Still Waiting On Hyperinflation...
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
Well the uber doom-and-gloomers have been decidedly reticent of late. This changed recently in the blog arena. Changes in purchasing patterns of bonds later this year seem to have everyone in a tizzy now.
I renew my stance that all of this HYPERinflation rhetoric is utter nonsense. These positions are generally coupled with someone trying to sell something (commodities, coaching, advice, etc.) so please be skeptical when you see them posted.
Following is a great, level-headed article on the subject for those that are interested:
Why the Pessimists Are Wrong About Inflation
and here are the real inflation rates:
I renew my request for anyone to provide TANGIBLE evidence that we are headed for hyperinflation.
Hyperinflation is different than inflation. If you take the original defination of inflation, (and as currently used by Austrian School Economists) you track inflation as an increase in the money supply, and price increases (commonly referred to as inflation today) are the effect of the money printing. So first defining which inflation, monetary inflation, or price inflation you are talking about is required.
There is no doubt that money supply has been inflated recently. The fed publishes figures and you can see what is going on. Somewhat more difficult to see is price inflation. The CPI is the most common but is skewed to make the govt look good. Looking at prices of common goods one can see price inflation; see gasoline, health care, college tuition, food, silver, oil, etc. The basic commodities are shooting up, which means that all derivative products are also getting more expensive. One way that producers are trying to mask this is by making packages smaller; a "green" package, "effeciency" packages, etc. The net result is maybe only a 10% increase in price, but when you couple that with the 15-20 decrease in product per package, you get 30-40% inflation. And this is happening more and more in the last year or two.
So that was inflation (the two types). Hyperinflation, on the other hand, is a loss in confidence in the currency being printed. It is not like in monopoly, when the more money you get, the more prices go up (remember, at first you dont have much money, so deals are cheap, but as the game progresses and everyone has tons of cash, the bids get higher and higher, hmm, sounds like the housing bubble), but rather that people realise that there is inflation, and that the currency is not a store of value, and they go out to spend (get rid of it, ie exchange it for something of value) it before it is worth less. So hyperinflation is when people do not trust their money anymore and want to buy stuff before the price goes up (ie the value of the paper money declines further).
So hyperinflation is a rare event, but not as rare, nor as impossible as people would like to believe. Argentina is now experiencing inflation in the area of 30% per year, this is very soon going to be hyperinflation if history has any rhyme to it.
The main complication today IMO with the hyperinflation/deflation/inflation debates is that there was such a huge increase in debt (learn how money is issued from banks, they can loan (create, print) 10x the money they have on deposit) money in the last couple bubbles that when the bubbles collapse the debt money disappears, this is monetary deflation (not price deflation) but means that there is less "wealth" on paper, and real losses for many. And debt is spending today what we need to tomorrow pay for, and if the earnings and savings are not there to pay, then money is tight. So the money printing, which is going to the banks to make up for that 10x debt money they created which is evaporating, and not going to the unemployed, underwater, etc, is not having such a big effect on prices yet... But money chases yield. Not going to housing yet, still such debt, and bankers not gonna buy their own shadow inventory, so it goes to stock markets and commodities. That is why the stock market has held up so well, and why commodities are so highly priced. And that is why food, clothes, etc are showing price inflation as well.
I do not see hyperinflation (remember, this a loss in confidence in the currency) happening yet; the US is still the largest producer of food in the world, still dominant in most areas, still no clear alternative (other than gold, etc) so most will cling to the hope that the US will be a safe haven. And remember, most people would rather believe the easy lie than face the hard truth, so they will cling to what has been, rather than look at the facts and accept what is coming.
