A Suggestion Regarding Interest Rates & Inflation

I was parking my car this morning in central mid-town Manhattan.  On impulse, I asked how much it costs monthly.  The guy told me it is $1000 a month. 
 
Well, it is mid-town NYC, so what’s the big deal?
 
Maybe not much, but I remember that a year ago, it was $465.  Yikes, it is up over 100%, and the guy told me that the lot is completely full. 
 
And this is in mid-town NYC, where rumor has it the worst office crunch debacle in history is unfolding.
 
This is just an anecdote, but like everyone else, I am thinking about inflation and interest rates and their impact on the real industry.  Here are my thoughts: 
 
To state something up front, I am NOT predicting interest rates or inflation here.  I like to think I am pretty smart – but only smart enough to know I have no more insight into that than anyone else.  I mean, even that genius guy Nicholas Taleb got his head handed to him when he predicted that interest rates were going to rise in 2010, and boy did he get that wrong.
 
My thinking here is, therefore, not a prediction, but instead a suggestion of how to handle the current situation if you are in the real estate industry. 
 
Here goes…..
 
In April 2021, I wrote the article, What if Inflation Goes Crazy?
 
This might make me the most prescient of prognosticators; however, I like to be accurate in evaluating my predictive performance and disclose that in that article, I specifically said I am not ‘predicting.’  Instead, my point was that it made sense to be prepared if inflation did, in fact, go crazy.
 
Let’s go back to how we got where we are.
 
Around 2009 during the GFC (i.e., the Global Financial Crisis), I recall that there was an incredible amount of debt around, and the world really should have ended financially, but somehow our government bought into that debt one way or another, and everything recovered eventually, and it was …..okay? 
 
Other countries did that too, and it was….okay?
 
I was thinking at the time – and still think – boy is that strange.  That we just convert private debt to public debt, and it is….okay?
 
And then I was thinking that as long as our country doesn’t do this kind of thing more than other countries are doing it, then it will be…..okay?
 
Then the deficit kept growing – I think about $30T now.  That is “Trillion.”  I am old enough to remember when a “Billion” was a lot of money.
 
Some economists even said things like deficits don’t matter.  It was – is – called Modern Monetary Theory.  If you don’t believe me.  Google it. 
 
And I still wondered…is this really…..okay? 
 
My disquiet grew – like I bet a lot of peoples’ – so I kept wondering, is all this….okay? 
 
But finally, the gig was up.  The years of profligate spending by our government had let the evil (inflation) genie out of the bag, and the Devil was among us. 
 
Then thank God – the Fed was coming to the rescue, and it would be okay very soon.
 
And it would be so easy to solve the problems.  Inflation hits 8%, and we raise interest rates to (about) 5%, and it is over!
 
Indeed, the venerable Goldman Sachs said so only a couple of weeks ago:   
 
As an aside, I recall Goldman Sachs saying – when oil prices hit $129 in 2008 that soon the prices would be over $200.  The next year the price of oil fell to under $40.
 
But still, no worries, right?  The Fed has rescued us….and it will be okay very soon…
 
This seems too easy to me.  Just too easy and makes me queasy (a rhyme)…
 
Okay, now what?
 
This is how I would think things through…..
 
You have to start from the assumption you cannot predict what will happen.
 
That means interest rates and inflation will either go up, stay the same, or go down – obviously.
 
Applying that to your real estate business, it would seem that the one thing you cannot do is put yourself in a position where any one of these outcomes would put you out of business.  This seems obvious, too – that if you lose everything, you are out of the game.  And that has to be something you just can’t do.  Note – as an aside, this does not apply if you have very little or are very young.  In those situations, making a prediction and hoping you are right might have a solid risk/reward profile, but for the rest of us, this is not an acceptable outcome.
 
Next, I would guess that if interest rates fall, you will probably be just fine, and if interest rates stay where they are, you will maybe struggle but at least not have a lose-everything outcome.
 
However, if interest rates spike – a lot – more, then a lose-everything outcome might apply to many parties.
 
So now – to conclude – I would suggest that you assume (but not predict) that interest rates have just begun to spike and will end up spiking a lot higher, and plan for that outcome.
 
If you make this assumption and act accordingly, you may have just saved your economic life.  If you make this assumption and you are wrong, it might hurt you a bit from the lost upside.
 
To end, as I said upfront, this is NOT a prediction.  However, this is a logical way to play the hands we are all being dealt.
 
Best regards to everyone in real estate.

Bruce Stachenfeld aka The Real Estate Philosopher™

PS:      If you think I am wrong here, I would love to hear why.  Please let me know!