Interest Rates, Recession, and Finding Opportunities | Top of Mind
In this unscripted "Top of Mind" episode of the Invest Like a Billionaire podcast, co‑hosts Ben Fraser and Bob Fraser break down the Federal Reserve’s role, tools, and recent policy shifts, then connect those macro dynamics to concrete investment ideas. They explain the Fed’s dual mandate (price stability and maximum employment), its primary lever—short‑term interest rates—and the newer balance‑sheet tools of quantitative easing (QE) and quantitative tightening (QT). The hosts argue that today’s inflation is being driven largely by a global energy shortage, which makes it difficult for the Fed’s rate hikes alone to tame price growth, raising the specter of stagflation reminiscent of the 1970s. They discuss how the Fed’s increasingly hawkish stance may be partly posturing but also reflects genuine concern about persistent inflation. From an investor’s perspective, they highlight opportunities in energy equities (including fossil‑fuel plays despite ESG criticism), re‑industrialization and reshoring trends, and real‑estate assets—particularly Class A multifamily deals with favorable financing—while warning about risks from aggressive bridge lenders. Throughout, they stress the importance of buying on dips, maintaining solid cash‑flow coverage, and treating inflation as a friend to certain asset classes. The episode ends with a call to action for listeners to submit questions via their new website.
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Are we headed to recession? What does that mean? How are these interest rates impacting the world and the economy? And what is the Fed going to do going forward? And how do we make our positions as investors with that information?
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Welcome back to the Invest Like a Billionaire podcast. I'm your co-host Ben Fraser, joined by Bob Fraser on another top of mind series. And so in this series, if you haven't listened to any of them before, these are really fun. These are kind of shorter little nuggets and we kind of tackle, you know, one or two things that are happening in the economy, just in the markets that we're in. And it's really kind of off-the-cuff conversation. So this is not scripted. We didn't, you know, have really an agenda before this, but we had kind of a topic we want to talk about and we think it's really relevant to today's investors. And just to kind of have a conversation about, you know, what's going on in the economy. Are we headed to recession? What does that mean? How are these interest rates impacting, you know, the world and the economy? And what is the Fed going to do going forward? And how do we, how do we kind of, you know, make our positions as investors, you know, with that information? So, you know, I think before we kind of dive into some of these questions, one thing that I think would be helpful just to kind of break down for listeners that are maybe not economists or newer to this kind of concept of quantitative tightening, quantitative easing, raising interest rates, lowering interest rates, and how that impacts the economy. Talk about the Fed, their role in the economy and their mandates and how interest rates are kind of related to those mandates.
The Fed's mandate is primarily employment and to keep employment low and keep inflation in check. And you know, they've adopted various other mandates, kind of loose mandates from time to time, like, you know, the stock market and then not the stock market, but whatever that, that's their mandate is to kind of keep, keep the economy from overheating. The one thing they have is short-term interest rates. So they actually control short-term interest rates. And by controlling short-term interest rates, it has an effect on long-term interest rates a little bit. It's more like grabbing, you know, the tail of a dog and you can kind of steer the rest of the dog, you know? But it's, you know, the dog kind of got a mind of its own. And so that's the way long-term— so interest rates are 100% determined by auction at the market. So especially the longer-term rates. So that's really what all the Fed does. And it's a pretty giant hammer. And that's the only tool they have really. So, so they have this one tool. If you imagine you're a doctor, you go to a doctor and they have the only thing they have is an amputation saw, right? That's their only tool. That's pretty much what it is with the Fed, you know?
Yeah.
So it's a very broad tool.
It gets the job done, but be a little bloody potentially.
