Ok But What About Deflation?
@eric just noted that US inflation just hit a 13-year high. That is certainly notable.

But let's consider both sides of the argument. Here's my rebuttal in defense of deflation.

(Shoutout to Cathie Wood- as this is my interpretation of her perspective on the market)

Post media

Inflation may be a big problem in emerging market currencies and especially in unstable regimes. But in the US inflation isn't something to worry about because of three different sources of deflation that will combine to overshadow the inflation we are seeing.

Those three sources of deflation are:

1) Cyclical deflation. Commodities will go through a period of significant weakness during the next 6-9 months.

2) Innovation platforms are moving into the sweet spots of adoption S-curves and will generate explosive growth. New technologies making things faster, cheaper, and better will cause deflation.

3) Pricing power of many companies will diminish because they have leveraged up for profits now as opposed to sacrificing short term profitability in order to invest in innovation. These companies will be in trouble and the loss of pricing power will cause deflation.

So now you have both sides to consider.

Which will win out, inflation, or deflation?

What say you?
Chris Tolvkin's avatar
I'm still going with inflation winning out (for the next 3 years). Money printing is too powerful and the innovation platforms that Cathie is talking about will take longer than she thinks to cause the 'creative destruction' she's talking about.
Jeanette Gonzalez's avatar
Deflation, but only because I don't watch this closely and trust Cathie more than other pundits.
Dante Keilani's avatar
Maybe inflation and deflation match each other and we just stay where we're at?

.... please? πŸ˜…πŸ™ƒ
ParrotStock's avatar
I think you will see pockets of both. Great job pointing out the counter argument btw. 😊
Tβ—Žm's avatar
Personally, I believe inflation. The whole "40% (or something around there) of the US was printed in 2020" kind of makes it hard to believe how we wouldn't have inflation. I also saw news that $CMG was raising prices 3-4% because of inflation and that makes me wonder who else will follow
Nathan Worden's avatar
Things get real when the price of my Chipotle Burrito bowls go up 🚫
Gaurav Kotak @ Fincredible's avatar
@nathanworden Funny you mention this :) They've increased their prices 17% on average in last few quarters. Quote from their latest earnings call - "we had the 13% price increase running for several months, and we were very comfortable that we could go another 4%. So 4% we just took earlier this month was in addition" - view/listen here - https://app.fincredible.ai/company/CMG/earnings/2021/q1/transcript?t=2288
Nathan Worden's avatar
Ok wow, that is some impressive pricing power. That seems extremely rare to have that kind of pricing power in the fast/casual food industry, correct?

As a shareholder of CMG I am very happy. As a customer... well I guess they've got me because I still go to Chipotle. So this all checks out!
Gaurav Kotak @ Fincredible's avatar
Yep I think your gains as a shareholder will often the more expensive meal. and you can always skip the guac!

CMG I think is in an envious position where they value prop is not tied so close to 'value' as is for McD, Burger King etc.
Gaurav Kotak @ Fincredible's avatar
I get point #2. Technology has and will likely continue to be a large deflationary force. I don't get #1 and #3. Why would commodities go through a period of significant weakness during the next 6-9 months and how will the amount of leverage of balance sheet weakness or inability for certain companies to innovate/complete affect prices?

All-in-all with the money being printed, with the Fed saying they want at least 2% inflation, with the desire to push minimum wage to $15 (welcome move) and the strong design to reduce the genie coefficient (inequality) and inflation being a good tool for that, I'd bet on inflation.

P.S. We're not talking about Volker era double-digit inflation, we are talking about 2 - 4 % inflation. If it happen, that'll likely be a headwind to high multiple, 'cash flow in future' growth stocks.
Nathan Worden's avatar
Yeah really good point, we'll have to check back in over the next 6-9 months and review. You bring up good points.

For commodities, I was searching for a deeper explanation, but it seems to just be "commodities are cyclical, and today's current high prices suggest that we're at the top of a cycle. Therefore we can expect the next move to be lower"

For #3 I think the example here would be car companies. Ford hasn't innovated enough on electric vehicles and so in order to sell the volume of cars they're used to selling, they'll have to lower prices. Not because they want to, but because electric vehicles are going to start to drop in price and they will need to also lower price to keep up.
Gaurav Kotak @ Fincredible's avatar
It would be worthwhile to read up on the concept of commodity supercycles. Typically tied to M2 and booming economy.
Nathan Worden's avatar
You have me intrigued, do you have any good resources on commodity super cycles?

I found this from the Bank of Canada:
Gaurav Kotak @ Fincredible's avatar
Ahh i've read about it in past and recently heard about it in a podcast. I'll dig in
Gaurav Kotak @ Fincredible's avatar
I feel your Ford comment is about electric vehicles being cheaper than gas (not sure true or maybe true after gov't subsidies) rather than Ford's competitiveness. If Ford can't compete their market share will go down and Tsla, GM others will take over. I think this is a net-blah when it comes to macro/inflation, but ofc happy to learn more
Gaurav Kotak @ Fincredible's avatar
In full disclosure, I'm a (happy) share holder (to be precise long date call option holder) in Ford. Their Mustang Mach E is gorgeous imo and their electrification of F-150 line is appealing
Nathan Worden's avatar
No I think you've got a valid point. That's a good comeback.