With interest rates rising and a recession looming, successfully navigating bumpy waters can be challenging. But, the best opportunities always occur when the economic landscape is shifting. In this episode of the Top of Mind series, co-hosts Bob Fraser and Ben Fraser talk about many of the questions on investors’ minds. They discuss whether or not we’ll have a recession, how the Fed may respond to continued inflation, and the best places to invest your money.
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Top of Mind: Interest Rates, Recession, and Finding Opportunities
Are we headed to recession? What does that mean? How are these interest rates impacting the world and the economy and what is the Fed gonna do going forward? How do we make our positions as investors with that information?
Welcome back to the Invest Like a Billionaire podcast. I’m a cohost Ben Fraser, joined by Bob Fraser on another Top of Mind series, and so in this series, if you haven’t listened to any of them before, These are really funny. These are kind of shorter little nuggets and we kind of tackle, you know, one or two things that are happening in the economy, um, uh, just in the markets that we’re in.
And it’s really kind of off-the-cuff conversation. So this is not scripted. Uh, we didn’t, you know, have really an agenda before this, but we had kind of a topic we wanna talk about. And we think it’s really relevant to today’s investors and just to kind of have a conversation about, you know, what’s going on in the economy.
Um, are we headed to recession? What does that mean? How are these interest rates, um, impacting, you know, the world and the economy, and what is the Fed gonna do going forward? And how do we, how do we kind of, you know, make our, um, Positions as investors, you know, with that information. So, you know, I think before we kind of dive into some of these questions, one thing that I think would be helpful just to kind of break down for, for listeners that are maybe, you know, not economists or newer to this kind of concept of, um, you know, quantitative tightening, quantitative easing raise, interest rates, learning rates, and how that impacts the economy.
You know, talk about. , um, you know, the Fed their role and the economy and their mandates, and how interest rates are kind of related to, to those mandates.
The Fed’s mandate is primarily employment and to keep employment, um, low and keep inflation in check. And, uh, you know, they’ve adopted various other mandates, kind of loose mandates from time to time, like, you know, stock market and then not the stock market, but whatever that, that’s their mandate is to kind of keep, keep the economy from overheating.
The one thing they have is short term interest rates. So they actually control short term interest rates, and by controlling short-term interest rates, it has an effect on long-term interest rates. A little bit.
It’s more like, Grabbing, you know, uh, the, the tail of a dog and you can kind of steer the rest of the dog, you know? Right. . But it’s, you know, the dog kind of got in mind of its own. And, and so that’s the way long term. So, so interest rates are a hundred percent determined by auction. At the market. So, so especially the longer term rates.
So that’s really what all the Fed does. And, and it’s pretty, it’s a pretty giant hammer and it’s the only tool they have really. So, so they have this one tool, if you imagine your doctor, you go to a doctor and they have, the only thing they have is an amputation saw. Right? That’s their only tool. Um, that’s pretty much what it is with the Fed, you know.
So it’s a very broad tool.
Get, get the, the job done to be a little bloody, potentially.
Yes. And the, It’s, that’s the only tool they have now since the great recession we’ve had, they’ve had another tool called quantitative easing, where they can actually go into the bond market and start buying bonds, printing money in essence, and buying debt.
Well, they’re not a market participant as a buyer or seller of that debt, and so they can actually affect long term and longer term rates by actually entering the market. That’s brand new. That’s only since, you know, 2009. They did that for the first time and then they go into the mortgage market and they, they can go buy and sell those and control mortgage rates by simply buying and selling.
So if they’re buying mortgage rates, rates are gonna go down and the Fed’s balance sheet means the stuff they own goes up, it balloons, and that’s exactly what happened. And then if they decide they wanna sell that stuff, well then interest rates will go up. Um, because there’s now not, not only less buyers, but there’s more sellers.
And in order to be attractive, you gotta sell it, uh, you know, in higher interest rates. So, so that’s, that’s the bottom line. Um, so what about, what about inflation and interest rates? And there they’re, no, they’re not directly related, right? But it’s kind of, you can think of inflation interest rates as like two, two forces connected by a rubber band, right?
So you can pull inflation long ways over here, while the, One of the ways to cool, to cool inflation is to raise, raise in interest rates, right? And. All of a sudden, you know that that can create the pressure off inflation by reducing demand. If you put the economy in recession, you are gonna slow down inflation because there’s less energy use, less raises being given out.
