We Are In The Throes of A Deflationary Downward Spiral

[Yavin4]

which means that the value of assets will decline over time. The only assets that will maintain or increase their value will be those assets that generate income, bonds, dividend paying stocks, rental properties. All other assets, in particular housing, will decline in value to their original purchased price.

The root cause of this deflation has been two-fold:

(1) The globalization scam, which is nothing more then currency gamesmanship, bifurcated national economies into disconnected producer/consumer nations. When the consumption nations curtail consumption then the whole facade comes tumbling down.

(2) Extremely narrow-minded, anti-government forces in our economy with most of the blame going to state and local governments who've been cutting spending and services the most. The one thing that could blount this deflationary cycle is more spending by government, esp. on the state and local level.

[Donnachaidh]

1. rental properties?

uh, yeah. right... :rofl:

[Yavin4]

3. "Vulture investors move from flippers to landlords in down market"

Vulture investors are feasting on the depressed U.S. housing market. Deflating home prices, rock-bottom mortgage rates and a rental market surging with people who have lost their homes are attracting swarms of vulture investors who are after distressed properties. But in this weak U.S. economy, their strategy is changing. In boom times, vulture investors were home flippers looking for quick cash. In these troubled times, they are landlords raking in hefty, steady incomes.




http://personalmoneystore.com/moneyblog/2010/08/05/vulture-investors/

[Submariner]

2. Reaganomics (Voodoo economics) + Bushonomics = F'ing Disaster

But let's name another ship, bridge, or statue to these corporate controlled assholes.

from Bartcop

[Skidmore]

4. I don't even know what that jargon means any more.

In plain language, a bunch of rich bastards found ways to steal the middle-class and poor blind and then refuse to provide employment as a means extorting lower taxes rates so they can continue to steal us blind. To hell with the fancy labels and contorted reasoning. Reinstate usery rates.

[Yavin4]

6. In Plain English, They Destroyed The Labor Market

Until the 1980s, labor was able to bargain for wages collectively. Since moving away from unions and with national policy leaders buying into the globalization scam, labor is completely powerless to have any effect on wages.

Without rising wages, there is no inflation. In fact, there's deflation which means that the prices of assets (think housing) fall since housing prices are related to income.

[Skidmore]

19. I would think it would be good for housing prices to come down.

There are locations where even the most average of accommodations are out of the reach of a lot of people.

[MilesColtrane]

5. We haven't had any deflation since October of last year.

Inflation rate for the past 12 months: .992%

Inflation rate since Dec. 31, 2009: 2.065%

Wilshire 5000 index (total stock market index) 12 months return rate: 15.11%

Wilshire 5000 index since Dec. 31, 2009: .65%

We haven't had any deflation since October of last year.

http://inflationdata.com/inflation/inflation_rate/CurrentInflation.asp

True the economy is being to drag again compared to the past 8 months, but we are hardly in a deflationary spiral.

[Yavin4]

7. Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1
percent in June on a seasonally adjusted basis, the U.S. Bureau of
Labor Statistics reported today.Over the last 12 months, the index
increased 1.1 percent before seasonal adjustment.

Similarly to April and May, a decline in the energy index caused the
seasonally adjusted all items decrease in June. The index for energy
decreased 2.9 percent in June, the same decline as in May, with a
decline in the gasoline index accounting for most of the decrease.
This more than offset an increase in the index for all items less
food and energy, while the food index was unchanged for the second
month in a row.

http://www.bls.gov/news.release/cpi.nr0.htm

The real telltale sign is the Fed's move. They're keeping rates at 0% because they know we are in a deflationary downward spiral.

[Statistical]

8. In deflation rental prices decline also.

Deflation is an equal opportunity killer. Declining house prices means no entrants in the market can undercut existing rental owners and you will see a slow decline in rents. Dividend paying stocks see selling prices and thus margins decline. Eventually the board needs to cut the dividend to hoard cash.

Deflation kills wealth. Only thing protected in deflation environment is cash and bonds. Bonds obviously subject to default risk. Bonds will rise in price (good for those who get in early) but rising prices on bonds means yields are crushed. Internest rates of cash hover at around 0%. So these two asset classes don't lose money but they don't make much either.

