How to Survive and Thrive in the Coming Wave of Deflation by A. Gary Shilling

I'd like to accomplish two things with this review of a book that, frankly, isn't worth a close read.

First, I'll briefly point to the specific sections of the book readers can skim to extract most of the book's value--see the next paragraph for that part. Second, I want to use this book--which is the macroeconomic prediction equivalent of a man with a hammer--to expose the "expert prediction" game and illustrate how dangerous it is to credulously follow so-called expert predictions, especially when it comes to stock markets and economics.

We'll start with what to skip and skim. A time-constrained reader can extract 99% of the value of the book by skimming parts 3 and 4 (pages 209-331) and studying the two charts on pages 330 and 331, which spell out all the dos and don'ts for surviving deflation. Readers might also consider reading Chapter 15 for its discussion of the Kondratieff wave concept, a useful mental model for thinking about cyclicality in a wide range of systems, including economic cycles, commodity cycles and stock market cycles.

Much of the rest of the book--three times longer than it should be--consists of laundry lists of economic events and various trends in household, government and market activity, all force-fit into the author's "whatever it is, it's going to lead to deflation" world view.

A quick sidebar before we get to the main purpose of this book review. It is important to understand what deflation is, the "flavors" it comes in, and how to handle your financial life to survive it. Every once in a while "making it through a deflation" suddenly becomes a foundational life skill! Note however, it is even more important to understand what the government policy response will be to any threat of deflation, and how those policy responses usually lead to the opposite problem, inflation, which produces its own outcomes, problems and challenges that we all need to learn to survive as well.

In fact, this book's primary intellectual gap is the author's utter failure to account for the eminently predictable government policy response to deflation (for that matter even the slightest hint of deflation) by using monetary debasement and monetary repression[1] to transform that deflation into future inflation.

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Now on to what we're really here for: to illustrate how stock market and economic "experts" can get away with claiming their predictions are "right" even when they are observably wrong, and to show the danger to you and your family's investment capital if you believe them. My goal here is not to single out this author, but to single out the business of making predictions.

If you look at this author's body of work, you'll see that in 1998 he published a book entitled Deflation, which called for a coming deflationary era. The next year, 1999, he pumped out this lengthy book, How to Survive and Thrive in the Coming Wave of Deflation, also calling for a deflationary era. Then, in 2011, a couple of years after the 2008-2009 Great Financial Crisis, the author wrote yet another book, The Age of Deleveraging, also calling for a coming grand period of deflation.

Note that there are always brief pockets of deflation in any economic environment. Certain industries may go through periodic downcycles or retrenchments, stock markets may experience periodic corrections or crashes, and there are always certain technology markets (semiconductors are the usual example) that feature downward-sloping price curves--in other words, deflationary pricing. These are all different flavors of deflation, and we see them here and there all the time. But we have not had deflation in any broad sense of the word, and certainly no grand "wave" of deflation. Not even close! Price levels are relentlessly higher for almost all things (and certainly in the aggregate) across any period following each of the author's books.

But what's most offensive to me is how an author who gets the main macro trend observably so backwards somehow still feels he can tell his readers how "right" he's been. This is where the danger lies for innocent readers. Bear with me briefly and I'll explain, rhetorically, how this works. We're going to lay bare the basic business model of any expert prediction maker.

We saw a couple of paragraphs ago how there will always be pockets of deflation here and there, even in an inflationary economic environment. Now, broaden this idea a bit, and think of any complex system--like a stock market, an economy, even a geopolitical system over time--all of which will always feature lots of puts and takes, moves and countermoves. Think of this as the prediction "substrate" on which our predictor makes his predictions. Since you can always find exceptions and epicycles to anything in any complex environment, all you have to do is fill your books with hundreds of predictions, and even when you get your main thesis wrong, you can always dig up and quote-mine plenty of sub-instances where you were right. Always! Say enough things, and some of those things might happen.

Getting back to the offensiveness of it all: this author, while somehow never once owning that he got the main trend exactly, exactly wrong, is borderline relentless in reminding readers of all the instances where he was right. This is of course its own tell.

Above, I touched on what I think is the primary factor the author consistently overlooks, which is the inflationary policy response of governments, always and everywhere, to even the tiniest threat of deflation. I'll share two recent, blatant examples: The 2008-9 GFC era's brief deflation caused governments around the world to engage in massive monetary debasement (this by the way made the author's 2011 Age of Deleveraging book anti-predictive). But the real mother of all inflationary responses occurred during the COVID era, where the US government responded with the largest monetary expansion[2] since WWII, leading to the significant inflation we are all experiencing right now.

You'd think at some point the author might take a look around and notice the obvious lack of any generalized deflation. You'd think he might consider using a different mental model, perhaps one taking into account the highly consistent government policy response discussed above. Perhaps he might admit he was totally incorrect, or even change his mind.

...But you'd be wrong. After at least 18 years of calling for deflation, during which the aggregate price level has inflated 2x, the price of a single family house has inflated 4x, and the stock market has inflated some 7x, this author, astoundingly, still thinks a long-term wave of deflation is looming!

I'm sure by now it seems like I'm being cruel to this author. No. He is being cruel to you. It doesn't seem to matter what occurs in this author's reality, nor that what ends up happening is the exact opposite of what he calls for. This author will keep telling you there's going to be a coming era of deflation, and he will somehow mine his books to tell you how right he was. Give a man a hammer and all the world's a nail.

Once again, for the gabillionth time, this is why you read investing books outside of their time period. It teaches you that no one knows--especially those making the most confident predictions. 

With that final thought in mind, this blog has written countless reviews exposing various predictions from "experts" in investing, politics and economics. Here's a brief sampling, with links to the reviews: 

1) The Gorilla Game (describes an investing approach to use in hypergrowth industries that would have murdered you if you used it when the book came out. My review here also explains some of the mechanisms behind why the publishing industry tends to release books at precisely the wrong times, and why those books therefore tend to be contra-indicators.)

2) Capital Returns: Investing Through the Capital Cycle (an extremely useful book teaching readers to keep an eye on capacity expansion (or contraction) in any industry they invest in, but also a book filled with what the authors consider "correct" predictions that were timed so badly as to be useless.)

3) Bear Market Investment Strategies (the strategies in this book are useful and worth learning--the only problem was this book came out literally seconds before the start of the 1982-2000 great bull market, during which the US stock market went up 15 times.)

4) The Retirement Myth (this book is another good example of "make a million predictions and one or two of them might actually happen." Many of the author's predictions in this book are self-contradictory: a convenient way of being right one way or the other.)

5) Crisis Investing for the Rest of the '90s (this book, hilariously, called for a great depression... in 1993! One of the all-time great books to read to make you permanently bulletproof from "expert" predictions.)

Footnotes:

[1] A discussion of monetary repression is beyond the scope of a mere book review, but in short it involves various mechanisms to keep interest rates well below the true inflation rate. This is how the USA inflated its way out from under its gigantic WWII debts, and--at the risk of making a prediction--this may be a useful mental model to think about how our nation state might inflate its way out of its even more gigantic debts today. This is one of the reasons I've been studying inflation and monetary history so relentlessly lately.

[2] We really should use the more honest word "debasement" instead of the fundamentally dishonest euphemism "monetary expansion." Words mean things.

[Readers, I'm sorry for a longer than normal essay. But as you can see, I feel strongly about the ideas here and, clearly, I needed to get them off my chest! Please don't read any of the notes below, you'll likely regret it.]

Notes:

Acknowledgements

ixff The author talks here about his other books on deflation, including 1998's Deflation: Why It's Coming, Whether It's Good or Bad, and How It Will Affect Your Investments, Business, and Personal Affairs; also note the mentions here of an absolute who's who of permabear writers: Marc Faber, Jim Bianco, Dennis Gartman.

