I had an interesting conversation with a pal the other day about the potential for continued and exacerbated deflation.
For some background, my friend is the opposite of me in his spending proclivities - his consumer footprint is probably twice the size of mine. He's got two parking garage spots in Manhattan, one by his apartment and the other by his office, both of which cost him $300-something a month. You can extrapolate from there to get a sense of what kind of bills this kid is seeing each month.
Anyway, he's in the commercial real estate brokerage biz which is basically Ground Zero for the deflationary spiral right now. In the absence of businesses expanding and forming, prices per square foot are plummeting pretty much up and down NYC and around the clock. No one's bringing in new employees so taking more space is literally the furthest thing from their minds. In a city that recently had eleventy-five hedge funds starting up each weekday that were willing pay whatever you quoted them for space, even the most sought-after buildings now sit at fractions of full capacity. What's worse, there is no burgeoning industry waiting in the wings to take up all the recently vacated hedgie offices - there are only so many law firms and bankruptcy specialists after all!
My friend the broker may be profligate, but he is also realistic and sees that, because of capacity slack, this could continue for quite some time. His question is, short of moving to Tahiti with an easel and paint brushes, what can we do to counter the deleterious effects of this deflationary miasma?
My answer? Not having lived through any periods of sustained deflation in my own lifetime (born in '77), I gave him the only answer I could, one based on common sense. I told him to Get Small.
Reducing the expenditure footprint allows you to preserve both cash and cash flow, two of the most valuable commodities of all when prices and returns on investment are falling all around us. Many will be forced to puke up properties, investments, businesses and crown jewel assets in a deflationary environment - but kings are made on the other side. The kings would be the counter-cyclically prepared, the guy showing up to the estate sale with an unencumbered bankroll.
We're not concerning ourselves in this post with the debate about will we have deflation or not, we already do. It may not last or get much worse, but who's to say? Better to Get Small now and be wrong than to stay big, sprawling and at risk.
Remember, the armies that have won the great wars throughout history were not necessarily the most illustrious or fierce. Rather, they were those armies that could be amply protected, supplied and fed without breaking the royal treasury.
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