Could Deflation Eat The World?

Photo: Could Deflation Eat The World?

Every year I build a few new garden boxes for my backyard. I buy 16' 4x4"s for around $26 / board. This year, at my local Home Depot, the sticker price for the same lumber I've bought the previous two years is $74.

There are a few things at play here. I am sure we have all been shocked by the price of something - whether a used car or a head of lettuce - prices are going up. Coincidentally, my realtor called last week asking if I’d be willing to sell my house for 80% more than what I paid only three years ago. She could close tomorrow, she said.

Last year, the conversation that dominated my Youtube Channel was the debate over whether we would see inflation or deflation in the near future. In the above examples, there is more than inflation at play, such as supply chain disruption and a mass suburban migration, but inflation is playing a role.

Inflation is easy to see and easy to feel as it hits us square in the wallet. It's easy to argue for as it is the logical consequence of an aggressively expanding money supply.

But - the smartest people in my network are deflationists... so what's going on?

The more I dive into it the more I am convinced it is not a this or that debate, it is a this, then that, process.

Deflation is less obvious. It sneaks up in subtle ways - we are more prone to notice rising prices than falling ones. Growing up I would pay $20 for a CD. Now I pay $7/month for more music than I could ever consume. I have endless movies and TV shows for $14. I have mobile apps for any purpose I could dream of, often free, at the touch of a button.

Technology is deflationary. And technology is eating the world in a confusingly subtle but exponential way.

Food prices are rising. They will keep rising, as long as we need expensive farming inputs, cross border shipping, fuel, storage and more. But this is changing.

Fresh Edmonton Pineapples... In January?

David and Alyssy Pfaeffli, owners of Swiss Leaf Farms in Alberta, are now able to grow fresh vegetables through a -42˚C winter in their vertical farming system using less water, a fraction of the labour and no toxic chemicals. No shipping required - fresh, local produce through an Albertan winter.

The vertical farming systems are made by a Vancouver start-up, Cubic Farms (Not a sponsor, but listed on the Venture under CUB.V). These are far more than sophisticated greenhouses. A vertical farm operates as a protected chamber, allowing for precise calibration of all inputs (water, temperature, light), in an enclosed environment (no need for pesticides or herbicides), with a dramatically smaller footprint and year round output - anywhere. Less labour and inputs equals higher margins for farmers and cheaper produce for consumers.

Food disruption is high on my watch list - but when it comes to deflationary activities, it is not the tip of the spear, major industries will be disrupted simultaneously. Soon (relative) my $74 lumber will be 3D printed from composite, at the same Home Depot down the street - reducing the need for natural timber and forest destruction, fuel, man hours, and logistics of our traditional industry. Cheaper goods.

COVID19 has been an accelerant in this regard. Supply chain disruptions and higher prices create pain for consumers - consumer pain is an ideal environment for innovative entrepreneurs. Over the next decade, the displacement of outdated industries by innovative systems will hit speeds we have never seen.

This will be painful for millions of people as livelihoods will be destroyed. Governments, associations and unions will fight to protect jobs, but at best, these are delay tactics. I think of my hometown of Vancouver, Canada - the last major North American city to accept Uber, after an extended fight from the taxi unions.

I created my Youtube Channel to better understand the various directions the world could go, allowing me to position my portfolio accordingly. The inflation / deflation conversation is an important one as the wealth creation and preservation strategies for each are very different.

Decreasing the cost of housing inputs will decrease the cost of housing... but will that decrease the cost of real estate? I don't know yet. Nothing is binary, and the impact on private beach front will differ from an inner-city apartment.

To better understand the potential outcomes, I sat down with one of the more famous deflationists this week, Jeff Booth, the author of The Price of Tomorrow - the best selling book in Macro Finance in 2020. Jeff outlines his case and his wealth preservation strategy.

Watch it Here

Have a fantastic weekend.