- The Fed stokes inflation for a major budget line item
- Zach Scheidt: turning “challenge” into “opportunity”
- A crestfallen year for stocks and bonds (One must-see chart)
- Will Xi Jinping walk back China’s “zero COVID” policy?
- Trick-or-treating will cost an arm and a leg this year
- A reader calls The 5 “delusional”… Another wants “every cent” taxed… And more!
Go figure: The Federal Reserve is jacking up interest rates to bring down inflation… which will only fuel inflation for one of the major line items in a typical household budget.
As noted here last week, the September inflation numbers came in hotter than expected. A major driver of that jump was rental costs.
“Of course, the Fed is aggressively hiking interest rates to slow down the economy and drive inflation lower,” points out our income-investing specialist Zach Scheidt.
“But that’s not going to work with the housing market.
“That’s because when the Fed hikes rates, it makes mortgage payments more expensive. So hiking interest rates increases inflation for homebuyers,” Zach goes on.
Back in May we cited figures from Compound Capital showing how the monthly payment on new construction had jumped 80% in a year — from $1,294 to $2,327 — thanks to soaring mortgage rates.
Yes, prices will likely climb down to compensate in too-hot markets like Boise and Nashville. But by and large, Zach says monthly payments will remain elevated — or even continue rising from here.
Key point: “The U.S. rental market is dominated by small individual families that buy and rent one or two units at a time,” says Zach.
“So higher mortgage rates will naturally drive these families’ prices higher to buy rental units. That means they must then charge higher monthly rates for their tenants.
“Bottom line, while the Fed is trying to kill inflation with higher interest rates, this key source of inflation will actually get worse because of higher interest rates.”
Still, there’s “a way you can turn this challenge into an opportunity,” Zach says — which brings us back to an exposé we published a decade ago.
We called it “the steal of the century.” When the feds rolled it out in early 2012, they gave it the more humdrum name “REO to rental.”
At that time, millions of foreclosed single-family homes were sitting on the federal government’s books in the wake of the 2008 housing bust. Under this scheme, hedge-fund and private-equity types could buy these homes at a deep discount and manage them as rentals.
These homes were available only to investors who could drop $1 billion or more on a bulk transaction.
If you as a mere peasant wanted to buy the bargain-priced foreclosure down the street to pull down a little investment income, you were out of luck. It was crony capitalism at its worst.
We also warned in 2012 that the investors in these rentals would eventually turn their holdings into REITs — real estate investment trusts whose shares you could buy on the stock market.
Of course, just like with any other IPO, the pros and insiders made all the easy money by the time these firms went public. When Starwood Waypoint Homes went public in early 2014, it sorely underperformed the S&P 500 for the 3½ years before it was taken over by a bigger name in the sector.
But by last year, Zach Scheidt said that bigger company — Invitation Homes Inc. (INVH) — had become an excellent income-investing play in its own right. And that’s still the case now.
Because it’s structured as a REIT, he explains, the company “doesn’t pay corporate tax and is required to pay the majority of its income to you as an investor.
“At the beginning of this year, INVH increased its quarterly dividend from $0.17 to $0.22 per share. That payout gives you a 2.7% yield if you buy shares today.
“Thanks to rental inflation, I expect these payments to increase next year — possibly by a lot!”
And he says it’s a good contrarian buy right now: “Wall Street traders have pushed shares of INVH lower because they believe higher interest rates will hurt the value of homes owned by the company.
“The truth is home values will continue to be high, thanks to a supply/demand imbalance. That means INVH is an excellent investment to help protect your wealth despite last week’s high inflation print.”
To the markets… where we find nearly every major asset class starting the week on the rally tracks.
After touching new year-to-date lows last week, the S&P 500 is roaring 100 points or 2.8% higher to 3,683. The Dow is up a little less, the Nasdaq up a little more.
Bond prices are rallying, pushing yields lower: The 10-year Treasury note is back to 3.96%.
That said, it’s been a miserable year for both stocks and bonds — in a nearly unprecedented way. Look at the chart before you read this fellow’s hot take…
Hmmm… Of course, there’s no gold peg at all now. Would we be looking at “Biden Bucks” come 2024? Just askin’…
Even precious metals are moving up today — gold at $1,662, silver at $18.73. Crude is up slightly to $86.13.
➢ The lone economic number of the day offers our first glimpse into the economy’s performance so far in October: Factory activity in New York state has been declining for three straight months now, per the Empire State survey by the Federal Reserve Bank of New York. Worse, the internals of the survey show that manufacturers see no relief in sight from rising costs.
The U.S. dollar index is down more than 1% to 112 — mostly because the British pound is up 2.1% against the dollar. This morning, the U.K.’s new finance minister formally abandoned almost all of the tax cuts proposed only weeks ago by Prime Minister Liz Truss.
Really, there wasn’t any choice: Truss’ government and the Bank of England were playing a game of chicken with British government debt and with the pound: The tax-cut talk set off panic selling in gilts (U.K. government bonds) — which threatened the solvency of pension plans that foolishly engaged in leverage games.