Introduction

xiff Referring back to his 1998 book Deflation and how [now in 1999] "events have been unfolding very much in line with that book's forecasts." Commenting on Asia currency collapses, also Russia, Brazil, on Japan returning to recession and Long Term Capital Management; but also noting how commodity prices are at historical lows: crude oil, sugar, gasoline, copper, pork, etc. [Note that it was around this time that Jim Rogers' wonderful book Hot Commodities came out--a book that was actually predictive, as commodity prices went through an upcycle beginning around this time.] Comments also on how a survey of CFOs indicates that their firms expect to be able to raise prices only 0.8% in 1999; on many products having falling prices compared to years ago. [Not to nitpick but this isn't really deflation: this is just manufacturing at scale and declining cost curves: the question isn't the price per se of something, it's the aggregate revenues. If you mass produce something at a lower cost per unit but can sell way more of that thing, you'll earn more revenues and profits--even though the price per unit is lower. The author will later comment on this type of deflation as "good deflation" but here he just lumps it in with his other bearish talking points. Note also it's sort of hilarious (and also depressing) to look at the 1990s-era quiescent inflation and compare it to today's post-COVID money-printing era when inflation is raging all over again.]

xiii The author shares a list of examples of excess capacity in the economy [all of which were reabsorbed by the marketplace over time]. Examples here include more than 100 cities in the United States that are moving from two cellphone systems to six or more competing wireless providers. [Two things here: first, how is this bad? And second, this industry ultimately renormalized to oligopoly economics in the long run anyway, as now we have essentially three national cellphone carriers.]

xiiiff "...after 60 years of inflation, most Americans don't believe that deflation is possible." The author claims here that polls show that the vast majority of consumers think current inflation is higher than CPI and that economists think CPI overstates inflation by more than one percentage point [holy cow the exact opposite is true today]. And then see the table here of price declines among US consumer products with "information processing equipment" leading the list down 26.6% from 1997 to 1998 [again the author is confusing silicon/mass production economics with deflation in the true economic sense]. 

xv See the chart below for the author's list of deflationary forces. [It is highly instructive to review this and recognize that almost all of his examples have completely reverted in today's era. This author was exactly wrong!]:

xvff Comments on the difference between deflation and disinflation, which the author covers in more detail in Chapter 14; the author claims that deflation to most people can conjures up the financial collapse of the 1930s, whereas the author is talking about technology advances and excess supply as well as the ability for capital and technology to move around the globe to the lowest cost locations. He thinks the coming deflation will resemble what happened in the late 1800s and 1920s. Comments here in general about what types of investments work well, the author claims high quality bonds will be winners [he's right if there's deflation, but note that you will get slowly crushed holding bonds these if there's inflation!] Stocks will do reasonably well although they will "be beaten up in the transition to it," real estate and commodities will have rough times [again, the opposite is true during inflationary periods]. Comments on business strategy, Chapter 29, and advice for consumers, Chapter 30, which is to save more and make sure you're worth more to your boss than he's paying you [agreed on saving more, that's evergreen good advice in any -flation environment, but the "be worth more to your boss" could be thought of as somewhat incongruous advice: if you're worth more than you're getting paid at a job maybe you should start your own business doing what you do and then keep all the residual value.]

Part One: Major Deflationary Forces

Chapter 1: Government Spending is Shrinking

3 The author talks about how he was correct in forecasting that inflation was on the way out in the mid-1970s. "Our analysis showed that in this country, the history of serious inflation is the history of big government spending." [This will be the first of many times where the author tells us how right he was. Ironically this prominent claim of "being right" then occurs in a chapter filled with wildly wrong predictions.]

4ff The argument here is that because the Cold War ended, US and global military spending is shrinking [Note that this was self-evident in 1999 but hilariously wrong in a matter of a couple of years when the "endless war" era started]; the author also claims [laughably] that government efficiency is increasing, such that overall government spending (beyond military spending) is in decline too. [This prediction was also laughably wrong.]

5ff Comments on varying levels of societal tolerance for big government: tolerance of it in the decades following the 1930s, citing the Reagan revolution, followed by the Clinton welfare reform era where even Bill Clinton famously said "the era of big government is over." [This entire chapter has obviously aged poorly.]

Chapter 2: The Role of Central Banks

11ff Discussion of the "Monetarist" view that the money supply drives inflation, the author does not consider this the prime mover of inflation or deflation however. On changes in monetary policy; how the central bank has had a mindset of fighting inflation since the late '70s; the author thinks that today in 1999 it is fighting the last war; he cites the 1994 Fed decision to make a pre-emptive strike against inflation taking rates from 3 to 6%. [I'm getting ahead of myself a bit here by talking about predictions and scenarios the author expects but won't discuss until much later in the book, but note that within a year of this book's release the Fed cut rates dramatically in order to stem the tech market selloff--for what turned out to be a tiny "crisis" to be honest--in other words, the government policy response totally blew out of the water any deflationary process that this author would have predicted! As we will see, this author--as well as other authors I have been reading lately--frequently make predictions of what he thinks should happen, but because of the highly predictable government policy response, the prediction simply won't happen.]

14ff Various examples of different central banks fighting inflation at the wrong time. [Note again that today, each one of the countries the author cites (England, Germany, Japan, etc.) are all experiencing significant inflation.]

15ff Comments on demographics as a deflationary driver; also the author offers a nonsensical argument that the social security schemes in various countries become top-heavy, and therefore solutions to this problem (raising the retirement age, cutting benefits) are deflationary. [In reality we are already seeing the exact opposite "solution" being used here: moneyprinting, while having the inflation indexing of those benefits run at a lower rate than the true inflation rate. This is of course inflationary, not deflationary!]

Chapter 3: Restructuring in the United States Continues

19ff A discussion of the transition from the post-World War II dominance of the United States in manufacturing, where pent-up demand and catch-up spending after the war drove inflation; then the 1970s era of rampant inflation, followed by the 1980s' restructuring of the US business sector in the face of competition from Europe and Asia; also other deflationary factors like outsourcing, weakening union power, offshoring, that drove down costs.

27ff This is a strange chapter as the author now discusses various productivity games in various industries: larger supertankers, oil industry technology, 3D imaging, the steel industry facing competition from imports. Not quite sure what the author's point here is, other than to point out all sorts of things while assuming [ultimately incorrectly] that somehow all of it leads to deflation. [In reality our government can do things like add 80% to the money supply (as they did in the four years after COVID) and blow all of this "deflationary cost savings" right out of the water. What we are having right now is certainly not deflation.]

Chapter 4: Mergers at Home and Restructuring Abroad

30ff The author cites mergers and acquisitions, which he believes results in cost-cutting and job losses, examples given in the banking industry, the auto industry, the telecom industry, the combination of ExxonMobil, a long laundry list here. [Again he sees any restructuring that results after M&A as deflationary--he has a hammer and all the world to him appears to be deflationary--but if you really think about it mergers and acquisitions produces oligopoly capitalism, and is therefore inflationary because it reduces competition and enables price increases. This author is disappointing the reader here with his lack of rigor.]

37 "By cutting costs and promoting productivity growth, restructuring is clearly deflationary, not only directly but also by pressuring foreign and domestic competitors to follow suit." [Nope, not if there are a lot fewer competitors. Oligopoly is the rule these days not the exception in most major industries.]

Chapter 5: High Tech is Deflationary

38ff The author considers tech today as an evolution of technology advancements dating back to the 19th century as it causes cross-cutting and productivity enhancement, which the author [correctly] considers deflationary. [We will soon find out that this is what he and other economists call "good deflation" as opposed to "bad deflation" that comes from panics, crashes and economic crises.]

43ff extrapolation from tech to other industries like biotech and agriculture.

44ff Various deflationary effects of technology: the author claims that it depresses prices economy-wide, forcing down prices of competing older technologies; see for example long distance telephone calls. [Again this isn't wrong, communications, memory, bandwidth, digital storage, various digitizing technologies have dematerialized entire industries, making them much less costly. In any period "technology" will reduce costs in some industries. I just wish someone could figure out a way to "dematerialize" my monthly health insurance bill, or my HOA fees.]

46 Strange long-winded sidebar about how the company that this guy runs saves money on making charts by using a computer and modem. [This passage is a good example of the types of things that a truly harsh editor would hack out with a chainsaw: it would cut the book down by 80% though, and then it wouldn't be a book.]

Chapter 6: The Internet and Mass Distribution

48ff Once again the author sees deflation everywhere, the internet is no exception. Trivia given here about how eBay does what it does, Amazon does what it does, etc. We can comparison shop; selling direct to consumers eliminates the need for large inventories and store-based sales staff; products can be delivered more cheaply; online banking and other services reduce costs. Yes, all deflationary.

