PENT-UP RISKS AND WHAT'S CHEAP

Now that the first interest rate hike from the Fed is being digested, much of the focus shifts to what the media is calling "pent-up risks."

So what are pent-up risks? Well, a simple example might be rent control. Once those controls are loosened, landlords usually hike rents quickly to make up for lost time and revenue. That lost revenue in part stems from inflation or increased costs associated with owning and renting the property.

Yea, we realize their telling us there's no inflation, but that's a relative term. In a recent interview Chicago real estate mogul and billionaire Sam Zell, in responding to a question about how angry Americans are today, an obvious political question, responded:

The American people are extraordinarily angry. The American people are extraordinarily depressed. The last time we had anything like this in my opinion was 1979. [To a statement regarding Trump’s popularity Zell responded]:  It's because you guys are sitting here in New York City and you're not in Des Moines. And you're not in Boulder and you're not all over the country. And you're not seeing the enormous disparity that has existed between you know the coasts and the rest of the country. We have a lot of very unhappy people and I think this election is reflecting it. And I think it will be very dangerous.

Zell's comment, in our view, defines the meaning of the term relative.

Before the big real estate crash a few years ago, when prices were soaring, the standard response to anyone who questioned it, was don't worry, it's mostly bi-coastal. Well, when that Humpty Dumpty came crashing to earth, it was hardly bi-coastal after all.

The WSJ describes some of these pent-up risks today as: 

Historically, inflation was the risk the Fed worried about when it held interest rates low. This time, the Fed would actually welcome a rise in inflation, which has consistently undershot its 2% target. Its greater concern in recent years has been that low interest rates would fuel unsustainable asset bubbles. It has concluded that the boost to employment it achieved with easy policy now would outweigh the potential harm of a bursting bubble later.

This next quote is telling in itself.  It’s a calculated bet. The harm from financial disruptions is much less predictable than from inflation, because it involves linkages that are apparent only under stress.

There's two things in that first paragraph to note: One, like that old saying, be careful what you wish for when it comes to inflation. Second, the trade off for no bubble now but what could be an even larger one later in the name of jobs. Is that really a calucated bet you want to take? Ansd is it the true job of the Federal Reserve?

Betting on the unexpected comes with risks, too. But in our view, the odds for success there are improving all the time. You might want to think about focusing on whatever is extremely cheap today, another one of Zell's known characterisitcs.

We printed the above chart for the second time in a few days for a reason.