Oh what a mess this economy is! Helicopter money during Covid and supply chain issues brought on inflation like we haven’t seen in decades.
To respond to this self-inflicted predicament, the Federal Reserve began raising interest rates at an alarming pace. Never have we seen interest rates rise at this steep of a slope—even in good old Paul Volker’s days.
Inflation has been going down for several months although the most recent CPI figure is still 6 percent. That is well above the 2 percent target the Fed has had for years.
That’s why Jerome Powell was so hawkish last week about continuing to raise interest rates aggressively. They could do that without worry if nothing bad happened.
But in the last week, something broke. Specifically, we saw bank failures of two regional banks. They weren’t doing anything nefarious. In fact, they seemed to be doing what they were supposed to do—investing in conservative bonds that became worthless as interest rates rose.
Things are moving quickly now. By the time I release this podcast a week from now, things could get a lot worse. So now, the Fed is in a pickle.
Usually, when something “breaks” like it did, that is a signal for the Fed to back off its hawkish stance. But with inflation still at 6 percent, that isn’t exactly an easy decision.
So what do I think is going to happen? Well, whether or not rates go up at the next meeting is irrelevant. Unless there are other signs of systemic weakness too hard to ignore, the Fed will continue to raise rates until inflation is tamed.
That is going to result in a lot more destruction to the economy than we see now. We are hearing all about banks right now but the real estate market is also about to see a reckoning.
I do believe within the next few months, there will be the proverbial blood in the streets. In that process, it is quite possible that you will lose some money. However, the most important thing is to keep a level head.
You see, it is in times like these that the most money is made. Those who are paralyzed with fear will lose out. Those who act rationally will win big. A buyer’s market in real estate will be here shortly.
This week on Wealth Formula Podcast, I speak with Jorge Newbery about the real estate and debt markets. Make sure to tune in!
Jorge P. Newbery is Founder and CEO of American Homeowner Preservation LLC, which crowdfunds the purchase of nonperforming mortgages from banks at big discounts, then shares the discounts with struggling homeowners. A 2004 natural disaster triggered the financial collapse of Newbery’s former business, leaving him with $26 million in debts he could not pay. Newbery rebuilt himself through AHP, sharing what he learned from his challenges to help families at risk of foreclosure stay in their homes.