Competitive Deflation Spells Opportunity for Real Estate Investors

You hear and see it everywhere, "A crash in the stock market is coming! Market mavens prepare for huge fall!"

Don't believe it. A crash in both the US stock market, and in American real estate, is not going to happen. Here are the reasons why.

Let's start with what is really happening in the world economy.

The so called "crash" theorists insist that the Federal Reserve is soon going to raise interest rates to where historically they have been in the past. Their thinking is that sooner or later, the Fed has to return to normal interests rates, and when that happens, all of the values in the current real estate and US stock market will be affected so negatively that a crash will occur.

But interest rates are NOT going to return to normal levels anytime soon, and here is why: a new economic phenomenon in almost all of the the World's economies is slowing taking hold. That new phenomenon is what I call, "competitive deflation." I am sure that you have never heard of this two terms before, and the reason that you haven't heard of them is because no one is talking about deflation at all. Yet, this new economic trend actually has existed in the world economy since 2008, and the forces behind this new phenomenon are growing and deepening in intensity.

Competitive deflation can be defined an ongoing competition between economic interests to create goods and services at lower and lower prices. So, for example, one manufacturer in Vietnam hires employees at hourly rate of fifty cents in US currency, then produces products similar to other countries at a lower price. Their production items they bring to the market have the same components as other producers in the world, but because the labor required for the production of the Vietnamese devices is far cheaper than other producers, their products can be sold at a lower price. This forces the manufacturing competitors of the Vietnamese to react. If they are to keep their share of the market, these competitors must produce their devices cheaper than the Vietnamese. Sometimes, this cut in cost is accomplished by finding a source of raw materials which is significantly cheaper than those prices the Vietnamese suppliers are paying for their raw materials, and this competitive edge makes it possible for the competition to meet or beat the lower prices of their competitors in Vietnam.

However, another, more significant way to achieve the same effect, is to have your government lower the value of your currency. In other words, if the Vietnamese are producing a device at a significantly lower price because they have cheaper labor costs, and you are a Chinese producer of the same device, and you cannot find any raw materials in the world market to purchase at a lower price, you can simply do this: go to your government and ask your leaders to lower the value of your yuan currency and match the prices of the Vietnamese. And this is exactly what is happening now on a large scale around the world. As the "currency effect" gathers force on a world wide market level, deflation, or what common folk call, "price breaks" appear to be accelerating throughout the economies of competing countries.

The result of a cycle of currency devaluation, and the combination of cheaper and cheaper production of goods by producers, is that deflation takes hold on such a large scale that the only way Central Banks can compensate for this trend is to keep their country's interest rates low. And, if possible, Central Bankers can even make efforts to lower interest rates are even more. If Central Banks don't compensate for deflation by lowering interest rates, the value of their currencies strengthen and trade with international markets slows. And, as time passes, each year, this cycle goes on and on. Competitive deflation is the reason why we currently see negative interest rates in Europe, Japan and other Western nations. It is the only way that these countries can compensate for the growing deflationary pressures they see in their economies.

The United States is in no position right now to ignore this very significant economic deflationary phenomenon. Our dollar is already very strong against almost all other currencies in the world, and this economic fact means that we are bound in the future to see our trade with other nations slow. The pressure on our Federal Reserve at the moment is to raise rates, or to keep rates the same. But deflation is growing, and in fact, the Fed most likely is going to have to eventually ease some more to compensate for the ever rising and stronger dollar as measured against all other world currencies. Don't be fooled by the Fed jawboning right now in their news conferences about how they need to raise rates. These are attempts on the part of the Fed to get the market to respond, so that the markets themselves naturally compensate for the threat of future rate increases.

The future of the world economy is one in which ongoing deflation is going to continue for the next eight to ten years. So the idea that somehow interest rates in America are going to return to previous "normal" levels is just ridiculous. There is no way that interest rates are going to rise significantly here, or anywhere else, until the world economy, and governments creating and managing their currencies, come to terms with competitive deflation. Regular currency devaluations by governments around the world that want their products to take market share from their international competitors is going to hold down interest rates longer than anyone now dreams.

So what about the real estate and the US stock market? I am not a specialist on the US stock market, so I will leave that issue to others more qualified, but I will say this about the current real estate market in the US. I expect more prices increases in real estate all over America. I expect most real estate markets in the US to continue to strengthen, and that is especially the case here in Florida, where the strong dollar is currently causing a healthy pause in our residential market. The commercial market in Florida will continue to see healthy rises in value because inventories are low and lenders are more willing to make loans with very favorable and low rates to investors. Because of these factors, our commercial real estate market in Florida is currently fairly strong. I expect this strengthening trend to continue for the next five to seven years.

In other words, its time to BUY quality commercial real estate properties with good tenants in good locations. It is especially a great time to take advantage of the fear in the markets, as we approach the US elections in November. Every headline in the US news right now regarding the politics of Washington creates a kind of nervousness, and worrisome attitude which makes sellers more amenable to compromise and to a willingness to sell their properties at a reasonable price. And, it is time to take advantage of our US economic independence from some of the more deflationary markets in Asia and South America and use our US dollars to make more money for ourselves.

John K Brackett, Ph.D.

John K Brackett Real Estate

Jupiter, Florida