Are Investors Being Too Complacent? with Ben Miller

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1:24And now to the top analysis of today's markets.

1:41Are investors too complacent? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Ben Miller, co-founder and CEO of Fundrise. Hi, Ben. Welcome. Yeah, thanks for having me. So this is your first time on Real Vision. We're thrilled to have you on. So why don't you, before we jump into today's action. Just give us a little overview of Fundrise. What do you concentrate on there? We're a real estate and technology investment platform. We started in 2012. Basically, I have about 25 years of investment experience. I bought about$10 billion of real estate in my career, so I have some experience in this.

2:23I basically felt like the 2008 financial crisis and undermine my confidence in the financial system. And so we created a new model where individuals could invest directly into real estate or private technology companies and not have to have a lot of the kind of like noise you see or fees in the traditional financial system. So I guess it's kind of a similar ethos as crypto, but instead of investing in like a digital asset, you're investing in a real asset. Awesome. So it'll be really interesting to hear your thoughts given this environment. I feel like both of those topics, both technology and real estate, are really top of mind for a lot of people, given the fact that we're trying to figure out what's happening with the economy and interest rates.

3:07And it's been interesting, today's action, because we see stocks in rally mode again. Yesterday, things fell off, a little concerned about the BOJ. And the BOJ actually did something. They actually tweaked yield curve control. But this time around, everyone seems to be focused on the data and numbers coming out. I mean, we have the Nasdaq up almost 2%. So I want to unpack a little bit of that. But just generally, it seems to be feeding into this. The numbers out this week, the earnings, the econ numbers seem to be feeding into this soft landing narrative. And we've been seeing this play out all week.

3:42And our guests have been sort of pointing it out and talking about it. So let's have a listen to some of the highlights. And then we'll talk on the other side. Normally, we see Fed raising rates and fiscal policy getting tighter. And that's why you usually get a slowdown pretty soon after that. Whereas in this case, we haven't gotten that. We've had fiscal policy kind of offsetting monetary policy. And I think the fact that we've had the Infrastructure Act, the CHIPS Act, the Inflation Reduction Act, all coming after all the stimulus that came from COVID has been given sort of a longer chain of fiscal stimulus that's kind of working its way through the system over time and affecting more the industrial side of the economy, People are building factories and doing new things they didn't do before because of fiscal policy.

4:25And so it's less about tax cuts and things like that or cash for clunkers or things like they did after the 2008, 2009. This is a much more broad-based and industrially focused kind of fiscal policy. And it's having knock-on effects in the private sector, I think, which has been kind of underestimated so far because it's just been so long since we've ever really seen that in this country. I honestly think that the probability has risen for such a scenario over the course of the past two or three months here. And that is probably also why the Fed is starting to acknowledge this scenario to a larger extent and started to sound more upbeat on the actual possibility of creating a soft landing.

5:02It is not the standard scenario to expect, given what we see in the yield curve right now, but you shouldn't rule it out. From the perspective of the very leading indicators, the leading edge, the vanguard of inflation statistics, it's likely that we have gone back to 2%. The reality is, however, if we don't go into a recession and the labor market continues to remove slack by obviously hiring more and more people, and that's the nature of this business cycle process, eventually those numbers that are 1.4 or something a little bit higher for PCE, those numbers are going to prove to be unsustainable.

5:37And we're going to start to tax the economy and really drain slack and really tax the supply base of the economy again. And that could be a 2024 story if we do, in fact, have a self-landing. Now, again, I've been on record here. I don't think a self-landing is the highest probability outcome, but I do think it's a higher probability than a near-term recession. I follow the year-to-date horse race. And where were energy stocks before I went on vacation and sort of the weeks prior to that? They were down 10%, 15%, sometimes 20%. Where are they now? They're bubbling back towards unchanged, and they're down 1 % or 2 % on the year.

6:11Does it seem like that sector could be up 10 % on the year at a certain point? If oil rallies just a little bit, yeah, it sure can. There's nobody in it. We saw everybody take all of their money out of these stocks. So I feel like there are tumbleweeds blowing through this trade. And when I see that, I mean, that's the time to get the weapons out and start firing.

