We have entered a long term cycle of inflation. Now hold on, because I am not talking about your garden style inflation. No, this is not your father’s inflation!
Inflation is caused when you have too many dollars chasing too few goods. Fortunately we have plenty of labor, lots of industrial capacity, and enough materials. Plus, technology is contributing to supply of all of those. So CPI is under control. I am not talking about inflation in the cost of living. That's good!
So what inflation am I speaking about? Where are there too many dollars chasing to few goods? Answer: Investments!
The rise in millionaires, billionaires, and corporate cash around the world is astounding. According to the 2014 Hurun Report on the global rich:
WORLD’S BILLIONAIRES EXPANDED BY 414 TO 1867 INDIVIDUALS IN RECORD-BREAKING YEAR.
946 SAW WEALTH INCREASE, OF WHICH 152 BY MORE THAN 50%. ONLY 318 SAW WEALTH DECREASE.
1867 BILLIONAIRES FROM 68 COUNTRIES. OF 414 INCREASE, USA LEADS WITH 72, FOLLOWED BY CHINA 41, UK 22, JAPAN 21.
Record number of billionaires in 2014 - the number of billionaires in the world increased 7% over 2013.
Record number of billionaires in 2014 - the number of billionaires in the world increased 7% over 2013.
Forbes Magazine reports that China is "minting billionaires at a phenomenal rate. --- China registered a record 152 billionaires in the 2014 list, up near 25 percent from 122 last year, while Hong Kong clocked up 45." Still, the U.S. remained home to the largest number of billionaires at 492. And, Europe boasted the most billionaires outside of the U.S., with 468 billionaires."
One study by PWC predicts Assets Under Management (AUM) to grow 56% over the next 6 years. That wealth needs to be invested because try as a billionaire may, they can't “consume” fast enough - they literally don't have enough time in the day. They have a problem 99.999% of us on the planet will never experience - their money is growing faster than they can consume the “stuff” their money can buy. Isn't that sad! What's a billionaire to do? Or, a corporation with billions in cash with the same dilemma. And frankly, it is a bigger problem for a company because they are under pressure to generate a return on that cash! They have two CHOICES. 1) Donate to charity. 2) Invest.
I can hear some people thinking, Wait!! There is a third choice - higher taxes!!!! I will speak very briefly to that misguided thought. To begin with that is not a “CHOICE.” And even if it were, it is a bad one. And in case you forgot, they WILL pay more taxes because that IS HOW THE SYSTEM WORKS NOW! Secondly, what makes you think that when government taxes wealth that it will spend the money in ways which are better for the rest of us. Chances are greater that the government will buy a war ship or fighter jet with those found tax dollars. But the best reason to let the wealthy invest their spare money, rather that to excessively tax it, is that they will produce more wealth, more jobs, and more taxes anyway. Otherwise you could make the argument to tax 100% of profit and let government pay for everything. Besides, if you haven't noticed, when a good cause is looking for support, be it a hospital or a research organization fighting a disease, or whatever, they target big donors, not big government. So CHOICE #1, “donate to charity" is quite valid. And America is blessed to be the most charitable nation on the planet. Therefore, let me get back to choice #2.
In the financial news we hear a lot about Corporations buying their own stock. Stock buybacks and cash dividends totaled $214.4b in the fourth quarter of 2013. That is the highest level since the record high of $233.2b in the final quarter of 2007, according to the Wall Street Journal. Compare that to the second quarter of 2009, when buybacks and dividends totaled a mere $71.8b. Buybacks reduce the supply and raises the value of their stock. In addition, nearly every time you hear about a merger or acquisition of one company by another, that translates into a lower supply of equities. Another strong demand side factor is coming in the form of inflows from international wealthy investors looking to get a piece of our equity markets, as well as foreign businesses looking to establish operations in America and see acquisitions/mergers as a efficient way to do so.
So, what if investment dollars are running short of investment options? What if too many investment dollars are chasing too few investment goods - you get inflation in stocks and business values! Some call it a bubble. And if we do get runaway inflation of stock valuation that would be a troublesome sign of a bubble. But thus far, with some notable exceptions, the valuation of equities is in line with earnings. And, if growth keeps accelerating, there is a valid argument that equities are cheap. Read Jeremy Siegel.
I do not buy the argument that stocks are at all time highs so they have to come back down! Since when did that argument apply to population, or patents, or even the wealth of any country? The lid on these things is not a justification for the reduction of these things.
One area that benefits from investment is innovation and business formation. Which in turn increases the demand for jobs and helps to lift personal income. That in turn increases consumption. All of which a reason for optimism and feeds into the trends which support rising equities.
And let's not exclude the fact that billionaires, not to mention millionaires, which there are more of around the world than ever and growing, are trying to spend their money. OK, so you and I may not get to board one of their new yachts or private jets. And the closest we may get to a joy ride in a Lamborghini is hearing about Bieber's bust on the entertainment news. But building those things creates jobs. I know better than to call it "trickle down economics." That would be too inflammatory, and then the whole point of my post would be lost in a debate about the 1% and how wealth disparity is destroying the world. Since that is NOT what this article is about, I will sum it up.
This article IS about the possibility of your stock investments going up. (Or, they could go down.) But if they are going up, and if the cost of living is not going up faster, that is good for your 401K. Thank you very much.