Yes. And it's, that's the only tool they have. Now since the Great Recession, we've had, they've had another tool called quantitative easing where they can actually go into the bond market and start buying bonds printing money in essence and buying debt. Well, they're not a market participant as a buyer or seller of that debt. And so they can actually affect long-term and longer-term rates by actually entering the market. That's brand new. That's only since, you know, 2009 they did that for the first time. And they, they go into the mortgage market and they, they can go buy and sell those and control mortgage rates by simply buying and selling. So if they're buying mortgage rates, rates are going to go down and the Fed's balance sheet means the stuff they own goes up, it balloons. And that's exactly what happened. And then if they decide they want to sell that stuff, well then interest rates will go up because there's now not only less buyers, but there's more sellers. And in order to be attractive, you gotta sell it, you know, in higher interest rates. And so, so that's, that's the bottom line. So what about inflation and interest rates? And they're not directly related, right? But it's kind of, you can think of inflation and interest rates as like two forces connected by a rubber band, right? So you can pull inflation a long ways over here. Well, one of the ways to cool inflation is to raise interest rates, right? And all of a sudden, you know, that can create the pressure off inflation by reducing demand. If you put the economy in recession, you are going to slow down inflation because there's less energy use, less raises being given out. It's, you know, a very blunt instrument. So they're related but not directly, but they're, you know, they push and pull each other, so to speak. So the primary thing that's going on right now, and this is very similar to what happened in the '70s, is we're seeing the Fed, the Fed is going to be very difficult to get inflation under control. One, there's so much liquidity created during COVID So if you look, there's something like $4 trillion in excess savings that people have 'cause they didn't go out. So people's balance sheets just ballooned. Add to that, you know, $3 trillion-ish of stimulus where we put cash in people's pockets. So people were just flush and the stock market going up and housing market going up, the wealth effects. So you have the, all those things really made a very, very healthy consumer. And then add wage increases on top of that. So you're seeing, you know, so that's, it's going to be, it's going to be a lot to take the air out of that thing. And now can they do it? Absolutely. Yeah. I mean, they're working hard to do it, but it's a bit of an effort. To take the wind out of that thing. So they're working hard on that. Can they bring inflation down? Well, here's the problem. Even if we went into full recession, it's going to be very difficult to take inflation down right now. And so there's a bunch of inflation components, but the big one right now is energy. Okay? And as I've pointed out before, the problem with energy is energy is the mother of all commodities, meaning Everything takes energy. If energy's up, everything's up. Takes energy to ship your groceries. It takes energy to run your diesel tractors and your farm combine. It takes energy to run the mines and the mining equipment. It takes energy to commute. It takes energy. Energy is used in everything. And so if energy is high, then everything's high. And the problem is, as I've pointed out, is we have a pretty major energy crisis underway across the globe right now. And it's caused by this false narrative. And I went into this, you know, in the 20— 2015 that the age of fossil fuels was over, was the world is massively underinvested in fossil fuels for the last 7 years. And so we have production caps right now across the globe, and it's a huge problem. So, so the bottom line, so the Fed can create recession, but it's not going to, it's not going to cause energy to come way down. Now, now can they cause energy demand to lessen? Yes, but it's still going to remain stubbornly high. And so the problem is you can do that, but you're not going to get inflation down. So we end up in a potential scenario of stagflation like we had in the '70s where low growth, you know, you know, in and outta recession. And, but we still have inflation in spite of that, you know, kind of worst case scenario. So it seems like that might, this might be what it's unfolding. And by the way, this is exactly the scenario that we, we were looking at earlier in the year that we said this is the way it's going to play out. I said, I said inflation is going to peak, but it's going to be stubbornly high. We're, we're not in recession yet, but you know, that's, that's the way we're angling towards that. So, So it's kind of playing out really like we thought.
You know, one of the goals of every investor and every trader out there is to try to read and predict what the Fed is going to do. And it's been so interesting to see kind of the evolution of the Fed's position on inflation.
You sent out today.
Yeah, I sent a little meme I found, which I thought was hilarious.
Here it is. Yeah.
Okay.
Q1 '21, QE won't cause inflation. This is Powell. QE won't cause inflation. Then Q2, it's some inflation, but it's transitory. And then it, okay, it's high inflation, but we're peaking. Then next it's okay, inflation may not be transitory, but the job market wage growth is going to be very strong. And next it's going to be, well, we need to hike aggressively to curb inflation, but no worries, the economy is very strong and soft landing is possible. And then finally, negative growth in Q1, but no recession risk. And then, okay, recession is coming. It's like it just keeps getting worse.
