institutional money. But what if the point of increased regulation is to prevent crypto/DeFi from growing in popularity?
Take, for example, the efforts by the Securities and Exchange Commission to prevent Coinbase (NASDAQ:COIN) from launching its Coinbase Lend service. It remains to be seen whether increased scrutiny of crypto products will affect usage growth for DeFi. If it does? This may challenge the idea that increased
Along with regulatory risk, there’s the risk that, if markets get rocky, speculative assets like cryptocurrencies will fall in price as well. With both uncertainties hanging over it, don’t be surprised if traders continue to take profit, sending Ethereum back below $3,000.
Only Buy Today If You’re in For The Long Haul
In the long run, ETH-USD may have a road to $10,000 and above. If DeFi takes off and institutional investors allocate more capital to this top altcoin, it may eventually make it to five-digit price levels. Just don’t expect to happen in a matter of months. At least until the issues weighing over it today clear up or play out.
As regulatory and market risks remain, traders looking at it as a short-term play should be cautious with Ethereum. Holding it through uncertainty could pay off on the other side.
On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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The dot plot thickens
All eyes on FOMC meeting FOMC day finally arrives with markets already being buffeted by a variety of inputs. Although I expect the FOMC to not give too…
All eyes on FOMC meeting
FOMC day finally arrives with markets already being buffeted by a variety of inputs. Although I expect the FOMC to not give too much away on the tapering front, the best we can expect I believe is a signal that they will make a firm decision on whether to start at the November meeting, we could in for a surprise on the latest dot plot. The dot plot, which charts FOMC members’ timelines for rate hikes or cuts could see more members moving hiking expectations into 2022. We may not get a taper tantrum lite from tapering comments, but we could from a more hawkish dot plot. I’ve long given up hope that US bond yields will react materially, but we could see a further extension to the US dollar rally and equities and commodities probably won’t have a good day at the office.
It is a busy day for central banks anyway with the Bank of Japan announcing its latest policy decision this morning. Like Indonesia yesterday, I expect no change from the BOJ, with a new prime minister to be chosen next week and an election to hold in the next couple of months. They may downgrade growth expectations and hint that more stimulus is ready should the economy slow, which should be supportive of Japan equities. Paraguay sneaked in a 0.50% rate hike this morning Asia time, and Brazil this evening, after the FOMC looks set to hike rates by another 1.0%. With Russia also on a hiking path, parts of the EM world could become attractive carry propositions if Mr Powell keeps the dovish hat firmly on. Turkey should be hiking, but that is a quick path to unemployment if you are the central bank governor.
Mainland China returns to work today although Hong Kong markets are on holiday in a game of tag. China has left its one and five-year Loan Prime Rates unchanged at 3.85% and 4.65% respectively as expected. Another RRR cut, probably early in Q4, is my favoured easing path for the PBOC. With one eye on the Evergrande saga, which has captured the world’s attention, the PBOC has injected a chunky liquidity injection today of CNY 120 billion via the 7 and 14-day repos. Whether that is enough to soothe frayed nerves in China remains to be seen.
What has soothed nerves is Reuters reporting that Evergrande’s Hengda Real Estate unit will make coupon payments on onshore bonds that was due tomorrow. That saw an immediate jump in the risk-correlated Australian and New Zealand dollars, and some buying coming into early Asian equity markets. However, the Evergrande story will keep on giving with the Financial Times reporting yesterday that Evergrande issued wealth management products sold to Chinese retail investors were used to plug financial holes in various subsidiaries. Concerns also swirl around its stake in a regional Chinese bank and whether it has been borrowing from itself effectively. The coupon payment story is likely only a temporary reprieve with no signals from the Chinese government over what steps, if any, it will take to assist an orderly wind down or restructuring.
