Weekly Update from RLA Tax and Wealth Advisory

“Is the Deflation Part of the Inflation-Deflation Cycle Emerging?”

         History is the best teacher.

         Mark Twain is widely attribute with originating the saying, “history doesn’t repeat itself, but it often rhymes”.

         It’s true.  And it’s particularly accurate when studying economic history for two reasons.  One, human behavior is predictable.  Faced with the same set of facts and circumstances, groups of humans behave similarly.  And two, the collective behavior of groups of politicians is also predictable.  Confronted with overwhelming deficits and unmanageable levels of debt, the collective group of politicians has three choices: raise taxes, cut spending, or create currency from thin air.  Historically speaking, whenever debt levels reach unsustainable amounts, the ruling class opts for currency creation.

         This initially leads to what I call a ‘prosperity illusion’.  This prosperity illusion is actually an easy money-fueled bubble that eventually bursts.

         Excessive debt levels lead to deflation.  Risk assets like stocks and real estate decline in value when deflation takes hold.  Currency creation is only a band-aid that temporarily relieves the symptoms of debt excesses.  Ultimately, though, deflation occurs.

         We are now seeing signs that deflation may be becoming a more dominant economic force.  First quarter gross domestic product has now been revised to negative, falling .5% on an annualized basis.  (Source:  https://www.schiffgold.com/commentaries/gdp-turns-negative-as-inflation-smolders)

         Real estate is slowing significantly nationally.  The inventory of new homes for sale has now risen to 9.8 months as of May.  That means that at the current rate of sales, it would take nearly 10 months to sell all the homes that are now for sale.  Of course, that assumes that no new homes are listed for those same 10 months.  (Source:  https://wolfstreet.com/2025/06/25/inventory-of-new-single-family-homes-for-sale-highest-since-2007-amid-record-pile-up-in-the-south-as-sales-drop-homebuilders-face-a-tough-market/)

         Homebuilders are becoming aggressive.  Lennar, a homebuilder whose stock is down 39% from the October peak, recently reported that incentive spending is now at 13.3% of revenues.  Incentive spending represents outlays made to make home purchases more attractive, like mortgage rate buydowns.

         While incentive spending is up, the average sale price of a home has declined, falling 8.7% year-over-year and 19.5% over two years.  Gross profit margins on homes sold by homebuilders fell to 17.8%, down from a fat 29.5% in 2022.

         Debt levels are still high, so it’s my view that this deflationary cycle will only accelerate from here.

         If you’re thinking about buying real estate, it might make sense to follow the sage investing advice that warns, “never try to catch a falling knife”.

         Also, if you’ve not taken steps to add deflation hedges to your portfolio, now is the time to seriously look at it.

UBS – US Dollar Now “Unattractive”

         The US Dollar is now down about 10% year-to-date when using the US Dollar Index as the metric.  The US Dollar Index compares the purchasing power of the US Dollar to the purchasing power of the primary trading partners of the United States, largely the Euro and the Yen.

         This past week, UBS, in a letter to clients, declared the US Dollar was unattractive, noting that the beneficiary of the US Dollar’s decline was gold. 

         In my view, the bank gets this only partially right.  While the US Dollar is weaker, it doesn’t mean that the currencies of the trading partners of the United States are stronger.  It means that at this particular point in time, they are simply ‘less weak’.

         The reality is that ALL fiat currencies are being devalued.  The best way to see this is to look at gold prices in various fiat currencies.

         During the first week of January 2022, gold prices in US Dollars were $1788 per ounce.  That’s roughly half of the recent gold high priced in US Dollars.

         During the first week of January 2022, gold prices in Euro’s were 1580 euros per ounce.  Recently, gold hit about 3000 euros per ounce, about the same devaluation over the same approximate time frame.

         During the first week of January 2022, gold prices in Japanese yen were about 207,500 yen per ounce.  That’s about 40% of the recent high of nearly 500,000 yen per ounce.

         Perhaps the UBS letter should have advised clients that fiat currencies are unattractive.

         Here’s the important question: Have you done fiat currency diversification in your portfolio?

Has Your Estate Plan Addressed All Contingencies?

         There was another reminder in the news this past week about how important it is to address ALL the contingencies in your estate plan.  In addition to doing tax reduction planning on the inheritance you leave your heirs (see my “Winning Strategies” book for more details), it’s important to address trustee powers and perform due diligence on corporate trustees should you elect to employ them.  Of course, as we’ve discussed here in prior issues, utilizing a trust that can divorce protect and creditor protect the inheritance that you leave to your heirs can also be a good planning policy.

         The estate of “Margaritaville” singer and empire-builder Jimmy Buffett is now involved in two opposing lawsuits, one filed by Mr. Buffett’s wife of 46 years, Jane, against the corporate trustee and the other filed by the corporate trustee to remove Ms. Buffett as co-trustee.

         The corporate trustee claims, among other things, that Ms. Buffett is not cooperating as trustee, and Ms. Buffett claims that her income from the trust, which was to be about $2 million annually, according to the article, is a very poor return for a trust with $275 million in assets.  

         According to the article, the corporate trustee has allegedly paid himself and his firm about $1.7 million in fees over the past year.

Quote of the Week

“It was self-serving politicians who convinced recent generations of Americans that we could all stand in a circle with our hands in each other’s pockets and somehow get rich.”

                                                               -Paul Harvey