Moelis & Co. chief executive Ken Moelis was on CNBC’s Closing Bell on Thursday, and brought up one of his favourite topics: technological deflation.
The idea here is that technological advancements help drive prices down, whether it’s through lowering the cost of production (think manufacturing), accessing new resources (think shale) or increasing price transparency (think Amazon).
That then leads to below-target inflation, or deflation. That then impacts central bank policy, as monetary policy is at least partly based on an old world view of inflation.
It is a really big picture idea, but it’s gaining traction with people on Wall Street. We’ve heard a number of people bring it up now.
Here is what Ken Moelis had to say [emphasis ours]:
I actually think we’re in a deflationary world. But a deflationary world that should not scare people. The fact is if you polled most American people and you said ‘Do you want to buy more for less?’ I think 99.9% of the people would go, ‘Yeah, that’s what I want.’ And that is what deflation is.
They don’t want to make less, but deflation is being able to purchase more for less. And there’s only a small amount of people that seemed concerned about this and it seems to be the central bankers of the world.
I think in our world right now, you have so much technology driving price transparency, pricing power, efficiency. These are great things. I mean, what Amazon is doing – if you are a retailer, look, you better take your profit down and give the consumer an awfully good deal of Amazon is going to replace you.
This is what people ask me. What sectors are hot, and I say, you know the interesting part in M&A it’s every sector because it’s not a sector – there’s not a sector theme to this. There is a deflation theme. Everbody has to look for cost synergies. Everybody has to take every cost out of their income statement they can possibly find. And that’s why you’re seeing large-scale mergers, trying to take out corporate overhead, bring down the cost of goods sold, this is all what’s going on.
I think this is a long term trend, this is not a cycle. We don’t have a lower oil because of a new oil field that was discovered in Saudi Arabia. We have lower oil because of a new technology. And by the way, there’s probably a better technology that will come a year from now now. Technology doesn’t seem to cycle. It seems to accelerate. So if we are in a technologically driven deflationary market, I think you will see it last longer than people think. And that’s why I think you will see rates stay low for a long period of time.
The attack of technology and regulatory environment really on every asset you have is going to surprise people how quickly their assets become obsolete. So I think you have to be careful as to how you finance your companies right now.