This Time Is Not Different

On today’s show we are taking yet another look at the macro economic environment. Virtually everything in the world of real estate investing is being dominated by the macro environment.  

The Federal reserve increased the Fed funds rate another 25 basis points. They made the argument that future rate hikes are going to be data dependent. 

I watched the entire press conference today and there were some obvious holes in the press conference. 

The first major hole is that there were no questions on the Fed’s balance sheet. That’s astonishing to me. The discussion centered entirely on interest rates and there was virtually no discussion on the stability of the banking system or generating liquidity.  

Chair Powell made mention of the most recent report on the retrospective of the SVB failure. 

The insane thing about these bank failures is that the underly banks were fundamentally strong. They were weakened and eventually bankrupted by the outflow of deposits. 

Chairman Powell said in his remarks that he recognized that his view of the current situation is at odds with history. But he said this time is different. He knows that the this time is different argument is not supported by history. 

But it’s never different. The yield curve inversion is screaming, it is the market screaming at the top of its lungs that they don’t believe the Fed. The Fed has it wrong. 

So what does this mean for us real estate investors? 

I believe it means that we will see more bank failures, and that all the member banks themselves will have to come out of pocket to top up the reserves at the FDIC. That will weigh heavily on bank earnings across the industry. These reserves are not funded by the taxpayer. The fund is funded by the member banks. 

More bank failures means tightening credit as banks lose the ability to lend money. They don’t trust their own balance sheet because they know their balance sheet can change on a moment’s notice based on nothing more than rumour. 

The second inning is over and the batter struck out at the plate. We are now entering the top of the third inning in this saga.  

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Host: Victor Menasce

email: podcast@victorjm.com