Here’s When Deflation Will Replace Inflation as “the Topic”

The price effects of deflation tend to occur in goods and investment assets simultaneously.

Indeed, David Rosenberg, who is the founder of an independent research firm, just wrote an article for the Financial Post (October 8) which is titled:

David Rosenberg: Deflation not inflation will be the topic when housing, equity bubbles pop

Here’s a brief quote from that article, which follows Rosenberg’s mention of the 2008 financial crisis:

The bubble this time around is even more acute, and the reversal in these asset values will hit even harder. The S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE) multiple is 38.3x today and U.S. home prices have soared a record 20 per cent on a year-over-year basis. It now takes a near-unprecedented eight years of wages to buy a new house (the historical norm is closer to five years).

We do not have an inflationary future at all, and this will become apparent not just when these pandemic-induced supply issues are resolved, but when these asset bubbles pop. And they will pop.

Elliott Wave International agrees that a major reversal in equities and the housing market is at hand.

Regarding the U.S. housing market, here’s what the September Elliott Wave Financial Forecast had to say:

The downturn in prices from June is still just a blip, but there is further evidence of a dramatic change of tone in the market for homes. A survey by Redfin confirms that prices fell 0.2% in the four weeks ended August 1. “This is the first sign of the price rally petering out,” says Business Insider. The mad scramble, which had buyers piling into homes without the benefit of inspections or even in some cases seeing their new home, has also abated, at least a bit. According to Redfin, just under half of homes that went under contract in the last four weeks of July had an accepted offer in two weeks. That’s the first time the share fell below 50% since February. Also, for the first time since October 2019, the share of sellers dropping their price surpassed 5%. As in 2006, housing market economists say “homebuying demand remains strong and the market is tipped heavily in buyers favor.” We offered some anecdotal evidence of the frenzy in our area last month. Here’s an update from The Atlanta Journal-Constitution on August 26: “Metro Home Prices Flat—For Now.” According to the experts, the lull represents an “equilibrium that may prove short lived.” So they say. Our stance is that it will soon be replaced by an even more enormous crater than that of 2006-2011.

The doubling of consumers who say it is a “good time to sell” compared to 2006 is powerful confirmation of this outlook. It tells us that the astounding psychological power of a progressing mania continued to build, at least through June. When surveyed, many consumers recognize the current moment as a great opportunity to sell, but how many will? The answer is very few. Instead, many are rushing into second, third, or in the case of one retired couple profiled here last month, a 21st home. In a bid to make “second home ownership possible for more people,” a start-up company called Pacaso sells shares in a “corporatized house. The buyer gets one eighth of a share of ownership and the right to stay in the house 44 nights per year.” Back in the day, a preponderance of “odd lot” stock buying, units of less than 100 shares, was a dependable sign of an impending market high. Now that homes are being fractionalized, the stage is set for a very big reversal.