Inflation: The Problem & The Opportunity

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With the House, Senate and White House now held by the Democrats, sharply higher government spending is forecasted and this bring problems for the bond markets. More stimulus does three things bonds do not like which is more supply, higher inflation expectations and aid to the economy.

As Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in the output”. Up until recently, current inflation and inflation expectations have not been a problem. The Fed even said low inflation was “transitory” for a decade. We may be seeing a shift.

At the moment, inflation expectations, what the markets expect inflation to be on average for the next 10 years, is at the highest levels in over 2 years. This is happening at a time when we are likely to see another record amount of spending and a record amounts of money printed.

The problem – we are already see sharp asset inflation (lumber, oil, commodities, stocks, bitcoin, real estate). The Fed may commit to even more bond-buying or outright Yield Curve Control to help pin down long-term rates.

The opportunity – Millennials, who made up over 1/3 of home purchases in 2020, have no experience with inflation. It’s our job to education them on what it means. If inflation rises, which the Fed wants to see happen, the time to buy is now. Why? Clients can lock in at “artificially low rates” created by the Fed and purchase a real asset that is subject to prices increases from demand and price inflation. Lastly, we will see rising wages. Down the road, a homeowner can pay down their fixed low mortgage with ever-increasing wages.

We will see what 2021 brings. But for now, as a buyer, buy now.