The main point of contention is whether the recent rise in inflation will be temporary or more protracted.
You know I am on Team Transitory. My view that the Fed is doing a great job and should be commended is the true contrarian take of 2021.
That aside, I am dubious that moderately higher inflation will actually have any effect on interest rates. Not even a couple years of 6% inflation, which is very unlikely.
The old model where inflation and nominal interest rates moved closely in tandem was based on a world where the marginal and median dollar saved was from middle class families. That world is dead, replaced by our current world of extreme inequality and elite domination. And while a middle class family may decide to spend more if inflation is high and return on their bank account balances is low, the wealthy just don’t work that way.
Rates are low and will continue on a secular path even lower, real and nominal both, because demographic and technological change has resulted in a permanent “creditworthy borrower’s” market. We are getting rarer, and savers are getting more common.
You have savings to lend, but want stability, low risk, and liquidity? Take a number bub, nobody cares in 2021.
The idea that savers can say “Due to higher inflation, I won’t lend out my money unless I get a commensurable higher rate” just doesn’t fly. The marginal and median dollar saved is saved by someone with a high net worth who does not have a bunch of consumption he will substitute for savings if he doesn’t get his desired rate.
Negative real rates are our future, and negative nominal rates will be a regular thing too in a large and growing portion of the world.[/quote]
Going out on a limb here but I think 24-36 months out we could be setup for a meaningful soft patch with odd side effects:
Not sure there is any specific action a person can take other than to have some reasonable liquidity/reserves/open lines of credit: much of the stimulus funds are unspent but think by 2024 that is gone.
1. the supply chain issues will have worked themselves out, even PC demand is set to slump about 5% in coming 12 months heard on CNBC today
2. shipping costs will come back to historical trends
3. energy prices will soften (perhaps at somewhat elevated levels)
4. housing will enter a period of 3-5 years of under performance (mean reversion) 2023-2026 it may still be 1-2% nominal increases but likely below inflation (over 3 years could drop 5% adjusted for inflation).
5. unemployment will rise and stay below 2019 levels in tourism/restaurants
6. will hit some limits of government stimulus
7. USD will stay relatively flat with low interest rates (safe haven effect) but continued political infighting will prevent signifiant boost to growth via public investment
8. US growth may actually outpace China for a couple of years as China starts to show age from demographic shifts (10-15 years out it gets worse for them)
9. stocks are the hardest to predict as there has been so much obsession with the US market so momentum likely to continue, many international markets are more fairly valued but the momentum catalyst is often missing
10. Don’t want to make political predictions but if we don’t get better choices in 2024 (could be catalyst for meaningful volatility), revulsion at whoever is perceived as extreme could cause more damage
11. certain commodities (think coffee) may be the best investments (something like 1/3 of the Brazilian crop was wiped out in August and may take years to recover
In a nutshell, I’m not going to go hard on raising rents. I can be fine with lagging the market but having higher quality tenants. The more secure cash flow is more important than getting every last dollar. Content to play catch up as the occasional one opens up.
I put this out there as the rental income would potentially become the money I live on if I work less or retire. The predictability is more important.