54ff Now a discussion of mass distribution and how it's deflationary too, citing retailers, the auto industry, etc. This is a strange appended section that doesn't really fit with this chapter. [I would like to know how the author argues that the auto industry is in any way deflationary these days when cars cost more than ever.]

Chapter 7: Global Deregulation

57ff [Once again the author bottom-ticks a trend that was happening in the 1980s and '90s but has since completely mean reverted since, as most industries are more heavily regulated, and thus we will more oligopoly-type industries behaving with firmer price discipline. I think the health insurance industry might be the poster child here! Yes, of course, deregulation is deflationary as the author claims, but we are simply not seeing the deregulation he claims will happen, and we are certainly not seeing any deflation from a trend that never occurred.]

57ff Various examples of industries where the author thinks deregulation is happening or will happen: financial services, banking [both industries are now much more heavily regulated than this author's worst nightmare since the great financial crisis and Dodd-Frank]. Discussion of airline deregulation which also now is not meaningful anymore because the industry has fully oligopolized. 

60ff More odd, appended orphan-type examples given here: Japanese financial services, telecom deregulation in Germany and a comparison between the deregulated Deutsche Telecom and the still-regulated Deutsche Post.

Chapter 8: Global Sourcing and New Market Economies

63 [At this point our reader doesn't really need to read the text in the chapters, he can read the chapter title and just assume there will be a laundry list of examples given by the author all "driving deflation" by his view--it doesn't matter whether or not the trend actually happened, or whether or not the underlying examples literally did produce deflation. The author is becoming highly predictable here and we are only 60-ish pages into his book: he has a hammer and everything he hits causes deflation.]

63ff This chapter is a six-page summary of various offshoring activities of the corporate sector; companies using low-cost labor in India to do their programming; US companies outsourcing manufacturing work to Mexico where labor is cheaper; also outsourcing to the former Soviet Union and China; then examples of cars being manufactured in lower-cost Eastern Europe, and then also crude oil being sourced from countries in the former Soviet empire. [Note that with regard to oil prices, one can easily make an inflationary argument: as the rest of the world lifts its standard of living closer to the developed world's level, global demand for oil will increase significantly, this is obviously inflationary.] 

Chapter 9: The Strengthening Dollar

69ff The author explains the mechanics of a strong dollar causing deflationary effects in the USA as imports become cheaper, which forces domestic competitors to cut prices.

73ff Comments here on how America's competitive advantage is huge and growing. [This claim/prediction can only be read with rueful discouragement some 27 years after this book came out, as the US has ceded much of its advantage in many industries including the ones the author cites where the USA is supposedly dominant, like semiconductors.]

Chapter 10: The Asian Contagion

77ff Commentary on the 1997 Asia crisis, discussion of the excessive lending to these countries. [Although the author does not frame it this way, the problem here was that these countries had excessive dollar liabilities, which is why currencies like the Thai baht (and others) fell dramatically. Note that what happened in Thailand literally was inflation for them, although a dollar-denominated buyer in the USA would experience deflation buying anything denominated in the now-weaker baht.]

79ff Ather countries dragged along into the malaise: Indonesia, Malaysia, then South Korea and even Taiwan and Singapore, all of which suffered recessions; and then in the following year Russia had a currency collapse and defaulted on its government debt, and then Brazil experienced a decline in their currency.

81ff Now the author attempts to make some predictions based on the Asia/Russia/Brazil crises, asking if Latin America will experience this contagion, is China next, etc. Of course, things did not really play out as negatively as many permabears/deflationistas had hoped. Comments on Latin America being "shaky at best." [These again are backward-looking comments that were not predictive of deflation in the United States. There is the old expression "When the US catches a cold the rest of the world catches pneumonia" but the reverse typically isn't true. Note that any permabear can always point to specific places in the world where things aren't going well, it doesn't mean that the rest of the world goes to hell as a result.]

82ff Note the comments here talking about Argentina's peg to the dollar and how it is under threat. [Note that in 2001 Argentina had the famous corralito that Fernando "Ferfal" Aguirre referrs to in his extremely useful book Surviving the Economic Collapse.]

84ff Standard discussion of vanilla bear fears for China that you commonly would hear in 1999: problems flowing from the competitive devaluations of other Asian countries in the late 90s, risk to the Chinese yuan peg to the dollar, problems with Chinese state-owned enterprises, China's need for rapid growth to offset inefficiencies in its controlled economy, how China's "special economic zones" are all overbuilt [this is the whole "ghost cities" argument], various techniques China uses like tax rebates and loans to exporters which are equivalent to a stealth devaluation of their currency; etc. None of these really worries really ended up breaking anything, especially from the perspective of investors in the USA.

87 "Most emerging countries, then, are in deep trouble, and they will be slow to recover, even more so because Japan will not provide much help, as you'll learn in chapter 11." [It turned out that the policy solution here was moneyprinting, both in the US and elsewhere, and these countries were not in deep trouble as it turned out, and they most certainly were not slow to recover. By 2002 the entire tech bubble had mean-reverted back to normality.]

Chapter 11: Slow Recovery in Asia

88ff Off-topic discussion here of Japanese mercantilism and high Japanese savings rates, which, according to the author, are "to offset their huge losses in stock and real estate values," which makes no sense.

90 Note the chart here of the Nikkei Index, down from its 1989-1990 peak. [The irony here, though, is if you punch up a chart of the Nikkei today, you'll see it at 69,000, quite a distance above the 1990 all-time peak at around 38,000. Sure, this really looked like a long period of deflation in the late 1990s, but if you bought this index anytime in the early 2000s you'd be sitting on gigantic--and assuredly non-deflationary!--gains today. Markets humble us: it's what they do.]

92ff Comments from the author here on why Japan and various "Asian contagion" countries won't recover quickly [this turned out to be anti-predictive too]. Also strange comments differentiating Mexico and its recovery after the 1990s era peso crisis and Asia specifically Japan. [This book is absolutely weird: I thought the purpose was to discuss deflation but now it's just chapter after chapter of discussion of the author's bearish views on all these various countries.]

95 "We believe that, given the onset of global deflation, it will take at least a decade for meaningful recovery in Asia and maybe Latin America as well." [Holy cow, wrong!]

98ff Finally we get to the punch line of this chapter, which is: because all these economies are export-based and none of them want to buy each other's stuff, the US becomes "the happy dumping ground for the world's excess supply of goods and services." Thus this means cheap imports, causing price cuts for domestic producers and therefore deflation all over again. "...the net effect of the Asian contagion is to reduce worldwide demand and increase global supply for many years to come. Both effects are deflationary."

Chapter 12: American Consumers Will Save More

100ff [The central claim of this chapter, that "American consumers will save more" couldn't be more anti-predictive.] The author's thesis here is that American consumers will switch from "borrowing and spending" to "saving and not spending." [This of course did not happen, it's unlikely to happen, and you'd have to be utterly blind to modern American culture to expect it to happen.] The author refers to the 13 deflationary forces from the introduction that he thinks will "push the world into chronic deflation."

103ff Moralizing about how Americans don't want to give up the good life and are willing to use credit cards and consumer borrowing (or just not save at all) because their investment portfolios "make them feel wealthier" [As an example of the logical incontinence of some of this author's arguments: where do you think those investment portfolios came from? And what exactly are those investment portfolios if not savings?]

Chapter 13: US Saving Spree, Triggered by a Bear Market, Ensures Deflation

110fff Comments here about how we currently have an overvalued stock market: dividend yields are at record lows; price to book, price to cash flow, stock market capitalization to GDP, etc., are all cited here to prove the stock market is overvalued as the author is writing here in 1998. The author also cites the S&P500's average annual return since the beginning of the great bull market in 1982, roughly 21.5%/year, "about twice the historic norm." [It is true that periods of above average returns can be followed by periods of below average returns, but the difficulty is how much deviation can you see from the norm for how long before any mean reversion happens...]