US markets are contending with their own challenges in addition to the FOMC. The House of Representatives passed a vote to extend the US debt ceiling until after next year’s mid-term elections and will vote on a full bill today. It will likely be dead on arrival in the US Senate though, with Mitch McConnell as much as saying so, forcing the process into reconciliation to pass. The tiresome gamesmanship over the debt ceiling from both sides should be another reason for the Fed to stay on the cautious side of things this evening.
Natural gas prices continue to make headlines with European gas prices having climbed by over 400%. Most of the noise is around the 10-20% of gas that producers keep for the spot market and here it seems Asia is winning the bidding war. Gazprom is reluctant to increase export volumes to Europe above contracted amounts, meaning no spot gas. Bemusingly, signals from Russia suggest that a quick approval and certification of the new NordStream2 pipeline could result in an immediate increase. All Europe and Asia, to a lesser extent, can do, is hope for a mild winter at this stage. Europe is paying the price for its naivety in tying energy security to Russia in the hope that it would be a reliable partner. That’s like me turning structurally bullish on cryptocurrencies and starting to call them an investable versus tradeable asset class.
For today, Evergrande has knocked the FOMC meeting into second place in the attention of Asian investors. I expect regional markets to be buffeted by headlines emerging from that situation and the price action after the coupon payment news suggests dip buyers hungrily await in everything if even tenuous positive news arrives.dollar commodities markets policy fed central bank us dollar
When Will “Transitory Inflation” Overstay Its Welcome?
There has been much talk of "transitory inflation", but the evidence is starting to suggest the term may overstay its welcome.
The Fed chose the word…
There has been much talk of “transitory inflation”, but the evidence is starting to suggest the term may overstay its welcome.
The Fed chose the word “transitory” to describe this instance of rising prices because of its imprecision. Transitory can denote hours, months, or decades. Using transitory versus a specific period provides the Fed freedom to be wrong but be grammatically correct.
While the Fed uses ambiguous words, Mr. Market may have more defined expectations. If investors grow impatient with the Fed’s transitory, bond markets may react. In such a case, how will the Fed respond to “enduring” or “lasting” inflation coupled with higher yields? If they are already tapering, will such conditions push them to speed up their pace?
Conversely, recent data shows inflation may be stabilizing. Maybe the Fed is correct, and inflation rates will normalize in the coming months. If so, will they hold off on tapering or reduce the rate of tapering?
In July, we wrote Just How Transitory is Inflation? The article is a deep dive analysis of CPI. At the time, we sought a better understanding of what was causing inflation to rise. With two more months of inflationary data, an update is essential.
Understanding inflation beyond the headlines helps us answer the all-important question: Just how transitory is transitory? From there, we can begin to assess potential Fed and market reactions.
Headline CPI Summary
In the latest CPI report, covering August, the monthly CPI figure rose by 0.3% or 3.6% annualized. The year-over-year rate is +5.30%. In comparison, June’s monthly CPI rose by 0.90% or nearly 11% annualized. Despite the big difference in monthly rates, June’s year-over-year change of +5.40% is only 0.10% higher than August.
As shown, the monthly CPI and core (excluding food and energy) are turning lower. While not as pronounced, the annual data is following suit. Two months does not make a trend, but it appears to be fulfilling the transitory definition. Core CPI, at +0.10% last month, is 0.10% below the average for 2017-2019. Headline CPI is only 0.10% above the average.
The headline data is supportive of the transitory narrative; however, it does not tell the whole story.
The Breadth of CPI
Digging deeper into CPI and looking beyond the headline averages may not support the word transitory. The graph below shows the CPI Index based on the median price of the goods and services in the index. Unlike the headline CPI Index, median CPI is still rising and at the highest level since 2008.
The distribution graph below compares June to August regarding how the prices of all the underlying goods and services within CPI are changing on an annual basis. We separate the data into 2% price buckets.
The blue (August) and orange (June) bars comparing the two months may look somewhat similar, but there are differences worth discussing.
In June, 75% of the CPI components were rising at a rate slower than the 5.4% inflation rate. In August, 71% were rising at a slower rate than the 5.3% rate of inflation.
