Deflation, Stagflation, Inflation, Hyperinflation and Uncertainty

[Natasha Keck]

I've read a lot about having a three legged stool approach as a way to preserve and grow wealth involving a hedge for

1. deflation (depression, falling prices)
2. inflation (status quo, slowly rising prices)
3. uncertainty

It would seem to me that we have two additional possibilities on our horizon due to our federal debt levels:

1. stagflation (steady prices for extended time.  Think Japan.  We'd better load up on all the yield we can get.)
2. hyper-inflation (rapidly rising prices.  Think Venezuela.  Look out for political unrest.)

Are you starting to hedge for stagflation or hyper-inflation?

[Ryland Taniguchi]

The United States government has a $18 trillion deficit not included infunded liabilities. Those that think the US dollar is not are risk are not doing simple math. In the short run, the bigger problems in the world are in Europe and Japan, but in the long run the dollar will be at risk as well.

In your scenario, I think inflation is the least likely. During the Reagon/Volcker days of 20% interest rates created by Volcker to fight inflation, we didn't have an $18 trillion national debt. If the US treasury had to pay 20% interest in $18 trillion, the interest payment of $3.6 trillion would exceed all tax revenues. I believe we won't see interest rates this high as the government will keep running manipulated low interest rates until it causes a bubble so big that it will explode.

Understanding the state of these perpetual Bubble economies, a long term buy and hold strategy makes no sense. The roller coaster ride will only have higher highs and lower lows as we are in a state of long term low interest rates. I am a "buy and hold a while" investor. Since 2009, I have personally (outside of the hedge funds I run) been buying 10 rental properties a year at an average IRR of 70%.

Between 2009 to 2011, you could get 24% cash-on-cash newly constructed for $80,000 in Phoenix and that market has appreciated up to $280,000 today. The rents have gone up by $500/month. Those turnkey buys bought during those years are 80%+ IRR. Between 2012 and 2013, I was finding 2% rule deals in class B neighborhoods in Memphis, Houston, Kansas City and Birmingham. I realize my IRR had dropped to less than 30% and so in 2014 till today I started buying 65% IRR BRR deals locally in Tacoma where I get an instant equity of 30% and then 1.25% to 1.5% rule cash flow deals. 40% of these deals are R2 lots over 14,000 sq ft that I subdivided and build a new house to rent.

Real estate historically tends to go in major crashes around every 18 years (15 to 20 years) unless we run into a world war or a currency crisis. The last crash was in 2007 and according this theory real estate would crash around 2025 with 2022 being the early side of it. The next global meltdown I believe will be much worse than 2008 and more like the 1929 crash. England and Germany were the safeguards of the European Union and now with Brexit the next crash will be caused by a sovereign debt crisis in either Portgual, Italty, Ireland, Greece or Spain. Brexit has set a precedent for one of these five countries to leave the European Union to deal with their sovereign debt crisis. One of these five countries will do something similar to what Germany did in 1921 where they ran the printing press on marks to stimulate the German economy through cheap exports. The financial experiment worked and by 1924 Germany because a major industrial power. Although we cannot forget the emotional trauma of wheeling barrows of marks to buy a loaf of bread. The Germans went through so much emotional turmoil during hyperinflation that it set-up the psychology for Hitler and also for getting revenge on the Jewish Rothchild bankers who they perceived as the cause of their problems.

England followed suit after Germany and devalued their currency and cheap exports being dumped forced the US and the rest of the world to put up Smoot-Harley tariffs. Printing currency recklessly always results in the same outcome... Trade wars and then a breakdown in global trade. I am betting that the prices of those Phoenix houses will pass $400,000 and during the next 2025 global meltdown will tumble all the way back down below $80,000 again.

So around 2020 or 2021 (will watch the world markets and see what is going on), I will sell all of my buy and hold rentals and probably donate 100% of the profits into my 501(c)3 non-profit start with America.

1) I don't buy cash flow properties to get out of the rat race so my passive income exceeds my expenses. I buy cash flow properties and don't touch the cash flow. I use the cash flow pay down the debt. The best hedge against deflation and hyper-inflation is cash flow rentals owned free and clear. 

We are going to have low interest rates for a long time and it will make the bubble crazy crazy big. Deflation happens when the bubble pops. Recent financial experiments in Japan show that they cannot stop deflation no matter how much money they print. You can print all the money but you cannot force people to spend it. Interestingly, I think the money does get back into the economy through hedge funds. When the real estate hits a equilibrium where it is cheaper to buy properties than the replacement cost to build them, the hedge funds come in and get capital under 2% and buy whatever they can get. Hedge funds are the new way to stop deflation from spiraling forever and that is why I think running a hedge fund is the best way to invest in real estate.

2) Quantative easing causes exports to be cheaper and too much quantitative easing by multiple countries will lead to a breakdown in global trade. The hyper flatiron is created on purpose by a government that can't pay the interest on its debts. Governments will never pay the interests on their debt if they can't afford. They always will opt for hyperinflation, get exports cheaper and screw their people for 2-3 years. The people will be so emotionally worn out that they will do something like geneocide and will be willing to fight a world war.

When a government cannot pay the interest on their debt, they will manipulate interest rates as long as they can until they have no choice but to create hyperinflation. 

3) During deflation, debt becomes burdensome. During hyperinflation, debt is like free money. The problem that deflation and hyperinflation are so closely linked, you need a strategy that covers both. And that is buy your cash flow rentals and use the cash flow to pay down the debt.