Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19
Betting on Next British Prime Minister Tory Leadership Betfair Markets Forecast - 10th June 19
How Can Stock Market Go Up When We’re Headed Towards a Recession? - 10th June 19
If You Invest in Dividend Stocks, Do This to Double Your Returns - 10th June 19
Reasons for the Success of the Dating Market - 10th June 19
Gold Price Trend Analysis - Video - 10th June 19
US Stock Markets Rally Hard – Could Another Big Upside Leg Begin? - 10th June 19
Stock Market Huge Cosmic Cluster Ahead: Buckle Up! - 10th June 19
Stock Market Higher To Go? - 10th June 19
The Gold Price Golden Neckline… - 10th June 19
Gold Price Seasonal Trend Analysis - 9th June 19
The Fed Stops Pretending - 9th June 19
Fed Rate Cuts Soon; Bitcoin Enthusiasts Join Wall Street in Bashing Gold - 9th June 19
1990s vs. 2010s - Which Expansion Will be Better for Gold? - 9th June 19
Gold Price Trend Analysis, MACD, Trend Channels, Support / Resistance - 8th June 19
Gold Surges Near Breakout - 8th June 19
Could Gold Rally Above $3750 Before December 2019? - 8th June 19
5 Big Lies About Precious Metals Investing Exposed - 8th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

The Deflationary Cycle Full Monty, Eight Risks That Will Cause Deflation

Economics / Deflation Jul 26, 2010 - 10:26 AM GMT

By: JD_Rosendahl

Economics Best Financial Markets Analysis ArticleIn the past couple years I have written quite a few blogs.  One of my personal favorites has to be:  Mustard Seeds for Deflation: The Deflationary Cycle Full Monty.  This was my somewhat complete case for a deflationary spiral written in August 2009.


In that blog, I identified my eight risks that in some combination together or linked in time will cause a deflationary cycle.  Those risks are:
1)        Higher Taxes.
2)        A Correcting US Long Bond Market.
3)        Wage Deflation.
4)        The Next Wave of Residential Foreclosures.
5)        Non Primary Residential Real Estate (Farms, Vacation Homes, Commercial, and            Multi-Family).
6)        The Baby Boomer Switch.
7)        The Local Municipal Government.
8)        The Bubble State California.

In part 2, I want to visit those categories that are moving in the direction of the deflationary cycle now.  It's the combination of any 3-5 of the above that will get the deflationary cycle rolling forward with more momentum. 

1)  Higher Taxes.  In some states like California we see higher retail sales tax.  In states like Illinois they have raised fees in certain areas.  In some parts of California, parents now have to pay for their children to play high school sports.  We see early signs of increased taxes and fees.  This issue is not terribly significant now though. In the last depression tax rates didn't go up until a few years after the meltdown.  So, this could be a slow process of increasing taxes and taking away loopholes for the wealthy.  But any increase is a decrease in net incomes.  That impacts consumer spending and the affordability of real estate.  Higher taxes and fees are negatives for two of the most important parts of the economy.

2)  Wage Deflation.  We see wage deflation now mostly in the world of contractors.  I have several clients who have cut salaries by 10% twice.  I have clients who have moved employees to part time which allowed the employer to get rid of benefits.  Here's where I see the next waves of wage deflation:  First, as the bank industry consolidates over the next few years there will simply be too many bankers in this world.  Greater supply and lower demand will force bank compensation downward.   Secondly, many sales people are going to get a haircut, especially those with high base salaries.  In a slow sales environment, companies won't pay top level salaries, and will move to a  more commission based platform.

Lastly, the biggest current issue is the layoff of unionized municipal workers.  Where in the world is a policeman going to go to work after being laid off and make $100,000 in salary with $50,000 to $150,000 in overtime, not to mention their benefits package.  Policemen, Firemen, teachers, etc. are so specialized in their training, there is no way for them to integrate back into the world without taking a 25-60% total compensation cut.  

Everyone in the world is focused on the budget deficit issue for so many states and cities.  What gets lost in that issue is that the correction in budgets requires lower compensation from those fired and later in the cycle from those who get to keep their jobs.  In the case of California we are going to lose a great number of people who make well over $100,000 per year. 

