Commercial Outlook Inflation and Interest Rates

[Henry Clark]

Was responding to a blog about inflation and Fed interest rate hikes in the future.  Sharing my comments here.

There is tons of Noise around the economy, historical, political, world events, etc. I look at two different sets of information:

1.Commodities: March December Today/latest

Steel $54.46 $35.60 $38.77

Copper 4.75 3.82 4.22

Lumber 1,441 391 344

Silver 26.46 23.16 24.49

Crude oil 111.76 79.98 79.86

Natl gas 12.80 11.00 12.22

Corn 7.49 6.26 6.75

Soybeans 17.00 14.39 15.38

A. Different charts, different days, you will find different numbers for the above.

Believe we are still in a Whiplash effect. Nothing ever goes out of kilter far one way and then comes back to average or normal. What I love about the above numbers they are the Purchasing indicators by 10,000's of company Buyers and 100,000's of companies what they think the future holds. And the customer orders they need to fulfill. They are bidding against each other, causing inflation.

B. Although the above figures are clear, there is a lot of noise in them. Steel went up due to Covid and shipments from China being decreased along with shipping backups.

Lumber went up due to import issues by the US with Canada. Then Covid and weather locked down Canadian mills.

Crude went up due to Russia and traders bidding up.

C. The majority of the above items are on a sharp upswing since the first of December. They were at historic highs earlier in the year. Went down to normal prices late fall. Now headed back up, even with the Interest rate hikes that have occurred throughout 2022.

D. New Homes. Unless builders were on Cost Plus, they got their heads handed to them in 2022. They will keep their prices high to make up for lost cash positions. Even though Lumber is a 1/3 of the price and Steel has come down.

E. Silver has started back up. The majority of silver is used for industrial purposes. Mainly electric connections, like your computer or phone. This is a good indication of consumer goods and spending. Going up. Don't know when the credit cards will max out.

F. Food prices are going to stay up or go up. Corn and Soybeans make up the majority of our food, from soft drinks, chips, cooking oil, etc. Natural gas from which Nitrogen is made which is used for Corn production is going up, thus food will stay up. Russia and Ukraine are some of the primary suppliers of Potash and Phosphorus which are primary fertilizers in the N/P/K. They will stay up or go up.

G. Wages- no data, but I know I am having to pay more.

2. Finance and Contractors: I always ask them how business is going.

H. Finance- Our 3 bankers say there is still a lot of covid money with their customers trying to find a home. Thus, they are willing to bid up prices.

I. Contractors- Engineering firm, excavators, electricians, plumbers, Building manufacturer, erectors, etc. Were about 6 to 9 months out last year and they are still 6 to 9 months out this year. Plus, they can't find employees. So, they don't plan on catching up.

We are putting our money on interest rates staying high and inflation staying in place. I'm an accountant by trade, so I can make good numbers look bad and bad numbers look good. For example a year from now, we will hear Year over Year inflation is negative. Sounds Great. But 9% last year and 8.9% a year from now, year over year, inflation is still high.

Black Swans:

1. Wage increases haven't been factored in. Plus, the US working population is decreasing, which will cause wage rates to increase. Illegal immigration won't fill those positions. We won't put in place legal immigration policies for qualified workers. Only a minor % decrease in the work force will create a bidding war for employees.

2. China. If Russia prevails, then China will take Taiwan. Any trade issues with China cannot be remedy quickly. Thus, products across the board will increase.

3. China. Manufacturing has to move away from China. It is short of people and its labor rate has tripled in the last 30 years. India and Malyasia are the next Low-cost producers. Mexico doesn't have enough people and their cost of living is too high for cheap labor. The rest of Central and South America although the labor is cheap, the governments are unstable, and Politically the US will stay away from anything that looks like Colonial advances there.

4. College tuition cancellation- These are far larger figures than the home loan crisis. We are in a cutthroat environment where we will do anything for a vote.

Will any of the above hit or worthy of consideration. Who knows. I always tell people it's your Money, your right whether you succeed or fail. I hate to fail based on someone else's decision.

Actions taken:

We postponed building this year because prices were too high. Our manufacturers say prices have come down about 30% from a year ago. But they said will probably be a momentary decrease and then go back up. We sold our highest debt property, reducing debt, but also taking large profit off the table. At about a 50% LTV across the board.

Refi'd early. Some to 20-year SBA. Our 5-year balloons/20-year amorts were at about 2 to 3 years left. We refi'd early to 7-year balloon on 20-year amorts. We paid about 1% point extra for the remaining 2 to 3 years.

Bought land and holding. Positioned to build new assets when we deem its time.

Worst mistake. Selling the property. Was a Golden Goose. Also took debt off the table going into an inflationary period. Luckily, can always build another Golden Goose.

"Start small and Make Your Big Mistakes Early."