MARKETS
Bravo Nick! A wonderful illustration on the perception of value and where you can go buy 18 tonnes of Pork Belly!
Is this: Inflation or
Deflation? (View the original article HERE)
By +Nick Hubble • April 27th, 2013
The biggest question facing investors in this new age of
centrally planned economies is this: inflation or deflation?
That sounds like a mind numbingly boring idea. So let’s put
it another way.
Right now, the world’s policy makers are walking a
tightrope. On the one side is a plunge into inflation. On the other deflation.
The dramatic part about this tightrope is that it isn’t flat. It’s leading
higher and higher. The further we go along the wire, the more dangerous a fall
becomes.
If we get severe deflation, the entire monetary system of
the world could collapse. Stock
markets will crash, banks will fail, and paper and electronic wealth
will disappear. It only gets worse. Without banks, supermarkets wouldn’t be
able to restock inventory, petrol won’t be trucked to petrol stations and
Tasmania would become a desirable place to live.
‘Inflation’ means a world just as chaotic, but in a different
way. Prices would rise so fast that restaurateurs have to reprint new menus
each week. Your spouse would rush down to the supermarket as soon as you’re
paid to try and buy things at reasonable prices. Your entire investment
portfolio would double, but only be worth half.
Now the question of inflation or deflation really
means something, right?
But could things really get that bad? The answer to that
question is yes, depending on how far we let central bankers and governments go
along the tightrope. Back when your editor used to teach tightrope walking, we
never got very far at all. In fact falling off elegantly was our speciality.
So in that spirit, how do you fall off a monetary tightrope
without wiping out your wealth? How do you secure yourself from both an inflationary and a deflationary drop?
Get Real
The only kind of wealth that can survive both inflation and
deflation is real tangible wealth. Real stuff has the advantage of being real
(believe it or not). Its cash price can go up, down and all over the place
without changing what it is. So, deflation or inflation, it doesn’t change.
Money is just a measurement. Well, it’s actually much more.
It’s a unified medium of exchange allowing division of labour and solving the
double coincidence of wants. But when it comes to investing, it’s important to
realise that money is just a measurement.
If the price of a porkbelly on the Chicago Mercantile
Exchange (CME) goes up 10%, it’s still just a porkbelly. What’s really changed
in that scenario — the value of the porkbelly or the value of money?
You might answer that the value of the porkbelly has gone
up, as you can sell it and get 10% more wheat bushels for your money. But what
if you really want porkbelly? Hasn’t money then lost 10% of its value in your
eyes?
Of course, porkbelly prices might fall 10% instead. Your
money would be worth 10% more in terms of porkbellies, but 10% less in terms of
everything else.
Now you probably don’t want any porkbellies from the CME
(they come in lots of 18 tonnes). But if you can find things you do want, what
would the effect of investing in them be? Would you withstand both inflation or
deflation? Yes, because the value of your money would change, but the value of
your real stuff wouldn’t.
Of course, you could end up selling the real assets you
decide to invest in. Some of them tend to rise in real value over time. The
word ‘real’ is crucial in that context. The value of a banana can increase even
if its price falls. That’s because the prices of other items can fall faster,
leaving you better off.
But porkbellies and bananas have a fairly poor investment
history. Incidentally, bananas have outperformed the stock market though. The
Dow Jones Industrial Average used to be worth more than double the amount of
bananas it is today. In other words, the prices of shares have lagged well behind
the price of a tonne of bananas.
What other real investments might there be for you to
protect yourself from inflation and deflation at the same time?
Real Investments
The March issue of The Money for Life Letter featured
investing in wine. We can’t reveal exactly how, but it involved a time travel
discount. You can find out more here.
Gardens are another opportunity. Fruit trees, vegetables and
herbs can save you big dollars in the long run. Not to mention improving your
lifestyle and health. Some families make a living by
charging other people to pick their strawberry fields. How’s that for a life?
All you do is own a real asset — strawberry plants — and other people pay you
to pick and eat them.
