Listen to Episode 114. 7 Investable Megatrends for the Next Decade ⁠⁠https://www.thebillionairepodcast.com/114-7-investable-megatrends-for-the-next-decade/⁠

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Ben Fraser: Welcome back to the Invest Like a Billionaire Podcast. I’m co host Ben Fraser joined by fellow co host Bob Fraser. And today we have another exciting top of mind episode, big news. Big news. So we just saw the report of GDP for the third quarter come out. And wow. It was a shocker. So Bob, you want to chat a little bit about that?

Bob Fraser: Or was it a shocker? Okay. So anybody who has watched our Investable megatrends for the next, next decade. It shouldn’t be surprised by this. So we have been, we’ve been predicting high growth, soft landing and no or little recession for almost two years now. And in spite of, lots of fear in the world, lots of fear of the economy and lo and behold, so the wall street journal article says a U S economy grew at 4.9% rate this summer, powered by fast spending Americans. And Ben, what was our theme? 

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Consumers are going to continue to spend, they’ve been spending the stimulus money I received, but they’ve also sentiment has been up and down, but despite that they continue to spend.

And so that’s been a core thesis of why we really like retail right now. Yeah. Also our thesis that consumers are largely pretty healthy 

Bob Fraser: still. And yeah, so if you look at the main market indicators of consumer health, the ones that, when I look at strong consumer spending, it’s still strong.

I had one, one person comment, your megatrends, Hasn’t changed a lot in the last year and I’m like it hasn’t and the reason you know why because the data hasn’t changed so consumer spending Since covid has been like this on a massive trajectory And then even in the last just since 22 has hockey sticked up and it has not come back down yet So in spite of inflation people are spending.

Why does that matter? That’s 70% of the US economy is consumer spending. So if consumers are spending, you are going to, you’re going to see economic strength. Then you have high consumer savings. Historically, right now it’s a little lower, but there was still a lot of savings done. Low debt service cost.

Relative to income, it’s low. Strong job market, strong wealth effect. The wealth effect means they feel rich from the stock market, from home prices, which home prices took a big jump in the last couple years. As record real income and inflation adjusted income and record cash. Now, people are confused when they see these stats.

I’ve done this presentation how many times? And people are like, what? Because you’re reading the headlines about the inflation strapped consumer and… People are struggling and you know what? Which is true? Both are. Both are. So you’ve got this bottom quartile, say, of consumers. The most, the lowest level, the lowest earners are really struggling right now.

But if you look overall on averages, they’re not. Overall averages. So just pure numbers based on the consumer is incredibly healthy. And again, if this is shocking to you, or it sounds weird, please just go watch the megatrends presentation and how can they access that Ben? Yeah. If you 

Ben Fraser: go to https://www.thebillionairepodcast.com/ you’ll be able to find that we actually released an episode just a few weeks ago. 

Bob Fraser: It’s just so important that if you haven’t listened to this, honestly, just please do yourself a favor. One of the keys to being a successful investor is knowing what time it is, right?

What is going to be working and that’s why we spend a lot of time at Aspen Coming up with these things and really what we’re sharing with you is our playbook. It’s the Aspen funds playbook for where we are deploying capital as smart savvy Investors, right? So anyhow, pay a lot of attention to that.

But it’s exactly what has been, what we’ve been saying for a long time and all of a sudden mainstream economists are now starting to come on board and say, I don’t agree with us that this is, this is, it’s 

Ben Fraser: not only the number came out, it was 4. 9%, right? That may be adjusted here a little bit, but it’s almost double on an annualized basis.

No, it is double. It is double. Yeah. You keep hearing about recession fears and we’re headed for this major hard landing and left the whole global economy. We’re not seeing it, we’re seeing positive in it. Massive. Robust GDP growth. That’s, 

Bob Fraser: It’s going wide, the face and we guys, we at Aspen predicted this two years ago, so we predicted this was gonna happen and it’s because, I’m looking at this data, you cannot have a recession with the consumer on fire like they are.

You just can’t, when that’s 70% of the economy. Yeah, the economy. And so now you pointed out, lower consumer confidence. There’s, so there are things that, you know, tightening credit, high, the, the student loans coming back online, low consumer confidence, inflation, squeezing consumers, all these things.

But. But they’re less powerful than the seven that I already gave. And, consumer confidence used to be one of the main things I looked at. But in the last few years, it’s been less predictive. And I think people, people feel hey, maybe, global, climate change is bad and, Politics is bad, right?

