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We're terrible at assigning weights
Variables and weights
A forecaster may get the right issues and still not know how they interact. Nobody knows what people inside the system will do to adjust and to mitigate the roadblocks that come up.
What is shifting now
The variables are easy to list. The old world order that governed economic flow and security has been in place more or less since World War II, and it feels like it is changing. The economic architecture is shifting in energy and in supply chains. Just-in-time inventories and the ability to find the cheapest pockets of labor face structural impediments, which has implications for inflation and rates. All of that has to be balanced against what looks like an incredibly deflationary impulse from technology, and how those forces net out is unclear.
Preparing instead of predicting
That is why Liberty Mutual Investments doesn't try to predict the future. Its saying is that it is in the business of being prepared for all of its eventualities. A house view built on guessing macro outcomes hardly works for an institution like it, so the house view concerns which long-term businesses and franchises to be in. A business like private equity has very little to do with feelings about the next two or three years.
Why is economic forecasting so unreliable?
Economies are made of millions of people who change their behavior when conditions change. Economist Robert Lucas argued in 1976 that relationships found in past data break down when policy shifts, because people adjust their expectations. Forecasts can also alter the outcome they predict, since businesses and households respond to them. Small differences in how variables interact can lead to very different results.
How can technology push prices down?
When a technology makes it cheaper to produce something, competition tends to pass some of those savings on to buyers. Computing is the clearest case: the cost of processing power has fallen enormously over several decades. Price indexes for computers have declined for years because capability per dollar kept rising. Economists call this kind of broad pressure on prices a deflationary impulse.
Why did just-in-time inventories spread?
The approach grew out of the Toyota Production System, developed by Taiichi Ohno in the decades after World War II. Parts arrive only when the assembly line needs them, which cuts the cost of warehouses and money tied up in stock. Manufacturers in the United States and Europe adopted versions of it widely through the 1980s. The tradeoff is that a delay at any one supplier can stall an entire production line.
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