I think that the situation is unsustainable, but for hyperinflation to come, people need to realize that, accept that, and react accordingly. I do not see the realization on a large scale yet; most would rather believe the easy lie perpetuated by politicians and media and bankers and real estate pros (NAR statistics, sorry for offending any straight shooting real estate people, but so many are clueless and lie) who push housing as the best investment, retirement/'investment managers, etc. They do not yet want to think that something is wrong and take the next step to figure out what and why, which would lead to what to do. When that happens (assuming that the economy and spending continue in this same direction, major deficits, high rate of unemployment, debt overhangs, etc) then you can worry about "hyperinflation", but for now it will be inflation, or stagflation, re the 70's. And look what happened then; gold, oil, etc shot up. Interest rates shot up. Inflation shot up. And then the economy took off, after a long period. Will that happen again this time? who knows, history does not repeat, but is rhymes. Some things are different this time; high debt, low savings, cannot really lower taxes more due to already insane deficit, wars, high oil, lots of jobs have been offshored and not coming back, it is a global economy now, not a US economy, so competion is worldwide for jobs, so many may not come back soon, at least as they were.
My outlook? Things which you "need", ie oil, clothes, food, healthcare, etc, will continue to get more expensive in the near term. Things which were financed/bought with debt will continue to get cheaper in the near term, ie housing, cars, boats, vacation cabins, toys, etc. People have to get rid of the debt items (cant pay for them) and pay for the things they need. And with higher unemployment, and tighter credit (banks not giving money to customers, putting it to "pay off bad debt", investing it in stocks, commodities,etc, remember money chases yield and the bankers have been burnt on housing and consumers, wonder why your HELOC which was unused was cancelled even tho you have 800 credit?), financing is not as big an option as it was.
So what about real estate? No crystal ball, I threw it away a long time ago... but I think that having a part of net worth in real estate or income producing assets is worthwhile. betting on appreciation will be a losing game for a while IMO, but if you can cashflow a decent amount and hang on to what you have even if prices drop another 30% (it can happen...) then you will be positioned well if/when prices increase in the future (10-15 years from now). remember, bottoms take time, recoveries are not instantaneous and even with the money pumping by the fed, this will take a while. but being in place, not too high leverage, and cashflowing allows you to build equity, gain experience, and when the prices start to rise, pull the equity out of your houses and start to buy. Not your own money at that point because renters have paid it.
Those are my thoughts, lol, just lookint that this was "quick reply"
Tony.
And I will say it again...It makes no difference if you own something free and clear if nobody can trade you anything of value for it. I have no debt on the leaves in my back yard either. I also don't have any debt on the rocks in my front yard.
Nobody will answer what they think the inflation rate will be so this back and forth is really fruitless. It sure is entertaining though!
I paid 25.9 cents per gallon for gas when my wife and I got married. I also remember gas shortages when we had to lineup all the way around the block and wait for hours to obtain enough gas to fill our tank.
Bryan-I've already stated that I'm comfortable with hyperinflation up to 100% annually. If it goes any higher than that, I'm afraid we're all screwed.
Alan-I wish it was only the 16 trillion that we had to worry about, but that doesn't count all of the unfunded obligations that we have. If you add that into the pot, our current debt is in the $25 trillion range. That makes it sound even less likely that will be able to fix things although I keep hoping.
I'm really not a doom and gloomer are but I do consider myself more of a realist based on experiences that I've had. Many of you have never been faced with 18% annual interest across the board. What do you think our interest rate would be currently if the government wasn't controlling it and keeping the cost of funds near zero? Most of you have not experienced gas lines all the way around the block. Do you see anything in the current status of our country to make you think our energy problems are going to get better and not worse? I really would love someone to use actual logic based on history to explain to me how this runaway train is going to be stopped. Rich
I will just have to disagree with you. I personally think houses and land will continue to have real value to people after a currency collapse or even a hyperinflation episode.
Can you please explain why you think houses and land would not have value?
Are you in-visioning a mad max like scenario?
Nobody will answer what they think the inflation rate will be so this back and forth is really fruitless. It sure is entertaining though!
Sorry, my crystal ball isn't working. My quest is not to have the ability to predict what cannot be predicted...I just want to be aware of what is happening, and hopefully have enough understanding to protect myself and my family.
