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The Deflationary World We Live In

There is much talk about deflation these days. Google "bbc deflation" and have a read. Falling prices are a big deal. However I would like to think about the context. What is the bigger picture?

A comment I feel we do not see enough is that falling prices reflect something. Basic economics is that price is where supply and demand matches off. And yet no one seems to say this about deflation. The news just tells us that its happening and central banks don't like it for xyz reason; and then concludes these are the positives and these are the [bigger] negatives

Capital plus labour multiplied by productivity, is the classic simplification of the economy. I think it is not said enough that deflation is a sign that we have over supply of all three

Many bullish market commentators talk about a coming capex (capital expenditure) cycle. Companies aren't investing and because of that at some point they will and they will spend money on machines to make more widgets

I observe (and I am naturally late to saying this), prices are telling us they won't

Today's thesis is we have oversupply of capital[money], which has led to an oversupply of capital[machines], and this means we need less labour

Prices of stuff indicate where supply and demand are currently meeting. Prices of labour e.g. wages indicate where supply and demand of your hard work is

To tie this back to the cycles of innovation I do enjoy referencing, we've had the invention of electricity, which led to the invention of a bunch of stuff, including light bulbs, tv's and computers. Computers led to the modern finance industry. And now we have...big data? Self driving cars? The tail end of innovation that (1) leads of relatively small new industries and (2) are so productive they will lay off thousands of people

Many would agree that we have goose'd up growth through the use of debt

The use of debt ultimately got so unproductive, central banks have been obliged to skip that part and just print the money directly. We see the results of this across the different users of "money"

The borrowers of debt - the growth of what they owe has been temporarily moderated

The lenders or owners of debt - their store of value has increased at a decent clip whilst what they earn against it has declined

Those who use money to buy and sell - have had no complaints

Those who earn money for their labour - have seen themselves get poorer

The dip into deflation. The inability of central banks to create inflation. Is going to modify the above

The borrowers of debt - are going to suffer as they will need to work harder to pay this off. However the interest on this debt is new debt still makes sense!

The owners of debt - are going to start b/tching. Their assets will be huge but earn them nothing

Those who earn money for their labour - will still not see any wage growth but at least the price of things declining will make them richer

This analysis is stale in market terms. But I feel like the narrative still needs has further to go

Sell banks. Buy yielding assets. Borrow money if you can. We are seeing a bounce (rise) in yields right now. The US bond yield got down to 1.65% and is now 2.1%. Is it a buy here? I do not know, but don't expect it to go above 3% in a long time. If you see something yielding greater than 3% and it isn't going to go bust or have its earnings squeezed (e.g. banks), then its probably a buy. That includes London property

Companies need to consolidate. Buy a competitor, and then cut costs and slyly raise prices or lower them less than they would otherwise

As a side note, if I am right inequality is close to peaking. Whether the complaints of it do are another matter. Imagine a world where the rich complain because what they have doesn't go up any more

Paragraph on the alternative: the European economy is fine and china stabilises at its current growth rate of >7% a year. Doesn't feel likely does it. Remember the US economy is fine already

I broadly still expect the economy to be ok. And short term rates to rise. But the rise is going to be a midget of a cycle. And property loves low interest rates

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.