How many times has a Financial Adviser sat down with a client to develop a retirement plan and said “Of course, we’ll want to factor in the deflationary aspect of the Central Bank Zero Rate Policy”. How many times? More than likely, none.
Since the ‘70’s most advisers were trained to assume the erosion of purchasing power by the dreaded evil inflation. Based upon that inflation assumption, assets such as stocks, real estate and precious metals have been the class of choice. Of course, assuming everything will cost more in the future, cash became an asset class to avoid not embrace. To ever think that deflation is flooding the world is so beyond most people’s imagination, including Central Bankers, that integrating it into a retirement plan would be considered foolish.
Now that Saudi Arabia has decided to embrace the policy of market share as opposed to their long held policy of being OPEC’s swing producer and emerging markets growth have commenced a slide into oblivion, oil prices will continue their long descent from the peak of 2008 at $147.27 per barrel. Currently the decline is almost 70%.
Should one have decided that a new television was in their future or even a new computer the planner would have been remiss in factoring in an inflationary increase of 4–6%. Each of these so-called personal electronics has declined 78 and 88% respectively over the past 10 years.
To be outfitted in the most contemporary fashion must cost more today if my planner is correct. Au contraire said the apparel economist at the Bureau of Labor Statistics. Looking at footwear alone we have seen a 4% decline in the last 10 years. Clothing a family dropped 11% during the same time period.
Although food prices seem to be escalating would it surprise anyone to learn that corn has fallen over 50% from its peak of $7.50 a bushel just a short while ago? So if I had been planning on paying more for any of these items I would most certainly have been advised to invest accordingly. Cash would not have been factored in.
Had I set aside, cash, $1,000 to purchase a new TV a decade ago, I would now have a new TV and $780 left over. Had I bought the inflationary hedge, gold, at the same time I would have my TV and approximately $550 left over.
Most, unable to embrace the power of cash, will respond – “but I keep paying more and more and my cash must outpace inflation”.
A few will understand that what is enveloping the world now, deflation, will ultimately impact everything they buy. Which means the best investment possible will be cash.
Rates of return will be measured by the amount of money you have leftover after purchasing your item.
When this happens embracing cash will not be difficult at all to understand. Even a Financial Planner will get it!