6:39So I just want to be clear on one thing on the timeframe, which our viewers will know we talk about all the time. Both Andreas and Darius are talking in the very near term, which is important from maybe their medium term outlook. But Ben, we did see more evidence of that today. This is why I think the probabilities for some people are going up, at least in the short term, for that soft landing. The PCE, that inflation reading that the Fed tracks closely out this morning, showed a modest monthly increase in the annual level. Now the lowest in two years, still above the Fed target, below us in two years.

7:15And we had strong earnings, Procter & Gamble and Intel. So we keep getting all of this information that seems to be bolstering this idea that we're in this really sweet spot. How are you thinking about all of this? so my perspective is different for two main reasons so we have you know millions of individual customers you know our funderize basically is a platform for individuals and so i'm i'm focused on people not trading not not um a lot of the things that you see essentially on squawk box and then also we invest in the real economy we have tens of thousands of residential units we We build housing.

7:53We invest in building companies. And so as a result, I'm mostly focused on two things, right? Protecting on the downside and on what it takes to build things in real life. And so it takes a long time to build things. And so as a result, I have a longer horizon. And I look out two, three years. I look back 50 or 100 years. And it seemed really clear to me that this is a giant bear trap. why so why okay well so uh when i try to understand the future i always look to the past and if you look at the past everything now seems different it seems uh unusual or unique but actually it's most things are are in history you can go back thousands of years they repeat over and over again.

8:46And so here we are, and the recession that's coming is almost at this point like destiny. Because when the Fed raises rates the way they've had to in the last 12 months, it almost always leads to a recession. And there's just basic reasons why. When you have cost of interest now for real estate is often 8%, 9%, 10%, and would have been 2%, 3%, maybe 4 % only 18 months ago. If you're a business, if you're a consumer, all of that higher cost is leading to a slowdown. But the slowdown takes a long time to work its way through the real economy, through a business. We have 300 people at the company.

9:36We have all these projects we invest across the country. And that delay, I think, is really confusing everybody because we live in a world of information technology where everything's instantaneous. But every single time, if you look back, this type of dynamic leads to a recession. So that's an interesting point. We're a sort of immediate gratification society. But things have felt compressed, right? So we have recently, it feels like that things got really bad really quickly. And then there was extraordinary measures and then things got better really quickly. And so there's an expectation that you're going to see the impact more quickly.

10:23So you think this is tracking, how does this measure up? Is this tracking in a traditional manner in the way monetary policy takes a while to factor in? Is it taking longer because of some of what we went through with COVID and supply chains? Why does it seem like that we're not seeing the impact from monetary policy? Yeah. So that's the perception of a reality. So if you go back and look at the data, which I did, and you could even pull some of it up, Brian. I think slide five is the last seven recessions. Yeah, that one. So basically, you look at this. Every major recession, 2008 financial crisis, 2089, 1980, all of them were preceded by major interest rate hiking.

11:22But those hiking always took a lag before it hit the economy. So you're talking about an, on average, a 10-month lag, 10 months from peak interest rates. So like go back to 2008, peak interest rates hit July 2006. And we didn't have the financial crisis for basically 24 more months, almost two years later. And so that's basically what happens every single time. So maybe we hit peak interest rates this Wednesday, or maybe we have another hike or two. And then from that point, you should expect a good number of months, on average 10 months, before you actually have a recession. So that would be late 2024, maybe early 2025.

12:06So you're still a ways off from actually having a recession. And then when a recession hits, they're so consequential that they make all this trading we're seeing day-to-day today look trivial. So if you go, I have another slide I want to show, but basically this is what is in the data and is so clear. And I think I see it in the real life, too. I can give you examples that we're seeing day to day. But the recession comes out of, it's a consequence of high interest rates, just like night follows day. Hey, everyone. We're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision daily briefing.

12:57So what is the other, what other chart do you want to show us? Because I think that will be. Yeah, slide three, I think is a good one. Because I think it's like, you know, why am I so focused on this? Because everybody looking at it day to day, week to week, that one exactly. So here are four recessions. Each one of these had interest rate hikes. And when the stock market fell, it gave up most of the returns you'd previously seen for the last 5, 10, almost 15 years. The 2008 financial crisis gave up 14 years of returns in the S &P 500 when it finally fell. Same thing with the year 2000. Same thing with 1989, 1974.