112ff Various "signs of a top" according to the author: on individual investors expecting much higher returns than "normal" market returns; the author cites the popularity of funds tied to the S&P500; countries like Poland and Chile investing their workers retirement money in stocks; also citing the "narrowness" of the market in 1999; rampant "speculation" with internet stocks; mention of tulips even, quoting Charles Mackay's famous [and disappointing] book Extraordinary Popular Delusions and the Madness of Crowds [note that the tulip bubble has been largely exposed as a psyop, it almost certainly did not happen in the way it is narrated today]. Other typical examples of speculative behavior cited here. [Note that this predicting a bear market is fine, but the argument here is that this bear market was going to (somehow?) cause Americans to save more, triggering deflation. It's the second and third steps in this argument that are incontinent--and never happened.]

120ff Comments on how investors think they are "long-term" investors, but then get panicked out at the bottom. 

122ff Finally the author gets to actually making the next steps in his argument: that after a the coming big bear market, American consumers will switch from spending to saving, which then will be deflationary. This switch from spending to savings will supposedly drag down GDP, which will precipitate a recession. Finally the author really gets it wrong here as he argues that the Fed will respond by raising rates and tightening credit as a response--and this would make things worse. [This is the exact opposite of what the Fed generally does in these situations, and it is the total opposite of what the Fed did in the case of the internet/tech bear market. They cut rates and loosened credit, aggressively! The author might be able to claim he "predicted" the tech bear market but yet he got the policy response and the deflation part totally, totally wrong. I think it's worth noting here that many deflationista and permabear-type investors are frequently frustrated that the government policy response is never the "harsh medicine" they want the system to take. But the world rarely acts the way we wish it would: to expect so is delusion.]

125 "Regardless of how we get there, I see deflation in the cards."

Part Two: The World Economy Under Deflation

Chapter 14: Deflation Is Self-Feeding

129ff The author's argument here is straightforward: when price declines are widespread, buyers anticipate further declines: they wait for lower prices and this causes producers to cut prices further. The author thinks that this makes for a self-perpetuating spiral. And then because people will then spend less and save even more, further reinforcing this spiral. [Interesting choice of words to call it a spiral, that's good rhetoric. But once again, the policymakers can't afford to have deflation and they have a childishly easy solution to prevent it: cut rates and print money. And if you need to you can always give people stimmy checks! This instantly juices everybody's behavior in the opposite direction! You cannot just argue that this deflation spiral will happen while ignoring the obvious central bank policy response.]

130ff The author cites more examples of self-reinforcing spirals like real estate or other heavily-leveraged asset prices, where their prices will fall, making lenders more cautious; the government sector then becomes part of this self-reinforcing mechanism because tax revenues decline. [After the 2008 real estate crisis, we saw another example of how the policy response inflates away any deflation: governments and central banks all over the world pumped money into their banking sectors, did deficit spending, cut rates dramatically, printed money, etc.]

131ff The author gives an example of the "self-feeding" aspects of deflation by giving a scenario of the exact opposite: the self-feeding inflation during the 1970s. People borrowed heavily to beat rising interest rates and price hikes; they invested in tangible assets like homes, collectibles, art and antiques; real long-term interest rates (adjusted for inflation) went negative; companies bought more inventories than they needed in anticipation of rising prices--which causes prices to go up further; people would engage in speculation rather than "productive work" which also pushed prices higher as well. The author gives an example of how he knew that high fertilizer prices would drive up the price is at his local garden center so we bought up the store's entire inventory one winter: the store owner gave him a discount so he wouldn't have to hold all that inventory over the winter. "Inflationary expectations ruled the 1970s and are the precise opposite of the deflationary expectations I see developing."

134 The author gives an example of his basement freezer that he bought in 1974 for $352 and then replaced in 1998 for $540. He claimed then that the new freezer was 55.7% cheaper compared to inflation and in quality adjusted terms it was even better because it was more efficient. [Wait. Think about the incontinent logic here: if we ignore inflation, we can therefore claim a much higher price for something is "cheaper"... and use that as "evidence" of deflation?]

135 Arm-waving arguments here that "the inflation emperor has no clothes" and that the onset of recession "will certainly push [American consumers] toward accepting deflation." 

136 Finally the author asks what will it take to trigger deflation expectations: he claims that an ongoing decline of 1-2% per year in the prices of most goods and services will do the job. [If that were true we should have seen the author's predictions already coming true in industries that were deflationary all along, like computers, semiconductors, flat screens, consumer electronics, etc. People should be deferring purchases and not buying because "it'll be cheaper next year," but clearly didn't (and doesn't) happen in these subsectors--and of course across the economy we never saw any consistent aggregate price declines anywhere near the author's "down 1-2% per year" expectations. This argument makes no sense, it is easy to show empirically that it doesn't hold water, and the author's predictions are wrong on multiple levels.]

Chapter 15: Deflation and the Kondratieff Wave

137ff [This chapter has some minor value, as the Kondratieff Wave idea has some interesting relevance across many domains. It's worth at least being conversant in the idea, but don't try to force-fit it to any single phenomena..] Comments here on the economic cycle phenomenon named after the Russian economist Nikolai Kondratieff and his work in the 1920s and his persecution under the Soviet system. The cycles tend to be 50-60 year long cycles of extended growth and decline, rising and falling commodity prices and rising and pulling interest rates; the idea here is there's typically a 25-year expansion in a so-called "long wave" that begins when public confidence is at its ebb. The author cites the Mexican war in 1846 or the Spanish-American war in 1898. Roughly 25 years later, the up phase ends with an unpopular war like the War of 1812, the Civil War, World War I or Vietnam, which were all started at the height of public confidence but then ended in disillusionment.

139ff These unpopular wars are followed by a surge in commodity prices, followed by the "Phase 2" part of the wave: a collapse in prices and then price weakness for the remainder of the downswing. He cites how the War of 1812, Civil War, World War I and after the 1970s inflation all were followed "right on schedule" by price declines--except for the instances he cites here where the cycle was "delayed" by Cold War spending, or government spending on social programs. [He frames things here as if this last "long wave" was delayed by one-off exceptions. Once again, I really wish the author would have a more foundational recognition that the standard government policy response will be to prevent deflation by causing inflation, via fiscal stimmies or tinkering with the money supply.]

139ff On to Phase 3, which is the "plateau decade" which Kondratieff calls "secondary prosperity": see for example the Roaring Twenties or mid 1980s; to be followed by Phase 4, the "final depression phase" of the Kondratieff wave, as seen in the "Hungry 1840s," the 1870s or the 1930s. "Deflation is a definite hallmark of this phase." [Sort of disturbing to see that the Kondratieff phenomena never really were predictive at all across the 1970s, 80s and 90s. I think the idea here is to consider this Kondratieff cycle as a generalized phenomenon or mental model, but not to expect it to map too directly to reality.]

141ff Discussion here on what creates the wave: "Kondratieff himself offered no causal explanation for the Long Wave, and his work was purely statistical." The author here claims that technology cycles offer a possible explanation: basically thinking of a cycle involving investment in a technology, then overinvestment, then excessive investment, and then a downcycle. The author describes it as "gaps between the full exploitation of one technology and the onset of massive investment in the next." [Much more useful to think of it in generalized terms like this.] Examples here includ railroads in the early 19th century, as the industry didn't become a major force until the second half of the 19th century, and then that was when there was overcapacity until the sector consolidated. The author claims that today's new technologies like telecoms, computers and the internet aren't strong enough to drive the US economy by themselves. [This is a sort of strange anti-predictive quote here, as it turns out these things actually were major drivers of the US economy in the two decades after this book was published, albeit with phases of excess followed by consolidation.]

Chapter 16: The Two Faces of Deflation

144ff On the American mental image of deflation, which is shantytowns, soup lines, apple sellers, etc. This section is a strange and scattered discussion of various things that happened during the Depression: the author cites overcapacity in agriculture after World War I in the United States, then electricity generation and the auto industry rapidly expanding into overcapacity in the 1920s, and then ultimately it was the collapse and incomes and demand the drove the so-called "bad deflation" of the 1930s.

