The first week of September 2012,The Fed & InFlaTIon; explore your options Articles the US Federal Boca Raton architects one of the most radical central banking decisions in recent history. The third round of quantitative easing also known as the money printing experiment immediately opened the flood gates to $40 Billion per month or $480 Billion per year to be used by the big bankers to purchase mortgage backed securities.
This radical money printing experiment is the third round of its kind since the banking crisis of 2008 and the biggest concern is how it continues to increase the national and international pressures to create an inflationary atmosphere. A continuous flow of new money into the economy leads to inflation but since the money printed is also used abroad we can be sure that the effects of inflation will come to realization in a few years. The US currently faces high unemployment, slow economic growth and high rates of inflation as the money supply continues to increase known as stagnation. As of now, it is clear that Europe and the US will continue their reckless monetary and fiscal policies to bail out countries on the brink of default. Meanwhile countless banks, & other financial institutions along with other too big to fail companies throughout the world await their share. European central banks will keep inflating and spending like there is no tomorrow and sooner or later will have to face a global funding and currency crisis. In the U.S., it is clear that we will have to face this inflation monster sooner or later as the country continues to run budget deficits and print money through QE draws to “stimulate the economy”. So, how do you protect your assets against inflation?
Options to protect your assets:
There are two types of investments that are traditionally favored as inflation hedges; Precious metals and real estate. Inflation index securities and inflation ETFs created by the US government address the concerns that investors have in regards to inflation. It is often said that precious metals hold their value over time. An ounce of gold would
buy you a quality suit in the 1400’s and it would still buy you a very nice quality suit today. Gold which became publicly available in the US in the 70’s, fell from $800/oz in the 80’s to about $350/oz in the late 90s. Of course, you can make money investing in gold related stocks and ETFs as gold continues to rise on inflation concerns but do you want to protect your assets against inflation or do you want to become a speculator?
If you buy gold bullion or coins, you must store them, pay for the bank safe or safe deposit box and these costs add up to $100 – $120 per year or more depending on the size. Physical gold does not pay dividends, does not pay interest, it just sits there in a box, in a safe, in the dark and the chances of gold being stolen keeps a lot of buyers away from transacting with it on a daily basis. It is tough to justify buying bullion unless you are convinced of a doomsday scenario and it is not clear that gold will be useful as the world turns to total chaos. Just imagine having to pay for your food, medical emergency or for any other service in gold and imagine carrying your bullion around town en route to your home or safe! Real estate
Residential real estate: Your home can provide a real hedge against inflation no matter what happens to the price of your home in the future. How so you ask? With rising inflation, buying an owner occupied home can eliminate paying increasing rents, while buying an investment home will help you capitalize via the increasing uptick in rental rates. If you have a fixed rate mortgage, you stop the progress of inflation on one of the biggest items in your personal budget: housing expenses. Your mortgage payment will be the same today as it is in 10 years from now or 30 years into the future. Your inflation rate will drop as your housing expense decreases although you will still have to pay taxes/insurance, however, that represents a minimal cost compared to rents. Average real estate prices tend to increase over long periods and if you buy at the right time and for the right price you can capitalize on the real estate appreciation opportunities.
Commercial: History can also prove that commercial real estate is also a great hedge against inflation. Throughout many years, commercial real estate returns beat inflation regardless of its correlation as you can see in figure 5.
Surge in property values during the 70s and 80s did more than keep pace with the surge in inflation during the Carter and Reagan administrations. How does this happen? Leases usually contain escalation clauses tied to CPI (Consumer Price Index) or specific dollar amount based on a percentage or absolute dollar increase.
Rising inflation usually brings rising construction costs which reflect in replacement costs of commercial real estate properties thus driving up their appraised values. Assignment of expenses can further provide inflation protection
for commercial real estate. A Triple net lease for example, passes all expenses through to tenants, protecting the owners from ever increasing construction costs, wages and other carrying costs associated with commercial real estate.
Although the pressure of QE 3 is not high enough yet to create a hyper inflationary situation, if the stock market slides more than 20% in the next months and the economy has a negative quarter in terms of GDP growth, the FED will come again with the rescue plan and it’s money printing experiment so we hope you are ready.