Blog with MAE Capital

We are coming out a year-long pandemic that has shut down certain sectors of our economy and now with the vaccine people are feeling better about going out in the world.  The Government has infused $1.9 Trillion dollars into our economy and other countries.  People are getting their stimulus checks whether they need it or not.   The stock market is at all-time highs and the Real Estate market is so hot it is prohibiting first-time homebuyers from entering the competitive market.  This all sounds like great news right, but is it?  This remains to be seen but if we follow the logic and basic economic principles this short-term run of euphoria will run out of gas over the next several years and here is why I say this.

Assuming the worst of the pandemic is behind us and those stores and restaurants that have been closed or limited in capacity will soon be up to 100%.  What will consumers do?  That is the question, will consumers go to Shopping Malls or stay to ordering online?   I do believe that people will go to restaurants again as that is social and people are social animals.  The landscape will look different as people’s habits have changed and adapted. Travel will also begin to get back to normal as people will want to finally go on a vacation and after they are vaccinated, they will feel confident in traveling again.  So as far as the obvious things people desire those will come roaring back but what about the price of those goods and services will they be able to afford the new higher prices?  

Higher prices of goods and services are inevitable with higher gas prices and inflation and the devaluation of the dollar.  Although the Federal Reserve has said they will not touch interest rates until 2023 the market will have other aspirations.  We are already seeing higher interest rates in the mortgage market as a result of the economy opening and stimulus.  Higher gas prices are due to the current administration’s killing of the Keystone Pipeline and moving to more oil dependency from foreign providers.   That dependency on importing oil makes the cost go up as opposed to relying on domestic oil production.  Thus, higher prices for goods and services that are imported, shipped, trucked, or driven to the marketplace.  We are also seeing increased prices in commodities (steel, copper, gold, silver, lithium, etc.) as the price to produce them has increased.  This makes automobiles and other items that depend on the price of steel or commodities more expensive to produce thus more expensive for consumers.  This is what we call inflation.

Inflation, left unchecked, can cause more problems than just higher prices of goods and services.   Inflation will cut potential buyers of goods and services out of the market thus causing businesses that sell those goods and services to slow production and lay off workers.  For example, automobiles, if the price of a new car is so high that the average or middle-class person can’t afford one they will not buy new cars, they will be relegated to buying used cars until their income catches up with inflation.  This will cause the automakers to slow and have to lay off workers.  This affects all goods produced thus causing other industries to have to lay off workers as well.  So, inflation is one of the most toxic things to occur in any economy.  Traditionally, the Federal Reserve would raise interest rates to slow inflation by making the cost of money more prohibitive for expansion.  Inflation is caused by 2 things; one the demand for goods and services are higher than the supply and; two the dollar is devalued to other currencies.  Currently, we are seeing both in action.

The demand for housing currently is a good example of where the demand exceeds the supply and that is why you are seeing skyrocketing housing prices.  You are also seeing the cost of the materials rising at a higher rate than normal to build a new house so new house prices are going up in response to demand and costs to produce.  In the short run, in the next 1-2 years, you will see this trend continue, and coupled with low-interest rates to buy a home the demand will stay strong.   The housing market will slow only when interest rates go up and the demand slows until then you will see increases in housing prices to the point that the average person can no longer afford a home.  The worry is that supply suddenly increases as people realize their homes are worth far more than they thought so they decide to sell all at the same time.   This would only be bad if the supply of homes for sale exceeds the demand for the houses.  When that happens, it would mean that all the demand has slowed due to higher interest rates or higher prices or high unemployment, or all three.  This is what we would call a perfect storm and we saw this occur in 2008 when the housing bubble burst.  

So, for the short term in the economy, we see higher inflation with industries opening up again and with the stimulus checks going out to Americans and to other countries.   The inflation we see will keep going as people get back to work and people feel better about their personal finances.  As people spend their stimulus checks or invest them this will keep the short euphoria going.  In the long-run, if inflation is left unchecked, the worry is that we will start to see normal economic moves such as higher interest rates to fight inflation which will cut people’s ability to buy higher-priced homes.  This will cause a slowing in demand for homes and eventually we will see supply exceed demand thus prices will have to go down to adjust for that.  How bad will this adjustment be is yet to be seen and will hinge on what monetary and fiscal policy the government adopts.  If the government raises corporate taxes to a point where corporations can no longer expand or hire, we could see an increase in unemployment which will hurt the economy.  The Government has also talked about raising taxes on individuals as well to pay for all this stimulus.  There is also talk about raising the capital gains tax to 43-48% from the current rates of 15-20%, if that happens people that have investments in Real Estate and Stocks or commodities will be impacted by either not selling or if they do having less from the sale to reinvest in the economy. In addition, if gas prices rise too high we could see a phenomenon that we have not seen since the late 1970s when we had “Stagflation” where we had a stagnant economy with inflation and super-high interest rates.  I do understand the human aspect of the government wanting to help people, but my worry is that what might be nice today will hurt tomorrow.  The $1.9 trillion dollars the government just spent is a worry that every American should have as that will have to be paid back and with the national debt over $35 Trillion dollars that’s over $80,000 per American that is owed.  When will it end, will the debt be called due at some point, do we just ignore it?   I am not sure the average American understands what this means to our country and to every American. Now there is talk about another $2 Trillion Dollars be allocated for infrastructure, the fixing of roads bridges.  

In the end, every dollar, the government spends it is money that we all owe back as Americans.  The way our economic system works is for every action there is an equal and opposite reaction.  So, If the government keeps spending our money every American will have to pay for it in higher taxes and inflation.  When the dollar falls from the world currency then America becomes like Europe that has had all kinds of problems with their monetary system since they went to the Eurodollar in the beginning of this century.  Every American has to pay for what our elected officials do.   This is not a political statement it is fact, and it is the way our country was founded.    What can be said about our economy is that we are in store for inflation and higher interest rates which will slow the economy and the slowing will cause higher unemployment.  We have the ability to stop all of this but the average American will not understand these basic principles as all they will see is the short-term benefits not the long-term harm.  We all need to learn basic economics so when we go to vote we are not harming our children and their children.  Rates are still great so if you have been thinking about refinancing or buying, now would be the time and everyone needs to look toward the future and hold their elected officials accountable.