What is your PLAN for the next Depression ?

[gigigoodyear]

depression

My investment strategy would depend on whether it is a hyperinflationary depression or a deflationary depression.

Hyperinflationary depression (aka stagflation) - gold, commodities, property and other hard assets. I would get a mortgage from the bank, fix the interest rates and the hyperinflation should make take care of paying off the property or gold. Even better yet if you can borrow US dollars (which are predicted to fall to below US index 80) and invest in Aust hard assets so you can get a double savings whammy from the exchange rates. Look at Zimbabwe as a case study of what does well during hyperinflationary times.

Deflationary depression - gold and cash. Gold did well during the 1929 depression and so did gold stocks apparently. I was reading that one gold stock went up 600% during the depression. Can't remember which one so don't ask me. Wait till prices bottom out and buy like crazy.

Some financial analysts of the Austrian school of economics predict we might have a hyperinflationary depression first and then followed by a deflationary depression. First with the $US dollar falling off the edge of the cliff which would mean central banks around the world printing money to save their economies (competitive devaluation) with currencies racing each other to the bottom. Rising price of gold in all currencies is already signalling that this is happening.

BTW - recession is just another name for a depression. Politicians prefer recession since they don't want the public conjuring up images of the 1929 depression. Look at Japan, it has been in a recession (um deflationary depression) for the last 10 years.

 

[RichardC]

Hyperinflationary depression (aka stagflation)

I suggest that stagflation is simply an (ordinary)inflationary recession. As a young man I felt that it was indeed "time" when I voted for Gough when the wonderful (Liberal) finance managers had stuffed it up.

The condition then was definately "stagflation" but it had no elements of hyper-inflation nor depression. Such extremes have only happened in grossly mismanaged economies in the last century. Most recently in Zimbabwe, hardly a model of good governance.

 

[Andrew_A]

Myths

Some good points in this thread. I would just like to spend some time correcting a myth that is very pervasive however.

Gold does not do well during a depression!

Gold did not do well during the great depression, or the 87 crash or the 00 crash, consult a chart. Inflationary times should excite the gold bugs but not recessions or depressions, this isn't a widely known point though it appears.

There is a very healthy correlation going on between gold and inflation, there are some other key drivers affecting supply and demand and it might be worthwile shedding some sweat and doing your own research if you are putting your money towards something gold related, rather than following the advice of others.

There are plenty of good inflation hedges and stores of value other than gold. Jim Rogers made a point recently about there being no shortage of people searching for gold and starting new mines, unlike some other lesser obsessed about commodities.

Also I have recently heard a forummite say that 'Yes property could do well, but your profits will be in inflation ravaged dollars' as an argument for equites instead of property, neglecting to mention that exactly the same scenarios will apply to your equities sadly.

 

[alexlee]

new mines, unlike some other lesser obsessed about commodities.

Also I have recently heard a forummite say that 'Yes property could do well, but your profits will be in inflation ravaged dollars' as an argument for equites instead of property, neglecting to mention that exactly the same scenarios will apply to your equities sadly.

And inflation would equally savage your mortgages (in your favour). So as long as the growth rate on your IP is higher than the inflation rate, you're still ahead.
Alex

 

[gigigoodyear]

gold and deflationary depression

Here are some arguments for why gold did not do well in those periods mentioned. The author alludes to market manipulation. Also recall the Plunge Protection Team, was created in 1987 after the stock market crash by Reagan to prevent any more stockmarket crash incidents. This would also mean suppressing the price of gold through gold leasing by central banks (see gata arguments). I think this is well documented if you do a google search.

http://www.gold-eagle.com/editorials_02/kennedy012302.html

Here are some arguments of why gold is like cash in a deflationary depression

http://www.prudentsquirrel.com/members/print/wacagaawh.php

"Now as to deflation...... I have written before that gold does well even in deflationary times, mainly by a similar mechanism.... In a severe deflation, fiat is pushed out like mad.....but prices drop for a while anyway.... since we are not in baby hyper inflation then, golds price does not rise in fiat, but falls some even.....but gold does not fall AS MUCH as the fiat, so in effect, once again, gold increases in purchasing power vsvs widgets.....

