Fed Cautions on Too Much Optimism | Top of Mind Series

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. The big thing everyone's been following the past few months is what's the Fed going to do with interest rates? You know, 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 kind of added extra optimism and hope to the market. Jerome Powell had some words to say and some things that he wanted us to temper. So 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, but, you know, not surprising.

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Yeah.

Jerome Powell said in a speech just a week ago that the US inflation has come down over the past year but remains well above our 2% target. My colleagues and I are gratified by this progress and expect that the process of getting inflation sustainably down to 2% has a long way to go. So that sounds you know, 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, done the happy dance that rates, you know, and they literally long rates started dropping last few weeks. And, you know, 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, you know, not a lot of reason for, for to do the happy dance yet. So we'll see.

Yeah, it's interesting too. I mean, we just had a great conversation with John Chang, which will be coming out in the next couple of weeks on, on the Thursday.

That was a great interview.

Definitely going to want to listen to every bit of that. He brought so much insight.

But one of the things that if you're a real estate investor, you want to listen to that, to that podcast. Yeah. Real Estate Economics.

And one of the things he was saying is so interesting. He is like, hey, a lot of the younger, you know, or newer investors in real estate kind of came into the market in the past, you know, 10, 15 years at a very unique time that is truly an anomaly in the course of, you know, 50-plus year history of real estate investing. And really from a debt standpoint, right? And a long-term rate standpoint. With rates being held close to zero for a long time and long-term rates being, you know, pretty anemic as well, it really made real estate really easy to pencil. Right. But as the rates are kind of higher right now and then even, you know, higher longer term relative to longer periods of history, it's not outside the norm. In fact, it's actually, you know, the long-term rates are even lower than historical averages. And so it's just an interesting kind of compare and contrast here with, you know, the market got so used to these incredibly cheap rates and it's felt like really for past year plus of the rates going up, you know, when is it going to be the first rate cut?

Right.

And people thought it was going to be— happens, right? Or now it's, it's kind of been this, you know, acceptance of, okay, it's probably going to be a little bit longer than we want, but you know, they can't hold this forever. We're seeing progress. Let's just drop it right away. But it's, you know, what we've been saying for a while, you know, 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, you know, black swan event. But it just— it feels like the market is overreacting again, right? And so Jerome Powell is calling out You know, don't get too optimistic yet. And, you know, along the same kind of theme, we were talking about the consumer being very strong, you know, from a savings standpoint, from a real income standpoint. We just got another report from The Wall Street Journal here saying American shoppers have plenty of dry powder. So this is Wall Street Journal. We'll link to both these articles in the show notes here. But talk through some of these charts. It is really fascinating.

Well, it's, you know, it sounds like— I mean, 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 2 years now. We're not going to have a recession, or if we do, it's going to be very, very light. And the reason is the consumer is spending like there's no tomorrow. And there was a huge savings glut as well. And And so the report just came out. Consumer, 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, consumer cumulative excess savings held by U.S. households is still at $50 billion. Just what was saved over in the COVID era is still— there still hasn't been spent yet. You know, it's dropping, but there's still money left. And so in spite of low consumer sentiment, which, you know, is probably due to the political impasse and, you know, you know, who knows, who knows, you know, high inflation, all these things. But consumers are absolutely on fire. And given that that is 70% of the US economy, You know, it's, it's, you know, it's just going to continue to boom along until it doesn't anymore. But there's still, there's still runway in this, in this economy. And, you know, the latest numbers out of the GDP, the GDP growth were just revised up over 5%. GDP growth. I mean, you know, it's a nutty— it's nuts what's happening. And So all that says we're probably not going to see, you know, see rate cuts. You know, I don't think in early 2024, and I think it's probably unlikely any time in 2024. You know, I'm hopeful. I would like to see rate cuts. We all got our mortgages refinanced and now, you know, if you missed that boat, I'm sure you're, you're, you're, you're upset by that. But You know, and back, back to your point, you know, everybody's waiting for the rates to get back to normal. And, you know, to John Chang's point on the podcast, you know, what if this is normal? In fact, it is, you know, higher, higher rates. If this is normal, that, you know, 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 been, been slow. Then we got hit by the pandemic and they went down to zero again, you know, and but I think this is probably closer to normal, like closer to normal.

And, you know, this, this kind of report from, you know, Wall Street Journal on the consumers dovetails, you know, squarely into the Fed sentiment is, you know, this being, you know, consumer spending is 70% of the economy. 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 be continue to be inflationary. And so as consumers continue to spend, maybe it slows down a little bit, but there's still, you know, a lot of this savings. And despite people being, you know, not very positive sentiment, they're still spending like there's no tomorrow.

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, you know. So, but we, we've always said, you know, we've never tried to predict inflation over, you know, one quarter or even a one-year period. But long-term inflation is not going to go— it's not going to stay down, um, because primarily of wages and, and energy prices are— have, have systemic, um, structural issues, not cyclical issues. So yeah. We're going to, we're going to see that. But, you know, I do think we might, we might see rates continue to, you know, sorry, inflation start to, you know, continue to soften in the short term, you know, before it continues being stubbornly high.

Yeah, I think as investors, you know, it's, it's always hard to shift your frame of what you've been used to. And we all got accustomed to it was 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 over the next 12 to 18 months, maybe even beyond, we— there's still opportunity and you need to shift where you're looking for the opportunity to shift, you know, how you're positioning, you know, with this is the new normal. And, you know, there's a lot of indications that this is going to be this way for a little while. And so as investors, we need to, you know, get over the desire for it to be different and go back to the way it was.

And there's opportunities everywhere, you know, and so So I don't know if you remember, but when this whole zero interest rate regime kind of became the normal, um, you know, you know, 10, 10 years ago or so, 15 years ago, um, the— all the, all the, the media was talking about how different, how, how horrible that was for savers. And it is. I mean, you're a saver, what do you— how do you get income? You know, so if you put your money in the stock market, it's a big gamble. But if you're retiring, what do you, what do you do? How do you see— well, right, you just open an account with Ally Bank and what is it, almost 5%? A savings account with an FDIC-insured bank? What? Well, that's kind of nice. So there's, there's two sides of every, of every coin. And now it's, it's good for savers, right? It's good for savers. And, uh, and it should be good for savers. You should be able— you know, money has a value over time, and you should have value over time. So that's called the interest rate. And so what's good for savers is not good for borrowers. And, um, so Shifting back the other way.

Shifting back. All right, 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.