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Inflation or Deflation?

The question of whether we are headed into an inflationary or deflationary environment is probably one of the most important, complex and difficult questions to answer right now. For investors, getting this call right or at least thinking about the potential possibilities is absolutely crucial.

As Dan discussed last week, we too think inflation is a likely long term outcome but you should also be wary about the very real possibility of a nasty deflationary episode beforehand.

In a deflation, cash is king and your investment strategy should be one of focussing on valuation and margin of safety. In an inflationary environment, valuation is still important but opportunities for the disciplined value investor will be much harder to come by, as speculation becomes the dominant theme.

So where are we? Ahhh…if only it were that easy.

Before we try to answer the question, we need to establish the framework for our thinking. To keep things simple, we’ll keep our focus on the US, which as manager of the world’s reserve currency is THE economy to focus on.

Now, a definition – inflation or deflation refers to an expansion or contraction of money and credit. Some analysts have focused exclusively on the money supply or the monetary reserves injected into the banking system by the Fed and made the claim that this is inflationary.

This is because in a fractional reserve banking system, the monetary reserves created by the central bank are lent out many times over by the banking system. This is how banks ‘create credit’.

But an increase in money does not always lead to an increase in credit, which is what is happening now. So when attempting to answer the question of inflation or deflation you need to take into account money supply AND credit.

The other point to note in this debate is that we’ll focus on the two areas that concern us as investors – inflation or deflation in asset prices and in consumer prices. Movements in money supply and credit impact on both, but to varying degrees.

Firstly, let’s talk about asset prices.

An historic credit expansion from 2001-2007, which was predominantly an expansion of private sector credit driven by the banks, resulted in sharply rising asset prices. Greenspan’s ultra low interest rate policy was the driving force here. Capital-intensive assets, namely property and also commodities, benefitted most from the credit expansion.

But it was more than just that. As the credit expansion made its way through the economy it resulted in higher household incomes, company profits (and therefore share prices) and government tax receipts, giving the illusion of widespread prosperity.

Then the credit expansion stopped, causing a collapse in the asset prices that most benefitted from the boom and a general fall in nearly all other asset prices.

Because the underlying banking system that provided the credit was capitalised largely by residential and commercial property, the collapse morphed into a credit crisis. Banks were widely viewed as insolvent and under these conditions no one was willing to extend credit to anyone.

Because the credit expansion was allowed to run unchecked for so long (and keep in mind the 2001-07 run-up was part of a much larger secular expansion of credit which had been running for decades) the bust was particularly nasty.

Money supply and credit were contracting simultaneously as banks wrote off their assets and the household sector decided it did not need to take on any more debt. So from roughly late 2007 until early 2009 we experienced an acute deflationary asset price shock.

But then the government and Fed stepped in to halt the deflation and credit contraction. The Fed expanded its balance sheet massively and the government ran an equally massive fiscal deficit. This stabilised the credit contraction.

It is important to realise that the unprecedented intervention has not caused credit to begin expanding again. The monetary base has soared but an excess of debt and a dysfunctional banking system is not turning this into credit growth – and nor will it. Government and central bank actions have merely stabilised the massive deflationary force of a burst credit bubble.

The recently released Fed Flow of Funds Report shows Total Credit Market Debt Outstanding at $52.4 trillion. It has declined marginally for the past three quarters and is pretty much flat year-on-year. Federal Government credit expansion has offset the small decline in Household Sector credit and large decline in Financial Sector credit.

Yet this total credit market stabilisation has resulted in widespread asset price inflation.

How can this be?

Our best guess is that much of it has to do with sentiment, or ‘animal spirits’, as well suspension of the rules regarding marking bank assets to market. The second point is related to the first. (Co-ordinated global stimulus and unprecedented credit expansion in China are also no doubt playing a major role).

As we mentioned banks’ asset bases are underpinned by property. Marking these assets to market would render the whole banking system insolvent, which is hugely deflationary. Obviously the authorities do not want this to happen so mark-to-market accounting has been suspended and the Fed has purchased $1 trillion worth of dud mortgage debt.

The plan is for banks to trade their way back to solvency. But because the private sector doesn’t want to borrow, banks instead try to make their money from speculating in asset markets (proprietary trading) and lending to the government, thus earning easy money on the interest rate ‘spread’.