The deflationary analog of gold capturing its masked purchasing power is recovered when gold is used to buy deflated assets at 10 cents on the dollar..... that is analogous to a 1000 percent return on gold's buying power. This is NOT an investment return however.

So in either case, in deflation or hyper inflation gold recaptures its masked purchasing power, but it has to occur after the deflation or hyper inflation ensues.... to recover all that value vsvs goods.....This lag is why gold seems to languish even when fiat is inflating world wide at about 8 percent a year.....worldwide. That will only last until demand falls precipitously world wide, and we are very very near that time. However, the masking effect remains presently."

 

[RichardC]

Some good points in this thread. I would just like to spend some time correcting a myth that is very pervasive however.

Gold does not do well during a depression!

Gold did not do well during the great depression,

Are you sure? If you believe as I do that "He who loses least wins" then I suggest that gold outperformed real estate.

or the 87 crash or the 00 crash, consult a chart.

These were shareprice "corrections". There was only a minor secondary effect on the general economy.

Inflationary times should excite the gold bugs but not recessions or depressions, this isn't a widely known point though it appears.

A point I don't accept but my replies have been inadequate so I'll let this pass

There is a very healthy correlation going on between gold and inflation, there are some other key drivers affecting supply and demand and it might be worthwile shedding some sweat and doing your own research if you are putting your money towards something gold related, rather than following the advice of others.

Yes. Mine as well as your's.

There are plenty of good inflation hedges and stores of value other than gold. Jim Rogers made a point recently about there being no shortage of people searching for gold and starting new mines, unlike some other lesser obsessed about commodities.

Jim is the world's greatest proponent of all commodities and the whole world knows he believes sugar will outperform gold. If you want to borrow his book Hot Commodities you are welcome.

Also I have recently heard a forummite say that 'Yes property could do well, but your profits will be in inflation ravaged dollars' as an argument for equites instead of property, neglecting to mention that exactly the same scenarios will apply to your equities sadly.

I'm not good at this but I'm thinking of updating the theory that an ounce of gold would buy a Gentlemen's suit in Roman days as it would (sort of) today, to how many ounces to buy a Sydney brick veneer in 2000 compared with today's exchange rate ($AU/oz Au). You see, gold is the only real constant to which anything can be compared.

 

[gigigoodyear]

recession versus depression

I suggest that stagflation is simply an (ordinary)inflationary recession. As a young man I felt that it was indeed "time" when I voted for Gough when the wonderful (Liberal) finance managers had stuffed it up.

The condition then was definately "stagflation" but it had no elements of hyper-inflation nor depression. Such extremes have only happened in grossly mismanaged economies in the last century. Most recently in Zimbabwe, hardly a model of good governance.

Depends how one defines recession and depression. I'd say that 10 years of deflationary recession in Japan qualifies as a depression. Don't you? For some, the periods of recession in Australia was quite prolonged that I felt it was like a depression.

"A recession is usually defined in macroeconomics as a fall of a country's real Gross Domestic Product in two or more successive quarters of a year. A recession may also involve falling prices, called deflation; alternatively it may involve sharply rising prices (inflation), in which case this process is known as stagflation. A severe or long recession is referred to as an economic depression or slump. A recession can also be defined as two consecutive periods of negative growth." http://www.answers.com/recession

It's a recession when your neighbor loses his job; it's a depression when you lose your own. — Harry Truman (1884-1972)

 

[RichardC]

Gigi, I think you have a "modern" concept of depression. Simply doing it tough isn't a depression.

The '30s were desperate times. I was born not long after and as I grew up the concept of the "sussos" (men working on road gangs just to be fed) was still folk lore.

