The Fed Said to Be Concerned About Deflation

Deflation is a terrible economic scourge and with inflation running at half of the Fed’s target small changes can put the economy on the wrong side of this issue. Right now, the Federal Reserve’s voting members appear to be changing their bias to protecting against this as the economy appears to be losing steam and federal stimulus begins to fade. For the heavily leverage real estate industry, this is important news.
Deflation if it occurs can mean continued falling property prices and an increasing spiral of foreclosures as hiring remains weak, wages begin to fall, and capital availability (especially debt) remains inadequate to push the economy forward. Were all these items begin to happen in a cascading roll of bad news not only a double dip recession but a much more damaging potential 2nd economic crash would be possible.
The good news is the Fed sees this as a risk and is taking strong steps to prevent this set of events from occurring. By increasing bank lending, buying federal notes, and acting to keep rates very low the potential for the disaster scenario is limited.
With the Fed watchful, the industry should focus on how best to capture gains from this continuing series of events. First, portfolio owners with strong capital positions should move aggressively to take over the assets that are faltering at as deep a discount, with as long a term, and as quickly as possible. The buyers will protect their current asset value, capture major future returns, and position themselves positively for the longer term growth patterns.
With the huge cash reserves in corporate America that already exist, the more assets investors can have well placed to endure a significant inflationary spiral the better as the protracted period of relatively extreme money supply promoting policy positions a major potential for future inflation. Essentially, corporate America’s own cash could become the very instrument driving inflation when conditions turn. Businesses seeing conditions begin to speed up will quickly move to put this oversized cash supply to work hiring, building new facilities, repairing what they already own over stressing the supply system and driving inflation.
Real estate investors should be winding down their cash positions over the next 18 months anticipating stronger economic growth at the end of this period. This wind down should be focused on debt reduction and cash flow ownership. Managing capital in this way, will provide the ongoing liquidity the investor needs while protecting against inflation risks and the potential destabilizing events that could occur.