Wage deflation is one of the integral parts of a deflationary cycle because it guarantees lower consumer spending and real estate affordability.  Again, two of the most important parts of the economy.  The layoffs coming from municipal governments this year and next will guarantee wage deflation moves forward.

3) The Next Wave of Residential Foreclosures.  Last year I wrote the following:

We've experienced a large wave of residential foreclosures in this country, and there is another wave pending. The next wave stems from the Alt A. and Option ARM programs underwritten during the real estate bubble. Many of these exotic loan programs come with low teaser rates or flexible loan payment structures that only last for the first few years of the loan and then convert to a fully amortizing loan payment at a higher rate.

And guess what:  Home Foreclosures Jump to Record Level in United States, No Big Surprise

Like clockwork, the residential foreclosure wave has come right on time.  As a banker, this was one of the easiest things to see coming.  At the core of a deflationary cycle is a correction in real estate far greater than anyone can see.  This wave of foreclosures will create a supply of financially distressed real estate in the market in one form or another (foreclosures or short sales).  We should see this push prices lower again.

Lower real estate values create several issues.  Declining real estate values impact consumer confidence and spending. This lowers retail sales taxes.  Lower real estate values pressure real estate tax revenue collections lower for municipal governments.  Reduced retail sales and real estate taxes guarantee continual budget deficits forcing municipal layoffs, and cuts to salary and benefits, which lowers income taxes, which again hits the budgetary issue.  Wage deflation and declining real estate are the two key ingredients of deflation.

Declining real estate will also put more banks out of business, which will force more bankers out of work, and again thereby decreasing income taxes for states. A consolidating and struggling banking industry will tighten down credit like no one has seen and businesses will not get funded.  

It's this category where you get the visual of a cycle of deflation.  Every wave down or negative impact causes another and another negative impact, like dominos falling.

4) Non Primary Residential Real Estate (Farms, Vacation Homes, Commercial, and Multi-Family).  Within this category let's focus on commercial real estate:  Commercial Mortgage Backed Security Delinquency Rate Rising Fast.  Again, as a banker that's provided financing on commercial real estate for the past 14 years this was an easy development to see coming.  It's amazing how many of my fellow commercial bankers failed to see this coming.  An increase in delinquencies will lead to a spike in foreclosures that will happen with or just after the current wave of residential foreclosures.  The current fundamentals of increased vacancies and lower rental rates for commercial real estate are as bad as it gets.  This is forcing values lower.

The most interesting part of the decline in commercial real estate values is the self coined concept I call, "Correctional Unity."

We should see residential and commercial real estate declining together later this year and 2011.  This will place further pressure on banks, and we will see the FDIC continue to close banks, and credit will become a lot tighter than it is now.

5) The Local Municipal Government.  This might be the hottest and most contentious topic at the local level of government:  States and cities face a daunting task to cure budget deficits.  We are witnessing layoffs that collectively across the nation will mount to big numbers.  There are roughly 20,000,000 municipal workers.  If we cut just 10%, that's another 2,000,000 in unemployed.  Once again, that impacts consumer spending and real estate affordability, pressuring real estate values down, and collectively they impact retail sales tax, real estate tax, and income tax collections.  Again, this pressures budget deficits in the future.

Summary:  We have 5 out of the 8 working in the direction of a deflationary cycle.  All eight don't need to happen to cause deflation.  The two key ingredients are real estate values and wage deflation.  We already have them moving in a negative direction with further pressure towards deflation.  Those two with any other two-three risks will cause a train wreck not seen in a generation.  The cycle of deflationary implies the time cycle lasts longer than the last deflationary period.  I wrote this update to help create the visual of a deflation cycle, where issues happen in waves due to cause and effect, as one negative causes one or two more negatives and so on.  This will be interrupted by the government and stimulus efforts that gain minimal traction for short periods. 

That's how it plays out!

Hope all is well.

By J.D. Rosendahl

www.roseysoutlook.blogspot.com

J.D. Rosendahl was a former stock broker/investment consultant (currently not licensed) before becoming a Commercial Banker for the past 14 years. He manages his family's wealth, helping them avoid the high tech bubble and the real estate bubble melt downs and preserving wealth.

© 2010 Copyright J.D. Rosendahl - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules