Money Growth and Inflation
Infusion of money in the U.S. economy by the Federal Reserve (money growth), has subsequently caused inflation in coming years. This trend goes back all the way to World War II but has been closely monitored and analyzed since the 1960s. Money growth in 2020-21 increased from 7.9% to 25.6%. Commodity prices have gone up by 17.3% in just 1 year. Consumer Price Index (CPI) increased by 3.8% from pre-covid levels, and a staggering 3-month move upwards to 8.2% in May 2021. The real trade-weighted value of the U.S.Dollar depreciated by 9% in 1 year.
Forecast: Inflation to rise from 3.1% to 5.3% by 2023.
The stock market in the last year has given investors great returns, and it would not have been prudent to bet against U.S.Equities. However, with the rise in inflation, that is about to change. It is now time to get out from U.S. Equities and diversify into real estate, commodities, currencies, bonds, emerging market equities. Consider it as an insurance policy against inflation.
Forecast: U.S. Equities to go lower. Diversify into other asset classes as a hedge against inflation.
Interest Rates and Home Prices
Home prices all over the U.S. have gone up considerably and they continue to rise due to low interest rates and very low inventory of existing and new homes. Now, a home on average sells in 20 days compared to 80 days earlier. Also, historically home prices appreciate at about 2.6x the inflation rate and the current increase in home prices are way above that level, and in a housing bubble territory. It is especially true, here in Orange County and Southern California. As interest rates start creeping up due to inflationary pressures, home prices are expected to drop in the coming years.
Forecast: 30-Yr mortgage rates to increase from an average 2.9% to 4.7% by 2023. Home prices in Southern California are expected to drop by 10-15% by 2023.
People moving within U.S. from one state to another is termed as domestic migration. States like New York and California are amongst the worst hit states in the trend of outbound domestic migration. In 2011 California had a positive net migration of 350,000. Compared to that, in 2020 it only had a positive net migration of 15,000 people.
Forecast: Outbound domestic migration trend from California to continue in the coming years.
Reference: Chapman University’s 2021 Economic Forecast Update on June 16, 2021
We think that inflation is about when and not if. It is time to take some profits out of U.S. Equities and diversify into other asset classes that benefit from inflation. Our asset class of choice is income producing U.S. commercial real estate.
We gathered data on domestic migration and analyzed factors like climate, job growth, quality of life, transportation, regulatory policy, tax rates, personal freedom; gave them individual weightage, and plugged those numbers into our formula to come up with the best overall states. The states that we think would benefit from the positive domestic migration trend, and where we would invest, are:
- North Carolina
- South Carolina
We call them “OMG FANTASTIC” states… 😊