Necessities, Desires, Commoditization and Obsolescence

The chart above showed up in our media threads and research pieces earlier this quarter. We discussed it internally and thought that perhaps it was worthy of a blog post. It recently reappeared at an industry conference and this blog’s fate was sealed. We think the perspective offered below is slightly askew and perhaps why you enjoy reading our EPIQ missives. Thank you for taking the time.

Does anybody watch TV anymore?

Yes, we all have screens with the ability to stream just about anything, anywhere we want, but the need for a traditional television has become obsolete. Waning demand combined with the reduction in labor and manufacturing expense has led to a substantial 20-year decline in the costs of televisions. In a word, obsolescence. Any product or service that can be produced inexpensively and needed by fewer people is a poor place to deploy capital.

Although cellphone service and software have become more affordable, it is amazing how exponentially more powerful and critical to daily life they have become. The productivity of a first-generation cellular phone cannot be compared to the magic provided by the device one carries today. The fact that affordability has improved is a function of technological advancements and the ability to deliver a huge quantity of data over the air from tower to device.

Mobility, Clothing and Stuff

Items with virtually no inflation over the last two decades, we classify as having become commoditized. As displayed in the image above, the automobiles that get us from point A to point B, the clothes on our backs and the stuff in our homes have been commoditized. Many of these items have also experienced a reduced cost of production and perhaps less of a cultural demand, but we still need them. We are just not willing to pay for more and industry has been able to hold prices level. Excluded from this category would be luxury autos, clothing, and household furnishings.

Of importance, on a relative basis, zero inflation amounts to significant savings over time. And while mobility will remain central to many economies, we do not expect upward price pressures on the automobile as ride sharing and autonomous vehicles continue to penetrate transportation systems. In addition, the trajectory of virtual and augmented reality technologies should reduce the need for physical mobility solutions.

So, where is the inflation?

We find it in food and shelter. These are the basics, the necessities. Over time, housing and sustenance (food and beverage) should be in line with long-term inflation. Using simple math (55.6%/20 years) we get annual inflation of 2.78% which should be a minimum investment return expectation if you would like to maintain your purchasing power over the years.

As you can see from the chart, these necessities are only slightly below the price change of wages since 1997. Bottom line is that it has been difficult to make any significant progress over the last 20 years as a wage earner, especially if you were in a position to spend on items that fall into categories we define as desires – health and education.

Health and Education

The items we cherish above all else are the health and education of ourselves and those close to us. The inflation metrics display that dramatically. An annual inflation rate of near 10% is difficult to maintain and yet college tuition and hospital services have managed to come close to that level over the last twenty years. We want the best and we are willing to pay for it.

Will it continue? In our opinion, yes, but not at the same trajectory. We expect technology disruptors and demand shifts to impact prices (Big 3 Team Up to Disrupt Health Care), but human desires for self-improvement and wellness will not wane.

The investment theme is to seek opportunities that will not become obsolete or commoditized and possess the ability to pass through price increases to customers. We suggest prioritizing the things that are important and saving accordingly. And whenever possible, investing in oneself.

EPIQ Partners

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