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Deflation ?

Discussion in 'Real Estate' started by 02bsure, 6th Oct, 2008.

  1. 02bsure

    02bsure Well-Known Member

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    INO Equities Stocks Indexes - US DOLLAR INDEX (NYBOT:DX) Price Chart and Quote

    Not what a property investor wants to hear but the dollar index is now suggesting deflation.

    The question is, will this deflationary period be short lived?
    The downward gold price is also suggesting deflation.

    I suspect it will continue for up to 6mths, then central banks will pump the system with cash to try and offset it. But its anyones guess right now.

    I'm sticking with CHF and Yen.
     
  2. Insight

    Insight Brisbane Buyers Agent

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    02b what's the correlation between gold price and deflation?
     
  3. 02bsure

    02bsure Well-Known Member

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    well, at least historically gold has been a safe haven in times of high inflation because it was seen to be a store of wealth.

    In other words , while the dollar in your hand bought less day after day, if you had purchased gold with that dollar you could have re-converted it to cash and purchased the equivalent goods (or even more).

    When people lose faith in paper currency (due to high inflation) they look to gold in an attempt to to store wealth.

    Ironically, gold has proven itself to be a safe store of wealth in both inflationary and deflationary environments.

    In the case of deflation though, all assets lose value including gold but at a certain point it finds a base and again becomes a store of wealth (as in the case of the 1930's).

    Examples of preserving wealth during inflation (hyper inflation ) would be Zimbabwe or Argnentina.

    Today , because precious metals have such a huge non physical market (ie ETF's , futures) its difficult to truly determine the real market value. In other words, how much speculative , leveraged money is supporting the current prices? Thats a worry because it will certainly be squeezed out before a bottom can be put in. Conversely, if central banks go berserk printing money to generate inflation, then we may have seen the bottom already.

    Interestingly, gold occassionally has over the last month shown some pretty impressive spikes in price. Makes me feel we've seen the bottom.

    24-hour Spot Chart - Gold

    So I might buy in below $800 per oz.
     
    Last edited by a moderator: 6th Oct, 2008
  4. Billv

    Billv Getting there

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    02

    I know the US and possibly the EU could have a period of deflation but do you think we will have deflation in Australia as well and if we do wouldn't interest rates here fall as a result?

    Cheers
     
  5. 02bsure

    02bsure Well-Known Member

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    Hi Bill,

    Well its happening big time in commodity prices, the stock market, the AUD.

    Why stop there? We all know the illiquidity of real estate. So I suspect its only a question of time before property holders relent due to one or any of the current financial forces at play.

    It looks pretty clear that the ASX will blow right through 4500 tomorrow and the participation of Australians in the stock market is amongst the highest in the world as a % of population. This will definitely financially dent a group of investors and there will be spill on effects.


    ___________________________


    Clearly the AUD is now being de-based as I suspected it would be, thats the first phase of the great ozzie unwind and its the phase where the locals feel no immediate pain.

    The next phase is that banks will not pass on the interest rate cuts because their cheap carry trade funds have fled resulting in higher funding costs.

    Then inflation begins to reassert itself (with some lag) due to the the devalued AUD all the while credit continues to be tightened and equity loans withdrawn.

    Commodity prices continue to be priced down due to hedge fund de-leveraging.

    imo, mortgage rates will higher than today one year from now.

    Bloomberg.com: Worldwide
     
  6. Billv

    Billv Getting there

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    02
    Why do you think that when interest rates are about to fall further and our economy is slowing?
    Cheers
     
  7. 02bsure

    02bsure Well-Known Member

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    Did you read the Boomberg article I posted above?

    Bloomberg.com: Worldwide

    Basically, banks have seized up. I don't believe this is a 2, 3 or 6mth issue just as it wasn't in Japan during the 1990 bust.

    The financial system is smashed and it will be years before it functions properly.

    In a nut shell, no one is going to under price risk in future.

    3.5 x provable annual income plus a 20% deposit = what you can borrow.

    One year from now, those will be the rules.
     
