Fed Cuts Rates by 25 Bps! - How to Make Inflation Your Friend

Welcome back, future billionaires, to another episode of the Invest Like a Billionaire show. My name is Ellis Hammond and I am joined today with Bob Fraser. Bob, how you doing?

Yeah, great to be here.

Hey, this is kind of a timely episode. We are meeting on Thursday, September 18th. Yesterday, of course, the Federal Reserve met and made a decision to cut rates for the first time in a long time by 25 basis points. Let's start there.

Yeah, I think the market expected it, and we're looking for maybe 2 more cuts this year, which would be pretty interesting. I think, you know, the stock market reacted positively, and I think it's definitely a good thing for real estate investors. You know, we've seen a lot of pressure in the commercial real estate sector, and there's been a lot of people just kind of collectively holding their breath to see if rates would come down, and they're definitely starting. So, so it's possibly the beginning of the next cycle in real estate.

Let me ask you a question, because I find that online and across the media, it's a divisive issue, which is interesting because I mean, the Federal Reserve has a clear mandate, you know, as its existence, right? They want to maximize employment. They want to keep inflation low. Why do you think this has become what almost feels like a political issue? I mean, we even saw like Trump— hard to say if this was, you know, him trying to get rid of a seat to get someone else in. Why does this feel so much, Bob, if there's a clear mandate from the Fed that this is a divisive issue politically?

Yeah, well, I think it is a divisive issue, and clearly Trump is putting pressure on the Fed, which is a little bit unprecedented. And I think it worries a lot of investors. You know, the Federal Reserve Bank has been independent since its inception, uh, 100 years ago. And so I think most investors want that. We want an independent Fed. I do. And I'm, I'm concerned, you know, that it's the politicization of the Fed. So does that mean prior to every election cycle, we're gonna see the Fed cut rates regardless of the damage in order to kind of boost the stock market. Right. And get election results. No one wants this. So we've had an independent Fed and clearly Trump is wanting to see the economy get stronger and he's trying to juice it. So I think there's a lot of concern and I think anyone who, you know, is against Trump on the political spectrum is against this, right? Because they're against everything that, that he wants to do. And I'm more neutral. I like the rate cuts, I do think they're risky. I mean, the Fed has not achieved its inflation goals, right? We're seeing the PCE running around 2.6% right now, and they have a stated goal to keep it at 2%. So what are they doing lowering rates if they haven't made their goal yet? Now, you've been watching my forecast for years, and I've said inflation is going to be stickier than otherwise. And I think the 2% goal is going to be very, very elusive. There's several reasons for that, and I've been proven right so far. So is the Fed willing to endure higher inflation rates in order to keep us out of recession? And I think the recession indicators, you know, there's no strong indicators of recession. We're seeing a little bit of softness in the job market, but it's not a lot, and the data is really suspect. Yeah, you know, we're seeing huge revisions in there. So I think it looks a little bit like maybe the Fed is bowing the knee to Trump possibly. But on the other hand, you know, I've watched Powell for years and he's as independent as they come. I mean, I think he's resisted the pressure and I think he's a very middle-of-the-road guy. He's a Republican politically, but he has been on both sides of the aisle. You know, he's nonpartisan, he doesn't favor any political party. And, you know, I have a lot of respect for Powell, so I don't really think he's necessarily bowing the knee, but I can see why people would say it looks like that.

Well, let me ask you this, because you talked about your projections. I mean, earlier this year, you know, when Trump got elected, Doge was a big thing, right? We were going to cut our way out of our deficit in terms of our national debt. And you said, and I remember you saying this, hey, I'm more surprised at how successful they've been so far, but I don't think it'll ever be enough. And I think you were absolutely proven true at this point, that Doge is kind of a nice idea at this point. But when you introduce a new bill, right, to increase it, you know, by trillions of dollars, then what do we really do? Is it your interpretation that Trump's ultimate goal is to essentially try to grow our way out of our national debt?

