The Problem Of Abundance

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Includes: AMZN, CVS, GOOG, GOOGL, INTC, JPM
by: Dana Blankenhorn

Summary

Too much energy, too many commodities, too many goods means deflation stalks the globe.

As deflation accelerates, stocks and other assets lose their value faster than prices fall.

The cure is simple and it can be quite pleasant. Or it can destroy the planet.

I have been writing about the problem of abundance since the century began, beginning with a book on Moore's Law, continuing with my personal blog, which still advocates the cost-cutting power of renewable energy sources and has looked forward to a recession based on abundance since 2011.

That recession has now come, a bit earlier than I anticipated, but it has come.

We now face abundance across the board. Intel (NASDAQ:INTC) is now suffering because we have too many PCs, too many servers, even too many cloud data centers. But that's just the tip of the iceberg. We obviously have too much oil and too much copper. We have too many farm commodities as well. There are too many manufactured goods seeking buyers, and many people will tell you there's just too much money floating around.

The great fear today is deflation. Any economists will tell you deflation is far more destructive than inflation - losses in stocks and other asset classes, wage cuts and job losses tend to move ahead of price cuts. Bread cost 8 cents a loaf, and lettuce 7 cents a head, in 1932. But one-third of all families had no income or social safety net, and starvation was real even while grain was rotting in fields.

Nothing holds its value in a deflationary environment. During the deflation of the Great Depression stocks lost 90% of their value. Some, like Treasury Secretary Andrew Mellon, saw this in Calvinist terms, saying that liquidation of labor, stocks, farmers and real estate would purge rottenness from the system. "People will work harder, live a more moral life," he said. "Enterprising people will pick up from less competent people." Economists have been debating the wisdom of those words ever since. Austrian economists insist Mellon was right.

Austrian economists became American economists because the "more enterprising people" found democracy and capitalism to be weaker, in the near term, than autocracy and a demand economy. Dictators could do that, dictate. The businesspeople who followed Mellon found themselves, later in the decade, enamored of German efficiency. It took the hyper-patriotism of the McCarthy era to make voters forget that.

The problem with abundance is that it makes scarcity a policy choice. Industries compete to create scarcity in other industries, and to build market share for themselves. Demagogues can use deflation to reward friends and punish enemies - a King ain't satisfied until he rules everything, as The Boss wrote in Badlands.

Our advantage, today, is that we have gone through this history. We know where that path leads. We know what the cure is. Someone needs to step up to the plate and buy, take out the bargains, create new demand, and use it to make life "a wonderful adventure," as Charlie Chaplin said in The Great Dictator. The problem of abundance is a huge opportunity to build things, and do things, we need to build and do, at bargain prices. Hoover Dam or weapons of mass destruction - it's our choice to make.

But that doesn't tell investors today what to buy, or what to sell. What you buy, when the smoke clears, is safety. You start over. Bank stocks like JP Morgan (NYSE:JPM) are going on sale, and technology leaders like Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) are going on sale. I still like Amazon.com (NASDAQ:AMZN), which has helped lead the deflationary spiral, and I like health care stocks focused on cutting costs from the system, like CVS (NYSE:CVS). You should be building your own list.

I am not buying these shares today. I'll gladly be buying, as I wrote earlier this week, when we have a quiet day, a balance of forces between buyers and sellers. The list is predicated on the idea we have learned the basic financial lesson, that abundance is an opportunity to do more, and do better.

Then, I'm convinced, we are going to prosper, because if mankind is stupid enough to re-run the 1930s, after all we have learned, then the cockroaches deserve to inherit the planet.

Disclosure: I am/we are long AMZN, GOOGL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.