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Prediction: 2021 is going to be a total shit show. Place your bets now.

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JScott

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That said, how do we go from where we are now to a world where deflation is happening?

Right now, people are spending like drunken sailors because of all the stimulus, and it looks like that won't stop.

Is the assertion that all these people losing their jobs and companies going out of business will ultimately result in a lot of people with heavily reduced buying power, so demand drops?

A few points worth mentioning:

- First, a lot of people don't realize that deflation is a lot like gravity -- it's a natural economic force that is always acting to push prices down. Barring any other economic impetus, an economy will naturally tend towards deflation. This is simply because economic, business and manufacturing processes tend to get more efficient, and with margins staying the same, prices will naturally fall. So, if there are no outside forces acting on the economy (think: the Fed or Congress), deflation will occur over time;

- Next, people aren't spending a ridiculous amount of money. 4Q20 GDP growth is forecast to be about 2.8%, or pretty close to the average over the past 10 years. And annual GDP *contraction* is looking to be about 3.6%. Spending is much more on track than it was 6-9 months ago, but it's still far from stellar;

- Third, consider that stimulus money is likely to run out at some point soon, and deflationary forces occur when demand for goods and services drop. When there is less money flowing through the economy -- like there may be in the near future -- deflation is much more likely;

- Finally, consider that with the income/wealth gap widening, more money is flowing to the wealthy. What do wealthy people do with excess money? Hint: They don't buy more groceries or consumables. They buy assets. So, poorer people will be buying fewer commodities and wealthy people will be using the money to buy assets. This will lead to asset inflation, but CPI disinflation (or perhaps deflation).

Put all those things together, and it's not hard to imagine a pretty strong deflationary force.

Of course, there's also forces on the other side -- increased money supply, low interest rates, compressed cap rates on investments, etc. -- which tend to favor inflation.

Depending on how strong the forces are on each side -- which will very much depend on Fed and Congress decisions over the next 12-36 months -- things could go either way.

That said, the Fed wants inflation. And the Fed generally gets what it wants. So, if I had to bet, I'd bet on inflation...at least long-term...
 

EVMaso

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To set the stage -- In 1990 I was putting my life back together after my husband had recently discarded me -- he was an executive-level consultant for an oil company, and I had been his trophy wife for a number of years. Professionally, I'd was a broker, investor, and a commercial RE appraiser -- way before appraisers were licensed. So, I saw the RE crash from the corporate perspective as well as from my RE career.

The first cracks in the commercial RE market came from my ex's company. They had been occupying all 48 floors in one of their twin towers. Their "test" convenience store and other shopping facilities were under the building. They sold those high-rise office buildings to a Japanese investment company in what seemed to be an overnight move. They bought land on the "wrong" side of the freeway and built a new building. This didn't make business sense to me. They had gone from a prime location to a much less desirable area of the city. I knew the players in that company and I was floored. Then, when they moved in, they only occupied 2 floors versus their previous 48 floors, plus retail space. How did they do that? They fired the whole army of secretaries, receptionists, and admin assistants. All remaining employees were given laptop computers (a new invention at the time) and a voice mail account. They were told to make an appointment for office space-time. The party was over.

And that was just the beginning. This trend cascaded throughout the office markets. It hit the A market first, and then the B & C markets. We had droves of "see-through" buildings -- high rises with no tenants. No office building tenants meant no one to shop in the retail stores and live in the downtown condos & flats. Downtown was a ghost town. (Are listening to this, New York City?)

In the meantime, the Japanese stock market crashed. Those investors had taken out full-page ads to brag about their penetration into the Los Angeles RE market. They dumped their properties for whatever they could get in order to meet their stock margin calls at home.

And then it hit the warehouse RE market. Normal was to have 60 days of good on hand for distribution. With computerization and new transportation systems (Fed Ex, UPS, etc), they now had on-time deliveries -- 2 to 5 days of goods on hand. The warehouse districts emptied out.