I mean, I haven't seen anything coming out of Trump where he's concerned about the national debt. Okay. So I think he's more concerned with the stock market and with economic growth. So I think the thing that he measures his success by, economically speaking at least, would be GDP growth and/or stock market growth. Very few politicians are talking about the deficit or the national debt because it hasn't really been a problem yet. And so it's not going to probably be addressed until it really becomes a problem now. And in my, my view, it's starting to rear its head, right? We're seeing the early little yellow flags, right, where the bond market auctions have been weak. Now, recently, of course, they've been on fire again. So who knows? You know, it's like we see a little bit of a red flag and then red flag disappears. So But at some point, you know, debt is going to be a problem. And by the way, you know, the solution to the national debt, and I've said this before many, many times, is a little-known reality called inflation. One of my favorite authors are Ken Rogoff and Carmen Reinhart, who wrote a book called "This Time Is Different" years ago. And they studied 800 years of financial crises in 65 countries, over 200 crises, and really did a whole lot of economic research that was, I found, absolutely fascinating. They wrote a very interesting report and showed that most countries that have this very high debt-to-GDP ratio don't default on their debt. In fact, none of them did. None of the major countries did. The way they get out of the debt cycle is by a little bit of inflation. So just 6% inflation reduces a debt by half over a 15-year period. So all you need is just moderate levels of inflation and the debt is inflated away. So, you know, the Fed has a hold back inflation goal, but the reality is inflation is what is gonna be the tool to reduce the national debt when it becomes a problem. And no one's ever gonna say this, right? But it's reality of what's gonna happen, which is why investors need to position themselves in what I've said for years, position yourself to benefit from inflation because we are going to see inflation. And not only that, are we going to see it as the answer to the national debt at some point, We are seeing it now because of systemic issues like the structure of the employment market.

I want to dive into that a little bit more, but let me back up just kind of one question before— I mean, at this point, Bob, it seems clear like they're probably not going to increase rates, right? We're kind of on the cutting or stay still plan, you might say. So, you know, as this is an investment show, we're an investment firm, like what does a rate cut mean for the public market traditionally and the private market?

Yeah, it typically influences the bond markets. Okay, so what a lot of investors don't realize is the Fed is changing the Fed funds rate, which is the shortest of short-term rates. Okay, the Fed does not control long-term rates, so those rates are controlled at auction. The Treasury issues bonds and bills, and they're auctioned, and the auction determines the pricing, which determines the yield. And so if there's a lot of demand for the debt, the yields drop, right? Investors are willing to accept lower yields. You follow me? So it is an indirect relationship, but there is a correlation. So when the Fed drops rates, you will see the treasury markets drop. And we've seen a lot of softness in the treasury markets right now. The 10-year treasury, which is really kind of the benchmark rate that a lot of commercial lending is based on, and even mortgages are, are loosely correlated with that. You've seen it very soft and now it's, you know, right around 4%. So we're seeing that at all. So the Fed funds rate also So we're seeing the prime rate drop, which is the rate that banks loan to their best customers. So that's dropping. So we are seeing some easing, which is gonna be a relief to some businesses and certainly to the real estate sector.

I did see the White House X account post the Trump effect that we have the lowest mortgage rates in the last 3 years of history. So I do think your earlier point of like, what is Trump's agenda? One, I think is clearly to show that the economy is healthy. And that's one of those tell signs of like, What is he promoting, right? It's interest rates and housing. I mean, a lot of their wealth for most people is in their house, of course. So I do think that's really interesting. I mean, in terms of allocation, are the markets going to have a tear? Are we, are we in for a great run? You know, like, what does this mean for investors and allocating? And maybe you personally.

And when you say the markets, are you referring to the stock market?

Let's start with the stock market, but then of course we're alternative investors, so I want to talk about both.

Well, okay, you know, anyone who's listened to me realize I'm kind of have a bias against the stock market. Okay, so I'll just say that I've been burned by the stock market too many times in my life. Well, the stock market has had a historic run. We had two back-to-back nearly 25% gain years. Okay. 2023 and '24. It is on fire. The chances that we have another one of those is virtually nil. Okay, now it could happen. Okay. But the reality is, if you look at the valuation, which is the P/E ratio of the stock market where it is right now, meaning the price of the stocks relative to the earning potential of those stocks, right? The future earnings estimates is as high as it has ever been.

