This post is mainly a link to the ARK funds website, where portfolio manager Cathie Wood argues that future deflation is a more important issue than inflation. She cites three sources of deflation. From the least to most impactful, they are
–a cyclical shift from consumption of goods to services as the world reopens post-covid
–the demise of companies that have failed to invest in innovation to provide better products/services, but have instead essentially propped up their stock prices by using cash flow + the proceeds from bank loans and bond issues to buy back shares and pay dividends to satisfy an investor base focused on current income (my addition: or to pay huge compensation to managements). Wood doesn’t name any names, but I imagine GE, IBM, Intel, GM, Ford, Boeing, JC Penney, Sears… as the kind of companies she’s talking about.
–the deflationary effect of new product development in areas the ARK funds focus on, like AI and genomics, that are rapidly reducing the cost of traditional products/services, with the door open to as yet unimagined new products and services.
I’m not sure what to say. These are all good points, but it seems to me that none of these amount to deflation.
–the only non-food commodities that even show up as a blip on the GDP radar for a country like the US are oil and steel. In today’s world, inflation/deflation is all about wages
–yes, firms like IBM and GM are mere shadows of their former selves. But their fall from prominence has been going on for almost half a century as innovating founders are gradually replaced by bureaucratic bean counters and the firms stultify. But this is the way the world works. Also, none of this has stopped the price level from rising year after year.
–in the early 1980s a 31-lb Compaq “luggable” PC cost about $3000. one floppy drive, a 4 inch (?) orange screen, the computing power of today’s pocket calculator. Thanks to incredible innovation, today we have phones, tablets, PCs… that are infinitely better, and considerably easier to get on a plane, than back then. Again, an important point. But, again, all this happened without a hint of overall deflation. Quite the contrary. The US was in the early days of the struggle to control runaway inflation while this was happening. Put another way, I find it hard to imagine that a possible side effect of innovation is the potential threat of another 1930s-style depression.
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