If you’re like me, you got the biggest bucket you could find and you’ve got it held up to the global money taps. And now you’re watching governments fall over themselves to send gallons upon gallons of cash flooding your way.
Not literally, obviously. But some days it feels like that.
The only question now is how long can it last?
It’s a good question. When you’ve got a Godzilla of money stomping around the globe, you want to make sure you’re not in the way when it goes rouge.
So how will we know? What are we looking for?
Well, assuming civilisation holds it together (and I’m not making any promises there), the tipping point will be a flip from the current deflationary environment into inflation.
The “Doomsayers” love this. They’re scaring the living daylight out of all the mum and dad investors with the whole inflation thing, costing them thousands in lost opportunity.
Don’t listen to them… Not yet anyway.
Don’t get me wrong Inflation is coming, given the scale of money printing going on in the US, even hyper-inflation, but not yet and not right now. What you need right now is a bucket (and a big one) to fill it with all this easy money around.
But while the possibility for a money-bust is real, even-garden variety inflation will have the central banks turning off the taps and interest rates starting to rise.
And it is true that all this money printing, even the EZ money on offer here in Australia, must be inflationary at some point. In fact, that’s exactly the point.
But while you’ve got the wall of money in one corner, in the other corner you have a number of massive deflationary super-trends that are keeping prices suppressed (oppressed?).
On my reading, there are at least 7 deflationary super trends that mean that governments around the world will leave the money taps on for a lot longer than most people think.
Let me lay ‘em on ya.
This is the big one. I talked a bit about it in a blog a week or so ago. The basic idea is that a large chunk of the growth in the run up to the GFC was due to both households and businesses taking on more debt.
I also published this graph here, which I think is worth another run:
This shows the story for Australia. You can see the levelling off of household debt levels, and the sharp fall in corporate debt following the GFC.
It’s a story that’s repeated around the world, though on a global scale we’ve had a pretty easy ride of it.
So around the world right now, banks are tightening their standards, and households and business are using any surplus they can get their hands on to pay down debt.
This means that before a wall of money can spark levels of growth that are going to worry inflation, it will have to work through the debt hangovers of the GFC.
How long will this take? Well that’s anybody’s guess. But it took us more than ten years to get into that mess…
2. Increased saving
Associated with an unwillingness to take on more debt is an increase in household saving. Australians were dis-savers before the GFC. Now they’re saving more than 10 percent of their disposable income.
This isn’t just about changing attitudes to debt, though that’s part of the story. A big reason for it is that other sources of equity have taken solid knocks to the head.
The stock market gave people a surprise when it started going backwards, trampling all over super funds on the way down. And with house prices stalling for a couple of years, people have stopped drawing down housing equity, particularly to go play in a losing market.
This has driven an aggregate return to savings as a store of wealth.
It remains to be seen whether this new level of savings is a new normal or not. But either way, that wall of money has to keep working harder to stop the cooling effects an increased saving rate is having.
3. Fertility and Ageing
This trend is so slow moving but so powerful, that by the time that most countries realised what was happening, it was too late to do very much about it. And now there’s no easy way out of the fix we’re in.
The world is ageing. Fertility rates across the globe fell as we got richer, and now there’s a baby-boomer bulge in our age distribution moving into the retirement years. There are just fewer young people coming up through the ranks.
At the same time as we started having less children, we also started living longer, and spending more and more years in retirement.
So what this means is that national dependency ratios – the number of people supported by the workforce, relative to the workforce itself, are increasing.
We’ve got a pretty steady increase scheduled in for Australia over the next 30 years (it’s easy to predict because we know how many people are alive right now, and fertility rates are slow to change…) But some European countries, like Italy have a real headache on their hands. So does Japan. And so does China.
It’s a headache because an increase in the dependency ratio reduces an economy’s productive capacity, and puts a solid drag on growth.
This in turn creates solid and sustained deflationary momentum – across a generation. Money market tinkering, even on the scale we’re seeing now, pales in comparison.
If your with me and want to find the 4 other reasons why there are seriously great times ahead, click here to keep reading.
I laid out three reasons why the global money taps are going to be flowing for a long while yet.
Now, I’m not saying it’s the end of the economic cycle, the end of boom and bust history.
There will always be ups and downs.
But one of the challenges I like to set for myself is to seek out those deeper undercurrents. Those massive super-trends that set the broader direction of the market – the trend line that the market swings and zig-zags about.
