I had the good fortune of being taught by Peter Drucker while getting my MBA at Claremont University. One evening, Drucker quipped that he had been a journalist, mathematician, investment banker, economist, and a few other things before settling on writing, consulting and teaching.
He said the job he most disliked was being an economist.
The reason, he stated, was because economists were rarely right. They could tell you what happened but could almost never forecast what was going to happen. It seems I could have been a terrific economist – as I have incorrectly believed inflation and a recession were right around the corner for the past five years!
RISING PRICES SPARK INFLATION FEARS
The Bureau of Labor Statistics reported this week that consumer prices rose at the fastest annual rate in decades. This was mostly driven by the largest government spending since World War ll. More importantly, this is untargeted spending. Instead of using the money to build assets like roads, bridges and water storage facilities, the money was dropped on people’s heads. Money supply is up 30%. So much money fell from the sky that spending has stayed strong, while savings rates are the highest in decades.
COVID did not cause a recession; it caused a work stoppage. Supply constraints, paired with massive spending, low interest rates and the reopening of our economy has caused a huge spike in pent up demand, as well as inflation. Core consumer prices, which exclude food and energy, rose 0.7% between April and May 2021 (i.e. 8.4% annualized). They’re up 3.8% from the same period last year, representing the largest increase since 1991.
This looks scary . . . but keep in mind, the base rate used to calculate these inflation numbers is the abnormally low prices we had in 2020. Does this mean it’s a one off, or are we in for high inflation over the longer term? My view (like any good economist) is “maybe”. The current data is unclear and doesn’t clearly support either thesis.
What is clear is that the global pandemic and the government’s actions have created circumstances unlike any in the past. This is not something economists do well with.
THE ONLY THING CERTAIN IS UNCERTAINTY
John Rutledge, a CNBC commentator, investment guru and good friend, last week stated, “There is no single data point that would change my mind on the state of the economy or how I would structure my portfolio.” The economy is awash in mixed messages, and humans dislike uncertainty. It is one of the main natural stressors in our lives. Regardless, given COVID and the massive amount of recent government stimulus, our economy is unusually uncertain.
Don’t assume massive deficit government spending always equals inflation. A quick look at Japan will prove this is true. Japan is still dealing with deflation after decades of deficit spending.
No one knows what’s going to happen to the economy. Just as important, we don’t know when it will happen – or what “it” even is. This I am certain of!
REMEMBER YOU ARE IN CONTROL OF WHAT MATTERS
The one thing we can do when on unsteady ground is stabilize ourselves. This means making the best decisions you can based on your financial situation and risk tolerance. For some, this may involve refinancing or repositioning your real estate portfolio with more conservative leverage levels that allow you to withstand market cycles. Or financing out cash to take advantage of this uncertainty.
Review every investment in your securities portfolio and consider how each would do with higher (or even extreme) inflation. Think about the investment’s core fundamentals. Do not bend to “group think”!
Popular opinion seems to say inflation is coming. However, many feel the Fed will not raise interest rates because the government can’t afford to pay the debt, plus the stock market would be impacted severely. This may be so, but if inflation comes and they do not act, the dollar will be devalued and create a new set of issues.
Good investing in either real estate or securities does not require you to predict the future. Just understand the moment you are in and think long term. Moments like this create opportunities. At this moment, as uncertainty abounds, your knowledge of your assets, and understanding your personal risk tolerance, while also thinking through your long-term goals are more important disciplines than predicting the future.
Plus, you don’t have to go this alone. FBF is always here to answer your questions, provide insight and supplement any research you’ve already done. Give us a call today. We’re happy to ensure you’re on solid ground, no matter how shaky the environment gets.
Article By: David Frosh
Partner at Fidelity Bancorp Funding