Sausage Sizzle: $̶2̶.̶5̶0̶ $4.50

You’ve likely heard about the marshmallow test.

You know, the social experiment where a researcher puts a marshmallow (or a pretzel) in front of a kid and tells them if they wait 15 minutes to eat it, they’ll give them a second one. They then leave the kid alone in the room with the snack…

The results from the 1970s experiment showed that only about one-third of the kids waited to eat the snack. Follow-up studies indicated that those who waited did better in life than those who didn’t.

The study is supposed to be about patience and willpower. But to me, it always seemed about trust.

Can you really trust the researcher will give you another marshmallow after 15 minutes?

After all, you ARE the subject of an experiment. A bird in the hand is worth two in the bush and all.

What if the researcher comes back empty-handed? Or worse, takes the one you have away?

Turns out, I wasn’t alone.

The University of Rochester has tried to replicate the experiment but with certain differences.

First, they divided the 28 kids into two groups. The kids in the first group were given bad art supplies and were told by the researcher that if they waited, they would get better supplies.

But when the researcher came back a few minutes later, he was empty-handed and said that there had been a mistake, there were no better art supplies available.

He then did the same thing with stickers.

They then put all the children in one room, gave them a marshmallow and said that if they waited for the researcher to come back to eat it, they would get another one.

Unsurprisingly, the kids that had been in the first group didn’t wait. It took them an average of three minutes and two seconds to eat the marshmallow with only one holding out. Of the other kids, five held out for 12 minutes and nine kids didn’t eat the marshmallow at all.

The difference being they trusted what the researcher said.

There are several factors at play here along with trust, such as past experiences.

The lead researcher said that seeing a girl at a homeless shelter have a lollypop taken from her by an older kid was what inspired her to conduct the experiment. What surprised her was the girl wasn’t upset; she was used to an unreliable environment.

But there are also future expectations. What are the risks of waiting?

This made me think about inflation. The point being, when there’s inflation and prices are rising, the worst thing you can do is wait.

Let’s say you’re at Bunnings.

Would you really wait to have that sausage after you’re done shopping if you knew there was a chance the price would rise while you were inside?

I know, I know. It’s an extreme example.

But I’ve seen it happen in Argentina. The price of items like a coffee would go up by the hour with hyperinflation.

And inflation is very much here in property, stocks, and things like food prices. This week, I paid $62 a kilo for scotch fillet when the price a few weeks back had been around $56.

The thing with inflation is that it’s a tax on your money. Especially when interest rates are way below the inflation rate, there’s less incentive to keep money in the bank.

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So you spend it. You buy property, cars, boats, gold, anything that will keep your purchasing power.

If you expect things will cost more in the future, you bring forward spending…which at the same time fuels more inflation.

Central banks around the world are saying that inflation is transitory…but do you believe it? One of the big things that affect inflation is people’s future expectations and what they believe future prices will be.

It’s something former president of the New York Fed, Bill Dudley, wrote in Bloomberg this week in a piece titled ‘Powell is fighting the for the minds of the people’:

What if people stop believing in this benign outlook? [That is, that inflation is transitory.] This is one of the greatest risks the Fed now faces.

The Fed’s power to manage the economy rests in large part on public confidence.

A longer-than-expected bout of higher inflation could raise doubts about the central bank’s commitment to its inflation objective. As a result, people’s expectations of future inflation could rise, leading them to respond in ways that would make actual inflation more persistent. 

Credibility is a powerful tool for keeping inflation in check. If persistently high inflation calls that credibility into question, the Fed’s job will become much more difficult.

That’s why you keep hearing the Fed hammering on about inflation being ‘transitory’.

But it doesn’t seem to be working too well already.

The Fed’s August Survey of Consumer Expectations shows that people expect inflation to be 5.2% over the next year and 4% over the next three years, well above the 2% Fed target.

It’s a similar story here in Australia.

According to Roy Morgan, inflation expectations are rising with Australians expecting inflation to be 4.3% over the next two years.

Roy Morgan’s CEO Michele Levine had this to say:

The steady increase in Inflation Expectations has continued over the last three months despite over 15 million Australians being in lockdown throughout the month of August.

The increase in Inflation Expectations over the last year is the largest increase in the measure for a decade since increasing by 1.2% points in 2010-11 during the height of the ‘Mining Boom.

‘If Inflation Expectations continue to rise at the current rate over the next six-to-nine months, the increasing prices will be a serious issue as we approach next year’s Federal Election due by May 2022 .

Inflation worries were already one of the big issues in the recent Canadian election.

At the moment, it’s looking like the US Fed is gearing up to wind down stimulus. But in my view, they won’t rush to it. Inflation and low interest rates are a way to make the huge amounts of debt smaller.

But of course, people’s expectations could always throw a wrench into this plan.


Selva Freigedo

Editor, The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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