2022 Economic Outlook - What To Expect For The Rest of the Year

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. Welcome back to the Invest Like a Billionaire podcast. We've got a great episode for you today, and today is a little bit different, and it's actually a recording from a few weeks ago from our annual shareholder event. So we do an event for our shareholders every year, and as part of that, Bob Fraser goes through an economic update. And so, uh, given the current environment, just where we're at right now with the economy, you know, rates are going up, inflation's still really high. A lot of people are concerned about recession. We thought that this presentation would be really valuable to share more than just our investors, but with our broader listenership on the podcast, as this is the same questions a lot of people are asking. And so this is a little bit different than normal, and it's really more of a presentation that Bob Fraser went through. And so I would highly encourage you, if you have the ability to watch this episode on YouTube, and you will be able to see the presentation and the slides. There's a lot of slides and graphs that he's going to be referencing. So it'd be a lot more helpful if you can watch it. You'll be able to listen to it and glean a good amount of information from it that way. But if you can watch it, definitely encourage you to do that. And if you wouldn't mind liking, commenting, subscribing to our YouTube channel, that really helps us continue to grow this show and get in front of more people just like you that are looking to be educated on investing. And with that, I hope you enjoy this episode. Thanks so much for listening.

Those of you who know, know we're passionate about economics. You know, I personally spend many, many hours a day, every day reading and studying economics and to really understand what's going on on the planet and what it means for us. So, so some of the, some of the, some of the highlights here that I'm paying attention to, of course, inflation is the big, the big thing. Here's my summaries. I believe we will see inflation moderating. But it's also going to persist stubbornly throughout this year, next year. There's a lot of people calling for recession. I'm not seeing it yet. You know, could happen. Not yet. Well, I'll go into why we're seeing commercial real estate cap rates rising right now on— because of basically debt rates are increasing. And so we're seeing a lot of particularly multifamily the cap rate's actually below the debt to buy that, to buy the property, which is, which is nuts. I mean, so we're not so— but we're not seeing cap rates significantly moving and probably will not see cap rates significantly moving. And of course, the housing market, we are seeing the high mortgage rates slowing sales volumes and, and, and surprisingly or not, prices continue to rise. So So we'll dive into some of these, some of these trends here. This is on inflation. This is just a little backup. Goldman, actually Goldman Sachs actually called me and agrees. So no, I'm joking. They, they're basically, they concur that, that basically strong inflation will keep the sequential pace of core PCE elevated throughout year-end. But year-over-year inflation, core inflation will decline further in the coming months. As last year's sharp goods price increases drop out. So, so, so they're, they're basically seeing, you know, predicting that inflation rates are going to basically, basically moderate a little bit as we come down. The GDP print. So big headlines. GDP came in and dropping 1.4% and everybody's freaking out and saying recession, the sky is falling and it's not. It's not. And I've actually said, you you know, we're seeing incredibly strong consumer demand, incredibly strong savings, consumer numbers, and they continue to be strong. I wanna look in detail at the GDP print this year. So this is the detail, this is the components, and you can see consumer spending was very strong right here. Investment is strong. Where we saw the negative print was net imports and exports. So this is as basically, you know, we're importing goods versus exporting goods. It negatively impacts GDP and investment. So people are, companies are basically building in inventory in that. And so this basically caused, and then the government spending to individuals also decreased. So we're seeing these things. This is all temporary. This is all temporary stuff. Nothing, nothing lasting and nothing that actually is signaling a real recession yet. So again, let's see what happens in Q2. We are seeing, you know, weakness in a lot of the economic data coming out. Um, remains to be seen, but, uh, I'm not seeing recession yet. Could the, could the Fed cause a recession? Absolutely. They seem bent on that. A lot of talk about will they pause in the fall? That's September, that's certainly possible. Would not be surprised to see that that happens. You know, you're going to see, you know, continued growth. But there's so much strength in the economy right now in the underlying economy and so much demand that I actually expect, expect us to not go into recession at this time. You know, there's been a lot of talk about affordability. I love, I love this chart, housing affordability