The 1980s had been a go-go time for RE -- lots of inflation. Everyone was living on OPM (other people's money) and most RE investors were highly leveraged. The early 1990s was the wall that they hit head-on. This time it didn't recover quickly. We had all that excess RE inventory to absorb. We, in the RE business, had a mantra. "Stay alive 'til 95." 1995 came and went. Nothing changed. We were still in the toilet in the business. No one could believe how low the prices went during those days.

And, I was hired by RTC, on their audit teams, to go in and take over the Savings & Loan and Thrifts that were holding all that bad paper. They fell like flies. The entire industry failed. Wall Street and the secondary housing market took over financing RE.

The recovery took the entire decade. I got a wild hair and I went to law school at night and on the weekends during the first half of that period of time. And I began my expert witness work and litigation support business in RE, using my degree. It was a horrible time for all of us in the RE business. I only survived because I was a fighter who was willing to meet the changes head-on.

So, that brings us to now. The commercial RE market is falling apart before our eyes. It's not just one sector -- it's everything. The housing market is in a bubble. People are moving, now that they have proved that they can work remotely. New York and other cities are ghost towns. RE prices and rents are falling. The rioters have burned down huge areas of many of our cities. Will they be rebuilt? And how? With whose money? What land uses will they have in those areas when they are done? Residential rentals are head-to-head with homeownership under the last tax relief bill due to the standard deduction. That creates a whole new market of single-family rentals. How will that affect appreciation in the housing market? And this time Wall Street and the bond markets are on the hook.

You see, I have more questions than answers.
Thank you for the writeup. What a journey you've had! I also can't imagine doing law school on nights/weekends while working full time, I had trouble in regular Uni doing just regular part time jobs! But law + RE investing seems like a powerful combo.
 

EVMaso

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csalvato

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A few points worth mentioning:

- First, a lot of people don't realize that deflation is a lot like gravity -- it's a natural economic force that is always acting to push prices down. Barring any other economic impetus, an economy will naturally tend towards deflation. This is simply because economic, business and manufacturing processes tend to get more efficient, and with margins staying the same, prices will naturally fall. So, if there are no outside forces acting on the economy (think: the Fed or Congress), deflation will occur over time;

- Next, people aren't spending a ridiculous amount of money. 4Q20 GDP growth is forecast to be about 2.8%, or pretty close to the average over the past 10 years. And annual GDP *contraction* is looking to be about 3.6%. Spending is much more on track than it was 6-9 months ago, but it's still far from stellar;

- Third, consider that stimulus money is likely to run out at some point soon, and deflationary forces occur when demand for goods and services drop. When there is less money flowing through the economy -- like there may be in the near future -- deflation is much more likely;

- Finally, consider that with the income/wealth gap widening, more money is flowing to the wealthy. What do wealthy people do with excess money? Hint: They don't buy more groceries or consumables. They buy assets. So, poorer people will be buying fewer commodities and wealthy people will be using the money to buy assets. This will lead to asset inflation, but CPI disinflation (or perhaps deflation).

Put all those things together, and it's not hard to imagine a pretty strong deflationary force.

Of course, there's also forces on the other side -- increased money supply, low interest rates, compressed cap rates on investments, etc. -- which tend to favor inflation.

Depending on how strong the forces are on each side -- which will very much depend on Fed and Congress decisions over the next 12-36 months -- things could go either way.

That said, the Fed wants inflation. And the Fed generally gets what it wants. So, if I had to bet, I'd bet on inflation...at least long-term...
Thank you again for your thoughtful reply and correcting my misconceptions.

It turns out I was incorrect about people spending like drunken sailors, which is good info to know.

From your post, it looks like you still believe the bet is inflation, though you did a good job explaining how there are deflationary forces at work, and what they are.



@MJ DeMarco I'm constantly reaching to react to a post with a "thanks" instead of a "like" or "love", and I'm also always looking for a "thanks" emoji (usually the praying hands). If you're reading, I put in a vote for those two things to be added to the forum. @JScott's post above is an example of where I'd use one or both.
 

csalvato

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Hey Kak (or anyone else really), what are these charts supposed to represent? Throw as many big fancy economic terms and concepts in there, I'm in finance and economics learning mode, and I like to deep dive into any new terms and concepts I come across. It's slowly all coming together in my head, piece by piece.

