Astute reader Legrand posted an insightful comment below our article about shorting the S&P 500 that I wanted to call attention to. I believe he’s onto something very important:
Back to my father’s generation- the boomers. They really have only seen inflation during their adult lives. Deflation isn’t something that seems plausible. Their entire adult life they have been trained to look at the inflation strategies, seen real estate go up by magnitudes, seen everything go up. To see something go down requires stepping outside and taking a hard look at current events.
A lot of people don’t realize that there have only been two periods of inflation in the history of the world. The first was after the Spanish Armada raided South America for its gold, and brought it back to Europe – hence flooding the market, and kicking off a century of inflation.
The second era may be coming to an end – or it may have at least put in a short term top in 2007. The post World War II era has seen an experiment with fiat currency for the first time, and shockingly, steady inflation has been the result. Maybe the shocking part is that the paper is still worth something!
But as we know, the past is no guarantee of future results. And few investors alive can recall the pre-WWII investing era. So are we biased by our upbringing during inflationary time?
I say yes. We are, by definition, affected by our experience – and the experience of our parents generation. This is illustrated fantastically in The Fourth Turning, by Neil Howe and William Strauss. Here’s the crux of the book:
A human life lasts roughly 80 years. Even though humans are living longer on average today, a full life has always been about 80 years…averages were skewed downwards in earlier times, because there were more premature deaths, but a “full life” has always been about 80 years.
At any given time, you’ve got about 4 generations of people inhabiting the US, separated by about 20 years each. These generations are shaped by their shared experiences…so their beliefs, their actions, etc, are really a function of the country they grow up and live in.
Bottom line: Be careful in letting your personal biases and experiences cloud your judgement. History is cyclical because of this. Just because you haven’t seen something happen (such as deflation), doesn’t mean it can’t happen.
Further reading about deflation:
- Bob Prechter: 5 Signs of Deflation Investors are Missing
- Why the US Dollar Show Deflation is Alive and Well
- A Deflation Investing Strategy: Hold Cash, Trash Gold