Inflation is Far Away
Pfäffikon SZ, Switzerland – Since the outbreak of the credit crisis enormous amounts of money have been pumped into the economy. Many market researchers predicted a strong increase in inflation and adjusted their investment strategy accordingly. Hyper inflation, it was believed, would be our destination, where the American dollar would be the first to bite the dust. The reality of the situation is that after 6 years of incredibly loose monetary policy the discussion seems to be centered around deflation rather than inflation. In the meantime the American dollar is experiencing a second youth. The threat of deflation – namely in Europe – is a problem that should not be underestimated.
Deflationary Suction
Innovation is often seen as the solution for escaping the current financial malaise. But many technological innovations cause enormous deflationary suction. When you look at a typical shopping street in Rotterdam for instance, you will undoubtedly notice that in some cases there have been shocking changes. The deflationary suction caused by – in this case – the internet, becomes painfully apparent.
Globalisation
In addition, globalisation contributes to low inflation. The dirt cheap money finds its own path and people are prepared to relocate for a promising future. Country borders often play no role at all. Wage inflation therefore is strikingly low. Moreover it is notable that price inflation is not high and partly for this reason inflation is not self-evident.
Another focus is the composition of the global population, which is changing at rapid speed. Recently I have been conducting more and more research into this phenomenon. For me it’s still too early to draw conclusions, but one thing is crystal clear: private real estate investors are underestimating the influence of the aging of the global population, which will have an enormous impact on their investments. Moreover, this development will have a big influence on inflation in general, because the future greybeard will only spend his money reluctantly.
Considerable Time
In monetary terms, last week – according to many investors – revolved around a mere two words spoken by president of the Fed, Janet Yellen; “considerable time”. Yellen looks at the data and doesn’t care about the timeline, this much is clear. For the time being the issue of inflation seems to have been shelved. Investors are seeking salvation in stocks as they chase the indices higher still. In the past, within this framework, I have written about smugness. In many respects the current situation on the international markets reminds me of 2007. Investors are ignoring too many warning signals and that makes me reluctant.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
