Many amateur investors … both Wall Street and Main Street … tend to “wing it” … investing on tips, hunches, intuition, and “feel”.
And in real estate, you can add “insider information”. Not that anyone does that on Wall Street. Nah.
Meanwhile, pros and serious amateurs pay attention to data, analysis, and the opinions of proven analysts.
Of course, news, trends, innovations, and emergencies often require quick action based on limited data … so investing is far from an exact science.
So both fortunately and unfortunately, real estate moves slowly.
So while Wall Street investors run to-and-fro like cats chasing a laser pointer …
… real estate investors have the luxury of meandering into position and riding out the slow moving trends in interest rates, inflation, population, migration, and tax policies.
The flip side is that real estate investors are prone to fall asleep at the wheel … or can’t get equity out of the path of occasional fast-moving dangers.
Of course, there are equity strategies for moving, optimizing, growing, and protecting real estate wealth …
… even while retaining the income, tax-breaks, and long-term appreciation. But that’s a topic for another day.
Today, our focus is on the challenge of making strategic investment decisions in what looks to be a rare combination of rising prices in a slow economy.
Our recent two-part tome describes this unusual phenomenon … stagflation … and contrasts it to stagflation’s last fabled appearance in the 1970s.
Of course, Wall Street investors need to be VERY careful in a stagflationary economy. False signals in a fast-moving environment can create havoc.
But Main Street real estate investors … especially those who pride themselves in paying attention … aren’t immune from being misled by false signals too.
For example, you’ve probably noticed energy costs are up. In fact, oil recently flirted with $70 per barrel.
Wow. It doesn’t seem that long ago oil was at NEGATIVE $40 per barrel. That’s a HUGE swing in a relatively short period of time.
(Boy, too bad someone didn’t see that coming and tell us how to profit … oh, wait …)
Of course, oil … like interest rates and taxes … are major factors in the cost of everything. So big oil price fluctuations are noteworthy … even to Main Street real estate investors.
Obviously, your tenants feel high oil prices at the pump.
But they also feel high energy prices at the grocery store. After all, it takes energy to grow, harvest, package, and ship food.
But the problem isn’t just that prices are going up … that’s been going on for a long time, even if the CPI is infamous for hiding it.
The problem, as anyone running a tight household budget will attest, is when prices are going up substantially faster than incomes.
Of course, incomes are a bid on labor. So when there are lots of jobs but workers are few, labor gets bid up and wages rise.
But when there are lots of workers competing for too few jobs, the opposite is generally true. Wages are constrained … or even decline.
Enter the February jobs report …
Headlines claim, that along with the rising price of oil, February’s “robust” jobs report signals economic recovery. But does it really?
In short, most of the “new” jobs are tertiary … meaning low-paying service sector jobs which depend on primary and secondary industries to support them.
But the recovery barely created any primary or secondary jobs.
Because this is an important point, we’ll digress for just a moment …
If you and your friend both own restaurants and take turns eating at each other’s place, is your local economy growing?
No. Because you’re simply trading between each other. In fact, because you’re consuming the food, your two-person economy is shrinking.
Now let’s say you buy your produce from a local farmer and he uses the money you paid him to eat at your restaurant. Did your local economy grow?
No. You’re all still just passing local money around between the three of you.
But because the farmer is adding to the mix the produce you’re all consuming, at least you’re not shrinking.
That’s because the farmer is trading his productive labor for your service labor … but it’s the farmer’s produce which feeds ALL of you.
Service doesn’t work without production.
But let’s say the farmer sells some of his produce to another state or country.
This brings outside money into the farmer. If he spends it with you, your local economy grows. It’s GOOD to have an exporting farmer in your club.
That’s why, when we look at real estate markets, we look for Primary businesses which pull money in from outside the local economy. It’s the fuel of growth.
Secondary businesses directly support Primary businesses. For example, an airplane manufacturer might use a local machine shop for parts.
That machine shop doesn’t exist unless the airplane manufacturer is there to place orders for parts.
