Chief Investment Strategist, The Freeport Society
By the time this hits your inbox, the May Consumer Price Index (CPI) inflation numbers will be out.
But we still have to wait until 2 p.m. to hear what the Federal Reserve’s interest rate decision is.
Which makes us wonder…
Did Fed Chairman Jerome Powell wake up this morning already sure of his rate plans and his outlook for the months ahead?
Or was he – like the rest of us – just waiting for the inflation number to drop so that he’d know what to say in his press conference?
Let’s not kid ourselves. We already know what the answer is.
We like to pretend that our leaders know what they’re doing. Our fates and livelihoods are in their hands, for crying out loud. But experience has made it abundantly clear that they don’t. They really are just putting on a good show, flying by the seat of their pants and hoping the rest of us don’t catch on.
These are the same people who told us that inflation would be “transitory.” Although, I suppose “transitory” could mean that it wouldn’t literally last until the end of time… if we want to make an academic argument about the accuracy of the language.
But let’s get serious…
Fighting a Fire With a Toy Water Gun
We have people fighting inflation they never expected and clearly don’t understand with tools that haven’t worked, hoping – just hoping – that maybe this month will be different. They’re fighting a fire with a toy water gun.
That’s our reality.
We’ll see what the Fed says but it’s likely that rates will remain unchanged today. The futures markets are pricing in a 99% probability that rates remain unchanged, and while futures traders have been a little off their game all year, it would be rare for them to miss on the day of the announcement. Regardless, it will be Powell’s forward-looking comments that get the most attention.
I’d take anything he says with a grain of salt.
Powell has made it abundantly clear that he’s in no hurry to cut rates and that he’s waiting for more confirmation that inflation is actually falling before he makes any moves.
But let’s look past the Fed for a minute. As foreign as this might sound, there was an economy before the Fed and there will still be an economy long after we’ve abandoned the central bank and moved on to whatever the next currency mismanagement du jour might be.
So, what’s going on in that real economy?
The Real Wave of Distress Is Starting
Pimco, one of the world’s largest bond managers, reported yesterday that more regional bank failures are in the cards.
“The real wave of distress is just starting,” according to John Murry, the firm’s head of global private commercial real estate. “The combination of rising rates plus recessionary pressures creates real challenges for commercial real estate, from both a capital markets and fundamentals perspective.”
In other words, the properties themselves are in a real mess.
Their borrowing costs are resetting higher, but their tenants are in no position to pay higher rent…
And most are still happy to make do with less square footage than they had before the pandemic.
These rough fundamentals make the loans toxic. Few investors are willing to buy commercial real estate debt at anything close to face value.
How bad is it exactly?
A good 20 years ago, as a lowly risk analyst, I used to work in the Burnett Plaza tower in Fort Worth, Texas. It’s the tallest tower downtown, and it dominates the skyline. From its upper stories you can see the skyline of Dallas on a clear day.
Well, it just sold at a foreclosure auction for a measly $12.3 million. Three years ago it was sold for $137.5 million.
More than $125 million in value just… evaporated.
When you have downtown office towers selling for less than 10 cents on the dollar, you have the potential for major, systemwide chaos.
And if only it stopped there…
More Ominous Words
Billionaire hedge fund manager Ray Dalio was in the news last week with some of the most ominous words I’ve heard in a long time. He noted that while presidential candidates Joe Biden and Donald Trump were very different across a wide range of issues, they were virtually identical when it comes to trade and specifically trade with China.
(I quoted Freeport friend Rodney Johnson expressing the same sentiment just last week.)
One of the founding themes of The Freeport Society is that globalization is dead and that the foreseeable future will be one of deglobalization, with all of the inflationary consequences that entails.
But Dalio took it further, noting that “economic warfare precedes military warfare.”
Just. Bloody. Fantastic!
Apart from inflation, Fed incompetence, and a slow motion meltdown in the regional banking and commercial real estate sectors… we have a potential hot war with China on the horizon.
The recurring theme here is chaos.
We live in an Age of Chaos, and that’s not changing. We can either bury our heads in the sand or we can accept this as true and invest accordingly.
In an age of chaos, it pays to stay nimble… and to follow the money. It also pays to consider an age-old investment strategy from a completely fresh – dare I say “revolutionary” – perspective. And if you throw in the input of one of the top fintech companies in the world… you have a quant-driven strategy that could help you not only survive this Age of Chaos, but thrive despite it.
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To life, liberty, and the pursuit of PROFIT.
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