Coronavirus & Property – Deflation – Could prices drop & why we really should avoid!

Brett Alegre-Wood
April 9, 2020

If it's not V-Shaped, U-Shaped, Inflation, Stagflation then it could well be Deflation. Prices dropping, cash is worth more everyday, debt load increasing, but when does it end. Let's look at whether this is really an option.

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Video Transcription:

Hey, guys so welcome to today's session for so we're gonna cover coronavirus and property investment but we're gonna cover inflation today. So yeah I'm looking forward to that.

But anyway guys you know this is these are two so obviously it's I know it's Thursday but I figure you know Sunday's coming around and just in case you haven't remembered because obviously has been so many other things. I thought that I would just pop a little reminder in there. So yes I'm gonna look like an Easter Bunny we've got our Easter bonnet or Easter bake-off for lunch today in the UK with our teams. So I'm going to be wearing these is the rest of the day the kids think it's quite funny actually but anyway good fun.

So deflation this is gonna be an interesting one because this is one that I think as a property investor it's probably the worst thing. Because what it means all that bet is gonna be increasing okay but we'll get into it so yeah it could prices really drop and you know I can we really avoid this or should we avoid this. I think that the definite is yes it would be good to be able to avoid this because of all the other things that go into but we'll talk more about that.

So what I want to do is I just I'll introduce to or go through our usual stuff which is where are we here okay so we've got nine days left of my account down seven days left and we really are from what the modelling looks like in the UK between Thursday and Tuesday is where we're really gonna peek in the numbers. It seems to be the peaks is about the 900 per day people dying they had predicted double that so that's been a positive thing but had been the day that was models, models use assumptions can be wrong and I think that's what we're seeing but yeah I still think the disruption in 69 days you know we're being counting back since 90 days it's amazing I've done 43 videos now since I started this it's amazing how you know that happens for years I've been doing you know one or two a week and that sort of been missing a week here and I've done 3 videos in the last like three or four weeks I think I knew these haven't even looked at how many days it is.

But anyway yeah so let's move on so in terms of you know 1.5 meters have bumped over the 1.5 million 88,000 deaths so pretty serious you know still pales in comparison to the Spanish flu in 1918 or as Trump would miss make the mistake of saying 1917. You know anyway but look the interesting thing yeah so we're talking Thursday to Tuesday we're looking to peak there's pretty harrowing all of the morgues are now full in the UK. So now that every ice rink around the country is being used as a makeshift morgue. And they're saying that you know there's the hospital beds are pretty much all filled up now so that they're trying you know to put it all around and but yeah I mean it's pretty full-on. Because we know if it peaks at nine hundred people a day that's full-on.

We really want to focus on recovery so you know 420,000 outcomes of which 330,000 have recovered. Interesting I was reading stats they reckon in the UK a third of the deaths over the next week will be women, children, babies, children and teenagers. A third you know now if you think of the you know it was one stage they were saying well it doesn't really affect teenagers and I mean I know the guys on spring break we're all running around you know saying well doesn't affect us, it's the oldies. Well, it's not the oldies you know I mean if you're a third of the deaths this is deaths not you know this isn't cases this is deaths pretty full-on but thirty-seven thousand three and sixty-six people recovered yesterday. So you know so that's something to be happy about I guess.

Let's talk about deflation because I think this is an interesting one. By definition all inflation is the general decrease in prices within an economy. Interestingly what we use to judge inflation as a percentage rate is a basket of goods. So we throw in a mortgage payment there we throw in how much a mobile phone cost we throw in the price of bread and eggs and milk that's sorts of thing. A basket of goods and we look at the change in price over time. And that is basically how we decide what inflation is, so from one period to the next how price has gone up if they've gone up that's inflation if they've gone down that's deflation effectively okay. Now obviously prolonged deflation is a bad thing we just got to look at Japan for an example that they had over a decade of deflationary pressure. And really what that meant was the prices went down but that's a prices of everything assets yeah goods you buy consumer goods see my supermarket bill decreases that's great. But look bottom line is what causes deflation is caused by a lack of money supply in the economy yeah so you might say well that's easy well it is print more money and actually that is one way of getting out of it absolutely but obviously you know there's a whole range and I'll sort through.

Let's have a look at how we actually you know get a get around this or not how we get around it but let's look at some of the characteristics of it. And why we don't want deflation. Bottom line is this we have this the risk is this deflationary spiral. Which basically says yeah possibly if prices start to fall then people go well I'm not going to buy something today I'm gonna buy it tomorrow and therefore demand falls and when demand falls okay then what happens is people who own companies and have inventory they go actually my goods are gonna be cheaper next week next month so I'm not gonna order as much. And then on top of that then production decreases and then what happens is unemployment increases okay so all these things are going on. Basically what that means is with now all these things going on and this is a spiral so that starts off and then with unemployment people having as much money demand drops you know there for inventory and therefore all around and keep spiralling and spiralling spying and it's you know it's almost a race to the bottom.

This is one of the problems with it is how do you stop it? This is one of the other things too is when this happens you can give people money but then what are they going to do they're not going to go out and spend it. Because you know tomorrow it's cheaper next week it's even cheaper a month later it's cheaper and this is where when people start hoarding cash and not spending money that's an issue. The other side of it is the debt burden on those figures because what has what should happen and this is one of the issues is that the wages are relatively inelastic try going to all your employees and saying hey in deflation has been at 20% and so we need to drop your wage 20%. It's a lot harder to do that the price of a carton of milk go down very quickly you know they can literally just change it on the cash register. The reality is to change someone's wages and a number of other things that make you know if you've got a lot of inventory that you bought at one price and now the prices come down you know you're not necessarily going to want to sell it for less but you might have to in order to keep the things.

