Top of Mind: Fed Cautions on Too Much Optimism

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Transcription

Introduction to the Episode

Ben Fraser: Welcome back to another episode of the Invest Like a Billionaire podcast. We’ve got a top of mind episode coming at you. These are short and sweet, hitting on one or two topics that are trending right now and things that we’re seeing in the market. 

Discussion on Federal Interest Rates

Ben Fraser: The big thing that everyone’s been following the past few months is what’s the Fed going to do with interest rates?

They just held rates steady recently. The past week or two, we’ve seen the long term rates drop substantially, right? And so that’s, An indication that the market believes rates are going to be coming down, maybe sooner than expected, and that’s added extra optimism and hope to the market.

Jerome Powell had some words to say in some things that you wanted us to tamper with. Talk about that a little bit and then we’re going to hit on some other recent updates from consumer spending into this holiday season here that’s just pretty interesting. Not surprising. 

Introduction to the Invest Like a Billionaire Podcast

Ben Fraser: This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth.

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Analysis of Jerome Powell’s Speech

Bob Fraser: Yeah. Jerome Powell said in a speech just a week ago that the U. S. inflation has come down over the past year, but remains well above our 2 percent target.

My colleagues and I are gratified by this progress and expect that the process of getting inflation sustainably down to 2 percent has a long way to go. So that sounds a little bit optimistic. They are definitely not declaring victory and There’s literally no visibility in 2024 on rate cuts.

Meanwhile, the market has jubilantly done the happy dance of rates, and the literally long rates started dropping in the last few weeks and so markets do the happy dance and real estate investors are doing the happy dance, but the Fed is not doing a happy dance. So we’ll see who’s right.

We’ll see who’s right. But not a lot of reasons to do the happy dance yet. So we’ll see. 

Real Estate Investment Insights

Ben Fraser: Yeah. And it’s interesting too. We just had a great conversation with John Chang, which will be coming out in the next couple of weeks on Thursday. That was a great interview. I’m definitely going to want to listen to every bit of that.

He brought so much insight. 

Bob Fraser: If you’re a real estate investor, you want to listen to that podcast on real estate economics.

Ben Fraser: And one of the things he was saying is so interesting. Hey, a lot of the younger, or newer investors in real estate came into the market in the past 10, 15 years at a very unique time.

That is truly an anomaly in the course of, 50 plus 50 plus a year history of We’ll say that’s really from a debt standpoint, right? And in a long term rate standpoint, and with rates being held close to zero for a long time and long term rates being pretty anemic as well. It really made real estate really easy to pencil, right?

But as the rates are higher right now, and then even, higher longer term, relative to longer periods of history, it’s not outside the norm. In fact, it’s actually, the long term rates are even lower than historical averages. And so it’s just an interesting kind of compare and contrast here with the market getting so used to these incredibly cheap rates and it’s felt like really for the past year plus of the rates going up, when is it going to be the first rate cut?

And people thought it was going to happen later and now it’s been this, acceptance of, okay, it’s probably gonna be a little bit longer than we want, that can’t hold us forever. We’re seeing progress. Let’s just drop it right away. But it’s what we’ve been saying for a while, over the past year, 18 months is higher for longer both inflation and by necessity, interest rates being higher for longer, unless there’s some kind of, black swan event.

But it just, it feels like the market is overreacting to get it right. And so Jerome Powell is calling out, don’t get too optimistic yet. 

Consumer Spending and Economic Growth

Ben Fraser: Along the same kind of theme, we were talking about the consumer being very strong from a savings standpoint, from a real income standpoint.

We just got another report from the Wall Street Journal here saying, America’s shoppers have plenty of dry powder. So this is the Wall Street Journal. We’ll link to both these articles in the show notes here, but talking through some of these charts is just really fascinating. 

Bob Fraser: It sounds like we keep replaying the same theme.

So if you’ve been listening to our podcast, it’s, we’re not going to have a recession, which we’ve been saying for almost two years now. We’re not going to have a recession or if we do, it’s going to be very light. And the reason is the consumer is spending like there’s no tomorrow and there was a huge savings cut as well.

