Jeff Saut: Inflation, Deflation, or Both?
What you're experiencing depends on your household income.
Last Monday's article, Jeff Saut: How Much to Invest in Japan, began with this quote from Arthur Zeikel: "Thinking, good thinking that is, is a lonely sport. This may explain why so many of us do it so poorly. Good thinking is also an inefficient process. It takes a lot of thinking to come up with those few good, new ideas that are clearly worth thinking about -- ideas that can be exploited in the marketplace."
This week I'll expand on those thoughts with a quote from Albert von Nagyrapolt that reads: "Discovery consists of seeing what everybody has seen and thinking what nobody has thought." To frame today's discussion I begin with this quote from the brilliant Marc Faber:
"Surely, it is academically interesting to discuss for hours whether we are in a 'deflationary' or 'inflationary' economic environment. The different views on this issue have become extremely polarized with the deflationists maintaining that equities and commodities will collapse and that government bonds will rally. The believers in higher future inflation rates on the other hand argue that large fiscal deficits and expansionary monetary policies will boost selected asset prices and eventually flow into rising consumer prices and lead to higher interest rates. But, as I have tried to show by comparing oil with natural gas prices, in an economic system some prices may be rising, while others decline. This process is continuous and particularly evident in the price movements of various asset classes when there are massive excess capacities, which constrain new capital investments, and zero interest rates, which force cash holders to 'speculate' in one, or the other, asset class."
Inflation or deflation? The argument rages. Yet on CNBC last Thursday, I opined that we're currently experiencing both. Indeed, "seeing what everybody has seen and thinking what nobody has thought." Well, maybe not "nobody," but clearly not very many.
Consider this: It appears to me that the country's top quintile of wage-earners -- the folks with the most assets -- are experiencing deflation as their home prices have collapsed, their 401Ks are substantially below where they were in October 2007, their bonuses have been "whacked," and the list goes on. Meanwhile, the lower-income households are experiencing inflation with their heath-care costs rising, food prices escalating, insurance premiums climbing, etc. Even here in the Tampa Bay area, electric rates were recently increased by 7.5%. My bet is that the inflationary forces will eventually win out because that's the way it's always played since the Great Depression.
Plainly, I don't think it's different this time as we expect the typical business cycle to play. To wit: The current inventory re-build should lead to increased capacity utilization and capital expenditures. That should be followed by a pick-up in employment, which in turn, should foster more consumer spending. To be sure, I haven't thought, and don't think, this will be the typical post WW II V-shaped economic recovery because the sectors that have pulled economic activity sharply forward out of past recessions have been the "debt driven" sectors.
However, with consumers currently in a deleveraging mindset, it's difficult to envision housing and autos doing the "heavy lifting" this time. Nevertheless, I've averred since the anticipated March stock market "lows" that economic growth would be stronger than most expect. My sense was that since the working age population grows by about 1% per year, and productivity increases by roughly 1.8% per year, that it would take GDP growth of greater than 2.8% to create jobs.
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