What investors might be missing in the big picture

A one-term Congressman from Illinois runs twice for the Senate, loses and decides to launch a quixotic campaign for president: Lincoln saves the Union.
An unheralded college quarterback gets drafted in the sixth round: Tom Brady wins (at least) three Super Bowls.
A Dutch painter with mental health issues finds no buyers for his work and dies in despair: Van Gogh is now considered one of the greatest artists who ever lived.
We never know when what is going on around us is of true historic importance. Hindsight gives us the chance, over and over again, to slap our collective foreheads and say, “How did we miss that?” As 2014 closed with U.S. equity markets at record highs, might something else have happened that we observed but failed to grasp? Is there anything (aside from not buying Apple stock) we might be missing?
We all know what inflation is. It is a defined concept in economics, but inflation is something that most of us get intuitively. Isn’t it strange, then, that deflation, as an idea and a reality, is something so many people don’t quite get? Try this experiment: Ask someone you know to define deflation and watch what happens. Most times they will start with a definition, stop, regroup, get a funny look on their face and spit out an answer. Based on an unscientific survey I conducted, many people define deflation as decelerating inflation, prices going up more slowly, rather than the true definition of declining prices.
(More: Global markets offer opportunities, but central bankers hold the key: El-Erian)
When we have only a fuzzy understanding of something, we tend to seek other explanations. Behavioral economists probably have a fancy term for this phenomenon.
OIL AND RATES
Let’s look at two familiar barometers that are talked about constantly: oil and interest rates. The price of oil declined in 2014 at a precipitous rate. Reasons given: “OPEC mumble mumble Shale gas mumble mumble China mumble mumble.” Anyone using the D word? Nope. Interest rates, in the U.S and everywhere in the world except Russia, declined during a year when everyone (everyone!) said they were going up. Reasons given: (How do you type dead silence?)
We see confirmation of things we expect more readily than of something we don’t understand or believe. Millions of planes land without incident, then one crash makes some fear flying. Thus, we will complain about higher property taxes but fail to acknowledge lower gas prices or mortgage rates, cheaper travel or less-pricey consumer electronics.
We should not be too hard on ourselves for not understanding, not worrying about or (maybe) not seeing deflation when it could be staring us in the face. Anyone in the U.S. who remembers the 1970s knows inflation is a scourge that eats away at investments, savings and plans for the future. In Germany, the echoes and ghosts of hyperinflation loom large almost 100 years later. Surely industrial economies are doing the right thing by their vigilant stands on the anti-inflation ramparts?
(More: With no inflation and oil falling, gold loses appeal for investors)
Or are they? What about Japan? The Japanese economy has endured years and years of deflation and is still not back to the levels of economic strength it enjoyed before the start of the deflationary spiral. Was there a sign or opportunity it missed that could have kept it from the lost decades? That could keep us from the same fate? No one knows, but chances are there is some head slapping ahead for all of us.
David F. Sand is chief investment strategist at Community Capital Management.