Goofy posts,
I would go long ultra luxury (the rich won’t be affected) and short middle class (who always take it in the hindquarters), I would go long stable houses like Berkshire and short Saul’s and similar.
I agree on the Berkshire. Worked well the last time everything “hit the fan”.
intercst
I disagree that is betting on macro econ instead of investing based on fundamentals. Always a mistake. Macro econ does not determine any actual success for a corporation.
What about Smithfield? It’s the largest pork producer in the US.
Capitol Hill is!
The Captain
PSU et al.,
The “Farmer” has been converted to a baby sitter for many of the pork, poultry and beef value chain participants.
The actual live stock is owned by the corporation. The facilities are owned by the babysitter. The feed, vaccine, and vitamins are provided. Electricity, water and waste production is owned by the babysitter.
This dynamic provides fixed rent for the low margin end of the business (still quite profitable at volume - think 15,000 to 20,000 head of hogs per 8 week cycle), while giving quite a bit of price optionality to the high margin part of the business.
Notably, disease, force majeure and supply shocks are still owned by the corporation.
In these corporate systems, the “farmer” traded all of that pricing power for consistent, reliable income at a terminally lower rate.
<-speaking from direct, first hand experience.
“How long will inflation last?”
Two answers:
Forever
It ended permanently when the industrial revolution began
In the sense that we’ve never seen persistent deflation. BUT, this is mostly because we change the definition of “package of goods and services” all the time as the world changes.
-and-
In the sense that the price of more and more complex things in our lives constantly go down as time passes. For example, 38 years ago the price of a 10MHz computer was $5000 and today is under 50 cents.
PSU et al.,
The “Farmer” has been converted to a baby sitter for many of the pork, poultry and beef value chain participants.
The actual live stock is owned by the corporation. The facilities are owned by the babysitter. The feed, vaccine, and vitamins are provided. Electricity, water and waste production is owned by the babysitter.
This dynamic provides fixed rent for the low margin end of the business (still quite profitable at volume - think 15,000 to 20,000 head of hogs per 8 week cycle), while giving quite a bit of price optionality to the high margin part of the business.
Notably, disease, force majeure and supply shocks are still owned by the corporation.
In these corporate systems, the “farmer” traded all of that pricing power for consistent, reliable income at a terminally lower rate.
<-speaking from direct, first hand experience.
I know quite a bit about the industry.
PSU
also has direct, first hand experience
Your argument is a good one but I have reached the stage in life where I also value simplicity.
An LBYM lifestyle combined with more stocks than I need combined with more cash than I need combined with no mortgages, combined with a paid-off home combined with no investment real estate that requires me to find good deals, fix them up and repair and maintain them, all give me the freedom to do what I want to do with my spare time.
If I took out a mortgage on my house even at 2% (which is no longer available anyway), I would have to do something with the extra cash that I no longer need - either buy additioanal stocks that I don’t need or search for yield with extra cash that I don’t need.
So perhaps I should not have called it an inflation hedge so much as another safety net. Even if my stocks lost 90% of their value and stayed there for 10 years I would still have a paid-for home, an oversized cash position, and the freedom to buy stocks at a much reduced price - or not.
Your argument is a good one but I have reached the stage in life where I also value simplicity.
I find a mortgage simplifies things. One constant monthly payment directly debited from checking to the mortgage co, who also pays our taxes and insurance without our lifting a finger. We have no mortgage on our vacation home, (wasn’t available,) and almost missed paying the annual taxes when the post office failed to deliver the tax bill last year. Happily I realized we had not yet paid the taxes, (while qualifying for another mortgage,) and we got a payment in on the day before which we would have been assessed a penalty.
…with no investment real estate that requires me to find good deals, fix them up and repair and maintain them, all give me the freedom to do what I want to do with my spare time.
Sure, real estate investing isn’t for everyone…not even for me at this point…but I loved the hunt, and am frankly wrestling with jettisoning that part of my life, but that has nothing to do with inflation. Was not required, just as having a paid off primary is very much not required to LBYM and have simplicity in one’s life. A low rate 30 year FRM is much more anti-inflationary than a paid off house. You pay back a loan with inflated dollars that can buy less over time, increasing the value of the house that is increasing in value with inflation.
A paid off home is very much an emotional component that many seek, but it is in no way an inflation hedge, unless you are at risk of losing the home. Many reasons to prefer not to have a mortgage, and I make no judgement on that. I only judge it’s use on fighting inflation.
IP
PSU asks,
<<For those who worry about “the price of bacon”, we’re seeing record Executive Compensation in the four companies that control the meat packing industry (i.e., Tyson, Cargill, JBS, and National Beef) and the delta between what a farmer gets for a hog and what the meat sells for in a shrink-wrapped package has never been greater.>>
What about Smithfield? It’s the largest pork producer in the US.
