Are we headed for inflation or deflation?
The following guest post is by REALTORS(R) Signature Series Speaker Rob Nahigian, FRICS, SIOR, CRE.
As we focus on the third quarter of 2011, we are faced each day with investment decisions based on projections. Where is the economy headed for the remainder of 2011 or for the next 5 years? Are we headed into inflation or deflation? Are interest rates going to rise or fall?
I recently posed similar types of questions to members of the Charleston Trident Association of REALTORS® during their Commercial Education Program – with opinions differing across the room. After mixed responses from the audience, I offered my thoughts, along with those of well-respected industry experts. I let them know that I am in the midst of reading “The Age of Deleveraging” by Dr. Gary Shilling. Shilling’s outlook on inflation is quite bearish. Shilling feels that the U.S. consumer, after 30 years of spending, is now ready to pay off the bills and “stash the cash.” He also feels that Governments cannot afford to spend more money either.
Commercial real estate professionals must think like economists because investors do! I believe that in the very near future it is becoming evident that we will see immediate inflation. These 5 listed issues below will help influence your answer this summer.
- The market’s reaction after the end of QE 2 on June 30th. The M2 Money Supply is already starting to shrink. Will interest rates increase dramatically, slowly or nominally?
- The proposed Risk Retention Rules would require that CMBS issuers hold at least 5% of the credit risk of any loan as part of the pool. Lenders could curtail financing or dramatically increase interest rates.
- Trillions of dollars of CMBS financing is coming due and KC Conway, CRE has stated that the CMBS debt will break the dam during 2011 with new defaults (and foreclosures?). Will this cause deflation of real estate pricing?
- The Federal Debt Ceiling: will the Feds vote to increase it? If not, interest rates will skyrocket.
- Greece and its debt and the impact on the German bondholders. Can Greece really pay off these loans? I am suspicious.
Bob Rodriguez, the successful fund manager of FPA Capital Stock was interviewed in the June, 2011 Money Magazine article. In early 2007 he felt that the housing debt would be a crisis and he had worried then about the federal debt. He took a sabbatical in 2010 and now observes “I would say a lot of nothing has changed. Investors are still chasing after high yields and loading up on risky investments. Very little has been learned. At best, we’re facing a substandard recovery.”
We cannot spend our way out of this mess without some repercussions years down the road. We need economic encouragement that investing in real estate and other assets will not result in penalties as well. The long-term capital gain tax rate will expire in 2 years and I anticipate a flurry of activity. But I would be fooling myself in not admitting that this recovery will be slow and will need 4 more years to recover. But the question, are we headed into inflation or deflation? We may need the summer to see how matters settle out.
- CRE: Still in the Hospital But Out of the Intensive Care Unit (commercialsource.com)