Inflation: Fact or Fiction? by Thomas E. Jandt

by 26 Jun 2011
When considering the path we are on in this country with inflation rearing its ugly head in more than just the price of oil and gasoline, $4.00 a gallon for fuel just might be considered a bargain in a few years as we look back from the future. In fact, taking into account that the economy is still stumbling along with anemic growth in most industries nearly two years after the recession was officially declared over, while housing and credit across the nation has been showing signs of double dipping, I really should be thankful for how low gas prices are today relative to where they might be otherwise. If prices have risen this much in a recessionary climate, I would hate to see where prices might be if demand actually picked up for that combustible daily necessity.

What I find strange is that a lot of analysts, government officials and market pundits keep promoting the idea that interest rates are going to stay low for the next couple of years. To me, this obfuscates the fact that interest rates are a result of inflation, not a cause. You would surely be satisfied to think that inflation simply does not exist if you just listened to the testimony of “Helicopter Ben” Bernanke, Treasury Secretary Timothy Geithner or any of the other bumbling fools in government. You might also come to the same conclusion, should you be unfortunate enough to endure the opinions and assumptions made on the various business news networks by the gullible hoards of Financial Advisors and analysts that explore the topic of inflation, interest rates and monetary policy with only the alignment of their careers and fortunes guiding their advice.

With current interest rates set at or near zero by the Federal Reserve for the Fed Funds Rate, Treasuries barely paying investors enough yield to pay for account maintenance fees (less than a 1 percent yield on a two year Treasury) and with a 30 year mortgage rate at under 5 percent; interest rates in and of themselves have rarely ever been lower. So, with rates at such historically low levels, how could there possibly be any other reasoning than this? Inflation is here in a big way. Inflation has already impacted the prices of almost everything we buy here in the United States and cost increases have just begun to materialize. Anecdotal evidence is everywhere and any attempts to refute that inflation is a real concern should be vehemently rejected. If inflation is not an issue like Bernanke claims, then why did I just spend that $100 filling my tank when it used to only cost $65?  Look at the prices of steel, cocoa, sugar, cotton, gold, silver and every other commodity on earth that is traded in US Dollars.

In fact, food inflation alone has been cited as one of the primary causes of revolutions like that in Egypt and protests in other foreign countries that are struggling to pay for these increased costs. Inflation is very real and can be very harmful to your way of life if you don’t save and invest your hard earned money into the right assets and hold your cash in currencies other than the Dollar. An increase in costs of the things you buy each day can take food off your table, gas out of your tank and can suck money out of your savings and retirement accounts. However, inflation could be leveraged to your benefit if you approach this issue positively and proactively. You can embrace inflation, understand its cause and use this trend to improve your quality of life, put more food on your table and create more wealth and income than you ever imagined while others are struggling to exist. You just need a slight paradigm shift in your thinking about how to hold your cash and how to allocate your investments. Buying gold, silver, foreign currencies through holding foreign CDs or bonds isn’t doom and gloom, it’s just smart.

The lesson to take away here is not that inflation is an insurmountable obstacle to overcome, but it can be seen as an economic condition and trend that can provide significant opportunities if you prepare accordingly. However, these opportunities don’t come without risk and navigating inflationary periods can be a bit tricky, so it’s important to stay on top of the latest data as it relates to those metrics that can be gauged that are known causes of rising prices and rising interest rates. Having recently written a newly published book dedicated to this topic called “Your Money Is Everything” (www.yourmoneyiseverything.com), I have done extensive research and analysis on the effects of inflation on assets, economies and currencies; so for a detailed analysis I would highly recommend you get a copy of the book as I cannot cover this comprehensively in a short article.

However, I can go over some of the key factors you’ll want to keep in mind when assessing your business strategy, cash management and investment allocations, especially for those of you in the real estate and mortgage industries. First of all, it is important to note that inflation is caused by one primary action, the printing of new money by the Federal Reserve and the addition of new debt issued by the U.S. Government known as deficit spending. When you hear about quantitative easing or easy money policies (loosening) when the Fed talks, that means they’re printing money. That’s inflationary. If the government talks about raising the spending cap, going to war, providing bailout capital, welfare or other social programs, community redevelopment projects, government loan modification programs, government backed mortgage assistance, mortgage backed security purchases, programs to benefit the public, financial support for state and local governments, as well as special purpose funding; that’s inflationary. This is all pretty straightforward. However, spending and money supply is not the only trend to watch.

Another more widely known cause of inflation in prices is from a pickup in an economy, known as demand. As demand for goods and services picks up, prices tend to rise. This is important to note as the U.S. economy has recently shown small signs of improving. Although I believe the improvement in the economy data is just the result of higher prices due to currency debasement in the US Dollar, it is important to watch because if the economy truly does gain steam and you see wages and salaries begin to rise with recent price inflation, then you know you have significant, real and potentially harmful inflation ahead. The final and much more troubling inflationary pressure that could begin to appear soon is inflation induced by a weakened currency. Since over 65 percent of all US Treasuries are bought by China and Japan, it is very likely that one day if our economy continues to languish and our monetary policies stay loose, that they could decide to sell their US Dollars and flood the market with our paper.

