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Transcription

Introduction and Podcast Overview

Ben Fraser: Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. We’ve got a Top of Mind episode for you. Bob, what are we talking about? 

Bob Fraser: Okay. The inflation numbers are out and inflation is down. So time to do the victory dance. Time to see the Fed lower rates and refinance your mortgage.

Okay, find out the real scoop. 

Ben Fraser: This is the invest like a billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth The tools and tactics you’ll learn from this podcast will make you a better investor and help you build legacy wealth Join us as we dive into the world of alternative investments, uncover strategies of the ultra wealthy, discuss economics, and interview successful investors.

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We focus on macro driven, alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. 

Understanding Inflation: CPI vs PCE

Bob Fraser: The CPI numbers just came out, consumer price index, and we’re running about, uh, you know, 3. 1%. So, you know, generally, people are seeing that as positive.

Of course, the Fed wants to see it at 2%. Now, we are talking about apples and oranges a little bit because the Fed looks at PCE, not CPI. So, they are different calculations, but You know, it’s still a rough indicator. 

Ben Fraser: So if you don’t really fully understand CPI or PCE, if you break that down a little bit, basically these are our measures, you know, consumer price index.

It’s an index that measures the change over time of certain categories of. Goods and services and that is kind of the measure and the proxy for what inflation is. But PCE is a different form. It has a different, uh, allocation and types. 

Bob Fraser: Vastly different allocation. It’s the same in, in many ways. It just measures a bucket of goods and services and, um, you know, it just measures them in a different way.

So, and they do track pretty close, right, to, to each other, but they are definitely different and they’re calculated differently and have different weightings for the components. But, right. 

Ben Fraser: You, you know, and do you, do you know the rationale for why the Fed uses PCE versus CPI? Like what’s their position on that?

It’s, yeah, I mean, the weightings are more accurate to what they’re trying to track. 

Bob Fraser: To what they’re, to what they care about. Yeah. So that’s exactly right. 

Market Reactions to Inflation Numbers

Bob Fraser: So, so the, so the bottom line is, you know, I think the markets are doing a victory dance, right. Kind of saying, you know, you know, it’s, it’s good. And now the Fed is going to ease, you know, there’s a couple issues with that.

You know, first of all, the 3. 1 is not 2 and 2%, which is the Fed’s target and in the 2%, it’s been slow. It’s not, inflation has not been coming down like I think people expected it to. And it’s been a little more, more stubborn, which is exactly what we have been saying for a couple of years. We think that it’s going to be stubborn.

You know, I’ve said rates are going to come down, but I think they’re going to be hard, hard to get down. And the Fed is not moving off the 2 percent target, not even a little bit. 

Ben Fraser: Well, I want to make a little point here, cause this is math, right? But a lot of people just assume 3%, it sounds pretty close to 2%.

What’s the big deal? But if you think about it, it’s actually 50 percent higher than, right? So it’s, it’s, it’s, it’s actually pretty big from a percentage standpoint, because of the GDP, which is the measure of the whole economy, it’s. That’s a big number, right? So it is important. And even though it feels like, man, it’s come down off the highs of seven and 8%, it’s still pretty far off the target.

Bob Fraser: And the Fed, so, uh, you know, I think people are waiting for that, you know, 3. 1 to come down to the two. And then as soon as it’s two, The Fed’s going to start chopping interest rates. It’s just, again, these guys, they don’t think like you and me. They’re not going to do that. In my opinion. I mean, they’re, they’re going to let it sit around two, maybe drop below two and they’re going to watch it for a while.

They’re not in a hurry to recharge the economy, but they’ve been, they’ve been working hard to get this economy tried to cool off. So they’re going to wait for evidence in my opinion. So again, I think rates are going to be, are going to be, are going to lag. You know, and again, I, you know, I can remember we’ve talked about this, but, you know, historically Um, you know, rates at five, five to five and a half percent, it’s, it’s normal, right?

So we’ve got this idea that everyone wants rates to go back to normal. Well, that’s exactly what they just did by releasing like this, you know, people, you know, people have a very short term view of things. So, so, so inflation is a little higher now. 

