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Howdy there folks welcome into this video here today so uh i want to explain here uh about the risk of what is coming after inflation essentially and we’re gonna uh talk about inflation obviously inflation’s been running wild everybody knows that watching this video right but i think it’s very important to understand kind of what’s coming next and i think that’s one
Of the things i always try to do with my channel is break down a very complicated subject as simply as possible and let you guys know what’s going to be the discussion three months from now six months from now and i definitely see this playing out and it definitely is a risk to a lot of businesses out there and like i said i’m gonna try to break this down so like
My seven-year-old could understand a complicated subject and broken down as easily as possible hope you guys enjoy this as always let me know if you enjoy a video like this where we kind of dive into something a little more i would call a niche than a usual subject so obviously inflation numbers came out awful right tuesday’s inflation data showed consumer prices
Rose 8.5 in march from the previous year the highest level since 1981 inflation’s going crazy we all know that right now real quick before we get into this my feelings on inflation are the same as my feelings have been for the last several months i’ve always said we would likely peak as far as the rate of increase somewhere around mayish may june somewhere around
There and then the rate of increase will start coming down doesn’t mean inflation goes negative to deflation at that moment it just means that the rate of increase starts to come down and come down and i think i’ll end up being correct on that we’ll have to see how obviously that plays out but i think i’ll end up being correct and the rate of increase will continue
To decrease and decrease then what’s going to be coming is a discussion as the rate of increase decreases more and more and more what’s going to be the interesting discussion is then there’s going to be talk of deflation which is the subject we’re getting into in this video and i want to try to break down as simply as possible which i think is going to be a very
Interesting subject because we haven’t talked about that in a long long time okay so let’s say um you know i i have a product service whatever right uh but let’s just say it’s a product that i’m trying to sell and let’s say i can’t sell this dang product right and i’m a business owner well i usually have two things at my disposal that i can do right is one is i
Can increase the marketing for that product so i can put ads out there i can try to get more customers to that product in those sorts of things right the second thing is i could drop price and for 99.9 percent of businesses out there those are the two options companies have right not every company’s apple and has an iphone that you know people just if you know it
Breaks they buy a new one and a new one a new one a new one right very few businesses are like that and that’s why apple’s a multi-trillion dollar company and most companies aren’t right so those are the two options for you if you can’t sell this thing that your business has right you have to increase marketing you have to drop price now some companies like to try
To increase marketing right and what a lot of companies find is man it’s a lot harder to uh you know increase customers through marketing you have to be very very strategic and very very good at what you’re doing and the ad rates you have to pay are usually very very substantial because you’re usually going to advertise where facebook instagram uh google search
Those type places maybe youtube very very costly and just getting more expensive over time so for most companies marketing is you know it’s a tough proposition so what a lot of companies start doing if they’re having trouble moving their product is they start dropping price now when you start dropping prices causes a chain reaction that is pretty darn epic right so
Let’s say for instance uh standing desk i thought this was kind of a good example there’s a billion examples i could give of products out there right but this is just a good example right standing desk probably a very popular thing for the last two years as uh you know everybody had to be home work from home was obviously a big thing right now also we’re hearing
A lot about a lot of companies going back to the office those sorts of things but i’m sure standing deaths was like a massive deal from probably about april 2020 through about january or this year right i’m sure if you sold standing desk you it was a great business model so let’s say this is me right and i’m selling my standing desks which honestly these things
Don’t differentiate very much uh so let’s say i’m selling my standing desk for 270 dollars right make a nice little profit margin of whatever on that 50 or you know whatever right after all the shipping and everything that goes into that and you know returns because remember you when you’re running a business you have a lot of issues that can come up in problems
That can eat in the profits right so there i am selling my desk for 270 but the problem is now this guy he just dropped his desk to 249 so now he’s undercutting me right and he’s got this 30 coupon so i’m like crap okay great this guy’s undercutting this guy’s now undercutting he’s going 239 for his product this guy’s undercutting he’s going 249 which looks like
The same company just a different product here they got a 15 off coupon for theirs this guy’s way undercutting everybody there they got a limited time deal they’re really trying to move product 188 right and then this guy he’s so dang greedy that he’s taking out an ad a sponsored ad on this plus he’s got this so he’s increasing his marketing and he’s dropping
His prices right so that guy’s really getting hammered when it comes to margins but he’s trying to move product any way possible right and if he can just make a few bucks he’s just trying to sell his dang inventory right and so there i am what am i going to do in this situation well i could try to increase marketing and probably won’t get a good roi on that right
Or i have to join this and i have to drop price as well now the problem is i’m going to have to likely drop even more than these guys right because this guy’s taking out ad space if i don’t want to take out ad space i want to get customers to me i might have to drop to 239 right so which means now i’m in a situation where my profit margin on this product is now
You know insanely thin from i had a healthy profit margin to a a profit margin that’s very much decreased now and you know my business just isn’t going to make as much money and if this keeps going on like this right next thing you know i can start losing money to sell product right because if at some point in time you know everybody that’s competing in this they
