Friday, June 26, 2009

Inflation? Americans Pay 300% More: Prices, Rents, Land, Gold, Hedges, Plays, Trades

What are people paying and buying and what does it tell us about prices and inflation?

Are Rents Rising?

Landlord Kyrgyzstan raises rent more than 300% on tenant USA

The United States will pay more than triple its current $17.4 Million annual rent to use the Manas airbase outside Bishkek in Kyrgyzstan in Central Asia.

In addition, Uncle Sam must pay "$37 million to build aircraft parking slots and storage areas, plus $30 million for new navigation systems" (hoping that it does not fall into Russian hands like the base the US accidentally built for the Soviets at Cam Ranh Bay).

Obama says thanks for tripling our rent and having us build a base that might fall into Russian hands:

President Barack Obama recently sent a message of thanks to Bakiyev for Kyrgyzstan's support of U.S.-led military operations in Afghanistan, according to U.S. Embassy officials in Bishkek. ("US, Kyryzstan reach deal on air base use," Leila Saralayeva, Associated Press (AP), 6/23/09)
The 300% price hike is probably a "production" phenomenon (supply-demand), not a monetary phenomenon--it neither proves inflation nor disproves deflation.

Rents Fall across America

Rents from Boston to San Fancisco are falling for several reasons:
  • Building boom creates oversupply of houses (Residential Real Estate)
  • Building boom creates oversupply of apartments (Commercial Real Estate (CRE))
  • Building boom creates oversupply of hotels/motels (Commercial Real Estate (CRE))
  • Housing bust (foreclosures, etc.) decreases demand (increases vacancies)
  • Recession/unemployment decreases demand (consolidates more people in fewer households)
Desperate, often underwater, investors (intentional landlords) face additional competition from "accidental landlords" (people who rent as a last resort after being unable to or unwilling to sell after moving) and hotels/motels with crashing vacancy rates which offer extended-stay discounts to save their crashing RevPAR (Revenue Per Available Room).

Falling rents are probably a "production" phenomenon (supply-demand), not a monetary phenomenon--they neither disprove inflation nor prove deflation.

Some people mistake these falling rents to mean too little money/credit (deflation) rather than the more likely explanation of too many houses/condos/apartments/motels/hotels (where prices can fall in several sectors despite general inflation of the money/credit supply).

Mish argued that there never has been "hyperinflation" with "crash"-ing "home prices"--although Keynesians likewise believed that we could not have inflation will falling employment--until we did (1970s stagflation).
  • Inflation easily can coincide with falling house prices (falling nominal prices and falling real prices).
  • Hyperinflation easily can coincide with falling real house prices (but rising nominal prices). Hyperinflation in Zimbabwe caused a loaf of bread to cost Z$10 Million and obviously one house can cost more than one loaf of bread but investors need to know if houses will crash in real terms, relative to other goods (is it better to invest in houses or in bread?).
Inflation Plays? How To Trade Inflation?

Mish argued that people claiming "hyperinflation" should be advocating "houses"--and he asked who was advocating "houses." The premise is flawed because there is no reason to assume that houses are always the best investment in hyperinflation but to answer the question generally about who is seeing inflation and/or considering real estate:

Jim Rogers sees inflation from central banks "printing money" and he has been buying farmland (real estate, perhaps with a farmhouse) as part of his commodities strategy and in a separate interview (not the one below) he would consider some Asian real estate (not in China/Hong Kong):

Marc Faber predicted possibly 10%-20% (annual?) inflation in the US within 5-10 years and said that he preferred US real estate over US Treasury 30-year bonds (but he recommended other assets or equities):

China's party policy research office economics head Li Lianzhong recommended buying real estate (as well as commodities, energy, gold):
A top Communist Party research chief said Thursday that China should buy gold and U.S. real estate rather than Treasurys . . . the U.S. dollar is poised for a fall, making gold and land better investments for China's $1.95 trillion in foreign exchange reserves. (citing Reuters report, "Chinese official urges buying of gold, U.S. land: report," MarketWatch, 6/24/09)
Note that China mentions US assets because it is trying to recycle its US dollars from its trade surplus and foreign-currency surplus.

Rogers, Faber, and Li at minimum see real estate as a defensive inflation hedge to pace inflation (capital preservation in real terms) under the assumption that, whatever the inflation rate, real estate nominal prices tend to float by a similar amount (Rogers reminded that he wants to make money, not break even, but he also recommended to hedge risk). However, remember:
  • US residential real estate in the last century saw real growth of the sales price only slightly above 0%.
  • Real estate can charge significant carrying costs such as repairs/maintenance and property tax (analagous to mutual-fund/brokerage fees) that can cause real net negative ROI.
  • An alternative to land is cash, if you expect that even during 100% inflation a bank account will pay 101% with FDIC insurance (principal guarantee) and not charge $100k of property tax.
  • Cost-Benefit analysis requires opportunity costs of relative prices and values (price:rent ratio, stocks price: earnings (P/E) ratio).
Beware that many people who talk of acquiring real estate actually mean acquiring debt, using land as collateral to make a leveraged bet which can multiply ROI gains but also ROI losses (leveraged investments gone sour including buying stock with mortgage debt are components of the current financial mess).

What is inflation/deflation, which do we have now, and how to measure it?

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