Posted by: seanmalstrom | February 14, 2014

Email: A little confused about deflation…

Hi Master Malstrom,

I understand why deflation is a bad thing, per your chart in the January 2014 NPD post, but I thought in the past decade or so everyone was saying there was too much inflation. I’ve learned more about inflation in school, e.g. Germany before WWII where loaves of bread cost a wheelbarrow full of money, or today in Zimbabwe with their trillion dollar bills. So is the problem that instead of a little bit of deflation to balance out the inflation issues we were having, it’s going to enter a big feedback loop? Or is deflation just always bad?

I’d never look at any big trend as purely ‘good’ or ‘bad’. There were many people got rich during the Great Depression after all.

Here is Sal from Khan Academy to explain how the Deflationary Cycle works:

Here is a fun chart:

Here is a sensationalist video on deflation.

The United States has gone through several deflations in its history. None of them have been in your lifetime (or in Shigeru Miyamoto’s lifetime).

The WRONG way to look at this is to see it as the chart where things ‘crash’. A BETTER way to look at it is to think: The Sky Falls SLOWLY.

Japan! Japan is the key. It is Japan who is ahead of everyone else in the deflation cycle. This doesn’t mean the West’s future will be exactly like Japan, but the overall trends point in that way.

One thing the sensationalist video keeps harping about is the retiring Baby Boomers. I have investment books published in 2000 or earlier who were all in agreement of A Great Economic Downturn at this precise time. How did they know? Through demographics. When the Baby Boom generation retires, they will be spending less and extracting their money from the stock market and other assets. America has an aging problem. In fact, many European countries have an aging problem too. Japan is the most severe with its aging problem. The fact that Nintendo wants to make Quality of Life products for old people should hammer the reality home that this is a very big issue. It’s incredible how accurate these old investment books were. It’s why in the last article I wrote about disruption, the deLorean went into the future to the economic depression. It was written before the 2008 crash.

The investment books seemed to agree that the crescendo will be around 2016. I keep hearing, “I feel sorry for whoever is president in 2016.”

What’s going on today is worse than even they imagined. Being rational, they assumed politicians would act rationally and begin to prepare for the economic dissolving of social services and economic decline due to the aging baby boomers. What have we gotten in the past decade? Trillions of dollars of new debt. That’s not going to help. Ripping apart the health care system isn’t going to help anyone. The unemployment numbers are there for anyone to see. The decline in retail is there for everyone to see. And the decline in the gaming industry is there for everyone to see.

This shouldn’t be seen as BAD, merely DIFFERENT. Nearly everyone reading this site has a 1990s outlook on the economy. We expect technology revolutions to improve the economy and for things to boom. But a real investor knows how to make money on the decline as well as on the growth. How will you invest your skills and time in this New Normal? For myself, I am aligning myself with Black Gold (oil which is still at $100 a barrel). As baby boomers retire, some very lucrative jobs are opening up related to oil services. Many baby boomers cannot retire, but those in the oil industry can due to their fat wages. From my context, deflation is opening up an opportunity for me to get wealthy or relatively wealthy (as much as one could be from being an employee. Starting an oil business is something so far beyond me I cannot fathom doing that).

Do you remember the ones who lived through the Great Depression? They always had money tucked in their mattress or somewhere just in case the banks took all their money away, and they couldn’t get it. The following generations mocked them. “Stupid old geezers!” But those generations didn’t have to endure the shock of the depression. The point is that there is totally different context. You need to change your context. If you don’t change it now, the economy will change it for you in the near future.

There is nothing alarmist in this. There are economic changes all the time. Your job as an investor (since you invest with time do you not?) is to make the winning plays with before each change breaks into a wave over the average people. They will drown, but you will still be bobbling up on the surface.

Have you noticed how gamers will only pay very little for video games today? Games have to go on massive sales in order to move numbers now. That is an example of deflation occurring.

The Game Industry is in big trouble because the costs of game production keep rising and the profits keep decreasing. I’ve heard from people in the know that game publishers have been betting on continued long term growth. Now that we are hitting long term decline, what are they going to do? There’s going to be a ton of pain going around.

This is also why the Iwata bashing is wrong. No CEO can stop deflation. It’s like blaming Japanese companies for the decline in Japanese game industry. Every Japanese industry is declining due to the macro-economic conditions there. There are other things you can point blame to, but it is unreasonable to yell at profit decline when it is hitting everyone and everything. Why does the Game Industry crap on Iwata but not on the ones responsible for the Vita? Or the Xbox One? I bet the PS4 will decline too. The analysts have set themselves up to create a double standard. They will blame macro-economic conditions for Microsoft and Sony’s woes, but blame Iwata and Nintendo’s ‘proprietary hardware strategy’ for Nintendo’s woes. Apparently, macro-economic conditions will only hit Microsoft and Sony and not affect Nintendo as if Nintendo is on the moon or in a different dimension.



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