Time for a history lesson kids. I can already hear the groans. Don’t worry, it’ll be short and sweet. Borrowing from a recently penned WSJ piece by Phil Gramm and Mike Solon, we will call it “Lessons from the Great Inflation of 1973-81.”
Are you tracking? Last time around with folks like Ronald Reagan, the greatest President since the end of WWII and Paul Volcker, the last Fed Chairman with real balls, running the show inflation lasted 8 years, eight long years.
Now, with Joe Biden, a man who has a hard time staying on a fat tire bike and Jerome Powell, the Rubber Lion in charge, you really think it’s going to get better anytime soon?
Of course not. Things are only going to get worse and here’s why. Runaway government spending in the ‘60s was in large part responsible for ‘70s stagflation. As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Then, just like now, the Johnson Administration presided over a huge expansion of government spending in its war on poverty and ‘Great Society” programs. This says nothing of the concurrent war in Vietnam.
The Federal Reserve Bank, under then Chairman Arthur Burns accommodated or enabled these fiscal excesses with easy money policies. Is any of this sounding familiar?
Then, as now, the Fed paid lip service to fighting inflation. However, whenever recession threatened, it would back track, and crank up the money presses again. In so doing, inflation was never truly slain and returned with a vengeance.
It took Ronald Reagan’s spending restraint and tax cuts in the face of a deep recession and Volcker’s unflinching resolve to tighten, sending prime interest rates to 20.5% in 1981 to finally get the job done.
With the new $739 billion “Inflation Reduction Act,” the Biden administration is pursuing polices that are exactly the opposite. Biden may think he can tax, spend and regulate America out of inflation and recession but history suggests otherwise. As renowned conservative economist Stephen Moore recently said in the Washington Examiner, “It’s reminiscent of the immortal line by Jeff Daniels to Jim Carrey in Dumb and Dumber: “Every time I think you couldn’t do anything dumber…”
What might all this mean for income property owners? First, there may be nothing transitory about this bout of inflation, or any other for that matter. Therefore, higher prices and higher interest rates could to be around for a while.
Second, the higher mortgage rates resulting from this are already cracking the economy. Housing is already in recession and it may spool out form there into the rest of the economy.
As builders stop putting up new homes, they face the risk of being laid off. This could then create a ripple out effect into the rest of the economy. Restaurants, clothing stores and purveyors of luxury items may feel it first. Inevitability, auto sales could be impacted too as the unemployed put off new vehicle purchases.
Some industries like leisure and hospitality may get walloped. Spas, hotels, amusement parks all face the possibility of shedding workers at an accelerated rate. I would plan on fewer trips to Disney World, etc.
Many folks may trade down in terms of eating as well. This may be bad news for higher end restaurants and good news for chains such as in McDonalds, Burger King etc.
Those industries which have historically been more resilient and shed the fewest jobs revolve around essential goods and services.
Healthcare is a prime example of this. While a consumer may forego purchase of myriad luxury items, they will be much less likely to ignore those things that promote their health and wellbeing.
This is just one more reason we feel senior living is attractive. Adults gravitate to these communities primarily for socialization purposes; someone loses a spouse, your circle of friends grows smaller as you age. To avoid the increasing sense of isolation this brings in its wake, the transition to senior living becomes more compelling.
Most credible studies on aging identify socialization as a primary contributor to mental health and longevity. Again, something one is not likely to skimp on even in recession.
Finally, even though retail has been in bad odor as a property type for over a decade, the current recession may prove a boon to retailers such as Walgreens, Home Depot, Dollar General, etc.
Instead of putting crumbling homes on market in an attempt to move up, owners may try to hold on until market conditions improve. In this case, more home repairs would be necessary.
When retailers like Target become too expensive for consumers, they can always trade down to Dollar General and the like for the purchase of necessary home goods. Healthcare, food and housing are all essentials that no one can do without.
We hope this helps.