It’s, you know, a very blunt instrument. Um, so, so, so they’re, they’re, they’re related, but not directly. Uh, but they’re, you know, they, they push and pull each other, um, so to speak. Uh, so, so the, the, the primary thing that’s going on right now, and it’s a very similar what happened in the seventies. Is we’re, we’re, we’re seeing the feds, The Fed is gonna be very difficult to get inflation under, under control one.
There’s so much liquidity created during covid. So if you look, there’s something like a $4 trillion in excess savings that people had cuz they didn’t go out. So, so people’s balance sheets just ballooned. And to that, you know, uh, you know, 3 trillion or ish of stimulus where you to put cash in people’s pockets.
Um, so people were just flushed in the stock market going up and housing market going up the wealth effects. So you have the, all those things really made a very, very healthy consumer and, uh, and then add wage increases on top of that. So you’re, you’re seeing, you know, so that’s, it’s gonna be, it’s gonna be a lot to take the air out of that thing.
And now can they do it? Absolutely. I mean, they’re working hard to do it, but it’s, it’s a bit of an effort, um, to take the wind outta that thing. So, so they’re, they’re working hard on that.
Can they bring inflation down? Well, here’s the problem. Even if we went into full recession, it’s gonna be very difficult to take inflation down right now.
Mm-hmm. . Um, and so there’s a, there’s a bunch of inflation components, um, but the big one right now is energy. Okay. And as I’ve pointed up before, the problem with energy is energy is the mother of all commodities, meaning everything takes energy, right? So if energy’s up, everything’s up. Uh, it takes energy to ship your groceries.
It takes energy to run your diesel tractors and your your farm combine. It takes energy to run the, run the mines and the mining equipment. It takes energy to commute. It takes energy, is it is used in everything. And so if energy is high, Then everything’s high. And the problem is, as I’ve pointed out, is we have a pretty major energy crisis underway across the globe right now.
Mm-hmm. . And it’s caused by this false narrative. And I went into this, you know, in the 20 20 15 that the age of fossil fuels was over, was the world is massively under risk in fossil fuels for the last seven years. And so we have a production caps, right now across the globe and it’s a huge problem. So, So the bottom line, so the Fed can create recession, but it’s not going to, it’s not gonna cause energy to come way down.
Now. Now can they cause energy demand to lessen? Yes, but it’s still gonna remain stubbornly high. Uh. And so the problem is you can do that, but you’re not gonna get inflation down. So we end up in a potential scenario of stagflation like we wake had in the seventies where low growth, you know, re you know, in and outta recession and, but we still have inflation in spite of that, you know, kind of worst case scenario.
So seems like that might, it might be what it’s unfolding. And by the way, this is exactly the scenario that we, we were looking at, uh, earlier in the year that we said, this is the way it’s gonna play out. Right. I said, I said, Inflation is gonna peak, but it’s gonna be stubbornly high. Um, we’re, we’re not in recession yet, but you know, that’s, that’s the way we’re angling towards that.
So, so it’s kind of playing out like we thought,
you know, what one of the, you know, goals of every investor and, and every, you know, trader out there is to try to read and predict what the Fed is gonna do. And it’s been so interesting to see kind of the evolution of the Fed’s position.
right? You, you sent out today? Yeah. I sent
a little me I found, which I thought was hilarious.
Here it is.
Yeah. Okay. Q1 21 QE won’t cause inflation. This is pile QE won’t cause inflation then. Then q2, it’s some inflation, but it’s transitory, , and then it, Okay. It’s high inflation, but we’re peaking. Then next, it’s okay. Inflation may not be transitory, but the Joe job market and wage growth is gonna be very strong.
And, uh, next it’s gonna be, well, we need to hike aggressively to curb inflation, but no worries. The economy is very strong and soft landing is possible. And then finally, negative growth in q1, but no recession risk. And then, okay, recession is coming. It’s like, it just keeps getting worse.
And yeah, the, the, the line keeps moving on, on what they’re tracking it.
To me it feels partially. Plan and then partially, I think they are shocked in, in some ways and no.
So here, here’s what happened. People attributed inflation to the supply chain problem with Covid, right? And, and there was, it wasn’t, but right? But underneath was this sneaky inflation driven by energy that no one foresaw.
And so and so, so we have this massive energy shortage that’s that’s working through the system and it, it wasn’t exposed during the low demand years of covid. Right? And as soon as we exit from Covid, all of a sudden demand. Oh, you know, we, it, it, all of a sudden it surfaces this shortage of surfaces because there’s not enough, not enough energy supply.
