Markets are betting that the Fed is done with rate hikes. Before we get ahead of ourselves, they made the same sort of bet earlier in the year when a few banks went under.
However, I believe that the markets may be right this time for a few reasons.
1. The economy does not have to be "cured" in order for rates to come back down. The Fed told us what they wanted to see: lower inflation and a weaker labor market. We are seeing both.
After the recent Fed meeting where they announced another pause in rate hikes, the markets rejoiced and bet that hikes were done. Then, in an attempt to subdue market excitement, Fed Chairman Powell spoke and said the Fed is ready to hike rates again if the data suggests further hikes are needed.
In the following week, inflation data came in lower than expectations and the labor market showed stronger signs of weakness than expected.
I expect this trend to continue throughout 2024.
2. The Fed is going to bankrupt itself. With over $1T in interest payments alone, there is no way the Fed will be able to make enough money to pay off its debt.
The US used to have no issues auctioning off its debt to foreign nations. However, many countries (China, for example) have been reducing their US debt exposure - I believe in a coordinated effort to de-dollarize the global economy, but this is a conversation for a different time.
Without any new buyers of US debt, the Fed will be forced to purchase them themselves. They can print however much they like to pay their debts, but printing will create sky-high inflation. Although this will be good for asset prices (think 2020 but x's 10), savings will be destroyed and the cost of living will be too expensive for most.
The new balancing act for the Fed will be a combination of how much new money to print (devaluing the dollar and savings but increasing the value of assets such as stocks, real estate, bitcoin, etc.) and how quickly to cut rates. If the Fed cuts rates they will be decreasing their interest payments.
The US government can cut their spending to help solve this issue (think new right-wing Argentinian President Javier Milei) but that will be political suicide (no politician will get re-elected if they, for example, cut welfare).
3. Election Year. Since August 2021 I've been saying the Fed will be cutting rates during Biden's re-election campaign. To think that rates are not politically and purposely manipulated is naive. This narrative has begun to gain traction as 2023 quickly comes to a close.
Having said all that, bad times are not around the corner. The Fed is notorious for kicking the can down the road as much as possible. I believe, however, it is imperative to educate and prepare for what's to come.
But before we get there, we will see another bull market that should dwarf 2020-2021 in comparison. Think of the metaphoric can being kicked down the road as a snowball. The more it travels, the bigger it gets. The more printing that will be needed, the more cuts that will occur, and the more manipulation that will be endured.
Owning real estate during this time will perform incredibly well. Stocks will boom as new money enters the market - when rates are slashed all of these stocks/businesses will be algorithmically valued more as the cost of doing business decreases. Gold, silver, and bitcoin will see all-time highs as market participants look for dollar alternatives.
This is not a doom and gloom newsletter nor am I bearish on the United States - in fact, it's the opposite. It's how I see our current markets playing out in the next few years and the important role real estate will play.
We have a short week ahead of Thanksgiving. Here is what's in store for this week.
- US Leading Economic Indicators
- Richmond Fed President Barkin Speaks
- Existing Home Sales
- Minutes Of Fed's November FOMC Meeting
- Initial Jobless Claims
- Consumer Sentiment
- Closed for Thanksgiving
- S&P Flash US Manufacturing and Services PMIs
That's it for today. I hope everyone has a wonderful week!