Reason for Optimism/ Leverage the buying opportunity

[Nathan Grabau]

Following the Fed raising rates yesterday, I am send out a note to my investor clients with my quick thoughts on what happened and where I see things going:

On a very basic level, the Fed controls how much money is in our system, and can increase the money supply, causing interest rates to decrease and economic activity to increase, like they did during Covid. They can also do the opposite, decreasing the money supply, causing rates to increase and economic activity to decrease, like they are doing now.

At the end of last year, the Fed predicted that inflation would go away largely on its own and they would not have to do much economic tightening. Fast forward to today and we know that is not true, they have had to take rates almost 3 times as high as they expected they would. Over the last 6 months, the Fed has slammed the breaks on the economy as hard as they ever had in an effort to get inflation under control. The way they slam the breaks, it can take a while for it to show up in the economy. Fed activity generally first affects asset prices, then inflation moves, and then the job market moves.

We have seen asset prices go down, from houses to stocks, we also now have 2 month in a row of core CPI at the Fed's target, and have seen minor softening in the job market. There is a growing feeling among Fed watchers that the Fed is over tightening. Jeremy Siegel is a professor at Wharton, who was right about inflation on the front end, who is now vocally saying that he believes the Fed will have to start cutting rates into the middle of 2023.

If the Fed cuts rates next year, people who have been waiting to "see what happens" or "rates to come down" will likely rush into the market, potentially bringing back the aggressive sellers market. I believe that we have this window where it is possible to buy investment property while sellers are getting desperate and there is little competition. I am not sure when this window will close, but this is an incredible opportunity to buy when everything is on sale, and likely refinance and crank cash on cash returns up as rates fall.

I think any investment strategy has to be sustainable in current conditions, but we could be very close to a bottom, and that is the best time to buy.

If you would like to discuss this more, please let me know.