If you’re perplexed by the stock market, the economy or how Washington has reacted to it… please read on.
We’ve got some interesting data to share.
For the last decade or so, the wonks in Washington have been a bit confused. They look at the numbers, look up from their desks and then look at the numbers again.
Things don’t add up.
But instead of changing the way they crunch their numbers or changing the data they look at, these moneymen shrug their shoulders and keep on tapping the calculator.
Perhaps the biggest point of confusion – especially within the Federal Reserve – is the lack of inflation.
It hits on some important Know-How we’ve looked at a lot in recent weeks.
When Models Lose Their Beauty
We mentioned last week that if we’re investing our cash using the same models invented half a decade or more ago, we’re going to get lousy, no-good results. Things have changed, in other words… and so should our strategy.
Somebody needs to tell Washington.
Take some nimble-thinking research, for example. Last year, Austan Goolsbee of the University of Chicago and Peter Klenow of Stanford decided to take a deep dive into a topic we’ve covered a lot – the internet’s effect on inflation.
What they found is what we’d expect.
The ability to quickly and easily compare prices on the web has had a tremendous effect on inflation.
That should be obvious.
And yet… the folks in D.C. are doing exactly what we advised not to do.
They’re sticking with their old models and their outdated equations.
The professors, for example, found that low-priced electronic items (like calculators, landline phones, etc.) have seen the competitive landscape of the internet drastically reduce their prices.
According to the official government data, prices have fallen by 10%.
But according to real-world research, prices are down by about 27%.
That’s a huge gap.
It’s the same with TVs – where the void between the truth and the government is five points.
And get this… In the realm of footwear, the government says prices are rising by 2% each year. Meanwhile, real research shows prices are actually falling by 4%.
What Now?
We share this critical data for a very good reason.
It’s not that we expect readers to use footwear inflation data in their everyday investment decisions. And we don’t think it’s news to anybody that the government can’t add.
Instead, we share this idea because it points to a monumental problem within our economy. It’s one that absolutely affects every financial decision we make. And, if we don’t get the choices right, the issue will keep us from reaching our financial goals.
It’s no secret the Federal Reserve is in a trap.
This time last week, for example, Jay Powell quietly met with President Trump to discuss the economy, interest rates and, most importantly, the prospects of negative interest rates.
The thought that rates could and would go below zero in the land of the world’s reserve currency seemed crazy a couple of decades ago. Now, thanks to the deflationary forces mentioned above, pushing rates back to “normal” sounds equally preposterous.
But thanks to the internet – perhaps the biggest economic disruptor in human history – all of our old equations and old models have been tossed out the window.
And here’s the thing… The problem (if we can call it that) will get worse before it gets better.
To understand why, we need to look at a couple of important things.
Don’t worry… They’re quite simple.
Is Cheaper Better?
First, the government measures inflation using a standard set of goods – it looks at everything from cars and groceries to shoes and health insurance.
Much of what it looks at hasn’t yet been all that impacted by the web’s deflationary forces.
But that’s changing very quickly.
Groceries are now sold online. The days of going to one store and paying whatever the price is on the shelf are quickly dying.
It’s the same with cars.
But here’s the big one… health insurance. We recently shared some very important headlines from Google with Manward Letter subscribers. We detailed the company’s healthcare initiatives and what it means for the average person.
When we add those ideas to what Amazon wants to do in the health business… we get some huge disruptive forces.
We may not like the final product, but there’s no doubt prices will be cheaper.
Deflation will absolutely be the result.
But it will be years – if not decades – before the wonks in Washington add this new logic into their equations.
Meanwhile, they’ll scratch their heads, wonder why their data doesn’t match reality and continue to make half-assed tweaks to the world of money.
Worse, investors who don’t take advantage of this crucial Know-How will look at their investing statements and wonder why they’re not making the sort of money they should.
Folks who are still looking at “old school” investment models that use inflation as a given are in trouble. The math won’t add up.
Times have changed… and they’re changing faster every day.
The way we invest absolutely must follow.