The Impact of Rent and Energy Prices on Inflation

Bob Fraser: We’ve also, you know, we follow Jay Parsons and we’ve had him on this podcast and we, we love him and he’s, he’s a real estate focused guy.

And well, it turns out, you know, rents are a big component of shelter, which is, are the largest component of shelter, which is the largest component of CPI. Right. And the way the CPI calculates it, their formula is a very lagging formula. So what’s happened, even though all we’ve seen rents, rent growth stopped really, really utterly for the last year.

And, and even drop, you’re not seeing that in the CPI, the CPI data is still showing increasing. So because it’s so laggy, our view is that short term, you’re going to see inflation continue to drop. Okay, and it’s going to continue to come down because of shelter is, is this very laggy indicator. And, and, uh, you know, the assumption of the Bureau of Economic Analysis, the guys that put together the CPI is that rents don’t change that often while actually they do.

And, uh, and so whatever, it’s just, it’s just the way they construct it. 

Ben Fraser: Well, in a normal economy, they, they don’t, right? This kind of natural slide increases year over year. But when we had their level of increases, we had. And, you know, 21 and into 22, like they were the biggest rent increases that we’d seen in multiple decades, like massive.

And so it creates this huge, you know, rad side of the snake that’s just kind of trying to be gulped down. And it’s, it’s this big lump that it’s throwing all the data off. And it’s usually, I mean, about a 12 month lag, uh, from what, what rents are being born and what’s the CPI. 

Bob Fraser: So as those, that negative rent growth goes through the snake.

Yeah. It’s going to result in lower inflation in the near term, you know, let’s say six to 18 months, you know, from now. So we’re going to see inflation continue to come down. Add to the fact that we’re seeing energy prices, you know, oil continues to just be in this bear market in spite of them refilling the strategic petroleum reserve and fighting in spite of.

OPEC and whatever, we’re seeing energy prices come, come down and energy prices are just volatile in the short term, right? We’ve always said, we’ve never said, Hey, we’re the, we’re the guys that are going to tell you exactly what’s going to happen this week or this month or this year and in commodity prices or anything.

But what, we’re the guys that are saying, Hey, the tide is the tide and the tide is, you know, an energy where we’ve seen a massive under investment in infrastructure and development of oilfields. I mean, 55 percent down, uh, in the last seven years and, and that is going to have a huge downstream effect and we’re, it’s an energy crisis that is going to come in the next five or so years.

But, obviously the market should say, well, it’s not this year. And which is great for us because we’re buying oil fields. So, you know, we’d, we’d rather be. Be backing up the truck here and buying, you know, well, prices are low, but so you’re seeing a counter trend move, uh, called let’s call that a buying opportunity.

That’s what counter trend moves are always buying opportunities, right? So we’re seeing a counter trend move for the long term trend as there is, you know, energy going up, you know, and we’re also seeing softness in the jobs market. So again, there’s so much noise out there, right? You know, the headlines are, you know, Job market softens, you know, but the reality is there’s still more job openings than there are unemployed people Right, right.

And so it’s kind of like, you know, you know, the the market that or so the economy is still quite Healthy and, um, and then, yeah, the latest Wall Street Journal article, you know, Janet Yellen is saying, you know, it looks like soft landing, which again is what we have been saying for over two years now. And that, you know, soft, soft landing is in the cards and it was because of the massive stimulus that happened and the fact that consumers because of that are on fire. This idea that You know, the past, this stimulus was completely different than every other stimulus ever done in history.

Right. When you, when you wire money to people’s checking accounts, it changes things. Okay. That creates demand. And that’s exactly what we saw is trillions and trillions. Um, in artificial demand by, by government direct stimulus, direct payments.

Predicting Future Interest Rates and Inflation

Ben Fraser: I think, you know, it, it has felt like it’s been this back and forth prediction of recession, soft landing, CPI is up, it’s going down and it’s, it’s, you know, the headlines to see what the latest numbers is, but you have to look at the relative trend and the relative and also absolute, you know, where are things at right now.

But it’s, it’s also surprising, I think, to the market to even consider that a soft landing is possible because. We’ve never really seen that in the past. So I, I think the market has taken time to digest that, but all indications are pointed that way. And I think another, you know, consequence of that is even if we do hit that 2 percent number, like you said earlier, the Fed’s not going to all of a sudden just chop rates down.