I wasn't exactly sure how far prices would fall when I sold in 05/6....but I did have the foresight to understand the housing market made no sense.
I find it entertaining as well... I enjoy a bit of debate because I hope to find flaws in my logic. And trying to explain my thoughts to someone help me clear them up in my own mind. So for me it has been a time sink over the past few days...but not really fruitless.
Curious, Bryan, have you read "The black swan"?
I have read The Black Swan. It was really quite boring to me.
Houses will only have functional value if you can trade space for something of value. That is my point.
My crystal ball certainly isn't working either. I just haven't seen any compelling evidence we will have hyperinflation. Thus I don't want to make the sacrifices to hedge what seems exceedingly unlikely to happen. Every investment choice you make has a price. Doing the things necessary to TRULY hedge a hyperinflation scenario are very costly and thus not worth it to me.
I do, however, think we will continue to see inflation and that my debt will continue to be either free or less than free in real terms. At least I think that is something we can agree on.
You know what I meant Jon!! =D
The Black swan was a terribly written book in my opinion. But I think his point is very important and it totally applicable to this debate. Just because something has not happen yet... shouldn't be you primary reason for believing it cannot happen.
Considering all of the investments I have written in my posts over the past few days...exactly how are they costing me? All of my equipment is worth way more than I paid. My rentals are all cash-flowing wonderfully. I would like to pick up more but I am just not seeing the deals I was a year ago. The low end seems to have bottomed in my area. My solar house is awesome. I didn't pay a premium for the solar system, it was a existing house and I got a great deal on it...it saves me a ton every winter. We have not fired up the central heater once in the 8 years we have lived in the house. The solar heat and 2 cords of wood (which comes from trimming the many tree's on my property) is all it takes. All the equipment I have purchased is worth much more than what I paid during the freefall period (07/8), and it has dropped the cost of my rehabs and operational costs of my rentals dramatically.
I believe all of them will continue to benefit from low levels of positive inflation we are seeing today. And I think they give me a better than average chance of doing well if things do get bad.
The biggest difference I see between the two of us is that I do not hold cash. Considering interest rates are below the rate of inflation...I would rather be a borrower right now.
I don't hold a lot of cash either Gene. I'm not sure where you got the impression that I do. Our fund raises money every month so I have very little need to invest in cash to fund my deals. I also have JV partners and other debt lenders to capitalize deals. Then there are always banks and seller financing too.
Many of the purchases you cite above have real costs associated with them. There is an opportunity cost for money trapped in assets that are not producing income. I can certainly understand you buying some of this stuff if you truly believe things will spiral downward. This is clearly non-optimal though. If you monetize and invest the trapped equity elsewhere you can make a better return on it.
Glad to hear the purchases turned out good for you though...you clearly timed things well with some of the purchases.
In a past post your wrote....
"My short-term goal is to build more liquidity after we loaded up on some debt in years past."
I took this to mean your were moving more to a cash position.
Many of the purchases you cite above have real costs associated with them. There is an opportunity cost for money trapped in assets that are not producing income. I can certainly understand you buying some of this stuff if you truly believe things will spiral downward. This is clearly non-optimal though. If you monetize and invest the trapped equity elsewhere you can make a better return on it.
I will agree that everything had acquisition costs...what doesn't? Well I have bought houses with no money down in the past.
But I am not seeing the opportunity costs.
Our house is cheaper to live in than any I have seen of a similar size because of the monthly saving in utility bills. I don't really see our primary residence as an investment and I will concede that it doesn't produce income (most personal residence don't)...but it dose provide my family a tremendous dividend: a comfortable and enjoyable residence. My point is that there are ways to hedge without a large expense...it just takes forward thinking.
The rental properties all spin of positive cash flow. I would likely hold the same portfolio even if I thought there would be deflation. My skill set is in real estate, It has been my primary source of income for 10 years...I take it very seriously...its what I know.
