What a week for the stock market. Stocks have been getting crushed on news of the new variant and the Fed admitting that inflation is no longer transitory.
Inflation
I was kind of expecting the Federal Reserve to kick the can a little more on inflation and say that it was transitory still or that the target for inflation would be higher. However, Wednesday Fed Chair Jerome Powell expressed concern about price spikes and said that it would be impossible to be sure that inflation will slow over the next year. I do not think more stimulus and trillion-dollar spending packages from congress will help cool inflation despite their claims. Raising interest rates is the way to fight inflation or let the free market be free to produce more supply to bring the price down. The heavy hand of government regulation, supply chain disruption, and a cheap-money monetary policy almost ensures that we will continue to see more abnormalities out of the market like we have been seeing the last couple years.
How do we invest in such a manipulated market? It is certainly difficult to have price discovery when the system is awash with capital at near zero interest rates. I have seen deals over $100 million get cash offers. Hedge funds can borrow billions at a percent, and they are looking for yield.
Treasury Bonds an Interest Rates
The Fed has been buying $120 billion in Treasury Bonds and mortgage-backed securities since spring of 2020. It has announced that it will start trimming back on those purchases by $15 billion a month and then start raising interest rates. This has the market shook along with news of the new variant, so the market has been in the red this week.
What does this mean for real estate prices? The stock market tends to react or overreact on news, but property prices do not drop on a dime. It will be tough to predict if we see housing prices start to come down because we are not sure how much the Fed can raise rates. The rate hikes they are talking about for next year are 0.25% each with an estimated of 2 to 3 hikes in 2022. Raising interest rates 1% hardly moves the needle and is not enough to fight inflation. I would continue to monitor inflation and interest rates to make the best investing decisions. It is certainly difficult because keeping money safe in the bank loses purchasing power to inflation. Risky to invest and risky not to.
New Variant
The market might have reacted to news of the new variant in addition to the Fed tapering and interest rate hikes. The first case reached the U.S. yesterday in California. I think it is too soon to tell what will become of it, but it is something else to keep an eye on. The supply chain probably cannot handle much more interruption without exacerbating the supply shortages and price increases.
Conclusion
Interesting times we live in. A lot of the books on personal finance and investing written in the past seem to no longer apply. You simply cannot save your way to financial freedom or out of the rat race—you need to invest. Fundamentals are deteriorating so it helps to stay abreast of the financial landscape.
