Commentary by Joe Clark
The Baby Boomer generation witnessed hyperinflation in the 1980’s with 30 year mortgages peaking at 18 percent in 1980. Investors in this era saw CD rates top 14 percent and watched home ownership become almost unattainable for the average family. Inflation has always been on the fear monitor, leaving deflation as a non-event.
A classic definition of inflation is, “too many dollars chasing too few of goods”. Today, the great concern of many is that monetary easing across the globe could lead to dramatic forms of inflation seen in the late 70’s and early 80’s. Simply put, a lot of cash has been added with little chasing of the goods and services.
What has happened to create such a situation? Exhibit one is the spike in asset prices, especially here at home with the U.S. stock market. We are now paying a multiple near 17 times and perhaps 18 times trailing earnings on the SP 500. That is a frothy price not seen since previous market peaks and such valuation most likely comes from access to easy cash and limited desire to buy other things. But money has to go somewhere.
Currently, the US economy is declining .1 percent in terms of year-over-year consumer prices– a negative number. Fortunately, we are at 1.6 percent year-over-year on what economists consider the core rate. In November 2014, we had 10 countries with negative year-over-year inflation. In December we moved to 13 such countries and January saw the number hit 18.
The inflation of the Weimar Republic of Germany in the 1920s and the hyperinflation witnessed in the U.S. 35 years ago still generates fear among those of us who lived through the fallout. We haven’t seen or felt the impact of deflation. The issues associated with deflation and its economic consequences are dramatically different and the Federal Reserve Chairman goes to bed nightly praying for inflation near 2 percent. Deflation is her nightmare.
You must consider the impact of declining prices worldwide when you look at your portfolio. The impact of inflation or deflation extends way beyond the prices you pay at the pump or the store.