and rent, rent affordability. Right. And so what this chart shows since 2000, the, the top line is your housing payment right, right here. And the bottom line is, is rents. And so you're seeing as housing prices have increased during the, during the Great Recession here, you saw this gap where, where rents were, you know, housing were, was cheap, as cheap as rents. Then as the housing prices have taken off, you've seen rents tracking but below. And so, so we're seeing this gap. It's all looks very healthy to me. We're seeing as, as home prices rise, rents rise, both are protection for one another. As home prices rise, that makes, that makes renting more attractive. And as rents rise, it makes buying a home more attractive. So both things are supporting and neither one is out of whack. So, so it just Nothing seems out of whack to me. You know, inflation is hurting a lot of people and these things are getting increasingly, you know, it's increasingly challenging. At the same time, you're seeing, you know, you're seeing a lot of, a lot of, you know, COVID caused a lot of older people to pass on. We're seeing that, you know, younger people have made some inheritances. They came into cash. They're buying houses and you're seeing younger people, millennials and others doing household formation. And, and so it continues to drive up demand and we're seeing demand statistics continue to just peg the needle. Here's, here's some of the things that, that I think are, are may shock people if you look at. So this is the pandemic here, right? And this is retail sales. Look what's happened. So during the pandemic, you saw retail sales crash. And since then it's been on fire. It's exactly what we've been saying. You know, people are, they, they, they basically are flush with cash. You know, you've seen a 20% in increase in household net worth since COVID in the US consumer and 15% in increase in, in household earnings per capita since COVID So, households are flush. And what are they doing? They're, they're getting out of the house and they're spending money. 26% increase. And I'm indebted to Marcus Millichap. Encourage you to sign up for their website. They have great economic data. So this is from Marcus Millichap. So you're seeing retail sales have just been on fire. And this is, this is the deposits, total savings deposits and money market mutual fund deposits. Look what happened. So during COVID you know, individuals saved and today they estimate $5.7 trillion in excess savings on US individuals' balance sheets. So people are just sitting on cash. They're flush with cash. And so they're traveling, they're spending, they're, they're, they're, they're buying houses, they're investing. And so again, this is, this is the underlying, this is the fuel that's fueling the economy right now. And it's not stopping. So not, not yet. Commercial real estate, I'm going to hit about that a little bit. This is the transaction volume since 2017. And you're seeing a— literally last year was more real estate transactions than have ever happened in history. So we're seeing a lot of activity. And those of us that are active in the commercial real estate field can attest to that. That it is just on fire right now. Why? Well, you can see here's the returns. So commercial real estate since 2000 has outpaced the S&P 500 quite a bit. And especially with the volatility in the markets, it just makes commercial real estate that much more competitive. In office space, we're— office is not a space we are very excited about right now, although we just are hearing some strategies that may make a lot of sense. We're not ready to talk about those, but, but, you know, there will be a time when it makes sense to get into office space. So here's what happened. This, this yellow line is the vacancy rate. So you saw it dropping until COVID, and then all of a sudden vacancy has just shot up. And this is new construction and this is, you know, basically net absorption. And so you can see there's a lot more supply than there is demand and demand is uncertain. We're not excited about office right now. I'm not, not going to be doing anything in office at this time. Senior housing is another, another one with, with pretty high vacancy rates. And, you know, COVID killed it. And this, this is, this is an industry major transition. I don't think people know what's going to happen here. And so we're not very excited about senior housing right now. Retail, this, this is, this is nuts. Multitenant retail. So you see vacancy rates dropping, dropping, dropping. All of a sudden they spike up during COVID but now they're dropping again. And so we're seeing, we're seeing huge demand. Now, this is, this is all retail. The retail that Aspen is especially excited about is neighborhood retail, which is the very small strip centers. And these are the ones with your dog groomer, your neighborhood, you know, nail salon, you know, et cetera. So these are the ones super bullish on. So hotels surprisingly are coming back. Hotels are not something we're excited about. Yet, but we're seeing massive comebacks here. Now I want to get into some of the things we are very excited about. So if you look since 2008, look, look at the vacancy rate just, just crushing down. We're seeing a vacancy rate