October RIA Roundup: Is Inflation Peaking?
The RIA Roundup is a monthly real estate newsletter with the latest stories, data, and insights curated especially for rental property investors.
In this issue:
Lead Story: Is Inflation Peaking?
Portfolio Updates
In Other News…
Final Thoughts: Is Nothing Sacred?
Lead Story: Is Inflation Peaking?
Inflation is everywhere these days; news about inflation, even more so. Prices are rising faster than we’re used to, and the media can’t seem to find enough opportunities to remind us about it. It has become a dominant issue in the ongoing election season, with more than 70% of voters saying they are “very concerned” about inflation. It is our current national obsession, perceived by some to be the greatest threat we face. (It’s not.) Still, the prevailing mood seems to be along the lines of “prices are rising, and the sky is falling.”
Why Is This Happening?
Understood in the simplest terms, inflation occurs when demand exceeds supply — or said differently, when too many dollars are chasing too few goods. The causes of this particular inflationary cycle are fuzzy, as nearly everything is when it comes to macroeconomics. But these are the major factors that have likely been in play, all of which are related in some way to the pandemic:
a pandemic-driven shift in consumer demand away from services (travel, entertainment, and more) and toward goods, which was too rapid and severe for our global supply chains to keep up with
simultaneously, a decrease in the world’s ability to make and deliver those goods, due to pandemic-related shutdowns, restrictions, and worker shortages across the globe
a subsequent increase in wages due to those worker shortages
an increase in the monetary supply driven by government spending and pandemic-related assistance programs
One further cause of current inflation has been getting a lot more attention recently: the increase in corporate profit margins. Yes, wages are up, but they’ve barely been able to keep up with the rate of price increases on the things we buy; meanwhile, corporate profits are through the roof, up 41% in Q2 of this year. Data also show that a large portion — perhaps more than half — of the overall increase in prices is flowing directly to companies’ bottom line profits. This is not at all typical, as this chart from the Economic Policy Institute shows:
The war in Ukraine has put further pressure on food and energy prices in particular, and may be exacerbating or elongating inflationary pressures in those sectors.
What is clear is that the factors driving inflation are not unique to the U.S. — countries across the globe are experiencing high inflation at the same time that we are. Those attempting to pin blame on Congress, one particular piece of legislation, or a particular President (the current one or the previous one) are missing the bigger global picture. At bottom, this is all about the pandemic, and the sudden, massive upheaval it caused to the way 8 billion people produce and consume the “stuff” that our economy is made of.
What Are We Doing About It?
To counteract these global inflationary pressures, central banks across the world — including our central bank, the Federal Reserve — have been rapidly increasing interest rates. They have indicated their commitment to further interest rate hikes, until it’s clear that inflation is heading back down to the ~2% level that these central banks target.
Interest rates are a crude tool, but it’s about all we have. How do higher interest rates stop inflation? In theory, higher interest rates will make it more expensive for businesses and consumers to borrow money, causing them to choose to spend less. This reduction in demand should eventually lead to a reduction (or stabilization) in the price of goods.
There are a few problems with this. First, this does nothing to address supply chain issues that are at least part of the cause of current inflation. Second, to the extent that increased corporate profits are a driver of inflation, interest rates also can’t directly address that issue. And finally, if you overdo it, and reduce demand TOO much, you trigger a recession and higher unemployment, in which case the cure may be just as bad as the disease — or at least bad in different ways.
Given the speed, steepness, and global simultaneity of these interest rate increases, there is growing concern about this last problem. Many voices have warned that the Fed should not move too quickly, because overshooting their target would come with significant economic pain in the form of unemployment. Achieving a “soft landing” for the economy — one in which inflation is brought under control without undue negative consequences for employment or the broader economy — has always been the Fed’s goal, but knowing precisely when to slow or stop interest rate hikes is a very tricky business, because the indicators they use to make their decisions are all backward-looking, and it can take time for the impact of interest rate changes to make their way through the economy.
Has Inflation Peaked?
Though inflation readings remain high, there are some interesting signs in the data that suggest inflation is peaking:
Retail inventories are up significantly, which should lead to downward price pressures on a range of consumer goods
The rate of wage growth is falling, which should ease inflationary pressure
Rent increases have slowed down dramatically — in fact, rents have begun to fall in many places
Regarding that last point, I have been keenly aware of rent increases over the last year in my own business. I’ve been able to increase rents significantly across my portfolio, both when tenants renew and when placing new tenants. However, my experience also confirms the idea that rent prices have recently stabilized — and shelter costs comprise a significant portion of our measurements of inflation.
