“When the price of a certain commodity or asset has already risen multiple times, it will decline even when inflation comes.”

“I often receive questions on why property prices shouldn’t continue to rise with inflation. The difference is in the past. When the price of a certain commodity or asset has risen multiple times, it will decline even when inflation comes.
Let’s say that inflation in the future would double the general price level in a decade. Any commodity or asset that has seen its price more than doubled already may not be a good inflation hedge. The bubble phenomenon has made many commodities and assets bad inflation hedges.”

Andy Xie, in his article ‘The Rise of Inflation Nations’, caixin.com, 6 Sep 2012

For those who claim that, if we see an inflationary period, Vancouver RE would be a good hedge. – vreaa

4 responses to ““When the price of a certain commodity or asset has already risen multiple times, it will decline even when inflation comes.”

  1. Andy Xie has been known to be right from time to time. I read most of what he writes, when it’s made available.

    • Read and followed his stuff religiously when he was with Morgan Stanley because I thought it was more thoughtful than most. This article is no exception but it’s not conclusive in terms of Vancouver RE. I continue to maintain that Vancouver is a “two speed” market with the top end entirely fuelled by hot money and a bottom end that is about to be destroyed. The top end could end up being a relatively good inflation hedge after all with the never ending supply of stimulus money from around the globe now.

      • Xie explicitly mentioned a bubble in Manhattan apartments as well as wine, art, etc.

      • I think that’s the point I was trying to make – being long a bubble market may be an inflation hedge. All that matters in whether a hedge is effective or not is the correlation and volatilities. There doesn’t need to be causation since it’s generally impossible to prove anyway despite all the anectodal evidence in the world (HAM and YVR, for instance). What’s important is that there is a measureable statistical correlation between Vancouver SFH home prices and global central bank stimulus. This doesn’t mean bubbles will last forever; nor does it mean inflation will be permanent. Correlations are significantly volatile over longer time frames and this applies to periods of decreasing prices. This admits the possibility that the increase in YVR SFH prices will be relatively resilient if inflation or even the expectation for inflation moves lower than current. It could simply be that the rise in YVR SFH prices is simply a call on expected inflation – ie. a leading call on inflation or “front running the delta” so to speak

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