Hey, everybody, it's Ken, and I'm here with George Gammon.
What's happening George. Good to be here, buddy.
So if you guys don't know George, than you're under a rock.
George has got an incredible YouTube channel.
Is my partner in the collective.
Well, we're doing an event in two weeks in Scottsdale.
We're doing another Limitless, baby Limitless.
I'm speaking. It's going to be awesome. Yeah.
And we got a whole range of speakers there.
And then I'm going to be speaking at his event,
along with Kiyosaki and a bunch of other people.
At the end of the month, it Rebel Capitalists, right?
Yeah.
Rebel Capitalists live Miami, June 24th to the 26.
Yup, yup.
So let's jump right in on interest rates.
Everybody knows we've had these high inflationary months
and I don't know where it's all heading, but interest rates
have been have gone up at least twice, three quarters of a point so far.
Where do you see all this headed?
So we could look at Fed funds, you know, what is the Fed going to do?
But that's a little bit different than mortgage rates as an example,
because what we saw while the Fed is doing quantitative easing
is they were buying a lot of those mortgage backed securities.
So the Bank of America, let's say, when they go down
and give you your home loan for 500 grand
they're selling that paper to Fannie and Freddie before the ink is dry.
But then that goes out into the private sector.
When the Fed buys these, they buy at any price they don't care if they lose money.
You know, they can literally print the money
so they'll buy it any interest rate, any price.
So they don't really care about future inflation expectations.
Nor do they care about a risk premium
that would usually be associated with that mortgage
if it's absorbed by the private sector because they have a PNL right.
So we saw the Fed do QE from, let's call it 2008.
I mean, they had a little bit of a delay or a time
delay was cute before the market had a tizzy fit.
And then we went into 20, 20 where we had a COVID where they did QE
infinity and their balance sheet just completely exploded.
So they're buying 40 billion a month roughly of mortgage backed securities.
But what happened in November of 20, 21 is they declared that they were going
to gradually reduce that QE program down to zero
and then actually start Q t so this is quantitative tightening
where instead of buying
mortgage backed securities now they're selling them into the market
so what I find interesting is
if you look at a chart of the 30 year fixed rate mortgage
and you look at a chart of Fed funds, it is true
that Jerome Powell has taken the Fed funds rate, you know, 75 basis points, 1%.
But mortgage rates have gone up way higher than that.
They've gone up much higher than just 1%, roughly from,
let's call it 3% up to 5.2 or wherever we are today.
So why, why, why is that?
Because if the Fed isn't buying those mortgage backed securities
and they're being absorbed by the private sector now, all of a sudden
there needs to be a risk premium on that interest rate
or the price they pay is lower.
So you get the mortgage rates if the Fed's absorbing all of them at 3%,
but the market's absorbing them, well, now all of a sudden they're at five or 5.2.
So then the question becomes, OK, what do mortgage rates do
if the Fed starts selling mortgage backed securities?
Because now they're adding supply, they're reducing demand.
And as you know, that usually means the price goes down.
And there's an inverse relationship between the price and interest rate.
So interest rates go up even higher than they already are.
So I think we could go into an environment where the Fed is only
maybe raising rates another 2550 basis points,
but mortgage rates go up another two, three 4%.
And I don't know how that affects well, we talked about demand destruction,
and that would definitely equal a lot of demand destruction for homes
because mortgage rates would go to a point where the people just could not afford
the monthly payment for the home they want to purchase.
And we were just talking about the supply side of the equation
being at historic lows, and that is absolutely true.
But as far as residential homes,
you know, these starter homes or pretty much any residential homes
I should just throw them all into a bucket.
We could see an environment where aggregate demand goes down
to a point because mortgage rates go so high
that it actually starts affecting the nominal price
of the real estate market in total, even though the supply is at all time lows
and probably isn't going to get better any time soon
unless we have, I think, the only release valve, there would be
these big funds like Blackstone having a better risk reward
alternative to those single family homes that are on their balance sheet.
So they sell those and buy, let's say, a ten year treasury
if it's at six or 7% I think that's the only way
that we're going to get more supply coming online quickly.
So then it's just a question of how much demand destruction is there
as if if these mortgage rates
skyrocket even higher than they already have.
If the Fed does quantitative tightening, like they've said, they're going to start
in June,
what are some of the consumer behaviors and some of the things that people
are going to see when this recession hit?
Because I believe it is going to hit.
So I think that people can expect to see higher rates of unemployment.
You see economic output go down and you see the standard of living go down.
You see people's purchasing power decrease.
And a lot of people associate that with deflation.
But we can absolutely have an inflationary recession.
So that's really the bottom line.
It's just a lower standard of living especially
and unfortunately for the poor and the middle class, because
like we said earlier, prices
always go up at a much faster rate than incomes.
So their purchasing power really gets squeezed.
And usually the things that are going up in price
are the things that occupy a larger percentage of their paycheck.
We've consumed in the United States far more than we have produced,
and we have lived off of asset prices
and artificially low interest rates for a long, long time.
And we've lived off our 41 K, and we lived off our home equity
and at some point in time you got to pay the fiddler.
Oh, so what do you see outside of the U.S.
from a supply standpoint when people think about these supply chains
and the supply chain disruptions,
you have to understand how fragile they are and how intricate they are.
And this goes back to 1940s
and why I don't know that we can
simply just cure high prices with high prices
because I don't, I don't think that we can fix
those supply chains as quickly as we otherwise would
because the world is much, much different and so is consumer behavior.
Well, George, as always, brother thank you.
Thanks for having me on the time.