“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” — Vladimir Lenin
Is inflation really improving?
You’ve probably seen the headlines:
Inflation for the month of June plummeted to 3%.
A year ago, it hovered around 9%, according to the official CPI.
However, the CPI isn’t always accurate.
In this blog we’re going to tackle a few questions:
What number is inflation at?
Is it getting better or worse?
How will inflation impact you and your investments?
There’s a lot to cover, so let’s jump into it!
1. What is Actual Inflation?
What is the actual inflation number?
This is a very important concept.
If you think inflation is super low and it’s actually high, you’ll make many investment mistakes.
Shadow Stats, which uses 1980 metrics, says inflation is around 12%.
Why is there that big of a difference between the officially reported 3% and the 12% reported by Shadow Stats?
It’s because the CPI is more like the CP-Lie.
The numbers don’t include things like food and energy.
It’ll substitute things.
For example, if the price of apples has doubled in the last year, the CPI assumes you’d switch to oranges because apples are too expensive.
Or maybe you’re in a two-bedroom apartment that’s $1,200 a month, but if rent goes up to $1,500, you might move to a cheaper one bedroom.
With this logic, there’d be no change in inflation.
They fudge the numbers.
Since 1980, they’ve officially changed the way they calculate things.
They just changed it again in January to make inflation look better than it really is.
This is in part due to having more currency.
The M2 money supply has increased about 40% over a two-year period from February 2020 to February 2022.
The amount of inflation we’ll get is affected by how much currency is in supply.
It’s also affected by government deficits.
When more money is spent, that debt creates new currency.
When the debt is paid down, the amount of currency is reduced.
There are different ways to measure how much US currency there is.
One example I can think of is my recent experience at a local fair.
They had all kinds of food trucks and vendors.
I was expecting to spend around $10 to $15 for food, but everything was $20 to $30!
This was basic food: burritos, Chinese, hamburgers.
The cost of food was much higher than I was expecting.
In my area, things have doubled in the last two to three years.
That’s a sign we’re having substantial inflation.
2. Why the Government Wants to Fool You
Why does the government want to fool you?
They want you to think inflation is low so you’ll spend money and vote for them.
If inflation gets down to 2%, they’ll say we can lower rates again.
Those lower rates lower the cost of big government debt.
There’s also a big political agenda to make you think things are better than they really are so you’ll feel comfortable spending.
They want to make you feel like economic conditions are better than they really are.
Doesn’t that feel sneaky?
Why would somebody do that?
But it continues happening!
Let’s look at government spending over the next 10 years.
We’re expecting a $2 trillion deficit every single year for the next 10 years.
Realistically, it’ll be higher than that because they’ll find other things to spend money on.
There’ll surely be new issues that come up over the next 10 years.
Inflation will grow the currency supply and continue growing.
3. What Impact Does This Have On Your Investments?
What impact does inflation have if you’re an investor?
In real estate, rates are currently much higher than 18 months ago.
I know people who have mortgages at 2.25% for 30 years.
Now we’re seeing those same mortgages go for around 7% or higher.
That’s a huge jump!
When rates go higher, the cost of money and borrowing go up with them.
If interest rates were 0%, the cost of real estate would be sky high!
People could buy whatever they want.
There would be 0% on everything.
As interest costs increase, valuations come down.
A couple of months ago I saw real estate valuations across the country and they were down 18% in single family.
We’re seeing this in a multifamily as well.
Real estate is a challenging space right now.
There was a time in multifamily between 2014 and 2021 where everything was working.
You could do a lot of things wrong and still succeed.
Now, you have to operate things almost meticulously.
We’re also seeing more risk in multifamily.
This all leads us to interest rate risk.
There are investments that have interest rate risk.
If you have a property you have to sell, you will need to refinance.
When you sell a refinance, what does that look like?
If somebody can’t buy your property except at a very high rate, that means the valuation will squeeze all the profit out of it.
We try to avoid that by doing value-add deals.
We do this mostly with renovations that increase the price of rents.
You can also do fixed-rate debt.
But even with those strategies, there are still issues with interest rate risk.
To offset that, we’ve shifted to investments outside of real estate.
We’ve done deals with ATM machines, oil and gas, and car washes.
Having a diverse portfolio allows you to not be enslaved to interest rate risk.
To sum it all up: Inflation is here to stay.
The number is also higher than what they’re saying.
Just look at your costs.
It’s important to have a plan and take advantage of this situation.
Now I want to hear from you!
How are your investments reacting to inflation?
Let us know in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.