November 20, 2007: A few dark thoughts on inflation, energy and real estate

A bit on the dark side today.

Anyone for Citicorp (C)? An interesting question given its current price. I am down about ten bucks a share since purchasing it a month ago. Not brilliant, to say the least. Am I going to hold on? Yes. Foolishly? Maybe. I bought it because I felt a change in leadership was imminent. I was correct, and the new management should do very well given time. My price point was weak, to say the least. Time will tell.

I believe that we may be heading for a new round of unexpectedly high inflation. Three reasons give me cause to suspect this.

1. China and other dollar rich adversaries are dumping the dollar as their international currency and accepting the benign Euro from a politically and militarily weak Europe. This will have a profound impact on US foreign policy leverage, and thus dilute US economic prestige throughout the world.

2. Our huge spending binge and resultant debt can only be solved by the government printing presses going top speed, 24/7. It may well be policy that our government has reached the conclusion that we must inflate our way out of debt with cheap dollars. It has worked before, to a degree. The result is the folks on the government dole and unions benefit. Everyone else suffers a loss in purchasing power and quality of life.

3. Raw materials and energy are at a premium with the rest of the world, especially China, India, and the near and far east growing their economies and thus their population's economic expectations for material goods and foodstuffs.Inflation in the raw materials and energy sector means inflation, even if the dollar is being marginalized.


Speaking of energy. Alternative energy is of no consequence in the macro-economic picture. It is not a solution at this time. It is a distraction. With the majority of the developing world choosing carbon energy, no "save the planet" alternatives touted here and in the developed world are going to have much of an impact. Brazil just discovered over 8 billion barrels of oil off it's coast. Cuba has a like amount off our borders (which are off limits to American companies because of environmental restrictions). There is no shortage of oil and there is enough coal for over six hundred years (and China is mining it in vast quantities with twenty-six new mines being developed with little or no environmental considerations -- they just need the energy coal provides, Al Gore be damned). Money can be made in alternative energy stocks. Just don't translate profits to global energy realities.

Real estate may seem to be the opposite of a paper investment. You can stand on the land, scoop up the soil, and live in the house. You aren't concerned with a board of directors a thousand miles or a continent away and the property does not appear to depend on any one's promise.

But with rising inflation that may be an illusion. Real estate is as much a paper investment as a bond or a share of stock. The piece of paper is a government-issued deed. Its value depends on the governments willingness to protect your property, and on its forbearance in not stealing it from you through rent controls, taxes or eminent domain.

Property taxes are nothing more than rent paid to the true, if not rightful, owner - the government. The government can change the terms whenever it feels like it.

If inflation gets especially nasty, say 12-20% or more, the cost of holding mortgaged property and increasingly taxed property will seem outrageous. On one hand, especially if a populist Democrat is President, the government's willingness and ability to protect your property (the supposed reason for property taxes) will diminish,on the other hand the same government will want a larger and larger share of the assessed value.

This is not to say don't own real estate. I own plenty. However, if inflation heats up, be prepared to adjust your thinking, and take actions that will protect wealth that is precious to your current standard of living. What that action will be is any one's guess at this stage.