Last week, Fed chair Powell claimed inflation is “transitory” and there’s no need to raise interest rates or taper their asset purchases.
For the uninitiated, that’s Fed-speak for …
… inflation is real, but the Fed can’t do anything about it because if they do the financial system implodes;
… real interest rates must continue to fall, and because we can’t lower rates, the Fed needs to drive even more inflation to create a bigger spread;
(We know this may seem geeky, but it’s quite simple …
If nominal interest rate … the published number … is 1 percent (it’s not … it’s zero) … and inflation is 3 percent (it’s not … it’s more like 5 percent) … then “real” rates are 1 minus 3 = negative 2.
To drive rates down from here … where nominal rates are already zero … then inflation is the ONLY answer to increase the spread. )
… the Fed must continue to digitally conjure many tens of billions of dollars from thin air each and every month to buy Treasuries AND mortgage-backed securities (MBS).
Yes, there IS a real estate play in all this financial system mumbo-jumbo …
As we’ve discussed repeatedly on the air and in our writings, the financial system requires asset price inflation in stocks, bonds and real estate.
And although many investors think the stock market is the primary focus, it’s not. That’s just a shiny object to make people think the economy is booming.
Bonds and real estate are FAR more important. These both act as collateral for LOTS of systemic leverage. This is what the Fed is worried about.
This is undoubtedly why Jerome Powell did NOT slow down the monthly purchases of Treasuries and MBS.
Treasury purchases prop bond prices UP (suppressing interest rates) and prevents falling bond prices (rising interest rates).
Falling bond prices are problematic because so many bonds have been “hypothecated” … a fancy word for borrowed against.
But unlike real estate, when the value of the collateral (in this case, bonds) drops, the borrowers get a nasty thing known as a MARGIN call.
This means the borrower must post MORE collateral, bring in MORE cash, or sell at a LOSS. But when cash is tight and everyone’s selling, it’s a train wreck.
The 2008 crisis had it’s roots in margin calls on hypothecated bonds. We’re pretty sure the Fed would prefer to avoid a repeat. Their actions say so.
Meanwhile, MBS purchases pump new Fed currency directly into propping up (inflating) real estate … housing in particular …
… which keeps hypothecated MBS bonds from imploding the system (like they did in the “sub-prime” genesis of the 2008 debacle) …
… AND in creating LOTS of housing equity consumers can look at and FEEL richer so they’ll borrow and spend more …
… and also directly turning homes into consumer ATM machines and putting spending cash in the hands of consumers.
The politicians and the bankers love everything about this. So pumping up housing equity is always a top priority …in spite of what they SAY.
Of course, YOU don’t need to foolishly SPEND your equity. You can use max cash-out loans to reposition equity to invest, protect it, and/or hedge against inflation.
Of course, as savvy investors realize, the Fed is trapped and MUST inflate … and they inflation is at least partially aimed at housing …
… the obvious play is to get in front of the Fed by investing in quality markets and property types … those likely to benefit from the very conditions the Fed is creating.
That’s why we’re headed to Jacksonville, Florida VERY soon …
We’re going to tour the market, meet with our teams, and look at brand new build-to-rent housing inventory.
YOU are invited to JOIN US in for the upcoming Jacksonville Market Field Trip August 12-15, 2021.
This multi-market field trip (Jacksonville, Ocala, and Palm Coast) includes two FULL days touring the markets, visiting neighborhoods and looking at properties.
PLUS, there are two classroom sessions to discuss the macro factors and local market dynamics LIVE and IN-PERSON with Robert, Russ and local market experts.
Florida is hot. Jacksonville is hot. Housing is hot. Build-to-Rent is hot. And it looks like inflation could be gearing up to run hot too …
… and when real estate inflates, equity happens.
Join us in Jacksonville to see what all the excitement’s about.
Space is limited and time is short …
We’re looking forward to seeing YOU in Jacksonville August 12-15!