Just keep dropping prices and that’s that’s the issue as you get into right and i want to explain this kind of in detail here but the more this company drops price the more this guy has to drop price and the more this guy drops price the more this guy has to drop price and so you’re getting this chain reaction where you start to become a price war right and like
I said for a company like maybe an apple or something like that a very specialized company that has proprietary technology and you know decades of branding behind them and all those sorts of things they don’t necessarily have to fight this war but for most businesses they are not that sort of company so if they get in the price battle with this other company
It can it can get ugly real real fast otherwise you lose market share to these other companies remember uber and lyft for a long time had a price war going against them right where they can constantly compete it both companies lost a fortune because they were competing on price right and uber wanted undercut lift the lift wanted to undercut uber and you had this
Kind of vicious price war between those companies i remember when i started my real estate marketing company uh i was a new kid on the block and i probably wasn’t as good as the other one so what did i have to do the only thing i really had to compete on other than customer service was price so what i did i undercut i undercut the competition right and that was
Something that attracted me business and i grew my business by basically being more affordable than the other guys were were affordable right and so that’s kind of what happens when you’re a business right now the dangerous thing is when you start to have scarce customers right this leads to many various issues this leads to a potential you got too much inventory
Because let’s say last year you’re you got you know you’re selling standing desks left and right so then you’re ordering a ton of inventory because you’re moving standing desks like crazy right so obviously you’re probably missing out on sales you could be missing out on amazon ranking because you’re not uh you know you don’t have enough inventory in so you’re
Disappointing customers maybe your product quality is not there uh and so you just start ordering inventory like crazy right well now also a lot of that’s drying up now you have too much inventory that you need to get rid of right which could explain why you know you drop price and you’re doing ads on top of that right you got too much inventory you need to just
Get rid of this right the discounts start to erode your profitability as your profitability is eroded right and if you go from making money to losing money then the next step that ends up having to usually happen as a company or a business is you have to start cutting jobs right and that’s kind of a dangerous thing because next thing you know you know in a time
Of great profits you can add to a lot of positions that maybe aren’t as necessary as you realize especially when business drops off right if let’s say i had um let’s say i was selling 500 standing desks a day right i’m gonna probably need a lot of different workers to sell those 500 standing desks a day and for all the complicated things and the customer service
And the returns and all those sorts of things right if now i’m selling 50 a day guess what i don’t need nearly as many people now right and i’m not making any money because my dis my profits have been eroded from discounts so now i need to cut jobs right and this is a situation that you can go through and this can kind of take either months or sometimes years
Depending upon the industry where the weakest businesses they go under the biggest of the big dogs make it through right and then they they emerge and they’re kind of like they have a dominant market share over that market and this usually plays out every single time in a recessionary scenario where the weakest businesses go under they file for bankruptcy the
Strongest emerge and they start to become almost like monopolies in the industry and then long term they get pricing power okay now i’m already starting to see some of this happen in the real world with with different businesses and companies and i want to kind of you know share some more in depth here on how exactly this plays out and how you know so much different
Than the market we’ve been in so it was interesting i got this email uh from this stock brokerage i won’t mention their name essentially uh but it was interesting because now this company is giving out nine free stocks nine free stocks right and so this is a company that was probably getting massive amounts of of new customers coming in there 2019 especially 2020 and
2021 as there was a lot of new market uh you know folks in the stock market right that were trying out the stock market and so they’re probably getting massive amounts of new customers and i could guarantee you they ain’t getting those those customers anymore so what is this company doing well now they’re trying to give out as many free stocks as possible pretty
Soon it’s going to be give out an entire diversified portfolio for signing up for an account right because that’s all you got that’s all you got you know if you’re you’re that company you’re you’re if your customers start drawing up you have to do anything to try to attract people to set up an account if that means you got to give nine free stocks away then damn it
That’s what you’ll do you give nine free stocks away right and so because you gotta understand as a business as a company right you can’t just stand still you can’t just say well you know it’s a tough market right now so it’s just how it is no you can’t do that you can’t get away with that right you have to continue to try to do something to fix the situation or
Remedy this situation uh as employees of that company you’re being paid to problem solve and to figure your way out of this right and so you’re going to do whatever it takes or talk you know upper management to doing this or doing that because you’re like dude we got to get customers in here i think we can get customers by this way and so as a company or a business
You start to get more and more desperate right and the more and more desperate you get right the more and more and erodes profits and at the end of the day you just if you can’t control the market like if the market’s not there to buy standing desks now like the market’s not there there’s nothing you know you can try this and you try that but at the end of the day
It’s i don’t know only add up to probably this situation even being worse right if you’re a stock brokerage and you’re trying to get new clients and you’re you know you’re like i’m going to give away 20 stocks now i mean shoot if there’s just not the the people that are attracted to the market right now that’s a tough situation and it’s just it’s something you have