148ff Contrasting the 1930s "bad deflation" with the so-called "good deflation" that comes because of excess supply: see for example after the US Civil War when the US industrial revolution happened; odd sidebar here on advancements in glass technology, then on the rollout of the railroad industry with unnecessary statistics here on track miles built; then a discussion of expansion in agricultural capacity with the new John Deere steel plows of the mid-1800s, as well as other ag innovations like the horse-drawn reaper and then reaper-thresher ("combine); statistics here on man hours needed to prepare and harvest one acre of grain. [I'm not sure why the author is jumping around talking about these different sectors and historical developments: if you look at the specifics of his argument, a long list of various examples of innovation, or pointing out various examples of ag sectors where prices declined is not proof that we are going to have deflation in general! Agricultural commodities have had a declining price curve for centuries.]

153 Discussion here of wages, and how we see lower nominal wages during deflation but higher real wages because the overall price level drops more than the wage drop. [This section would be worth developing much more, as one of the reasons we rarely have system deflation, ever, is because people can't handle the "real" part of their wages allegedly going up if they see their nominal wages doing down. People live in the nominal world. This is why the system--and the citizens who participate in it--all prefer inflation, and it's why the policy response is always to produce inflation, it's way easier to screw workers over the long term by having wages go up, but go up less than inflation in a subtle way that they don't really notice. The author just drops the topic and never explores this.] 

154 Now back to the third Kondratieff wave, which began its plateau after the 1920-21 recession and then the 1920s boom; all sorts of scattered stats here talking about vacuum cleaners, refrigerators, automobiles, Henry Ford's high wages, but then price declines in things like automobiles because of mass production. Thus per the author the Roaring 20s were actually a period of overall deflation, "the good deflation of excess supply" [No! He even gets this wrong. Yes, it is good deflation, but it's due not to excess supply, but due to technological advancements where cost and prices go down but revenues go up because people buy much more/demand goes way up.]

Chapter 17: The Looming Threat of Protectionism

163ff [The author spends the first half of this chapter on various sidebars, only halfway through does he actually get to protectionism.] Comments on how the tariffs that went up after World War II scarred the memories of policy makers thereafter, although the author claims that there's pressure for tariffs right now, (meaning in 1999). [This was once again not at all predictive: it was only 25+ years later that we actually started getting some actual "protectionism" in the US!]

Chapter 18: Western Central Banks and Governments Can't Stop Deflation

169ff [A classic, almost beautiful example of an "on the one hand on the other hand" quote at the beginning of this chapter]: "A major bear market in US stocks that spreads globally will probably not create financial chaos in the West--unless it touches off a forced unwinding of all the derivatives that have permeated the financial structures in recent years." [Not only is it bereft of practical, useful information, it can also be interpreted in enough ways that the author can claim "I was right" under a wide range of circumstances. Beautiful! If you happen to ever find yourself in a situation where you're forced to earn a living making prognostications, study this kind of rhetoric!] Discussion here of derivatives, portfolio insurance, then a move to the Y2K problem [Y2K was yet again something that turned out not to be a thing! I think the author could perhaps scratch at a genuine insight if he were to ask why Y2K didn't turn out to be a problem. How was it that something that was so obviously bearish not actually turn out to be bearish? It's because the system is reflexive: it looks at itself and reacts.]

172 A section here where the author argues why central banks "can't hold back the deflation tide" despite their interventions. [This passage reveals how the author fundamentally does not understand the ideas from Austrian economists or monetary thinkers like Jorg Guido Hulsmann, all of whom deeply understand the fear, loathing and revulsion central banks have towards the risk of deflation; the central idea here is that whenever any deflation happens--or even threatens to happen--they stand ready to loosen credit and print money. This author not framing it correctly by saying central banks "are still fighting the last war, inflation, and not the next, deflation." The point to understand, the only point to understand, is that whenever there is any chance of deflation, it triggers an instant inflationary response. Note also the world's central banks never call their reactions "inflationary"--after they use more rhetorically swallowable words like "reflation." See Jorg Guido Hulsmann's short book Deflation and Liberty for more on this.]

173ff The author's argument here appears to be that even the central bank prints money and cuts interest rates, there is no pent-up demand that will be "unleashed" by these looser financial conditions. "If you've already got too much of almost everything, lower financing costs and more readily affordable credit won't make you rush out to buy more. Instead, you're waiting for lower prices before buying." [This is not how it plays out: in fact it is moneyprinting and the resulting inflation which causes people to pour their money into scarce goods, investments or assets that will keep up with inflation, this is way different from what the author is talking about.]

174 Uh, oh, the classic permabear phrase here: "pushing on a string." When any economic prognosticator uses this expression... run! [This expression is usually dragged out when a permabear wants to claim that the Federal reserve's cuts to interest rates won't have any effect. Another related slogan you'll often hear is "The Fed is out of bullets." Another personal favorite.]

176ff Comments here on the author's "surprise" at discovering that money supply grew faster than the economy during deflation, especially during the "bad deflations" of the 1930s and in Japan in the 1990s, It's not entirely clear here what he's saying but I think the central idea here is that the velocity of money drops such that the monetary dilution doesn't have any effect. This quote where he tries to explain it makes no sense: "The money supply grows faster than the economy in deflation and slower than business activity in inflation. This is exactly the reverse of what most investors--and economists--believe. And it tells us that rapid money growth is no deterrent to deflation. At least it hasn't been in the past." [I suppose this makes some sense if the velocity of money overcomes the printing of that new money, but even so, if you simply debase the money, prices are going to go higher and you will create inflation. So on some level this might indicate a special temporary case that may happen here and there, but the underlying principle--that debasement literally and definitionally causes higher prices--still holds.]

179 Another big miss here: "...central bankers, who genetically hate inflation..." [Yikes, this author needs to read Deflation and Liberty, he needs to better understand his Murray Rothbard, needs to understand his Hayek and von Mises... he has to understand that central banking systems fear deflation more than anything else and vastly misrepresent and mischaracterize the always inflationary moneyprinting they engage in to react to it.]

179 Still more backward looking comments here claiming that developed country governments are more interested in surpluses than deficits; this was true briefly during the Clinton era [and even then only if you ignored Social Security and Medicare!], and it is absolutely not true in the modern "monster deficit" era.

181 The author comments here that "I don't expect any coming deflation to be the bad variety" and claims that there will still be economic growth.

Chapter 19: The Coming Era of Good Deflation

182ff "In the late 1800s and in the 1920s, good deflation was driven by new technologies. It will be this time as well." Referring back to chapter 15, citing computers, semiconductors, telecom, biotech, the internet, all to be like the American industrial revolution in the 1900s, or electrification and the automobile in the 1920s; the author cites additional factors, like exporting the industrial revolution to developing countries in Asia, Latin America and elsewhere [this would be better thought of as the "deindustrialization" of the United States, but it does drive costs lower]. Also innovations in communications where you can send programming work from India to the United States. 

185ff This increases productivity, the author claims the productivity growth will recover and return to the previous decades' 2-2.5% trendline. Not also the comment here that "Nationwide sentiment against falling wages since the Depression have made general declines and wages nearly impossible." [Again the author is scratching at, but can't seem to see, that the policy pressures are way, way too high to actually enable the kind of "deflation that fixes everything"--these systemic price and wage declines simply don't happen in a fiat, expansionary monetary system structured around consistent money debasement.] Note also the discussion here where the author thinks "compensation cuts" will come without actual pay reductions in money wages, but more in the form of like outsourcing jobs, increasingly using bonuses and incentive pay, or replacing older, expensive workers with younger, cheaper ones. [Note that yes, we are experiencing all of these things for sure, and wages are therefore getting squeezed... but we are still experiencing inflation anyway! They are making the game harder and harder on everyone.]

189 "In my judgment, the deflation ahead will be the good variety. It may not appear that way during the transition to deflation, which, admittedly, will probably be rough for many." Here he "predicts" various possible shocks that might happen [as always with well-made predictions, make sure you make a lot of them such that at least one will assuredly come true at some point. He does an admirable job with this series of "predictions"!], including a financial crisis in China, a big devaluation in China, a stock market correction, a recession in the Western world, etc. "he warns the reader not to act "contrary to my advice in Chapter 22." [this is three chapters from now, where he will call for a 40--50% decline in stock prices. Note that a 40% or greater decline in stock prices has happened at least three times since this book came out--in 2000, 2008 and 2020--making him "right".. and yet the resultant deflationary phenomenon he also calls for never happened in the way he expected it to]. "But the transitions to good deflation are always difficult." Here he cites as examples the two recessions before the deflation of 1870 to 1896, also post-World War I price controls and inventory building spree which was followed by a drop in prices and a sharp recession before the Roaring 20s commenced.

