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As political pundits debate debating, financial pundits are watching the 3D tennis match between President Trump, Speaker Pelosi and Chairman Powell. This trio has been volleying stimulus demands back and forth for quite a while … even though the last round of stimulus ran out.
Despite all this political pandemic pandering … so far, it’s not been very stimulating, except for perhaps Wall Street. Meanwhile, Main Street is lying face down with a lockdown knee on its neck pleading, “I can’t breathe.” Without relief of some kind ... either the freedom to go back to work at full speed, or another dose of emergency funding ... eventually, the damage could become permanent to the extent it's not already.
After all, cash is like financial oxygen. When you’re prevented from operating your business, you can’t take a breath of fresh cash. Wait too long, and it’s game over. Many are already there. You may or may not think the lockdowns are legal, warranted, or effective. Ditto for stimulus. But as we always say, it doesn’t matter what we think. What matters is what happens. And because we can’t control what happens, we watch and plan carefully for possibilities and probabilities.
As the picture gets clearer, we’re prepared to promptly pivot properly. It seems to us the most likely scenario is a tsunami of stimulus. And mostly likely, fiscal stimulus (government spending) versus monetary stimulus (lending stimulation from the Fed).
After all, what can the Fed do? Lower rates? They’re already at zero. So, it’s no surprise Powell is calling for more government spending. Presumably, Powell's proposing to print dollars to loan to Uncle Sam ... by purchasing Treasuries to provide for the spending. (Sorry, we had to P again)
(Yes, it’s a nifty racket the Fed has. They print dollars out of thin air to buy IOUs from Uncle Sam which are repaid by taxing Main Street workers … but that’s a creature to dissect on another day). Which brings us to the primary point of today’s pontification … the potential impact of Powell printing trillions of dollars. (Okay, we’re done P’ing now)
Peter Schiff says printing more dollars is in and of itself inflationary.
Meanwhile, Jim Rickards says the Fed doesn't count printing dollars as inflation until it shows up in the official Consumer Price Index (CPI). They don't disagree. At least Rickards doesn't think so. He's just saying the Fed is myopically focused on moving this one metric ... CPI. The challenge is that prices are derived from MANY components of cost ... including materials, energy, interest, taxes, regulations, and the biggie ... labor.
And as many of those other costs went up, it is no secret corporations invested a lot of time and money moving jobs offshore to reduce labor costs. Like real estate investors, business people are constantly looking for ways to structure their activities to increase revenue and decrease expenses. Sadly, labor is often the target.
Policymakers would be wise to focus on creating environments attractive to job creators. It's one of the things we look for when choosing markets to invest in. And in case you're not already keenly aware, it takes a healthy labor market to create a great real estate investing market. So, while the Fed wants to push consumer price inflation because it's a metric of strong employment and wages ... it's a result, not a cause. Giving people money to spend to force prices up doesn't create jobs any more than heating a dead body up to 98.6 degrees Fahrenheit creates life.
It's not the metric that matters. It's HOW you get it. As we've noted before, it seems to us President Trump's policies attempt to create an environment welcoming of jobs and capable of higher wages. Unsurprisingly, he approaches the challenge the way a real estate developer would ... by cutting other components of cost to make room for higher wages.
It's a tall order and comes at a price, American voters may or may not be willing to pay. But after 3-1/2 years of watching, it seems like that's the plan. Meanwhile, for the Fed to get the CPI to move up, consumers need both jobs and purchasing power. Sure, the Fed can print dollars so Uncle Sam can pass out "free" money ... and like a sugar-high, provide a temporary burst of consumer purchasing power. But each time the Fed injects new money into circulation ... directly or indirectly ... it dilutes the dollar. The danger is the Fed succeeds in raising prices, but not wages.
The first American Revolution was based on the complaint taxation without representation is tyranny. If policymakers aren't careful, a new battle cry may emerge ... inflation without wage growth is poverty. It certainly will be hard on tenants. But as long as it's easier and profitable to move jobs offshore or automate them away, it's hard to get wages to rise. We don't envy the folks trying to solve this problem. But we do need to think through what they're doing and how it rolls downhill onto our investing. The short of it is we think a diluted dollar is coming to a financial statement near you. The question is … How does a diluting dollar affect your real estate ... and how do you position your portfolio to prosper in spite of it? Of course, that's a giant question ... and you'd need a lot of smart people and a lot of time to talk it all out. But it sounds fun. (It is.)