To deal with right if you’re an auto manufacturer and you’re making cars and people just in a given period right don’t have the money to buy a new fifty thousand dollar car you just gotta deal with that like that you know you can try to do incentives and maybe that can help a little bit but at the end of the day it’s probably gonna make you less profitable and might
Not help very much at all it might just kind of weather you through that storm and so this is something very very important to keep in mind here right now and if we think about uh the housing right let’s talk about housing for a moment you know the toll brothers the lenars polti’s kb homes century communities all the big home builders right and we think about this
For a moment these companies man have they been in a position of power the last couple years right and so these home builders have been in a situation where the housing market has been so insanely hot right now they got multiple people basically bidding against each other to get a lot to get a new house right and they’ve been able to charge almost whatever they
Want for new homes right because the market’s just been that incredibly strong interest rates were ridiculously low for quite a while until very very recently right and so the new home builders have been able to get away with whatever they want right well now let’s say there’s a scenario where interest rates keep going up and up and up right next thing you know we
Just saw what five and a quarter percent now for a thirty year what if five and a half percent hits six percent hit six and a half percent hits for mortgage rates right well i can promise you those home builders are going to start to dry up and dry up pretty darn quickly in terms of people putting in those new orders right so which means essentially right that
You have to start competing on price because marketing is not going to magically fix that scenario right so you have to start competing on price and nelson you have a smaller pool of people buying homes so let’s say um let’s say it’s the las vegas market for instance right and let’s say on a given weekend you had 500 people i’m just using hypothetical numbers
Let’s say you had 500 people that were out there looking for new homes and they were going to see these model homes for all these different companies right and let’s say now or let’s say you know this summer all of a sudden it goes from 500 to now you got a hundred people right well shoot now that toll community has compete with that polti community which has to
Compete with that kb community with that has to compete with this community in that community right and so then you start to get into some price wars where companies want they want to move product right and so they can’t just you know sit on that land forever and ever so the next thing you know you start getting some lot discounts and those things i remember when
I negotiated for this house i negotiated this for in for this house in the midst of the roni rona uh kind of stock market crash and the scare that was going on there right great time to negotiate for a house and the reason being is i was in a full position of power obviously with you know there’d be so much uncertainty right now so what i did is i said you know if
You guys dropped this price i wanted the contract where essentially um i get guaranteed that money coming back to me right because i was i was i was preferred to be clear i was afraid that what happens if the housing market dropped for several years and toll got desperate for this community they could start you know giving lots for free let’s say for instance so i
Was like oh you used to have to pay a hundred thousand dollar lot premium for that or a quarter million dollar lot premium for that or a five hundred thousand dollar lot premium for that but now you get that lot for free all you gotta pay for the home right and if a company’s desperate they’re gonna do whatever it takes to survive and to sell that right and so i
Was in a weird situation there where i had to cover my bases right but that’s been the opposite situation here in 2022 it’s been like you you got 10 people been for one lot and you can pay this price for the home and ain’t no negotiations and you’ve got to pay a grip for those upgrades if you want those upgrades and when you’re in a position of power as a business
That’s what they got for them right but if also in that pool of buyers starts to dry up more and more you have to start competing on price you could folks start negotiating with you right and if this guy’s going to give me the great price and you’re not i’m going over there with them and so that’s where you’re starting to get in some trouble and next thing you know
These companies start making less money right and jobs end up having to be lost in a situation right like that right and i know i’ve spoken a lot about real estate recently i think this is the most important thing to pay attention to in the overall economic landscape over the you know next uh i in my opinion six to 12 months and how what happens there and it does
Housing actually stay red-hot like it’s been or do we start to substantially cool that market and maybe even uh have a big dry up of buyers and with with homes being more unaffordable than ever interest rates skyrocketing up um i think it’s very much a possibility that we see a massive and i mean massive slowing of the housing market starting this summer and you
Know where that just obviously has to kind of play out there over time coming out of the roanoke crash housing lagged the stock market right and now here we are in a situation where the the stock market’s been going down for four or five months and that the real estate market stayed hot well if the same amount of lag happens which is a five to six month leg then
You can actually see housing start to slow right around either may or june which should be very very interesting if you start seeing that numbers the problem is you those numbers usually start coming in uh you know several months late essentially that’s the way it kind of the housing market works and so it’s important you want to kind of understand the risk um to
Deflation in the market and kind of how that matters and why it matters so yeah hope you guys enjoyed this try to break this uh complicated subject down as simply as i possibly could so it doesn’t matter where you’re at with your level of understanding of the financial markets or economy or or economics or anything like that um i hope this kind of helps folks out
So much love as always thanks so much for joining me and have a great day
Transcribed from video
THE RISK NO ONE SEES AFTER INFLATION By Financial Education
