The Arbor Outlook: Deflation, Baby Boomers and Alison Krauss

Editor's note: This is the first of a two-part series on deflation.

"Another day, another dollar, That's what I'm working for today, Another day, another dollar, Sure can't buy my blues away."
—from "Another Day, Another Dollar" as performed by Alison Krauss

My high school economics teacher once explained inflation by saying, "Money tends to be worth a little less every year." Interested in finance even back then, I asked her, “Why do things have to cost more every year just because?” She apparently wasn’t in the mood to take me on a journey through economic history because the answer I received was: “That’s just the way it is and has always been.”

I memorized what would be required for the test that week and moved on. But the answer never satisfied me. As I grew older and learned more about financial history, I realized why her answer bothered me. It wasn’t true.

Moderate-to-high inflation has been a feature of the world Baby Boomers grew up with and have experienced consistently throughout our lives, but history tells us that the formative era for Boomers was somewhat exceptional. According to a recent study by the Bank of England, the United Kingdom’s version of our Federal Reserve, over the past 700 years global inflation has only averaged 1.08 percent annually.

Back to the original question. Why don’t we have inflation all the time?

Let’s look back to the late 1800s, the last prolonged period of deflation outside of the Great Depression, for clues. The latter part of the 19th century was an age of global economic growth. It was also an era of technological innovation (internal combustion engine, electrification, indoor plumbing, etc.), communications advances (telegraph) and heavy globalization with expanded international trade. And it was a period of declining prices on most goods. Plug in the words “internet” and “iPhone” and it sounds a lot like the last 30 years, right?

If left undisturbed by war or plagues, over time, the dynamic duo of capitalism and technology tend to produce an abundance of cheap goods quite efficiently. Thankfully, there haven't been any multi-national, global wars in recent decades and the international order has been relatively sanguine. Thus we’ve been able to create an age of oversupply. In other words, with very few exceptions, if a company makes a physical product, then oftentimes someone, somewhere is likely willing to make it cheaper. And those willing-to-do-it cheaper competitors are easier than ever to find thanks to the telegraph of our day, the internet.

In many ways, low inflation or deflation reflects a successful society. Inflation accompanies scarcity. Deflation denotes abundance. It’s a good problem to have. It’s also one that’s likely to stay with us.

Next week: the investing implications of living in a low inflation world.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: War Eagle, Perseverance, Wainwright

“This summer I went swimming... this summer I might have drowned; But I held my breath and I kicked my feet and I moved my arms around...”
—from “The Swimming Song,” by Loudon Wainwright III

His parents named him Ambrose, and he could swim before he could walk. A venturesome and active toddler, he was nicknamed Rowdy. Often he would roll off the dock and into the water at his parents’ central Florida lakefront home, frightening friends and relatives. But he always popped back up like a cork on a fishing line. By eight months, he was dog paddling 20 feet or more.

In his second year of competition, he won a Florida state high school championship and a scholarship to Auburn University.

At Auburn, he set school records, was a five-time NCAA champion, and established himself as one of the fastest swimmers in the U.S. Eventually he would set 10 world records. His ultimate goal was to represent our country in the 1980 Olympic Games.

How good was Rowdy Gaines? In 1981, he was voted the Athlete of the Year in the Southeastern Conference.

The Soviet Union invaded Afghanistan in 1980, and rather than send our athletes to Moscow, President Carter decreed that we would boycott the Games there. Gaines was devastated. He had missed his window. Sprint swimming was for young men, not 25 year olds, the age he would be at the 1984 Summer Games in L.A. He left the pool for several months before his father convinced him to return to his regimen and try again in ‘84.

Gaines had little money, and often swam his morning practice after working all night at a local motel. In L.A., he won three gold medals. Seven years later he was afflicted with Guillain-Barre’ syndrome and became temporarily paralyzed. After recovering, he returned to the pool, and at age 35 became the oldest competitor to qualify for the 1996 Olympic swimming trials.

I am not a swim fan per se, but I recently watched a documentary on Gaines’ life and was astounded at his perseverance. We need a similar commitment in our financial lives to become and remain successful. We all experience hurdles and setbacks; the road to financial security is rarely smooth and straight. It takes willpower and sacrifice to become financially successful and provide for a comfortable retirement.

Many of us have faced burdensome debt, made poor financial decisions, and experienced financial misfortune. Most successful folks can recall more than a few mishaps. The question is: how do we respond to economic adversity? We can allow ourselves to sink. Or we can rise again to the surface and pull ourselves across the water.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Heat Waves, Dust Storms and Summer of ’34

“Old man depression, you are through, you done us wrong...”
—from “We’re in the Money,” as performed in the film “Gold Diggers”

In the summer of 1934, the entire country was sweltering with record heat and suffering on multiple weather fronts. Three years of dust storms had culminated on an April Sunday when the country was hit by the worst dust storm in history. Dust bowl conditions prevailed from Minnesota to Texas, and food production declined significantly.

That summer saw 29 consecutive days with temperatures hovering in triple digits. By year’s end, 75 percent of the country was suffering from drought conditions. In north Texas, the cicadas were too thirsty to chirp.

Americans were dying from both heat and hunger. In an attempt to bring relief to working class farmers, Congress passed the Smoot-Hawley Tariff Act, which raised taxes on 900 imports. But the import tariffs caused an international trade war and the global economy hit a wall. The Great Depression then picked up speed and spread beyond our borders.

What many may not remember is that before Smoot-Hawley, there was a tentative economic recovery afoot and unemployment numbers had temporarily leveled. The Tariff Act helped negate the fledgling recovery and thrust the U.S. and the world further into depression.

