American Gods

American Gods(2001), the novel by Neil Gaiman turned into an excellent TV Series, tells the fantastic story of a fight between new and old gods.


Central to the narrative is the idea that beliefs power gods, which finds an origin in Voltaire’s assertion whereby ‘gods are born out of men’s belief.’ Because the belief in them has waned, the old gods, such as Odin or Anubis, have lost most of their power. They have almost been downgraded to ordinary citizens. In contrast, the new gods, including ‘Technical Boy’ and ‘Media,’ are striving since benefiting from people’s fast-growing belief in them. ‘American Gods’ is about the journey started by old gods who, tired of their degraded condition, gather their troops and resources to confront the new ones.


A similar fight is taking place in the financial markets today. There are two belief systems at war: Value stocks, Europe, 2%+ inflation rate expectations, and higher long-term interest rates sit in the old gods camp; Growth stocks, the U.S., low inflation rate expectations, and low interest rates rest on the side of the new gods. Investors’ belief in one or the other powers market dynamics.


Diverging assumptions about future inflation are the contention point that fuels the current battle. The trigger? The gargantuan $1.9 trillion stimulus package promoted by the Biden administration. Now that inflation fears are out there, they cannot be easily dismissed. Ironically, Mr. Powell’s lack of concern about inflationary trends is precisely what has added to investors’ growing concerns about it this week.


The former Fed’s Chair, now the U.S. Secretary of the Treasury, famously characterized inflation as a ‘mystery.’ Naturally, all renowned economists are attempting to solve it. Project Syndicate is an interesting repository of recent articles on the topic. Taken altogether, however, the readings suggest that the inflation mystery is unlikely to be cracked any time soon.


My favorite theory about inflation is based on the notion that inflation is powered by beliefs, like Neil Gaiman’s or Voltaire’s gods. In a Federal Reserve paper entitled The Relationship between Inflation and Inflation expectations(2009), the author states that ‘the evidence shows that [inflation] expectations are an important force in inflation dynamics.’ For example, inflation expectations affect wage increase demands, which eventually influence demand for goods and then firms’ pricing decisions.


Low (high) inflation expectations beget low (high) inflation. That is why central banks have been dead focused on anchoring inflation expectations at around 2% over the last thirty years.


Could a one-off fiscal boost, however shocking, change these profoundly ingrained expectations and move the global economy into a new macroeconomic regime? I do not believe so. These are extraordinary times calling for extraordinary measures. Any resulting inflation will be viewed in that temporary context.


That said, I do expect many investors to confuse cyclical factors with structural ones in the coming months. Indeed, it may look like the old gods are regaining some power, especially after a week like this. They may well win a battle, but the odds of winning the war are firmly against them.



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