Fynsa
– But Mom, I left without telling anyone because everyone else left without telling anyone.
– Let's see, if one of your friends jumped off the top floor, would you do it too?
I'm sure many of you heard that phrase from your mothers or fathers when you were children, or have said it to your own children when you see them acting impulsively. While it often seems like an exaggeration (since we’re not mindless robots), in real life it happens more often than we realize. For example, to cite a recent event, do you remember when, at the start of the pandemic, people rushed to supermarkets and stores and bought up all the toilet paper? It’s true that in March 2020 we knew very little about the coronavirus, but diarrhea wasn’t listed among the symptoms described by the WHO or in the Ministry of Health’s guidelines. Nor was there any sign on the horizon of a global paper shortage that could jeopardize the future supply of this essential item. So, if there was no information suggesting an increase in demand or a contraction in supply, why did people clear out the shelves dedicated to this product?
This behavior is known asthe“bandwagoneffect”(or by many othernamesout there, in case you’ve heard them), and it refers to how people follow the crowd without necessarily knowing why they’re doing it. “Maybe they know something I don’t,” which becomes a reason to follow their lead so as not to end up looking foolish or uninformed. This can also be seen in lines, when many people start waiting in line without necessarily knowing if it’s the right one for them, simply because others who seem to be pursuing the same goal—like getting into the stadium—are doing the same. Not that it’s ever happened to me, noooo.
Well, since, in every respect, the economy and financial markets are reflections of human behavior, these phenomena are also evident in these areas. John Maynard Keynes put it better than I ever could, calling them “animal spirits”:
“Even setting aside the instability caused by speculation, there is another form of instability that stems from the nature of human beings: that much of our positive activity depends more on spontaneous optimism than on a mathematical expectation, whether moral, hedonistic, or economic. Perhaps most of our decisions to take positive action—whose full consequences will only become apparent many days hence—can only be regarded as the result of animal spirits—a spontaneous impulse that drives us toward action rather than inaction—and not as the consequence of a weighted average of quantitative benefits multiplied by quantitative probabilities.”(1)
This type of behavior has been used to explain major stock market movements, exchange rate fluctuations without a clear underlying cause, rises in financial asset futures, and negative prices for oil futures contracts (2), etc.
This has also been observed in the local market, very recently, in the price that market participants assign to the UF in the future. That’s right—there is a market where the future value the UF might have on a specific date is bought and sold. For example, if you believe that inflation in three months will be higher than what is reflected in the prices of future UF contracts, you can buy these UFs, and if your expectation is realized, your UFs will be worth more at that time. You can do the same thing—but in the opposite direction—if you believe inflation will be lower. At FYNSA, we have an entire department dedicated to this, which allows us in the Economics division to keep a close eye on market trends. This is how, this week, we’ve observed a very significant increase in inflation expectations for the coming months, which has been distributed quite evenly throughout 2022, with the exception of the last quarter. This has caught our attention, since this week we haven’t actually had any news that would, on balance, lead us to believe there will be higher inflation—say, in May or July. In fact, we’ve seen that market participants believe August will be just as inflationary—or even more so—than September or October, which generally does not happen, mainly for seasonal reasons. I’m not saying this can’t happen—especially in this context with so many surprises—I’m just saying that I don’t see any reasons to explain this weekly shift, which is so clearly reflected in prices.
No one here can predict the future, and I’ve never claimed to be able to. The March figure was certainly surprising and may have caused a lot of concern among investors about the CPI in the coming months. I don’t doubt that. I’m just saying that, in light of this week’s news, I find it hard to justify these additional fluctuations on top of the already high existing expectations.
I might be wrong, but—at least as far as I'm concerned— I'd rather not jump off the top floor.