Okay. We hit our, we hit our goal and we’re good now. They’re going to, yeah, they want to see it sustained for a while. They’ve said as much, right? And so it’s, it’s again, this higher for longer is. If they haven’t caused a recession, what need do they have other than, you know, investors are, you know, throwing a fit that rates are higher, you know, and that, that, that is kind of their ultimate tool they have, there is a recession, right, is to drop rates and to stimulate through, you know, cheaper money.

And so they’re going to be very reluctant to cut it until they feel like this, this issue of inflation has been. Properly managed and over a period of time and fills under control, which is probably going to take some time. And I was looking at the yield curve again. The yield curve has changed from predicting rate cuts, you know, in the early part of 2024 to potentially not even in 2024, right?

I mean, maybe we see a small little 25 basis point cut potentially. I mean, and that, that’s been a big shift from even a few months ago where. You know, the market was anticipating earlier cuts and multiple cuts throughout the year. 

The Unreliability of Market Predictions

Bob Fraser: You remember, it was maybe 12 or 18 months ago and you said to me, yeah, you know, inverted yield curve, yield curve, Bob, you know, the, uh, you know, that’s a, that’s a gold standard for prediction of recession.

I said, Okay. Um, in the past, in the past we didn’t have a stimulus that dumped trillions of dollars worth of cash in people’s bank accounts. And uh, you know, and you know, it’s just, this is definitely different. And so, you know, you can’t look at these, you can’t look at simplified measures and you can’t just read headlines.

I’m telling you, you could read, you read the headlines, you’re going to go insane. Okay. You know, because the headlines are, you know, as opposite as you can possibly be and all based on data, right? They quote data and quote, but it’s not, it’s not based on data. It’s not really based on data. They, they, they pull one, one factor out.

And they, they overanalyze it and blow it up into of supreme importance, you know, and then the yield curve is still negative and has been for an extended period of time. And, you know, and the yield curve just shows what the market thinks, you know, interest rates are going to be. It’s really the market has not been right, you know, um, in fact, um, so markets have been wrong and you have markets ever been wrong before.

Uh, You know, almost continuously, you know, you know, think about this. com crash or the, you know, when Amazon was selling for 30 cents a share, right. And, you know, was the market wrong? Uh, yeah, majorly, you know, uh, you know, so, so the markets are herd mentality driven by. An open market auction of people’s emotions based on emotions, sentiment and narrative and headlines.

Right. And not based on data. So there’s, you know, there’s, you know, very little, very little data that is weighing on the markets, you know, so I had it, I’m Mr. Anti public markets, so I’m sure people could debate me and probably win. You know, I’m going to, I’m going to just say it. So there 

Ben Fraser: It is. 

Closing Remarks and Upcoming Content

Ben Fraser: And this is a little bit of a preview for an episode coming up, uh, I think later this week or next week that you guys will hear.

We talked with John Chang, who’s one of our favorite economists, Marcus and Milichap. We talked about why, why the yield curve isn’t the, uh, you know, measure that it used to be or the indicator that it used to be when you have an inverted yield curve. 

Bob Fraser: He’s one of the smartest guys out there. And I always learn something from this guy.

And uh, You know, he is, he’s just super studied and, uh, very articulate. He’s able to say things very simply and very clearly and very, very short sentences too, which I really appreciate, you know, economy of words. 

Ben Fraser: Well, guys, hope this is helpful. And again, as you guys are enjoying this, please subscribe, rate the show, share with a friend.

I’ll give you feedback on the other things you’re seeing or want to comment on. We always love hearing from you all to respond to the questions and things you’re seeing. And just as a little preview as well, as we go into 2024, Bob and I are working on putting together. our economic forecast and updates to some of these macro trends.

And we’re kind of talking a little bit about them, but we’re gonna have a lot more data and kind of a holistic presentation that you should be excited for. Um, kind of go into 2024 with a lot of updated charts and graphs. And if you know anything about Bob’s presentations, you will definitely have plenty of charts to, uh, to back up everything we’re saying.

So I hope you enjoy it. Thanks so much for tuning in and until next time.