This has given money managers and private investors the green light to head back into the market. As a result equity and corporate debt markets in particular have rebounded spectacularly over the past 12 months.

But in order for asset inflation to persist from here, total credit outstanding must grow again. Federal stimulus is set to fall later this year and the Fed is due to end its quantitative easing program this month. The expectation is that the private sector will pick up the slack again but we doubt that will happen. As Japan proved following the bursting of its credit bubble in the late 1980s, deleveraging is a long term trend.

So if the artificial support of the government and the Fed begins to diminish, we expect deflationary forces to re-assert themselves. The risk to this outlook is that the authorities actually have no intention of removing stimulus. We will soon find out.

Should some form of exit strategy unfold, does this mean markets fall to new lows? While any decline could be significant, we do not think this is a likely scenario. Governments have proved they are always ready to ‘do something’ and any significant equity market fall would be met with more government credit creation.

So by our reckoning, the next phase for asset markets will be deflationary. Your current investment strategy should therefore be focussed on fundamental value and in the absence of these opportunities – cash.

But the automatic government response to such an environment will be to print and spend. As Ludwig Von Mises wrote in Human Action many years ago:

All governments are firmly committed to the policy of low interest rates, credit expansion, and inflation. When the unavoidable aftermath of these short-term policies appears, they know only of one remedy – to go on inflationary ventures.

You can guarantee the people who did not see it coming will blame the renewed deflationary forces on that fact that the prior stimulus was not big enough. They will advocate even larger spending programs. The next round of stimulus will be larger fiscal deficits and more money printing. Such a policy is inflationary, first in asset prices (as we have seen in the past 12 months) but ultimately it will manifest in consumer price inflation.

How quickly this inflation comes about depends on a few things. If the wider public maintains faith in the purchasing power of the dollar, the increase in dollars will probably be matched by an increase in demand for dollars and dollar denominated assets. In this case inflation will take quite a few years to manifest because of the considerable unemployment and spare capacity in the economy.

We reckon the global economy is in this position now. It explains why bond markets are rallying or at least holding up in the face of massive government bond issuance.

But, if the public begin to question to value of the dollar then demand will decline (as the same time as its supply rises) and the demand for real assets or goods or whatever will take off. This is the ‘crack-up boom’ that Mises talked about, the exchange of paper money for goods at any price. The end result is the destruction of the monetary system.

We think we are some years away from Mises’ end game. And if governments make some hard decisions in the years ahead, it can be avoided. But is there another Volcker out there to replace Bernanke? Let’s hope so.

Bringing all this together, our best guess is we get deflation then inflation of asset prices, followed by a general rise in consumer price inflation, the severity of which depends on how quickly the populace loses faith in government fiat currency. We’ll be watching the bond market closely for clues here.

So what should you do about it? The first thing to recognise is that macro events play out over a number of years. But you still need to be prepared. Because we are cautious about a renewed deflationary downturn we think you should focus strictly on quality companies with cheap fundamental valuations. In the absence of such opportunities (and there are not many) we like cash…and gold.

If we are right in our thinking, the silver lining for investors holding decent cash balances is that there will be some very, very good opportunities down the track. We just have no idea when those opportunities will arise.

And how do you take advantage of these opportunities? We advocate and practice good old-fashioned valuing investing. Forget trading, forget charting and forget other short-term schemes…these are simply methods designed to separate you – slowly – from your money.

Over the decades, all great investors have proven that simply buying good quality companies well below intrinsic value (no matter what the macro environment) leads to healthy outperformance and increasing wealth. But it takes discipline, and that’s were we can help.

Keep in mind the above analysis is simplistic in that it focuses on the US and ignores the major emerging economy of China, which is obviously hugely influential for the Australian economy. We’ll tackle that issue in a future report.

But the US is still at the centre of the global economy. Like it or not, the manager of the world’s reserve currency has a huge influence on the economic fate of the rest of the world.

Greg Canavan
for The Daily Reckoning Australia

Greg Canavan
Greg Canavan is a feature editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Sound Money. Sound Investments, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
Greg Canavan

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32 Comments

  1. Anon says:

    Great article DR.

  2. Don says:

    One of the big differences between private and government debt is that when a heavily indebted company goes insolvent the debts go down with it, punishing those who took a risk lending it to them. Government debt never goes away, unless of course it defaults or significantly inflates its currency. The first scenario is very unpleasant, the second less so unless the inflation rate is a runaway situation.

