Housing Deflation? IS A Deflationary Crash Coming?

We have inflation and everybody knows it but that’s kind of the point , this is now common knowlege among professionals. This means inflation has already been effecting investing and speculation decisions for a while now and its priced in. Commodites and real estate already went up , the stock market already went up. The black swan that would crash everything would be deflation , inflation is already built into the current situation. Also its objectively true that the dollar index has been going up at same time everyone is talking about collapse of the dollar. So the real risk could really be deflation!

Over the past few months, almost everyone has been warning about upcoming inflation. Ray Dalio, Michael Burry, Warren Buffett, and even consumers worldwide have witnessed inflation start to take off in practically all goods and services. Not only that, but the majority of investors believe that inflation is going to continue to rise substantially in the future. However, as a typical contrarian, Cathie Wood thinks that the opposite is going to happen: deflation.

Housing Deflation?

The world has prepared for inflation and the real black swan event in Cathie’s eyes is actually a deflationary crash.

Cathie Wood started out her career as an economist and has decades of experience to back up her claims. Therefore, it’s vital that we see what Cathie has to say, regardless of any preconceived notions. In fact, in the early 1980s, two famous economists, Henry Kaufman and Milton Friedman, thought that inflation was here to stay. On the other hand, Cathie, a relatively new economist, thought that inflation was cooling off. In the end, Cathie was right. (Note for me: put a card in the corner for the Cathie Wood documentary) Now, Cathie Wood is making her own bold prediction against the crowd.

The first signal pointing towards decelerating inflation is the money supply. The supply of M2 money has increased significantly ever since the pandemic started. M2 money is a measure of the US money supply that includes savings deposits, checks, cash, checkable deposits, money market funds, and certificates of deposit. Of course, with the rise of stimulus checks, it’s not a surprise that M2 money has increased drastically. However, Cathie Wood is seeing a trend, which is that M2 money growth is slowing down at a rapid pace. M2 money growth has slowed down from 27% in April this year to just 13.8% in May. This slowdown in growth is likely why the bond market has been rallying over the past few months. 10-year treasury bond yields have been suppressed to roughly 1.5% after peaking at 1.7% in March. Because bond yields and bond prices are inversely correlated, this means that the bond market has been rallying as yields are going down. When this happens, we know that the bond market is predicting deflation instead of inflation.

You might think that the bond market has been rallying because of the artificial buying power of the Federal Reserve. However, the Fed has been purchasing bonds for months now, and this isn’t a new variable in the bond market. The buying power from the Fed has not changed the entire time, as even when the bond yields spiked up in March, the Fed’s buying power was still there. In fact, the Fed plans to sell some corporate bonds and corporate bond ETFs that it purchased in the pandemic. After the high inflation reports, Cathie Wood, like every economist, actually expected the bond market to sell off. Nevertheless, bonds have just continued to rally.

As crazy as Cathie Wood may seem, she does actually expect inflation to stay for the next couple of months. The personal consumption expenditures price index has shown that prices have increased 1.6% year over year in February to 3.9% in May. However, Cathie thinks this inflation rate could increase all the way to 5%. So while inflation could heat up for the next couple of months, Cathie sees prices going down long term.

The rise in oil prices is ironically setting the stage for deflation. The OPEC, which is a group of many countries that control the supply of oil, is determined to make back some profits by keeping the oil supply low. This may actually be counterintuitive. As oil prices have gone up, more and more people have begun flocking towards electric vehicles. During the pandemic, EV sales have increased disproportionately to fossil fuel vehicles. This is partly influenced by increasing gas prices, and also the idea that EVs are superior to gas-powered vehicles.

If oil prices continue to rise, then this will just incentivize more and more people to purchase EVs, which lowers the long-term demand for oil. Crude oil currently sits at roughly $75 per barrel, which is approaching the previous high of $77. Cathie thinks that oil will eventually go down to $3 to $12 per barrel. That’s right, $3 to $12 per barrel. $12 per barrel would be an 84% decline from the current prices. If these low prices come to reality, substantial deflation would come.

My first post where I called the real estate market top was June 15, 2021 (https://brokerforyou.com/brokerforyou/real-estate-market-downturn/ ) just a couple of weeks ago. Then, two days later on June 17 I had a follow-up post ( https://brokerforyou.com/brokerforyou/real-estate-market-bust/ )where I added additional indicators, that to me showed that the market was in a topping phase right now! I put the links to each one of those prior post above, and would suggest if you’re interested, to reread those posts!

Housing Deflation?