The polarization and, housing prices are up and inflation is eating at me And now i’ve got to pay my student loan back So so they might be feeling these negative kind of forces at the same time their pocketbook is full They got a job their job is paying more than they’ve ever had They’ve got people reaching out to them for additional jobs their home Spiked in value.

They’re sitting on a lot of equity, they’ve got, so they’re one, the one, one part of their emotions is like all this sucks. It’s bad in other parts but I’m doing great. I’m going to keep 

Ben Fraser: spending. Ultimately the pocket books are in charge right now because they are, and it’s, and that, that outweighs.

The negative, feelings of inflation is in a way 

Bob Fraser: my budget, all the negative things. Yeah. And yeah and to this day, I keep checking the data. None of the data has changed, right? We’re not seeing this massive rollover. We’re seeing, I think again, 

Ben Fraser: this is just further corroboration. Earlier on, and as the feds were raising rates very quickly, we saw an early. Potential issue in the banking world, right? And so there were a lot of things and we’re saying, Hey, it’s possible. It could be a recession, but I just started to dig in deeper. I just started to see some of these things play out.

We shifted to the soft landing camp pretty early because it was, it’s just too hard to argue with these massive forces of strong consumers in a lot of the comments that have flipped over the past six months, right? Thinking softly is probably more likely than not likely. And this is a great corroboration of that.

If you have GDP growth, that’s the opposite of recession, right? We’re seeing that and we don’t want to be all, roses and ponies cause it’s not all great out there. There are challenges. 

Bob Fraser: Hey, who’s roses and ponies? I’m looking at data. I’m looking at data. I’ve seen plenty of recessions.

I’ll call it. But we’re and we’ve called a multifamily meltdown. We’ve called a few negative things We’re calling, I think the next time rates go down It’s gonna be because of an outside event like a black swan coming out of China people are not paying enough attention to the data coming out of China they’re they’re seeing a massive property bubble popping right now and and that could spill over.

We’re seeing the numbers dropping massively as they’re economic numbers as people are reshoring out of China, moving out of China. There’s a lot of industries that are very much hurting and I think the greatest risk to a strong economy here is a global run right now.

Not an internal one. Biden is one of the most. Prolific spenders, right? And the Biden administration, with the 1. 9 trillion, COVID, COVID rescue, and then even the Inflation Reduction Act, right?

Which is just incredible spending. And it’s all stimulus. It’s all stimulus. When you spend that much money, it creates economic activity. They’re rebuilding the infrastructure and some of those things are needed. We do need, we need infrastructure help but, the scale is just insane.

And building hydrogen plants and, it’s all this it’s spending. And that money goes into the economy, goes into new construction. It goes into businesses, which goes into hiring, and if you do not have enough people to hire then rates, wages go up. So it’s just we’re seeing a very spend happy kind of mode in DC and it’s not all Biden.

It was pre Biden too. It was stimulus spending, from Trump as well. So 

Ben Fraser: Yeah, it’s interesting. I think the other piece of this is what’s the Fed going to do? Because all eyes are on the Fed. They’ve increased rates massively over the past 18 months, fastest in history.

And, anticipations are going to. Raise rates again, we’ll see most sentiment right now is saying they’re not going to probably raise in November. I think it’s a 60 percent chance they don’t actually raise in December. So we might be at the top of their rates being raised, but what’s really 

But 

Bob Fraser: if inflation keeps going up, they will rise.

They will raise right now. The last number, the core PCE, was 4. 25, I believe it was. And they want that to be at 2%. And it’s, so if it keeps hot, and by the way, all this, all the stimulus spending still coming out of DC is going to continue to keep inflation hot. But then add in, and again, go back to our megatrends, I’m just.

There’s two, two things that are underlying this inflation and it is energy prices and it is wages. And those things, what we’re hitting now is where those two things are not cyclically high. There’s they’re structurally high. There’s reasons they are high because of demographics and because of the oil crisis that’s on the horizon.

Because there’s been an underinvestment in oil development. And so we’re not going to see in our view, we’re not going to see. Inflation softened significantly. And that means we’re going to see rates higher for longer. 

Ben Fraser: And to that point, but we’ve been saying higher for longer for a while.

And that sentiment has started to, I think, be adopted by more people. Cause it, the natural, I think part of our psychology as humans is this is just a short term thing, or it’s, we’ll adjust this quickly. But these things are hard to make massive switches in a dime a year.

And with the amount of. Tailwinds behind the consumer, tailwinds behind inflation to the point you just made. It’s just, you can’t argue with that. And what was I, we’ve been saying for a while is higher for longer. Inflation also means higher for longer interest rates. And so we’re actually seeing this actually now being more reflected in the yield curve, right?