190 The way he frames this, it sounds like there's going to be some kind of massive recession, but you're supposed to buy stocks right through it, and "not be swayed by the doomsayers of financial collapse and bad deflation."

190ff How long will the deflation last? The author's simple answer here is "until the next war" as inflation is a wartime phenomenon. [Now I can't help but wonder what this author thinks about the current "endless war" era that pretty much also began right after he published this book.] Note also this quote: "As a test, I've recently been asking clients if their office leases contain escalators to cover increases in property taxes, maintenance, utilities, etc. Invariably the answer is, yes. Then I ask if the escalators are symmetrical, so rent will fall when costs decline in deflation. None so far have thought about that possibility. But I have and am waiting for the day when we send our landlord a smaller rent check. He'll undoubtedly yell bloody murder. I'll calmly direct him to the escalator clause in our lease. It's symmetrical." [I mean, I see his point. But it sounds delusional to say it from inside the constantly debasing monetary system that we all live in. But I hope he gets his day one day and can send his landlord that smaller check. God bless.]

Chapter 20: Interest Rates and Profits

192 Here the author predicts lower nominal short-term interest rates, but higher real rates. "I don't expect short rates to go to zero, but they could well fall to the 2 to 3 percent range in the period of 1 to 2 percent deflation we see ahead. That would put real short-term rates in the 3 to 5 percent range, not unusual by historical standards." [Again, predictions are difficult, especially about the future. Right now, in an inflationary environment, we have nominal short term rates around 3.75%, but real rates are negative, even by the understated CPI inflation measure, and well negative if you consider true inflation.]

194 [Note the photo here of short-term interest rates adjusted by CPI. Remember that CPI is always understated, especially so now. Take a look at the post-World War I and post-World War II negative real interest rates: these are periods of "financial repression" where interest rates were held well below the inflation rate, on purpose, to solve each era's massive government deficits. Those two periods are in my opinion more likely proxies for what we're likely to face for the foreseeable future given our current debt to GDP ratio, which is sitting at post-World War II levels.]

195 "If deflation averages 1 to 2 percent in coming years, there will be times of 4 to 5 percent price declines. Then nominal rates of only 1 percent would return 5 to 6 percent in real terms." [Reading this today, 27 years after this book came out, a period over which we have never been even close to putting up numbers anywhere near these (particularly right now as we are putting up 4-5 years in a row of higher and higher inflation numbers), it just feels like a bad dream, a joke almost, to see author offer such profoundly anti-predictive comments.] Note here the author admits that inflation happened after World War II, as well as during the Korean and Vietnam wars; he repeats here that he thinks that central bankers are set up to fight the wrong war: inflation. [Again, this is where the author is structurally completely backwards, the central bank must create inflation along with financial repression to "fix" the USA's tremendous debt problems!]

198ff The author thinks long-term treasury yields of 3% will produce real yields of 4 to 5%, and then the yield curve will be flat in his opinion. [Short and long rates very similar in level.] "This will have profound effects on investment in business strategies, as you'll learn in chapters 21 and 30." The author argues that corporate profits will get squeezed and it will "precipitate a serious stock market slide." He then argues even if the Asian crisis proves to be a non-event in the United states, it's only a matter of time until tight labor markets push the Fed to tighten credit to a recession-triggering level, which will lead to unemployment. [This is backwards! This is actually not even wrong. If there's a crash in the stock market the Fed will (and in the 2000 tech correction it actually did) loosen monetary policy. The author has not thought through carefully this part of the argument clearly. Once again, he is backward in how he anticipate the central bank policy response.]

200ff The author discusses "a statistical model" to forecast corporate profits; then offers a strange sidebar on how his model is "simplistic," claiming strangely that "simplistic models have worked at least as well as much more complicated ones in my decades of forecasting." In any case his model produces a 4% increase in nominal corporate profits. [For exactly what purpose he forecasts this isn't clear to this reader, however.] The rest of this chapter seems kind of like gobbledygook, with an unrelated discussion of accounting conventions and accounting gimmicks, comments on traditional pension plans in the face of a declining stock market, which isn't a relevant issue for most companies any more. A strange, undirected and disappointing discussion here.

Part Three: Investment Strategy for Deflation

Chapter 21: Bond-Based Investment Strategy for Deflation

209ff "Bonds are beautiful, especially in the transition to deflation." Discussion here of how bonds work, how the payments are fixed, how the price goes up as interest rates go down and vice versa. Also when bonds went from yielding 15% to 5%, you'd think that the run is over for bonds, but the author notes, correctly, that another 2 percentage point decline [thus from 5% to 3%] will result in a disproportionate increase in that bond's price, because the percentage is a greater portion of the base. Discussion of different maturities and how they perform under an interest rate changes, "if you really believe that interest rates are going down, you want to own the longest maturity bond possible." [Please, please make sure you understand the reverse case here too: you will get killed owning long maturity bonds when rates go up a lot--just like a lot of banks did in 2023 when interest rates rose from near-zero to 5%.]

213ff Discussion of zero coupon bonds, which have even more sensitivity to interest rates, basically this is a discussion of bond "duration," although he doesn't use this term.

216ff The author argues that supply and demand will become attractive for Treasury bonds because the government will be running a surplus, demand will be strong and supply will be limited, also comments on avoiding junk bonds. [Once again predictions are hard, especially about the future. This advice--while it was more or less useful during the great interest rate decline from 1982 until the mid-2000s--would have been absolutely disastrous if you applied it in the post COVID era, and (again I'm making my own prediction here) it will likely get you slowly torn to pieces as inflation/financial repression is used to inflate our way out of the incredible debt to GDP situation we're in right now.]

Chapter 22: Utilities and Stocks as Deflationary Investments

221 On utilities, because they have high debt levels, they are helped by declining interest rates [somehow the author completely forgets here that a heavily-levered institution blows up in a deflationary environment--yet another example of some of the incontinent thinking in this book.]

222ff Now on to stocks in general. "Overblown US equities may suffer a major fall of 40 to 50 percent in the transition to deflation." He counsels readers, wisely here, to picture your reaction to a 40 or 50% decline in your stock portfolio, [this is great advice, you always want to think about what your situation would look like if you had a 50% drawdown, this will happen at least a few times over the course of anyone's investing career.] "Do you accept the loss as part of the game?"

227ff Discussion here of dividends: how they're usually overlooked or forgotten. [Note this quote and think about the hilarious logic error]: "With an interim stock market decline of 40 to 50 percent, current dividend yields would rise to about 3 percent." [Nuh-uh" if the stock market declines 40 to 50%, most dividends are going to get cut.] Discussion here of how the author recommends stocks after this 40-50% decline, once deflation is established and after the decline in interest rates is "over." [Holy cow, if you can figure this out, you'd be writing this manuscript on your yacht off the coast of the Azores.] "It's abundantly clear that I favor bonds over stocks in the transition to deflation." [You can also see certain "on the one hand/on the other hand" scenarios where the author can cite how he was "right": Later he can just say things like "I recommended stocks after they crashed" or "I recommended bonds until stocks crashed, then I said to switch to stocks." The scenarios are already built in, even though he isn't predicting when this crash will happen or at what point precisely to buy, but he'll have things he wrote to point to that he can later quote-mine to be "right." Gross.]

Chapter 23: The Myth of Global Diversification

213ff On the idea that as different economies become increasingly interdependent there's much more correlation among global bond and stock markets. Also on the idea that stock markets with low correlations with the United States tend to have much more volatility, so it's misleading to look at their annual average returns, because the "cost" of those (seemingly higher) returns comes in the form of extreme volatility over time. Finally under big bear markets, correlations approach 1.00 across all markets. "Diversification doesn't work for American investors because bear markets tend to be global but bull markets aren't as consistently so." Comments on other types of risks, like hedging problems, currency risks, and then the types of lousy company disclosure you get in some countries, or limits to foreign ownership, etc.