  8. Billv

    Billv Getting there

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    I did and it was reported on fox as well but let's wait and see
    I believe that this is a temporary situation



    I don't believe that it will take that long.
    Think about it, CEO's want the big profits to return so they can justify their fat packet and shareholders are used to high dividends as well.
    No high dividends and no ability to grow them means that their shares won't be very attractive. On top of that, bank profits are linked to employment and government revenue. On top of that, the banking system is vital to an economy and no government is going to allow their banking system to struggle for very long.


    Actually those are nearly the rules today with the few exemptions ofcourse
    but I agree that the current situation could change for the worse.
    However, if that happens bank profits will fall and they won't be able to afford paying you 6 digit salaries anymore. :eek:
    So loosen up mate, stop hoarding the cash and let it flow towards us poor property investors ...;)

    Cheers
     
    Last edited by a moderator: 7th Oct, 2008
  9. Insight

    Insight Brisbane Buyers Agent

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    Far out that was a good call... Now the $64,000 question, did you make any money? :)
     
  10. Tropo

    Tropo Well-Known Member

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    You hit the nail on the 02bsure head !!!!:p:D
     
  11. AsxBroker

    AsxBroker Well-Known Member

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    Hi all,

    What I want to know is, if inflation makes things more expensive, why doesn't deflation make things cheaper?

    Cheers,

    Dan
     
  12. Billv

    Billv Getting there

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    It will when property falls by 40%
    we'll just have to have patience and one day it will happen....we will grow old waiting tho :D
     
  13. 02bsure

    02bsure Well-Known Member

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    because you live in a far away country

    - with a depreciating currency
    - with a small population
    - and very low competition

    Ozzies pay through the nose for almost everything regardless of the economic environment. You're held to ransom by importers and domestic monopolies.

    Basically, Australians are conditioned to pay big dollars for inferior everything.
     
  14. 02bsure

    02bsure Well-Known Member

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    Don't know what you're talking about Bill. Absolutely all Australian real estate has devalued 20% in the last 6mths ...in Euro, in other words, for me.

    Fear not, it will also devalue for you too.

    __________________________________________________________

    2509 Redwood Rd - update

    When we started watching this house in October 2008 (I think it was) it had an estimated worth of $447K. Today its $372.5K ...vapour equity of approx $75K in little more than 6mths. Even with that price drop it wouldn't sell today for more than 300K.

    2509 Redwood Rd, Napa, CA 94558 - Zillow

    Too bad there isn't a Parallels H-Sphere although I'm sure even the mere thought of such a website would strike terror into the heart of an oz property speculator.

    Imagine the effect of introducing free open transparency into the australian property market (during a down market). If you're into money making ideas then I think you should jump on this.
     
    Last edited by a moderator: 14th Mar, 2009
  15. Billv

    Billv Getting there

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    It has already done so and it's time for prices to go the other way.
    This quarter the median price will fall because most properties selling are entry level but this does not mean that prices are coming down.

    Ofcourse the media will pick up on the lower median price and will say that prices fell by 10% or whatever and this should make you happy as well.

    In reality though, actual property prices and particularly in FHB territory would have gone up, and I'll be happy with that.
     
  16. Chris C

    Chris C Well-Known Member

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    I know I made a bit of money in the last few months listening to 02B and doing research into the topics he was bringing up and from my PM's with 02B I'd be almost certain that he himself made a few bucks too.

    I worked out around August - October last year that 02B was a pretty switched on guy that used a lot of common sense, I think everyone should be at least considering his insights and opinions.

    Loads of things are cheaper, it's just that there aren't a lot of things that purely made in Australia and given that we import a lot the weaker AUD is keeping prices high.

    You can bet your bottom dollar that new car prices in the US, Japan or Euro are dirt cheaper compared to 18 months ago.

    Though with deflation of price will also come deflation of incomes... so don't expect that cheaper prices will bring back good times.

    I personally think the $64,000 question is, will the deflationary spiral be sustainable given the liquidity that world governments are throwing at this problem?