Historic.

We're seeing the stock market, oh, very highly valued, valued to perfection. And I'm personally wanting to increase my allocations in the public markets, but I don't want to do it at these valuations. You know, the math would say that the returns on the stock market over the next 10 years should be around 0%. So roughly zero, you know, between 0 and 1%. That's what the historical numbers would suggest. So I'm not hugely bullish on the stock market. And that said, how high can a tree grow? You know, can it go up from here? Absolutely. I've been shocked. You know, I remember, you know, the '90s, I think it was— was it '95 or '94? I can't remember. '96. That Alan Greenspan called out the stock market, the dot-com, you know, the irrational exuberance of the stock market. I think it went up 3x from there, right, when he was talking about irrational exuberance. So irrational exuberance can be a lot more irrational, a lot more exuberant than we think. So it could definitely go up, but I don't think investors should be banking on the next— on another one big more run of the stock market. I think the downside risk is far greater than the upside risk. Although I don't see recession, so I don't see the risks out there, but of course you never do.

Well, let's talk about a world that we spend more time in, which is real estate. I mean, talk a little more broadly about how interest rates are tied to assets and real estate and what you're excited about and what this might mean for this next couple years of commercial real estate investing.

Real estate is very heavily affected by interest rates because let's say, you know, an apartment complex competes with a treasury bond, right, for yield. So you buy this apartment complex, you're getting, you know, you're expecting, you know, a 5%, 6% yield perhaps. And so if you can get a 6% yield in a, in a risk-free treasury, well, why bother buying an apartment complex, right? With all the headaches that go with that. So it definitely competes. So that'll drive cap rates. So what I would expect to see is cap rates begin to come down and that will drive real estate values. So real estate is always levered using debt. And so the values are very heavily affected by debt. So I do think it's time to be investing in real estate. Just because I think it's that time in the cycle. So at Aspen, we are having discussions right now on our partner level about really dipping the toe in and starting to buy a lot more multifamily. And I think it's a really good time to be buying really good deals. Now, it's not a time to buy anything, right? It's a time to buy at the right price. And there is a lot of ability to buy at the right price, right? There's a lot of deals out there that you can get at the right price because it's still a buyer's market for sure. And I think we're gonna have a buyer's market for the next few years. So it's time to start accumulating these assets. From an investor's point of view, it's time to be positioning yourself for an inflationary reality, which is just what's going to happen. The structural reasons behind that are energy prices and the structure of the labor market. We have a structural labor shortage and it's manifesting. I mean, right now you can see the inflation rate is roughly, you know, let's say PCE is 2.6%, but wages are inflating about 3.6% per year. So wages are just increasing and that's not stopping because we have a demographic issue and we're not seeing the pressure in the oil markets yet. I still think we're probably a couple years away from that. And then that's gonna continue to cause inflation to come about. Add the fact that ultimately the Treasury wants inflation to reduce the debt. You know, again, no one's gonna talk about that, but the reality is, you know, people know that.

What do you mean why we're not, just for clarity, we don't feel the pressure of oil prices yet?

Well, oil prices are quite soft, and it's really because the world economy has never really recovered. So the US economy is pretty strong, but the European economy is anemic. Chinese growth never resurfaced, right? And with the tariffs and, you know, China under massive pressure, China's oil demand has never had a resurgence. So we're seeing global oil demand being continued to be very soft. So, you know, we've been looking at oil investment globally, and it's very, very low, right? It's down by half from the last 7 years. So we're not seeing a lot of exploration development, and that's not a problem until there's a lot of oil demand. And right now we're not seeing a lot of oil demand, and we likely will not see an increase in oil demand in the immediate future, which is why I like investments. What we're doing is we're buying oil fields that make a lot of sense at today's low oil prices and will be insanely good when prices rise. And if they don't, we're still going to be fine. Right. Because we're making money at these low rates.

