How Does Inflation Impact Investments? (Combat Inflation Now!)
Hey guys, Toby Mathis here. And today we're going to talk about the effect of inflation on your investments. So I'm going to do kind of broad categories thing was, Ray Dalio, the one said that there's really two major growth, you know, things that move the markets, and that is inflation and growth, the ability to develop in and have a wider market. And this thing called inflation. What is inflation? More people running around trying to buy fewer things. And so if you think about it, what occurred over the last ten years in our economy is we had a Federal Reserve put in about what is an eight.
$9 trillion of liquidity into the market, which means like they printed a ton of cash, pulled it out of air and used it to buy mortgages, basically And it's kind of what you call the mortgage backed securities. They take all the mortgages and they sell them. And so that's what they were buying. They were putting a ton of liquidity into the marketplace, which means there's more dollars Add to the fact that we had this pandemic and pandemic relief where we're handing out cash and it's no surprise that there's inflation. Anybody was paying attention to it.
We all pretty much said, I can go back and watch videos from a couple of years ago. We're all saying, hey, when you're creating this much cash, it just means now there's the people that have cash. Your cash is worth less. So if I had $100, no matter what the situation was, if I had a I had a certain percentage of the total dollars in the world, which was represented by my $100 versus the entire monetary supply.
And if we just injected and said, hey, we're going to add a bunch more money, my percentage goes down, it's kind of like diluting stock. Hey, I could have three shares of ABC Corporation when there's only a thousand shares. Hey, that's that's decent. But now if there's a million shares and I still have only three shares, you just devalued my interest. That's all that happened so that we don't have to overthink it. So when we look at what does inflation drive, it's going to make things obviously more expensive, like energy.
Our CPI is using a number of 5% year over year growth of real estate, for example. And we know that it's 20 to 30% higher like in the last two years in my, my neighborhood in Vegas. You're talking about growth in some cases of 50, 60% on the equity, you know, the value of homes.
And we saw 30% to 40% growth on rents. As long as those numbers are staying somewhat consistent, we're not going to have an overheated market. There's several things that come into play there, by the way. A how much supply is there? Are we do we have enough housing for everybody? Here's a hint. We don't. So there's not enough supply.
How do we know there's not enough supply? Because we're below seasonal norms. We're below the average norms consistently for this last year, year and a half we just haven't had enough supply. We're looking at somewhere two to 3 million units shy of where we need to be in it. That's about how much falls out. Every year is 1.7 million. So we have to be bringing into fruition 1.7 homes, either rehabbing or building new houses or whatnot.
And we're barely keeping up with it, which means it's not getting better, which means housing prices. The demand is going to continue to be more than what there is supply, which is going to continue to push things up. What could bring it down? You know, again, how do you combat inflation? Econ one on one is you make it more expensive to get money so people have less access to cash. The credit gets more expensive when the Fed is out there giving money away at you know, zero basis points to 50 basis points. You know, we had these big Wall Street institutions getting really cheap money, going out, buying everything and people were look at it like, hey, I got sub 3% mortgage.
You're still paying twice as much as the institutions like institution decided to go compete with you and even make more pressure on the markets and cause prices to go up even higher. So as interest rates go up, that's going to put gravity under the situation. The reason I say gravity is because Warren Buffett once said that inflation rates are to the markets. What what gravity is to matter something very similar to that, not a direct quote, but he just meant that it pushes down. So if you have a company that's high flying, but they're not making money, the fundamentals aren't great. They might because money's cheap and they can get all this cash and they can enter in this marketplace they seem like a high flier.
That's your growth stocks. So once inflation, once the interest rates start going up to combat inflation. So here goes inflation. Here go interest rates, try to combat it. Boom. Growth stocks get hammered. Everybody could see it.
Anybody that was looking at the numbers knew that that was going to be something that happens. And we're saying get in with good companies. I've always said this like if you're in a high inflationary cycle, expect the increased interest rates when there's higher interest rates. You want good, strong companies because all interest rates are is basically saying if you need credit, it's going to cost you more. So, for example, if you're a cash buyer for a house, doesn't matter, but if you need to borrow money for a house, you're affordability of a home just got worse as interest rates go up and put it in real terms. The cost of a house, let's say a $500,000 house, you're putting 20% down to $400,000. Note the payment on that 400,000 note has roughly doubled in the last six months, so it's less affordable.