The equipment I own has great ongoing value to me. It has paid for itself and I think it will save me much more in the future (even if we only have low but positive inflation). It is an investment to reduce expenses not to produce income.
What trapped equity are you suggesting I tap for better returns?
We are shoring up liquidity some Gene. I don't hold a lot of cash though. In order to appease the banks I am investing a bit more in cash to make sure I can continue to borrow at low rates from the handful of small regionals chasing us right now. It is certainly nice to have banks chasing us instead of the other way around given the last several years!
If you sell the equipment you can almost undoubtedly invest the proceeds in higher return projects. As long as they aren't a financial albatross it isn't a big deal...just non-optimal. Non-optimal equals opportunity cost.
I suppose you are right...The big backhoe doesn't get used much at all. But I am a bit attached. Its very enjoyable to use.
The little backhoe is so handy we actually find a use for it almost weekly.
The dump trailer is one of the best investments I have ever made. One of those..."how did I ever live without this"...kind-of things.
I believe in buying good tools instead of renting...its just my style. Even during the final stages of the real estate run up when I was thought there would be deflation, I was buying good tools. And I think in the long run...good tools that you use always end up being a very good investment.
Using the equipment is one of my favorite aspects of the job...but I am usually to busy in the office or out making deals. My repair guy gets to have all the fun.
Good fun, a decent short term investment, and a hedge for the worst case scenario...What a deal!
Sounds like an expensive hobby to me ;-) To each his own.
Backhoes really aren't all that expensive. I paid $2800 at auction for it. I see similar units selling for $7k to $9k right now. When you consider it costs about $150 an hour to rent a similar unit, I think its worth keeping. I currently have 16 properties with septic systems so it will get used enough to justify holding it.
It is also has a decent size loader. I have a large lot to clean up next week...the large backhoe (loader) and my dump trailer will be a life saver (or a huge money saver anyhow).
When you have the right tools, you can do deal that are impossible or just too costly for other investors. Its nice to have limited competition on deals.
It certainly would be fun to bulldoze some vacant houses you scrape and rebuild. Why pay someone to do that? That is fun!
My crystal ball certainly isn't working either. I just haven't seen any compelling evidence we will have hyperinflation....
Forgive me if this answer is obvious as I am an amateur economist, but if we have more than doubled our 825 Billion dollars of physical money in only two years (after it took us 200 years to get that much), AND we have already hit our "economy saving" debt limit in 6 months.....why would these two facts NOT be a sign or at least some compelling evidence that there is a risk for Hyper-Inflation?
Silly Alan-after you've been on the BP board long enough you'll be sure to realize there is absolutely zero, I repeat zero, I repeat zero possibility of anything nearly in the realm of hyper inflation. We've already determined previously that is somewhere between 26% annually and infinity percent monthly. Rich
And we wait...
Here is some reading while you wait...
http://en.wikipedia.org/wiki/Problem_of_induction
Cool...I'll also enjoy this one:
Good!
That would likely lead one to believe that the United States will default on it is debt....that is the most simple outcome of our complex problem.
Nope...the most simple outcome of the back and forth debate is that there is no evidence of hyperinflation. Even more telling is that the vast majority of strategies cited in this thread and others to protect against said hyperinflation will all be useless if it did happen.
Oh yea...I forgot...our leaders are going to save us because the fix is really simple and easy.
Wait...there is no evidence of that either.
"I am investing a bit more in cash..." Now if that doesn't sound funny...but aside from that I pick up two points that keep coming up:
I see no proof of that yet, when will it come?
and, what is your definition of hyperinflation?
on the first point, you will not see proof of it until it is past and the statisticians "prove" it to you. Then you can either believe it or not. If you are an investor, or a speculator, or hedging for something that may impact your portfolio, I do not think it is the wisest course of action to wait until something is already occured to try to prevent it hurting performance.
