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Disinflation affecting asset prices

Posted by jdavis on April 14, 2015

Inflation has been falling since the 1970s.

Then, the annual rise in living costs was c 25% PER ANNUM.  By 1990 it was down to c 10%.

c 5% by 2009.  0.0% today (most recent statistic from ONS, outside of chart).

Interest rates have been falling, similarly.   The chart below shows from 1971...:

The (almost) Zero percent, currently, has been in place for 6 years.  It is the lowest in the history of the Bank of England, since the 17th Century.  Through Depressions, World Wars etc.

Central Banks cut rates when times are hard.  And raise when the economy is going well.

Yet still we are told our economy is strong.  Yet, the interest rate has never been lower.  The economy is anything but strong.  How people cannot see this remains a mystery to us.  That they believe that all will be well, even though it is abundantly obvious that all is not well and, with our debts, will not be well.

Since the 1970s we have had the following in asset prices:

  • Property has soared.  Outside London it fell sharply in 2008 and was still falling into 2012 until Help to Buy was launched.  London also fell in 2008 but rose again after the banks were bailed out and the Russians and the Chinese bought heavily for some 3 years.  It has been falling since early last year as Chinese and Russian investors stopped investing.
  • Shares rose to 2000.  Since then they have slumped, soared, slumped again and soared again.  Currently they are about where they were 15 years ago.
  • Government bonds have soared as can be expected as inflation falls.

So what can we expect of investment returns going forward into the medium to long terms?


We cannot ignore the experience of Japan.  A country with a stock market and house price bubble up to 1989.  The bubble burst (as all bubbles do).  They slashed interest rates.  Inflation turned to very low inflation indeed mild deflation for decades.  Does this sound like something closer to home?  Interest rates slashed.  Inflation falling to Zero.

In Japan, as inflation fell, Government Bond prices soared for many years, on a trend basis (not in a straight line).

The stock market fell 80%.

House prices fell 60%.  (More in Tokyo and the major cities.)

Interest rates fell from 1991 and were just 0-1% from 1995.  Just like us now.

Inflation has been around 0% since 1992 (and very low since 1982).  We are at 0.0% inflation, right now.

The above is in US$.  It shows how the average Japanese house price fell from $225k (c£150k) to $75k (c£50k) over 20 years.  A fall of c 65%.  The fall in Tokyo and major cities was greater than for the country average.

Are we, in the West, 'Turning Japanese'?  It is hard to say.  However, the signs are there that we very well could be.

Now, if you have your retirement funds/assets in property, shares and Government Bonds, what proportions should they be?  

Often the major asset will be the house or another (and another?).  The retirement pot (pension, ISA, investment account etc) will generally be perhaps shares and bonds, with the former a higher proportion.

So, in an era that we just had of falling inflation and interest rates that was appropriate.  Yet, still portfolio managers and 'financial advisers' say property, equities and bonds in that order.  Who's living in the past?

Forget the past when interest rates and inflation fell.  Consider the future as interest rates and inflation are most unlikely to fall further.  How can the Base Rate fall much anymore, from the already tiny 0.5%?  It's literally not possible.  This is not conjecture or opinion.  IT IS NOT POSSIBLE!  The most it can fall is ... 0.5%.  Which is curious, given it fell 14.5% since the early 1990s.

Now remember, the next time we have a Recession, they cannot slash rates as they did in 2009.  Thus, in our expectation, the Recession will turn Depressionary.

Yet people still cannot imagine house prices or the stock market falling more than a few percent and only temporarily.  Go figure.


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