Hasn’t the Fed learned anything from its monetary mistakes that led to the worst inflation in 40 years?
First Jerome Powell made the rounds on Capitol Hill urging congress and the Administration to keep the pedal to the metal regarding spending. In so doing, he assured them this government spending blow out would not trigger inflation. Wrong.
When inflation did arrive, Powell and his mates said not to worry, it was “transitory.” Wrong again.
Now the central bank is pivoting from the tightening cycle mandated by its own inflationary debacle and Triumphalism is in the air.
Inflation is vanquished, Powell and his mates are hailed as financial heroes and the Fed can now get back to the business that Wall Street and the financial press want and get the big financial party started again. And don’t worry. The labor market is strong and the economy is fine.
This is the very definition of “lipstick on a pig.” Not to be a spoilsport but if the economy is in such great shape, why did over 800,000 jobs just disappear into the thin air? Why is Walgreen’s closing a quarter of its stores nationwide?
Prices are rising less rapidly now then before but they aren’t going back down. The price of nearly everything is about 20% higher overall since January of 2021 and real wages have not kept up.
Housing for most Americans is less affordable in large part because interest rates had to rise dramatically to reduce inflation. Therefore, humility is much more appropriate now on the Fed’s part than hagiography.
However, humility has never been the “strong suit” of our governing elites. After all, even though their policy mistakes have meant real hardship for tens of millions of wage earners, it effects them little.
Given the Fed’s lack of introspection and continuing uncertainty about future inflation, now that we are embarking on a monetary easing cycle, don’t be surprised if prices begin rising again.
In reality the Fed is flying blind. It is simply feeling its way in the dark hoping for the best.
Unfortunately, CRE investors cannot afford to be that cavalier. Income producing property is illiquid. It costs a lot to buy, sell and finance. Therefore, once a transaction is consummated, you are going to remain in place for a while.
CRE investors cannot blithely trade in and out of positions as the financial policy winds shift.
In light of the outsized influence Fed policy has on the economy, its abysmal track record, and its unwillingness to learn from past mistakes, we believe CRE investors are well advised to remain hunkered down and invest as defensively as possible.
There is still no guarantee of an economic soft landing. All we really know is that recent Fed modeling regarding the direction of the economy and prices has been very wrong. Considering this, asset types like storage and senior housing that are least effected when things go wrong remain our preference.
Whether a recession is in the cards is unknowable. However, we do know that the emotional and economic consequences that often come in its wake, death, divorce, downsizing and dislocation are often good for storage demand.
We also know aging is inexorable. The economy aside, we all get a little older every day.
As a highly mobile and fragmented society, elder care will likely be outsourced to a third party. This is where senior living communities come in. They can provide an aging population both the physical care and emotional support necessary in the absence of an intact nuclear family.
Finally, don’t forget their potential strength and desirability as an inflation hedge. They are the only two CRE types with monthly lease intervals.
With the Fed’s return to a policy of easy money, future price increases may not be far off.
CRE investors are well advised to hedge against this and not genuflect on the altar of Fed omniscience.
