Tuesday, August 03, 2004
Almost everyone believes that inflation is set to rise in the coming months and years, and that the interest rate cycle is due to turn up over the long-term. In other words, we should see a rising interest rate environment coupled with increasing inflation.
However I am not so sure about that. I seriously question the notion that we are heading back into the 1970's era of high inflation and high interest rates. Unlike the 1970's, the world economy today is beset with massive disinflationary (if not outright deflationary) forces, chief among them being the huge supply of cheap labour in emerging market economies like China and India, globalization and the rise of global free-trade, as well as the worldwide overcapacity in manufacturing engendered by China in the past decade and in the US as a result of the late 1990's bubble.
Another important disinflationary factor is the aging of the population in developed economies such as the Eurozone, the US and Japan. As the tidal wave of babyboomers hit retirement in the US, and as population dynamics inexorably tend towards an inverted structure (many old, fewer young) in Japan and the Eurozone, consumer consumption in these countries will be seriously undermined for years if not decades. As the baby boomers hit retirement, they will also start pulling funds out of the stock market, puttingcontinuous pressure on asset prices over the long-term.
Conclusion: I forsee that the conventional view of rising inflation is in serious error, and that instead of the 1970's happening all over again, we will instead see continued disinflation in the world economy over the long-term. Any spike in inflation that we may witness (such as during this year) will at most be temporary, lasting at most a couple of years. In addition, the US will have to endure a long-term secular bear market in asset prices, and the Eurozone and Japan will also be muddling through. The only thing that can perk up asset prices over the longer term would be continued investment by growing emerging market economies. Emerging markets are also where I think the best investment opportunities will be found in the years ahead.
However I am not so sure about that. I seriously question the notion that we are heading back into the 1970's era of high inflation and high interest rates. Unlike the 1970's, the world economy today is beset with massive disinflationary (if not outright deflationary) forces, chief among them being the huge supply of cheap labour in emerging market economies like China and India, globalization and the rise of global free-trade, as well as the worldwide overcapacity in manufacturing engendered by China in the past decade and in the US as a result of the late 1990's bubble.
Another important disinflationary factor is the aging of the population in developed economies such as the Eurozone, the US and Japan. As the tidal wave of babyboomers hit retirement in the US, and as population dynamics inexorably tend towards an inverted structure (many old, fewer young) in Japan and the Eurozone, consumer consumption in these countries will be seriously undermined for years if not decades. As the baby boomers hit retirement, they will also start pulling funds out of the stock market, puttingcontinuous pressure on asset prices over the long-term.
Conclusion: I forsee that the conventional view of rising inflation is in serious error, and that instead of the 1970's happening all over again, we will instead see continued disinflation in the world economy over the long-term. Any spike in inflation that we may witness (such as during this year) will at most be temporary, lasting at most a couple of years. In addition, the US will have to endure a long-term secular bear market in asset prices, and the Eurozone and Japan will also be muddling through. The only thing that can perk up asset prices over the longer term would be continued investment by growing emerging market economies. Emerging markets are also where I think the best investment opportunities will be found in the years ahead.
