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Is inflation pulling back or blowing up into a worldwide financial disaster? The latest CPI report shows that U.S. inflation has come down substantially, but just a week before that, the Fed hiked short-term interest rates by three-quarters of a percent in its battle against high prices. The CPI report is now changing what some economists believe the Fed will or should do next. But inflation is also a worldwide problem and some doom and gloom economists are worried about the possibility of \u201cglobal hyperinflation.\u201d Let\u2019s take a look at a hedge fund warning and how real estate can protect you from this kind of uncertainty.

Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review.

First, the October CPI shows a lower-than-expected .4% increase in consumer prices. That brings the annual rate down from 8.2% in September to 7.7% in October. (1) It\u2019s still too high but as economist Andrew Hunter at Capital Economics said in a CNBC report: \u201cAt least it\u2019s a move in the right direction.\u201d The report triggered a huge stock market rally right after that report, with the Dow closing up more than 1,000 points. There\u2019s also a lot of talk about how inflation is much lower than it appears, because the inflation reports use lagging data.

After the CPI report, Wharton Professor Jeremy Siegel told CNBC that \u201cinflation is basically over\u201d and the Fed is getting it wrong because it\u2019s not using up-to-date information, including data on the housing market. (2) He says there\u2019s already a decline in both home and rent prices and believes the Fed isn\u2019t taking that into consideration. When asked when the Fed should have stopped implementing aggressive rate hikes, Siegel says like \u201cyesterday.\u201d

He says the Fed still has time to take its foot off the brake at the December meeting. Any decisions at that meeting will also be influenced by the \u201cnext\u201d CPI report for November, which will be released just ahead of that meeting.

Is the World on the Verge of Hyperinflation?

Meantime, one of the world\u2019s largest hedge funds recently sent letters to clients, warning them that the world could be on the verge of hyperinflation. That\u2019s when the value of your money disappears rapidly and the cost of goods changes so quickly that stores want you to ask for the price. As reported by the Financial Times, the Florida-based Ellio Fund says we are in an \u201cextremely challenging\u201d situation and possibly the worst since World War II. Ellio was founded by billionaire Paul Singer and manages more than $50 billion in assets. (3)

In the letter it sent to clients, the firm said that \u201cinvestors should not assume they have seen everything\u201d because they have experienced other financial crises, like the dotcom bust or the 2008 financial crisis. It says that today\u2019s situation is the culmination of an extreme set of financial scenarios at the end of a long period of cheap money, and that hyperinflation is a very real possibility that could cause a \u201cglobal societal collapse and civil or international strife.\u201d There\u2019s no guarantee this will happen, but the hedge fund says that we are currently headed in that direction.

Elliot suggests that the stock markets will fall further, possibly as much as 50% from their peak. According to the Financial Times, the hedge fund is currently up 6.4% this year, and has only lost money in two calendar years since its launch in 1977. Fund managers named a few of the bigger financial risks it sees in the road ahead. They include potential bank losses on bridge financing, potential markdowns on collateralized loan obligations, and losses from leveraged private equity.

Global Rates of Inflation

So how does U.S. inflation compare to other countries?

The Consumer Price Index topped 9% in June, which is the highest it\u2019s been in 40 years, but it has fallen slightly since then, to 8.5% in July and 8.2% in September. For comparison, let\u2019s take a look at a list of countries and their rates of inflation on the Trading Economics website. (4) The September/October reading on inflation ranges from -2.5% in South Sudan to 269% in Zimbabwe. Only three countries have a negative reading, and most countries are in the single to lower double digits, but we already know that it doesn\u2019t take much of an increase to cause a lot of financial pain.

In the U.S., inflation has subsided a bit from 9.1% in June to 8.2% in September. Our neighbor to the north, in Canada, the inflation rate is 6.9%. To the south, in Mexico, the inflation rate is 8.7%. The United Kingdom is battling an inflation rate of 10.1%, and in Italy, it\u2019s 11.9%. France and Spain are lower at 6.2% and 7.3% respectively. Russian inflation is quite high at 13.7%. But there are many countries experiencing an inflation rate of 20% or higher, and even some with triple digit inflation. In August inflation hit 117% in Sudan and 139% in Syria. Last month, in October, Venezuela had an inflation rate of 156%. Lebanon is up to around 162% and then there\u2019s Zimbabwe, which I previously mentioned with a rate of 269%.

