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December 1, 2010
Quarterly Review
Watch Out for the Inflation Groundhog
Watch out for the inflation groundhog to show its ugly head. We are being told from the powers
at be not to fret about inflation because deflation is the real concern. According to the Fed, the
economy is teetering on the brink of deflation, and needs a jumpstart. The Consumer Price Index
is showing dangerously low levels of inflation, though they are not highlighting the dramatic in-
Nicholas French
crease to commodity prices. My concern, inflation is a nasty beast that can get out of control
Broker Associate, CRS very quickly when confidence
369 S. San Antonio Road increases and there is too much
Los Altos, CA 94022
new money (thanks again to the
Fed for the 600 billion of unnec-
650 773 8000 (cell)
essary fresh dollars). Inflation
650 947 2999 (office) data is at the lowest point since
650 947 3099 (fax) 1957, according to the CPI, re-
nick@realtornickfrench.com moving food and energy prices.
My concern is that I am seeing
www.realtornickfrench.com
commodity inflation (raw materi-
als such as cotton, wheat, oil,
etc.) that companies are not pass-
Inside this issue:
ing to the consumers yet; rather they are taking lower profits or offsetting the increased raw
costs through their internal cost cutting measures such as streamlining processes and headcount.
Watch Out for the 1
Inflation Groundhog Corporate profits are up on many industries (especially services and technology), but retailers are
starting to show signs of slower growth (Wal-Mart, etc). Profits have been up with cost cutting
If At First You Don’t 2
Succeed, Print Another
measures (labor, higher efficiencies – which is part of a market correction to cut the fat). Compa-
600 Billion nies that create goods with many raw materials are showing profits, but it is difficult to grow far-
If At First You Don’t 3 ther because of the dramatic increase in raw material prices: cotton, wheat, oil, etc. Corporate
Succeed, Print Another profits are up in many cases, but
600 Billion (cont)
they are not spending their cash
New Law Regarding 4 being cautious about the rebound
Short Sale Transactions
knowing their profits have been
Updated Neighborhood 4 driven by cost cutting, not end prod-
Statistics
uct sales profit. At some point these
companies will pass the increased
costs to the consumer. They are
also sitting on a ton of cash because
of low corporate confidence waiting
to see less uncertainty in the mar-
ket. Be prepared for the rise in everyday costs, wait, you’re probably already seeing that, but it
should get worse. If you have a moment visit my website (www.realtornickfrench.com) for a
great video that discusses these concerns in a very easy to follow, and comical way.
Quarterly Review
Page 2
Another argument by the Feb for the additional billions was to keep interest rates low to entice corporations to take advan-
tage of the cheap money and invest back into the market. The reality is that corporations are taking advantage of low rates,
refinancing existing debt and holding the cash while waiting for corporate confidence to increase – thank you Uncle Sam! They
are not spending on hiring, capital improvements or other immediate investments. Corporations recognize cash is king and
they are making strategic decisions whether to acquire competing companies or new product lines or research and develop-
ment. Once corporations see clarity in the market they will be aggressive about investing, so is the new printed money helping
the situation or setting up the US economy for some significant inflation once we get rolling – I’m going to bet on the latter.
But for consumers guess what a great hedge for inflation
is? (I will discuss this later). The Fed also says consumers
will take advantage of the low interest rates to refinance
their mortgages and new buyers will surge into the market.
Interest rates were at record lows before the Fed released
600 billion of fresh money, so they are counting on this
new release keeping rates low for some time. So what was
the reason for this new easing again? It’s ironic that the
corporations are refinancing into lower interest rates, but
the average homeowner that has a high mortgage rate is
unable to refinance to the market rate. Doing so would
save thousands of homeowners from going into default.
The media and government are making claims that borrowers should refinance into lower debt as if it were simple – appar-
ently the banks did not get the memo. According to Freddie Mac, at least half of mortgage holders still pay 5% or higher in
interest. I’m experiencing families selling their homes in distress that want to stay but unfortunately have high interest rates
that they cannot refinance because the equity is not there, but they make ample income to justify the expenses at the market
rate. Because of this scenario we are seeing those families sell the property, the bank and homeowner take the loss then the
property is resold to a new buyer that gets the low interest rate and has a great house that is affordable. The previous owner
typically goes into a rental with hopes of saving cash to buy again in the future. (cont page 3)
Volume 5, Issue 4
Page 3
I asked the question earlier about hedging inflation for consumers – answer: real estate debt. In an inflationary market fixed
interest rate debt is your best friend. Imagine having future debt locked at 4.5% and banks are paying you 4% in your savings
account. That sounds like a great scenario to me. Furthermore, you will be paying down the future debt on cheaper money;
your million dollar loan after inflation will be significantly less if adjusted to today’s dollars. Let’s hope it is not so bad that we
are pushing wheel barrows of money to the corner store to buy bread and milk. Should everyone go out and buy real estate
tomorrow? No. Another funny state-
ment I hear especially from Realtors is
commenting on how they “should have
bought that house when it was low”,
but the reality is during the low markets
a few variables are typically true: 1)
money is tighter so you can’t afford it,
2) you may be scared just like your
neighbor and not willing to take the risk,
3) the extra effort and hoops you have
to jump through to make it happen may
be too frustrating to you. I think it is a
great opportunity for those ready and
willing to take the leap. Patience is a
virtue: the market isn’t jumping up dou-
ble digits tomorrow, so look and make
the right decision because realistically
you won’t be moving until the market
does rebound and you see some size-
able appreciation.
Please don’t forget if you are buying your home that is exactly what it is, a home, not an investment. Many people in the last
run forgot that their home was a home, a safe location, not an ATM machine or investment to refinance and go on vacation.
Buy a home to live in and if you have extra income look at investment opportunities.
Page 4 Nicholas French, Broker Associate, CRS