  3. Joe says:

    Haven’t read this report yet, just the headline.
    I believe inflation not deflation because the global international sovereign debt cannot be repaid at current values and so inflating these away is the secret global political and economic conspiracy of our time.
    I will now read the report to see if Greg thinks the same.

  4. Anon says:

    I agree Joe, excessive inflation is an eventuality. But there are very big time lags between monetary inflation and price inflation.
    The warning signs are most retail investors are preparing for inflation type trades/setups. They maybe right but its a very crowded trade.
    No doubt when deflation/disinflation hits the sheep will move from the inflation camp to deflation and the smart money can move to asset classes benefiting from excess inflation at very attractive prices.

    Above not advice, just banter. See a financial advisor for decisions and the like!

  5. Joe says:

    Having finished the excellent article, It seems my suspicions are not too wide of the mark. I suppose we are already in a deflationary cycle. In the U.K interest paid on consumer cash deposits is less than the quoted (yes I know we should never believe CPI) inflation rate.

    Margins on debt have been increasing as a matter of necessity and urgency on the part of the finance industry, which has instituted the biggest single uniform and universal failure of management the World has ever seen.

    It was always going to collapse. The whole system was always designed to self reward by operating a ponzi scheme of investment vehicles.

    Take pensions in the U.K.
    These are front loaded on charges across the life of the pension.
    So a 40 year investment is paid up within 7 years. The net effect is that the accumulation of value is deminished. I know personally. My UK pension started in 1995 is still not worth the money invested into it! Yet, the provider and the advisor who set it up have had their generous pound of flesh and have (most probably) already retired to the sun.

    The same was true of Endowments in the 80′s and 90′s. When these were invented, it was those early participants that took great returns. As they became ever more popular, the returns these funds could magic became ever less, until all of a sudden the markets were doing exactly the same, but the funds were making losses for their members.

    Sooner or later these wealth destroying social thievery schemes must be rationalised and the charges associated with them socialised. The finance industry has to learn it is not the master, it serves the master. Until then, the economies of the World will continue their gradual decline into collapse.

  6. Dan says:

    Interesting thoughts Joe. The best way I can see to predict the economic future of cities and nations is to decouple money from the real economy, and follow the real economy. Collapse is not the future of every economy by this measure, but only some. People who are still fixated on price instead of value (almost everybody) are, as you say, being ripped off in broad daylight, with their reliance on superannuation or pensions or cash savings or appreciation of asset prices.

    Still, even this method of analysis is flawed because the fake money economy has real (even awesome) power at the moment, backed by sabre rattling crazies who inflict regime change on anyone who doesn’t play ball.

    But nothing looks after you better than people. It’s the best place to invest your time and effort – in people, and the things people will always need. In the short term, the latter is still regular fiat money, but down the track we can see that the stuff that buys stuff is destined for big changes.

  7. prozak says:

    A decent article on DR for a change.

    Except for the last 4 paragraphs which turned into ignorance and advertising.

  8. dr. prechtor says:

    …here at dailyreckoning i reveal prozak to be 17X as critical as average, click on the blue MORE for more…prozak was pleased by 40 paragraphs which he characterizes as decent while expressing exception for 4 paragraphs in 12 words as opposed to the former 8 which when taken as a sentence was 50% the length of the 12…thus…if you would like more interesting data, wip out your credit card and shoot a wad of mulah over to elliot’s…

  9. Biker Pete says:

    Have just reread Canavan’s piece ‘Inflation or Deflation?’ No question that it’s inflation for Australia. Utilities and services rising steadily; most retailers doing record business (DJs for example); construction costs creeping up (6% PA, in our experience); contractors up, around 20%(!); wages growth (particularly in WA); and everyone’s driving the latest vehicles… .

    The exception is electrical and whitegoods (all ex-China)but I put that down to the Ozbuck’s strength. Any other evidence of deflation here? If there is, we certainly can’t see it… .

  10. Pete says:

    Biker Pete my good friend. You don’t know what you are talking about.

    The article is not talking about ‘right now’. I know you live in the ‘right now’ and don’t think things could change tomorrow.