The problem is you have it. You have so much cash chasing all these houses, you still have massive demand. Eventually it'll work itself out. Eventually, as home prices are going up, rents are going up. Here's what happened in 2000.
I'll actually draw it up because you actually you kind of want to see the ratio, the ratio of the value of the house who way up here to like 1.6, which was the value of the home. You know, the, the median value of a house versus its rent equivalent And so you see these things as long as the rents are going up in even with the even what the house is going up. So like everything's increasing 20% a year, you could do that indefinitely. But if you have this goes up 20% and the rents go up 10%, all of a sudden you start having this peak because the rental value of that property, if I wasn't going to live, if I wasn't going to buy it and stay in it like I have to rent it to somebody, it's not going to pay for itself.
I'm overpaying for houses. And where are we at right now? This was about 2005. 2006 is probably where we hit that peak so we could see it. We're still down right about 1.4. And the reason that we're there, I shouldn't put that other side to it because we're just right here. We're slowly easing up but as long as rents are consistently following the prices, it could do it indefinitely.
What I look at is when that ratio starts to get two out of whack, like when we get into the 1.5, 1.6, expect that the market's overheated. People are overpaying for homes because they couldn't rent it so there's not enough demand. So what happened in 2007 when we just got crushed is we had a lot of vacancies. Nobody wanted to be in them. There wasn't a rental market to support it. So if you went and bought three speculative homes, hey, I'm going to be the next real estate typhoon or whatever it tycoon nine typhoon tycoon and you bought those houses you couldn't rent them and for the rent equivalent you overpaid you way overpaid so you couldn't justify the price based off the rent.
That hasn't happened yet. Guys, we're not there. So what does that mean for the real estate market? The real estate market's going to stay solid as long as inflation is going up. And it's in it's affecting the house prices at the same rate as it's affecting the rents. We could do this indefinitely.
We're going to be fine because there's not enough inventory it's going to take, I would guess. And nobody has a crystal ball. So I can put a big disclaimer on this, but I think it's going to take probably two years before we see any meaningful either downturn or it's going to be completely evened out. You might see a slowdown in growth to not be 20% year over year, right? Maybe it'll be 5%, but I don't think you're going to see it turn the other direction and start going down because there's too much demand barring some catastrophic, like the economy just goes boom, completely goes bonkers.
Like, I don't think we're there. I don't see that happening. But unless something catastrophic occurred, like there's World War Three, that's beyond just the Ukraine and Russia stuff, that there's something more that's going on that's that's causing an issue. Just on the forces that we're at right now, just the economy, the economics of it, I don't think that we're going to stop now. That said, the Fed is still raising interest rates.
So that's going to have an impact on affordability. And that could cause a little bit of these. Actually, I think the numbers are going to come down because what it's going to do is cut some of the top of the market. So the median is going to be kind of somewhere in the middle and it's going to push that down. But right, right now, I believe that we're over 500. And your rent rents are up 30%. Over the last two years.
Like it's it's bonkers. I don't see it coming back. Now, if they raise interest rates and they start to push that down, I guess there's nothing that's beyond possibility. But I just I still don't see it like we still are under Bill. Give me a year.
Give me two years of of lots of people trying to build. And we don't have supply chain issues and we're able to get modular homes like we've ordered modular homes that take six months to nine months to get everybody's in that same boat. Everybody's trying to find materials to build.
Even if you have the materials, you don't have the labor. It's tough. So we're building about as fast as we can, and it's keeping it caught up with with with how many properties are falling out every year, having houses that are retired, torn down, dilapidated, inhabitable well, there's about 1.7 million a year that just fall out. And we're not really replacing that number we need to make up. I would guesstimate somewhere around 3 million units before we're there.
Now, that said, I'm just a tax attorney. All I could do is read the tea leaves and read the economic report. There's still no inventory vacancy rates are really, really low in my town. You can't find a property. You go in there and the property manager all saying the same thing. They'll get 20 applications for a rental and I'm in.
