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Famous for Being Wrong
Is Technology Really Inflation's Kryptonite?
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The above is a now infamous BusinessWeek magazine cover from August 1979. While stocks did indeed have a rough go of it after "The Death of Equities" edition hit the racks, a few years later they found a bottom and proceeded to go on a twenty-year bull market run. Contrarians point to this BusinessWeek as the birth of the "Magazine Cover Indicator"*, which theorizes that when an investment concept makes front page news, it has already run its course.
Below is another cover of Bloomberg Businessweek magazine (formerly BusinessWeek), published earlier this year:
The article inside the magazine argues for the death of inflation instead of equities, claiming that none other than capitalism killed it. The murder weapons include a combination of automation/technology, globalization, de-unionization, and aging demographics. As a result of these and other factors, inflation is between low and non-existent around the world, excepting only a few special circumstances like Venezuela.
Thus, despite what should be an inflationary environment in the U.S. --- full employment, an economy expanding at a solid if not extraordinary rate, and interest rates at near record lows --- inflation remains stubbornly at or below 2%, the Federal Reserve's target level.
There are many possible explanations for inflation's pronounced lull, but one - technology - stands above the rest. Advancing technology has of course reduced costs for centuries (just as examples, think of the printing press, steam engine and the assembly line, all of which improved the efficiencies and lowered costs of their respective industries by huge amounts). Unlike these historic examples, however, today's technological improvements disperse farther and more rapidly throughout the economy than ever before.
In 1965 Gordon Moore, co-founder of Intel, predicted that microprocessor speed would double every two years, while costs were cut in half. His Moore's Law (no relation to NN's unfortunately) proved correct, having persisted, for the most part, uninterrupted, for over 50 years. Twice the speed at half the cost is obviously deflationary for microprocessors themselves. Less obvious but way more powerful are the advances that extra processing power brings to other areas of the economy.
That critical broken part that once took weeks to order oftentimes can be delivered the same day. Bottlenecks that vexed logistics managers are solved instantly by sophisticated algorithms. Computers can orchestrate the complex dance of manufacturing and assembly robots tirelessly working around the clock. Industry and technology have truly become inseparable.
Technology's effect on the consumer marketplace has also been profound. The "average car" may cost more than it used to, but its hardly the same car. The newest, greatest TV this year will be available in the bargain bin the next year. A computer more powerful than the one NASA used to put a man on the moon now sits in most peoples' pockets.
Some think Moore's Law could roll on for another fifty years, especially if "quantum computing" gains hold sway. Indeed, today's technological advances are so deflationary as to make the very concept of inflation seem outdated.
However, all we can know with certainty for now is that inflation has been below average for the past decade.
The magazine cover predicting the death of equities followed ten years of lousy stock returns. When the same magazine proclaims something else is "dead" after another ten year beating, it may be wise to check for a lingering pulse.
Ned’s Notes Takeaway: No one knows if inflation will come roaring back next week or remain dormant for the next 100 years. It is clear that the drivers of inflation are much different in today's technology-dominated economy than was the case when industrial advances preceded most productivity gains. As we saw in the BusinessWeek article from 1979, however, extrapolating current trends far into the future is risky - and may even one day prove embarrassing.
*Also see the Wikipedia entry for "Magazine Cover Indicator".
Wealth & Health
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Email with questions or comments: Nedmoore@bey-douglas.com
Addendum: Ned's Notes is a proprietary newsletter created by none other than Ned. Feel free to forward it to others as you like but its contents may not be used for commercial purposes without the express consent of the author.
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