Posted by shawn sisco on December 05, 2010 at 08:06:29:
Dilligence in collections,increased frequency of payments and barter would seem to be about all that one could do that is in his power.
I really imagine that the everyday maintenance would become impossible as I doubt suppliers and lumber yards will be able operate.
With so many pressing concerns going on during such an event, I would imagine that the ablity to focus would become incredibly difficult.
In the Event of Hyperinflation… - Posted by Tony Colella
Posted by Tony Colella on December 04, 2010 at 15:17:27:
For today?s question let?s walk through what might happen to our investments if our country were to experience hyperinflation.
We often here suggestions such as people will be able to pay off their fixed mortgages with highly devalued dollars. This would be nice I guess but I don?t know that I expect the Gov?t bailout teams to standby while banks get the short end of the stick, but I digress.
For those of us with rental units I imagine that our rents will not adjust fast enough based upon lease terms and depending on how our tenant base is paid and how quickly their wages can increase.
If our only income is generated through rentals, we would have a slow increase in a fast paced inflationary time right? This means less coming in and more going out does it not? This sounds bad to me.
If we turn over tenants and get higher paying tenants we still may not be able to do so quickly enough to keep up with hyperinflation. Turnover also means costs for us (turning power on to repair and clean etc.).
If the money flooding the economy (which created the hyperinflation) makes everything more expensive but what happens to real estate? Commercial real estate value boils down to net income. Here is my concern, if expenses are increasing exponentially and quickly but income is increasing slowly due to the lease terms, won?t this suppress the commercial market?
What about the individual rental units?
It is my hope that together we can address and expand upon these few questions regarding a hyperinflation scenario. If we prepare for such an event we will better be able to survive and thrive. If we learn only as we go it may be too late. If it doesn’t happen then we lost nothing and gained knowledge (not a bad trade).
Tony
Hyperinflation (very, very long) - Posted by Dr. B. (OH)
Posted by Dr. B. (OH) on December 05, 2010 at 13:40:55:
Man, you guys are putting out some good thoughts. First of all we, thanks to the additional prodding of Tony, are doing what we can to look where we are going. We can only see so far ahead. Some may turn out to have better vision than others. Thanks for sharing your vision(s). I am more inclined to believe in the international devaluing of the dollar. We have been doing it to ourselves for years, particularly recent years. We are just waiting for the rest of the world to admit it. China just may call in our debt to it by demanding a chunk of the U.S., say all that is West of the Mississippi? I agree with focusing on commodities and consumables. I was thinking of getting into wind or solar power.
I am reading a phenomenal book called Power Hungry by Robert Bryce. It reviews the uninformed way we are approaching the “green” movement and the realities of market demand for more power. Power is defined as watts/min. Almost every sentence in this book is properly footnoted and referenced, yet it is an easy read. Did you know that for every windmill put up there MUST be an additional equivalent alternate energy source built such as hydro- coal- or gas-fired generators to cover when the wind doesn’t blow? This is not very energy efficient or economical. Just ask Denmark which has 40% wind power? Did you know that modern windmills require a rare earth to build them called neodymium that is almost exclusively mined in China. China won’t allow foreign companies to invest in its mining and it has restricted its export to maintain a high price. Some way of becoming energy independent, huh?
Do you know why Texas is booming? Because of fractionating shale deposits for their natural gas. In the past several years 12,000 wells have been drilled and more coming. Thanks to a billionaire oilman who spent millions and millions figuring out how to get that gas out despite his own engineers telling him he’s wasting his money. p.s Horizontal drilling (after 8,000 ft. down) was the majority of the answer.
Why am I telling you this? If you don’t like solid commodities like gold, silver, platinum, etc. How about consumable commodities like gas, oil, nuclear power. Nuclear, by the way has grown 30% in the past 20yrs despite environmental opposition and because of worldwide demand and improved technology. Also BTW, all of the USN’s submarines are nuclear powered and have been for over 20 yrs. Most of the ACCarriers too.
If we think “backwards” we should be able to come up with sensible things to invest in. When our money is devalued or hyperinflated, how many Gucci purses will be sold? How many Cadillacs, Lincolns and BMWs and Mercedes? How many 5-8,000 sq. ft. houses? How many private schools and colleges will have to close their doors? How many swim and coutry club memberships will remain? Now, working our way down: How many new rugs will be bought? How many scooters and buses will replace car travel?, How many train cars will replace OTR tractor-trailers (already happening). Moving down to the basics, food, clothing, housing and heat: How much artichokes vs. corn will be bought? How much name brand name clothing will be bought? How many new houses will be built? How much heat and A/C will be bought?
Continued urbanization of this world will deflate demand for rural living. Only suburban MHPs will survive. Buying now the things you NEED (e.g. materials for your business or home) will hedge your bets on hyperinflation and devaluation. Investing in ESSENTIAL consumable commodities and solid tradeable commodities such as gold or silver is not likely to put you BEHIND everyone else.