I'm in Las Vegas. So that may be different in your town, but there's a lot of places reporting that type of activity, which is just going to keep pushing those prices on it. Other thing that you look at is the market so the stock market, like I said, we have the increased cost of money is going to have an adverse impact on companies that are not profitable and are burning through cash and are relying on credit. So if they're needing to go out there and get money, what you're going to see and I guarantee this is going to be the case, I'm not looking at the stats, but my guess is you're not seeing a lot of companies going public this year. You're not seeing a lot of companies raising money in private financing. It doesn't mean it's nonexistent.
It just means it's really hard. And it's kind of like the dot com days. Whenever anybody with a pulse, you have a website, people would throw money at it. Now it's being very, very frugal. It's just not going to happen.
So you're going to see a tightening in the market because money is now more expensive. If you're a company like I always look at Coca-Cola 3 a.m. Procter and Gamble, what other ones would would be good ones, Lowe's, Home Depot, even your company is like a Verizon, Exxon, Chevron, some of these I don't see them getting creamed in this market.
They might get caught up in the sell off a little bit. But over like over time, these companies that dividend yield is strong. They're profitable companies. They pay out those profits. They're consistently profitable, even if they pull back a little bit and they say, hey, supply chain issues or money is more expensive, people are spending less because they don't have as much money.
It was great during the pandemic everybody got checks and they were spending it freely. But now they're going into their credit and you know, they're not going to be as free to spend. I get that. But it doesn't mean the company is not profitable. Any longer.
It means companies that have a good moat built around their brand like a Coca-Cola. People are still going to go out there and get it. It doesn't matter to the price go up ten, 10%. Okay, so my soda is a dollar ten instead of a dollar. It's not going to matter.
They're still going to sell their soda. They're still going to make their profit margin. It's not going to have that big of an impact are people going to stop buying iPhones now? It's still going to happen.
So there's companies like that that are solid that are going to continue to do just fine and here's the the truth of the matter is that when we have a pullback in the market, I believe we're probably in a twice three time in a lifetime opportunity in the marketplace. You've had a pullback with the S&P, unlike it's probably less than five times in history. Have we seen this type of pullback? I haven't looked at the numbers today. But I would say we're probably in the neighborhood of the fourth farthest pullback we've ever had at the beginning of a of a year between January and in May. And that it's every single situation.
By the end of the year, you were up double digits. So I think you're sitting on a great opportunity to look at solid companies. Now, I'm not a financial advisor. I'm just a tax attorney.
But I could just say from my clients watching successful clients year over year, what do they do? They continuously buy solid companies. They don't go chasing. If they are gambling, they're deliberately gambling saying, hey, I'll put some money into speculative stocks because I like the technology or I'm interested in that company knowing that it's a gamble and they're willing to lose. But for the most part, they're in real estate and they're in solid equities. The other reason this is good and they may or may not realize this is that you can still use those assets to pull money back.
A lot of those are tied to index. So, for example, you may have a prime plus 1.5% or something like that. And so the money goes up if you have to use it. But then that one, that money starts going down, you have free access to it as well. It just means that you have some liquidity to go into some of these things where you're saying, hey, right now inflation's 8%.
So I know if I just sit on my cash, it's going negative. So my dollars to be worth $0.92 at the end of the year, I'm not going to put it in a savings account because that's what point five it's going to give me half a percent. So I'm going to lose 7.5 or 8% by the end of the year with inflation.
So I'm going to have to put it in something. And that's what most investors start doing is they're saying, Hey, I can make nice returns even if they're paying 5% on that money instead of 3%, they'll still say, I'm going to make nice returns and they don't have to sell their underlying asset to do it. I see it over and over and over again.
Hey, I see great real estate opportunities. They're borrowing against their stocks. You be able to go, you can't do that. It's a security background credit it wasn't that long ago that those were sub 2%, even on even on a lot when they're still around four or 5%, even if you depending on which brokerage house you go to, you can get that money pretty inexpensively.
And then you take it and you go buy something that's going to go crazy. Like right now, real estate again, still going up. I don't think it's going to stop.
