“Katie, I’m sorry… but we might sell your car,” my buddy Dave told his daughter a few weeks ago.
Dave and I were watching the England-Italy soccer match when he gave her the news. And her reaction was probably what you’d expect…
“What, Dad?! Why would you do that?”
“We bought your FJ Cruiser used for $15,000,” Dave replied. “Today, I can sell it for $30,000. When you get back from your year abroad, I can get you a much more expensive car.”
This story sounds crazy… a used car doubling in value. But it’s 100% true.
Used car prices have gone nuts. It makes up a huge proportion of the high inflation that’s gripping the economy. But as I’ll share today, you don’t need to worry about it… And I mean that.
Let me explain…
The June Consumer Price Index (“CPI”) data surprised everyone. It was up 5.4% over the last year, the largest jump since 2008. “Core” inflation (stripping out volatile energy and food prices) was the highest since 1991.
Inflation is obviously here in a big way. And it’s darn scary… not just for investors, but for just about everyone. The question is, will it last?
The short answer is “no.” The inflation we’re seeing right now is temporary. It’s the result of a supply and demand imbalance… one that will correct itself.
You know the stories of why the supply of new cars – for example – is low:
- Thousands of new cars are sitting on lots, unable to be sold, simply waiting on computer chips.
- Rental car companies bought up more new cars this year than usual, since they sold many of their cars a year ago to stay alive. (They typically buy 2 million cars a year.)
Problems like these decimated the inventory of new cars for sale. That caused the prices of used cars like Katie’s FJ Cruiser to soar.
That’s crazy, because everyone knows cars are a liability, not an asset. In the real world (not the COVID-19 world), as soon as you drive a car off the lot, it loses value.
Today, the script is flipped. And it’s not just Katie’s FJ Cruiser… Used car prices are up 45% over the last 12 months. Take a look…
These numbers are insane. But this situation will end… guaranteed. The problem with the supply of new cars will go away. The inventory of new cars will return. And then, used car prices will fall – possibly a lot. This is simple economics.
I think the main inflation we are seeing now is temporary (and totally separate from the long-term risk of the value of our dollar falling, which is very real)…
Today’s near-term inflation is caused by COVID-induced imbalances, like we’re seeing in the car market. As an example, the massive spike in used car prices in June was responsible for more than a third of the increase in inflation that month.
We’ve also had shortages of building materials, which has caused the cost of building new homes to soar. And we’ve had shortages of hourly labor workers… which have caused the cost of paying hourly workers to soar.
Supplies are tight. Meanwhile, demand is massive right now. That’s because the economy is “back” in a big way…
I live in Florida, where the economy has been back for a while… Real estate prices have gone up incredibly quickly. Between the COVID-19 “refugees” moving here from major cities and the low supply of building materials and labor, prices have soared. It’s happening so fast that the businesses that try to estimate home values simply can’t keep up…
The house two doors down from me was recently valued at $2.6 million on Zillow and Redfin. Someone just bought it for $3 million – and then proceeded to gut it completely, down to the framing. They will put in at least a million bucks from here. So Zillow and Redfin weren’t even close in estimating the price gains on this house here in North Florida.
Now, I realize that this is just one house. But the story is the same all along the Florida coast…
South Florida is even crazier than North Florida. My wife and I were there a few weeks ago, and we spent time with high-end realtor Heidi Wicky from Palm Beach County. Prices are up as much as 50% in two years in the more desirable areas – and there is no supply. It is a seller’s market for sure.
This might all feel like runaway inflation. But in each case, it’s simply a supply imbalance.
Those imbalances will work themselves out in time… And when they do, inflation will fall. It’s really that simple.
So, if inflation is worrying you, try to ease up a bit. Things aren’t nearly as bad as they seem.
Good investing,
— Steve
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Source: Daily Wealth