Right. And then Shock shocks Ukraine, and now it’s, it’s a, it’s a, you know, holy smokes moment, like, what’s going on? Right? And so it’s this very sneaky, uh, you know, energy is what no one was counting on. And no one saw it coming, but it was very predictable.
Right. And so, so it seems like, to your point earlier on, you know, the Fed has this blunt use instrument that that can work for certain things.
And the idea of high keeping interest rates size, it’s gonna slow down demand, slow down lending, gonna slow down the economy, right? Hopefully to slow down inflation. But, so much of what is driving the inflation numbers, the headline CPI is energy.
This is solvable, the Biden administration is releasing from the strategic petroleum reserve, which is really there for, to fuel our military in case we need it. So, unfortunately, , that’s, you know, it’s, it’s really more of a political thing.
Now let’s get oil prices down prior to the election is what they’re trying to do. Um, but the, you know, really we need policy. They need to release oil and gas leases. They need to fast track energy infrastructure projects, including l and g projects and, and that’s what needs to happen.
And even, even there, it’s gonna be very tough because those things take a long time to develop.
Yeah. So what, based on kind of your interpretation of where the, the Fed stands, because during Covid they were extremely dovish and they just opened up the floodgate to, you know, make every effort to, um, make it a soft landing.
And they, they largely did, but maybe kind of kicked the can down the road, the road a little bit. And now all of a sudden they’ve kind of turned and, you know, channeled the Volker as we kind of joke. And are you.
I, I didn’t a honk they were serious about, I thought administration. They’re, they’re, they’re gonna buckle, but, you know, you know, hats off to them.
They’re not, they, he’s, he is, he is vulgar from what I can tell. And I think everybody believes that right now. Right. So, So
how much do you think of, of this is, is posturing, right? Because we’ve talked about before, some of them, because the Fed has such a large impact on. Um, kind of the, the expectation of the future and what it’s gonna be like.
And so, you know, sometimes they can posture whether you know, positively or negatively and, and it impacts the perception of investors. Um, do you think this really hawkish, uh, approach is more of a posturing approach to hopefully kind of, Slow down potential demand? Or is it, I mean, it’s anyone’s guess at this point, but what?
What do you think?
I don’t think it’s pure posturing. I think that’s part of it. They do want to talk the game, so get people out of the inflation mindset, because inflation mindset creates inflation, so right. The solutions is to change the mindset. Um, but I, I think they’re, I think they’re very serious, but they understand how damaging it is.
Do you see them holding interest rates high potentially throughout 2023?
I definitely do and, and especially because my prediction is that energy’s gonna stay high. And so I think we’re gonna see prolonged period of higher rates. Um, They, and they can soften it. So it depends how a recession they want to create and Right.
And, uh, talk a little
bit about that cuz that’s, that’s kind of the big scary “r” word recession. Right. And there’s obviously, you know, that can mean different things as far as how deep in a recession is. What markets and, um, asset classes it impacts. I mean, talk a little bit about that. As someone you know who has not been through only, only really one recession, which was the great recession in 2008, but you’ve been through multiple, what, what do these cycles look like?
Right? What does it look like from a consumer and an investment standpoint? Yeah.
Earnings drop and revs drop, NOIs drop. Add higher interest rates, which makes the cost of investment higher, right? Um, and leverage. So, which also hurts earnings. So, so it’s, you know, things go down.
Is it catastrophic? Rarely, uh, You know, I think the, the Great Recession was on the worst we’ve had, you know, I mean, really since the Great Depression and, uh, so I don’t think we should be looking for anything like, like that, especially since there’s a lot of healthy foundation in economy, so, Right.
This is actually a great time to buy. So in the market is just going up, up into the right, right? Well, when do you wanna buy, You know, I’ll tell you what’s really perfect is when, as the market’s getting ready to head up into the right, it takes a little dip, right?
Yeah. And so that’s actually the time you wanna buy. So given the trends we’re following, so I’m, I’m following right, this massive industrial trend, right? That is the reindustrialization, the, the reshoring of America. And the rebuilding of energy infrastructure and all those things, that’s not changing in the next 20 years.
Right now, if there is a dip before that, that lets us get in cheap. Well, that’s a gift, right? So we want to be able to move on those things. And so this is actually, so, so counter trend moves are awesome. Buying opportunities. So that, that’s my view. And you know, there’s a lot of things. So, you know, right now energy is really top of my mind.
