The end of the year is approaching, but that does not mean that we are slowing down. In fact, our fund launch is keeping the entire Peak 15 team very busy. Our last newsletter covered the structure and benefits of this fund and why we are so excited to bring it to market, so instead, let’s take a broader look at the macroeconomic environment we find ourselves in.
As you very well know, the biggest stories in the economic world continue to be inflation and the Fed’s response to it. The predictions that we have been making in our newsletters seem to have come true. 2% as the inflation goal seems to be a fantasy and the “Great Moderation” as Blackrock calls it, is over. You may remember our prediction of the Fed giving up on this goal and choosing a new target as early as next year, well this prediction seems more likely now than it did when we published our last newsletter at the beginning of October.
That being said, I do not expect Chair Powell to say this out loud on November 2nd during their meeting. As we have mentioned previously the public dance that the Fed does on this issue is just as much about public sentiment and confidence in the markets as it is the increase in the target rate. If Chair Powell shows any sign of halting rate hikes before the “job is done”, the result would be market instability and the rate increases that are already baked into the current price of debt would begin unraveling in a chaotic display. There are plenty of reasons why the Fed would continue on their rate hike spree: inflation has not come down as much as they, or anybody else, would have hoped, the labor market remains robust, and the deep pain of a recession is not yet upon us. Powell has expressed his concern before that inflation feeds on itself and that inflation must be squelched quickly so that the expectations of inflation do not entrench themselves in our economy long term.
In our last blog post titled “The Emotional Investor” we spelled out that, absent of major shocks, financial trends tend to continue. There is an inertia when it comes to price changes that is difficult to shake. Unfortunately, the Fed really only has one tool, rate hikes. These hikes are a very powerful tool, but, by design, the tool does not give “shocks” into the system that would be necessary to reverse inflationary pressures very quickly. Eventually, of course, investors and the general public will look around and realize that interest rates are very high, but this lag is exactly why overshooting almost always occurs.
It is now November in an even numbered year, which means that here in the United States we have an election coming up. While we do not cover politics here at Peak 15, we do encourage you to vote and we recognize how both domestic policy and world politics affect us directly. One example of this would be the aftermath of the 20th National Congress of the Chinese Communist Party. While the meeting was more of a continuation of the current system rather than a change to something new, there were some indications that the Chinese economy, as well as the global economy, are slowing down. Just a few years ago, President Xi said it was “entirely possible” to overtake the United States’ economy in size by doubling GDP and GDP per capita by 2035. In this most recent CCP meeting, President Xi abandoned the national GDP goal with the understanding that the declining birthrate will put them out of contention for the coveted position of largest global economy. There are other factors contributing to the declining growth of the Chinese economy, but, for our purposes, we will just leave it here by saying that the slowing of this economy is indicative of larger global macroeconomic factors that are visible at every level of the economy.
Another contributing factor to the end of the Great Moderation and the inflation rate generally has been the ongoing war in Ukraine. Uncertainty helps drive prices up, and there is nothing more uncertain than war. Luckily, we have seen most of the rest of the world, including religiously neutral Switzerland, publicly side against Putin, but the impact of the war will be dramatic regardless of which side “wins”. One layer of this uncertainty to peel back is the horrible possibility that Putin’s war becomes a precedent for other world powers to claim territory, further disrupting supply chains and shifting global alliances. Unfortunately, we have to reckon with the fact that the Great Moderation and the rapid globalization that defined this period from the mid 1980s onward left many people out, including Russia. Countries that felt uncomfortable with the established world order at the time, whether it be for geopolitical reasons, religious reasons, or ideological reasons, are now finding themselves behind in a world that is more acutely aware of the environmental impacts of rapid growth. Catching up now in the same way that countries like the United States got ahead will be met with climate activist pushback. The water level rose very quickly, and the leading parties seem to be constantly keeping others below the surface, at least from some perspectives.
The money supply is another huge driver when looking at current markets. In April of 2020 there were about 4.8 trillion dollars in the M1 money supply, that is the amount of cash in circulation as well as in checking accounts. The very next month, there were about 16.2 trillion dollars in the M1 money supply. This was largely due to the spending that was seen to be necessary at the time, but we are now seeing how untargeted and excessive the money printing was. Frankly, it is shocking that inflation is still so low given that we quadrupled the money supply in a month, but nevertheless, I have not heard from modern monetary theorists recently who, presumably, have their tails tucked and are sitting in timeout.
I bring all this up to emphasize that the issue of inflation is far more complex than most people will lead one to believe. There are no easy solutions to inflation. The issue is multifaceted and we, as investors, must consider what it will mean to live in a world with an inflation target closer to 5-6% rather than 2-3%. Luckily for us at Peak 15, we have been well positioned for this reality since our inception in 2019. As we repeatedly drive home in these newsletters, real estate, especially multifamily real estate, is the best hedge against inflation. We are so glad to be raising our fund at the exact time that we are, and we are excited to take advantage of the tremendous opportunities that we see coming up over the next several months. If you would like to be a part of our journey and invest with us, we would love to have you on board.
Keep Climbing!