Chapter 24: New Technologies Win in Deflation

239ff On new technologies as generators, and beneficiaries, of deflation as they replace old technologies. The author goes over five characteristics of technology industries:

1) they are no strangers to deflation

2) their sales volume soars because lower prices open up new markets

3) their products boost the profitability and productivity of their customers

4) tech has rapid obsolescence [the author makes a bit of a tortured argument but he argues that even though tech markets have deflationary prices--thus it pays to wait to buy because the thing will be cheaper a year from now--but because of rapid obsolescence, you get people to still buy and replace their products anyway. Of course, you can always skip multiple obsolescence/replacement cycles too.]

5) new tech replaces old tech [this section could have been fleshed out much more but one idea here is when you disintermediate an industry (like the car replacing the horse), you "deflate" the value of the replaced industry's capacity, labor, assets, and so on.]

243ff Discussion of the tech adoption cycle: beginning with overenthusiasm, then the introduction of competition, then consolidation.

249ff Strange off-topic discussion here about making predictions about consumer discretionary spending, where consumers will cut back, etc. This shouldn't even be in this chapter at all. The author puts up a chart of changes in US consumer spending during the 1973-75 recession, citing weakness in autos, appliances, foreign travel, clothing and tobacco, while utility spending and medical spending went up, and spending on movies went up a lot. [These specific examples here are useless, except to sort of show thematically that when under pressure consumers tend to defer spending on the things they can defer. Thus you want to think about what their behavior might look like today.]

Chapter 25: Consumer Spending Winners

253ff The author cites "winners" in the domain of consumer spending: products with good brand identifications (that therefore are protected from competition or price cutting); luxury goods with status appeal; also the author cites lower-cost status symbols; the author also cites banks, insurance companies security firms and financial planners (basically people who provide financial services to individual savers who need help investing), but then throws in that this is only "once deflation is established." [Ugh: yet more "on the one hand on the other hand"-type discussions that he can later mine to be "right."] And then yet another "on the one hand on the other hand" prediction here as the author says that during the deflationary period nominal returns on financial assets will be much lower, thus fees will be forced down. [So he'll be "right" because he is saying the financial sector will do well and won't do well!]

254 Note the chart here giving examples of winners and losers in the "transition to deflation" and then "during deflation." [Setting aside my objections to this author having created the perfect quote-mining edifice to be always right, you will need to think about these scenarios and what types of investments might and might not work.]

256ff Strange non-committal section here on how the manufactured housing industry and "maybe rental apartments win": The author argues that in future years people are going to not focus on home ownership as inflation ebbs, thus they'll be more inclined to live in rental apartments where they don't have to do maintenance. [Here's an instance where the author, so far, is right, but for exactly the wrong reasons: young people are not as focused on home ownership, true, but the reason is because the prices of home are *inflating* out of their reach!]

259ff The author goes through an argument that the dollar will rally, and thus multinational companies will struggle because of their foreign exposure.

260 Finally a very strange appended section here on Y2K, showing basically arguing there's no investment case for investing in any Y2K-related companies, showing that an index of Y2k stocks is already selling off even as this book is being published in 1999. [The takeaway here is to recognize that the stock market always looks forward, thus it anticipates the decline even while the actual boom may still be happening.]

Chapter 26: Avoid Commodities and Real Estate

262ff [Once again we can see how the author has been grieviously incorrect predicting deflation, both in 1999 when this book came out, and now too. It turned out that commodities actually went through an early 2000 upcycle then, and now they're going through yet another upcycle! Keep in mind however the concept--that during a deflation commodity prices go down.] Discussion here on bearish arguments for gold and copper, also arguments for crude oil prices to decline. [You also want to remember the opposite side of this cycle, discussed very usefully in Investing Through the Capital Cycle,  where the excess supply of a given commodity (or industry) gets finally taken up, and then due to normal demand growth there starts to be more demand than supply. Often the addition of new supply in some commodities lags by years, thus prices go up--sometimes a whole lot. Metals are the textbook example here: it can take years or even decades to open a new mine, built smelting capacity, get permits, etc.] 

267ff Discussion here of the beneficiaries of commodity price declines: consumers who pay less for gas for example; the author only goes through oil as an example unfortunately. [It would be useful to consider, say, food companies, users of metals, or any of a range of companies where commodities drive their input costs to a meaningful extent, thus these companies benefit during commodity price declines are are hurt during commodity price increases.]

271ff Finally comments on real estate and other tangible assets becoming less attractive in a deflationary environment, including antiques and collectibles. "If the price of everything else is falling, why should the price of land and structures resist?" The author argues in a time of excess capacity people don't need more buildings, businesses are looking for ways to cut costs, people aren't shopping and thus will cut discretionary spending. [Of course today we're seeing various secular trends in retail and office real estate heavily impacting property prices and uses.] 

272ff The author now addresses the argument that lower interest rates mean real estate becomes easier to finance and therefore more attractive. He rejects this argument, saying: "If I'm right and long-term Treasury yields drop to 3 percent, mortgage rates will be about 4 percent. If overall prices are falling 1 to 2 percent annually, real estate prices in general--buildings and land--will probably decline at about these same rates. {Real estate has followed inflation rates closely in the past.) Hence, the real cost of real estate financing won't be negative, as in the 1970s, but positive and quite high, 5 to 6%... In deflation, gone are the days when real estate investors could only cover current costs with rents and count on making a profit through appreciation of the property's value." [I share this entire quote because it shows how logical the author can seem inside his imaginary deflationary world, but his readers live in the real world, which is an inflationary and money-debasing world. All the most carefully thought-out scenarios go out the window when you get the entire backdrop wrong! I also think during periods of monetary debasement and monetary repression, people want to hold scarce goods, real estate included, to try and protect themselves from the inflation.]

273 Another incontinent argument here: the author argues that because building materials prices fall with deflation this cuts the cost of putting up new buildings which encourages new construction which puts downward pressure on rents. [I mean, it's true that new construction/new square footage puts downward pressure on rents, duh. But to think that a couple of percentage points drop in building material costs is going to be the major driver behind new construction makes no sense, especially given the author's argument just a few paragraphs ago that real estate will be a terrible investment in a deflationary environment in the first place. I wonder if the author is really thinking through what he's saying here.]

274 Discussion of how investing in antiques and collectibles have less merit during a deflationary era. [Correct: you don't need to buy this stuff, you can instead just hold money, which grows in purchasing power. Collectibles are scarce goods that people flee to when there's inflation.]

276 An anti-predictive comment on war here: "...wars are not extinct and at least a brief one is likely in the next decade, if history is any guide. It will push up government spending and create inflation, but for only a year or so before deflation returns. Not knowing the timing or extent of any war, we haven't built it into our forecast numbers." [Recall that within two years of the 1999 publication date of this book, we entered the "endless war" era. Once again, this is why predictions are difficult, especially about the future.]

Chapter 27: How to Invest in Deflation

279ff [This is a tremendously disappointing chapter filled with pablum.] Cautionary comments about poor mutual fund performance and mutual fund fees; comments on eliminating "unforced errors" in your investing; On using index funds--although the author has problems with index funds too, because he thinks they give the illusion of great performance after a 16-year bull market. Strange pointless comments here on investment clubs and the infamous "Beardstown Ladies" who overstated their returns. [The rest of this chapter is hardly worthy of comment. I'd like to get back the 15 minutes I wasted reading it!]

Chapter 28: Market Timing, Stock Exposure, and Leverage

290ff The author criticizes "buy and hold" investing here using more incontinent logic: he argues that returns are not smooth, a very small percentage of months drive the vast majority of gains [in other words stock returns are Pareto-distributed in time terms], and thus the author suggests, via a long quoted passage copypasted from an article he wrote, that investors should try to time the market, and therefore be "in" when the good time periods happen and be "out" or even short the market during the bad time periods. [If it were only so easy!]

294ff Obligatory warnings about stock market exposure and leverage.