You could do worse than to read about the times. A quick Google didn't link "Hardy" with "Horses don't bet on people". Tomorrow I will remember Hardy's first name but he was very much left. This should not put you off because if you think about it, the victims could not possibly have loved the Torys.

It was Frank Hardy, of course.

 

[gigigoodyear]

hyperinflation vs inflation

RichardC

You are quite correct about the differences between ordinary inflation and hyperinflation. The only difference between the two is time. I recall my parents bought a house in 1980 for $40,000 and sold it in 2005 for $500,000, so it took 25 years for about a 1250% increase. This is how stealthy and devious politicians extract more taxes in the form of inflation from the sheeple who keep voting them in. Sheeple who get sucked in with promises of ridiculously low tax cuts when they should be demanding lower inflation and the preservation of the purchasing power of their money!

Now say if my parents bought the house in 2003 for $40,000 and sold it in 2005 for $500,000 then I would regard this as hyperinflation. Which by the way, would make it harder for the government to collect their secret hidden tax from the sheeple like a huge boil at the end of your nose!

 

[TJamesX]

And inflation would equally savage your mortgages (in your favour). So as long as the growth rate on your IP is higher than the inflation rate, you're still ahead.
Alex

Property always seems to get the tick as an asset for inflationary times as it is grouped with other hard assets - I really don't understand in our current environment why;

We've had a global house price boom in an environment where inflation has been very low. This is largly a result of low interest rates and increase in money supply - as the rates went down people could afford more on the same monthly payment, so the prices went up..... so why won't the reverse happen when rates follow inflation on the way up??? My view is that if we reached a high inflationary period - house prices at least in the medium term would fall in real terms.

As far as a depression scenario goes.... my opinion

Cash rules, debt doesn't. Grandparents (who lived through the depression) always seem to hate debt (good or bad). when everything goes bad, people who owe default, and people who are owed lose as well. Anything that generates cash flow (and is not heavily debt funded) would be gold.

TJ

 

[RichardC]

Sorry Gigi. You have it all wrong. Hyper-inflation is when you need to be paid twice a week (each pay being significantly higher than the one you got afew days ago) so you can feed yourself.

It is probably an urban myth but it is said that Albert Einstien's mother was so desperate to buy something of "lasting value" that she bought a pile of used bed pans. Even if it isn't true it's probably close to the truth .

Are you aware that it is cheaper to wipe your bum with a Zimbabwe bank note than a square of toilet paper? That during the Wienmar (sp?) hyper-inflation (that's when Einstien's mum was worried) it was cheaper to burn banknotes than coal in the fire place?

 

[RichardC]

Grandparents (who lived through the depression) always seem to hate debt (good or bad).

My Dad fought in France in the Great War, lived through the depression, became a sole Dad when his wife died in childberth, failed the medical for WW2, and used to say to me "I've lived through two world wars, a depression and two marriages, and you still think I'm naive!!" Funny thing was, he was. LOL

That generation had no confidence in the future and therefore could not commit to a mortgage. They are worthy of our understanding nonetheless.

 

[gigigoodyear]

Property always seems to get the tick as an asset for inflationary times as it is grouped with other hard assets - I really don't understand in our current environment why;

People invest in property in inflationary times to preserve the purchasing power of their money. $1 will not buy you the same amount of goods when you spend it next year. But the same amount of goods will buy you more dollars when you sell it next year.

We've had a global house price boom in an environment where inflation has been very low. This is largly a result of low interest rates and increase in money supply - as the rates went down people could afford more on the same monthly payment, so the prices went up..... so why won't the reverse happen when rates follow inflation on the way up??? My view is that if we reached a high inflationary period - house prices at least in the medium term would fall in real terms.;

I think you need to define "inflation". For myself, the term inflation refers to an increase in the money supply, this concept is often referred to as monetary expansion. Too much money created by central banksters means more money chasing fewer assets and this includes stocks, real estate, gold, commodities which spills over to goods and services. This eventually means an increase in the prices the next time you buy that chocolate bar you have to have. The Reserve Bank of Australia has tightened credit by increasing interest rates to 5.75% but don't forget they have also increased the broad money supply also (ie inflation) by 8-10% per year. There remains a difference of about 2-4% inflation. They are still behind the inflation curve. So there is still additional money chasing fewer goods and so somehow I don't think housing prices will fall all that much yet.


