The Surprising Link Between GDP Growth and Long-Term Rates | Top of Mind Series

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?

Well, or was it a shocker?

Right. Okay.

So anybody who has watched our Investable Megatrends for the next, you know, next decade, you 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 2 years now. And in spite of, you know, lots of fear in the world, lots of fear of the economy, And lo and behold, you know, so the Wall Street Journal article says the US economy grew at 4.9% rate this summer, powered by fast-spending Americans. And Ben, what was our theme?

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. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments, so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Consumers are going to continue to spend. They've been spending the stimulus money that they I received, but they've also, you know, sentiment has kind of been kind of 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. And also our thesis that consumers are largely pretty healthy still. Right.

And yeah, so if you look at, you know, the main market indicators of consumer health, the ones that, that I look at, strong consumer spending. It's still strong. So, you know, I had one, one person comment, you know, your, your megatrends, you know, 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, 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. Well, why does that matter? Well, 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, debt service cost. Relative to income is 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 of years. As record real income and inflation-adjusted income and record cash. Now, people are confused when they see these stats. So I've done this presentation how many times? And people are like, what? Because you're reading the headlines about, you know, the inflation-strapped consumer and people are struggling and, you know, What? Which is true? Well, both are. Both are. So you've got this bottom quartile, say, of consumers, of the most, you know, the lowest level, the, you know, the lowest earners are really struggling right now. But if you look overall on averages, they're not overall averages. So, so just pure numbers based, the consumer is incredibly healthy. And again, if this is shocking to you or it sounds weird, please just go watch The, the Megatrends presentation. And how can they access that, Ben?

Yeah, if you go to thebilliarderpodcast.com, you'll be able to find that. We actually released an episode just a few weeks ago.

It's just so important that if you haven't listened to this, honestly, just please do yourself a favor. It's one of the keys to being a successful investor is knowing what time it is, right? 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, and really what we're sharing with you is our playbook. It's the Aspen Funds playbook for what— where are we deploying capital as, as smart, savvy investors, right? So, and yeah, pay a lot of attention to that. So, um, but it's exactly what has been what we've been saying for a long time. And, and all of a sudden mainstream economists are now starting to come on board and say, I would agree with us that This is, you know, this is—

I mean, it's, it's 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. So, you know, you keep hearing about recession fears and, you know, we're headed for this major hard landing and lift the whole global economy. We're not seeing it, right? We're seeing positive in it. Massive robust GDP growth. I mean, that's—

it's going to— and, and we guys, we at Aspen predicted this 2 years ago. So we predicted this was going to happen. And it's because, you know, 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, uh, of the, uh, of the, uh, you know, economy. Yeah, the economy. And so now you pointed out, you know, lower consumer confidence.

There's—

so there are things that you know, tightening credit, you know, um, you know, high, you know, the, you know, the student loans coming back online, low consumer confidence, inflation squeezing consumers, you know, all these things. But, but, but they're, they're, they're less powerful than the 7 that I already gave. And, you know, and consumer confidence used to be one of the main things I looked at, um, but, but in the last few years it's been less predictive And I think people, you know, people feel, you know, like, hey, maybe, you know, global, you know, climate change is bad and, you know, politics is bad, right? The polarization and, you know, housing prices are up and inflation is eating at me and now I've gotta pay my student loan back. 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, you know, they've got— so, so they're— one, one, one part of their emotions is like, uh, right, you know, uh, you know, all this sucks, it's bad.

And other parts like, but I'm doing great, you know, I'm going to keep spending. I mean, ultimately the pocketbooks are, are, you know, in charge right now because they are spending and it's— and that, that is outweighing the negative feelings of inflation is eating away at my budget.

All the negative things. 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, this is just further corroboration. I mean, earlier on, right? And kind of as the Fed's raising rates very, very quickly, we saw kind of an early potential issue in the banking world. Right. And so there was a lot of things and we were 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. And a lot of economists have kind of flipped over the past 6 months to thinking soft landing is probably more likely than not likely. And this is again, great corroboration of that. I mean, if you have GDP growth, that's the opposite of a recession, right? So we're seeing that and we don't want to be all roses and ponies because it's not all great out there. There are challenges.

Hey, who's roses and ponies? I mean, I'm looking at data. I'm looking at data. I mean, I've seen plenty of recessions. I'll call it, you know, but, and we've called a multifamily meltdown. We've called a few negative things. We're calling, You know, you know, I think the next time rates go down, it's going to be because of an outside event like a black swan coming out of China. I mean, you know, people are not paying enough attention to the data coming out of China. You know, they're, uh, you know, they're, they're seeing a massive property bubble, uh, popping right now, right? And, uh, and that could spill over. Um, we're, we're seeing, we're seeing the, the numbers dropping massively as, as, uh, you know, their economic numbers as people are reshoring out of China, moving out of China. So there's a lot of industries that are very much hurting. And, uh, you know, and I, I think the greatest risk to, you know, a strong economy here is a, is a, is a global one right now, not an internal one. Biden is one of the most, you know, uh, prolific spenders, right? And administration, I mean, with the $1.9 trillion, you know, COVID, COVID rescue, and then even the, the Inflation Reduction Act, right? which is just incredible spending. And, and it's all stimulus. It's all stimulus. When you spend that much money, it creates economic activity. You know, they're, they're rebuilding the infrastructure and, and some of those things are needed. I mean, we do need, we need infrastructure help, but, but you know, the scale is just insane. And, you know, building hydrogen plants and, you know, I mean, it's all this, it's, it's, it's spending and that money goes into the economy, goes into new construction, it goes into businesses, which goes into hiring. You know, and if you not have people to hire, well, then rates, you know, wages go up. So it's just, uh, you know, we're seeing a very spend-happy kind of mode in, uh, in, in DC. And it's not all Biden, it's, you know, it was pre-Biden too. It was, you know, stimulus spending, you know, uh, from Trump as well.