Because most of what we think of as “the cycle” is really just the herd getting excited in one direction, and then getting spooked in the other. There often isn’t much reason for any of it…
So how much use is that to us? It’s a mug’s game. Leave the herd to do its thing. Anchor your investment strategies to these deeper economic realities, and you can leave the boom and bust cycle behind.
So, I gave you three reasons why inflation was going to remain in check and give central banks no reason to start closing off the money taps anytime soon. Remember, central banks are focused on prices and inflation, and right now there are some massive movements against price increases – deflationary super-trends we can call them.
4. Emerging Market Production
Back in the 60s Japan established a fresh young town and named it ‘Usa’. They then turned it into a major manufacturing hub. As a result, all the spanners coming out of the tool district were blazoned with the branding ‘MADE IN USA’.
The Americans obviously weren’t too impressed.
And it fed into a lot of nervous hand-wringing at the time about the rise of Japan. A lot of people worried that Japan’s new found industrial muscle would kill the American economy. It certainly caused some pretty major shifts in the industrial mix, but it didn’t kill it. (That honour might end up going to sub-prime mortgages.)
And eventually American consumers were sold on the flood of cheap, high-quality cameras and electronics. In the process, Japan went from an emerging to a first world country.
They were followed by Taiwan, and now there’s China. Who will be next? India? Brazil? Mozambique?
The point to note is that manufacturing, particularly of consumption goods, tends to flow to where labour is cheapest. And China has access to an abundance of cheap labour now, but there are other countries lining up behind them who would love to take their place.
And what it means for first world countries like Australia is that consumer goods just keep getting cheaper and cheaper.
Take a look around your own home. Pick anything, especially high-end electronic goods. Compare how much it would cost to replace, with how much you paid for it.
Can you find anything that would cost more to replace now than the dollar price you paid for it?
We can maybe quibble over quality, but the CPI isn’t very good at picking up distinctions between a cheap and a premium wheel-barrow.
This is deflation in action. The rise of the Chinese manufacturing juggernaut has kept prices on a downward trend for years, and has allowed rates to hold at record lows through the golden years of ‘economic management’…
… and will continue to do so.
Technological advances improve production processes and bring costs down. Relentlessly, and at an ever increasing pace.
Take my I-phone.
If you could send it back to the 60s, you’d have a super computer worth millions of dollars.
Today, this super-computer costs just a couple of days work. And what do I use this super-computer for other than making phone calls?
Checking the time and playing Angry Birds.
This is the glory of technological progress.
And the pace of progress is getting quicker and quicker.
The electronics industry is driven by something called Moore’s law. This states that semi-conductor performance more or less doubles every two years. First formulated back in the 60s, it’s been pretty much on track all that time.
I don’t need to tell you how much more powerful your i-phone is compared to the original i-pods, but the important thing here is that technology is improving at an exponential rate. It’s getting faster and faster. That means the impact on prices, the cost savings it delivers, will simply get bigger and bigger.
And there’s no end in sight. This deflationary trend will continue until the singularity, after which i-robots will probably make slaves of us all.
6. Competitive Devaluations
This one is less of a certainty, but my bet is that governments won’t be able to keep their hands off the currency lever. By all reports Japan’s already well on the way.
You win a currency war by sacrificing your domestic purchasing power to increase the attractiveness of your exports. But when everyone is doing it, you dry up global demand, trade shrinks, and all economies suffer.
It doesn’t have to be this way, and there’s every chance we could avoid this trap. But it requires governments to be less self-serving and more global minded.
So may as well lock it in.
Ultimately I’m pretty cynical when it comes to government and our system of so-called democracy.
Vote buying governments and self-interested ‘interest groups’ (like the banks!) hijacking the policy process mean that no one ever makes the hard decisions.
We could have let the GFC shake things out, cleansed ourselves of the dud banks, cleared the rotten assets from the books, and started over.
But short-term pain loses elections, regardless of the long term gain. Just look at the mess Greece and Cyprus are in.
So you can bet that the money taps will stay open long after it stops being a good idea…
Get a bucket…the bigger the better….
There you have it. The money taps are on and its time to grab what you can.
How do you do that?
Stay invested and don’t be spooked by the media. Setup a plan of action, get quality education and most of all make informed and astute action.
Don’t sit on the side lines right now, roll up your sleeves and get to it!