I don’t have a stutter. The thing is, it’s just hard to say the word.
Actually I don’t have a problem saying it. But the almighty ‘D’ word can be difficult for many to stomach. Particularly this week, when the latest CPI numbers came out and the ‘D’ word sent a shudder through the Aussie psyche.
Inflation figures came out this week. Except there’s one small problem. There is no inflation. According to The Australian, inflation fell 0.2% for the March quarter.
So…did inflation fall? Or was there deflation of 0.2%?
Well the honest truth is they’re both the same thing. But it seems the use of the ‘D’ word is simply too much for most to suffer. So instead of bandying around the term ‘deflation’, terrifying the masses, the decision was to say ‘inflation fell’.
Not here. Let’s call it like it is. Prices are less than they were last quarter. Deflation is here!
Or is it?
What is all this brouhaha about anyway? What is deflation? Why is it bad? Is it bad? What does it mean for stocks?
That’s what most people want to know when they hear the ‘D’ word. What does it mean for you?
After all, if you really think about it, aren’t cheaper prices better for you? I know I’d like to pay less for transport. I’d like to pay less for energy. I’d like to pay less for everything – that’s why I’m not impartial to a trip down to an outlet shop, or Lidl.
Is it really that bad?
If prices are cheaper, why aren’t we all celebrating?
Well the theory goes that if there’s deflation then an economy is struggling. A struggling economy leads to a bleak future. Fewer jobs, lower wages, lower living standards. All around, not a great outcome.
Inflation on the other hand is ‘good’ because it means an economy is expanding. It’s growing, creating employment, and lifting the standard of living. It allows for people to buy expensive houses, boats, jet skis and holiday homes.
Inflation = good. Deflation = bad.
That’s what the textbook says in Year 10 economics. That’s what the lecturers in university finance lectures tell us. It’s what we know to be true.
But can deflation be a good thing? Well, short term it can. When you see things like petrol and food drop in price, that’s a benefit to the end consumer; you. These are goods that you can’t put off your purchase of.
You see, deflation is seen as bad because it discourages spending. The theory is why spend your dollar today when tomorrow you can buy more with it? And why spend it tomorrow when perhaps in a week you can buy even more still?
That applies to some goods and services. But not things like petrol or food. If you don’t spend your dollar today, you can’t drive. Don’t spend it tomorrow and you starve. So deflation in some parts of an economy might actually be the economy rectifying itself to an acceptable level of prices.
Where things get messy though is when there are widespread falls across the board. When there’s persistent and long term falls in prices. Then it’s a sure sign an economy is in dire straits.
If we look at the major drivers of the recent deflation, there are a few key points. The Australian reports,
‘Driving the weak reading was a 10 per cent slide in petrol prices as well as an 11.1 per cent drop in fruit prices and a 2 per cent dip in accommodation prices.
‘This was partially offset by a 4.6 per cent surge in secondary education costs and rises in the healthcare sector.’
Add in to that mix virtually no movement in rents and costs of new dwellings, and it’s easy to see why things appear shaky. But what you can see clearly is that the right kinds of goods fell in price.
Yes, housing prices are softer. Rents didn’t move. Petrol is a damn sight cheaper than it was a few years ago (remember the $2 days back in 2011?). And fruit, fruit is cheaper! I was in Coles up in Port Douglas last week and a kilo of Bananas was about $1.20.
That’s bargain basement prices. It wasn’t that long ago Bananas were $12 a kilo. The prices today are more in line with reality. And perhaps that’s the key point here. Maybe this small bout of deflation is actually a good thing for the Aussie economy.
Perhaps it will bring a few prices back in line with what they should be. And other prices that help propel the economy forward, education, healthcare and energy, can keep ticking along.
Of course if this bout of deflation is limited to the ‘right’ kinds of goods then it might be a sign the economy is capable of self-correcting. If it’s long term, systemic and sustained, we’ll maybe we’re all stuffed.
But I don’t think so.
Sideways for the last four years
This to me might be a warning shot across the bow. A wake up call that the Aussie economy could soon slip into dangerous territory. But for now, there’s a chance to keep it above water, moving forward and onto future strength.
The downside to all this is that typically takes strong, unified leadership. Something, which hasn’t existed in Australia for a decade. Worst thing is political uncertainty is helping the uncertainty and fuelling the fear.
With this all in consideration the market has been its same old predictable self. When I say predictable, I mean predictably uncertain. Still hovering around the 5,200 mark. I still can’t see how the market will surpass 6,000 points any time in the next few years.
The latest figures further support my theory. And after four years around the 5,000 mark you might begin to wonder where to invest. After all, while the Dow is heading to record territory, the ASX is proverbially stuck in neutral.
Of course from my perspective times like this mean picking stocks is the best way to make money. That means stocks that can deliver double, triple and quadruple digit gains. Where do you find such stocks? On the ASX of course. You’ve just to know where to look. And here’s a hint, it’s usually at the thousands of companies that have a market cap under $500 million.
So while deflation might be bad, this bout of it might actually be good. Don’t get caught up in the fear of it all. While many get caught up in the whirlwind of economic data remember, it’s a stock pickers market, and there are literally thousands of opportunities to invest in companies that could deliver huge returns to the smart investor.