I don't think it's going to go into lost territory at all. But I think that if anything is just going to keep on its kind of a current trajectory, maybe start to level out, but it's still going to be nice increases. And if you're using it for cash flow, it's even better. Frankly, good investors don't care what the value of their stock portfolio is unless they're going to borrow against it, what they care about or excuse me, on their rental portfolio when they have or even their stocks, you know, really good investors are living off of the income that's being provided off the stock or they're renting out using covered calls and they're getting all that extra money, but they don't really worry about the value of their stock. Real estate investors tend to not care so much about the value of their real estate.
What they care about is can I use that as leverage to get more real estate? But what they care about is that cash flow. If I have $1,000,000 of property or $2 million of property, it matters not if I'm making $100,000 a year in positive cash flow right. It doesn't really matter. Sometimes you're looking at, say, my getting a big enough return, do I want to trade it for something else? But it really to me doesn't make that big of a difference. A lot of times you looking at it saying, I'm not going to worry about the value of my portfolio because if I start looking at values, I might do something emotional that words. Right now we've had the market run up and you could sell a house.
We have folks in my town where their houses have doubled and they go out and they're like, I'm going to sell it. And then they sell it and then they're like, Oh, crap, I can't find another house. Everything's gone up twice as much. Yep. So unless you're going to move to a cheaper neighborhood or you're going to move out of state or go someplace else everywhere, prices are up. You've seen it all over the country.
They're up 20% nationwide year over year. That's an average it might be worse in your neighborhood. It might be better in your neighborhood. But I'm telling you, if you're going from like an Austin where you've had massive growth to Las Vegas, it's not necessarily going to be cheaper. Are all these people in my town, they come from California a lot where they sell their houses, where they have these big profits and they come in here and they're going to buy a house because it's cheaper.
And what they've done is they the prices have driven driven up. Now, a lot of neighborhoods, they're twice as much as they were just a year ago because you have so much cash coming in and these people are like, hey, it was so much more expensive on the coast and I could buy. So they don't care. They're going to overbid. They're going to bid 100,000 200,000 over asking a really nice house or something like that. It's just crazy what you see. So I don't see that going away.
So going all full circle you have inflation which drives your values higher, everything gets driven higher. What's pushing them down is interest rates because it's designed to squish down and slow down inflation. Until that happens, you're going to see this market in this muddled area where schizophrenic going crazy up, down. It's all sorts of volatility, right? Until they see that working, we're going to say, oh my God, inflation's going up 8%, 8.5%.
Hint if we use the old CPI number from 1980 to what they always compare it to. Inflation hasn't been this bad since the eighties. Well, under the eighties calculation we'd be closer to 16% because we've dumped a bunch of cash into the system. Right. Inflation went bonkers. So we're trying to combat it it's not going to stop.
We're going to keep seeing that. The way you should know is that real estate and security is still a great place. It's still a sin investors game right now.
In fact, it's the best investors. This is what you love. You love it when things are on sale and there's been madness in the market. Massive drops, great values like you're just seeing companies that I use Zoom. Zoom was was selling at some ridiculous multiple of its sales at the beginning of the pandemic.
And now it's like seven times sales. Like Netflix is another one. Their sales go up, but they get creamed, right? They were just too high flying and they needed to come back down to earth. I'm not saying to go buy those. What I'm just saying is that you look at it now and they're they're financially healthier than when their valuations were much higher, which is kind of you know, it seems counter counter intuitive.
So this is a good time for you to go out and buy really good, solid companies that are going to pay you. They'll pay for themselves over a not long enough horizon. If you're getting a company that's at a 5% dividend yield, you'll pay for itself in 20 years. Right.
It's going to buy itself. So you're out of here. You're out nothing.
And you'll just have an income stream for the next 10,200 years for your family. That's that's that's one of the ways to look at it. If you're looking at real estate, you can go out there and get into real estate. There's a heavy demand for it's not going away.
You're always going to have a pretty high demand. And you're looking at it saying, Hey, I'm going to get rents and rents are continuing to go up inflation drives it up, too. So there's still opportunities out there for folks.
And I wish you well as you go out there and take advantage of, hey, guys, if you like this type of information, please click the like button, subscribe and better yet, share it with somebody who might benefit from this. And the other thing is if you have specific topics you want us to hit, please go into the comment section and let us know what topic you'd like to see us discuss.
2022-06-07 14:25