You. Because this is just a huge opportunity and energy plays are still massively undervalued, right? I mean, Buffett is buying energy right now. What does that tell you? I mean, it’s, it’s the value I,
the, the pinnacle value investor. If he’s buying something,
everyone hates it.
You’re, you’re, you’re pretty, I mean, if you’re, if you’re in energy, you’re pretty much satanic, you know, you’re, you’re viewed as the evil of society because you’re, you know, create, you know, you know, using fossil fuels, which are everyone knows, is evil. And although, And gets in their car, you know, still.
Yeah. Flys gets in that plane. Well, um, they do that. You didn’t use green energy to do that. So I love green energy, but green energy isn’t there yet. And the bottom line is it is energy is still on sale and energy plays are still in sale. So pretty much I wanna back up the truck in energy. We’re definitely at Aspen, are really looking at all a more energy plays. Really, really smart energy plays. And there’s looks to be some killer opportunities still. Um, surprisingly, the world hasn’t woken up to these yet. Great. You know, and the other thing is, Inflation is the friend of real estate, right?
They’re, they’re very good, good pals. Mm-hmm. . And, uh, so if we see NOIs drop and we see deals falling out, um, which we’re seeing, we’re, we’re seeing a lot of like Class C, multi-family and stuff falling out. Because all of a sudden the rehab costs went up because of inflation. These deals, they didn’t fund them enough for to do the rehab, the the value add piece.
Right. Right. And they’re falling out. And so we’re seeing those dropping in price. Great time.
And a lot of the really aggressive bridge lenders, which we’ve been talking about for a while,
is we’ve been talking about that is a huge risk as the bridge, The bridge
lenders, they, they’ve completely left the market, at least get not competitive to where these deals aren’t pencilling, which, and, and so
that’s causing deals to fall out in prices to soften, which now thats, now maybe we, we, we have not been doing a lot of multifamily recently and, you know, in the last, uh, the last part of the year and, uh, Because of that.
So now it’s looks like hopefully we, we’ll start to, maybe we’ll start to find some deals we like again. Yep. And, uh, so it’s all good. And we’re doing, we got a multi-family coming up that we’re super pumped on, but Head has a three and a half percent ins consumable Fannie Mae loan on it. , it’s like, and it’s Class A, so it’s still.
Killer sweet deals. So there are a few sweet deals, but, and even there, I remember inflation is our friend. So, um, even if there is a little recession, okay, how long is it gonna be, 10 year recession? Those things, it’s just unheard of recessions. Last a. You know, usually next The Obama, the Obama recession was a, was was a different, it, you know, he managed to make it last a good six years.
you know, it’s super skill of a guy who had no business experience whatsoever. In fact, no experience whatsoever, but, but making speeches, um, Um, so, uh, you know, but that’s, most recessions are short. Um, so even if, even if that happens, you have some NOIs hit as, as long as you can cover your cash flow, cover your debt service, you’re good.
So you wanna make, make sure your investments are super solid and then you just write it out and extend. You know, if your timeline was three years, we, you make it five. Yep. And you’re fine. Right. And inflation still is gonna be your best friend as long as you don’t get shaken out of the deal. Yeah.
Awesome. Well, hopefully this is some helpful kind of thoughts as, as we’re all, you know, uh, trying to find opportunities and position ourselves as investors in, in. In good ways, um, kind of for what’s coming the rest of this year into next year. And I don’t know if you have seen recently, if you’ve been following this podcast, but we just launched our new website at TheBillionairePodcast.com.
And on there we have, uh, several things you can do. It’s easy to follow along all the episodes. Um, but we also have this, this new, uh, uh, thing you can click on there where it’s basically he says, Ask anything and you really ask questions you’re thinking about, right? So this is, we wanna, what do you wanna know?
What do you wanna, So we wanna do a lot more of these types of just kind of short, you know, one hitter, um, uh, a little podcast top of mind. And we really want lot that to be driven by listeners questions. And so if you have questions, things you’re thinking about, we would love to see those. So, so please, um, go in there, submit your questions.
You can do a, a, a little voice text and it goes straight to our team. Um, and we’ll review those and, and listen to ’em. And, and maybe we’ll even future your question on a future podcast. So please go there, check it out. Um, hope this is, is instructive and valuable. And, uh, tune in next time. Thanks so much.