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CenterSquare CIO on the best ways to hedge against inflation

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Scott Crowe, CIO at CenterSquare Investment Management, joined Yahoo Finance Live to discuss the state of the market and the best ways to hedge against inflation.

Video Transcript

- Let's take a look at the broader market action. For that, we want to bring in Scott Crowe. He's CenterSquare's investment Management Chief Investment Officer. And Scott, the retail sales they were better than expected, jobless claims coming in a bit short of what the Street was expecting. What's your assessment, though, of what we've seen in the market over the last several days or really so far this month because we've seen a bit of a pullback?

SCOTT CROWE: Yeah, we have. Some of that's being driven by the softening in China, for instance. But the data that you just pointed to as it relates to the US consumer continues to be very strong despite headwinds such as Delta, the roll off of some of the unemployment benefits.

And what we're really looking at right now is a self-sustaining cycle. You know, jobs-- jobs continue to be created. And, you know, that's flowing into inflation, however. And that's something to watch out for because inflation really is now creeping into wages, is creeping into rents, consumer inflation expectations, and commodities. And so, I think, you know, as we hit the fourth quarter I don't think you should expect, you know, a market slowdown in growth. And the thing to really watch out for is what happens with inflation, and how does the Fed respond.

- So that is the big question going forward. I mean, we've talked to a number of guests here just in terms of what to expect when it comes to inflation? What to expect when it comes to the Fed's plan here in terms of whether or not they will announce tapering and when? I guess, more so when that would be.

But when it comes to inflation what camp are you in? Or in the transitory camp? Or are some of these higher prices do you think here to stay?

SCOTT CROWE: I don't think that there's much transitory about inflation. I don't think there's much that's transitory about how, you know, how the world has evolved post COVID. There is no sort of going back to the old normal, this is the new normal.

And, I think, it's a deliberate policy by the Fed. You know, they want to run negative real interest rates to get the economy going and, you know, also deleverage the economy as well. You know, the trick is, you know, you don't want to let the genie out of the bottle, you don't want to, you know, permanently see a runaway in inflation and inflation expectations, you know, look like they did back in the early '80s because then you have to really increase interest rates very dramatically to reset expectations.

So, you know, for now, I think, that the inflation, you know, we're a little bit of Goldilocks right now, just enough inflation. But at some point, the Fed is going to have to move. The first move will be to taper off their-- their-- their quantitative easing. And interest rates are still going to probably be zero for most of next year it does seem right now.

- And Scott, when you talk about the Fed moving the timing of that, of course, is so critical. How do you think investors should be positioned, I guess, in anticipation of that?

SCOTT CROWE: Yeah, well, at CenterSquare we focus on real estate in its various forms, including publicly traded REITs. One of the ways-- and this backdrop is actually very constructive for real estate because negative interest rates imply higher and, you know, asset price inflation, right? So getting that coming through.

The key thing to-- the key thing to remember when you're buying real estate, investing in real estate is that the best way to hedge against inflation is to own asset classes that are going to be correlated with inflation and have shorter lease durations. So that would include, in our space, pretty much all things residential-- apartments but also single family residential, even student housing, and then other shorter duration asset classes like self-storage, et cetera. You know, where-- where there's risk is if you own an asset that has a very long duration lease.

It's very bond like. And that's going to get the negative of higher interest rates without the positive of higher net operating income and NRI growth. And so, look, thinking about the market in terms of how can I hedge against and benefit from inflation because I am inherently taking some risk as it relates to will the 10-year bond yield still be like 1.35% in a year from now?

- And, Scott, I think, the big question when it comes to real estate, more specifically residential housing, is whether or not some of the numbers can be sustained? The-- the trajectory that it has been on has been incredible to say the least. We were just talking to a guest yesterday Warning about a potential bubble that could be brewing in the housing market. I'm curious since you do focus on this area, are you seeing any signs of that at all?

SCOTT CROWE: Yeah, well, look, the housing market is on fire as it relates to single-family homes for purchase but, you know, also the rental market even in a city like New York, which was heavily impacted by COVID, rents are back up ahead of where they were pre-COVID. And essentially what's going on is you've got a lot of people in motion, you've got a lot of people moving, you've had delayed household formation so there's some pent up demand there as well and you've got low supply. Because, you know, COVID, A, shut things down and B, has now created supply chain issues.

And at the same time, the home builders today are much less aggressive than they were back in the early, before the GFC and manage this-- manage their book much more carefully. In other words, they don't they don't want to be caught with too much inventory if and when things slow down. And certainly, you know, prices are responding in a very aggressive fashion.

I do think it's too early to call it a bubble. And the reason is, if you look at the cost of servicing a mortgage today, you know, as a percentage of income, it's still relative-- it's still low relative to history. Now again, that's why interest rates are so important because if the interest rate outlook changes significantly and quickly, then that equation will change as well.

- Scott Crowe, great to have you back on. Chief Investment Officer at CenterSquare Investment Management, thanks so much for taking--