The first is DXY, or an index that tracks the USD against various foreign currencies.

When it goes down (as it has been doing), it generally means the dollar is weaker compared to the world economy.

It is a weighted geometric mean of the dollar's value relative to following select currencies:


More info on the Dixie here: U.S. Dollar Index - Wikipedia

The second is the M2 Money Stock. The M2 is a measure of the amount of money in circulation. Theoretically, more money means individual unit (i.e. the dollar) is less valuable.

Showing M2 Money Stock rocketing upwards would usually be taken as a symbol that inflation is going to take off.

KEY TAKEAWAYS​

  • M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money.
  • M2 is a broader measure of the money supply than M1, which just includes cash and checking deposits.
  • M2 is closely watched as an indicator of money supply and future inflation, and as a target of central bank monetary policy.

More info on the M2 here: What Is M2?
 

JScott

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From your post, it looks like you still believe the bet is inflation, though you did a good job explaining how there are deflationary forces at work, and what they are.

Yup, if I had to guess, inflation over the next 5 years is my guess. Simply due to the expanded money supply and the loosening fiscal (and perhaps monetary) policy.

But, I think the next 1-3 years is a lot more difficult to predict. Though I'm not sure I would do anything differently in the next 1-3 years given that I'm betting on longer-term inflation.
 

WJK

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Thank you for the writeup. What a journey you've had! I also can't imagine doing law school on nights/weekends while working full time, I had trouble in regular Uni doing just regular part time jobs! But law + RE investing seems like a powerful combo.
Thanks for your kind words. Yes, it was tough to work and keep up my classes. I was a single woman on a mission -- to get through school and get my degree. I continuously listened to tapes of law lectures when I was awake. And I slept with my legal outlines under my pillow. I still use that education every day in my RE business.
 

WJK

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A few points worth mentioning:

- First, a lot of people don't realize that deflation is a lot like gravity -- it's a natural economic force that is always acting to push prices down. Barring any other economic impetus, an economy will naturally tend towards deflation. This is simply because economic, business and manufacturing processes tend to get more efficient, and with margins staying the same, prices will naturally fall. So, if there are no outside forces acting on the economy (think: the Fed or Congress), deflation will occur over time;

- Next, people aren't spending a ridiculous amount of money. 4Q20 GDP growth is forecast to be about 2.8%, or pretty close to the average over the past 10 years. And annual GDP *contraction* is looking to be about 3.6%. Spending is much more on track than it was 6-9 months ago, but it's still far from stellar;

- Third, consider that stimulus money is likely to run out at some point soon, and deflationary forces occur when demand for goods and services drop. When there is less money flowing through the economy -- like there may be in the near future -- deflation is much more likely;

- Finally, consider that with the income/wealth gap widening, more money is flowing to the wealthy. What do wealthy people do with excess money? Hint: They don't buy more groceries or consumables. They buy assets. So, poorer people will be buying fewer commodities and wealthy people will be using the money to buy assets. This will lead to asset inflation, but CPI disinflation (or perhaps deflation).

Put all those things together, and it's not hard to imagine a pretty strong deflationary force.

Of course, there's also forces on the other side -- increased money supply, low interest rates, compressed cap rates on investments, etc. -- which tend to favor inflation.

Depending on how strong the forces are on each side -- which will very much depend on Fed and Congress decisions over the next 12-36 months -- things could go either way.

That said, the Fed wants inflation. And the Fed generally gets what it wants. So, if I had to bet, I'd bet on inflation...at least long-term...
Just keep in mind that the Feds are a private bank... who have their own interest in mind...
 

MJ DeMarco

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@MJ DeMarco I'm constantly reaching to react to a post with a "thanks" instead of a "like" or "love", and I'm also always looking for a "thanks" emoji (usually the praying hands). If you're reading, I put in a vote for those two things to be added to the forum. @JScott's post above is an example of where I'd use one or both.

