Reflections on Inflections: Part 1

History seems to move in broad cycles. Beliefs come into and fall out of favor. Despite evidence of these cycles, people tend to “forecast with a straight edge.” In other words, we assume trends that are in place will remain in place forever. And, thus, it can come as a shock to society when trends shift.

One key reason why people tend to be surprised by inflection points is because we are mortal. Once we identify the trends in place there is an incentive to buy into those patterns. There are pundits who warn us that changes are in the offing but they are often warning us well in advance of the shift, and thus can either become like “Cassandras” who always signal calamity or like “stopped clocks that are right twice a day.”

In Part I of this report, we will offer some observations about inflection points—points in history when conditions change and a new regime of policy and thinking becomes dominant. These observations will lay the groundwork for Part II, where we will examine in detail what we believe are two coming inflection points. As always, we will conclude with market ramifications.

Characteristics of Inflection Points

If something cannot go on forever, it will stop.

-- Herbert Stein

Herbert Stein, a University of Chicago economist, was the chairman of the Council of Economic Advisors under Presidents Nixon and Ford and taught economics at the University of Virginia. His quote is a reminder that trends that seem “impossible” will eventually end. The trick is to figure out “when” and “how” they will end.

One way to frame this problem is the difference between the “short run” and the “long run.” Technically, in economics, these terms refer to situations of capacity. In the short run, supply and demand are defined as constrained; in the long run, both adjust. For example, in the short run, gasoline demand is thought to be highly price inelastic, meaning that declines in supply lead to sharply higher prices.[1] In the long run, consumers react to higher prices by investing in conservation. They will favor fuel-efficient cars, adopt public transportation, relocate closer to work, etc. To some extent, some adjustments simply represent the shift from the short run to the long run. Although these sort of changes are sometimes referred to as inflection points, this type of adjustment isn’t what we are discussing in this report.