And So the report just came out. Consumer spending on goods is at an all time high. Inflation adjusted after adjusting for inflation. It’s at an all time high. Consumers are on fire. And then there’s a great chart in the article that shows this, and then it says, cumulative, cumulative excess savings held by US households is still at $50 billion.

Just what was saved over in the Covid era. is still there still hasn’t been spent yet. It’s dropping, but there’s still money left. And so in spite of low consumer sentiment, which is probably due to the political impasse and, who knows, high inflation, all these things.

But Consumers are absolutely on fire. And given that is 70 percent of the U. S. economy, it’s just going to continue to boom until it doesn’t anymore. But there’s still a runway in this economy. And the latest numbers out of the GDP the GDP growth were just revised up over 5 percent GDP growth.

Predictions for Future Interest Rates

Bob Fraser: So all that says we’re probably not going to see rate cuts, I don’t think in early 2024 and I think it’s probably unlikely anytime in 2024. I’m hopeful. I would like to see rate cuts. Get our mortgages refinanced and, if you miss that boat, I’m sure you’re upset by that.

And back to your point, everybody’s waiting for the rates to get back to normal and, to John Chang’s point on the podcast, what if this is normal? In fact, it is, higher rates if this is normal, that, Rates dropped to near zero during the great financial crisis and really during the Obama years, we never quite got out of recession, just never quite happened and so rates have just been slow.

Then we got hit by the pandemic and they went down to zero again, but I think this is probably closer to normal. 

Ben Fraser: Probably closer to normal and, this kind of report from, Wall Street Journal and the consumers dovetails. Squarely into the Fed sentiment is, this being, consumer spending is 70 percent of the economy and in 2023 it’s looking like we’re going to have a gangbuster GDP growth year, right?

And a lot of it’s being driven by the consumers, like that’s going to continue to be inflationary. And so as consumers continue to spend, maybe it slows down a little bit, but there’s still a lot of this excess savings. And despite people being not very positive, they’re still spending like there’s no tomorrow.

Bob Fraser: We are seeing rent growth slowing. We’re seeing oil prices being soft. All those things are going to help the inflation numbers get down, but we’ve always said, we’ve never tried to predict inflation over, a one quarter or even a one year period, but long term inflation is not going to go, it’s not going to stay down because primarily of wages and energy prices are have systemic structural issues, not cyclical issues.

So we’re going to, we’re going to see that, I do think we might see rates continue to, sorry, inflation start to, continue to soften in the short term. Yeah. Before it continues being stubbornly high. 

Adapting to the New Normal as Investors

Ben Fraser: I think as investors, it’s always hard to shift your frame of what you’ve been used to.

And we all got accustomed to cheap debt. We loved it and it made things a lot easier, but we have to now shift the frame. If this is the reality of the next 12 to 18 months, maybe even beyond, there’s still opportunity and you need to shift where you’re looking for the opportunity to shift.

How you’re positioning, with this is the new normal. And, there’s a lot of indications that this isn’t going to be this way for a little while. And so as investors, we need to get over the desire for it to be different and go back to the way it was.

Bob Fraser: There’s opportunities everywhere, everywhere, and so I don’t know if you remember, but when this whole zero interest rate regime became the normal 10, 10 years ago or so 15 years ago.

The Impact of Interest Rates on Savers

Bob Fraser: All the media was talking about how difficult and how horrible that was for savers. And it is. You’re a saver. What do you do, how do you get income? So if you put your money in the stock market, it’s a big gamble. But if you’re retiring, what do you do? How do you save?

You just open an account with Ally Bank and what is it, almost 5 percent a savings account with an FDIC insured bank. What? That’s nice. There’s two sides to every coin and now it’s good for savers, right? It’s good for savers and it should be good for savers.

You should be able, money has a value over time and you should have value over time. That’s called the interest rate and so it’s good for savers, it’s not good for borrowers. And so shifting back the other way. 

Conclusion and Episode Wrap-up

Ben Fraser: Alright guys, hope you enjoyed this episode, and always appreciate you tuning in.

Feel free to share with a friend, and don’t miss the next episode. Thanks.