    Of course if Australia continues with boom times and keeps loaning money out to bubble-ville we’ll get inflation…of assets. That is what has happened for a few years now. However it is when loans contract that we will get deflation.

    You are the grasshopper, seeing the Autumn sunshine and thinking “wow, everyone seems to be having a good time! Things must be great!”. Meanwhile the Ant knows that the warm weather won’t be there forever.

  11. prozak says:

    confusion reigns for those who mix talking about price inflation with inflation.

    The definition in this piece is the most accurate one.

    some data:

    http://www.rba.gov.au/statistics/tables/xls/d03hist.xls

    Clearly shows inflation YoY but deflation in broad money (stagnant m3) since June 2009.

  12. Anon says:

    Thanks for the link Prozac.
    lol look at m3 growth from January 2001 to January 2010. 168% rise !
    I wonder why the cost of living went up ;)

  13. nick says:

    Certainly a lot of contradictory information out there.

    I strongly expect inflation, and biker Pets comments are real, as the source of inflation is basically the cost of everything going up (and/or the value of money going down due to increases in supply of money).

    So, there is demand and supply of goods & services, and there is demand and supply of currency.

    For now, if we assume the government is not printing too much currency & devaluing it, we can look at the demand and supply of goods and services as the backbone of any argument of inflation or deflation.

    Demand in Australia is increasing, and even though consumers are maxed out on credit, and houses are super expensive, the corporate sector is pumping money into Australia like there is no tomorrow. Hundreds of billions of mining projects either underway or waiting to start. So, even when the loans contract, and even when the government stimulus ends, the volume of miming investment means demand in Australia will continue to grow. This will bring inflation.

    On a global scale, there is a real risk of deflation in the western world because the sum of all private, public & corporate investment is declining, however, in the developing world, it is increasing. Globally, investment is increasing, so the long term picture is inflation.

    The real risk of developed world reduced spending / investment is deflation, however, if the US government starts printing money to make up teh gap (which it is doing right now) it will lead to devaluation of their currency (that is, inflation). Because USD is the reserve currency, the consequences will be felt everywhere.

    This strongly supports the case for gold investments, even if you live in Australia, because if you have spare cash, stocks and property do not look super safe, also, cash may be risky. The long term is great for Australia, but there will be a major shakedown if the US starts printing lots of dollars.

    In fact, the only thing that will damage Australia’s long term prosperity is a decline in the global population by 3 or more billion people. But for now, it looks like 3 billion people are becoming middle class (China, India, Brazil, Russia), demand is set to explode, inflation will run rampant & Australia will sell trillions of commodities at inflated prices to the rest of the world

  14. Anon says:

    M3 data is not very accurate tho Prozac, it tends to overstate monetary inflation. Unfortunately I cant find any TMS (True Money Supply) figures for Australia.

    US M3 and TMS correlation with CPI to 08:
    http://www.paulvaneeden.com/Sites/paulvaneedencom/Root/Web/Images/page_38/20080530-1.gif

  15. Biker Pete says:

    You’re correct… I’m speaking ‘in the present’. Given our situation, I think your assertion that I’m ‘the grasshopper’ in Aesop’s fable is amusing; but let’s face it, that future Armageddon of which we often speak here is unlikely to be much better for ‘ants’ than it is for grasshoppers, should it ever occur. ;)

    Nick’s description, above, certainly describes WA’s likely future. Our realtor has just set a new record for the number of rentals let. The state’s population is growing rapidly. Long queues in department stores are becoming an issue. My apologies for online optimism… . :)

  16. Biker Pete says:

    Doesn’t look all that good over there, does it Shoes?!~

    “”When people are on a bigger income, they tend to borrow more and tend to have more credit cards, personal loans or a bigger mortgage,” she said.”

    Sounds like ‘credit card stress’ and ‘personal loan stress’, as much as ‘mortgage stress’. Wonder if anyone is keeping data on ‘rental stress’ anywhere in Australia? We’ve never had anyone tell us they’re leaving because our rents are too high, but as interest rates rise we see others’ rents inflating up to 20% higher than we now ask. Smaller houses in less desirable locations… and they’re let almost immediately.

    There certainly is major disparity between east and west at present… .

