We’ve been talking about deflation for a long time and now the media is finally catching on to it as well. However, you will rarely if ever here the Federal Reserve talk about deflation.
The latest issue of The Economist magazine has on the cover “A Billion Shades Of Gray.” In this issue they discuss the global aging population. While it’s good that people are living longer, we need to remember that older people spend less money. Additionally, younger people are also spending less. When people are spending less money, there are fewer consumers and less money out in the economy.
A combination for deflation
In addition to the aging population, technology is also contributing to deflation. Technology is bringing the cost of many products down. Your smartphone and tablet, for example, have dematerialized products like music, books, cd player, alarm clock, etc. The aging population and technology are both are putting pressure on prices around the globe.
Another important fact for investors to consider is that many corporations are also replacing people with technology and therefore not hiring like they use to. As investors we like to see corporate earnings go up because that causes the stock market to rise. If this trend continues however, corporations will be hiring less people, which means more people are out of work which leads to less consumers improving our economy.
A deflation case study
Japan is a great case study for how this combination of events can contribute to a deflationary period. Their baby boom generation is far ahead of us, and the younger generation is not getting married or buying houses because of what they have seen in the generation before them.
What investors need to do
In the big scheme of things this is just a part of market cycles. The key for investors is to know how to maneuver their money in the right asset categories and not get caught up in it.
We could see inflation raise its ugly head in the future but I believe one of the reasons the Fed is not raising interest rates is for the same reason The Economist has it on the cover of this issue.
Staying ahead of the curve
We will be covering more of this as the year goes on. We are dedicated to being ahead of the curve and on the cutting edge of research for our clients. We are constantly thinking about our client’s portfolios as we develop strategies to help give them better returns but also keep them ahead of the game before these trends become a reality.
If you have questions about your own portfolio, I would be delighted to talk with you. Comment below, email me here, or call me at (205) 989-3498.
Greg Powell, CIMA
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Greg Powell is President and CEO of Fi Plan Partners, an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.