Interestingly, increases in rents may also have been tangentially related to the pandemic, since it led to an unprecedented rise in work-from-home. Renter migration patterns suggest that renters have been leaving higher-cost cities in favor of lower-cost areas, perhaps in response to increased flexibility in their work arrangements. And tellingly, rent increases have disproportionately impacted Sun Belt markets that “digital nomads” are likely to prefer:
What Does All This Mean for Rental Property Investors?
I am in the middle of a full blog article about how rental investors should think about and navigate our current era of higher inflation and higher mortgage rates. Stay tuned for that to be published in the next several weeks. (UPDATE: That article is now published here.)
Portfolio Updates
I recently published my September Portfolio Report, which detailed a pretty uneventful month (uneventful months are my favorite kind). In September, I returned to full occupancy after several recent turns, and produced nearly $8,000 in net cash flow, just a bit above my pro forma:
Meanwhile, as I mentioned last month, I have succeeded in selling my last New York City rental condo. I am happy and relieved to have exited these failed “appreciation plays”, and be able to redeploy the assets to more cash-productive uses. In the case of this final condo, I am doing a 1031 exchange to defer the tax implications of the sale, and will be using the sale proceeds to purchase four new properties in Memphis. In fact, the first of those properties has already closed! I’ll be publishing a full blog post about that property soon.
Speaking of which: I’ve re-categorized my blog articles that focus on individual properties in my portfolio. These will be called Property Spotlights, and there will be a handful of new ones published in the coming months as I complete this 1031 exchange. I’ve also gone back to the older Property Spotlights and updated them with annual results by property. While I already publish Annual Reports for my full portfolio, this will provide a new level of detail and transparency on the performance of individual properties over time. That kind of transparency has always been a hallmark of RIA content, and I’m excited to take it to the next level. For example, here’s a taste of what I’m providing — in this case, annual data for my very first Memphis property:
I will update each article annually with new data, creating a detailed record over time that (as far as I know) is unrivaled by any other blogger or content creator. And yes, I’ll do this however the properties perform, good or bad…
In Other News…
In other inflation-adjacent news, Social Security beneficiaries will get an 8.7% raise next year, the largest-ever annual increase to their monthly benefits. This will help 70 million retirees keep up with the rising cost of goods.
For similar reasons, the IRS has updated the thresholds for federal income tax brackets for 2023. (It’s necessary and appropriate that these things be automatically adjusted for inflation; why we don’t do the same for the minimum wage is a complete mystery to me.)
The price of something else is up: your holiday turkey. Alas, your more expensive turkey will be just as likely to come out dry and flavorless.
Netflix is now an advertising company, and will begin selling ad-supported plans. It used to be that among giant tech firms, only Google was an advertising company. Then Facebook became one too as it matured, monetizing our likes, comments, and interactions by selling them to advertisers. In recent years, Amazon has become an ad giant as well, selling space at the top of their own marketplace search results. Then there’s Apple, which is not primarily an advertising company, and in fact has adopted privacy features on the iPhone that make it much harder for third-party advertisers to reach you. (Facebook hates this, of course, and has said it’s costing them billions.) That said, Apple does sell ads inside the App Store, and may be looking to ramp up their advertising in other ways. Netflix was the last holdout among these giant firms, and for many years were publicly steadfast that they would NEVER sully their offerings with ads — until they weren’t. These giant firms all turn to advertising for basically the same reason: when your product achieves near-universal adoption, you can’t sell more product, so if you want to keep growing, you have little choice but to sell your customers instead.
If you thought NFT news couldn’t get any weirder, think again: a London-based artist is burning thousands of his own paintings, because the owners of the pieces decided they were content to simply own the NFT, and allow its corresponding physical painting to be destroyed. The artist explained it this way: "A lot of people think I'm burning millions of dollars of art but I'm not. The value of art, digital or physical, which is hard to define at the best of times, will not be lost, it will be transferred to the NFT as soon as they are burnt." If this sounds like complete techno-babble nonsense to you…trust your instincts.
And finally: Vicki Robinson’s well-known personal finance book, “Your Money or Your Life”, celebrates 30 years since its publication in 1992. The book, which many adherents consider to be the foundational text of the FIRE movement, still has a strong following three decades after publication. It’s a good read.
Final Thoughts: Is Nothing Sacred?
The story that I couldn’t stop thinking about this month was the fishing cheating scandal. (Nope, not a typo.) A pair of men allegedly stuffed the fish they caught with lead balls and fish fillets (gross) in order to artificially increase their weight, and thereby win top prizes at competitive fishing events. It now seems possible they’ve been doing this for years, and have collected hundreds of thousands of dollars in prize money in the process.
If people will go to such lengths to cheat in a FISHING competition — is nothing sacred anymore? What happened to old-fashioned American values like working hard and playing by the rules? Do we believe in these things anymore, or have we accepted that cheating — ideally without getting caught — is just another way for “clever” people to succeed?
