To Rent or Buy?

By Lloyd Graff

The U.S. stock market has been acting like a yoyo. Up and down, up and down. The reason is understandable. Higher interest rates orchestrated by the Fed are perceived to justify lower stock prices, at least in the short run. The Fed Chairman, Janet Yellen, has signaled rather opaquely that interest rates are eventually going up, but she has been deliberately vague about when that might happen.

Wall Street traders are generally believing rates will go up within six months, but the statistics are so inconsistent it is leaving the markets terribly confused.

Unemployment seems to be plummeting, it’s currently at 5.5%, but wage growth is still sluggish. The income gap between rich and poor is growing. Huge numbers of people are incarcerated in America and when they get out of jail it is very tough for them to get jobs.

A large number of people have chosen not to work, many because their skills won’t earn them enough to live better than they are living on the various government subsidies available. So unemployment statistics are not a slam dunk for the Fed to raise rates to combat its bogeyman, INFLATION.

The markets keep asking – where’s inflation? It’s harder to find than Waldo.

Oil prices have been cut by more than half over a few months. The dollar has risen 30% versus the euro and the yen. Europe and Japan have cut their interest rates to almost zero, and some countries like Germany and Switzerland, below zero. So money leaps out of Europe and Japan to America with its strong currency and low rates but still better than zero interest rates.

The oversupply of almost every commodity except brains is pushing prices in the United States down, not up. Toyota has a lot of room to haggle on a Camry with the yen at 120 to the dollar and costs figured at 90 yen to the dollar. China is so glutted with steel it is stabbing Nucor and every other American mill in the gut by lowering prices. I know the specialty mills are holding up prices of bar-stock at the moment, but one wonders for how long. Corn is cheap, gasoline and natural gas are up from the lows, but $2 gas appears to be coming soon. Many of the jobs produced over the last five years have been from the presently waning shale boom.

So the Fed looks around and wonders why it should push up rates when American consumers are socking away money and Millennials are paying off college debt and not buying big houses in the burbs for kids they don’t have.

And the stock market yoyos. I get it.

An equally intriguing issue for folks in the machining world is, how do we play this new world of no inflation that may become disinflation and heaven forbid, DEFLATION.

Gary Shilling, the brilliant American economist, has correctly predicted the economy for decades. He thinks oil could go to $10 a barrel, at least for a little while, because of huge overproduction and lack of storage facilities.

What if everybody’s house lost 25% of its value, mortgages dropped to 2% for 15 years, and car prices dropped by 30%? It could happen.

I think there is a persuasive argument to be made today that we should be renters of capital equipment and real estate. This possibility scares me as a buyer and seller of capital equipment and a home owner, but I see the logic of being a renter today, if long term assets may deflate in value.

I know young people seem to prefer renting over buying these days, and not just because they cannot raise a down payment. It may be an important trend.

Renting capital equipment still seems to be the exception in my world, but if you are looking at a 3D printer, where technology is bringing prices down rapidly, it seems to make perfect sense to rent.

If I step back, the tug of war in the equities and bond market is fascinating, but for people making big bets on machinery and property every day, it is scary.

Which side are you on? Brian Beaulieu, who I wrote about 10 days ago, is confident that the big spending by Governments will keep the economy buoyant for two more decades.

Gary Shilling, also a great predictor, sees a deflationary trend, though he’s not buying a generator and waiting for the apocalypse. Is it a time to rent or a time to buy? To everything, there is a season.

Question: Is it better to rent or buy today?

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3 thoughts on “To Rent or Buy?

  1. Avatarallen

    If you think deflation’s on the horizon hanging onto every buck is the smart play. They’ll be worth more then they are now. But that decision has to measured against the wealth-generating potential of those dollars.

    I’m still scratching my head about the reason for what appears to be a long-term, wide spread deflationary trend.

    After all, prices have been coming down on a number of commodities for quite a while and about the only thing that remotely explains that phenomenon is that productivity is increasing fast enough to exceed demand. That drives down the price of “stuff” making.

    When the price of “stuff” goes down that means the value of money’s going up. Deflation is the value of currency increasing and given the economic dislocations in Japan and Europe the one currency that looks safe by comparison is the dollar.

    If the European Union fractures that’s hardly going to inspire confidence in the euro and Japan seems mired very much in the past with economic performance to prove it.

    No one with a lick of sense is going to buy renminbis as a store of wealth, quite the opposite. So, despite a president who’s inspired fear and loathing among our allies, cautious optimism among our enemies, an economy that’s still pretty flaccid and various social ill, real and imagined, the dollar’s still the safest repository of wealth.

    Hopefully, before things get too much worse we’ll have a president who inspires confidence rather then fear but that hope’s no nearer then about two years and that’s a long time.

     
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  2. AvatarCraig St John

    Thousands of products are rented every day – but renting new CNC machine tools is very rare. There are reasons why it hasn’t been done in the past but perhaps there is a business model today where it would make sense. I’d love to hear from anyone that has rented a new CNC machine tool. Usually the interest, depreciation and other cost factors that the seller has to recover within a rental period cause the monthly expense to rise above what the market will bare.

     
  3. AvatarRandy

    If you are leasing equipment you are in fact renting it. Some people like this model, we prefer buying. When you are renting a house it gives you flexibility of relocation and upscaling or down scaling as opportunities change or arise. In the business side we find that same choice in any decision to buy the equipment. If your business model is short term, then renting or in this case a short term lease may allow you to fix your time frame and overall investment. It gives you a know “exit strategy”. Buying and then having to sell is less firm, but that comes to opportunity, long range vision and planning. We are “in” on the manufacturing decision so not a question for us, we will keep buying. I struggled to jump into the Swiss market after many years of consideration. We decided to jump in whole hog and get the highest capability we could to allow us to compete on anything we saw come across the quote desk. I could have entered used and 8-10 year old technology for 1/4 of the price, but then I would have to compete with every other swiss shop that had 30 years of history and equipment. For me it was go in hard and heavy, if I can’t make any money at it and our customer base won’t support it I can more easily sell the high end at a discount. If we gather up less complicated work, I can always add capacity at the lower end of the spectrum. Either way, owning and the Section 179 was a better decision than leasing or renting.

     
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