So yeah, it's interesting. I think kind of the other piece of this, right, is what's the Fed going to do? Because all eyes are on the Fed. They've Increased rates massively over the past, you know, 18 months, fastest in history. And, you know, anticipations are, are they going to raise rates again? We'll kind of see. Most sentiment right now is saying they're not going to probably raise in November. I think it's a 60% chance they don't raise actually in December. So we might be at the top of the rates being raised, but what's really—

but if inflation keeps going up, they will raise. They will raise right now the last number, you know, the core PCE was 4.25, I believe it was. And they want that to be at 2%. And I am, it's so if it, if it keeps hot, hot, hot, hot. And, and by the way, I mean all this, all the stimulus spending still coming out of DC is going to continue to keep inflation hot. But, but then add in, and again, going back to our megatrends, you know, I'm just You know, it's— there's two, two things that are underlying this inflation, and it is, it is energy prices and it is wages. And those things, what we're, what we're hitting now is where those two things are not cyclically high. They're, they're, they're structurally high. There's reasons they are high because of demographics and because of the, of oil crisis that's, that's, 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 soften significantly. And that means we're going to see rates higher for longer.

Right. And to that point, we've been saying higher for longer for a while. And you know, that sentiment has started to, I think, be adopted by more people because the natural, I think, part of our psychology as humans is, well, this is just a short-term thing, or we'll kind of adjust this quickly. But these things are hard to make massive switches on a dime here. 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 the, 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, what that means, right, is this is the expectation of what yields are going to be now and into the future. And so the short part of the yield curve, are generally heavily influenced and dictated by—

You mean short-term rates, so rates like 30-day rates or 90-day rates, right?

Yes. But the long-term rates are largely dictated by the market and sentiment of what's the expectation going to be at 3 years from now, 5 years from now, 20 years from now, 30 years from now. And so we've had this kind of semi-inverted yield curve where the shorter-term rates are higher than the longer term.

You know, and, 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.

Yep. And that usually points to historically recession, right? Because that usually means expectation is lower growth in the future. Not as much GDP there in, struggling economy. But we've seen just past few weeks a big run-up in longer-term rates. The 5-year and even the 30-year rates have all risen substantially. And it's—

And literally just spiked up. And what happens when interest rates spike up? Bonds crash. So, bonds have dropped over 40% of their value. And so, it's just a huge— huge issue. But again, this is all what we have been predicting, right? You know, you know, can we keep tooting our horn without, you know, without sounding, you know, like we're know-it-alls? But I'm telling you, we called this. So, so guys, listen to this. I mean, in the end of 2020, just a couple years ago, the 10-year rate was at 0.5% yield. 0.5.

0.5.

0.5. Today it's at 5%. And it's just spiked up. And, and so, you know, and it just in the last year, year and a half, it's gone from 1.5% to 5%. So this is a 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 economic, you know, economists are saying, their opinions, The market is saying we're going to have high growth and, and, you know, high economic growth and probably higher inflation. So, you know, it's all bearing out. And what this means, bad news for investors because, you know, I mean, we're in the real estate space, right? And how many real estate operators are, are just can't wait? I mean, I don't know how many people predicted that rates would start dropping by the end of this year. Right. And I'm like, you know, yeah. 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, you know, where rates go down. I mean, excepting for a black swan type of event.

But on the flip side 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 on the values. But the flip side of that is if we have higher rates, we probably have higher growth. Higher growth means higher inflation. Higher inflation means higher rates.

So, so, so the crazy thing about this, like, and, and by the way, the, 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 off. It's the one that is, that the, the, the mortgage market is based on. Consumer, consumer debt is based on. It tracks the 10-year more than any. And, and what, what's happening is, is that thing as it's moved up, we have not seen property prices crash like everybody predicted. And that includes, you know, just single-family homes, your homes, but all the, all the CRE, right? It's moved. The cap rate has moved about, you know, about 90 basis points on average. You know, averages are so tough because office is just in the toilet, you know, But it's, so it's somewhere around that. It's not as much as interest rates have moved. So the property values are holding their value in spite of these interest rates moves. Why is that? As you just said, inflation, because, okay, so let's say, you know, you've got this apartment complex and yeah, your, your interest, your, your interest cost is going way up. But if you hold that puppy for 10 years and we do have, you know, let's say, you know, let's say it's 8% inflation that we don't have, but even less, let's just say 4%. Well, in 10 years, the value of that property, the value of the rents, the rents are going to go up 50%.

5-0, 50% in.

And at 4% inflation, they're going to go up 50% over a 10-year period. And that means the value of that property is going to go up 50%. What? So is it a bad investment? Would you— should you not buy? Well, 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 know, you're catching this, catching this incredible wind called inflation and making it benefit you. You know, 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.

Awesome. Well, I hope this was insightful for you and appreciate you listening. If you If not currently subscribed, be sure to hit the subscribe button on whatever platform you listen to this podcast. 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 so much.