Winter of Our Discontent: December Media Focused a Little Too Much on Bad News

Posted by Vident Financial on 1/20/22 9:22 AM

December 2021 was the month of the media catching up with real problems and then going on to over-hype them. We believe that the historic pattern regarding financial risk runs like this: The actual data shows a problem is brewing, but the media is slow to acknowledge the problem. Then, when the problem becomes undeniable, the media overshoots and exaggerates it.

There are two stories we started talking about early:

  1. Inflation Signs that the central bank was creating too much money supply were evident in the data during the spring of 2020, which we discussed in Q2 2020 ("Are We Creating The Next Crisis With What We’re Doing To Get Through This Crisis?" Vident Financial blog, 6-16-20). At that point in the conversation people were afraid of deflation, and Google analytics shows a spike in searches for “deflation” at that time. But since the Fed is deflation-averse, it panicked and vastly expanded the money supply at a rapid pace, creating the conditions for the inflation we’ve seen this year. Market indicators of inflation like treasury inflation-protected securities (TIPS) began signaling future inflation risk then, as did gold and indices designed to track CPI. The dollar fell precipitously during that period as well. Most of these indicators continued to show rising inflation risks well into the summer of 2021. Google searches on “inflation” spiked in summer 2021, and Google searches on “hyperinflation” peaked early in fall 2021. But the actual market-oriented risk metrics mostly peaked in summer 2021 and have been falling since then, especially in December 2021. Bottom line: Inflation is real, and the same media that was in denial about it for a year and a half is now overhyping things with talk about hyperinflation.
  2. Supply chain problems Supply chain issues are something we were talking about as early as February 2021. The data showed that the general economy was growing faster than supply chain production (according to our proprietary index). What we said at the time was, “The supply chain is struggling to keep up with demand,” which we also pointed to as an inflation issue. What the data showed is that although business was able to accumulate excess inventory during the worst of the shutdown, after the reopenings in late 2020, inventory stocks kept falling relative to sales demand. Business was losing the margin to service its customers. Google searches of “supply chain” were low during that time, when the problem was already showing up in the data, but they peaked in early fall 2021. But by then conditions were already starting to improve, as indicated by real-time surveys of supply chain managers and changes in inventory. Once again, a problem appeared in the data. The media ignored it, then eventually hyped it around the time when the data showed that things were beginning to improve a little.

It’s very difficult to accurately assess the level of a problem and there are two errors one can fall into: understating a problem, and overstating it. Historically, financial media tends to commit the first error and then the second one. So, inflation is still a problem and supply chain issues are real, but neither seem to be apocalyptic.

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