[Yavin4]

9. Rents Will Remain Constant or Slightly Rise As People Need To Live Somewhere

Also, keep in mind that you can buy housing for pennies on the dollar. Think $20K or $30K in AZ or Nev. One or two years of rent, and it's pure profits after that.

Income bearing stocks will hold or increase in value as Baby Boomers retire. They will need every penny they can muster in retirement. Say goodbye to growth stocks and hello to dividend yielding stocks.

"Eventually the board needs to cut the dividend to hoard cash." You have it backwards, corporations are hoarding cash so as to start paying dividends in order to keep the value of the stock high. The Dow is off 28% or so off its high from three years ago.

"Deflation kills wealth." Deflation kills non-incoming producing assets. People will be starved for any income.

[Statistical]

10. Sorry you claims are false.

In deflation assets & prices decline.

Rent:
Say you buy a house today for $200,000 and you rent it for $1,200 a month. 5 years of deflation the house (or similar property) is worth $120,000. Now you claim rent will stay high because people need somewhere to live. That is a strawman. Of course people need somewhere to live but you ignore two factors trading down and new landlords. Some people will trade down. Wages will crash in a deflationary cycle so people will have no choice. They simply will trade down or they will get evicted. Also it isn't like all property is fixed and never sold. 5 years into a deflationary cycle I could buy a house similar to yours for $120,000. I can then rent it for more profit than you are making and only charge $1,000 a month. That action on a macro-economic level will cause rental rates to decline (just like they rise in an inflationary cycle).

Dividend paying stocks:
Dividend paying stocks are only paying dividends because they have stable cashflow from sales. As deflation grips the country prices on goods & services decline. Companies will respond by cutting wages & labor, downsizing, and using cheaper materials but inevitably margins will be squeezed. Companies facing uncertainty combined with falling margins will cut dividends. Falling dividends will put downward pressure on stock prices (which are priced at a multiple of earnings & yield both of which are declining).

There is no historical evidence that either rents or dividends remain stable in deflationary environment.

Bonds are a fixed promise. They rate is set in advance thus it can't be changed (except by default) hence bonds will continue to pay interest and that means they remain protected in deflation. The downside is many corporate bonds will default because deflation is very hard on balance sheets of companies. The other issue is increased demand will drive yields down (bad for slow reacting investors). The exception is callable bonds. Callable bonds provide no protection because they will be called. Companies can simply re-issue debt at the new lower rates.

[Yavin4]

11. Wait. Stop.

First, I never said that assets don't decline. I said just the opposite. I said that non-income bearing assets decline.

Second, you said, "Say you buy a house today for $200,000..." Whoa, hold on there. Who would pay $200K for a house in this market. Have you been to Vegas? Have you been to AZ? With all of these state layoffs, you can buy a house fo $15K or $20K. $200K?!?! That's ridiculous.

Third, you said, "Dividend paying stocks are only paying dividends because they have stable cashflow from sales." Yes, but they also have positive cashflows from cost savings from operations. Less workers, more technology. More outsourcing mean stronger positive cash flow.

Look, not all companies are going to be able to pay dividends. Most won't, and their stock price will be hammered because of it. Some will try, and fail. Like all businesses do. The stronger ones will be able to pay a dividend.

"Bonds are a fixed promise. They rate is set in advance thus it can't be changed (except by default) hence bonds will continue to pay interest and that means they remain protected in deflation. The downside is many corporate bonds will default because deflation is very hard on balance sheets of companies."

In any type of economy, inflation, deflation, steady state, some corporations are going to fare better than others. One still has to do homework. There are corporations that can and will do well in a deflating economy. For instance, McDonald's, Johnson & Johnson, Western Union, Procter & Gamble, Exxon Mobile, these are stable companies that will still do well in a downturn. Older established, well managed corporations.

[Statistical]

13. The amount of the house doesn't matter just the fact that it will decline in face of deflation.

If you buy a house today for $50K and rent it after 5 years of deflation your competitor can buy an equivelent one for $40K and rent it 20% cheaper.

