Secular Deflationary Cycle: Do Not Get Thrown By Short-Term Moves

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All the rage right now is inflation. The CPI, CPE, and PPI are coming in at multi-decade highs. Hence, how can we discuss deflation?

Like most things, we deal with cycles. Nothing goes up forever. There are times things reverse. This is where most fall victim to cycles. When people fail to realize this, they are often caught on the wrong side of things.

We are in a cyclical stage. There is no way around that. To start, commodities were entering a bull market even before the lockdowns due to COVID. Some started their run a couple years earlier. Bull markets eventually come to an end. No matter how high they go, there is a reversal. In fact, there is often a correlation between how high they go and the power of the turn.

Therefore, when we look at oil, which is the major driver of all this, at some point, we are going to see it peter out. Nobody knows when or where it will reach before the turn, but it will happen.

Here is we have to look for the near-term circumstances if we are going to get an idea of what is going on at the macro level.

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Demographics Crashing

This is a subject I cover so much it can get tiresome. However, the basis for any macro-analysis starts with factors that do not change rapidly. This allows us to assert with reasonable certainty what things will be like in a decade or two.

Therefore, topics such as geography, industry, and climate are constants for a particular area. Of course so are demographics.

It is no secret that the fertility rate all over the developed world is below the replacement level of 2.1. This means, at some point, populations will enter decline unless this can be reversed. Since no country really was able to do it thus far, the likelihood does not seem great.

Also, and more importantly, before population decline occurs, aging happens. This means that people retire out of the workforce, leaving fewer people to sustain the productivity. At the same time, we also see the economics get inverted as more people are taking out of the system, requiring more services. With less workers contributing, it can also lead to civil unrest.

Japan is the poster child for this. While many feel deflation is a good thing, keep in mind their economy has not grown in 30 years. It is flat. They also see their stock market trading almost 30% below its highs (this is about twice as long as the NASDAQ spent below its ATH after the DotCom bubble) with no signs of ever getting back. Finally, their real estate market in Tokyo, the largest city in the world, is still 40% below its peak in the 1990s.

In short, this destruction in asset pricing means a lot of wealth is eradicated. Just imagine, if you are 40 now, that your house will be 40% below where it is now well into your retirement. How much would that cost you?

The Japan situation is going to spread across the developed world. There are very few countries that are not facing this situation. As uninteresting as the subject can be, it has profound impacts economically. Germany, for example, is at its peak workforce this year. Starting next year, it will decline. It is not something that is decades down the road. The impact is going to be felt in many countries almost immediately.

None of this is inflationary. It is extremely deflationary especially since older people do not spend money like those who are younger. The impact upon consumption along with investment all take a hit.

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Technology

Here is the second longer term piece of the puzzle that is impossible to get around.

Technology by its very nature is deflationary. Look at any industry that was seriously disrupted due to technology and you will see one that saw prices crash.

Here are a few:

  • Music
  • Information
  • Video/Films
  • Shopping
  • Communications
  • Stock Trading

In this decade, we could see major disruptions in transportation, healthcare, legal services, and education. The push towards renewable energy, while longer out, will eventually have a similar impact regardless of what technologies are eventually embraced.

Another factor in this analysis is to factor in not only the technology, but the impact on a larger scale. For example, the remote work movement is all due to technology. This is going to affect migration in many countries, with commercial and residential real estate being impacted. Some of the most valuable real estate in the world might find demand waning as people migrate to less expensive areas. Also, do companies truly need the expensive downtown offices? This is something they will have to consider.

All of these are long-term trends that cannot be denied. Those who focus upon the short-term moves are going to be caught off guard. Just like Japan was suppose to keep growing, eventually surpassing the US economy, the demographics put a fork in that idea. Instead of the projected outcome, a 30 years deflationary super cycle took hold and is not letting up.

Technology is also going to affect labor. We are already seeing it. The US manufacturing ranks are 1.5 million below where they were a couple decades ago yet output is higher than it ever was. This is something that we will see across the board.

It is now entering the white collar arena, an area that could see things move faster. After all, software is easier to create than machines.

Regardless of how things look exactly, we can be sure there are not too many inflationary characteristics going forward. Even now, the shape of the yield curve is telling us that the long end does not see inflation or economic growth.

This aligns with what demographic and technology trends tell us.


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So if the old people don't spend money like the young people, won't this mean the future is slightly more inflationary? I know the old people aren't use to online payments or technology in general. For the most part, I agree that we are in a deflationary environment.

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Definitely I agree with you on this,the fact that they don't know how technology works like the young people don't means they don't understand how things works too.

How is that inflationary? When people do not spend, that causes economic contraction which is deflationary, not inflationary.

With less younger people, spending on kids (the most costliest of events), is reduced.

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Well I guess there is also that point of view. I was more in the view that people's habits on spending would not change so it means the people dying off would stop saving and the others would still be spending just as much.

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Super important points right here. We tend to think near 1 year or less in our lives and not 5-10 years or hell your retirement years look so far away and before you know it it slaps you in the face and you wonder why you're screwed. Always think long term in your actions and they will pay for themselves. There's money to be made in a bull market and there's money to be made in a bear market.

