The Moon Landing & Your Money

For all but the skeptics, Saturday marks the 50th anniversary of the Moon Landing. For those of you ready to read something a little different than my onslaught of factor tilt articles, this piece is going to use the Moon Landing to illustrate how dramatic technological revelations may be skewing inflation and economic growth readings important to valuing securities.

Before we go back to the summer of 1969, let's go to Providence, Rhode Island in May of 2015. There then-Fed Chair Janet Yellen delivered an innocuous speech to the Chamber of Commerce. In that speech she stated: “The Federal Reserve's objectives of maximum employment and price stability do not, by themselves, ensure a strong pace of economic growth or an improvement in living standards. The most important factor determining living standards is productivity growth".

At its basest definition, the productivity growth that Yellen keyed as important to rising living standards is the change in inflation-adjusted output per labor hour over time. When we talk about productivity in terms of inflation-adjusted, or "real", output per labor hour, it is easy to measure hours worked in an economy, but trickier to measure output and inflation.

That brings us back to that Apollo mission to the moon. There is a common anecdote that your smartphone has more computing power than Apollo 11, which took 3 men to the moon. Your iPhone actually has thousands of times more processing power than the computer used to land that rocket. Fifty years ago the computing power used to handle the complex calculations that successfully completed that mission was wildly expensive. By the end of the 1960s, the U.S. was spending nearly 5% of GDP (a figure close to $1 trillion in today's dollars) on the space program. Think of that in terms of the deflationary impact of the price of computing power. The magnitude is astounding, and highlights how very difficult it is to quality-adjust prices as our consumption basket evolves.

In the inflation metric, price deflators used to convert measurements of nominal output to real output reflect both easy-to-calculate price changes as well as difficult-to-estimate changes in the quality of the good or service. For rapidly evolving technology, we often see prices fall as quality improves - that is very deflationary. As the Technology (XLK) sector has become a more dominant part of our economy, this may be exacerbating problems with estimating inflation.

The five most valuable companies in the United States are Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB). While these companies are extraordinarily valuable, internet search, e-mail, digital content, digital applications, and social networking are free to consumers. Think about the declining price of cloud computing and digital storage in terms of inflation. As these companies have come to dominate industry, do we really feel that their impact is being properly measured in economic growth? Internet search makes you more productive, but did GDP figures capture that fact?

One of the mysteries of this record economic expansion, is that wage growth has been stubbornly slow. Wage growth is inextricably tied to productivity growth, which Yellen deemed the most important factor to rising living standards. Economists have offered a myriad of explanations for why wage growth is sluggish. They include, but are not limited to:

We have all seen the stories that state that for most Americans real income wage gains have not changed for decades. Even if purchasing power is unchanged for these households, I do not know many people willing to change their consumption basket today for their consumption basket decades ago. People are not trading in their smart phones for rotary phones, or broadband for dial-up. Buzz Aldrin would not trade today's healthcare for 1960's healthcare even at inflation-adjusted prices. If inaccurate quality adjustments are leading to an understatement of real output, then real economic growth has been higher than current figures suggest. Could it be that rapid quality improvements have led to overstated inflation and understated improvement in living standards? Stagnating median wages has bolstered populist candidates here and abroad. As you marvel at the audacity of that moon mission 50 years ago, I hope this is interesting food for thought over the weekend.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore, inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Seekingalpha.com

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