Asset Deflation Crashes Through the Window

By: Steve Moyer | Thu, Sep 7, 2006
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"Sometimes you have to pay the piper, and we're going to have to pay the piper for a while. That's the way it is." ~ Frank Hamblen

The jig is up, my friends. The elephant that is asset deflation has slowly crashed through the big bay window straight onto our living room carpet and the no-fun part of speculative excess and leveraging (not to mention reckless borrowing and spending) has more than begun.

If you refuse to heed our advice, you will pay for it. Dearly.

One by one the commodities markets are going splat, proving once and for all that post-bubble phenomena will ultimately always win out over money-supply pumping, speculative frenzy, and the Pollyannaish, mistaken notion that "prices will always go up forever."

You don't even want to know how much money was bet on this naïve assumption. Most everyone jumped on board one way or another. "Prices always go up, right?" Isn't that what we've come to believe ever since our parents bought their houses for $10,000 -- you know, back when we were toddlers?

The commodities markets are figuring out that inflation is nowhere to be seen and that deflation is here. Crude oil, natural gas, unleaded gas, gold, silver, platinum....they're all joining in the deflation conga line. Inflation is getting priced right out of the equation. Interest rates are dropping, too.

That ol' yield curve inversion was right again, dad gummit.

Homebuilders are quaking in their boots as right before your very eyes, ordinary folks have figured out that if they wait 'til next year, prices will be lower. Soon they will figure out that prices will be a LOT lower. The speculators have run kicking and screaming from the housing market (step one) and the general consensus is already that the "housing boom is over." Lower interest rates aren't helping at all.

You should probably get accustomed to the following, coming-soon-to-the-business-section-of-your-local-newspaper phraseology: Oversupply, excess inventory, "hard landing," foreclosures, "upside-down" mortgages, contract cancellations, "fire-sales," bankruptcies, foreclosures, bank failures, credit crunch, credit contraction, bank crisis, Fannie Mae crisis, liquidity crisis, real estate deflation, asset deflation, price deflation, foreclosures, meltdown. Real estate values will fall from peak values somewhere in the range of 50% to 90%, depending on area, location, property type, "intrinsic value" and scarcity.

If you don't realize how much this economy has been built (on stilts) with money ordinary citizens borrowed against their homes, you really haven't been paying attention. With virtually no U.S. savings to back it up (why save when you are certain rising home prices will be there to bail your finances out?), there is nothing left to help withstand a hard landing in real estate. We've said all along we expect to see a Japan-style twelve-year gradual real estate deflation; more and more it seems there will be a huge ratcheting-down at some point, as well. Simply too much has been bet on the same horse. Geez, the whole world economy is essentially bet on the good ol' American zero-down, interest-only mortgage.

For those of you who think the Fed can engineer their way out of this inevitable mess, just understand that that money-supply concept is built on people maintaining their willingness to borrow even more money. But history shows that when folks see asset values declining (and debts mounting), they lose their appetite to borrow more and banks become much more hesitant to lend them money. Short of dropping cash from helicopters (hello, Ben Bernanke), the Fed will effectively be wielding a popgun in its effort to beat back that massive elephant.

All of you who made bets in the other direction have a chance to get out now before the real pain begins. If you have leveraged anything, it is time to de-leverage -- now! Sell your stocks, precious metals and all real estate (save for possibly your home and any property you won't mind owning for the next fifteen years while values decline relentlessly as the Greenspan bubbles deflate). If you are able to set aside a good chunk of cash (put it in "safe" vehicles, like the T. Rowe Price Treasury Money account), you will be in position to make a lot of money in the next decade or so. It is very likely you will be able to buy assets for prices significantly lower than they are today.

Keep in touch. We'll be here to guide you through the pain. The fact is you can prosper on the other side. Big time.



Steve Moyer

Author: Steve Moyer

Steve Moyer,

Steve Moyer is a columnist and assistant editor of the monthly newsletter, Ponder This.... ( He has been an investment real estate broker since 1982. Contact Steve at

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