approaching 2%, which is basically no vacancy in apartments. And the vacancy rates are just nuts. This, these dark lines here is the completions. This is new stuff being built. And you can see it's being, it's being built. And then this is the absorption, how much is actually being rented out. And there's just more absorption happening than stuff that's being built. As fast as it's being built, it's being rented. And this, this underlies the strength in the market right now. There's massive waits, massive waiting lists in almost all multifamily, kind of in all, in all urban areas and, and, suburban areas across the United States. There's just a huge vacancy, a huge problem with, with not, not enough spaces and, you know, huge demand. So this is what's underlying this, the strength here. And, and multifamily is really the gold standard of, of commercial real estate because it doesn't matter what happens to the economy, people need a place to live and it is inflation protected, very, very well, nicely inflation protected. And if you can get good debt terms, you can, you can make money in inflation on both the positive and the negative on the growth and the rents, as well as, as being a, being a debt holder and watching your debt being deflated away. Do you have any insight on, on this? Is kind of a random question, but for the 19, for the 21 year of '21, the, that net absorption being like way out of line with every other year. Well, you saw the vacancy rate drop. So you see vacancy, basically everything that was available dropped. So vacancy rate went from what, 4.5% to— Yeah, that's 2.5%. Yeah, that's because the units were absorbed. But what they were absorbed. And so people, yeah, '21, everybody decided to go get an apartment and go move out. And, you know, so millennials are forming households and they're, they're, they're doing this, you know, and there's just been not enough construction. So the great, great, great financial crisis put construction on hold. And so we're dealing with a massive backlog right now of, of demand in industrial and in single-family and multifamily housing. So now it's catch-up time. And, and with when, when rates are, are 2% vacancy rates, you are going to see prices go up. This is just a squeaker of a market. There's, there's— it's a seller's market like crazy. Will there be a day when it's overbuilt? Absolutely. But it's not going to happen for a few years. One of the other trends we love is self-storage. And look at the vacancy rates here. Again, you know, there's a theme, you know, vacancy rates just coming down in spite of this. Look at all this net, net new construction and absorption. So vacancy rates are at an all-time low in in self-storage and, and absorption is just there. One of the, one of the trends, of course, and, and sort through COVID, look what happened through COVID. You know, it just, it didn't, didn't literally didn't take a hit at all. And so one of the, one of the things as, as rents are going up and square footages are going down, people want to store their stuff. So people need storage. And so you're seeing a lot of demand. Americans love their storage. You know, and it's just a fantastic market. And as, as Ben has pointed out, there is no real estate out there that is more inflation protected than storage. So, you know, you can raise your— if you have a 1-year lease on your apartment complex, your rents can be raised every year. Right. But in storage, these are, you know, these are month-to-month or terms. These things, rents can go up on every 30 days if you need to. So they're super super, you know, a lot of just very, very amenable to inflation. And, and as Ben said, price inelastic. So if you're increasing rent by 25%, you're increasing your, your rent from, you know, $30 to, you know, $36 a month. It's not that much, not that big of a deal to a person versus their, their apartment rent that's going up $300 a month. So it's much more affordable. This is one of the areas that we are most excited about. If you look at, you know, industrial absorption, look what happened last year. You know, more absorption that's ever been in history in this, in industrial vacant and industrial. It's kind of nuts. This is insane. So again, look at the vacancy rates dropping. We're literally under a 4% vacancy rate, which is basically no vacancy in industrial in spite of, of, you know, a lot of, a lot of new construction going on. It's just is not enough to meet demand. What's, what's happening here? And again, so during the great financial crisis, building got way behind. There wasn't enough stuff built. Meanwhile, throughout the last 10 years, you've seen e-commerce requiring lots of warehouses. Think of Amazon. Needing warehouse space, etc. So they're, they're, they're busy acquiring all this warehouse space and e-commerce is growing. What's happening lately is e-commerce. We're starting to see the e-commerce trend plateauing. It doesn't mean e-commerce is stopping. It just means the growth is beginning to slow down. Well, just as that happens, look what happened in '21 and '22. We're seeing two brand new trends emerge. Are just as powerful as e-commerce, just as powerful, and they're just getting started. And that is one, the desire to reshore to America. And so