Unlike the AI-generated investor above, no one can predict the future.
So anyone who says they know for sure what's about to happen and can't be convinced otherwise is generally not someone worth listening to.
Of course, the other extreme is just as bad, if not more so. Sticking your head in the sand and saying "no one knows anything, so I'll just do what I want anyway" almost always leads to a disastrous outcome.
The happy spot is somewhere in the middle, weighing the likelihood and impact of multiple possible outcomes and deciding on a course of action accordingly. As George Gammon says often, "there are no certainties, only probabilities."
And in my role at Big Spring Capital, I feel a strong responsibility to 1) have an informed opinion on the general direction of the investment landscape, and 2) have ideas of how to take advantage of potential coming opportunities, all while acknowledging there's a possibility things play out completely different.
So with that preface, I want to share some thoughts (both my own and those of others) on the investment outlook for this new year.
I'll start with JP Conklin, president of Pensford Financial, a commercial real estate interest rate advisory firm. A few weeks ago, JP published his own 2024 predictions. Here's what I found notable (emphasis mine):
Unemployment will rise above 5%
Unemployment is a terrible leading indicator. The Fed is usually cutting rates before unemployment is climbing materially. Heck, in the financial crisis it took a full year to peak after all the banks collapsed. In many ways, the labor market is behaving like it always does at this point in the cycle.
Unemployment does not grind higher…it surges. Everything seems fine until it isn’t.
There will be a recession
I don’t believe there will be a soft landing because those aren’t a thing in the real world. [A recent Bloomberg] piece also highlighted how calls for a soft landing always precede a recession.
In fact, we are right on schedule:
• The [yield] curve has been inverted for 18 months, the average amount of time before a recession
• Unemployment has started climbing
• [The Conference Board's Economic] Leading Indicators Index has bottomed out - the unemployment rate tends to peak about 8 months later, and GDP tends to bottom out about 3 months later
The Fed will cut at least 1%
I don’t think the Fed cuts in March unless the wheels fall off between now and then. But I think they start cutting in June and Fed Funds finishes next year around 4% - 4.25% but is still moving lower.
The market puts a 60% chance of Fed Funds below 4% at year end. I think that’s too high given the Fed’s track record of waiting too long. They will be playing catch up.
That being said - if I had to pick, I’d say [the Fed Funds rate is] more likely to finish sub-4% than above 4.50%.
Another angle
I read a lot on finance, investing, and economics. And to ensure I'm not living in a echo chamber, I seek out various sources and viewpoints (arguably too many). I always want to understand both sides of an argument, and am constantly asking "how could this argument be wrong?"
So when I see similar conclusions being reached by different people using wildly different methods, it grabs my attention.
Which brings me to item next: Greg Diamond, editor of Stansberry Research's Ten Stock Trader advisory service.
Greg uses technical analysis methods to anticipate price movements in everything from individual stocks, to bitcoin, to interest rates.
And he looked at interest rates in a research piece from mid-December, analyzing the 10-Year Treasury:
10-year U.S. Treasury interest rate going back to late 2019
From Greg:
From this top [5], you can see that last week interest rates broke below the black dashed trend line, which represents support.
This likely confirms a top in interest rates and likely a high that could remain in place for quite some time.
It doesn't mean we'll see a straight line lower and that interest rates will come crashing back to zero any time soon. But this is an important chart to watch over the next few months.
I've also marked (in blue) what would happen if the 5% level on this chart is in fact a major swing high. If the black dashed trend line marking support is now broken, it becomes resistance on any rally... That's a simple, but effective, technical setup.
Simply put, we could see interest rates fuel a lot of volatility throughout 2024 if they rebound back to near 5%. But if that level can't be broken, interest rates are likely to remain subdued for the foreseeable future.
So Greg and JP both agree that we're likely to see a volatile year, but that we've also seen the high in interest rates.
Putting it all together
Here are my thoughts, in the context of investing in real assets and commercial real estate:
Economic Risks Tilt Downward: Current economic trends suggest that inflation re-acceleration is unlikely, and the Fed probably won't be raising rates this year. This should create a more stable, though cautious, economic environment.
Interest Rates Don't Go To Zero: While rates won't plummet back to zero, they'll stay at a higher level than the last decade. This will continue to stress portions of the real estate market, creating buying opportunities due to distressed selling.
Tighter Credit Conditions: Banks, with the likelihood of higher unemployment and a recession (along with their other issues), will continue being cautious, lending less freely.
Opportunity for Private Credit: We will see more deals (#2) but they will be harder to finance (#3), creating an opportunity for private lenders to fill the financing gap. Passive cash flow investors will have more investment opportunities than they've seen in 10+ years.
That's what I'm seeing in my crystal ball. Are you seeing anything different in yours? I'd love to hear your thoughts.