The velocity of money is plunging so let's make some coin off it
Hardly surprising though, this has taken place whenever GDP contracts & unemployment increases as it certainly will this year. I think one would suspect that this could lead to risk of deflationary effects - which I know sounds odd when one thinks and sees first hand the rampant money printing and radical expansion of money supply, and inflation increasing. I am still heavily biased towards inflation arising over the next few years, with rates eventually rising to combat inflation - but I do want to be on the lookout for any hints as swiftly as possible that my ideology may be wrong.
I suspect this drop within the velocity of money is especially pronounced in hospitality industries, restaurants, hotels, aerospace, airlines, tourist destinations - where capital is not being exchanged as freely. We also have unemployment up so some individuals simply are being much more wary of purchasing wants, with potential needs still needing to be met on the horizon.
I think mfg's as well have had supply issues coupled with demand issues, with inventories only now ramping back up. With the low demand, and low supply this is a sour recipe that creates less opportunities for transactions, again hurting the velocity of money.
What does all of this mean? I think one needs to carefully weigh the proper strategies in the event inflation or deflation where to occur. In the event of the dreaded stagflation again, the writing will be more clear if that is to occur, but again we need to plan accordingly and develop strategies for each.
A simple strategy I am doing even outside of the fixed income corporate debt/Div yield strategies etc is within actual real estate.
If one were to acquire a home in this environment and inflationary affects play out, you essentially get to double dip on the inflationary affects in a favorable manner. the devaluation of the dollar will be an effect of the inflation. What does this mean for your mortgage?
***If you have a great strategy please be sure to share it with me.***
I suspect this drop within the velocity of money is especially pronounced in hospitality industries, restaurants, hotels, aerospace, airlines, tourist destinations - where capital is not being exchanged as freely. We also have unemployment up so some individuals simply are being much more wary of purchasing wants, with potential needs still needing to be met on the horizon.
I think mfg's as well have had supply issues coupled with demand issues, with inventories only now ramping back up. With the low demand, and low supply this is a sour recipe that creates less opportunities for transactions, again hurting the velocity of money.
What does all of this mean? I think one needs to carefully weigh the proper strategies in the event inflation or deflation where to occur. In the event of the dreaded stagflation again, the writing will be more clear if that is to occur, but again we need to plan accordingly and develop strategies for each.
A simple strategy I am doing even outside of the fixed income corporate debt/Div yield strategies etc is within actual real estate.
If one were to acquire a home in this environment and inflationary affects play out, you essentially get to double dip on the inflationary affects in a favorable manner. the devaluation of the dollar will be an effect of the inflation. What does this mean for your mortgage?
- The dollar amount of the debt side of the mortgage will decrease in value, relative to the purchasing power of the dollars within the debt. The debt itself gets eroded away from inflation. Very favorable if you have debt.
- We want equity with debt of course though. And much more equity relative to the volume of debt. The equity of the home will actually be continuing to rise because the value of dollars continuing to loose value will require more dollars to purchase the same amount of equity - meaning the equity increases in terms of dollars.
- So inflation will result in the loan decreasing in a dollar weighted comparison, while the equity in the home will increase because of the dollar's devaluation.
- Equity relative to a home is one thing, but this comparison can be made with equities (stocks) as well, but I think the home comparison may be helpful in getting my logic communicated clearly.
- Again, this does not mean to go wild longing equities - just like you do not want to go wild and start buying junk houses in the middle of Antarctica
- We need to be tacticians with finesse
***If you have a great strategy please be sure to share it with me.***
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