The number of goods whose prices rose between 2% and 10% increased from 66 to 77. The number of goods whose prices rose by 2% or less fell from 72 to 55. While subtle in the graph, the number of goods shifting to the right (more inflation) is noteworthy.
52 of the goods and services have price declines from June to August. Six were unchanged, and 95 had price increases. Again, more goods are rising in price than falling.
The breadth of the market is not supportive of the transitory theme. A wide swath of prices are broadly rising, albeit not at an alarming pace.
In the original article, four goods had year-over-year price changes of greater than 20%, as shown below.
- Used Cars 45.2%
- Gasoline 45.1%
- Fuel Oil 44.5%
- Other Motor Fuels 32.1%
In the August report, six goods had greater than 20% increases. The four goods from June maintain annual 20% rates of inflation. Added to the list are propane and utility services.
The inflationary outliers continue to be energy and auto-based. Both are rising in large part due to the reopening of the economy and supply disruptions. We expect both will moderate in the coming months. As this occurs, they will put less upward pressure on the CPI Index.
Employee and school cafeteria food prices are down well below 20%. Over time these should moderate as schools and offices come online. Such will result in inflationary pressures.
In June, 92% of CPI was due to the price changes of the ten largest index weightings, as shown below. Those ten goods played slightly less of a role in August, contributing 82% to the change in the index. Below is a comparison of the same ten contributors for June versus August.
The prices of Used Cars and Transportations rose at a lesser rate than June, but every other category was little changed.
In the original article, we warn Shelter prices are the most considerable risk to more inflation. Driving our concern is Shelter’s 30%+ contribution to CPI and rapidly rising home and rent prices. As we show above, higher home and rental prices are barely making their way into CPI.
In our article BLS’ Housing Inflation Measure is Hypothetical Bull****, we stated: “It appears impossible to calculate the BLS version of OER or rent.”
We remain concerned that a double-digit increase in rent and home prices (OER) will push Shelter prices higher in the months ahead. However, history proves reality, and the BLS Shelter measure has a near-zero correlation.
As we wrote in June, CPI tends to be heavily correlated with goods and services that have flexible prices. These are goods like gasoline, whose prices tend to fluctuate both up and down. The Atlanta Fed publishes data on flexible and sticky prices, as shown below.
The graph shows sharp increases in both flexible and sticky-price goods are leveling off over the last two months. Given the Atlanta Fed measure of flexible prices has a 96% correlation with CPI, we are hopeful the upsurge is halting.
The graph below shows a glaring divergence between Wall Street inflation expectations and those of Mom and Pop. Five and ten-year market-implied inflation expectations have been stable since January. All the while, the University of Michigan survey of consumers sees steadily rising inflation expectations.
While Wall Street buys into the transitory theme, consumers are not. This divergence matters as personal consumption drives about two-thirds of economic activity.
The New York Fed, via their latest Consumer Expectations Survey, highlights why confidence is weak. Per their survey, expected inflation is now over 5% and rising. At the same time, expected wage growth is 2.5% and stable/falling. As a result, consumers expect to lose 2.64% (red line) in purchasing power over the next year. Would you be confident taking a 2.64% pay cut?
We are witnessing unprecedented pressures on the supply and demand side of pricing equations. Forecasting, with such uncertainty, is challenging. As such, we maintain a humble approach to inflation forecasting.
The latest round of data provides some evidence inflationary pressures are abating. However, the breadth of the data tells us there are still many goods and services still rising in price. This difference may help explain why consumer inflation expectations are higher than the market’s and confidence is falling.
Just How Transitory is Transitory? We suspect the market will have its answer in the next few months. Prolonged rising or high inflation beyond December will likely get many to question if inflation is truly transitory. Until then, pay attention to headline inflation, the breadth of the data, and especially any effects from rising Shelter prices on CPI.
The post When Will “Transitory Inflation” Overstay Its Welcome? appeared first on RIA.inflation markets fed correlation inflationary
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