Again, we can only see so far down the road. This group is likely to act as fast as possible as the information it receives comes in to make sensible choices as we go along. And as Berndt has quoted me: Adapt or Die. Things work out if you allow them to,??..Enjoy life, otherwise what is the point.
Steve
Re: In the Event of Hyperinflation… - Posted by Auctioneer
Posted by Auctioneer on December 05, 2010 at 08:40:08:
It’s always wise to mentally plug in certain possible future variables into our Business model. But even still we cannot know exactly what to expect. Even the leading economists where stumped during the recession of the late 70’s and early 80’s when gold broke $1000. Only after the recession was over did we aquire a name for that recession which you may recall was stagflation.
I was a kid at that time but I’ve always felt that human nature is lead by our short memory. We reference the current economic state as the great recession, but I’ve not felt this great recession was quite as bad stagflation. Times are different and the economic makeup has changed. The great Depression was not understood at first and was later linked to the move from a farm based economy to industrialization. The 70’s was of the service sector. Now we are information oriented. Recessions are a necessary part of the economic cycle for long run stability as it tends to remove inefficiencies.
With all that said, no one really knows. I’m not a huge fan of the metals. The reason is that they are of little real useful value. They are valuable so long as they are in demand. But when the raw commodity is not in demand what is the exit strategy? Sell for what it’s worth on the way down? Make Jewelry? Hi tech equipment uses gold, silver and platinum but I’m not set up for that and those that are have plenty of supply.
Real Estate however is a useful commodity. Housing is a basic essential. Rents will increase in the long run. It is true that in the shortrun our renter’s wages likely will not keep up with inflation and the largest monthly bill will shoulder that pain taking a back seat to food, clothes, fuel. In otherwords, they need these things to keep or find jobs and live even at the most basic level but they can move in with family, friends, roomates, boarding houses (Large houses were made into boarding houses during the Great Dep., now there is a niche). In the end Real Estate is useful and lasting. Food, clothes and fuel all must be replaced. (fuel the new gold is useful??)
Infation and hyper inflation (HI) are two different things and this 230 plus yr old country has rarely and barely seen never seen the likes of hyper inflation, which usually results from an unstable gov’t (we can debate this but I still don’t think we qualify). One tell tell sign of HI is that employees lose interest in going to work because it does them no good unless the employer can compensate with something useful and non depreciating. Most recently, we have seen employees of countries riddled with HI problems demand dollars, food, housing anything bit their native ever devaluing currency. We have housing!!!
Persoanlly, holes in my planning include the plan that if and when demand for new housing ever fell, I would keep bldg rentals with cash - pull out equity, rinse and repeat all the time buying up developed land at a bargain. I never for a second thought lenders would say NO because they where once lined up to take 10 at a time. Little did I know, these Fannie Mae loans would one day be classified as subprime and supply would plummett. So you see, I was half right because I failed to plug in the right combination of variables. I too am not purchasing as I had planned too, even though I had plenty of cash reserves. The bulk of cash was used to payoff a few commercial loans that were called because bankers who were once lining up are now scared of investment property and investors.
So what are we to do? My vote says shore up what you have. Increase the useful value of existing properties (increase it’s demand and/or rent by adding value and/or cutting costs), Divest the inefficent investments (cut your losses/stop the bleeding) and keep the faith in your ability to learn, recognize, adjust and plan continously as we see the future unfold. No - things will never be the same but they will be different. If we position ourselves the different may even be better.
Re: I don’t know - Posted by JeffB (MI)
Posted by JeffB (MI) on December 04, 2010 at 21:14:46:
I’m not sure what would happen in the event of hyperinflation, but I do know one thing; whatever expectations I have of such an environment are sure to be wrong.
Let’s rewind back to 2006 or so. I remember many-a-seminar where we all sat around talking about the inevitable real estate bubble bursting, and how there would be mass foreclosures, blood in the street, etc, etc. We salivated. We planned. And yet, the day of reckoning is here and us so-called contrarians are either too scared to act, or financially unable to capitalize on opportunity.
Government intervention has reared it’s ugly head and affected many of us. The free markets have decidedly failed and the government is here to help. Who among us saw this coming? The next chapter is yet to be written, but I have my own suspicions of what follows.
The banks were there to bail out the unwise decisions of homeowners and investors.
The government was there to bail out the unwise decisions of the banks.
Who will bail out the government, now that we are faced with government debt that we are surely unable to repay. Who will be the greater fool? China? I foresee an unimaginable debt restructuring to come, when it becomes obvious that we are insolvent. A pre-packaged bankruptcy of national proportions. Still, we will survive.
Life will be different in the future, that much I know. One thing I have learned over the past 10 years is that while we can predict things sometimes, there are too many variables to be able to accurately plan a strategy to cope with the prophecies-come-true. The real estate investor who predicted the housing crash likely did not expect the lack of bank lending to allow him to acquire properties in this market. Or the lack of hard money available, or the drastic reduction in number of exit strategies. The list goes on…
My plan is to try my best to:
Aside from barring up my windows and buying a bunch of guns or building a food storage, I think that’s about all I can do to prepare for whatever comes our way. Whether it be war, inflation, or the apocalypse.
