We were among the first in the DST space to warn of impending inflation and what it may mean to income property investors. When we did so nearly two years ago, we were roundly derided as alarmists. This was dismissed as little more than economic folklore from a dim and distant past: something never to be repeated.
Our modern masters of the universe (central bankers, Ben Bernanke, Janet Yellen & Jerome Powell) were just too smart to ever let this happen again: until it did.
These are the same folks that are telling us now this is all “transitory.” We believe they were wrong then and are wrong now. To put this into perspective, this is brought to you by the same administration that offers up daily denials of obvious truths, many of which are on video and played on TV for all to see. These people seem to think “lumpenproles can be persuaded by flat denials to disbelieve what they see with their own lying eyes.” (Washington Examiner)
Recently falsehoods are jaw dropping. Homeland Security Secretary Alejandro Mayorkas testified before Congress stating the Southern border is “no less secure” now than under the previous administration. Maybe he should have spent a night under the bridge in Del Rio. Texas with the thousands of Haitians encamped there.
Want more: What about White House Press Secretary Jen Psaki insisting that our humiliating and shambolic flight from Afghanistan could not be described as “anything but a success.”
Or Biden himself in a recent speech defending his mega-trillion-dollar spending plan averring “I am a capitalist” and later, “I am not a socialist.” Uh-huh. White is black and up is down.
It is obvious that the current administration thinks you’re stupid. Therefore, the official position of the Federal Reserve Board remains unchanged. The inflation that was not supposed to occur in the first place “is transitory and will abate next year to a more sustainable growth of around 2% at or near the Fed’s target.” Sure thing.
In our opinion, the likelihood of inflation abating is extremely low. Any real attempt to raise interest rates now to combat it would cause tremendous pain and dislocation in global financial markets.
A reported 56% of households now own common stocks. And the correlation between stock prices and consumer confidence and wellbeing historically is strong. Therefore, politically minded Fed governors will continue to mouth platitudes regarding the transitory nature of inflation and their willingness to fight it while doing exactly the opposite.
Even Larry Summers, a staunch democrat and former director of the National Economic Council for President Obama, is now warning that a ‘woke’ Fed runs the risk of “losing control of inflation in the U.S.” (Fox Business News 10/14/2021)
This, combined with policies that actively discourage work, increases the potential for ‘70s style stagflation.
Does anyone remember the term stagflation? Those under the age of 40 probably don’t even know what it is, and they’ve certainly never experienced it up close and personal.
Here’s the definition from Investopedia: Stagflation is characterized by slow economic growth while at the same time accompanied by rising prices (i.e., inflation)
Inflation, which has been relatively tame for 40years, has been a cascading problem in Biden’s first 10 months in office. Despite double – digit U.S. real inflation, the Fed merely talks but takes no real action on interest rates or tapering. We believe this inaction leaves equity markets increasingly vulnerable to sudden corrections.
The silver lining in this cloud is that historically leveraged real estate has, so far been a good hedge against inflation. This is because real property owners historically get to play the same game as their government and inflate away some of this debt with devalued dollars. In the right circumstances, this has the potential to accelerate the growth rate of invested equity.
In a serious credit crunch (equity markets cascading downward), real estate can be adversely affected. However, for reasons stated over many months. No tax red states such as Florida, Texas, Tennessee, Nevada, etc. may prove to be a special case, attracting continued and even increased demand but possibly at reduced prices from potential buyers from out of state.
The takeaway here is to invest defensively and if possible, in no or low tax red states.