This would cause the value of the dollar to crash and send prices in all dollar denominated assets to skyrocket along with interest rates. This, of all inflationary fears, is truly the worst of them all by far because there is not fundamental improvement or change in the economy, this is merely the result of a currency imploding in on itself. This is the type of event that cause France to revolt, the Weimar Republic in Germany to collapse and has been the cause of the complete annihilation of entire countries. Sadly, however, the average citizen in the U.S. does not understand how inflation really works. Most people just see rising or falling interest rates and think that is a true measure of inflation and is an indication of what’s to come, but it’s not. Interest rates are a lagging indicator of inflation and rates simply adjust to the market conditions. You can see inflation coming way ahead of the actual move in nominal interest rates if you just know what to watch for. Put simply, when the Fed employs quantitative easing by flooding the market with cash, their sole intention is to create inflation, not hinder it.

This is the exact reason why they have to claim there is no inflation, otherwise, they would have to stop printing money to support our economy and our economy would sputter out and roll right back into recession. The reason most people scratch their heads when the stock market moves up to recent highs while so much global turmoil and “less bad” economic data is released is probably because most individual investors don’t totally appreciate the fact that stocks are dollar denominated assets. Inflation has always been good for stock prices in the long run as more and more money is being printed and pumped into the system, asset values are going to rise. Look at Gold, Silver, Copper, Oil, Gas, Stocks and nearly every other asset; they have all surged higher over the past two years since the first quantitative easing initiative was implemented. One asset class that has not benefited from this inflation in money supply has been real estate, but there is a simple explanation to this too; supply and demand.

When there is 27 percent of all home mortgages underwater, another 10 percent in foreclosure and a limited number of eligible buyers in a market flooded with inventory, there is no way to see price appreciation until that inventory is absorbed. This is going to take time and to think this issue will resolve itself quickly is a big mistake. Keep in mind that real estate might be a market based asset, but it’s not as liquid as a stock, currency or commodity. Buying a home takes good credit, verifiable income and a down payment. Plus, if you already have a hefty mortgage on a house worth a fraction of the loan amount, it might be a little difficult to buy that move-up home without paying cash because most lenders made their credit requirements much more stringent. This leaves the market with very few buyers and an extraordinary amount of supply. If you are a real estate or mortgage professional, you know exactly how tough it can be to deal with lenders when financing a new purchase, as well as when trying to negotiate a short sale on a distressed deal. Banks were more than happy to take bailout funds from the taxpayers, but they are slow to take a loss on a short sale or fund a new purchase for a borrower with some questionable payment history.

So until lenders choose to loosen up credit guidelines and relax their criteria for accepting offers on short sales and REO properties, real estate is going to be slow to recover and will likely double dip severely in the coming 12 to 24 months due to over-regulation of mortgage brokers and loan officers, tight credit, a lack of demand and an abundance of inventory, as usually happens shortly after a crisis this huge. But for those whom earn their income from real estate transactions, this should be perceived as a valuable opportunity to accelerate the growth of their business, income and career. As an investor seeking to build wealth and generate long term retirement income, this is nothing short of a life changing opportunity. You see, it is clear that the government is hell bent on printing as much money as it takes to get the economy back on track. However, until housing is back on track, the government is going to find it difficult to justify to the public that things are all better. Since over 65 percent of all Americans own a home, that is a problem that must be fixed before people feel like things are actually recovering. The only way to support this effort is for the government to try to keep mortgage rates low, which involves keeping the printing presses running. Again, this means the environment will continue to be inflationary.

Artificially suppressed rates for a prolonged period will only increase “real” inflationary pressures in most other dollar denominated assets; such as stocks, gold, silver and other commodities. So the first thing you need to do is to make sure your cash, savings and retirement investments are invested in assets that will appreciate with this increased inflationary pressure so that what you have today will increase in value along with the cost of living. As far as building a business during a weak sector cycle, such as providing mortgages or selling real estate during this slow sales periods, it is imperative to work twice as hard to build your business and make sure customer service and frequent customer contact is made so that when things do get better, you will be the first call they make when considering a real estate transaction. Your closing ratios will drop and your profit margins might be squeezed with new regulations in the industry (that seems bound and determined to make the mortgage broker and independent loan officer extinct) but keep the faith, keep moving forward and stay positive. In the end, maybe years from now, it will all be worthwhile.

