Is there a “New” Canary in the Coal Mine?

Since 1986, the price of a Big Mac has increased 171% from $1.60 to $4.33 today (that’s 6.3% per year). During this same time period, the consumer price index has increased at a much lower rate of 109%. More disconcerting is the effect of aggressive adjustment of monetary policy by the Federal Reserve, which began in 1999. This policy shift started with the Asian Crisis and Long Term Capital Management, followed by the Internet Bubble, the Housing Bubble and the Great Recession, and now we have the “New Normal” of zero federal funds rates and quantitative easing (QE1, QE2, QE3…). In the context of these Fed policies, the rate of price increases for the Big Mac is almost three times greater than the official Consumer Price index.

So what? It is pretty clear that the cost of food and many other items necessary for one’s comfort have increased. If you’re on a fixed income, it doesn’t really matter what the CPI is or whether the rules were changed. In 1986 you could buy a whole Big Mac with $1.60, now you canonlybuy37% of a Big Mac. If your budget is tight,you are in trouble.

What to do? A couple of years ago I wrote about what a killer deal it would be to buy a house with a 30 year fixed rate mortgage at these record setting sub 4% yields. Houses have gone up at least 15% in San Diego since then, and I think they have a long way to go. They don’t even have to get more valuable to “go up” a lot. If an average house remains worth four years pay for an average worker, then the simple act of destroying the value of the dollar can change the cost of the house dramatically – even if the value remains the same or goes down some. Think about it. If a Big Mac goes up on average 6% per year and you can lock in a sub 4% fixed rate for 30 years; oh my word, how grand this deal would look in 10 years. True, sub 4% is for owner occupants, so maybe you have kids or grand-kids that you could provide a down payment for and they could qualify for the loan. There is virtually no downside since the house is being used and the cost of the mortgage is very close to the cost of rent. The upside from the high leverage and the locked in low rate is stunning.
What does this have to do with Trust Deeds? Nothing. The point is simply that locking in low rate money for a long time, appears to be a strategy that will be immensely profitable and can be used by just about anyone right now.

What’s this about canaries?
Well the Big Mac is the canary that is now blowing (or not blowing) the whistle. Even though the government is understating inflation, the fact remains that Big Macs and bread and housing are going to get more expensive. The 2008 debacle has altered many lives, but because The Fund had staying power, we did not get wiped out. That aberrant slide is past. Land prices across most of coastal California are on fire and it is spreading east. Pretty soon, our loan on the 54 unit land in El Centro will be getting better and better. Additionally, we will be getting out of our 66th Street lots whole by building our way out (they had a special problem having to do with the City trying to make them a subdivision and pile on prohibitive costs).

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