We have been warning investors for some time now regarding the inevitability of inflation. This is the direct result of a decade or more of the Fed’s “monetary adventurism” (WSJ 5/17/2021). Now that it’s here, the question is how long will it last?
We are being encouraged by Jerome Powell and other modern “Masters of the Universe” to dismiss it as transitory: an inevitable by product of the pandemic and attendant pent up consumer demand. For all our sakes, I hope they are right.
However, I have learned the hard way not to count on what government says. More often than not its prognostications are predicated on some sort of arcane statistical computer model. And as Mark Twain famously said, “There are lies, damned lies and statistics.”
Even if the statistics underlying current government assumptions regarding inflation are correct, the potential problem is much deeper than this. This is because inflation is in no small part a result of consumer expectations. Ultimately, this is something the Fed, despite all its jawboning has no control over.
People know what they are paying for groceries and gas, even though economists’ strip this out of their core inflation calculation. They also know what they are paying for a new or used car or when they have to call the plumber. This is already increasing inflation expectations and may be hard to stop.
It’s hard to stop because these expectations can easily become embedded in consumer behavior and subsequent business decisions. Egged on by the most pro-union administration in decades, workers are already demanding higher wages to return to work in wake of the pandemic. Their return without these wage concessions is made even more problematic by the largesse lavished upon them by the self-same President and Congress.
Businesses will likely be forced to pay these higher wages, regardless of productivity to attract and keep workers. Of course, they will then raise prices to the consumer to compensate for this.
If this proves to be the case, it could be profoundly dislocating both emotionally and economically. This is because core inflation has not been above 5% over a 12 month period of time since 1991. As such, most Americans simply aren’t used to it.
Therefore, now may not be the time to be aggressive from a real property investment standpoint. If consumption habits change following an inflationary spike, institutional and retail cash flows could continue to skew in favor of habitational assets: multifamily, self-storage, senior living, manufactured housing, etc.
Commercial property types such as retail and office may continue to struggle. And real estate could continue to suffer badly in Democratic controlled cities and potentially benefit in Republican states like Florida and Texas that offer security, lifestyle and a business friendly climate.
Contrary to what many real estate ‘dons’ think, I believe we are seeing the beginnings of the “Detroit Syndrome” (Epoch Times 4/27/21) on a significant scale in blue state America as people vote with their feet. This is facilitated by the new norm of working remotely courtesy of Covid 19.
If this rapid reset of American demography is accompanied by an inflationary spike, demand for high quality habitational assets in red state refuges may continue growing. This is why a disproportionate amount of DST inventory at any one time is historically in red states.
DST property programs may enable you to capitalize on this exodus and protect your hard earned sweat equity from the corrosive effect of government induced inflation, modern blue state entitlement and a corresponding decline in the American work ethic.
As much as you may want to continue working, it will be hard to increase your wealth when those surrounding you want to tear it down. Do yourself a favor, look hard at red state America and what it has to offer and consider DSTs as a potential convenient way of getting there.