“Technology Has Changed The Game”: Why The Rise Of Robots Will Be A Permanent Deflationary Force

Back in 2015, BofA put together a simple equation trying to explain the pervasive deflationary wave around the globe when it said that “Deflation = Debt plus Disruption plus Demographics.”

In his overnight take on recent events, Bloomberg macro commentator Mark Cudmore took another look at this underlying assumption, and specifically the “disruption” part, or the role played by technology, and machines, both of which are reducing the need for labor (and implicitly pressuring the global labor force growth), and concluded that “while those with specialized skills can continue to earn more in a wealthier world, the rise of robots provides a significant disinflationary force on the median wage globally. This effect will be most extreme in developed economies where labor costs are already elevated. (And as an aside, is the reason why increasing inequality and populism isn’t going away any time soon).”

Adding demographics into the mix, Cudmore notes that “the growth rate of the global population continues to slow, further relaxing consumer demand pressures over the long-term. All this means that, excluding isolated and idiosyncratic flare-ups, consumer prices won’t ramp higher in real terms” even and as “a lack of CPI growth doesn’t prevent financial-asset inflation.”

However, the implication is that “bond curves should remain flatter than we are used to, equity valuations will look distorted relative to history due to a sustainable paradigm shift in discount rates, and many financial operations will have to adjust their whole business model.”

His full Macro View note below:

Macro View:

Rise of the Machines Keeps World Inflation In Check:

There’s little risk of global consumer price inflation running away to the topside, even as financial asset inflation persists. While the 30-year bull market in global bonds may have ended, there’s little chance of a severe bear market any time soon, if ever.

There won’t be a sustainable large increase in yields for as long as inflation-targeting is the primary goal of monetary policy. Global convergence of risk premiums will also be a long-term, if slow-moving, theme.

The acceleration in inflation has been almost parabolic since the global deflation scare of 2015. However, it’s important to consider the move in context of the low starting base and realize the average rate in major economies still isn’t high.

Technology provides a powerful disinflationary force on both wages and commodity prices, which are arguably the two key fundamental inputs to long-term consumer inflation levels.

The detection, extraction, production and distribution of commodities are becoming cheaper and more efficient all the time. That’s exerting a strong downward pull on prices over the long term, meaning demand-driven spikes will be short- lived.

Similarly, technology is reducing the need for labor. While those with specialized skills can continue to earn more in a wealthier world, the rise of robots provides a significant disinflationary force on the median wage globally. This effect will be most extreme in developed economies where labor costs are already elevated. (And as an aside, is the reason why increasing inequality and populism isn’t going away any time soon).

It’s also worth noting that the growth rate of the global population continues to slow, further relaxing consumer demand pressures over the long-term.

All this means that, excluding isolated and idiosyncratic flare-ups, consumer prices won’t ramp higher in real terms.

However, as has been perfectly clear in recent decades, a lack of CPI growth doesn’t prevent financial-asset inflation.

And, in fact, it makes sense for this divergence to widen while global wealth increases but interest rates stay contained and liquidity remains abundant.

The knock-on effects of this are profound: bond curves should remain flatter than we are used to, equity valuations will look distorted relative to history due to a sustainable paradigm shift in discount rates, and many financial operations will have to adjust their whole business model.

Something to think about next time you want to fight current financial valuations purely on the basis that they look historically anomalous. Technology has changed the game.