Yeah, the, the, the line keeps moving on, on what they're tracking. It, to me, it feels partially planned and then partially I think they are shocked in, in some ways. Yeah.
So here, here, here's what happened. People attributed inflation to the supply chain problem of COVID right? And, and there was, it wasn't, but, but underneath was this sneaky inflation driven by energy that no one foresaw. And so we have this massive energy shortage that's working through the system and it wasn't exposed during the low demand years of COVID Right. And as soon as we exit from COVID all of a sudden demand, oh, you know, we, it all of a sudden it surfaces, the shortage just surfaces because there's not enough energy supply. And then shock of shocks, Ukraine. And now it's a holy smokes moment, like what's going on? And so it's this very sneaky energy is what no one was counting on and no one saw it coming, but it was very predictable.
Right. And so it seems like to your point earlier on, the Fed has this blunt use instrument that can work for certain things and The idea of high keeping interest rates high is it's going to slow down demand, slow down lending, and slow down the economy, right? Hopefully to slow down inflation. But so much of what is driving the inflation numbers, the headline CPI, is energy.
This is solvable. The Biden administration is releasing from the Strategic Petroleum Reserve, which is really there to fuel our military in case we need it. So unfortunately, you know, it's really more of a political thing now. Let's get oil prices down prior to the election. It's what they're trying to do. But the, you know, really we need policy. They need to release oil and gas leases. They need to fast-track energy infrastructure projects, including LNG projects. And that's what needs to happen. And even there, it's going to be very tough because those things take a long time to develop.
Right. Yeah. So what, based on kind of your interpretation of where the Fed stands, because during COVID they were extremely dovish and they just opened up the floodgates to make every effort to make it a soft landing. And they largely did, but maybe kind of kicked the can down the road a little bit. And now all of a sudden they've kind of turned and channeled the inner Volcker, as we kind of joke, and are, you know, yeah, I didn't think they were serious about it.
I thought, right, Democratic administration, they're going to buckle, but You know, hats off to them. They're not there. He is, he is Volcker from what I can tell. And I think everybody believes that right now.
Right. So, so how much do you think of this as posturing? Right? Because we've talked about before, some of them, because the Fed has such a large impact on kind of the expectation of the future and what it's going to be like. And so, you know, sometimes they can posture whether positively or negatively and it impacts the perception of investors. Do you think this really hawkish approach is more of a posturing approach to hopefully kind of slow down potential demand or is it, I mean, it's anyone's guess at this point, but what do you think?
I don't think it's pure posturing. I think that's part of it. They do want to talk the game so get people out of the inflation mindset because inflation mindset creates inflation. So one of the solutions is to change the mindset. But I think they're very serious where they understand how damaging it is.
Do you see them holding interest rates high potentially throughout 2023?
I definitely do. And especially because my prediction is that energy's going to stay high. And so I think we're going to see prolonged period of higher rates. And they can soften. And so it depends how deep a recession they want to create. And right.
And talk a little bit about that, 'cause that's kind of the big scary R word, recession, right? And there's obviously, you know, that can mean different things as far as how deep a recession is, what markets and asset classes it impacts. I mean, talk a little bit about that as someone, you know, who has not been through only really one recession, which was the Great Recession in 2008, but you've been through multiple. What do these cycles look like, right? What does it look like from, consumer and investment standpoint.
Yeah. Earnings drop and revs drop and OIs drop and higher interest rates, which makes the cost of investment higher, right? And leverage, which also hurts earnings. So it's, you know, things go down. Is it catastrophic? Rarely. You know, I think the Great Recession was one of the worst we've had, you know, I mean, really since the Great Depression. And so I don't think we should be looking for anything like that, especially since there's a lot of healthy foundation in the economy.
So, right.
