Inflation Is Staring You in the Face. Are You Prepared?

I’m a natural contrarian … and today, I’m going to contradict myself.

Last week, I wrote that it’s imperative to plan your future based on value, not price.

But prices matter too, especially in the short term. For example: Is bitcoin so valuable that it deserves a price of $11,000?

The inflation that the Fed has been searching for has shown up in the most unexpected places, and it can’t be ignored any longer.

Are U.S. corporations worth so much that they deserve the second-highest Shiller price-to-earnings (P/E) ratio in history?

The inflation that the Fed has been searching for has shown up in the most unexpected places, and it can’t be ignored any longer.

Do those corporations deserve a price-to-sales ratio 75% above its historical average?

The inflation that the Fed has been searching for has shown up in the most unexpected places, and it can’t be ignored any longer.

In all three cases, the prudent answer to the question is no. The prices of bitcoin and stocks are out of line with their value.

But I’ve been saying “no” to another price-related question for the last nine years … and prudence tells me it’s time to change my answer.

It’s time to get ready for consumer price inflation. Are you?

Looking for Inflation in All the Wrong Places

For nearly 10 years, I’ve listened in frustration as people, who should know better, predict that central banks’ “quantitative easing” (QE) policies would produce consumer price inflation … and of course, the fabled “dollar crash.”

No inflation. No crash. Just as I predicted.

Why not?

Monetary theory says that the average level of prices is set by the total money supply divided by the real output of the economy. If money supply grows faster than output, inflation ensues.

Given the big gap between the growth of the economy and the growth of liquidity, we should have inflation.

But contrary to the misleading slang term, central banks don’t “print” money. Instead, they create reserves for the commercial banking system.

Money is only created when banks make loans against those reserves — say, $10 lent out for every $1 in new reserves.

If those loans aren’t forthcoming — or if they go to something other than consumption or investment — there’s no new money in the real economy, and no inflationary pressure.

At least not in the consumer economy.

Inflation Staring Us in the Face

What the dollar-doomsday crowd didn’t get is that QE is a peculiar sort of liquidity.

QE involved central bank purchases of bad debt held by banks from the pre-2008 housing bubble. Taking those debts off the banks’ balance sheets had the effect of boosting their reserves.

Of course, banks could have used this improved position for consumer or corporate investment loans. That’s what the politicians and bankers kept telling us.

That would have created more real-world money, and increased consumer inflation.

But, in the case of lending, supply doesn’t create its own demand.

With interest rates at historic lows, banks didn’t go out of their way to lend money (except where they could jack up lending rates, like credit cards and auto loans.)

On top of that, consumers were deleveraging, paying down old debt instead of buying new stuff. New regulations made it harder to get “liar loans.”

On the other hand, weak consumer demand meant corporations had no interest in borrowing to fund investment. In fact, corporations used the financial crisis to cut costs — firing workers and foregoing investment — which boosted their profit rates and gave them loads of cash, even as sales were flat.

So where did all that cash go? What about the QE money? What happened to inflation?

Here it is:

The inflation that the Fed has been searching for has shown up in the most unexpected places, and it can’t be ignored any longer.

 

Since QE money wasn’t going to Main Street, it went to Wall Street instead. The average annual return of the S&P 500 is 7%, net of dividends. Since 2009, it’s been about 15.5%.

There’s your inflation, folks.

I Predict Inflation … Both Kinds

Things have changed since 2009. The economy is growing at 3% and nearly at full employment. After a decade of trying to claw it out of Wall Street and corporate coffers, ordinary people are finally starting to get their hands on some disposable income.

Accordingly, seasonally-adjusted consumer inflation just hit 2.0%, the Fed’s target.

Given that, here’s what I predict:

1. Tax cuts will fuel inflation, not investment. There is already talk of workers at U.S. corporations demanding the wage increases promised by President Trump and the GOP. More money in the consumer economy will increase demand, leading to more hiring, and thus wage inflation. Wage inflation will lead to price inflation, and vice versa.

2. The Fed will raise interest rates more rapidly than it would have without the tax cuts. But it will be under intense political pressure to limit those increases to keep the economy hot. Fixed-income investments will continue to perform poorly, even as your cost of living rises.

3. Gutting the Consumer Financial Protection Bureau (CFPB) will lead to more reckless lending, and thus more money in the real economy, adding fuel to the inflationary fire.

4. The enormous firehose of cash from slashed corporate tax cuts, tax cuts at the top of the income ladder and repatriation of foreign profits will continue to push the most dangerous inflation of all — the stock market bubble — to new heights. Until, one day, it doesn’t.