Tariff costs are almost always passed on to consumers. Makers of cars, appliances, and other products, when hit with tariffs, will often simply tack on that cost to consumers. The U.S. recently imposed 20 percent tariffs on the first 1.2 million washing machines imported this year. After that, there’s a 50 percent tariff on machines, which is expected to take effect sometime in the fall; the United States imports over 3 million washing machines a year. The result? Between February and May of this year prices rose 16.4 percent, the largest three month increase in prices ever.

Washing machine sales are a small part of the overall economy. If the tariff talk stops here, consumers would hardly notice. But investors rightfully fear what could be next.

For example, if automobiles, which are a much larger chunk of U.S. GDP, are tariffed at that same 20 percent rate, it would likely raise the price of a new car by at least $5,000. This would hit a major domestic industry hard at a time when sales are flagging.

These price increases will likely show up full force in the CPI data later this year and early next year, just as the corporate sugar high from the recent tax cuts is starting to wear off. Beyond the headlines, what worries me most as an investor is that this will almost certainly speed up inflation data at a time when the Federal Reserve has a hair trigger and is primed to raise interest rates. Raising rates into an already slowing economy tends to equal downturns. Rinse and repeat if you dare.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Unemployment Declines, but Wage Growth Stalls

“Hundred dollar car note, two hundred rent; I get a check on Friday, but it’s already ready spent.”
—from “Workin’ for a Livin’,” as performed by Huey Lewis and the News

In spite of low unemployment and a consensus that an economic recovery has taken place, wage growth continues to stall. If the economy is good, where are the high-paying jobs that can support a family?

Unemployment is at its lowest level in 17 years and is likely to remain below 4 percent for the foreseeable future. Wage growth has often been a byproduct of tight labor markets: employers have to pay more to get good employees, or for that matter, any employees, because there is such competition for labor. But while wages have grown at over 3 percent per year since 2015, the rate of growth has stalled significantly. Wage growth was at its lowest level since the Great Recession (under 2 percent) in 2010, and has increased somewhat since then, but remains far below the 5 percent growth level achieved by the economy in 2000.

The Federal Reserve is raising interest rates periodically this year based partly on these low unemployment numbers. Simply stated, wage growth has traditionally accompanied low unemployment, and raising interest rates is a hedge against inflation.

So why aren’t paychecks getting considerably larger? Let’s consider two aspects of our current economy: an aging populace and hyper-globalization.

A large number of potential employees out there are growing older. But many business owners and employers are hesitant to hire and pay large salaries to older workers. We have shorter runways than our millennial peers. The median age in the U.S. is now over 38, more than a year older than it was only four years ago. The alternative, of course, is to hire to a younger person, a person with less experience but who may be willing to work for less. So unemployment remains low, but actual wage growth is stymied.

Secondly, international business competition is exerting forces on our economy that we haven’t experienced since the late 1800s. When a foreign company makes a competitive product, while paying its workers far less than U.S. workers are paid, it’s difficult for American businesses to compete on price. So business owners save money by paying employees less and then pass those savings on to consumers in order to remain competitive in the international marketplace.

There’s always been international business competition, but increasing hyper-globalization is creating a larger impact on our economy, and on the level of our wages, than at any time in American history. There’s just no way around it.

It’s complicated and confounding. The economy continues to improve; wages remain relatively flat.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Omaha Architecture and Wanting What We Have

“We always wanted a big two story house; back when we lived in that little two room shack... We wanted fame and fortune and we’d live life the way the rich folks do; we knew somehow we’d make it, together me and you...”
—from “Two Story House,” as performed by George Jones and Tammy Wynette

On a recent journey to Omaha my husband utilized some free time to explore the city. Omaha is an exceptionally attractive and clean place, its hilly, urban sectors punctuated by unique architecture, plenty of green space, and a thriving downtown restaurant district.

A few blocks from a main thoroughfare he found himself in a lovely, treelined neighborhood, with large lots and well-kept lawns, many featuring solid, brick homes built almost a hundred years ago. A realtor informed him that it was Warren Buffett’s neighborhood. So, like millions of others, he drove by and took a photo of Mr. Buffett’s house.

So, sitting at my office desk and holding my phone, I find myself looking at the primary residence of America’s most famous investor.

The home certainly doesn’t qualify as a mega-mansion, even though it is extremely spacious. It actually looks fairly similar to many of the other homes in the neighborhood.

There have been additions to the house over the years, and plenty of remodeling work. But the bones are the same as when Buffett paid $31,500 for it in 1958. It’s now worth about $650,000.

So what is Warren Buffett doing living in “only” an upper middle class, non-gated neighborhood?

Someone worth $87 billion can live wherever he chooses. Well, apparently Buffett likes the familiarity and feel of his long-time home.

It’s a classic example of wanting what we have. And of being satisfied with what is already ours, especially if it makes us happy.

So many of us (myself included) aspire to acquire, simply for the sake of “movin’ on up” in the eyes of others. What most of us really seek is peace and quiet, familiarity and happiness.

How many of us, for example, have traded in a perfectly good used car, one that runs well and suits our needs, just because its “newness” has faded?

Glittery new purchases are often accompanied by burdensome price tags, and we can find ourselves stuck with difficult, expensive payoffs long after the shine of newness recedes.

I am not naive enough to think that Mr. Buffett doesn’t own other homes. He does, including an $11 million house near the ocean in Laguna Beach, California. It’s instructive to note, however, that Buffett paid $150,000 (in 1971) for the house, so it proved an excellent investment. That home is currently for sale, because he and his family seldom can gather to use it.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.