For many Americans, these feelings and beliefs have embedded themselves into our cultural fabric. Reminders of uncertain, and for many, challenging times are plentiful. Gas pump prices have soared over the past 12 months. A gallon of milk is 11.2% higher in the same time period. Your favorite morning coffee tastes a little less fulfilling with the higher price tag. Our society has shifted from one cultural extreme to another – enduring a long stay-at-home mandate that stressed the core of human interaction needs to an economy flooded with out-of-control inflation. Why is this happening? What comes next? Our team of experts has thoughts and ideas. Before reading further, please know these thoughts, beliefs and predictions may make you uncomfortable. They are observations and beliefs; not a crystal ball reading. Time will tell how things play out.
Rich or poor, black or white, urban or rural – nobody is immune from its unwanted presence and the corresponding challenges it creates. Every month, the federal government reports inflation data in several different ways. As commercial real estate specialists, our Black Diamond Realty team pays close attention to the CPI, which stands for Consumer Price Index. The CPI recently hit multi-decade highs at 9.1% or (https://www.npr.org/2022/07/13/1111070073/no-retreat-in-the-summer-heat-prices-likely-topped-40-year-high-last-month). For perspective, dating back to 1913 (but first published in 1921), the CPI’s historical average is ~3.3%. For even greater perspective, the decade from 2011-2020 experienced total inflation of 17.3% which is an average of 1.73% per year. Reflecting upon recency which tends to dominate human thinking, in the past 12 months, we have experienced the equivalent of five plus years of inflation packed into one year (1.73% x 5 years = 8.65%).
Most of our nation’s current inflation can be pinned to two primary factors. The first factor is stimulus money. The federal government injected over $5 trillion into America’s money supply over a 24 month period via Covid relief funds. This amount represents roughly 27% of the current money supply in circulation. More money in citizen pockets led to increased spending. The higher velocity of spending creates inflation. To combat this velocity, the federal government utilizes one of its key control levers, interest rate fluctuation, to control spending habits. The goal of increasing interest rates is to decrease spending in an effort to slow down the economy. The Feds recent rate increases illustrate the government’s concern that inflation is running too hot. The impending challenge is the Fed’s interest rate hikes are only geared toward addressing the demand (spending habits) side of the equation. It does not address the supply side. The Fed faces an unprecedented task of reining in high inflation with 40% additional money in play.
Simply put, our dollars today are significantly less valuable (lower purchasing power) than they were 12 months ago. Stimulus money aims to help those most in need; those individuals most vulnerable and lowest on the earning potential food chain. The irony is disheartening… Our government over-injected for short-term benefit, thereby creating a long-term inflation challenge. The band aid (government stimulus checks) has been pulled while the wound has intensified. Printing money and more government spending is it the answer to stop the bleeding.
Under President Biden, an extreme focus on sustainable, clean energy has resulted in an under supply of oil and gas. In the long run, most agree this will be better for our planet and the sustainability of our nation. Others will point out this goal is a multi-decade process to reach a level of production and reliability to avoid power shortages and blackouts. In the short term, President Biden’s regime eliminated the ability to drill on most federal lands. The recent stay-at-home mandate also resulted in lower power consumption which led drilling companies to halt operations. Sanctions placed on Russia are also in play. The following article goes into great detail about how high energy costs greatly affect inflation: https://www.nytimes.com/interactive/2022/06/14/business/gas-prices.html
It is impossible for any individual to look into their crystal ball to decipher the outlook 1, 3 or 5 years out. Nonetheless, our team has put together a list of educated guesses.
Please note that statements based on forward-looking estimates may not materialize; there are no guarantees of future economic performance.
Warren Buffet has profited billions with a simple, straightforward investment strategy. Fear creates irrational decisions which lead to opportunities. “Buy when there is fear in the market.” The world’s current fear, uncertainty and challenges will result in tremendous buying opportunities.
The fundamentals of successful commercial real estate investing is changing. Our team of experts recommends keeping the following tips in mind.
We live in a world of challenges. Fear and anxiety are at all time highs for some. We survived the 1973-81 recession and will certainly overcome the present day’s hurdles. The United States has proven, many times over, to be a dynamic and resilient culture with the ability to overcome adversity. Proceed with caution, be prepared to pounce and consistently monitor opportunities. Buckle up. Remember rainbows only show after periods of rain. Challenging times present wealth building opportunities.
David Lorenze, Principal