Several elites are predicting tough times ahead, as interest rates rise. There is a very interesting slideshow from Sequoia Capital, with dire predictions, recommending that companies adapt to endure. Some recommendations include looking at cuts to preserve capital and making business more efficient.
Sequoia Capital said that response to COVID, governments around the world embarked on a combination of extraordinary fiscal and monetary stimulus to fill a massive demand hole created by the pandemic. This helped prevent an extremely severe recession, but came with consequences. During the pandemic, this money printing revealed itself in asset prices. The new Fed mandate, however, is to control inflation, and tighten liquidity conditions. They said that we are just beginning to see how the increasing cost of money flows through to impact the real economy. To give just one example in the housing sector. In the last 6 months, due to the changing cost of money, a new mortgage is 67% more expensive for the same house – the largest percentage shock in 50 years and putting housing affordability back to levels last seen at the peak of the housing boom. For this reason, public markets are already anticipating a severe slowdown in housing activity with the stocks of homebuilders down about 30% from their highs.
Similarly, Elon Musk has said that he has a “super bad feeling about the economy.” He wants a 10% jobs cut at Tesla. He is going to pause hiring worldwide.
James Dimon, CEO of JP Morgan Chase said “There is a hurricane coming. We are preparing for it.” Referring to inflation caused by printing of money for Covid stimulus spending, he said that “Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy, or Andrew or something like that, and you better brace yourself.”
Meanwhile, real estate inventory is increasing across the country. Bill McBride correctly called the last big real estate crash. He has been saying over and over again that we are not there again because inventory has been too low. The tone of his more recent newsletters has changed, however. He is now noting a rapid increase in inventory.
This may mean we are at or near the short term top of the real estate market. A global recession is probably coming. Global because all major economies turned on the printing presses during Covid. Signs of a more normal real estate market are showing, including price reductions, inspection contingencies, and final sales prices closer to asking price than well above asking price. How quickly things will slow depends partly on how much the Fed and other central banks raise interest rates in the next few meetings.
In China, China’s Communist Party will block promotions for senior cadres whose spouses or children hold significant assets abroad. They have seen the sanctions on Russian officials and want to avoid similar problems when they invade Taiwan. If Chinese officials actually do sell their western real estate, this may have an effect on countries or areas that have seen significant influx of Chinese money, such as Canada and Australia, and possibly San Francisco. Canada already has a two year ban on foreign purchases of real estate, which will slow demand there. The Evergrande crisis in China has changed the mindset of young Chinese investors who have never seen a real estate crash. Sales figures in Canada do show plummeting sales. Things in Canada will be worse than in the U.S. because most of their mortgages are adjustable. Increases in interest rates causes more pain to more people in Canada than in the U.S., where buyers use fixed rate mortgage products.
Review the Sequoia Capital slideshow and learn how to adapt.