So we’ve talked about the yield curve before. And just for those that are unfamiliar with what that means, right? This is the expectation of what yields are going to be, now and into the future. And the short part of the yield curve is generally heavily influenced.

Bob Fraser: Meaning short term rates, so rates like 30 day rates or 90 day rates, right? Yes, 

Ben Fraser: but the long term rates are largely dictated by the market and sentiment of what’s the expectation going to be at… Three years from now, five years from now, 20 years from now, 30 years from now. And, so we’ve had this kind of.

Semi inverted yield curve where their short term rates are higher than the longer term, 

Bob Fraser: And what that means is the world the market was expecting Yeah, the Fed is raising rates So short term rates are going up, but they expect them to be cutting in the future And so long term rates are lower than short term rates and it’s called an inverted yield curve 

Ben Fraser: And that usually points to historical recession, right?

Because that usually means expectation is lower growth in the future. Not as much GDP there and a struggling economy. What we’ve seen just the past few weeks, a Big run up in longer term rates, the five year and even the 30 year rates have all risen substantially. And it’s, 

Bob Fraser: And literally just spiked up.

And what happens when interest rates spike up bonds crash, so bonds have dropped over 40 percent of their value. And so it’s just a huge issue. But again, this is all what we have been predicting, right? Can we keep tooting our horn without, without sounding, like we know it all, but I’m telling you, we called this.

So guys listen to this. In the end of 2020, just a couple years ago, the 10 year rate was at 0. 5 percent yield, 0. 

Ben Fraser: 5, 0. 

Bob Fraser: 5, 0. 5. Today it’s at 5%. And it’s just spiked up and and and it just, in the last year and a half, it’s gone from one and a half percent to 5%. So this is just a massive shift.

And recently, so what’s happening, what that means is the market is realizing that we are going to have stronger growth. So regardless of what economists are saying, their opinions, the market is saying we’re going to have high growth. And, high economic growth and probably higher inflation.

It’s all bearing out and what this means is bad news for investors, because we’re in the real estate space, and how many real estate operators just can’t wait. I don’t know how many people predicted that rates would start dropping by the end of this year.

And I’m like, and they’re desperate for that. They want to go back and get their properties refinanced at lower rates. And. It’s not, it’s just not in the cards. And in fact, my prediction is I don’t think we’re going to see it in 24, where rates go down. Accepting for a black swan type of event.

But on the flip side 

Ben Fraser: of it, so the short term borrowing costs are going to be a lot higher and that creates a new reality that buyers and sellers have to adjust to really sellers and operators have to adjust to you on the values. But the flip side of that is if we have higher rates, probably higher growth means higher inflation.

Bob Fraser: So the crazy thing about this, and by the way, the 10 year is the one you want to watch. The 10 year is the most important interest rate because it’s the one that the market goes up. It’s the one that is that the. The mortgage market is based on consumer debt is based on, it tracks the tenure more than any and what’s happening is that thing as it’s moved up, we have not seen property prices crash, like everybody predicted, and that includes, just single family homes, your homes, but all the CRE it’s moved the cap rate has moved about, about 90 basis points on average.

Averages are so tough because the office is just in the toilet, but it’s so it’s somewhere around that it’s not as much as interest rates have moved so that the property values are holding their value in spite of these interest rates moves. Why is that as you just said? Inflation.

Okay, so let’s say, you’ve got this apartment complex and yeah your interest cost is going way up, but if you hold that puppy for 10 years and we do have, let’s say, let’s say it’s 8 percent inflation that we don’t have, but even let’s just say 4%.

In 10 years, the value of that property, the value of the rents are going to go up 50%. 5 0. 50 percent and at 4 percent inflation, they’re going to go up 50 percent over a 10 year period. And that means the value of that property is going to go up 50%. What? Is it a bad investment? Would you, should you not buy you should buy apartment complexes.

Why? Because they’re, it’s putting a giant spinnaker up in this massive wind you got on your boat. And, you’re catching this incredible wind called inflation and making it benefit you. Everybody’s complaining about high inflation and high Fuel pump prices get on the other side of inflation get on the other side of the fuel pump as an investor 

Ben Fraser: Awesome.

Hope this was insightful for you and appreciate you listening if you Not currently subscribe. Be sure to hit the subscribe button on whatever platform you listen to this podcast and share with a friend. Leave us a review. We always appreciate that and tune in for the next episode Coming to you very soon.

Thanks 

Bob Fraser: so much