  17. Ross says:

    It is worth keeping an eye on bank lending into the real economy

    http://www.rba.gov.au/statistics/tables/xls/d05hist.xls

    Note
    1. financial intermediary funding for past 10 years & knock on
    2. flat to negative recent personal lending outside housing
    3. low growth 10 yr non financial commercial & flat to negative recent past

    http://www.rba.gov.au/statistics/tables/xls/d07dhist.xls

    wholesale-retail & mfg trend weak

    And I don’t have a clue what is going with the supposed total bank assets vs total bank liabilities figures (b03hist & b02hist)….

  18. Don says:

    Don’t forget the delightful 60% increase in electricity prices for NSW – coming to a state near you! Will this increase prices? Naaaah!

  19. nick says:

    Australian properties are alarmingly overvalued, they are the most expensive in the world (median house price to median income ratio). the following report is a fantastic analysis with a significant focus on the Australian market
    http://www.demographia.com/dhi.pdf
    Add to that our high & increasing interest rates, making them even more expensive to acquire.

    The question however is sustainability. Will these price to income valuations hold over time, or will they fall or rise.

    My view is that the sheer $ size of the investment by mining companies by far exceeds any potential reduced spending by consumers (because of loan stress & increasing cost of living) and it exceeds the total amount of the government stimulus (hopefully a one off event). This mining investment = spending, so demand in the real economy is going up fast, and if Asian economies continue to thrive you can expect these levels of investment to continue its acceleration (this is already happening).

    Spending up = growth in the real economy, so my bet is that prices will stay strong & keep climbing up, East & West

  20. Biker Pete says:

    Interesting summary, Nick. It’s likely that some locations are ‘alarmingly overvalued’ and some are dirt cheap. The latest three-bedroom, two bathroom, double garage, high-ceiling home we’ve built in a top location (lakes, beach) is coming in well under $350K, all-up. That’s with solar HWS, dishwasher and air-con. Also includes auto-retic and top quality artificial lawns.

    Don’t know enough about east coast values to comment on your closing statement, but we’d argue that prices must go up. That same project would now cost a minimum of $390K to duplicate _if_ you could find another high block overlooking parkland and lakes, a two-minute walk to a white-sand beach. I think future West Aussies will look back on this era and bleat: “Those lucky b*stards!!~”
    * Grey-brown Australian plains turkey.

  21. Stillgotshoeson says:

    The problem Nick with your “trickle down ” theory is it is a farce…

    The mining companies well may face a credit crisis in obtaining funds if overseas markets collapse.. no one to supply due to lack of demand..
    Majority of the population is on the east coast of Australia, unless the government is going to hand the windfall of resource taxes to the waiting hands of the non spending consumers on the east coast while our west coast cousins do all the work.. you will not see any improvement in the financial situation of many many families this side of the nullabor.

    Skilled labour shortages for all the projects earmarked.. lack of willingness to train “domestic” workers, immigration to the west from overseas will be good for biker pete.. make little difference to people in Sydney and Melbourne.. the 2 speed economy WA and Queensland doing Ok because of the mining boom, Queensland losing a little tourism due to high dollar. The other states, face rising interest rates on the very mortgages they already struggle with due to demand on our economy. Our dollar staying high and probaly breaking parity with the US dollar.. very likely with the state of the USD anyway. Exports become even more expensive due to value of our dollar.. I am sorry but I only see one direction for the future of both stocks and property in Australia, (east coast property will be harder hit than west coast if China/India stay half reasonable on resource demands.. suffer the same if not worse fate if China nad India implode) and that is down.. we may well see a little more “up” before the correction.. I am a bear, the economy is a camel and the bulls are saying the camel is fine, all the while they keep loading it with straw.. the camel is going to break.

  22. nick says:

    Hi Stillgotshoeson, I am bearish for US, UK & Europe, I am bullish for Global & very bullish for Australia.

    You are absolutely correct when you say that things would get very bad if China & India implode. However, my bet is that, unless the population falls on a global level, that will not happen for any sustained period of time.

    I feel compelled to respond directly to some of your points, from my bullish perspective

    The planet has 6 to 7 bn people, over half of them in economies growing at 10% or more. As long as they stay alive, global demand will continue to rise over the medium & long term.

