You couldn’t turn on a T.V. Tuesday without hearing somebody yap about inflation.
But I suppose it at least gave CNBC something to talk about instead of the usual leaping from headline to headline.
I mean, they still did that too…You can’t run a publicly traded media company dependent on advertising sales and pass up an opportunity to talk about super important economic events. Things like ransomware hacks, Elon Musk, or allow noted China non-expert Cathie Wood to opine on the Chinese stock market.
But you’d think for a moment that if that’s going to drive the entire day’s content, someone on that network would have at least read the damned report, right?
Yes, it’s the highest CPI number since 2008 — literally right before the global financial crisis — and in its next revision, it may even be higher.
And yes, if that’s the case, then that would be the highest CPI level since 1990 — over three decades ago!
And yes, headline makers, prices for used cars, gasoline and food have all risen to incredible heights from incredible depths.
The used car supply chain has functioned terribly, essentially resulting in a shortage, energy prices are at their highest level since 2014, and food has… well just look at that red line for food!
Almost like our money doesn’t buy as much food as it once did, right?
Yes, those things all deserve headlines — especially food.
But if you read the data, you’d already know that things like used cars, airfare and car rentals only make up about 3-5% of the CPI basket of goods.
And if you read Venture Society, then you know that a much bigger component of the Index — in fact the largest part — is shelter… because I wrote an entire article about it a month and a half ago.
In fact, shelter comprises around one-third of the overall index.
That means when it goes up, CPI really goes up.
Right now, the year-on-year change in shelter is coming in at 2.3% versus the multi-year, pandemic-driven lows of just 1.2%.
Source: Seawolf Research
That’s low on an absolute level, but the slope of that line remains concerning to me.
In general, a change in housing prices leads to a change in the underlying rents.
And when I chart that out using the Case-Schiller Housing Price Index versus the actual CPI Shelter numbers, the data bear that relationship out.
Source: Seawolf Research
It takes a good long while for housing to work its way into CPI Shelter data — sometimes a couple of years.
And there’s obviously a good reason for that… We tend to sign one-year leases.
But last year, looming evictions and pandemic skittishness caused a secondary epidemic of urban flight that we wrote about back in September.
The moratorium on evictions managed to put a tourniquet on that wound.
But the reverse is literally happening as we speak as eviction moratoriums end and workers increasingly get called back into the office.
In the same way there’s no efficient way to put the blood directly back into that tourniquet-requiring wound in the previous analogy, there’s no pending legislation or executive order that can prevent rents from continuing to rise.
And that means there’s inflation left to come… It’s just not the inflation that you’ve gotten used to over the past year.
The Case-Schiller Housing Index will come back down to Earth eventually.
There’s a huge difference in demographics between older, richer homeowners and younger, poorer renters.
And if real estate inventories are low, prices are incredibly high, and interest rates aren’t as attractive as a year ago, the pool of potential buyers will slowly but surely retreat from the market and begin to dwindle.
Of course, that’s going to happen at the same time evictions kick in. Underwater rental unit owners will finally be freed from the eviction moratorium and put their properties up for sale, and the homebuilders will finally get their lumber orders and finish that glut of new construction.
And THAT is when housing prices will start to roll back.
But remember, there’s a huge lag between a decline in housing prices and a decline in rents. As the chart above showed, that can take anywhere between 1-3 years.
And those new property owners won’t exactly be inclined to lower it either!
THAT is why inflation won’t be as “transitory” as our old friends at the Federal Reserve think it’s going to be.
No, inflation is going to be as sticky as a Jolly Rancher some kid left on a park bench in 100-degree heat.
As we’ve said a gazillion times before, though, the way to beat inflation is to own all the things that are inflating.
And if that’s rent, there are two rental-focused real estate investment trusts (REITs) I like.
The first is Centerspace (NYSE: CSR), which focuses on multi-family apartments in the Midwest, and the second is American Homes 4 Rent (NYSE: AHM), which focuses on single family homes in Atlanta, Dallas and Charlotte.
All those markets are poised to show enormous population growth post-pandemic. And if my model is right, maximizing exposure to companies that control asset-based cash flow in those markets are going to fare extremely well.
They were both down with the broader market in trading Tuesday, so feel free to pick up a quarter share of each on sale tomorrow.
All the best,