It's kind of same model for real estate, right? I mean, if you can make a deal work today— exactly where interest rates are at and where inflation is at, that it probably is going to be really good over the next 3 to 4 years.

And it's actually a really good time to be buying oil fields as well, which is what we're doing. We're shopping and in these oil strip, the future price of oil is coming down. Now, it's, you know, a year ago we were buying with a strip, you know, running $65, $70. The future price of oil right now, it's $60. Well, that means we're getting these fields a lot cheaper. So, you know, definitely time to be shopping.

The last thing I would say to that from my perspective of being at Aspen, you know, we did a multifamily deal this year, a great asset, but it was surprisingly very hard to raise for in what, you know, we believe a really great time to buy real estate. Compare that to 2 or 3 years ago, the money was really easy to raise and we saw where valuations went. I mean, it feels like, especially for sponsors, if there's sponsors listening now, I mean, it's a harder time to raise capital. For real estate, at least for multifamily. But that can often mean it's probably a really good time to buy as well, right? Like that, that could be just another indication. Your thoughts on that?

Yeah, absolutely. Investors have the worst timing possible, right? It's well documented, you know, and I studied the dot-com boom in my recent book, Invest Like a Billionaire. And in spite of this, the stock market racing up during the dot-com era, most investors lost money. In fact, the average investor lost 70% of their capital in the dot-com boom. Even though if you start at the beginning, rode it all the way up and rode it all the way down, you would've broke even. No one did that. People time it wrong. It just goes against human nature. You, you know, to be a good investor, you must be contrarian. You must be fearful when others are greedy, and you gotta be greedy when others are fearful. I mean, this is, I've been in this business for decades and So that's why the importance of this show, right? The importance of this show is to educate investors, to help them overcome their fear when it's time to invest. Right. But I think it's okay to be fearful too. Like, I'm still out of the office market. I'm not interested in buying office space right now. Right. So fear is a good thing, right? But I also believe it's time for the multifamily market. So I'm not just all bullish all the time. We want to understand when it's time to invest and not catch a falling knife. But not wait until it's too late to place capital in front of these big trends.

100%. Well, let's wrap up here. Two things. One, kudos to you. This is the first time that we can announce live you are a nationally recognized bestseller. The book has come out and, you know, number 3 on the USA Today. Congratulations to you and Ben for hitting bestseller. Congrats.

Yeah, that feels pretty good.

Yeah, I actually wrote, you know, I saw Ben write an email and in the bio we kind of put a winky face, bestselling author. So, you know, it's something you can add in the future. Exciting announcement for listeners. We are also in the final draft of investlikeabillionaire.org, and I'm really looking forward to this because we've been wanting to build a place where our listeners can come in, collaborate, can chat with each other, can actually have live conversation about a lot of these topics. And so there's a waitlist right now. If you're listening to this show, it's probably not up yet, but Invest Like a Billionaire. Investoracademy.org. When we launch that website, you can be the first to know. So make sure you go check that out as well.

And what's it going to be for? What's going to be there, Ellis?

A lot of resources. One of the cool things that we're working on right now, it's kind of taking a little bit longer to roll out, is— and Bob, I haven't even shown you kind of the product that I think we landed on— is we're actually going to create a live forum, a live community section where investors can actually create threads and go back and forth on resources and communities and deals. And hey, the Fed cut rates, what should I do, right? So I think that is going to be a very, very meaningful thing for our listeners.

Yeah, and the whole point is investor resources for alternative investments, finding the best deals, how to do due diligence, you know, finding those best sponsors, everything related to alternatives and being a successful alt investor.

100%. Bob and Ben actually recorded a 9-part course that was exclusively for pre-orders of the book. We're going to be putting that up on the website as well for folks to be able to go through. So an actual course on how to become a professional alt investor. So really looking forward to that. Go to investlikeabillionaire.org and we'll let you know. All this is going to be free. So again, I really love being part of this mission, Bob, that you're rolling, really to bring alts to the masses. And so grateful to be on it with you. Anything else before we wrap up here today?

No, I think we hit it.

Awesome. See you next week, everybody. Cheers.