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Another key point is both will appear. Our linear thinking leads us to believe that markets (or whatever) only go in one direction. Every bull market end and turns into a bear. The reverse is also true. These cannot be avoided.

Hence we must plan accordingly.

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That is a scary trend but I confess I love the remote work movement XD

What could be other solutions besides a population and/or immigration growth?

!1UP

Immigration is going to be tough because all developed countries that are facing a population crisis are going to seek pulling them in. That means these countries will be targeted by many nations.

However, the developing countries are seeing their birth rates drop also. While many are still above replacement, it is slowing. At the same time, as their wealth grows and poverty is reduced, the number of kids tends to dimininish.

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I guess it's time to surrender to our machine overlords, greet Skynet and go to our government issued farming pod to live in the matrix XD

At the same time, as their wealth grows and poverty is reduced, the number of kids tends to diminish.

Isn't the increase in the standard of living one of the reasons for such decline in birth rate? Not sure if this is an accurate observation that with such trend, both parents have to spend more time to earn the needed income to sustain the new lifestyle.

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Cool art. Well, all I have to add is: Inflation and deflations work in ways you don't understand.

  1. As a Venezuelan, I can speak of how inflation-deflation works IRL for DAYS.

  2. As an accountant I can tell you that accounting will soon vanish and be replaced by software, white-collar arena is real, so real it's terrifying for most white-collar jobs...

  3. Frankenstein's dilemma is real. The fear of tech that goes beyond human "common knowledge" at its time of creation makes people change new tech to the old ways. The fact that bitcoin is used as a stockmarket bet and not as a currency is evidence of it. The original project was not meant to be worth 35k of USD. IT was supposed to be worth 1. Make usd obsolete for global trading, but People will just name the new 3.0 floating device, a flying car like they did with the automobile, based on the old pulling beast cars and down to the fucking neardentals and the first wheel.

Frankenstein's fear is what makes crypto a "market" instead of a common-use currency.

About inflation and deflation: they exist but at the same time, they do not exist. I'm talking as an economy school graduate, you can see them on books and economy markers, but they intrinsically are just "I don't trust in this money I have on hand" and "I fear this money is worthless in a couple of years". Deflation is just faith in the economy and distrust of other systems, which is a really "low grade" version of it but is the reason that makes Venezuela create national usd inflation. I mean, 4 years ago a kilogram of potatoes was 0.2$, now is 2$. There is no economic reason, the production is the same as 4 years ago, whatever marker that can actually explain inflation is useless for this case, is basically fear of inflation and "fear of civil war" that will never be real, that fear is a real thing and makes Venezuela Ducking day to day shet.

Sorry for the long text :P

It certainly is true that both can exist simultaneously. Right now, oil prices are forcing energy and food higher. These are two areas where people cannot avoid. This causes a reduction in discretionary spending, potentially leading to deflation in those areas. None of this, of course, has anything to do with monetary policy.

That adds in another layer, one which VZ is dealing with as it Turkey. When that happened, then price increases tend to be across the board and sustained.

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That is a focused inflation, and mutually dependent one to boot... The excuse on food is the high cost of transport, the excuse for oil is the low production. They work as a circle and could make the whole economy hit a trent, but global economy is better. Turkey, venezuela a other countrys that have high inflation have problems in price increases on all areas as you say.

And monetary policy is just goverments triying to get a hold on a wild horse :S

Thanks for putting this here. I totally agree with you, we are in a deflationary environment.

We are actually seeing inflation within a larger deflationary secular cycle.

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I contributed 6 children to the economy, so I replaced myself, my husband, and a few others. Among them I produced a therapist who works with children with autism, an entrepreneur with a bread route (if his business dries up, we are all dead, because it will mean people have stopped eating), a programmer, and a maker of fiber optic cable (interesting manufacturing process.) The other 2 are still finding their way, but they will.

All the moochers should be thankful my family is trying to prosper. Without people like us, there is nobody to mooch off of.

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When you mention music I have Napster in mind with high speed internet.

Things are changing and we need to adjust by staying 2 feet ahead.

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Napster certainly sent shockwaves throughout the entire record industry. Forced then to run to Jobs and Apple.

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I believe we're you say that, even if the market bull,there will be a correction. That's true. Market can't bull without a correction happening after the bull market.

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I feel for an economy to attain steady growth and not dwindle , there should be a striking balance in terms of inflationary and deflationary tactics, one should not only overshadow another, my opinion anyway. As regards technology, it is simply the gateway through which civilization comes into existence.

yes. it's smart to know and be able to recognize the two extremes of the economic cycle. Thanks for showing examples and explaining it.

This is going to affect migration in many countries, with commercial and residential real estate being impacted. Some of the most valuable real estate in the world might find demand waning as people migrate to less expensive areas. Also, do companies truly need the expensive downtown offices?

Wondering what would be the response of my friend hearing this kind of global trend. I just happened to talk to her for some time in the past and she was very upbeat when in comes to the property sector. She's a licensed real estate agent and she thinks that investing long-term in this sector will give a very promising yield.

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With the entire world in a deflationary dive, how do you think this will affect the crypto-markets of the next few years?