Thanks for starting this discussion, Tony.
Jeff
Re: In the Event of Hyperinflation… - Posted by Bernd Hanak
Posted by Bernd Hanak on December 04, 2010 at 19:46:06:
By the time hyperinflation arrives, we will be experienced in the effects of inflation. Hyperinflations are usually a byproduct of wars. Eg. Weimar Germany, Hungary, Zimbabwe and so on. What should be of greater immediate concern is the global competitive devaluations of currencies, the limitless printing of fiat money, the unprecedented escalation of unsupportable debt, the Ponzi schemes of the various corrupt governments. The exit strategy of these malevolent incompetents, to camouflage their sins and to assure their re-election, is to intentionally choose the inflationary options at the expense of the tax-payer and his progeny. The concepts of cause and effect guarantee an inflationary future. Presently, I estimate the rate of inflation to be at least 10% higher than the government?s reconstructed ?official? rate of inflation. Anybody who is a lender has the purchasing power of his loan reduced by the same amount. (That is my reason for not wanting to be a lender now.)Ask your wives about how much more expensive food and energy have become in a matter of a year. How does this affect our rental business? Rents, generally, have not increased and cannot increase. Our tenants? wages have not and will not go up for obvious reasons. Real estate is inundated with sellers. Larger commercial real estate is suspended on its fingernails. We have entered an inflationary depression. Let?s leave the term ?recession? to the con-men. If a serious inflation or a currency collapse should confront us, nobody gets paid or passes on the money as fast as possible (paying off debts with devalued monies just like the governments plan.). Barter will become the preferred method of transactions. How can we protect ourselves from the worst of such a calamity? We can learn from people who have experienced such catastrophes. Some voted with their feet and secured their assets into perceived safer climes and currencies, though that is not an option for most of us. Others put their discretionary monies into tangible assets which could not be destroyed by the printing press, but would constitute supplies for their own businesses, or were perceived as being highly desirable to others. Of course, there was always the value of real money, namely gold and especially silver as coins. To quote Dr.B.,? Things work out if you allow them to,??..Enjoy life, otherwise what is the point.?
Re: In the Event of Hyperinflation… - Posted by Tarheel T
Posted by Tarheel T on December 04, 2010 at 19:23:00:
I think it makes sense to hold some gold.
The more stimulus we get increases in my mind the likelihood of inflation at some point in the future.
I don’t see real estate doing well even with hyperflation. My dad was a realtor during the late 70’s and early 80’s and nothing was selling then.
With hyperinflation there is likely to be “high” interest rates, and alot of demand for all tangible assets. But with high interest rates, real estate might be about as liquid as tar. So limited opportunities may exist to pay off real estate loans with cheap dollars, because real estate is not turning over to produce those dollars. And we can probably forget about cash out refinancings to produce the dollars, as banks have learned a little about that the hard way in the last couple of years.
So, yes, go for the gold.
Re: Hyperinflation (very, very long) - Posted by Bob Smith
Posted by Bob Smith on December 08, 2010 at 24:36:02:
“Continued urbanization of this world will deflate demand for rural
living.”
So long as urban areas suffer from the mistaken belief that they can
overtax and overregulate without consequence because “everybody
knows urban areas are great and wonderful” the areas surrounding
them will continue to thrive.
Re: Hyperinflation (very, very long) - Posted by Bernd Hanak
Posted by Bernd Hanak on December 05, 2010 at 23:09:57:
Dr. B., I applaud your post and unequivocally endorse your conclusions. However, as a point of interest, I have it from a most reliable source, that the Chinese may buy the left coast and a few other collectivist areas, but they also do know that Texas is not an option for them. Texans make terrible house-boys and poor chambermaids.
Re: In the Event of Hyperinflation… - Posted by Tony Colella
Posted by Tony Colella on December 04, 2010 at 19:54:59:
Rather than Gold might I suggest Silver or at least in addition to.
Tony
Re: In the Event of Hyperinflation… - Posted by Tarheel T
Posted by Tarheel T on December 05, 2010 at 12:59:07:
Yes silver is a very good choice in that it is easier to buy than gold, but now the silver price is in line with the historic 50-1 ratio, which had been out of balance for so long. Gold in the form of Krugerrands is kind of a universally recognized asset, so i like it for that reason.
Additionally GLD/SLV could be a place to put some uninvested cash otherwise earning a fraction of 1%.
Or even oil stocks, which do have utility(BP is my choice).
I am not a believer in coming hyperinflation(the fed can put a stop to it if necessary), or that inflation is currently understated by 10%, or that the monetary system is likely to turn into barter only. No disrespect to anyone else’s opinions.
My view has been that despite the current administration, the economy will recover albiet a jobless recovery, and that 2 or so years from now we will be on more sound footing. I know I am probably in the minority with that belief.
But it is still prudent in my mind, while improving and adding to our real estate portfolios, to also have some tangibles, (silver/gold/oil) besides real estate, just in case.
Tracy