298-9 [Finally something useful!] Note the two charts here of "Investment Winners in Deflation" and "Investment Losers in Deflation." [Once again, the central idea is not necessarily to make specific investments in the things he says, it is to understand what types of things don't do well in a deflationary environment (and thus they will do well in an inflationary environment), and what things do well in a deflationary environment (and thus don't do well in an inflationary environment). The idea here is to cultivate the ability to flex between these genres as needed. You'll want to understand both kinds of water, and learn to swim in both, so you can increasingly become an all-weather investor able to handle all types of environments.]

Things that do poorly in a deflation likely do well in an inflation

And the converse: things that do well in a deflation will likely do poorly in an inflation

Part Four: Business and Personal Strategies for Deflation

Chapter 29: Twenty-Five Business Strategies for Deflation

303ff Most of these ideas are rather obvious, or are standard business practices all the time anyway (like "avoid excess capacity" or "keep inventories low"), but I'll list them all for reference: 

1) cut costs and push productivity, continue restructuring and automation

2) anticipate deflation: keep the pressure on your suppliers for lower prices, look for lower-cost sources and production sites abroad; be prepared for pressure from customers to reduce your prices; don't buy land ahead of your needs; don't rent offices or warehouses with short-term leases 

3) avoid excess capacity, don't fight for market share, resist the urge to expand or to gain market share regardless of the consequences

4) keep inventories low, the author gives an example of having a warehouse full of desktop PCs which decline in value 1% a week

5) emphasize new technologies not old: the author cites industries like semiconductors which create rapid obsolescence for their products

6) go for volume [this is perhaps inconsistent with 3) above, but the idea here is to use volume growth to boost your earnings or find industries where such volume growth can be found]

7) develop proprietary products: this helps protect from competition and price erosion and helps build brand loyalty

8) explore niche businesses [a similar idea to 7)]; niche businesses may not have as much competition, they may not be as commodified; the author gives an example of aftermarket sales where you have close ties to your customers or you are training customer technicians to service equipment already in use in the marketplace

9) use the internet: the author sites that is a cheap way to market your products, he cites Tupperware as an interesting case study [note a few ironies here: first, Tupperware declared bankruptcy in 2024; second you actually can still buy their products... online!]

10) be the low cost producer or get out: if you're in a commodity business, you might have to move production offshore

11) get into the productivity enhancing business 

12) watch out for protectionism, the author cites protectionists from his day like Pat Buchanan and Ross Perot and also pressure from the US auto industry to limit imports

13) be prepared for more competitive devaluations [he's referring to foreign currencies here]: "if you have foreign operations, anticipate currency translation losses and treat them like depreciation, a continuing deduction from revenues in driving earnings." [It's strange that he can seem to see the threats (and effects) of devaluing currencies/monetary debasement in other countries, but can't seem to put this together with the monetary policy response in his own country and currency]

14) examine foreign opportunities carefully: see for example Japan opening her financial sector to foreign ownership despite the risks

15) stick to businesses you know: The author make a point here to outsource stuff that you're not an expert in, like supply maintenance, fleet management, computer management, etc.; any kind of non-essential activities [of course this can also jack up your costs too...]

16) pursue mergers intelligently: note that the author says mergers do need to happen during deflation to cut overhead, eliminate duplicated functions and rationalize capacity

17) emphasize services to customers: and all-out customer orientation can take a mundane commodity business and make it proprietary and niche; the author gives an example of a friend who sells stationary and envelopes and does well because he understands his customers well, despite it being a total commodity business

18) understand your end customer: you want to understand the spending patterns of the final buyer of your product in order to understand the inventory levels up and down your wholesale and retail distribution chain

19) share company risk with employees: you can't just give employees pay raises in a deflationary environment [note an interesting quote here, where the author describes how to handle compensation in an inflationary environment with an employee whose productivity has declined: the solution is to give no more pay increases "and let inflation erode his real compensation back to the proper level." (!!!) If you think about it, this is the exact cheat code to all of W-2 hell! The entire corporate system gives people modest raise that are less than "true" inflation, and most everybody is fooled by their nominal pay raises and doesn't really see the mechanism by which they get squeezed a little bit more each and every year.] Other ideas from the author on how to manage employee compensation in a deflationary environment: have as much compensation in the form of bonuses and incentives as you can, thus linking the employee's success to your firm's success; this can involve productivity sharing or keeping your employee costs as variable as possible. Also the author talks about other ideas like outsourcing work to lower labor cost areas, or buying out older overpaid employees and replacing them with younger, cheaper workers. [Once again the secret is right there in front of you: you just have to think about your employer and what they are likely to do to you as you age through their system.]

20) be realistic about your profits: "Profits will be under pressure in deflation and even more so in the rough transition to it."

21) prepare for vigilant stockholders: your shareholders will be more active, they'll be looking for scapegoats among corporate management, they'll apply more pressure for short-term profits.

22) build financial strength: you want a fortress-like balance sheet during the uncertain transition to deflation, and then you'll have the ability to buy attractive but distressed companies during and after this period, also maintain good relations with your bankers and lenders

23) adapt to higher real interest rates: nominal interest rates may be lower but real rates will be higher [again, in an inflationary/monetary repression-type environment the exact opposite will be true: nominal interest rates will be higher but real interest rates will be relatively low because we have inflation that is not fully reflected in interest rates]

24) be prepared for a flat yield curve: this is going to impact spread lending (lenders who borrow short and lend long); this is something to keep in mind with banks and non-bank financials

25) wait to issue bonds but float stocks yesterday: the author again expects interest rates to be declining, so you can issue bonds at lower rates just by waiting; but then he's talking about how stocks at record high P/Es are better to sell, so if you're running a company you want to contemplate equity financing (that is, if your valuation is high)

Chapter 30: Six Personal Strategies for Deflation

320ff 1) wait for lower prices before buying: the author thinks [anti-predictively, as we've seen] that widespread and chronic price declines will come, thus you can save a bundle on things like cars, airline fares, etc., and so you should delay purchases. [Ironically, in an inflationary environment (like what we have now) you sometimes can delay or defer purchases to save money too: you drive your car a few more years, you may want to defer a big vacation another year into the future, etc.]

2) save more: the author gives a whole sidebar discussion here of the power of compound interest

3) reduce your financial leverage: deflation "increases the real burden of debts." The author says don't be misled by the siren call of lower nominal borrowing rates. The author repeats his idea of suggestion that older people who don't enjoy home repairs can sell their single family homes and move into rental apartments, since they won't miss out on property appreciation in a deflationary environment. Also he says to avoid long-term leases.

4) add value to your employer: the author repeats the idea that you have to be worth more to the boss than he's paying you [note that this is of course another cue to how the W-2 plantation works: the labor market will definitionally pay you less than you are worth... otherwise it wouldn't be worth it to hire you]

5) work for the winners, avoid the losers: the author suggests working for the computer, semiconductor, internet, biotech, telecom or other "new tech" industries. [This advice is also hilariously incontinent once you think through his predicted economic scenarios: if he see all these stocks as totally overvalued and due for a fall "in the transition to deflation," what do you think happens to jobs in these field when the inevitable "deflation" happens to their stock prices? Once again, sometimes I can't help wondering if this author really has carefully thought through these things.]

6) aim for income guarantees--maybe. [The author here is talking about getting income guarantees from your job, but perhaps one might think about this in the context of things like fixed annuities as well if we ever do enter a true deflationary environment and it actually stays that way: fixed annuity payouts would appear nominally low, but if there's long-term deflation they'll be worth a bit more in real terms each year. Of course if you buy a fixed annuity and we have a severe inflation you get crushed; and if you negotiate some sort of fixed long-term pay contract with your employer then you're also locked in for better or for worse. See the "Scottie Pippen problem" where he really wanted a long term fixed deal, but then the economics of basketball massively expanded in the following years, making him into one of the lowest-paid players of his caliber. There are trade-offs and risks all over the place here.]

330ff Note the following charts listing the winners and losers in deflation; the essential idea here is that savers and lenders do well in deflation, but during an inflation the opposite happens; you have to look for scarce assets in a heavy inflation, and perhaps even speculate or borrow to obtain those scarce assets.

Losers in deflation will likely be winners in inflation...

...and vice versa!

To Read:

Simon Ramo: Extraordinary Tennis for the Ordinary Player