The End of the Liquidity Hangover: Where Now?
In my opinion, the liquidity hangover that our country experienced as a result of the unprecedented cash flowing into the economy during the pandemic is now reaching the end stage and, from where I stand, it’s time to move on. The markets aren’t necessarily reflecting the changes yet, so here’s what I think needs to come next.
The Fed should hold off on additional interest-rate hikes
As we know, the Federal Reserve’s primary tool for reining in inflation is interest-rate increases, which we’ve seen a lot of over the last year or so. From where I stand, it’s time to let the full impact of these hikes settle into the economy – and for that reason, I don’t believe any additional increases are needed or wise at this point. It’s too soon to have truly useful data and to know the real impact of increases that are already in place. There are some layoffs, particularly in the tech sector, but the labor market is still strong overall; there’s a pullback in real estate, but demand is still high for limited inventory; and retail and other measures of consumer activity are still strong. Even with these mixed signals, I think we’ll see more impact soon.
Although the Fed may have wanted a more robust rollback by now, I think it’s just too early in the process to know what’s happening.
From my vantage point, the myriad of geopolitical issues facing the U.S. right now are also concerning from economic and humanitarian perspectives.
Tensions with China – one of our primary trade partners – are increasing. First, there’s China’s questionable alliances with Putin and Russia, which could add tremendous fuel to the fire that is the war in Ukraine. Second, there’s the ongoing mistrust of our overall trade alliances with a country that’s so fundamentally different from our own and that has tremendous economic and geopolitical power. Third, there’s the emerging narrative around the origins of the Covid-19 pandemic, which further fuels concern at best and suspicion at worst.
Then, there’s Russia. If China decides to bolster Putin’s war, then there’s a remarkable likelihood of economic and other backlash, the likes of which we’ve not encountered in recent memory, if at all.
None of this is good news for the markets.
Residential real estate continues its wobble
Recent reports on residential real estate show that transactions dropped by 35% year-over-year – and to me, the data shows only part of the problem. If you analyze it with adjustments that make a more apples-to-apples comparison of population and housing data adjusted to reflect real-world changes in both (increases in population and increases in housing), I’d say that transaction volume is down about 65% overall.
There's an enormous disconnect between sellers, buyers, pricing and inventory, which continues to be the primary driver of this problem, fueling high asking prices despite higher interest rates. We’re also seeing transaction drops in primary cities, which reflects not only the high asking prices and low inventory, but also the layoffs occurring in high-paying sectors, especially in tech jobs. The news hasn’t been great for the Bay Area, or for Seattle or, for example, in San Diego, where it was just reported that transactions reached a 35-year low. As I said in my last post, this will ripple throughout local and state economies. Even luxury markets, which are typically the safe havens for those who can afford them, are looking a little wonky now, although there’s no real reason for concern there, as these always hold their value and come back stronger.
If the hangover’s done, where do we go from here?
Clearly, we’re facing a lot of negative headwinds and for that reason, I think it’s imperative that the Fed gives the economy a little more time to absorb the interest-rate hikes that have already been set. To do otherwise adds fuel to a fire that we don’t need right now.
At this point, if I was Fed Chair Powell, I’d try to give some positive news – mainly, I’d take a break from rate increases for a while. This would, I think, have a positive ripple effect throughout markets and asset classes, as well as for the psyches of everyday Americans.
Chaos and creativity go hand-in-hand
I’ve always said that I tend to thrive in chaos and I’m certainly not alone: Many of the most successful entrepreneurs have launched groundbreaking businesses in times of uncertainty and great fortunes have been made in times of unrest. Now, instead of hiding out in fear until everything settles down, I think that we need to find more creative solutions to the problems at hand.
I can’t say what that looks like for the geopolitical challenges that we’re facing, but I can point to an interesting, if risky, move that Amazon recently announced: To help its employees afford homes, it’s enabling their staff to use stock equity for down payments.
It’s a move that can stimulate the residential real estate markets in key geographic areas for the company, while helping to bolster property-tax bases and local economies. Whether it gets adopted by many employees, or whether those employees make good on their mortgages, or whether this leads to a 21st-century version of company scrip is anyone’s guess. But on the surface, it’s an interesting and creative approach to a problem.
Follow the leaders or chart your own course
Of course, I’ll always point to what I see as tried-and-true strategies and assets that have been through decades of ups and downs and always come out ahead:
The investing strategies of Warren Buffett, Charlie Munger and the whole of Berkshire Hathaway always set a great example of how to find excellent opportunities and why we should stay the course, especially in times of anxiety and uncertainty. When in doubt, simply follow the leaders.
Real estate is always high on my list of excellent investments, too, and I don’t say this because I’m in the business – rather, I’m in the business because of the sensibility and performance of this asset class: It’s always in demand, it’s tangible and it always increases in value over time (with just a few tertiary markets as the potential exceptions).
Look for undiscovered opportunities. Refer back to some of the insight that I’ve provided in the past about discovering value investments (or, again, look at what Buffett and Munger are doing), read the tape and make your wisest, best play for the long term. While the liquidity hangover may be behind us, not everyone realizes it yet, so there are some great opportunities waiting to be discovered.
As for the economy, if we can find diplomatic solutions to the geopolitical strife, then I think things will bounce back and generally normalize by late 2023/24. Remember, though, that we’re always achieving a “new” normal, so consider what that looks like as we move forward – in many ways, the world hasn’t changed that much over the last five years and in other ways, nothing will be the same again.