Feeling Good About Inflation Vis-à-Vis Affordability
We get told daily that the developed world is falling into deflation. Europe, or rather the European Central Bank, is so worried about it that they saw it necessary to penalise savers with negative interest rates and intend to embark on a massive asset purchase scheme to flood the system with about 1 trillion in cash.
Inflation projections for Singapore was revised lower today with economic forecasters now expecting 1.8% as their full year forecast instead of 2.2% they had expected in June. http://www.businesstimes.com.sg/breaking-news/singapore/forecasters-lower-expectations-2014-singapore-gdp-growth-33-mas-poll-2014091
In the US, markets are cheering the job creation and the massive decline in unemployment rate, with the unstoppable S&P 500 marching to a record high. Yet the Federal Reserve still does not think their job is done.
You see, it is about inflation versus affordability.
Inflation may be lower but affordability is lower too !
With house and land prices rising around the world, shares and bond prices higher than ever, we can say assets are generally out of reach for the common man.
The income gap is the widest in decades making assets even more unaffordable not including the cost of healthcare and child rearing.
Indeed latest studies show that 95% of American households are worth less (inflation adjusted) than a decade ago whilst 5% are worth more. http://www.nytimes.com/2014/07/27/business/the-typical-household-now-worth-a-third-less.html?partner=socialflow&smid=tw-nytimesbusiness&_r=0
It is hard to stomach headlines like 36% of Americans have saved nothing for retirement when we read that Harlem condo values have doubled in the past decade.
If wages have not doubled in the past decade, that makes Harlem condos out of reach for a lot more people now.
Meanwhile for those with substantial asset gains, there is the purchasing power to accumulate more assets given the buffer that they have, and in turn generate more returns for themselves which increases their income stream.
Within this group of people, there are then those with more and as such, have more purchasing power which makes it expensive or unaffordable for those with less purchasing power to buy. And it goes on until we come to the apex of society, those with the astronomical sums of cash who can virtually sweep up a lot of assets. A good example would be stock ownership over the years which is gradually decreasing for the average household in America. http://www.businessinsider.sg/piketty-was-right-the-rich-get-richer-middle-class-suffer-2014-9/#.VBAfVBaKVX8
In the Federal Reserve’s triennial Survey of Consumer Finances, they found that poor are getting poorer, that 90% of US families accounted for 24.7% of the share of wealth (compared to 33.2% in 1989). http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf
And Singaporeans better not gloat because Singaporeans are poorer than Americans strangely, ranked 8th in the world last year. https://tradehaven.net/market/what-is-this-america-you-are-getting-richer-secrets-to-riches/
Housing is a key expense for the average person and most people rather buy than rent because the mentality is “why rent when you can buy and own ?”
Take a look at the housing table below.
For most of the countries house prices as a portion of disposable income has risen as a % to its long term average. In Singapore, it is not that bad if you earn GDP per capita and dream of owning an upscale home – it just takes about 34 years to pay it off.
I wrote a bit more on this back in June. https://tradehaven.net/market/singapore-millionaires-in-trouble-real-estate-and-the-mass-market-wealth-effect/
In other places like Vancouver, $3 million is the new $1 million. http://www.theglobeandmail.com//report-on-business/economy/in-vancouver-home-sales-3-million-is-the-new-1-million/article20483704/?cmpid=rss1&click=sf_rob
Unfortunately, things are not going to get much better. Latest survey out of Harvard Business School is that employers prefer to hire robots these days than people. http://thinkprogress.org/economy/2014/09/09/3564852/harvard-business-survey-hire-robots/ Afterall they are only paid to make shareholders happy.
Worse still, the World Bank estimates that 600 million new jobs will have to be created by 2030 in order to support population growth and quality jobs are lacking these days. http://time.com/3308095/a-global-jobs-crisis-is-coming-says-world-bank/
Couple that with stagnant wages and unaffordability of assets, it is no wonder that the general population, especially the young, are not feeling too good about things these days. http://www.theglobeandmail.com//globe-investor/personal-finance/household-finances/gen-ys-financial-woes-are-now-everyones-problem/article20482243/?cmpid=rss1&click=sf_rob
In another Harvard Business School survey, the income gap will only worsen that our own common sense tells us like I stated above because the ones with the purchasing power to garner assets will only make it even more unaffordable for the rest.
Seriously, how is anyone going to be able to own a shopping mall nowadays when GIC and Temasek are buying them by the scores etc. ?
But to get it to work, they still need us.
“Thriving citizens become more productive employees, more willing consumers, and stronger supporters of pro-business policies”
“Struggling citizens are disgruntled at work, frugal at the cash register, and anti-business at the ballot box.” http://www.theglobeandmail.com//report-on-business/international-business/us-business/americas-wealth-gap-unsustainable-may-worsen-study/article20467221/?cmpid=rss1&click=sf_globe
THAT IS WHY INFLATION IS DROPPING ! People aren’t spending.
So how would they like my new idea of renting ?
Rental yields are already insanely low. I am hearing $4k gets you a decent apartment in Sentosa. Rental yields will continue to go lower as prices go higher or until prices adjust lower eventually.
And the worst part is that governments think that by keeping interest rates negative will make people happy.
Wrong. It makes Citibank’s private banking clients happy perhaps because Citi says “Just Use Leverage for 10% Returns”.
” Sept. 9 (Bloomberg) — Stop complaining junk-bond yields are too low. Instead, just use borrowed money to juice returns.
That’s the message from Citigroup Inc. analysts, anyway.
Investors are better off leveraging speculative-grade bonds than U.S. Treasuries, stocks, emerging-market or investment- grade debt to reach a 10 percent return goal because they don’t need to borrow as much to get there, according to strategists led by Stephen Antczak. This means lower potential losses in a selloff.” http://www.bloomberg.com/news/2014-09-09/don-t-hate-credit-just-use-leverage-for-10-returns-says-citi.html
As for the rest of the people, especially average Mexicans who take about 300 years to save a million, I think it just makes life a little more unaffordable. http://www.economist.com/blogs/graphicdetail/2013/02/daily-chart-4?fsrc=scn/tw/te/bl/ed/howlongtobeamillionaire