Stagflation is Scary. And it May Already be Here...

Welcome to A Skeptical Dude’s Take on Real Estate: a frank, hopefully insightful, dive into real estate and financial markets, from one real estate investor to another. Coming at you live from Nashville, TN. Interested in Nashville real estate? Let's chat!

What am I listening to? - Classical music tracks from video games. They are actually pretty amazing. But yes….nerd alert.

Where am I? - An undisclosed location in Tennessee. Just a man, his laptop and his pooch.

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Is Scary Stagflation Really Here?
• - The Bottom Line

The Weekly 3: News and Data to Keep You Informed

1. - Baltimore Bridge Collapse: the economic disruption doesn't look like a threat to broader supply chains. (AXIOS)
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3. - Broccoli Sprouts are Cancer Fighting! Study shows growing broccoli sprouts at home and consuming them daily counteracts carcinogenic effects of chemicals in food / environment. I’m putting this one here again this year. I’ve seen too many cases of cancer lately. Get some broccoli sprouts! (Amazon Link).
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5. - Nashville Waterfront Development Starts to Take Shape. 30 acres of mixed-use development on the East Bank, anchored by a $2.1 billion domed stadium for the Tennessee Titans. (BizJournal)

Today’s Interest Rate: 6.91%

(👇 .18% from this time last week, 30-yr mortgage)

Economic Checkup

The economy is looking strong, and we always want to strongest economy we can get right? But, is it possible for it to be too strong? There actually is this weird scenario, just past goldilocks, and closer to Alice in Wonderland, where the economy keeps chugging along…. slowly, household incomes crawl ahead, corporate earnings play duck duck goose, unemployment (usually) rises and inflation stagnates. Economists call this Stagflation. You may hear folks also say the phrase “no landing,” referring to the Federal Reserve being able to avoid a recession but inflation remains. The two could actually become one.

It’s a no bueno situation.

Why is this bad? It is because the Federal Reserve and Federal Government may not be able to utilize their standard monetary and fiscal remedies for inflation or unemployment as effective bullets against stagflation. In fact, there is no agreement amongst economists on the best way to stop stagflation.

Stagflation, Are we There…Yet?

A year ago economists, Wall Street’s smart money, and pretty much everyone that calls themselves an investor was predicting a recession. I will include myself in that camp. Screaming high / fast interest rates employed by the Fed, $10 Trillion in federal spending, extremely low home sales, corporate earnings revised lower and lower, inverted yield curve for Treasury Bonds, etc…, all indicated a recession on the horizon.

Fast forward to today, and these same folks have reversed. The US economy was able to plow through those storms and avoid negative GDP growth. The main factor, unemployment didn’t plummet along with everything else. We are still under 4%.

The consensus (my skeptical ears perk up when I hear that word) amongst the finance community then became a“soft landing.” Here we expect inflation to slowly fizzle and GDP to remain positive, but slow. This is still the predominant thinking.

We have had several months of steady everything. Inflation is not dropping as the Fed hopes. I fact PPI, the Fed’s preferred measure of inflation, popped up last month, and both CPI and PPI have been resilient in the face of the fastest interest rate increases in history and Quantitative Tightening, where the Fed stops buying corporate and government debt to reduce liquidity in the economy and slow financial markets. Again the US Economy is remaining quite resilient.

All things being equal, this would be good. But again, inflation is not abiding and unemployment, layoffs, job switching, job quitting (JOLTS) are all showing signs of worsening. These things are happening.

Now, 45% of investors believe the economy could head toward stagflation.

Now, does this mean we are headed to a crash, bang, scary, violent, bad, awful, wrong, impossible, disastrous, hate, worst, hell…. fill in the media headline hyperbole…problem? Not necessarily, and there is reason for much optimism. But us Skeptics are always on alert to protect our downside.

For us real estate investors, if we are in a stagflation environment, we can expect that the Fed will keep interest rates at their current elevated levels or more slowly cut rates over the course of 2024/2025. Keep an eye on inflation and unemployment specifically. If we see inflation flatline / rise slightly and unemployment slowly rise, together, that could be a sign the economy is stagnating. Fed Chair Powell has now seen 2 months of hotter than expected inflation reports, saying at a March 20 press conference that these reports “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%.” This may be the case, hopefully. But the data doesn't fully support this optimism and that they should be cutting interest rates. I agree with former Treasury Secretary Summers, who said“My sense is still that the [Federal Reserve] has itchy fingers to start cutting rates and I don’t fully get it.”

Remain on guard.

I’m a positive pessimist, I see opportunity everywhere and when my spidey-sense starts a flashing’ I pay close attention to certain indicators for signs I may want to button down the hatches (put money in money markets, ramp down stocks, buy more real estate assets, other fun strategies…), so here are a few more indicators to watch, all you smarty-pants Skeptics out there: (This is not financial advice).

Economic / Financial Indicators to Watch:

• Stocks have had a fantastic run this year, up 10% and up 23% the last 6 months. If the Fed cuts rates in June I see this as bearish for stocks; but, bullish for real estate. And I’ll be bull riding bullish if they follow through with 1-2 more cuts this year and bond spreads ease.
• Speaking of stocks, it makes everyone feel rich (well the 60%+ of folks who own stocks). This may be one reason folks are willing to get back into crypto in a major way. And not just Bitcoin (which I own) but the “meme coins” too, it’s getting 2020/21 wild! There are also other reasons for bitcoin to be bullish, but not as much the alt-coins. Watch out. Bull markets create bullsh%t.
• On Real Estate. One of the major sticking points in this market is supply. We are at a 50 year low and 2022 we had a housing supply/sales recession (see here for my post on supply/demand). One indication to watch is housing sales and new listings, these will show if the liquidity is going back to the market. Homes sales increased significantly last month, 9.5% year on year. And inventory of available existing homes increased 5.8%. Both positives for the market. But one month doesn’t make a trend. Keep an eye on this. And by the way, prices went up, it’s never a perfect time to buy. If you are waiting on something to magically happen, well…
• 
  
• …. it’s going to be a long wait.

Bottom Line

Warren Buffett once said, “The first rule of an investment is don’t lose [money]. And the second rule of an investment is don’t forget the first rule. And that’s all the rules there are.”

Hear hear.

The Skeptics Take: The best way to maximize your upside is by protecting your downside. Protect that capital you have because getting it back is much harder. As a quick example, if the value of something (house, stock, asset…) goes down 33%, it will have to rise 50% just to get back to where it was. Go ahead, pull out your calculator. I’ll wait.

Protect your downside, watch your 6, trust but verify, invert always invert, avoiding stupidity is easier than seeking brilliance, avoid crazy at all costs… all reiterate the same basic idea. This is the golden principle for investing. After all, it’s your money. So it’s your responsibility.

Stay Skeptical, but positive. There is always opportunity.

Most Interesting Tweet(s) of the Week

WOW. I can’t stop looking at this amazing eagle.

That’s it for this week. If you are interested in digging deeper into any of these ideas or just want to talk real estate investing don’t hesitate to reach out. You can message me directly right here on Bigger Pockets. I'm also a realtor in Nashville and am the GP of Klout Capital.

Again, stay skeptical y'all.

Herzliche Grüße

-Andreas

* The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.