Definition of \u201cHyperinflation\u201d

Those are annual rates of inflation, so none of them meet the definition of \u201chyperinflation.\u201d According to USNews.com, hyperinflation is \u201ca phenomenon in which the prices of goods and services in an economy rise uncontrollably in a short period.\u201d It is \u201ctypically considered hyperinflation if prices rise by 50% or more in a month, which is an annualized inflation rate of at least 14,000%.\u201d (5)

Not all financial experts agree with the idea that hyperinflation will cause havoc around the world. The International Monetary Fund\u2019s Managing Director, Kristalina Georgieva, believes that U.S. inflation is reaching its peak, which sounds very dovish. She told Bloomberg: \u201cI\u2019m not going to jump ahead of data, but it is very possible that we are peaking.\u201d She says: \u201cWe now see central banks very united on fighting inflation as a top priority and rightly so.\u201d (6)

Protect Yourself with Real Estate

But the future is not certain, and it\u2019s wise to protect the value of your assets, even if worldwide hyperinflation doesn\u2019t manifest. I believe we can protect ourselves with income producing residential real estate because people will always need a place to live, and there\u2019s a huge shortage of homes in the U.S. Even if your portfolio values dip, the assets will not fade into nothing, the way currency can during periods of hyperinflation. It\u2019s something you can count on and history shows that property values typically recover and appreciate.

It does cost more to buy property with a loan right now, but even at 7%, it\u2019s much lower than it has been historically. According to an article in Mynd, 7% still qualifies as a low rate. Back in October of 1981, the interest rate for a 30-year fixed-rate loan spiked to almost 19%. (7)

Mynd Vice President Dennis Bron supports the idea of real estate as a hedge against inflation. He says: \u201cEven in this crazy environment, property is still a relatively safe investment.\u201d In this article, he refers to single-family rental homes which produce rental income along with tax write-offs for expenses and depreciation. Although some housing markets are seeing a home price correction, housing experts don\u2019t expect a dramatic downturn because housing demand is so strong.

Mynd\u2019s Senior Vice President of Investment Management, Don Gangula, says: \u201cRental housing demand is going to continue. Some percentage of people are going to work out of their houses for some period of time. A lot of these people may not want to buy, so you are going to have a spillover from the apartment rental cohort who are looking for a home in the rental market.\u201d While it might be harder to find good investment opportunities, many experts believe they are there, if you look for them.

You\u2019ll find links to the articles I mentioned in the show notes for this episode. You can also find out more about how to find investment opportunities by joining RealWealth at newsforinvestors.com. Just click on the Join for Free link for complete access to our market data, our experienced investment counselors, and our curated list of real estate professionals.

And please remember to subscribe to this podcast if you haven\u2019t already, and leave us a review!

Thanks for listening. I\u2019m Kathy Fettke.

Links:

1 -https://www.cnbc.com/2022/11/10/heres-the-inflation-breakdown-for-october-2022-in-one-chart.html

2 -https://markets.businessinsider.com/news/stocks/jeremy-siegel-stock-market-rally-fed-cpi-inflation-basically-over-2022-11

3 -https://www.ft.com/content/f3bb0f96-1816-4481-8318-4f7583326a4a

4 -https://tradingeconomics.com/country-list/inflation-rate

5 -https://money.usnews.com/investing/term/hyperinflation#:~:text=Cons%20of%20Hyperinflation-,What%20Is%20Hyperinflation%3F,rate%20of%20at%20least%2014%2C000%25.

6 -https://finance.yahoo.com/news/global-inflation-may-nearing-peak-090322699.html

7 -https://www.mynd.co/knowledge-center/what-happens-to-real-estate-during-inflation