    Most primary inputs are priced in USD – oil, cereals, iron ore, sugar, wool, coal … you name it, it is part of a global price system. This means global demand will drive inflation into prices everywhere in the world regardless of the local economy & even regardless of interest rates set by the CBA, which are supposed to keep inflation around 3%

    Because Australia is considered as a commodities only country (because the commodity potential is so big), it means we benefit from these higher prices (due to high demand globally), although the strong Aussie dollar means the miners dont get the full advantage, however, the upside of a stronger dollar keeps our costs down (cheaper oil, cars, ipods, clothes etc).You could say the miners end up sharing their gains with the public in this mysterious way.

    Exports will not be affected by the rising aussie dollar, because the price is a market the price & it is in USD. So long term jobs high employment is here to stay. This drives up wages over time as companies compete for scarce resources.

    Miners will continue to get credit as long as demand (prices) keep rising, so, no problems there by the looks of things.

    From the bull or the champion of wishful thinking :)

  23. Stillgotshoeson says:

    @nick

    Hi Stillgotshoeson, I am bearish for US, UK & Europe, I am bullish for Global & very bullish for Australia.

    I too will reply to you’re your views.. not an argument, just a different opinion.
    You are absolutely correct when you say that things would get very bad if China & India implode. However, my bet is that, unless the population falls on a global level, that will not happen for any sustained period of time.

    Implosion in Europe and USA will result in bad things for us as well. China “internal” growth is not enough to help us.
    I feel compelled to respond directly to some of your points, from my bullish perspective
    The planet has 6 to 7 bn people, over half of them in economies growing at 10% or more. As long as they stay alive, global demand will continue to rise over the medium & long term.
    Population nudging 7 Billion now I believe.. nice round figure anyway, trouble is 5 billion of them have no money.
    Medium to long term (2+ years) global demand will once again rise, fairly confident (read hopeful) of that. It’s the short term bit that has me more concerned. I don’t think we will be dodging any bullets this time around, just how serious the wound IS going to be is the million dollar question
    The other 2 are fairly evenly divided between bulls and bears.. many are in debt up to their eyeballs or have seen massive devaluation of their nett worth. Most growth in the DOW and ASX is attributed to bailout recipients. ASX more specifically is mainly growth in top 20 stocks for the increase from the low.
    Most primary inputs are priced in USD – oil, cereals, iron ore, sugar, wool, coal … you name it, it is part of a global price system. This means global demand will drive inflation into prices everywhere in the world regardless of the local economy & even regardless of interest rates set by the CBA, which are supposed to keep inflation around 3%
    I agree 100% here, we will see rises in interest rates from global forces outside of anything the RBA does and with so many over commited it can only end badly.. stone in a pond, the ripples will spread from suburb to suburb.
    If demand for our resources remains strong in the short term I fear for the housing market here, rate rises will be intolerable for many. Europe and USA falling over again quickly will reduce that demand.. hopefully less pressure on rates and employment..
    Because Australia is considered as a commodities only country (because the commodity potential is so big), it means we benefit from these higher prices (due to high demand globally), although the strong Aussie dollar means the miners dont get the full advantage, however, the upside of a stronger dollar keeps our costs down (cheaper oil, cars, ipods, clothes etc).You could say the miners end up sharing their gains with the public in this mysterious way.
    Exports will not be affected by the rising aussie dollar, because the price is a market the price & it is in USD. So long term jobs high employment is here to stay. This drives up wages over time as companies compete for scarce resources.
    Exports are always effected when our dollar goes high.. Tourism is always effected when our dollar goes high
    Miners will continue to get credit as long as demand (prices) keep rising, so, no problems there by the looks of things.
    You must look at different economic indicators than me, because I see problems.. ;)
    From the pessimistic optimist

  24. Lachlan says:

    My theory.
    Oz has some good things going for it but some bad too.
    Credit is tight for OZ consumer domestic now.
    Money in M3 has changed little in recent months as per Prozaks RBA data.
    For my argument I assume TSM possibly shows little difference.
    Price inflation occurs still because we have a government of insane deficit spenders who are/will raise taxes and charges to keep tax receipts above water level. This is bearish for OZ business since consumer credit is tight putting downward pressure on demand. Were I live we are getting poor turnouts at stud cattle sales due to tight credit and prices are well down. Sales down, costs up.
    Price inflation can be imported from China too. My hardware costs (Chinese goods are moving up)
    Less demand, higher input costs for business therefore more tendency for business to not borrow, to pay down debt or to default.
    We need less expensive governments.