So in this example, the airplane business is the gateway for outside money to come into the local economy. It’s the PRIMARY driver of the economy.
The machine shop is a SECONDARY driver … as money from the primary business flows through the secondary business into the local economy.
A Tertiary business is one which provides ancillary services to both Primary and Secondary businesses and their employees.
Restaurants, dry-cleaners, even healthcare, are all Tertiary. They SERVICE those who PRODUCE. It’s almost impossible to grow without production.
All this economic mumbo-jumbo directly translates into making smart decisions about real estate markets, product niches, and tenant demographics.
Like Game Stop stock, real estate can get hot for no good reason.
And if you pile in to ride the wave, you might be found swimming naked when the tide recedes.
These bubbles are driven by blindness and greed. Former Fed Chair Alan Greenspan famously called it “irrational exuberance“.
Meanwhile, true growth is driven by sound fundamentals – production, income, prudence, and rationality.
Now back to the challenge of deciphering rising prices in a stagnant economy …
While booming demand can drive prices up, so can limited supply.
So it’s a huge mistake to infer that rising prices by definition mean booming demand.
Which takes us back to oil …
It looks like a substantial contributor to rising oil prices is NOT booming demand, but rather a record decrease in production.
To further complicate the issue, there’s a new Sheriff in the White House with a new energy “plan” … which is unlikely to result in a resurrection of U.S. oil production.
Of course, we’re not The Oil Guys, so we checked in with our oil experts to see what they think. You can watch that here.
For now, our point is that rising prices aren’t unquestionably a sign of economic growth, though they may create a nice investing opportunity.
So while it’s nice when prices boom and equity happens, you don’t really gain in real terms if everything else is going up too. You just don’t lose.
But for those with no assets to boom … folks who live paycheck to paycheck … or stimulus check to stimulus check … your tenants …
… it’s hard for them to absorb your rent increases.
In other words, you can’t count on rising wages to drive rent increases to drive equity growth. But hot numbers can trick you into thinking you can.
The bottom line is these aren’t your run-of-the-mill distortions. Stagflation is a tricky environment to navigate.
And while the basics remain the same … use real estate to acquire cheap debt, income, and tax-breaks while inflation creates equity …
… don’t be lulled into thinking once things open up fully, it’s a smooth ride back to business as usual.
It might happen. But history says it may take something extreme to reset the gameboard.
Last time, it was a prime interest rate over 20%. It’s hard to imagine.
But our big-brained friends say that’s not likely … there’s WAY too much global debt. Rates that high would implode everything.
Still, it’s good to be ready just in case. Borrow long and fixed.
Our bet is the dollar’s going to come under serious pressure. We can think of almost two trillion reasons why … in just the last week.
All of this has been slow motion train wreck we’ve been watching closely for many years.
Yes, it’s boring. It’s easy to fall asleep at the wheel. But the fundamentals haven’t changed … in fact, they continue to affirm the core thesis.
Of course, we’re sure this will be a hot topic of discussion on this summer’s Investor Summit … but not at Sea. Still near water, but more “on the Sand.”
It’s where real estate, oil, gold, economics, and even crypto … all get discussed and debated by experts like Peter Schiff, Ken McElroy, Brien Lundin, and nearly 200 investors and entrepreneurs from around the world.
The stakes are high and getting higher. Most investors under 50 years old have never seen, much less dealt with stagflation.
But as two of the elder statesmen in the space, we can tell you it’s a weird and wild beast … and very difficult to tame.
Worse, there’s a LOT of incentive for the Wizards behind the curtain to resort to distractions and sleight of hand to shift the finger of blame elsewhere.
So if this is the first you’re hearing about stagflation, it’s time to start paying attention and getting into discussions with experienced investors and economic experts.
The good news … and you deserve it for reading ALL the way to the end … is inside the potential turmoil will be a tremendous opportunity for the aware and prepared.
Your mission, should you decide to accept it, is to be among them.
Until next time … good investing!