Swimming Upstream

What are we missing?

Great Barracuda. Photo: Clark Anderson/Aquaimages. Source: Wikipedia

There’s a story about two young fish swimming upstream who meet an older fish heading downstream. The old fish nods at them as he goes by and says, “Morning boys. How’s the water?” The two young fish swim on a bit. Eventually one of them looks over at his friend and asks, “What’s water?”

Sometimes the most obvious, important realities are the ones that are the hardest to see. Most of what we observe comes from inside us—from how we think about the world, what mental categories we use. It takes a lot of energy for a fish to think about what it’s swimming in.

So how’s our water?

One big issue we ignore is the long-term deflationary trend. The internet is deflationary. As connectivity goes up, prices fall lower and lower. That’s because information can be multiplied for almost nothing. I stream “free” movies off of Amazon Prime because it is so convenient. Wikipedia and Wikimedia are free. Google makes searching for what I want easier than ever. And it’s really simple to compare prices.

The same can be said for global demographics. It’s a truism to say that the world is getting older—that falling birth rates and improved medical care are causing median ages to rise everywhere. But what does this mean? Older folks don’t need as much stuff as younger folks. They don’t need as much housing, they don’t go out as much, they don’t need as much education. Demand falls as populations age.

Source: UN, Wikipedia

It doesn’t matter whether Donald Trump pulls out of TPP or builds a wall, the near-zero-cost of information and aging global population will continue to drive down prices. There’s more supply and less demand. This means that it will be hard for inflation to take off in any sustained way.

This has profound implications for stocks, bonds, real estate, pensions, and all kinds of businesses. The ‘30s to the ‘70s were the age of rising inflation. The ‘80s to the ‘10s were a time of falling inflation. Will the next era be one of low-flation or deflation?

Douglas R. Tengdin, CFA

Chief Investment Officer

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