  25. Stillgotshoeson says:

    @Biker Pete
    Comment by Biker Pete on 20 March 2010:

    Interesting summary, Nick. It’s likely that some locations are ‘alarmingly overvalued’ and some are dirt cheap.

    I think it is likely that some regions will cop a real hammering in a correction and some places will be unaffected..
    I have friends in California, Arizona, Illinois, Arkansas, Florida, Washington (State) and Idaho and they have different stories to tell of their local real estate markets.. Some parts of California, Arizona and Florida have been decimated >50% down still on real estate prices, some parts of California and Idaho and Illinois are recovering to near pre crash levels.. North West Arkansas was virtually untouched price wise.. average time on market has increased but prices holding.. That may well happen here, Sydney, Melbourne and Brisbane I expect to cop siginificant falls in SOME areas, other areas will propably be not too bad.. China and India keep buying our recources and stay afloat then WA will do very well, China and India stall or go backwards then some parts of WA house market is going to go very bad too…
    No one has a crystal ball… how many economists saw the last correction coming? Everyone has the same information available however comprehend it differently or “emotionally” digest the information.. “I think stocks will be fine because I have them” “I think property will be fine because that’s what I have” “I better sell everything I own and buy baked beans and a gun and go live in a cave”.. no one knows for sure, me personally I think we will have a correction and then we will get better..

  26. Stillgotshoeson says:

    @Lachlan

    Comment by Lachlan on 20 March 2010:

    We need less expensive governments.

    We need less government…

    My mind boggles trying to understand why a country of only 22 million people needs 3 tiers of government.. Federal, State and Local… State Goverments are not required in my view..

  27. Lachlan says:

    Where our deficits go..
    To quote David Galland at Casey’s.
    “The city council has awarded Sydney artists Michaela Gleave and Kate Mitchell 5500 dollars to build and immediately take down five 1.5m walls over five days in May”
    “Melbourne tradesmen said they were baffled at the decision to give two women $5500 to build two walls that would only last a few hours.”

    In farming areas mind boggling amounts of money (grants) are being given to unproductive projects while important basic infrastructure is falling apart and farmers are hung out to dry.

  28. Lachlan says:

    “We need less government..”
    Words cannot convey how much I agree with that Shoes.

  29. Biker Pete says:

    Shoes: “I think we will have a correction and then we will get better…”

    I think our kids may say: “I remember when you could buy a house for a million dollars.” Already there are Australian suburbs where this is the median price, now.

  30. Biker Pete says:

    Shoes: “I think stocks will be fine because I have them” “I think property will be fine because that’s what I have” “I better sell everything I own and buy baked beans and a gun and go live in a cave”..

    We could probably write a song about it: “Still a man hears what he wants to hear… and disregards the rest… ” Paul Simon, 1970″

    “… how many economists saw the last correction coming?”

    Well, DR US did. Some of us acted on that advice and saved a bundle.
    The same day the World Bank’s warning was issued, correlating with Bill Bonner’s editorial, we switched all our Super from ASX to cash. Yes, the ASX had fallen from 6850 to just over 6200, but DR helped save our bacon.

    Will there be another such correction? Who knows? We bought back in at 3200… sold at 3800… and we’d do the same again… . :)

  31. prozak says:

    hmmm…. some very interesting thoughts.

    I don’t know how some people think China, India, Australia will be fine in the the face of a worldwide credit contraction.

    For those bearish on Europe and US but bullish on China & India…..

    Who will China & India sell their stuff to if 53% of the worlds economy (US & EU) doesn’t want to buy it? (61% including Japan)

    Do you think it is THAT easy to replace the consumers of the world with consumers from countries where the distribution of wealth is a LOT worse than western countries?

    as for aus property and that article….

    “This report found more than 580,000 Australian households were suffering from mortgage stress and did not have enough money to pay for their living expenses and make mortgage repayments.”

    To be quite frank. I don’t have much sympathy for people who inflict their own stress. Some of these will have bought into the “must buy property” mentality…. why? Who says we all have to own property? In many european countries people rent their whole lives. This “must buy” mentality seems to be particular to brit.aus.america.

    A LOT of these stressed people will also have been under much less stress if they didn’t buy all the rubbish that they don’t NEED!

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