House prices have risen strongly to record levels. Share prices have also risen to record levels in many countries. In Australia they are close to all-time highs. Farm prices are at record levels. Is it time to be cautious?
In Australia the current lockdowns will mean an economic contraction in the September quarter but overseas economies are now opening up post-COVID.
Australia's recovery lies ahead. Hopefully we will open for Christmas on high vaccination rates. The cost of business failures, lost jobs, loan defaults, mental health problems, domestic violence and suicides must outweigh the medical threat of COVID by then.
A Christmas boom seems likely.
To benefit it sounds like we should just keep buying shares and properties.
Yet experienced investors are wondering where the threats lie.
Things seem to be a little too good. The biggest threat is interest rate rises.
What will cause them and when? The answer is inflation. It has spiked in the US and Europe.
The US Federal Reserve says it is transitory and will fall, the temporary jump is due to shortages and supply disruptions.
Can we be sure?
Already we have asset inflation in Australia and many countries, even if there is little consumer goods inflation here.
House prices are not part of the Australian CPI calculation, only rents.
Basic economics says increases in the money supply will raise inflation.
The Reserve Bank has been boosting the money supply for several years and still is.
It is printing money to buy government bonds, aiming to hold rates down at 0.1 per cent.
That is pushing asset prices up.
This may be a good time to buy inflation proof assets. These include commercial property where rents rise with inflation.Russell Tym
There is no reward for money in the bank and the cost of borrowing to buy assets is very low.
Last year the CPI rose 3.8 per cent so bank deposits lost real purchasing power.
Even though inflation has been missing in action recently the huge money supply increases may cause it to return.
This may be a good time to buy inflation proof assets.
These include commercial property where rents rise with inflation.
There are stock market traded property owners like Scentre Group, Stockland, GPT, and their overseas equivalents, or managed funds that invest in them.
Infrastructure businesses that own toll roads, airports and pipelines can also raise fees if inflation increases.
Examples include Sydney Airport, Transurban, APA, Ausnet and Atlas Arteria. Infrastructure funds can also provide exposure.
Shares in companies with pricing power can give inflation protection.
Monopolies and oligopolies can raise prices to protect their profits - the big banks, Coles, Woolworths and CSL for example.
Borrowers can protect themselves from inflation risk by locking in fixed rate loans for a long term, say five years.