"Prediction is very difficult, especially if it’s about the future."
–Nils Bohr,
Nobel laureate (yes using this one again!)
Having made the error of writing about politics, I am now going to stick my neck out and make a prediction about our upcoming economy. Many would argue that the best way to make money is to invest under assumptions directly opposite of mine… So, here goes.
I have been trying to figure out what impact falling home prices would have on the economy — recession, deflation, etc. While reading a recent Economist article, it struck me. We are staring into mouth of stagflation driven by rising wage pressures and rising interest rates. Here is my thinking (and a good amount from Mark Faber of the Doom Gloom Boom Report & Barron’s fame).
As home values drop while interest rates rise, people will be able to take less out of their homes. This will put increased pressure on the average household which has seen its real wages fall since 2000. With this buffer source of funding depleted, workers are going to put pressure on employers to raise salaries. Corporate profit margins are at an all time high, so it is unlikely that either productivity or outsourcing overseas will give companies relief.
The US government can not let deflation take over or the over-levered average American will go under. So, it will continue to man the money printing presses. This, along with wage pressure, will begin to drive prices up (and profits down).
Having lived in Southern California during the defense recession of the 1980’s, I saw first hand that housing markets don’t crater. They just go illiquid as people refuse to sell at the lower prices. For sale inventory grows, but only the truly desparate sell. So, housing prices drop moderately and there generally is no wide spread panic of plummeting housing prices, retail collapse, etc.
So, as an entrepreneur, go after labor saving solutions. Don’t go after heavy capital equipment type plays (not good in high interest rate environments). Provide solutions that allow firms to operate remotely or, better yet, virtually so that they don’t need to hire permanently. Peter Drucker predicted that in the next 25 years, most firms would only formally employ 50% of their FTE’s. This will require significant infrastructure to do. It also means that there are tremendous process outsourcing opportunities (vertically focused SaaS plays). Any consumer plays will favor the lowest cost producer since real wages will be under pressure as inflation hits.
Enough said…now build or invest assuming the opposite!!!