Real Estate (and inflation) is Local.

We’re all experiencing inflation. I’ve harped on it a lot already.

However, this chart that I’ve shared with some friends brought about a new series of questions for me.

What we’re looking at here is the inflow vs outflow of families earning $200k or more annually from each state. A reading of 1.0 means for every family that moves away, another one moves in. Heavily populated Democrat strongholds have been hemorrhaging residents to red-leaning states in the Southeast and Big Sky territories.

I’ve experienced this firsthand as our family moved from Louisiana (losing $200k population) to South Carolina (gaining) particularly as it relates to housing inflation.

Families have moved across America for hundreds of years…that’s nothing new. But what is new is the rate and degree of concentration of household relocation. Also what’s unique this time is it wasn’t due to some natural disaster, but rather disastrous political policies in many of these states.

So as we continue to focus on the inflation issue it’s important to look at how this relocation phenomenon is impacting cost of living inflation.

When a family leaves California for Dallas, their house in California doesn’t just disappear. Meanwhile that family is bidding against dozens of others for suitable housing in Dallas, often creating bidding wars and driving the price up. Back in California, the house may sell below ask but it’s not a 2008 scenario. The housing shortage since the Global Financial Crisis has still provided a quasi-backstop in a lot of stressed housing markets.

This issue then trickles down into other costs in that area. Rising property insurance. Rising tuition. Rising Country Club initiation. Rising property taxes.

The MASSIVE influx of people into states like TX, FL, NC, SC, TN and GA from states like CA, IL, NY, and MA is creating an inflation dynamic that pushes prices UP in the new state while prices remain flattish to modestly down in the old state. The net effect: rising inflation.

What this also creates is an imbalance to inflation perception across geographies…which means the Fed is going to have an even tricker time managing this issue to a degree that appeases a majority.

Finally, here is what’s on my radar:

lending & credit

Private Credit / High Yield has produced some very compelling investment opportunities and is a strong focus for capital we’re currently allocating. Understanding how the debt unwinds is critical as is the collateral value. As is with any “hot” sector there will always be funds playing fast & loose and it seems a rather large private credit shop is headed for stormy waters.

Particularly acute is the Payment in Kind aspect (PIK) which can be used in lieu of actual cash payments for debt service. Not all PIK is created equal and it’s important to understand how PIK can erode the credit quality of a piece of debt rather quickly if the original basis was too high to begin with.

Lastly, any credit manager who is not highly focused on default rates should be avoided.

macro

Our firm’s CIO Kevin Harper came out with a piece last week about the perceived AI Bubble. In it, he compared the Price/Earnings of a bubble stock in a prior cycle: CISCO

The first important point made is how despite NVDA’s parabolic move since 2023, the stock price has largely tracked earnings growth. Fact is: Nvidia is on a roll.

On the other hand, Cisco’s stock price became radically detached from its earnings growth rate and eventually became an untenable situation, ultimately leading to a crash in the stock (as did many others in that sector during the 2000 tech meltdown).

The second point made is how can AI stock growth continue to fuel a broader rally? Well, efficiencies from AI could trigger a new “productivity boom” which could potentially offset some of the sticky inflation we’re contending with. Additionally, you could likely see an arms race among large companies to invest in the best AI talent (sadly, driving costs UP). Lastly, the trickle down wealth effects from newly wealthy AI investors can lead to further spending in real estate, consumer discretionary and other areas.

bitcoin

One obvious tailwind for bitcoin was the launch of the spot bitcoin ETF products, giving investors almost pure exposure to the asset in brokerage accounts. However, the pace at which retail brokerages & wealth management firms have recommended & bought these ETFs has been glacial.

This is to be expected as large retail wire houses can’t expect their armies of brokers to develop a solid understanding of this digital asset overnight, therefore they have been slow to embrace it as an investment.

Morgan Stanley is looking to get ahead of the pack and start allowing its 15,000+ financial advisors the opportunity to recommend Bitcoin ETFs to clients. While I’m sure this will come with extensive guardrails….it’s at least a positive sign that large firms are warming up to Bitcoin exposure. No doubt they’ve been fielding calls from clients as talk of a “Bitcoin Reserve” gains traction as well.

Clark Gaines focuses on alternative investment strategies at Almanack Investment Partners, and is based in Charleston, SC.

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