The Challenge of Math

Math used to be a pretty straight forward thing. 1 plus 1 used to equal 2, right? It seems today though, the answer to the equation depends more on what political party is presenting the math. The world is now a place where numbers are made to dance to fit a narrative that is being sold.

It really sucks that we have to treat every set of data, every number, and every statistic with caution. It makes out jobs even harder. As of late, there have been a number of problems with the math that I want to point out. In doing so, I hope to allows you to ask questions, demand accountability, and above all else, give yourself a clear path going forward.

The mathematical conundrum I want to tackle is inflation. It should be pretty straight forward, but it seems to have gotten complicated over the last 24 months. We all see the number come out, and it is always quoted in every article, news story, and social media post. It may read something like ” Inflation dropped last month to 2.6%”, or “Inflation at lowest point in over 24 months”, or something along these lines. We all think low inflation is good, and high inflation as bad, so we would view the 2 phrases as a generally positive event. However, lets take a slightly different look:

Lets say in 2019 I weighed 200 pounds ( yeah, let’s use that ). In 2020 I gained 5 pounds, in 2021 I gained 11 pounds, in 2022 I gained 9 pounds, in 2023 I gained 6 pounds, but so far in 2024 I only gained 3 pounds. Now, most people with half a brain would reasonably assume that I am a big ol fatty, and gaining weight is my new found hobby. However, it could also be said that since I have only gained 3 pounds in 2024, the year over year comparison is down 50%. That is how inflation works. Inflation is measured year over year, so as long as things are going up slower this year then they were this month last year, the inflation rate will drop.

Keeping with my example, I may very well be gaining weight at a 50% reduction than the year before, but my total weight has gone from 200 pounds in 2019, to 234 pounds today. That is an increase of 17% and probably enough for my doctor to call me things like fatty, pre diabetic, and a candy vendors best friend. Now, if I was a government that was trying to bring obesity to a standstill, I would highlight the year over year drop ( 50% ), whereas if I were, oh lets say the leader of the official opposition trying to call bullshit on the current government, I would point to the 2019 to 2024 trend with an increase of 17%. Both are correct, but which one should we listen to? Is Ryan getting fatter, or has he turned the corner and learned his lesson. No matter which view you think is correct, the fact remains that Ryan is a whole hell of a lot fatter in 2024 than he was in 2019.

Inflation may be down month over month and year over year, but if you stretch the timetable out, you will find that inflation, much like my weight in the above scenario compounds. At some point this extra weight, or extra cost is too much, and the system cannot handle it. When it is weight, the body has a way of stopping – high blood pressure, strokes, heart attacks, things like that are what happens when you compound the weight growth over the years. Recessions, depressions, and financial ruin are what happens when inflation builds up the pounds.

Now, inflation on it’s own won’t kill the economy, much like a little spare tire probably won’t kill you, but it is the reason behind the inflation that will be the death knell. Inflation builds up due to, in large part excess government spending. When governments spend beyond their means, print more money, and take on more and more debt, it allows inflation to occur. Then people get mad when they cannot afford the basic necessities of life, so the government pulls out some scheme to make it better – which usually involves giving away money, which in turn exacurbates the inflation. It is very much like when you eat like crap, which in turn doesn’t give you energy to exercise, which leads to a bad mental state, which makes you eat crap to feel better. Weight loss isn’t the cause, it is just the end result.

Inflation isn’t caused because prices just go up. There needs to be a catalyst. Inflation is the end result of bad policy, bad economic management, and a lack of the willingness to do what is right economically speaking. Time lines also play a very large role in the data.

Lets say that I realized I was getting too fat for my own good, and decided to lose some weight. Lets say that I lost 5 pounds next year, 11 pounds the year after, 6 pounds the following year, and then 12 pounds the year after that. I would be right back to where I started at 200 pounds. It could be said that over a 10 year period, I was at exactly zero. True, but the damage done to my body for carrying the excess weight for 8 of those 10 years would take it’s toll. The heart may not be as strong, my blood pressure could be higher than it should be, I would probably be out of shape, and my knees might give out prematurely. Inflation is the same. Even if we got to negative inflation – deflation , and prices were at the same level as 2019, a lot of long term damage would have been done. The middle class, much like my knees may give out early due to the financial stress, the deteriorating buying power, and the lack of good life choices during a period of bad economic problems.

Just because it goes back to the way it was, does not mean all is well in financial land. The only way to fix the problem is to learn from it, and ensure that it is not repeated. Then, and only then can we say it was a worthwhile experiment, and the pain that was caused from inflation was worth it for society as a whole in the long run.

Before repeating a number, before parroting a news release, and before allowing your emotions to get involved on a news story, why not take a step back, see who is presenting it, and see what the timeline is. I have always found that if you expand the timeline, your results, predictions and talking points will be much more sound. Years ago when I was a younger broker, I had a year where I had 2 deals close on January 2nd. If a person extrapolated that data, I would have closed 365 mortgages for that year, and probably been able to retire. Of course, pulling out a little, expanding the data set, and it was quite a different story. While that may seem like a silly example, things like this happen every single day on social media. Extrapolation to suit a narrative should be a Harvard degree these days. Many people cannot seem to pull back, look at the forest from the trees, and wonder if the data they see is actually correct, or if it has been spun 6 ways from Sunday.

I promise you, if you do take that step back, look at who is presenting the data, and do about 5 minutes of independent research you will be much more informed, and much less likely to repeat something that only has a small inner lining of truth. If you want to geek out a little bit, look at the recent Government of Canada release on home building. Look at the numbers that were released for July 2024, then compare them to the rest of 2024, and go back over 10 or 15 years. This will serve as a reason why data should be extrapolated by more than 30 days. Of course, when you extrapolate the data 1 + 1 won’t equal the 2 that was presented in the press release.

I long for the days when the data is honest, dependable, and the math is the math.