How America Can Beat Deflation, NYC Style
- Joshua M Brown
- April 16th, 2013
The “D” Word. It’s on everyone’s lips.
This morning on Squawk Box I heard the chief strategist of UBS mention that the TIPS market is actually “pricing in a wave of deflation.” Last week, Art Cashin’s note used a similar phrase to describe the rolling crash in commodities, only Art called it “a chill wind blowing through” which was way more awesome, because Art is the man.
Interesting to note here as well that all the newsletter guys who had spent the last five years screaming and scribbling away about hyper-inflation have all become overnight DEflationistas. As Barry explained to me, “they believe in ‘flation, doesn’t matter what kind.” Put another way, if your entire reason for being depends on the Fed somehow losing control, why would care in which direction Bernanke fails so long as he fails and the politics of ZERO government win?
And so if deflation is to be the new battle, the new Wall of Worry erected before us, I have a plan. The United States can learn a great deal from my home city about how to stamp out deflation permanently. Yes, here in New York there has never been a price decrease for a single item in the last 30 years. Nothing has ever been cheaper on a Thursday than what it cost on Wednesday since at least the mid-1980′s.
We simply don’t do deflation here. It’s physically and conceptually impossible for it to even take root. And so I recommend that the rest of the US get up to speed with how this works. Below, a quick review:
Just as people in Los Angeles are obsessed with their cars and people in Miami are strangely focused on how many articles of white clothing one can accumulate during an adult lifespan, New Yorkers think primarily about real estate – perhaps more than anything else. It’s all about who lives where, what are they paying, when can they upgrade, which neighborhood is hot, what the best parking deal is etc. This makes sense as Manhattan is an island and Brooklyn is some kind of alien spaceship that crash-landed in the 1600s and became part of the firmament. As such, you can only build upward and space should naturally be an obsession. And as a result, regardless of the state of the economy, the price of New York City living space only goes in one direction: Much higher.
And when we run out of money and cannot conceivably pay up another penny, Louis Vuitton suitcases full of cash promptly arrive at JFK and LaGuardia, from China and Latin America and Italy and Great Britain and Dubai and South Africa. Even after 9/11 and in the aftermath of Lehman Brothers and Madoff – when clouds of choking debris filled the sky and personal bankruptcies exploded - it only took a moment or two for the upside-down waterfall of apartment prices to resume its uninterrupted ascent heavenward.
Current average real estate prices, collected unscientifically (you’ll just have to trust me on this):
1 bedroom co-op (which you could never get into anyway): $750k
1 bedroom condo, 3 windows, 1 1/2 bath: $1 million
2 bedroom, safe neighborhood: $1.8 million
4 bedroom, any neighborhood: $27 million
4 Bedroom, with parking space: $28 million
Penthouse apartment: Must be full-blooded relative of Kennedy’s or play for the Yankees
The other thing that New Yorkers obsess over is dining – breakfast, brunch, lunch, dinner, nightclub apps, 4am food truck binges, you name it – we require it be exquisite. And if it is not “the best” version of whatever thing it was that we were out hunting to eat – the most authentic sicilian slice on the east side, the best crepe suzette this side of the atlantic , the most to-die-for peking duck, etc – then the next meal offers us a new opportunity for redemption. And the next and the next. We traipse up and down the pavement thrice a day in search of culinary transcendence like a roving Food Network reality show in which everyone is simultaneously both a judge and a contestant. This is why a bagel and coffee is $7, no one can bring back lunch to their desks in midtown for less than $25 a day and weekly trip to what we call “the supermarket” will run you around $399 – Whole Foods is actually the discount market in Manhattan, surrounded as it is by Fairway, Citarella, Grace’s Market and Eli’s on the upper east, which requires a mortgage to fill a cart.
Don’t even think about a night out drinking unless you’ve just been paid.
We live in a city where even the college kids come from the wealthiest families around the world, nobody is on any kind of budget. Our dive bars are only ironically dive bars – they sell hipster cans of beer for ten dollars a piece that cost ten dollars a case anywhere else outside of the demilitarized zone over the bridge.
Want to go to a club? Great! I hope you can buy six bottles of vodka at a 1000% markup to sit at a table amidst a crossfire of rappers shooting at each other. Or you can wear sunglasses at night and a scarf in summer so as to be mistaken for some kind of douchebag art gallery something-or-other. Otherwise, forget it.
Some prices for a reference point:
Beer, draught: $8
Beer, bottle: $10
Martini, restaurant: $12
Martini, boutique hotel bar: $16
Martini, with Grey Goose: $22
Martini, with Grey Goose, at boutique hotel bar, on rooftop: $56
You have two choices here – you can live in a neighborhood you can’t afford and get your kids into one of only three acceptable public schools or you can live somewhere that you can just barely afford if a rich relative dies. That is, if you’re not already bankrupt and emotionally violated by the sexual favors you will have traded for pre-school. Don’t you tell me what you “won’t do” because you will do it all, with a smile on your face and a redheaded wig if that’s what they request. You’ll also require the services of a consultant to find a kindergarten that will accept your children despite your many, many flaws. The schools demand that you have up to eight years’ tuition per child in liquid cash in the bank. Your tax returns will also be reviewed so hire a good forensic accountant to find and correct any minor inconsistencies prior to submitting to the administrators.
Now before you snicker, keep in mind that your child’s entire fate in life rests in the hands of the commission you’ll grovel before – so I suggest getting your finances in order and wiping that smile off your face. Start thinking about $40,000 per child, per year, in terms of annual cost, not including uniforms and transportation and sushi bento box lunches and bail money for when they start slumming with the bad kids in junior high.
And of course, when the kids are not in school, there’ll be sailing camp and fencing lessons and music class at the conservatory and Mandarin Chinese language /cooking lessons and other extra-curricular activities – otherwise Ivy League schools are out of the question and so is the internship at Goldman followed by the associate gig straight out of school at Sullivan and Cromwell. And then how will your children ever be able to do this for their children in New York City decades from now? The prices will only go up, after all – what kind of monster are you to deprive them of this? DON’T YOU WATCH GOSSIP GIRL AND LAW AND ORDER: SVU? DON’T YOU WANT WHAT’S BEST FOR THEM???
Some additional NYC items and activities:
Movie tickets, 2 adults: $45
Cab ride, 20 minutes: $74
Broadway show ticket, 1 adult and 1 child: $1,250
Hot dog and soda, Central Park: $13.50
Parking garage, monthly: $699
Massage: $250 for 30 minutes. Erotic massage add $200 and divorce lawyer retainer costs.
Hotel room, 3 nights: $1749 plus tax plus service charge plus nyc tax plus nyc service charge.
Health club, downtown: $275 per month, not including classes or racquet court time. Minimum 7 year commitment.
Haircut and blowout: $325, coloring add $150.
MLB game, Yankees or Mets, family of 4: $950 – add $75 per person if you plan to eat or drink.
Now you might be saying to yourself “That sounds amazing!!! How can we transport a little slice of the heaven that is New York City to the rest of America so as to ward off this horrible deflation phenomenon wherein prices remain flat or even decline?
It’s very simple. Imagine the very limit of what you would reasonably expect to pay for a good or service anywhere else in the country. Got that number in mind? Great! Now add a 60% markup to it and needlessly complicate it with both variety and inconvenience. That’s a good starting point.
Now throw away all of your clothes and only wear black 9 months out of the year.
Now adjust about ten percent of the country’s salaries so that these prices are somewhat affordable and watch as the rest of the population breaks its neck to try and keep up!
Congratulations, you’ve whipped deflation, New York City style! Low prices shan’t be wrecking your lives any time soon.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.