Monday, 04 April 2011 09:19

Inflation Is When The Price of The Most Valuable Things (Such As Your House or Small Business) Drop Precipitously During High Unemployment, Right???!!!

The definition of "Inflation" is when the "value" and "price" of some of the most widely held and most used assets fall dramatically in price... NOT!!! Well then, why are all the financial rags, blogging pundits and mainstream media outlets crowing about inflation? Mr. and Mrs. Editor, stand up and stick that "S" on your chest. That's right, not Superman, but "Stagflaton Man".

In continuation of my rant from last week () and my preparation as keynote in the sold out ING conference on real estate valuation, I present to you the broke back moniker of what many would have you believe is a byproduct of rapid economic growth.

[iframe http://bcove.me/gai3xors 540 500]

We also have the WSJ reporting Euro-Zone Inflation Hits 29-Month High

The euro zone's inflation rate jumped unexpectedly to its highest level for 29 months in March, strengthening the case for the European Central Bank to raise interest rates.

To add to the above: South African Producer-Price Inflation Accelerates by More Than Expected. This is not about inflation. Input prices are increasing amongst a general global economic stagnation. What have hear dear friends is the creature called STAGFLATION! I warned of this two years ago, and in detail. Everyone was having the inflation-deflation debate, totally ignoring the very distinct - no, actually likely scenario of the worst of both worlds.

Reference All Throughout Last Year and During the Inflation/Deflation Camp Debates, I Warned of the Risks of Stagflation. Did I Have a Point? Let’s Look at the Numbers Behind the Numbers… Monday, July 26th, 2010:

Let’s make this quick and clean. Enter the first leg of the formula from the archived BoomBustBlog post referenced above…

Wages Fail to Keep Pace with Inflation: WSJ

  • Median weekly earnings rose 0.8% in the 2nd Quarter this year, against 1.8% CPI growth in the same period
  • Excess supply in the labor market has kept wage inflation low
  • On a year over year basis, wage growth based on occupation has been barely positive, or in some cases wages are showing deflationary pressures

Which leads to a hint of the Stagflationary conclusion…

Five months ago, I queried, ““, and went in depth to answer my own question after CNBC reported “Jobless Claims, Inflation Jump as Economy Wobbles

Both the number of workers filing new applications for unemployment insurance and producer prices unexpectedly surged, dealing a setback to hopes the economy was showing a strong recovery.

Have you noticed that nothing else much has changed in those five months or so?

But first we have to reinforce the (absence of) labor component of the thesis, ex. unemployment…

See All Throughout Last Year and During the Inflation/Deflation Camp Debates, I Warned of the Risks of Stagflation. Did I Have a Point? Let’s Look at the Numbers Behind the Numbers for the balance of the article.

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Commodities have always made a good inflation hedge because inflation indicates and overheated demand component in a rapidly expanding economic growth cycle - hence the consequential demand for things drives prices up. Think about the booming economy, bubble housing and the demand for concrete, copper, timber and tin - all of  which have made excellent inflation hedges. During stagflation,  those things reliant on economic growth, ex. housing, CRE, commodities depress in demand along with demand in general - thus blunting their historical correlation and hedging capabilities in relation to inflation. Add in the atrocious supply/demand imbalance in most residential and commercial real estate sectors, and you have what could amount to the antithesis of a price inflation hedge.

My graphic below shows how real estate and commodities have been among the best inflation hedges.

image003_copy.png

Don't look for this to necessarily be the case this time around. Is it because it's different this time? No! It's because this time around its not inflation, it's....

Don't be believe everything you read in the media (unless  its BoomBustBlog, of course :-).

Here's one area where Jim Rogers has proven to be overtly accurate, and more than once. Food. People will eat, and they will eat in inflationary, deflationary, and stagflationary times. Reduce supply, which is something that has recently and still is occurring, and you implicitly increase the proportionate demand portion of the equilibrium. It is not possible to rapidly increase food supply either. If I have the time, I will delve into this further. I also have several other installments on the stagflation topic, and how it can relate to the coming continuation of the global real estate crash. Stay tuned.

Last modified on Monday, 04 April 2011 09:19

4 comments

  • Comment Link Frank Shoemaker Tuesday, 05 April 2011 17:13 posted by Frank Shoemaker

    Where do you get the money paid out to unemployment? The last numbers I saw quoted were for Nov of 2007 and Nov of 2010. Those corresponded to an unemployment rate of over 17%

    We need wages to go up a by a big step and with the macro pix the way it is the only way I see it doing that is with a big bump in the minimum wage.

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  • Comment Link Reggie Middleton Tuesday, 05 April 2011 11:12 posted by Reggie Middleton

    As rates increase, NYC RRE should decrease accordingly unless wages and consequently NOI/rents increase dramatically. This is doubtful in the short term. Reality is just starting to settle in, that's all.

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  • Comment Link Wendy Tuesday, 05 April 2011 10:40 posted by Wendy

    Reggie, you recently (maybe as of YE2010?) noted how condos were down in all markets but NYC. Well NYC is down in the Q1-2011:
    http://www.reuters.com/article/2011/04/01/us-realestate-manhattan-idUSTRE73052Y20110401
    prices are nowhere near reasonable/affordable yet, but perhaps this is the beginning of the price decline that has been delayed for NYC. can't wait to hear your thoughts as they continue to develop, especially for NYC residential RE.

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  • Comment Link apeakunderthehood Monday, 04 April 2011 22:47 posted by apeakunderthehood

    http://apeakunderthehood.blogspot.com/2011/04/politics-vs-wall-street-consumers-this.html

    a laugh for the day

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