Update -

Proof That Inflation Is Already Here

The surge in inflation is real.

A note from a friend this morning shows what it looks like. He’s a bigwig in the real estate industry.

Things are nuts, he said.

“We are still seeing multiple offers and in many cases not just two offers… Seeing five and 10 offers is not uncommon – offers $50,000 over asking price on a $220,000 house.”

But this time things are different.

It’s not a bubble. Or at least it’s not a disastrous debt-fueled bubble like we saw in 2007.

This time, it’s fueled by ultra-low interest rates and a ton of freshly printed cash.

An article published this morning by CNN describes the scene. It looks at a “fixer-upper” just outside the nation’s capital. It was listed at $275,000. Within four days, the sellers had 88 offers to look over.

A whopping 76 of them were all-cash offers.

Anybody with a mortgage didn’t stand a chance.

Same Look, Different Problem

That’s the difference between now and 2007. Back then, buyers were leveraging up… way up. Borrowers could get interest-only loans. They could buy with no money down. And credit checks were skipped by many of the biggest lenders.

When home prices eventually stopped rising, many of those loans defaulted and the rickety debt-fueled system crashed… taking the banks that made such lousy loans with them.

This time, the too-big-to-fail are hardly involved. They learned their lesson.

But for the lawmakers in Washington… oh my, an easy vote is too hard to pass up. They keep giving away money that they don’t have.

The boom in real estate is what “stimulus” looks like.

And it’s just getting started.

What does the next step look like?

For that answer, we need to know what’s different between today’s real estate boom and what we saw in 2007.

Normal vs. Crazy

To start, back then, the Federal Reserve was not printing money. Quantitative easing didn’t come until after the meltdown. Mortgage rates weren’t all that low – averaging about 6.5% at the peak of the bubble.

Stocks, like today, were on a tear, though. The S&P 500 had nearly doubled over the previous four years.

Fresh off the dot-com collapse, folks cashed in their profits and transferred them to a “historically safe” asset class… real estate.

They’re not making any more of the stuff, right?

Prices rose… which caught the eye of sellers. They sold at high prices, which led to more attention… which led to more buyers. And so it went… all the way to the top.

By the end of it all, lenders were so eager to cash in that they lent to anybody who could sign a mortgage application.

Things got crazy.

Then the defaults happened…

Today may look the same, but the fuel is entirely different.

Historically low inventories are pushing prices to new highs with each day. But, again, this time the soaring prices are not fueled by debt.

They’re fueled by a stock market that’s rocketed higher… record-low interest rates… trillions of dollars’ worth of mailbox money… and, something most folks overlook, a moratorium on foreclosures.

That last one is key.

Government Intervention… Again

Normally, the market is flush with homes after a major economic downturn. Folks down on their luck are forced to sell because they can’t make the mortgage payments or the bank has already foreclosed.

That’s not happening now. The government has banned it… and banned it… and then banned it again. It’s cutting a major source of inventory.

At the same time, the gainfully employed and wise investors are sitting on stock portfolios that are at record highs. Many are cashing out their gains and buying homes… with cash.

They’re pushing out “traditional” buyers.

My realtor friend says a lot of mortgage-backed buyers are sitting out the boom. They simply can’t compete.

A Different Kind of Trouble

All of this won’t cause the housing market to eventually implode like so many think. But it will create another – potentially much bigger – problem.

It’s one I’ve written to you about a lot. It’s at the heart of our modern asset portfolio theory.

We’re seeing the nation becoming more economically divided than ever before.

Thanks to nearly $4 trillion worth of freshly printed money sloshing around over the past 12 months, inflation pressures are soaring.

Last week, I heard from half a dozen folks across the commercial spectrum who are screaming about how quickly prices are rising. Steel prices are rocketing. Wood prices are through the roof. Even corn prices are soaring.

If it’s a raw input… chances are its price has risen dramatically in recent months.

Wages, though, aren’t rising.

It’s because many of the jobs lost during the pandemic won’t come back. All told, economists are expecting to see growth of about 6 million jobs this year. If it happens, it won’t even put us back to pre-recession levels.

Add in the natural growth of the labor pool and we slip backward even further.

It’s why I continue to pound the table about the stock market.

Congress just wrote a check worth nearly $2 trillion in the name of stimulus. Tomorrow, President Biden is expected to announce an infrastructure proposal that will have a price tag of as much as $4 trillion.

Much of the money will be printed… pulled out of thin air.

Folks who have the ability to capture that cash – either through entrepreneurial efforts or investments – will do well. But the folks who can’t put their hands under the free-money spigot will suffer.

Inflation is coming.

As always, it’s not going to match the textbook description.

Instead, it will appear as a great divide between the “haves” and the “have-nots.”

The folks with the ability to tap into the stream will be riding high. The folks who don’t will be left behind.

The easiest way to ensure you get in on the action is by investing wisely in the stock market… and, if you can handle the volatility, the cryptocurrency market.

Valuations will continue to rise as more and more money flows out of Washington.

It’s home prices today. Cars will be next. Then clothes. Then food.

It doesn’t have to be scary. All it takes to overcome what’s ahead is some simple preparation and a smart investing strategy.

I’ll keep you informed.