Inflation, weak fixed income performance and a growing asset price bubble. Are you ready for that?

If not, you need to consider a safer strategy now.

Kind regards,

Ted Bauman

Editor, The Bauman Letter

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Buy These 3 High Yield REITs Increasing Dividends in January

To build momentum from your income stocks going into the new year, consider buying into those REITs that should announce higher dividend rates in the first month of 2018. Each month I like to list those real estate investment trusts (REITs) that should announce higher dividend rates in the upcoming months. This knowledge can give you a jump on the rest of investing public, which will be surprised when the positive news is announced.

I maintain a database of about 130 REITs. With it I track current yields, dividend growth rates and when these companies usually announce new dividend rates. Most REITs announce a new dividend rate once a year, and then pay that rate for the next four quarters. Currently about 90 REITs in my database have recent and ongoing histories of dividend growth. Out of that group, higher dividend announcements will come from different REIT companies during almost every month of the year. With the potential of a Fed interest rate hike, the prospects of higher dividend payments coming in January will help to offset any share price disruptions resulting from announcements out of the Federal Reserve Board.

Related: Add This Unique REIT to Your Portfolio for Dividend Safety

My list shows three companies that historically announce higher dividends in January and should do so again this year. Investors will start earning the higher payouts in the new year. But remember, you want to buy shares before the dividend announcement to get the benefit of a share price bump caused by the positive news event. Here is the list of REITs to consider:

Apartment Investment and Management (NYSE: AIV) is a mid-cap sized REIT that owns and operates about 140 apartment communities. About 40% of the company’s properties are in coastal California, with the balance spread across major U.S. metropolitan areas. Last year, AIV increased its dividend by 9.0%. Cash flow growth has been comparable in 2017, and I forecast an 8% to 10% dividend increase in January. The new dividend rate announcement will come out in late January with a mid-February ex-dividend date and payment at the end of February. AIV yields 3.3%.

EPR Properties (NYSE: EPR) focuses its real estate investments in three different business sectors. Primary is the ownership and triple-net leasing of entertainment complexes and multiplex theaters. The second sector is the ownership of golf and ski recreation centers, also triple-net leased. The third sector is the construction, ownership and leasing of private and charter schools. EPR pays monthly dividends, and has grown the dividend rate by an average of 7% per year for the last six years. In 2017 the company was active in both acquisitions and new developments. The new dividend rate is announced in mid-January, with an end of January record date and mid-February payment. EPR currently yields 6.0%.

Welltower Inc (NYSE: HCN) is a large cap healthcare sector REIT. The company owns interests in properties concentrated in markets in the United States, Canada and the United Kingdom. The portfolio is divided into three segments consisting of: Seniors housing and post-acute communities, and outpatient medical properties. Triple-net properties include independent living facilities, independent supportive living facilities, continuing care retirement communities, assisted living facilities, care homes with and without nursing, Alzheimer’s/dementia care facilities, long-term/post-acute care facilities and hospitals. Outpatient medical properties include outpatient medical buildings. Welltower has increased its dividend every year since 2009, with a modest 1.2% increase to start 2017. I expect a 2.0% to 2.5% increase to be announced in January. The announcement will come out at the end of the month, with an early February record date and payment around February 20. The stock yields 5.1%.

Any one of these three stocks would be a great addition to your dividend growth portfolio. You see, it’s not just important to include high-yield stocks that give you income now, but to hold stocks with a strong history of growing their dividend year after year. It’s like getting a raise every… that you didn’t have to ask the boss for.

These are the same kinds of stocks that I recommend as a core part of my high-yield income system called the Monthly Dividend Paycheck Calendar. It’s a system used by over 6,000 income investors right now to produce average monthly paydays upwards of $4,000 in extra income. And it’s helped to solve a lot of income problems and retirement worries.

Quality REITs need to be a core component to your income portfolio. Not only do you get the high yields but you also enjoy rising dividends and as we’ve seen from historical examples, share price gains as an added bonus. There are several best in class REITs in the portfolio of my Dividend Hunter service which features the Monthly Dividend Paycheck Calendar.

Get up to 14 dividend paychecks per month from safe, reliable stocks with The Monthly Dividend Paycheck Calendar, an easy-to-use system that shows you which dividend stocks to pick, when to buy them, when you get paid your dividends, and how much.  All you have to do is buy the stocks you like and tell them where to send your dividend payments. For more information Click Here.


Source: Investors Alley