It seems like there is no end to the depth and breadth of cheating — and its close cousin, lying — that goes on all around us. Cheating scandals in sports are well known, and have made us increasingly cynical about competitive sports. The steroid era in baseball was both a scandal and a cover-up, which has permanently muddied the waters of records and statistics that baseball fans hold dear. (Though, to be fair, baseball has a long, storied history of cheating, including pitchers using illegal substances to better grip the ball, batters corking their bats to make them lighter, teams losing games on purpose because of gambling bets, and teams stealing the signs of other teams in order to gain an unfair advantage.) Organized doping in cycling (most famously by Lance Armstrong, but by many others too) and the Olympics (by both individuals like Marion Jones, and entire countries like Russia) have cast a long shadow over those enterprises as well. And football fans know all about “deflate-gate”, in which the Tom Brady and the New England Patriots deliberately deflated the footballs used in their games.
But recently, the cheating has bled into other kinds of competition as well. In addition to this fishing scandal, we have seen major cheating scandals in both chess and poker — all in the last month. In chess, world champion Mangus Carlsen, considered by some to be the greatest chess player of all time, quit a live game against Hans Neimann and later openly accused him of cheating. The story continues to rock the chess world, and while an analysis of Neimann’s play suggests that he has cheated in the past, it is still unclear if he cheated in the match against Carlsen, and if he did, how it was accomplished. Separately, the poker world cannot stop talking about this hand, in which an amateur player made an inexplicable “hero call” against a seasoned professional player, Garrett Adelstein, who was immediately suspicious given the circumstances of the hand, and later accused his opponent of cheating. An investigation is ongoing.
And there’s the Brett Favre thing, in which a rich retired football quarterback is alleged to have misused state welfare funds (meant for the poor) to get a volleyball stadium built at the college where his daughter played volleyball. And the college admissions thing, where rich parents used their money to buy their kids places in elite schools.
We also have cheaters in the business world. Insider trading and quid pro quos are old hat; today, we have an entirely new category of cheaters that some people mistake for “innovators”. At Theranos, Elizabeth Holmes lied to employees, customers, and the press about what her blood testing machine could do, until her scam finally unraveled. Adam Neumann was going to change the world with WeWork, until everyone realized it was nothing more than a highly unprofitable real estate leasing business. At Nikola, founder Trevor Milton now faces fraud charges for lying to investors about what his autonomous trucks could do, including by creating a commercial that appeared to show the driverless truck navigating a highway. In reality, it was just rolling downhill. (Some are too willing to give these fraudsters a pass, saying that a certain amount of hype is necessary to paint an exciting picture of the potential of future technologies. To which I say, bullshit. They’re just cheaters, and they cheated for the same reason the lead-balls-in-the-fish guys cheated: for money.)
Have we become numb to cheating, given that it seems to be everywhere, and everyone seems to be doing it? In some ways, the entire economy seems rigged in favor of the people at the top, which could make ordinary people justify cheating in other contexts. “If everyone cheats, then I should too if I want to keep up. And if the game is rigged, then cheating is justified.”
The video of the cheating fisherman went crazy viral, breaking through to people like me who (you may not be shocked to learn) don’t regularly follow competitive fishing. Something about it was just SO compelling. Perhaps it was the grotesquery of stuffing fish fillets down another fish’s throat, or lead balls up its butt. (Cloaca, technically, but you get the idea.) Perhaps it was the dramatic way the cheating was publicly uncovered, gutting a fish to expose the “smoking gun” lead, all caught on camera in real time. Perhaps it was the novelty of discovering that there are competitive fishing competitions at all.
I have another, more hopeful theory: I think the video is compelling because of the righteous rage displayed by the other competitors in the video. To them, fishing IS sacred, and they are PISSED OFF about this cheating. We love the video because these people are passionately defending their sacred ground. We love the video because in their anger, we see a reflection of our own frustration at other injustices that cheat us. We love the video because the cheaters got caught, and got their comeuppance. (In fact, they are now facing felony charges. I doubt anyone will feel sorry for them. I certainly won’t.)
I think this shows that, despite all the cheating, we still have a strong innate desire for fairness and justice. Healthy competition is good for the economy, and good for us as individuals. Cheating is deeply corrosive to both. Things are sacred because we treat them that way, and work to protect them. So if honesty and fair play — “working hard and playing by the rules” — are sacred American values, then we must be ruthless in our treatment of cheaters, who would corrupt those values for their own personal and financial gain.
The old maxim tells us that cheaters never prosper, but it’s up to us to make sure of it.
Happy investing,
Eric
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
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