Smithfield was bought by China in 2013 and is now a private company. So who knows what’s happening to Executive Compensation there. No doubt Smithfield coordinates with the other four on pricing and other anticompetitive activities.
intercst
I appreciate your WAG, but confused as to why a paid-off home controls inflation more than a 30 year FRM? My 2% FR mortgage with 28 years left on it makes for a great inflation hedge, with it being probable that we can make more on the cash we could have used to pay off the mortgage rather than refinance it, even if that cash resides in a money market account.
In fact, it is just the opposite. A paid off home has a higher inflation rate than a home with a 30 year FRM. I’ll explain.
Case I - Paid off home - taxes are $5000, maintenance is $3500, total is 8500. Inflation years begin, taxes go up 12%, maintenance goes up 9%, next year, you ate paying $5350, and $3920, a total of $9270. Housing inflation for this person is about 9% that year.
Case II - Home with 30 yr FRM - taxes are $5000, maintenance is $3500, mortgage is $10,800 ($200k at 3.5%), total is 19,300. Inflation years hit, taxes go up to $5350, maintenance goes up to $3920, mortgage is $10,800, total is $20,070. Housing inflation for this person is about 4% that year.
(this is a little tongue in cheek, since the net increase is obviously the same)
When I bought my current home 10 years ago at the tail end Great Real Estate Bust in 2012 I paid cash for it. I happened to have sufficient funds sitting in a money market fund at 2% interest to cover the purchase, and it didn’t make much sense to take out a 3% mortgage if I had the cash sitting there.
And why did I have sufficient funds sitting in a money market fund to buy a home? Because I had slavishly used a “rent vs. buy” calculation to inform my real estate decisions over the previous three decades. That kept the money most people have tied up in a home invested at a much higher return in the stock market.
This is JUST the point of using a mortgage rather than paying cash!!! Instead of tying up $200k in the home, you only tie up $40k or so in it, and take a mortgage for the remaining $160k. Then you invest the $160k in an S&P500 fund for 30 years while you pay off the 3% mortgage. The S&P500 will return somewhere between 7% and 11% over the 30 year period, and you will net a substantial gain by taking that mortgage.
MarkR writes,
This is JUST the point of using a mortgage rather than paying cash!!! Instead of tying up $200k in the home, you only tie up $40k or so in it, and take a mortgage for the remaining $160k. Then you invest the $160k in an S&P500 fund for 30 years while you pay off the 3% mortgage. The S&P500 will return somewhere between 7% and 11% over the 30 year period, and you will net a substantial gain by taking that mortgage.
My point is that I don’t even want to tie up the $40k in down payment and closing costs in a home that’s very likely to give me a sub-S&P500 return. I’ll only buy a home if I have some prospect of seeing an S&P500 return from it. Otherwise, I’ll rent and let others finance the under performing asset.
See #4 at this link:
https://www.retireearlyhomepage.com/minimizing_the_skim.html…
intercst
My point is that I don’t even want to tie up the $40k in down payment and closing costs in a home that’s very likely to give me a sub-S&P500 return. I’ll only buy a home if I have some prospect of seeing an S&P500 return from it. Otherwise, I’ll rent and let others finance the under performing asset.
The part that isn’t clear is that you tied up $200,000 (or whatever it was) instead of $40K.
If I understand what you did correctly, you reduced the cash portion of your portfolio by the amount of the condo. Is that right?
syke6 writes,
<<My point is that I don’t even want to tie up the $40k in down payment and closing costs in a home that’s very likely to give me a sub-S&P500 return. I’ll only buy a home if I have some prospect of seeing an S&P500 return from it. Otherwise, I’ll rent and let others finance the under performing asset.>>
The part that isn’t clear is that you tied up $200,000 (or whatever it was) instead of $40K.
If I understand what you did correctly, you reduced the cash portion of your portfolio by the amount of the condo. Is that right?
Yes. And then the dividend income I wasn’t spending replenished the cash portion of the portfolio after a few years. (I keep 5 to 10 years worth of living expenses in cash and short-term bonds, the rest in equities.)
But the only reason I was willing to tie up the money in a home, was because I bought it for 70% off it’s 2008 value and there was some prospect of seeing an S&P500-like return from it.
intercst
But the only reason I was willing to tie up the money in a home, was because I bought it for 70% off it’s 2008 value and there was some prospect of seeing an S&P500-like return from it.
Of course, had you put only 20% in and taken 80% at a mortgage, even with the closing costs, that 20% would have the prospect of 3 or 4 times the S&P500 return, and the remaining 80% (minus closing costs) could have remained in the S&P500 and earn S&P500 returns. So the blended return prospect would be higher than S&P500.