Now, if you are an investor in real estate, this should be seen as the best years in history for you to accumulate wealth and generate extraordinary income.  Due to the supply in the market and weak demand, you will be acquiring income producing assets at incredibly low prices, financed with historically low rates. When things finally do turn positive, whenever and wherever that may be, prices will trend higher but financing costs will stay at that low fixed rate until the mortgage is completely paid off. Due to the value of being able to leverage your investments with most lenders allowing up to 10 investment properties to be financed, you can take $500,000 and turn that into over $2,500,000 in net equity, generating over $20,000 a month in cash flow within 15 years through an astute real estate investment strategy.

And you can do this is if real estate does not move up at all! If real estate is lower in 15 years from now, then you might have a little less than that but the free cash flow is still yours for life! Plus, in the 16th year, you will be 100 percent debt free if you finance these properties through a 15 year fixed rate mortgage instead of a 30 year fixed! What other asset class can do this for you? I call this the “Income for Life Strategy” and in my opinion, it is the easiest to understand and is extremely conservative relative to other fixed income investment alternatives.
 
A Quick & Simple Breakdown of the “Income for Life Strategy” is as follows:
Market Price of Rental Property
(Single Family Residence, 3 Bed, 2 Bath Min.)
<$250,000
Max List PricePurchase Price (Offer 20% below market price)  $200,000
Purchase Price Down Payment on Purchase (20% Down) $40,000
Cash Down 15 Yr. Fixed Rate Loan @ 3.93% APR to 5.25% APR
(Rates vary based on credit quality and O/O or NOO)
$1,164-1,276/month
Avg. Rent Rolls in Target Areas
(Riverside County, San Bernardino County, Orange County & San Diego County)
$1,800/month
Taxes, Insurance, Maintenance and Management Costs $430/month
Total Monthly Cost of Ownership $1,594-1,706/month
Monthly Free Cash Flow $206-294
Annual Free Cash Flow $2,472-1,128
Annual Return on Investment ($40,000 down payment) 6.18-2.82% ROI
Comparables for Yield Investors  
U.S. Treasury 10 Year Fixed Rate @ Par Value 3.625% Annual Yield
U.S. Treasury 30 Year Fixed Rate @ Par Value 4.75% Annual Yield
Municipal Bonds 15 Year Term @ Par Value 4.14% Annual Yield
Result of Investment Strategy in the 16th Year with the Assumption that Real Estate Values had NO CHANGE in value and 10 Properties were Purchased.
Loan Balance $0.00
Property Value $250,000 per property
# Properties 10
Total Capital Invested $400,000
Average Monthly Rents
(Inflation Adjusted of 1% per year)
$2,070 per property
Taxes, Insurance, Maintenance & Management Costs $430 / Month per property
Monthly Net Income $1,640 per property
Monthly Free Cash Flow (10 Properties) $16,400 Annual
Free Cash Flow $196,800 Annual Income
ROI Per Property
(Based on $40,00 initial down payment)
49.2% Annual Net ROI
Real Estate Portfolio Value $2,500,000 Total Value
Capital Appreciation $2,100,000 Profit
Annual Average Capital Gain 35% Avg. Annual Return
TOTAL ROI – Capital Gains 525% Total Capital Gain
Total Return (Income & Capital Gains) - 16th Year 84.2% Total Annual ROI
Estimate Lifetime Annual Income from R.E. Portfolio $196,800 Gross Income before Income Taxes

I wrote some articles back in 2006 calling for real estate to crash by 50 percent in California because I was disgusted at how high prices had gone and how impossible it was to invest in real estate and create any cash flow due to the bubble in prices. Now, you can find incredible double digit returns in real estate again, which was something I was eager to find a few short years ago. Needless to say, I am a buyer again and I am personally excited and thankful for this opportunity.Are you embracing these tough times, or are you struggling through them? You might need a checkup from the neck up!

In closing, if you are in the real estate and mortgage business, or are an investor in this market, this is your shining moment. If you take advantage of the inflationary pressures building in the economy before they start showing up in actual mortgage and lending rates, you will not only be extremely successful financially, but you will have made many people wealthy and can provide them with the tools that will allow them to retire with significant income and equity in property when they retire.

My business is all about creating wealth, income and above all else, financial wellness over the long term. What is more rewarding on a professional level than helping my clients create wealth and income so that they are free to enjoy life to its fullest today, as well as in retirement? All while creating a business and income stream for my clients and family? To me, that’s the epitome of Doing Well by Doing Good! And remember, “YOUR MONEY IS EVERYTHING: Earn It, Grow It, Protect It”. Don’t let anyone or anything get in between you and your goals!

Thomas Jandt is the author of a newly published book called “Your Money Is Everything” (www.yourmoneyiseverything.com). Mr. Jandt also owns and operates several companies in the real estate and financial services industries under the name i3 Financial (www.i3financial.com) To view Mr. Jandt’s complete BIO, go to www.i3financial.com and you can reach him at (866)635-3165.
“Mr. Jandt is a Registered Representative and Investment Advisor Representative with Newport Coast Securities, Inc., a Broker/Dealer, a Registered Investment Advisor and a member of FINRA/SIPC.”

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