The Problems Are The Path: Interest Rates and Money Supply
The commentary and forecasting of interest rates have taken a Pivot from confidence that rates would be cut in 2024 to a point that there will not be a cut or the cuts forecasted will be late or slow in occurring.
All attention has been on interest rate commentary and very little if any attention on total FED actions in slowing down the economy.
Of the FED's tools the tightening beyond interest rates can occur in contracting Money Supply. Money Supply takes many forms if one looks at the Federal Reserve's Balance Sheet. The most visible part the the Balance Sheet are the Assets.
To save the US economy and the world economy during the Pandemic the Federal Reserve began a policy of Qualitative Easing. A policy of lowering interest rates and simultaneously buying Treasury Bonds, Mortgage Backed Securities and debt instruments to feed liquidity into the monetary system to help business and the population in general survive the economy that was shut down by the Pandemic.
On a World Wide Level, the process was copied by most, if not all, of the World's Central Banks. The Qualitative Easing by some Central Banks went as far as mortgages were negative. Home owners did not pay a mortgage but were paid to have a mortgage. Government Bonds had a negative return. Buyers of such bonds did not receive the full amount of their purchase. Thus a NEGATIVE RETURN!
All through these times the United States Federal Reserve accumulated over $9 Trillion in assets. The money supply expanded. Corporations borrowed heavily at ultra low rates, individuals refinanced mortgages at ultra low rates.
Now we are experiencing the reverse. Quantitative Tightening. things are going too well, prices are escalating and inflation is or has increased. The result is lowering rates to stop the economy rolling into a recession.
So far, there is little to indicate a recession.
There is one item that has not been addressed, the Balance Sheet of the Federal Reserve. While raising interest rates in concept slows an economy down and reduces inflation. There is one tool the FED has in slowing down an economy that media and Wall Street Economists and Investment Analysts fail to mention.....MONEY SUPPLY.
From over $9 Trillion to the present balance to March 2024 to $7.74 Trillion, the FEDis reducing Money Supply. Interest rates have remained at the present level since Mid 2023. During that time the FED has been taking money out of the supply of funds necessary to grease the economy's gears. Since the end of April 2023 the FED has shed $1.53 Trillion through the maturation of debt and sale of debt in the FED's Balance Sheet. See Details Here
"By going slower we are going farther" said Chairman Powell in one of his recent comments. Which means that as long as the economy keeps a positive trend and the inflation slowly comes down the FED can control inflation by reducing the Money Supply. Thus investments in the economic growth will be evaluated on Risk Free Rates of Return as exemplified by the Yield Curve in Bonds. SEE RATES
By going slower the risk level of speculation comes down. The demand for higher wages comes down, with the exception of governmental interference. Conceptually the price of goods come down and inflation comes down.
Frankly, the concepts do not work well when extraneous forces make conceptual theory fail.
We are at such a point. Commodity prices are increasing. The price of Oil is increasing. These are all supply side economics. Interest rates cannot help supply side economics and neither can money supply. When Supply Side issues arise money supply reduction only accelerates commodity inflation as lack of supply of money must fight for limited supply. Then the only alternative is a flip to increasing money supply and lowering interest rates again. Until supply is corrected and then begin the cycle all over again.
Where are we today? Far from the FLIP. We are at the PIVOT. The Pivot from lowering interest rates to lowering Money Supply. The next phase is asset inflation decline. The Dow industrial Averages, the speculation over Artificial Intelligence will eventually lead to profit taking and the placement of proceeds of sales in T-Bills at 5%+ will certainly be warranted.
Now the Big Question for a Real Estate Blog is what happens to Real Estate? LOWER prices on residential housing is slowly occurring, but in most cases, hidden by the inability to have a look back. Look back at your specific neighborhood, town or city and you will note the decline that has occurred month to month year to date year to year. SEE HOME PRICES
As mortgage rates have increased it has diminished the number of those who can afford to purchase a home. Lenders have seen money supply decreasing affecting the ability to have funds for mortgages. Cash buyers have depleted savings. Baby Boomers who own 25% of the housing market are getting older and getting ill or dying adding slowly to the housing inventory for sale. On top of all that, the equation of how to purchase a single family home has been upset by the recent NAR settlement. Will buyers submit to a Broker Buyer Agreement that commits the buyer to a set $/% to the buyer agent? Will the buyer attempt to represent themself? Will sellers try to represent themselves? Will the cost of selling a home be unbundled between seller and agent to lessen the commission fee? All of this is unknown. When unknown my bet is the supply of homes increase because buyers back away from the market. Sellers attempt to use online sources to sell a home to buyers who have no idea of the legal implications in doing so. It all sounds like a Train Wreck waiting to happen. SEE MORTGAGES
Based on the history of the FED, the wreck will occur and the FED will then try to stop it from happening....JUST TOO LATE....as usual!
My recommendation is to pay off your mortgage, wait, continue to rent and wait. investors sell your single family home rentals in California and look for a states more friendly to single family rental market owners. Buy multi-family rental projects, Triple Net Lease corporate guaranteed properties, Storage facilities and gas stations with marts and car washes attached. Stay away from Bank buildings as they are closing. Car washes are intriguing but their competition is hard to battle and too many older washes needing upgrades are coming on the market. Take your profits in the growth sectors of the stock market, especially technology where the Federal Trade Commission is taking on monopolistic tendencies of the Tech industry especially in Search Engines and Social Media. SEE REAL ESTATE COMMISSIONS. SEE FB. SEE OPENDOOR. SEE AMAZON. SEE AI.