The chronic deflationary spiral is a real thing and what I mean by chronic is long term okay. If deflation is a small amount over a little period of time fine but generally how you get out of it okay and let's talk about how we fix it because really we don't fix it as individuals. I mean we can say we go out and spend which yes okay great that's one way of doing but how do we get people to spend well we can lower bank reserve limits. Now what does that mean that means banks are prepared to lend more money pump more money into the economy and that is effectively what has to happen they can lower interest rate. Now I put WTF I don't mean WTO I mean what the F yeah because quite simply there already zero will close enough to zero so then what are you going to try the other thing you can try is negative interest rates. In other words, if you borrow money will actually pay you effectively to take that money. We haven't really ever seen that in our lifetimes before yeah but that could be an option to get us out of deflation cycle. You've got to be pumping money in but more importantly not just pumping it in you've then got to go and spend it. So as consumers so the government can do one thing but the consumers have to go and spend it if they're not spending it they're not spiral from the demand and they're not going to turn that round and therefore we get that chronic deflationary spiral.

Okay so they can do more QE I mean how that's possible we've been doing QE now for the last 10, 12 years you know since the last recession so I you know that and this is one of the challenges right now about this coronavirus crisis here is that you know so many of these tools have been used and abused that they're no longer on the table or are effective. There just isn't you know lowering interest rates you know. I mean lowering bank reserve limits that's fair enough they can do that yeah but lowering interest rates they've got nowhere else to go yeah I mean they already they've already done that you know negative interest rates well we'll see if they try that but of course if they do that then pensioners and people like that suffer a lot people who have money you know cash in the bank account. All of a sudden now they're gonna charge you to keep your money in the account yeah no but look. They can increase government spending but of course they've already been doing this in a lot of the cases you know and certainly these stimulus package are huge. They can cut tax rates yeah so the whole idea and the only way out of this is to spend your way out effectively but obviously that has the debt load and things like this.

All right now taking it to its next level you know is this likely to happen all right now look what I'll say here is this I don't think it is yeah the governments around the world are more likely and have proven to me more likely to actually want to spend more or invest more money create more liquidity increase the money supply than to allow the money supply to drop off. Because I think if it gets the point where I mean this is this is a challenge right now that we've got in 2008-2009 we had a recession how we got out of that it was a big debt bubble and it was a mortgage collateralized debt instruments. Basically what it was a housing bubble effectively so it affected property in a big way but it was also shares, it was the derivatives of a lot of those sort of things collateralized debt obligations you know that actually caused it and were one of the problems. The problem now is they've actually to be there's more likely to be inflation than deflation right now okay so that's one thing can deflation happen yeah he can Japan had it for you know literally a whole different they caught the Lost Decade yeah where assets and prices went down over time.

Sorry I just realized to stand there streaming had a problem pi I've tried and tried to fix it but it just it's you know coming and going.

Hopefully not it wasn't too bad if it was I'll rerecord it like I had to do yesterday but I thought I tried it again today and it worked perfectly and so I thought I thought to get about it.

Anyway enough Spain also suffered deflation right and I noticed this from my face oh you never got a place in Spain and we often go out there you know every year for holidays and things like and I've noticed I noticed that prices were going up up up up up and then 2008-2009 actually was back 2007 it started there prices start to come down and they come down and down and down and down until it says 16 there but I started to notice that in 18 when I went there on holidays. That's when the prices started to come up and things started to get busy again and nineteen was even busier and of course, now it's 20 well I mean we've postponed our trip there totally I mean. Normally we fly the whole team over there and you know we have a great week and you know but this year that's not on which is you know coronavirus.

The bottom line is and this is the real issue here is the debt bubble bursting. What's been happening we've been creating a massive massive debt and the way we've been handling that is by pumping more money in more liquidity so that we can have more debt and the debt has got out of whack. I mean to the point where you know the US debt 22 trillion you know back in the last recession all was 10 now it's 22 trillion that's public debt yeah private debt 4 trillion you know student loans have increased a hundred percent you know auto loans you know more like all debt. This is the challenge right now is we're just building this massive massive debt bubble and the problem is that's inflating asset prices and eventually, that could go pop and we may see massive price reductions across the board and that's where we get that do I think that's going to happen do I think that's a likely outcome. Not yet okay I think that's more likely to be down the track when we perhaps see the US dollar fall from grace and when people when the trust you know and the confidence in the US Reserve you know the reserve currency falls away. And we go you know what I'm not listening to the US dollar anymore I'm gonna go after gold, silver something else or whatever replaces it there's not a likely candidate right now you know like that was when the pound used to be the reserve currency and then it seamlessly changed over to the US dollar you know and really the petrodollar but even the petrodollar struggling now but all these sorts of things are starting to get to the point where they're you know that bubbles bursts are getting bigger and bigger and bigger and therefore it's more stress and more risk you know eventually it might pop.

We'll see I don't think it is yet all right I do think however the US potentially is going to go into recession and I do think because they're pumping so much money and they're happily doing that away I think we're more likely to see inflation than deflation.

So yeah guys that's it for today I never got a question they're hoping the ears sorry my ears you know there is a compulsory that's for sure I thought I was expecting an economic question there and something what is ears to know what it was the ears yeah no they're not compulsory good alright guys anyway stay safe stay healthy and have a great Easter at home make the most of it spend some time with your kids we've got four days take it off yeah take it off.

I'm doing a couple of videos on Friday but then we're not gonna be doing a Monday video well actually I might have Monday video I may be bored by then but we'll see what happens but I hadn't planned to do a Monday next week video because it's Easter but do I have a great Easter and we'll catch you on the rebound but stay safe, stay healthy and stay at home see you guys bye


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UK Property Investors


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