If you buy a house today for $30K and rent it after 5 years of deflation your competitor can buy an equivalent one for $28K and rent it for 20% cheaper.

If you buy a house today for $100K and rent it after 5 years of deflation your competitor can buy an equivalent one for $80K and rent it for 20% cheaper.

I figured you could extrapolate the analogy to all market prices. Need me to provide you another 100,000 examples of all houses between $10,000 and $500,000?

The idea that rents rise or even remain steady in deflation is false. Rent is simply the price of a service (a residence provided by landlord). Deflation is characterized as persist fall in prices for goods and services. That includes rent.

Deflation is the mirror opposite of inflation.

Bond prices are crushed and yields rally in high inflation. Bond prices rise and yields are crushed in high deflation.
Wages, prices, and asset values rise in high inflation. Wages, prices, and asset values fall in high deflation.
Rent prices rise in high inflation environment ...... What makes you think they also rise in deflation environment?

None of the companies you listed will do well in a deflationary environment either. Take Exxon for example the largest correlated indicator to price of XOM is the current spot price of oil as well as the slope of future contracts. Both will fall rapidly in deflationary environment. Why would XOM stock price rise when the price it sells oil at falls (and thus its profit margin falls)? Simple answer it won't.

There is no economic theory of historical evidence that either rents or dividend paying stocks do well in a deflation.

[Yavin4]

15. Buy One House At $50K Rent It for 4 Years At $1000K A month

Leaves you with $48K to buy another house. How many other people are going to be able to afford the $40K house in 5 five years in a declining assets and wages market? Only the people with income bearing assets will be able to have the money to buy additional income bearing assets.

"What makes you think they also rise in deflation environment?"

Because people have to live somewhere. Unless we're going to have tent cities, people will have to live somewhere.

"There is no economic theory of historical evidence that either rents or dividend paying stocks do well in a deflation."

I didn't say that dividend paying stocks will do well. I said that the well-managed ones will.

[Statistical]

16. Strawman upon strawman.

Your trying to carve out a special island of deflation wonderland.

In deflation EVERYTHING declines

Wages, prices, raw material, contracts, industrial expansion, PROPERTY and yes rent & stock prices.

[Yavin4]

18. Deja Vu All Over Again

Seven years ago, I argued with many DUers here about the credit bubble, and many of them dismissed me as well. Fortunately, I followed my own advice and paid off my debts. As a result, I weathered the recent downturn quite nicely.

I won't argue with you about deflation. I will follow my path, and you should follow yours. The one thing that I learned about myself in the last 10 years is that I can analyze things pretty well.

Enjoy.

[Yavin4]

12. Almost Forgot: Investor Sentiment Is Changing Dramatically

As Baby Boomers start to retire, they will switch from investing for retirement to investing to pay for retirement. Thus, they will be in the market for income bearing assets which will drive up their value, and force other corporations to offer dividends as well.

[Statistical]

14. Which has nothing to do with deflation.

or your claim that rents will magically withstand deflation effect because "people need somewhere to live".

[Yavin4]

17. Where Are People Going To Live?

Marchiol projects apartments will rent for $600 a month each, for a total rent roll of $2,400. That gives the owners a profit of $1,100 per month and $13,200 per year — a nearly 70% annual return on investment

...

There are several factors presently occurring in this country’s real estate market that back up this long-term, renting strategy:

1. Home prices aren’t rising: The golden ticket in the hand of house flippers during the boom was ever-rising home prices. It was all buy cheap sell high. Today, that would translate to, buy cheap, and sell not as cheap.

2. New wave of renters: Foreclosed borrowers have to wait years before they can buy again. In markets like Phoenix where the foreclosure rate is high, former borrowers looking to rent are perfect for investors who just purchased rental properties for pennies on the dollar.

3. Short sales: “The banks make better profits with short sales, so they’re not foreclosing,” Plantone said. Marchiol also mentions the fact that “amateurs” have swooped in on the foreclosure market, causing sale prices to rise. ”Foreclosure auctions are no longer a fertile hunting ground for Marchiol,” writes CNNMoney’s Les Christie.


http://blog.hsh.com/index.php/2010/08/vulture-investors-find-a-new-prey-rentals/