Energy is a surprising opportunity to make a real
investment. Solar panels and solar hot water systems prove their value by
saving you money. In Europe, wood is the number 1 source of renewable energy.
In Germany, 38% of non-fossil fuel consumption comes from burning it.
To be clear, power stations in Europe burn wood pellets and
saw dust to generate electricity. Power companies just plant as many trees as
they burn to offset the pollution. Because of technology, the process of
generating power can actually reduce the amount of carbon in the air! All you
have to do is plant more trees than you burn.
Why not use the remarkable technological breakthrough of
burning wood to your advantage and install a fireplace? It could cut your
heating bill in half.
All these investments in your life are inflation and
deflation proof because they are real. They can’t be ruined by central bankers
or stolen by bankrupt financial institutions. If you definancialise part of
your wealth, you can watch the tightrope act safely from the ground below.
REAL ESTATE
Australian Property
Trusts Overbought: Morgan Stanley
Australian real estate investment trusts, known as A-REITs,
have run hard so far this month, outperforming the broader S&P/ASX200 index
by more than 8% on average.
That performance has led Morgan
Stanley MS +0.09% analyst
Lou Pirenc to question whether their premium is justified.
“In the absence of a pick-up in growth, we believe they ...continue reading
Reuters
250 Australian suburbs
tipped to double in value
Real estate data firm RP Data says there will be a doubling
in property values in over 250 Australian suburbs in the next decade. At the
same time, renters in almost 800 suburbs are likely to see weekly rent prices
double. RP Data believes Australia’s top property investment prospects include
263 suburbs or towns with the potential to see 100 per cent growth in the next ...continue reading
How property-hungry
Aussies see the global economy
Three hundred and fifty people cram into Brisbane Sofitel's
Ballroom Le Grand on a stormy Friday afternoon.
I ask ex-journalist Kathy Mac Dermott, the Queensland
executive director of the Property Council of Australia, if it's a barometer of
improving fortunes that so many people are attending its $A135-a-head lunch.
The drawcard isn't a boozy Friday lunch, she says, but
rather the insights of today's speaker, ...continue reading
SME
Australian SMEs lose
out from failure to participate in report on small business finance
Australia has once again failed to participate in an
international report on small business finance and this omission will cost
small business.
The Organisation
for Economic Development and Co-operation conducts a yearly report, Financing
SMEs and Entrepreneurs 2013: An OECD Scoreboard, which looks at access to
finance for small and medium-sized enterprises.
The report was published on Friday and found access to
finance remains a key challenge for small and medium-sized enterprises and a
stumbling block to recovery in most countries.
The report found SMEs requesting loans in 2011 generally
faced ...continue reading
Social media use by
Australian small businesses set to rise
Econsultancy, the Sydney based specialist publishers of
independent research, analysis and advice on digital marketing, social media,
ecommerce, SEO, mobile and tech for businesses has said time spent on social
media in business is likely to grow even further.
Following the publication of Bibby Financial Services
Australia’s bi-annual study of over 200 small businesses in February,
Econsultancy said it ...continue reading
Startups could
contribute $109bn to economy by 2033: PwC
Summary: Backing the startup sector's claim that it
could help save the Australian economy once the mining boom goes bust, PwC has
released its report showing that entrepreneurs could provide an injection of
$109 billion and 540,000 jobs to Australia.
Recent claims about how the Australian economy will flounder unless
the country invests in startups has left critics questioning what
impact entrepreneurs could possibly have. According to Pricewaterhouse Coopers
(PwC), it's AU$109 billion and 540,000 jobs.
The report, "The Startup Economy: How to support tech
startups and accelerate Australian innovation", estimates that ...continue reading
I passionately agree with Pricewaterhouse Coopers. Though capital expenditure in mining has come to an end, mining will still generate massive amounts of profit to the economy for years to come. It has however lost its flavour, along with capital expenditure decreasing, so the number of jobs associated are decreasing. The Startup Scene in Australia is still young and is definitely undergoing massive growth, we can expect great things from Australian Startups!
Until the next time dear readers, have a great weekend and keep your eyes on Generation Y Investor for some exciting posts coming during the week!
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