what's happening is manufacturing in the, during the '90s, the globalization trend, everyone wanted to save a dollar, save a dime by moving to China, sourcing from China. And, and, you know, if you could save a dime on your pro, your, your product. Right now it's actually cheaper to manufacture in Mexico than in China and in transportation to China. So the shipping for the freight rates have gone up 10 times. So people are wanting to come back to America besides the fact that, that, you know, so, you know, you, US car manufacturers are not shipping cars because they can't get a little, little tiny couple-dollar chip. What's it worth for them? You know, they're happy to pay, I'm sure, double the price of that chip in order to get a US manufacturer to manufacture that chip. So we're seeing tons of manufacturing coming back to America. It is not that much more expensive. Manufacturing rates in America are roughly 3 times what they are in Mexico. And once you add robots and automation, it ends up being about the same. And so we're seeing massive reshoring trend. The globalization of the '90s took place over the decade of of really the end, really the two decades beginning in the '90s is over. And we're seeing a massive deglobalization trend that is going to take another 10, 15, 20 years to play out. That's just getting started. The other thing is inventory, which is very similar. So it used to be no one wanted inventory. Let's get everything shipped so it arrives just in time when you just before you need it, it arrives in your shipping dock. That is out the window. Everybody wants inventory right now. Everybody wants storage and your, your, your chip shortage or whatever that is. Again, two megatrends, two brand new megatrends that have never happened before. It's reversing a multi-decade trend that's been in place since the '90s and is shifting everything. And it's requiring industrial space, large, large industrial space. We're not talking about flex, industrial flex. We're not talking about, you know, little flex centers. We're talking about large-scale industrial centers and manufacturing centers.

Hey Bob, while you're on this, we just had a great question from one of the attendees here on industrial. Isn't absorption influenced by Amazon warehouses, which they're now admitting they had too much? So, you know, how does that kind of play into this overall picture?

Yeah, great, great question. And yeah, you know, You have made the headlines when Amazon is saying, we're not renewing our leases on some of the places, but, but the stuff they're not renewing is 5% of the warehouse space that they increased in COVID. Okay. So, so they're keeping 95% of the space they've increased just during the COVID years. They're only getting rid of 5%. So is that, is that a big megatrend? You know, not really. You know, one, we do think the e-commerce is plateauing. We think Amazon probably overspent and over, overinvested in there. In their warehouses and they probably have some warehouses that are underperforming or they find they don't need as badly. So it's time to just trim the fat a little bit. But, but it does point to the point to the fact that e-commerce is, is not, not the growth place. It's not, it's not— e-commerce is not going away.

Okay.

But it's also not going to be the high growth area that it has been. And we love that. That's fine. The other, the two areas are, you know, that I've pointed out of reshoring and inventory are, are here to stay. And they're going to continue to drive demand. So, so the Amazon, the Amazon, you know, non-renewal of those leases is a tiny, tiny little deal that, that is, that is not a thing. All right. And let me see a couple other things. So, you know, this driving real estate, 1031 exchanges, you've got a lot of boomers that are looking for cash flow. Inflation. So, you know, in a high inflation scenario, what investments do you want? Commercial real estate is the go-to. It's the supercycle investment of choice. So commercial real estate, as long as we have inflation, commercial real estate is going to be the place to be. Record demand for housing, industrial, self-storage, literally hitting records on— and this is not speculative demand. This is demand, honest, demand that is just creating a crush of, of, of need in the space. So it's all driven by, by, by true demand, underlying strength in the economy. And the final thing, cap rates are rising on debt costs, but we're not seeing the effect yet. Finally, the last thing I'm going to hit is just, is just housing market. So we are seeing home buying volume cooling significantly. Sales volume is down by 15%. High, high mortgage rates. Obviously we're seeing what, 5.25% interest rates right now. Inventory, inventory is growing, but it's still short. We're still 650,000 houses short of a normal inventory level of what we saw in 2009. So we're seeing home sales are, are, are dropping. Home listings finally ticking up just a little bit. But still low. And surprising or not, prices continue to set records. So, you know, it's hard when you've got this kind of shortage and household formation and demand. It's, it's hard to see prices really coming down in spite of affordability issues because the demand is just so high. All right. That is it.