I write this on the “Ides of March” one day before the Federal Reserve meets to discuss the economy and its plans for the near future.
The 900-pound gorilla in the room is inflation although the war in Ukraine may be a mitigating factor for the impending hawkish moves anticipated.
By the time this post is published and podcast recorded, you’ll already know what happened at that meeting. Let me guess…an increase in the discount rate by 25 basis points?
Well, that’s what has baked into the markets and what will dictate any further market movements is discussion of further rate hikes and disposition of the Fed’s bond portfolio.
Ok, so now what do you do? Should you panic and stop investing? Well, that’s the knee-jerk response right? But remember, why are rates going up in the first place? Yes…inflation.
And what happens to the money in your bank account during inflation? It loses value. So, keeping yourself in cash right now is pretty much a guaranteed way to lose money. In order for you to break even, you have to be keeping up with inflation at least!
What am I doing? I’m still investing my money in assets hedged for inflation. The good news is that I don’t have to change my investment strategy at all because multifamily real estate is a great hedge against inflation.
“But Buck”, you ask, “won’t cap rates go up with interest rates?” Typically that’s true although it’s not necessarily a linear relationship. Furthermore, ask yourself once again why mortgage rates would go up? Yes…inflation. And yes…inflation means increasing rents as well. In other words, increasing rates is hedged by increasing rents.
Now to be clear, I’m not saying we have nothing to worry about. There is a Chinese curse that says, “May you live in interesting times.” Like it or not, we live in interesting times with plenty of danger and uncertainty. All we can do is be rational and disciplined with how we allocate our money.
How we allocate money may not be the same for everyone in the world right now either. If I was in Russia I’d try to buy as much bitcoin as possible to get out of the Ruble in a hurry. But in the US, the more reliable hedge might still be good old-fashioned multifamily real estate.
It’s a complicated topic and worth discussing further with experts on investing trends and that is exactly what we will do on this week’s Wealth Formula Podcast with my guest David Sacco!
P.S. DO NOT miss our upcoming meetup in Phoenix. Mark April 22nd and 23rd on your calendar and CLICK HERE to register ASAP. Only a few spots remain!
David Sacco is a Practitioner in Residence in the Finance program and serves as a full-time instructor in the Finance, Economics, Management and Entrepreneurship programs. Mr. Sacco joined the Pompea College of Business faculty in 2018. He holds both a BS and an MBA, in finance, from New York University.
Mr. Sacco spent 25 years in the institutional fixed income business. He began his career at The Chase Manhattan Bank in interest rate swaps in 1985 and moved to UBS in 1986. Before leaving UBS in 2009, he traded a variety of fixed income products and derivatives and rose to the level of Managing Director and global head of Rates. He was also a member of the UBS Investment Bank Board.
In addition to teaching, Mr. Sacco is involved in several extracurricular organizations at the Pompea College of Business including the Investment Club and Liberty Initiative. Mr. Sacco also has an active consulting business for and invests in start-ups and small businesses.
- What are the Fed’s best options to combat inflation right now?
- Is it possible to eliminate inflation without triggering a recession?
- How can inflation affect the commercial real estate market