For now, let's just pose some pertinent points to ponder, In the past, real estate has been an effective way to hedge inflation. And with mortgage debt as an accelerator, real estate is arguably still the BEST inflation hedge available to Main Street investors.
BUT ... real estate is influenced by incomes, lending, and mortgage rates. And it doesn't move fast.
A super bullish scenario (in a market with the right supply and demand dynamics) would be rising incomes, looser lending, and falling interest rates.
Mortgage interest rates are probably already about as low as they’re going to get. While we think it’s good to get all the cheap mortgages you can, we wouldn't borrow to buy hoping lower rates in the future will increase cash flow or equity. These might be the lowest rates you'll ever see. So best to focus on markets, niches and price points where you think rents have a reasonable chance to rise ... based on things YOU can control.
Meanwhile, it appears lending standards are tightening. This is a clue that lenders are nervous about the economy (jobs) and values (collateral). They care about getting payments ... and what they get if they don’t. When it comes to payments, lenders know it’s either going to be from stimulus or jobs. If you're a lender, which would you prefer? Stimulus isn't a long-term solution. In fact, with all the partisan bickering, it's not even turning out to be a short-term solution.
To no surprise, lenders are proceeding cautiously. This is probably why the Fed is asking the government to spend freshly printed money into circulation. Lenders are skittish about loaning it into circulation. Of course, if you’ve got good credit, documentable income, and equity, you’re sitting in a GREAT position ... if you move quickly. After all, the looming economic crisis might take your equity anyway. You might as well get it while it's there and the loans are cheap. Remember, CASH is king in a crisis. Equity is only there and useful in boom times. It hides when the going gets tough.
Hedging a Diluting Dollar
But as much as we love real estate, we know it’s not a one-size-fits-all cure-all for every economic pandemic that comes down the pike. Although each move (in dollar terms) independently from each other and from real estate … other asset classes also have some important things in common. First and foremost, they’re all real and essential. You probably already understand energy is essential. Anyone who’s run out of gas or lost power at home or work knows how essential energy is to daily life. Ditto for food. As for gold … up until 1971, for nearly all of civilized history, gold was money. Sure, people like gold for jewelry and it’s useful in electronics, but gold is primarily a monetary metal. That's why central banks own gold and protect it with armies. Maybe they know something you should know. Got gold?
After all, if the Fed is going to print trillions of new dollars to feed Uncle Sam stimulus cash, it dilutes all the dollars already out there. This dilution will show up in different places, but takes time to trickle into jobs, wages and real estate. Does that mean you should sit out real estate and wait for the big crash?
Some markets are already crashing, and others are booming. So, it's smart to always be looking for deals ... and then acting when it makes sense.
Another major thing to watch for is if and how fast the lockdowns end, and if the world is able to get back to work at full speed. It's notable the World Health Organization (WHO) just flip-flopped … telling world leaders NOT to use lockdowns as their primary weapon against the virus. However, there’s already been a lot of lockdown damage done. And who knows if WHO knows what WHO will do next?
And even IF everything opened up tomorrow, it’s going to take a lot of money from savings, investment, tax cuts, lending or stimulus to jump-start this stalled economy. If we had to bet on which funding source will be the lead horse, we think there's a lot more stimulus and dollar dilution coming ... in spite of all the bickering. That's because stimulus is the fastest and most politically expedient. We're not saying it's best ... or even a good idea…. it's likely.
So. while you're rearranging your balance sheet to hedge dollar dilution ... stay engaged with how well policymakers use the tax code, regulations, trade policy and other tools to direct the flow of funds into actual job creation and real wage growth. If they get it right, it could be a big boon for real estate ... potentially resurrecting some sleepy markets. The bad news is it will take time ... and that's good.
After all, we all need time to get in position. Hopefully, you're already making your moves.
Meanwhile, we’ll keep watching, talking to smart people, and thinking about how to take effective action.
We encourage you to do the same.
Robert Helms and Russell Gray
The Real Estate Guys™ Radio Show

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