Do you own a house? Do you rent?
How you answer these questions likely influences your perception of inflation and the economy.
But what if the forces driving your perception are about to reverse…thus, standing your perception on its head?
We believe big, earth-shattering changes are under foot in the credit market. A seemingly firm foundation may soon give way like liquified soil following an earthquake.
Where to begin…
Many investment gurus in the early 1980s were predicting the future while projecting the past. After a decade of raging price inflation, the popular dogma was to pack one’s portfolio with gold coins, fine art, and antiques. This was the proven, surefire way to preserve one’s hard earned wealth.
The United States, it seemed, was about to go full Weimar. Howard Ruff, in his investment newsletter The Ruff Times, was predicting the dollar would soon turn to hyperinflationary ash, like conifer trees in a California wildfire. It was inevitable. And imminent!
But then something unexpected happened. Ultra-high interest rates courtesy of Fed Chair Paul Volcker brought on a recession. An inflection point was hit. Consumer price inflation stabilized. And a new trend of asset price inflation – including house price inflation – was born…though it wasn’t immediately clear what was going on.
In September of 1981, the yield on the 10-year Treasury Note peaked at 15.32 percent. After that, yields commenced a 39 year decline that likely ended in June 2020 at just 0.62 percent.
Over this time, the median sales price of houses sold in the U.S. inflated from $64,900 to $411,200 – or by 533 percent. Yet during this period the U.S. median income only increased 254 percent, from $19,074 to $67,521. In other words, median house prices inflated by more than double that of median incomes.
Cheaper and cheaper credit supplied the fuel that powered the astronomic house price inflation. So, too, cheaper and cheaper labor from Asia supplied the cover that would mask consumer price inflation over this period.
To be fair, there were a few outcasts in the late 1970s who foresaw what was coming. A. Gary Shilling was one of them.
Rather than the consensus view that inflation would persist forever, Shilling suspected the U.S. was entering a long-term era of lower and lower interest rates and low consumer price inflation. Under this backdrop, traditional inflation hedges would be highly disastrous…
…and debt based financial assets would be highly prosperous.