Praying hands for thanks? How about a handshake? Or the raised hands? Not sure which one best represents a "thanks."
 

csalvato

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Praying hands for thanks? How about a handshake? Or the raised hands? Not sure which one best represents a "thanks."
All of those are good to me
 

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Bekit

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Praying hands for thanks? How about a handshake? Or the raised hands? Not sure which one best represents a "thanks."
On next door, thanks is a smiley face. That could also be an option.

A thanks reaction would be awesome to have on the site. I'll add my vote for one.
 

Kak

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I'm going to say, given the results of the runoffs last night... The country will get a LOT more stimulus, and more super dovish fed policy. I am actually kind of shocked gold is down, which is hilarious. Nothing about a democrat takeover of the senate is bullish for the dollar. They may even try for a UBI.

Not that Republicans were ever some saving grace fiscally. They are just democrats with slightly lower taxes, slightly fewer murdered babies, slightly more guns and 9/10 of the spending.
 

ljean

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My infrastructure stocks are up huge today, thanks Dems!
 

MJ DeMarco

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Handshake vote... since I miss them.

There is now a "Thank you" option ... I opted for a "clapping hands" since that seems to be the gesture associated with thanks.
 

sparechange

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Holy crap, the NWO is starting... Watched the DC protest and storming in, great stuff.

The US military should do their job and protect their citizens, throw Biden in a military prison for national security reasons.

''The Army exists to serve the American people, to defend the Nation, to protect vital national interests, and to fulfill national military responsibilities''

If the BLM protests in the US of eh were of any indication the amount of violence that can happen, America is going to turn into a war zone.
 
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JScott

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The US military should do their job and protect their citizens, throw Biden in a military prison for national security reasons.

''The Army exists to serve the American people, to defend the Nation, to protect vital national interests, and to fulfill national military responsibilities''

Due to the Posse Comitatus Act, there aren't too many situations where the US military can act on US soil. And those situations where it does have the authority are typically defined by the Commander in Chief (the President).

Unfortunately, it appears the President isn't much interested in doing more than tweeting these days, so it's being left up to the Vice President to take over some of the President's duties, which may or may not be legal:


If the BLM protests in the US of eh were of any indication the amount of violence that can happen, America is going to turn into a war zone.

If the storming of the US Capitol during a congressional session is any indication, it already has.
 

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WJK

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This sure is a Constitutional mess! This fight isn't going to die down any time soon. (The legal challenges are continuing and there was a court ruling in Georgia this morning that can affect the runoffs.) I'm worried about the economy and our power position relative to China in the coming few years. Unemployment numbers are up today reflecting the recent lockdowns. I was hoping we could pull through this moment without falling off the edge of the earth.
 

sparechange

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1610087156906.png

''Federal isolation site''

Well then.. do you think ya get poutine and hockey reruns with beer provided on a big screen tv inside these isolation sites?

Looks like MJ was right about the travel disaster for this year in regards to not running the summit.
 
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evergreen_scene

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This thread sounds like a Bitcoin hustle in disguise. The BTC bubble is going to pop soon. Once the sheep run out of money it won't climb any further. I am staying completely out of BTC and Altcoins.

The price of BTC is dependent on people pumping money into it. I have been seeing people all over the internet trying to hype it up for this reason. Sorry, not a sucker. Plus, at any moment, the government can ban it. Not safe if you ask me.
BTC in March 2020: $4k
BTC in Jan 2021: $40k

> Sorry not a sucker.

Sure sound like one to me, lmao
 

Turbine3

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Hey Kak (or anyone else really), what are these charts supposed to represent? Throw as many big fancy economic terms and concepts in there, I'm in finance and economics learning mode, and I like to deep dive into any new terms and concepts I come across. It's slowly all coming together in my head, piece by piece.
Look at the bottom chart:
Whenever the probability goes over about 27/28 a gray area follows - ie recession

Look at the CAPE chart:
Notice the current CAPE rate - meaning "overvalued" as she mentions, and compare it to history - back to the 1880's....

Free charting site to look at the chart of any stock or market:

Plug in these ticker symbols to get an idea of the broad US markets:
DJIA
COMP
SPX
NYA
GLD
SLV
MCHI
UUP
DBP
EDV
SQQQ
QQQ
 

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