Stagflation?

 From what I read and listen to on Podcasts, You Tube and the like; there is a majority of opinion of a CRASH.  A CRASH is expected, it is not a Black Swan.  What makes a Black Swan is the unexpected happens.  In the case of a Crash not occurring but a revival and continued economic growth, that unexpected is called a White Swan.  A good event that is prosperous.  Instead of a Crash we have a continued upward movement in the economy.  The Silver lining that is not being considered is the expansion is wages or earnings.  The increase in earnings can offset the inflationary pressures.  Higher oil prices do not necessarily mean it will affect all.  Cars are more economical,  more cars are EV or a combination thereof than in the past.  People have public transportation and car pools.  All are coming back to work in offices and the cities as the Pandemic is gone and the variants are more a severe cold.  

The commodity prices of Wheat, Corn, Soybeans and meat products which are created from the grains will go up.  With the increase in prices farmers and drilling companies will created more supply.  While the pressures will be near term the adjustment process is a potential political disaster for the Democrats in November  The talk of "green" will soon go on the back burner as the need for natural gas and oil take over to offset the Russian embargo on oil and the Ukraine situations.  The embargoes will stay!  When Putin goes things will change but up until then we live in the present world.

The Balance of payments will turn to a positive as America sells more oil and natural gas to the world.  America buys its oil from Canada and that makes the Trans-Canada pipeline a must.  Sell our oil and buy cheaper Canadian Oil is a great Arbitrage.  Canadian Oil is a heavier oil and our refiners are heavy oil refineries.  The new Frack Oil is a lighter oil and better to sell than convert our refineries.  That means a stronger dollar.

Basic Industries will be in revival.  Basic Industries as a group have lagged in the past Bull Market in stocks.  The stock portfolio asset mix will change and the FAANG stocks will change in dominance.  That then brings up a question for Silicon Valley.  Silicon Valley has grown on the growth stocks and FAANG stock dominance.  Will we see prices weaken or stabilize?  That will need to be answered in the Baby Boomers and their willingness to sell.  They are getting into their 70's and age does have its issues.  The wealth of most of them is in their homes.  When they need medical help or must need 24/7 care the funds must come from savings and or the sale of their homes.  I will venture to say we will see more inventory as rates increase and Silicon Valley slows down.

The Federal Reserve (FED) raised interest rates for the first time since 2018 by 1/4%, not the 1/2% as expected.  FED chairman Powell said 7 more to come.  10-year Treasury bonds are at 2.1%+.  Mortgage rates are at 4%+.  The increase of seven 1/4% rate increases will take the 10-year to 4% and mortgage rates to 6%.  Will that stop buyers?  Now that, to me, puts to question the increase in wages argument.  Wages increase earnings decrease is simple business accounting.  Earnings decrease, stock prices decrease, less stock buy backs and less dividend increases.  That seems more recessionary.  It is highly improbable to me, that wages will increase equally or more than inflationary increases.  That then puts pressure on buyer affordability and prices to become competitive.  In the area of consumer products there is always technological advances to create savings.  A house is built as it stands, the only give up is in price to the buyer.

The answer to the economic direction of our country will come in November when the House and Senate elections occur.  A shift to GOP will tell Mr Biden his days are limited.  Will Biden become more forceful with Putin?  That will also tell us more about the physiological being of Americans and Silicon Valley.  If this war gets nasty.  The outlook for higher rates and recession may be out of the question.  I do not think Putin will back down.  He is too much a KGB Colonel in mind set to Back Down.  I am reminded of a Colonel who taught Military History in college.  "Offer a Russian a finger nail, they will take your arm".  Putin got his finger nail in Crimea, Syria, and now it is time for the arm.  Will Mr. Biden be up to the challenge of WWIII?  I doubt Putin is insane, but the threat of nuclear is always a tough bluff to call.  If it happens he losses everything. Is he mentally disturbed; if so, a bullet will solve that.  His loyal backers do not want to loose everything and go back to the Soviet Days.

Locally we are in a market of transition.  The older 50's houses are either updated or demolished and new up-to-date homes replace them. Therein lies a fallacy of the increase in home prices.  Homes are bought a year ago and fixed and flipped by Professionals.  The increase is not an increase in appreciation, but a manufactured increase.  I cannot speak for the rest of the country, but from my experience locally.  How long will this continue?  It will continue until buyers stop buying based on economics.  The economics have not changed to date.  So, if you are a buyer, buy now. If you are considering selling do the same as where ever you go prices will increase, accordingly.

Comments of Gary McKae not eXp Realty of California