On the second, who cares? I see that all here think that some form of inflation is coming, who cares whether it is 10% or 26.1% annually (thus technically hyperinflation according to some definition), the main thing is that if you think higher inflation is going to hurt your portfolio then prepare accordingly, whether it is hyper or not. I can say that hyperinflation is 100% per month, it does not matter, 30% annual inflation will still kill my portfolio if my debt service is dependant upon there being no-low inflation.
Here is a story to make this easier: in the summer nobody is thinking of winter. One guy is cutting wood. People laugh at him... In the fall they are still laughing, then a cold snap comes. He says that winter is coming, get ready. then the sun warms things back up, the continue laughing at him. They say winter was not so bad, what a fool. He continues preparing for winter (and yes, he is still enjoying the warm weather and utilizing it to grow food, etc). then another cold snap comes, some snow. People freak out, then the sun warms things up again. He tells them winter is coming, that was a warning. The laugh at him, look at how warm it has been, winter never even came last year... Then winter comes. It comes slowly, temps slowly averaging lower and lower until a freeze arrives and then the long winter begins.
I think that is what is going on now. People think they can control the weather. Just put stimulus and the sun comes out. look at the last 30 years, winter never came. yeah, the 2000 and 2008 markets were rough, but more money and the sun came out. You fool, spend your money, quit preparing for winter, it is not coming. meanwhile, they are burning all their firewood enjoying the extended warm season... and when the winter comes they have none left for warmth. The guy who can keep warm in the winter without having to buy/beg/steal firewood can capitalize on his position.
Look at the other examples of rough times in history. The goal was first to keep what you have until the rough times were over. Maybe they were not worth much, but the worst times last the least. that is one reason the great depression was so great, they tried to prevent it from being so deep. Other countries in the same period did not go so long, they bit the bullet and came out. Look at the US in the depression of 20-21. bet you never heard of it. It was severe, but in a year and a half the cleansing was done and it roared off. Now we have the accumulated non-cleansing of a long period to pay for. and they are trying the same stuff they tried in the '30s... so you try to keep your assets for the other side when you can grow them. You also try to purchase assets from those who think that they have little or no value because they do not produce anything of value (some here complaining that they pay in fiat currency which will be worthless thus the underlying asset is worthless...) so you take them off their hands. And the others who need your whatever, take the assets off their hands.
Like the port example Gene brings up, I bet it was not producing anything of value. In terms of revenue valued in the local currency... but if you look at a port, a place to unload / load ships, they are valuable. they do offer a service of value, so you snap it up, and then when things get sorted out you are doing ok. Same with anything of value, do not value them in terms of a worthless or worth less currency, value them in different terms. Use your head.
Tho I firmly believe that we are headed for winter, and am planning accordingly, I am still enjoying life while the sun is hot and warming the days. No need to be a doomer and gloomer, I am happy and enjoy life and secure in the fact that whatever happens I can prosper and am prepared. that is one value in preparing, no need to gloom and doom and worry.
Be a thinker, not a yes man (I think that a danger exists for those who listen/watch too much TV and talk radio, one forgets how to think critically, instead blindly parroting the opinions spouted there and taking ownership without critically analyzing motive, bias, incentive, wisdom, experience, etc), be a leader, not a follower, be a doer, not a talker.
Tony
I do.
Preparation for HYPERinflation causes one to make an entirely different set of investment choices than preparing for high inflation like we had a few decades ago. These investment choices have a very real price in the real world.
I don't. As a very experienced investor that has gone through all types of economies and not just the economy of the last 5 to 10 years, I prepare exactly the same way for both potential scenarios and I sleep very well at night. The easy comparison is insurance. Those are also choices that have a very real price in the real world but I'm still going to plan and prepare accordingly. I still maintain health insurance, fire insurance, long-term care insurance, and others. These also are choices and have costs of which I have not benefited from any of them YET. That doesn't mean I plan on going without and I will continue to be prepared for any sort of inflation that might occur, just like my insurance programs. Rich