Are we headed for inflation or deflation?

The following guest post is by REALTORS(R) Signature Series Speaker Rob Nahigian, FRICS, SIOR, CRE.

As we focus on the third quarter of 2011, we are faced each day with investment decisions based on projections. Where is the economy headed for the remainder of 2011 or for the next 5 years? Are we headed into inflation or deflation? Are interest rates going to rise or fall?

I recently posed similar types of questions to members of the Charleston Trident Association of REALTORS® during their Commercial Education Program – with opinions differing across the room.  After mixed responses from the audience, I offered my thoughts, along with those of well-respected industry experts.   I let them know that I am in the midst of reading “The Age of Deleveraging” by Dr. Gary Shilling. Shilling’s outlook on inflation is quite bearish.  Shilling feels that the U.S. consumer, after 30 years of spending, is now ready to pay off the bills and “stash the cash.” He also feels that Governments cannot afford to spend more money either.

Commercial real estate professionals must think like economists because investors do!  I believe that in the very near future it is becoming evident that we will see immediate inflation. These 5 listed issues below will help influence your answer this summer.

  1. The market’s reaction after the end of QE 2 on June 30th. The M2 Money Supply is already starting to shrink. Will interest rates increase dramatically, slowly or nominally?
  2. The proposed Risk Retention Rules would require that CMBS issuers hold at least 5% of the credit risk of any loan as part of the pool. Lenders could curtail financing or dramatically increase interest rates.
  3. Trillions of dollars of CMBS financing is coming due and KC Conway, CRE has stated that the CMBS debt will break the dam during 2011 with new defaults (and foreclosures?). Will this cause deflation of real estate pricing?
  4. The Federal Debt Ceiling: will the Feds vote to increase it? If not, interest rates will skyrocket.
  5. Greece and its debt and the impact on the German bondholders. Can Greece really pay off these loans?  I am suspicious.

Bob Rodriguez, the successful fund manager of FPA Capital Stock was interviewed in the June, 2011 Money Magazine article. In early 2007 he felt that the housing debt would be a crisis and he had worried then about the federal debt. He took a sabbatical in 2010 and now observes “I would say a lot of nothing has changed. Investors are still chasing after high yields and loading up on risky investments. Very little has been learned. At best, we’re facing a substandard recovery.”

We cannot spend our way out of this mess without some repercussions years down the road. We need economic encouragement that investing in real estate and other assets will not result in penalties as well. The long-term capital gain tax rate will expire in 2 years and I anticipate a flurry of activity. But I would be fooling myself in not admitting that this recovery will be slow and will need 4 more years to recover. But the question, are we headed into inflation or deflation? We may need the summer to see how matters settle out.

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  • Fred Schneider

    July 14, 2011

    How sad that this county has fallen so deeply in debt all due do greed, power, socialistic thinking, and ignorance. We elected all these turkeys to run our county and now we are paying a heavy price and could mean a whole new way of life in the future if we don’t wake up. Spending billions to get turkeys elected who have no clue or experience is flabbergasting to me, to say the least. We need to run our country like a well oiled corporation and put people in office who can get the job done. We have to cut all this ridiculous spending and quit offering all our services for free:( Like Donald Trump said- the whole world is laughing at us and taking all our money and help to fight their own wars and what do we get in return??? God help us to see the light and get people back on track helping one another to help us all as a nation to become strong again and back to principles that made us great in the first place.

  • Dawn Shevlin

    July 15, 2011

    Finally someone in this industry is talking truth and sense! The fact is: If Obama gets reelected we will no longer have our country as we’ve known it never mind a housing market! We are headed for Hyperinflation without a doubt. WHEN they stupidly raise the debt ceiling limit, by 2.5 trillion, Obama & Ben Bernanke will pump out those trillions as stimulus #5 or QE3. What is the sense of cutting 1.7 trillion, over 10 years, if in one year he is going to spend another 2.5 trillion! I can not believe no one is able to stop this reckless behavior. To do the same thing over and over again and expect a different result is the definition of insanity. Someone needs to pull them both out with white jackets and throw away the keys forever! These are mad men. Plan on hyperinflation. You don’t have to wait and see anymore, it is already happening. Food and energy, the two things Americans need most are inflating quite well right now. FIAT money results in hyperinflation and currency collapse. It is history. Look it up. God Help us and Good luck to all!

  • Terri Simpson

    July 24, 2011

    The only way any of this will change is when people in general stop looking to Goverment to help them we voted these clowns in for years now it has gotton to the point of no return. I say be careful for the laws you ask for because you will get them and they never do anything in moderation.Regulation are coming and I am sure it will be horrible for all business so if people want this to stop then call your congressmen and women and local and make them aware that you are watching them and we cannot have a Socialist in office if you want business to grow. We has a people do have the power in numbers if we would all take the time to do the frustrating work they do listen


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