Research & Commentary

Inflation or Deflation: What’s the Long-Term Trend?

Signs to look for in the housing market

After a brief brush with deflation in 2008, the market conversation is increasingly inflationary. ElliottWaveTV asked co-editor of our monthly Elliott Wave Financial Forecast for his take on where things are headed — with one market in focus in particular: real estate.

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[Editor’s note: The text version of this video is below.]

Dana Weeks: Hi, I’m Dana Weeks, and I’m here today with Pete Kendall, co-editor of The Elliott Wave Financial Forecast. Pete, it’s great to see you. It’s been a while.

Pete Kendall: Good to see you again, Dana.

DW: I really enjoyed your April edition of The Elliott Wave Financial Forecast. There’s so much great information in there, and you focus on deflation. And I’m curious as to why this is on your radar when we’ve been hearing so much about inflation lately?

PK: Well, a deflationary phenomenon doesn’t need people to not believe in it for it to happen. In fact, later on, when we get into a structural deflation, it will intensify as people expect it to do so. But in the turn into the deflation, it’s common for people to not expect it at all. And that’s kind of what we see at this point.

DW: So Pete, how does this fit in with history?

PK: We’re transitioning into a grand supercycle degree bear market. Therefore, we have a much longer term trend change. We have a top in 2000. Again, in 2007, and kind of a mini-deflation or I guess the people that were in real estate at the time wouldn’t call it that, but it was a brief deflation that we believe will be revisited in the next phase of decline in the next phase of the bear market.

DW: Pete, one of the things that you focused on in the newsletter is the real estate markets. What are your key takeaways?

PK: Real estate’s the epicenter of a deflation. People’s property is what’s most important to them and their store of value, given the prior rise. They know only higher prices. And that is impacted by, in real estate, almost to the highest degree. So in 1835, stocks peaked in that year and then two years later, the real estate market had a speculative frenzy that then reverted into a crash. In 1929, it was more co-incident. Real estate and stocks peaked together and crashed together. From 2000 to the current point in time, we’ve had a long peaking process. And in the middle of that in 2007, we had the peak in real estate or at least for US housing. As we showed in the chart that was in the most recent issue. It was called the housing bust is back. As you can see, the housing peak came actually two years before the peak in stocks. That’s 2005. The arrow on the chart. That’s “a” wave down. And we had a “b” wave up. And now we’re entering a “c” wave down. And many of other key markets that we discuss in the latest issue. Particularly in New York, sales are down 25% in the first quarter. That’s a key indicator. And you can see prices starting to act that way. And especially like Toronto and some of the other major lead markets, we’re seeing a reversal.

DW: You also mentioned that China is the key to many real estate markets even outside of Asia. How does this work, Pete?

PK: Well, China is actually playing the role of New York in 1929. It has the highest concentration of the world’s tallest buildings at this point. We talked about this in past issues, and we’re starting to see, as we noted, a reversal in housing prices. This is not material at this point, but we think it will become so in the very near future. China will become the subprime real estate problem of 2008.

DW: I just have to mention this fact. I thought this was so fascinating. You state that China’s latest building boom is the greatest in recorded history.

PK: Yeah, and that’s because of the tall building factor, which I talked about a minute ago. But also the building of complete towns, ghost towns actually, in many cases. Nobody lives there. They’re built to spur on the economy. But they haven’t yet found an efficient use for them and they never will, in our opinion.

DW: And aside from real estate, what other deflationary signs do you see?

PK: Well, there’s many, of course, and they’re all covered in the latest issues. It’s been an amazing three months really. I’d say the biggest one is the debt situation. In China, total debt– that would be corporate debt, government debt, and personal debt– is 256% of GDP. That’s historically high number, especially for China. In the US, it’s 300%. These numbers are OK as long as the economy’s humming, but once it starts to stall, it’s going to add up fast it’s going to become a big problem. Of course, in the US, we now have trillion-dollar debt in student loans, credit card debt, and we have this chart of subprime auto housing, which shows that it’s default ratios are already rising. That will happen across the economy and in the not too distant future.

DW: Thanks for your time, Pete.

PK: Well, thank you for having me, Dana.

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