The Bank of England did a brief and limited bailout of the pensions — and said there were no more bailouts coming after last Friday.
Thus, the Truss government blinked this morning…
That’s a sobering thought when you realize it’s much worse in the United States: At $8.76 trillion, the Federal Reserve’s balance sheet is 34.8% of America’s $25.2 trillion GDP.
Yep, we’re filing away this little episode across the pond for future reference…
So much for an end to China’s “zero COVID” policy.
The 20th National Congress of the Chinese Communist Party opened yesterday with a speech by President Xi Jinping. The big economic takeaway: Random lockdowns of millions of people for minuscule numbers of “cases” will continue indefinitely. Xi dashed any hopes for a letup once the big commie confab is over.
“The lockdowns, the mass testing, the health code scanning, the quarantine, the travel restrictions are all here to stay for the foreseeable future,” reports the BBC. “There was not even the slightest acknowledgement of the social and economic pain being caused by the policy.”
But it might not be all about COVID: “My hunch is something else is behind it, the desire not to open up China too much to the outside world,” says Jean-Pierre Cabestan of the French Centre for Research on Contemporary China, Hong Kong.
“I think what they’re worried about is changes within Chinese society, youths,” Cabestan tells the Voice of America. “He [Xi] says the economy is a priority, but we don’t know if security is more important than economic development to him.”
As for Taiwan, Xi said nothing new — other than perhaps a warning against outside “interference.” Otherwise, he continues to seek peaceful “reunification” even as he won’t rule out the use of force.
“The cost of preventing your house from getting egged has gone up 13%,” says a snarky take at the Fark website.
With Halloween around the corner, the commenter is reacting to news that the cost of candy is up 13.1% year over year in the government’s aforementioned inflation report released last week.
That’s the biggest yearly jump in candy prices ever. “For comparison,” reports NPR, “it took nine years — from 1997–2006 — for candy prices to rise 13%.” Blame the current increase on a 17% jump in sugar prices.
“Costumes, too, may feel more expensive than usual,” NPR adds. “While the CPI report does not specifically track costumes, the price of clothing has jumped 5.5% since last year,” NPR adds. “Those crafty enough to make handmade costumes will feel the pinch even more: Sewing machines, fabric and supplies are up 11% since last September.”
There’s something perverse about do-it-yourself being more costly, no?
”I think you are being delusional thinking that an ‘Austrian-style neutrality for Ukraine’ would have easily prevented Russia from invading Ukraine,” a reader writes after we republished our May musings about the threat of nuclear superpower conflict.
“Ha, in Putin’s own words, his desire is to recreate the Soviet Union: That means annexing all the former Soviet Union territory back under Russian control. Ukraine was just the start!”
The 5: This old canard? Come on.
To be sure, there’s no shortage of people in the American power elite who self-servingly put those words in Putin’s mouth. “He wants to, in fact, reestablish the former Soviet Union,” said Joe Biden in February. “Putin’s main interest is to try to restore the old Soviet Union,” said former Defense Secretary Leon Panetta in 2016.
But what Putin himself has said is much more nuanced.
Asked in 2018 what historical event he wished he could go back to and change, he replied immediately, “the collapse of the Soviet Union.”
Not surprising, given a famous remark he made in 2005 about how “the collapse of the Soviet Union was a major geopolitical disaster of the [20th] century.” Other translations use “catastrophe.” In any event, the context for that remark was the fact that after the breakup in 1991, millions of ethnic Russians found themselves a minority in other former Soviet republics. (Like, uh, Ukraine.)
But wishes are one thing and the capacity to bring those wishes about is another. In a less famous remark, Putin said in 2000, “Anyone who doesn’t regret the passing of the Soviet Union has no heart. Anyone who wants it restored has no brains.”
“I know it would be a pittance but I feel every cent earned should be subject to Social Security tax,” says a reader’s short note. Last week we mentioned how come next year, the income level at which Social Security taxes are no longer collected jumps nearly 9% — from $147,000 to $160,200.
The 5: If that’s how you feel, then you’re advocating a total overhaul of Social Security as it’s existed since the 1930s.
No longer would it be a social-insurance scheme; it would become a straight-up welfare giveaway — unless you’re suggesting that higher tax payments during one’s working years should translate to higher payouts in retirement.
“The Social Security program is intended to be primarily a required-savings program and not primarily an income-redistribution program,” explained William Reichenstein, business professor emeritus at Baylor, in 2019.
“In a required-savings program, there is a reasonably close relationship between taxes paid and benefits received, while in an income-redistribution program this relationship is not close,” Reichenstein told Reuters columnist Mark Miller.
As it happens, there’s a bill in Congress that would subject all income over $400,000 a year to Social Security tax.
According to Reichenstein’s figures, someone with a $500,000 income would pay $6,200 more in taxes every year. But in retirement that would translate to only an additional $156 in lifetime benefits.
Is that really what you want, sir?
Well, there’s a decent chance it’ll become law in 2023 — for reasons we spelled out a year ago…
Best regards,
Dave Gonigam
The 5 Min. Forecast
