Update - June 8, 2021
The New Rules of Investing
This isn’t supposed to happen.
Cars are supposed to fall in value the instant they’re driven off the lot. But that’s not the case these days. Many used cars are jumping in value.
Things are far from normal.
But it’s not what it seems.
Lots of folks look at what’s happening to prices across the country and assume it’s the inflation we’ve all been calling for.
After all, a key indicator of harmful inflation is when folks are rushing to buy something today because they think it will be more expensive tomorrow. It’s a dangerous phenomenon. It’s the spark that has ignited many horrid disasters.
But that’s not the case today… at least not yet.
Particularly with cars, folks who are buying today are largely buying because they have to. They now need a second car. They might need it for business. Or their old car is no longer reliable.
Nobody is buying a car today trying to get a big discount on tomorrow’s price.
That’s critical to understand.
Those who can wait are waiting. They’re waiting for the supply shortage that’s sending prices higher to wane.
It’s coming.
Lower Prices in Sight
Take Ford (F), for example. It has so many of its trucks queued up, waiting for a critical microchip, that the lineup can be seen from space. Once those chips are installed, the trucks will quickly flow to dealerships.
It’s a similar story with lumber.
Watching July lumber futures last week, we saw a wild ride. At the height of the downward plunge, prices fell by the exchange maximum. Prices dropped during the week by as much as 8% for some types of lumber.
For folks buying many of these “inflating” assets right now, the future does not look great.
They’ll likely lose money.
Again, rational buyers are not rushing to take advantage of today’s prices, thinking tomorrow will cost them even more.
That’s why I’m convinced the inflation that I and so many others are calling for is not here yet.
In fact, as anybody who has followed our Modern Asset Portfolio knows, I believe deflation remains the market’s underlying force.
It all comes down to one simple reason: ultra-low interest rates.
Stay with me. This is important.
The Real Story
Because of record-low interest rates, prices are not what they seem.
This year’s car does not cost more than last year’s car… despite the price tag.
Right now, for example, folks are willing to pay a few extra grand for a used car because they can amortize the expense into a loan with a record-low interest rate.
Ultimately, the monthly price they’ll pay is no higher than it would have been a year ago.
It’s the same story with housing… and lumber prices.
The numbers are even more obvious there.
Remember, this time in 2019, the average rate on a fixed 30-year mortgage was 3.82%. Today, it’s 2.95%.
On a $250,000 loan, that cuts $150 per month off the payment.
The monthly tab goes from $1,200 to about $1,050.
Or we can look at it another way…
To get that same $1,200 monthly payment, a buyer can spend an extra $27,000 on the house.
Not surprisingly, that’s nearly the exact amount the increase in building material costs has added on to a house that size.
It’s funny how that works.
But here’s where trouble sets in.
The Full Story
As normalcy comes back, today’s “recovery” prices will slide. Again, we’re already seeing it.
Watch the price of lumber over the next two weeks.
Just as misguided reporters are using the lows of last year to make “startling” year-over-year comparisons right now… this time next year, they’ll be gauging things based on the peak of the supply crunch.
Mark my words… the prices for cars, homes and just about everything else that’s surged in recent months will not be higher next June.
It’s why the Federal Reserve will keep rates low, despite the obvious long-term risks.
The truly painful inflation I expect will come not because of what we’ve already seen – at least not solely. It will come because the Fed failed to raise rates when it should have… right now after a round of historic money printing.
If the Fed fails to raise rates between now and the end of next year – when all this free money has a chance to multiply in our fractional-banking economy – inflationary pressure will soar.
It’s not happening now. This is just the appetizer.
The main course is yet to come.
If this is the sort of stuff that keeps you up at night, I can’t blame you. It’s very complex, and the headline writers rarely get it right.
But one wrong (often emotional) move can have a big effect on your wealth.
Our system is designed to take the guesswork out of it.
By focusing on real interest rates, we know when it’s time to change our allocations. With the real rate on the 10-year Treasury at -0.84% (hardly budging over the last six weeks), our plan calls for an overweighted exposure to assets that outperform when money is cheap.
It’s treating us well.
If you want to see how we’ll invest once rates begin to climb, check out the April issue.