(http://www.rba.gov.au/Statistics/Bulletin/D03hist.xls see Broad Money Supply column). Broad money supply increased from $50.6 billion in Aug 1976 to $824.4 billion in April 2006.

There are of course, different opinions out there.

 

[gigigoodyear]

There remains a difference of about 2-4% inflation. They are still behind the inflation curve. So there is still additional money chasing fewer goods and so somehow I don't think housing prices will fall all that much yet.

Forgot to mention one caveat, the RBA can't control where this additional money may flow to. If people do not want to borrow this money to buy more real estate but may instead buy more stocks then you may get your wish and house prices should fall.

 

[TJamesX]

I think you need to define "inflation". For myself, the term inflation refers to an increase in the money supply, this concept is often referred to as monetary expansion. Too much money created by central banksters means more money chasing fewer assets and this includes stocks, real estate, gold, commodities which spills over to goods and services. This eventually means an increase in the prices the next time you buy that chocolate bar you have to have. The Reserve Bank of Australia has tightened credit by increasing interest rates to 5.75% but don't forget they have also increased the broad money supply also (ie inflation) by 8-10% per year. There remains a difference of about 2-4% inflation. They are still behind the inflation curve. So there is still additional money chasing fewer goods and so somehow I don't think housing prices will fall all that much yet.

I was talking about CPI inflation and its relation to interest rates – rather than money supply inflation. My thoughts on housing in an inflationary environment are like this;

- after a major boom in low CPI inflation, houses are more or less now priced on the cost of debt.

- If inflation was to seriously arrive then the cost of debt would also rise, so does this increase or decrease the value of existing housing? Housing is predominantly land value with some house value, the only component sensitive to inflation on a cost basis is the replacement costs of new houses (not land).

- Therefore I would expect the real value of land to fall in an interest rate increasing environment as affordability decreases.

- For example assuming a 400k loan at 6.75% - IO repayments of 2250 per month. To be making the same repayments at 9% rates would equate to a 300k loan, so a 100k drop in affordability.

I am open to persuasion, but I don’t believe the old ‘all hard assets benefit from inflation’ in this case….

TJ

 

[Brenda Irwin]

In a depression bunk beds would become popular as my tenants could double up in one IP and pay less rent each.

 

[topcropper]

............

 

[topcropper]

Here are some arguments for why gold did not do well in those periods mentioned. The author alludes to market manipulation. Also recall the Plunge Protection Team, was created in 1987 after the stock market crash by Reagan to prevent any more stockmarket crash incidents. This would also mean suppressing the price of gold through gold leasing by central banks (see gata arguments). I think this is well documented if you do a google search.

."

I've heard lots about this Plunge Protection Team, PPT. I reckon it's an urban myth.

Just think how many millions of dollars it would take to shift the Aussie market say. It would take billions to shift the US. OK, you could shift the market for a day. Then it would take the same money again to hold it up the next day. What would be the point? You couldn't shift a market for very long no matter how many billions you used.

That's what I reckon. I know nothing about this though, just using my commonsence.

See ya's.

 

[Delta]

I plan to read a few books, watch a few movies, travel to a few countries to see as much of the world as I can, before I have to meet my maker

Other than that, I will continue to make the most of my time on Earth.

 

[Andrew_A]

Seperating inflation is a very cute idea. Asset inflation, monetary inflation, CPI inflation!?, core inflation. I don't understand how it can be done personally, perhaps there is someone who can explain it?

In the US they have it down to a fine art, the less the 'core inflation rate' actually includes things that ever go up in price the better and more reliable a figure it is apparently.