This is actually a great time to buy. So when the market is just going up, up into the right, right. Well, when do you want to buy? You know, I'll tell you what's really perfect is when, as the market's getting ready to head up into the right, it takes a little dip, right? Yeah. And so that is actually the time you want to buy. So. Given the trends we're following, so I'm following, right, this massive industrial trend, right? That is the reindustrialization, the reshoring of America and the rebuilding of energy infrastructure, all those things. That's not changing in the next 20 years. Now, if there is a dip before that, that lets us get in cheap, well, that's a gift, right? So we want to be able to move on those things. And so this is actually, so counter-trend moves are awesome buying opportunities. So that's my view. And you know, there's a lot of things. So, you know, right now energy is really top of my mind because this is just a huge opportunity and energy plays are still massively undervalued. So, I mean, Buffett is buying energy right now. What does that tell you? I mean, it's the value.
That's the pinnacle value investor. If he's buying something, everyone hates it.
You're pretty, I mean, if you're in energy, you're pretty much satanic. You know, you're viewed as the evil of society because you're, you know, using fossil fuels, which are everyone else's evil. And although everyone gets in their car, you know, still flies, gets in that plane. Well, they do that and you didn't use green energy to do that. So I love green energy, but green energy isn't there yet. And the bottom line is it is energy is still on sale and energy plays are still on sale. So pretty much I want to back up the truck in energy. We're definitely at Aspen are really looking at a more energy place, really, really smart energy place. And there looks to be some killer opportunities still. Surprisingly, the world hasn't woken up to these yet. Great. You know, and the other thing is inflation is the friend of real estate, right? They're, they're very good, good pals. And so if we see NOIs drop and we see deals falling out, which we're seeing, we're, we're seeing a lot of like Class C multifamily and stuff falling out. Because all of a sudden the rehab costs went up because of inflation. These deals, they didn't fund them enough to do the rehab, the value-add piece, right? And they're falling out. And so we're seeing those dropping in price. Great.
And a lot of the really aggressive bridge lenders, which we've been talking about for a while, is we've been talking about that.
There's the huge risk is the bridge lenders, they've, until they left the market or at least get not competitive to where these deals aren't penciling, which, and, and so that's causing deals to fall out and prices to soften, which now that's now Maybe we have not been doing a lot of multifamily recently and, you know, in the last part of the year and because of that. So now it looks like hopefully we'll start to, maybe we'll start to find some deals we like again.
Yep.
And so it's all good and we're doing, we got a multifamily coming up that we're super pumped on, but has a 3.5% consumable Fannie Mae loan on it.
It's like, right.
And it's Class A. So it's still a killer sweet deal. So there are a few sweet deals, but, and even there, remember inflation is our friend. So even if there is a little recession, okay, how long is it going to be? 10-year recession? Those things, it's just unheard of. Recessions last, you know, usually not the Obama, the Obama recession was a different, it, you know, he managed to make it last a good 6 years. You know, it's, super skill of a guy who had no business experience whatsoever. In fact, no experience whatsoever but making speeches. So, you know, but that's most recessions are short. So even if that happens, you have some NOI hit. As long as you can cover your cash flow, cover your debt service, you're good. So you want to make sure your investments are super solid. And then you just ride it out and extend your, you know, if your timeline was 3 years, we make it 5.
Yep.
And you're fine, right? And inflation still is going to be your best friend as long as you don't get shaken out of the deal.
Yeah. Awesome. Well, hopefully this is some helpful kind of thoughts as we're all, you know, trying to find opportunities and position ourselves as investors in good ways kind of for, what's coming the rest of this year and next year. And I don't know if you have seen recently, if you've been following this podcast, but we just launched our new website at thebillionairepodcast.com. And on there we have several things you can do. It's easy to follow along all the episodes. But we also have this, this new thing you can click on there where it's basically says ask anything and you can really ask questions you're thinking about, right? And so this is, we want, what do you want to know? What do you want to know? So we want to do a lot more of these types of just kind of short, you know, one-hitter, a little podcast, top of mind. We really want a lot of that to be driven by listeners' questions. And so if you have questions, things you're thinking about, we would love to see those. So, so please go in there, submit your questions. You can do a little voice text and it goes straight to our team and we'll review those and listen to them and, Maybe we'll even feature your question on a future podcast. So please go there, check it out. I hope this is, is instructive and valuable and tune in next time. Thanks so much.