13:47You basically, if you're a fundamental investor, not a day trader, this is not for day traders. Maybe they've gotten out. But most people are longer term fundamental investors. And so if you're pouring into the stock market shortly before one of these downturns, I mean, it's so consequential. It just makes any of the sort of hype you're seeing in the short term look like a bear trap. Yeah. So and that makes a lot of sense. For our regular viewers, we've talked to Mitch Schneider about the danger of those drawdowns, like how difficult it can be to come out of. So you make a really important distinction, I think, Ben, which is understanding your time horizon, right?

14:28So some people who are listening and also some of the guests we've had on do have to pay attention to short term. They are interested in the short term. And so what we've been hearing is that it's just so hard to fight the rally we've seen and so hard to stand in the way of, in particular, the tech rally. Anybody who's tried to, well, people certainly on the sideline have missed it. Anybody who, heaven forbid, has tried to short it has had their face handed to them. So it's just been really powerful. How long do you think those go on? I mean, if it's a bear trap and the recession's not coming until late 24, that's a long time from now.

15:09Can it continue to grind higher or does it start to backfill and sort of get rangy as people try to sniff out maybe something's wrong? I think that's impossible to know. I mean, that's the, it's, it's the path, you know, the path to, to, you know, the final downturn is, is driven by so many short term drivers like you might see more AI technology come out and drive more excitement. It's very emotional. It's not driven by a lot of the fundamentals, I believe. And it's because I'm in the real economy. We're building thousands of homes. We have industrial properties. We have companies we're funding.

15:55We're building our own company. And in those contexts, the decisions you're making, you have to be thinking about it in a multi-year scenario. Multi-year, am I going to build this factory? Multi-year, am I going to basically hire 100 people or not? And in that context, there's no way with this cost of interest that you do those types of investments now. And I'm seeing it day to day. I'll give you an example. We have industrial property in Phoenix. And we had a tenant lined up, big e-commerce shoe company, huge. You would know who they are. They've been working on it with us for months. And the last minute, their board said, well, we better just slow down and stop and take a pause and just sort of wait and see what happens.

16:42And that kind of capex investment is a kind of capex investment that's basically slowly stopping growth. I'm out there. I've talked to all the major banks. We have billions of dollars of financing from basically every major bank you could name. And they're all frozen. I mean, you can't raise equity or debt for most projects today. the cost of digital marketing. Last year, we spent tens of millions of dollars in digital marketing. We have an entire team of 25 people. All they do is buy Google ads and Facebook ads. We have a really good sense of what's happening in the economy because the advertising spend is a good reflection of real economy.

17:27The cost of click, the cost of actually that advertising has fallen 50%. Wow. So there's just so many. So I don't know about the stock market. That doesn't make any sense to me. And that's not what I do. But in the long run, this stuff is what matters. Right, when you have that longer time horizon. So one of our viewers is asking, is a cash position the best strategy moving forward? I'm going to tweak that because I think you're asking, Neal, fight from an investment point of view, but Ben, just from a purchasing point of view, from running a business point of view, are you very concerned about holding onto cash and having dry powder because of the recession you see coming?

18:18I have to do a little nuance, but yeah, I don't think there's anything wrong with a 5 % CD, 5 % treasury, it's hard to beat that. And I don't think that anybody who's having concerns would regret that kind of investment. And I think a lot of companies are seeing a lot of cash who are also making similar calculus decisions. So that's when in doubt, I believe when in doubt don't. and I know for parts of the economy and this is where I have exceptions parts of the economy like AI there are sort of generational things happening and we invest in those types of companies too and so you'd say yes that's true broadly but with some exceptions and maybe those exceptions are situational you have to really know what you're talking about in the weeds of those decisions Right.

19:18Roger is saying timing looks so easy in charts, but it's really hard in real time. You are right, Roger. It is. And that's why we put that highlight clip of all the guests talking this week, because I think they're all touching on that. You have to be nimble, and even the best of them are going and looking against the frameworks they use and revising it. And that short-term part of it has become really tricky because you have this dynamic. If you're fixated on a longer-term view like you are, Ben, a little bit different. I want to ask about, so you see, so the fact that you're in commercial real estate is super interesting.

19:56You are definitely seeing signs of slowing in the real economy in terms of purchasing decisions. What's the state of the commercial real estate market right now? I mean, I don't know what part of it you're in, but we were so worried about that and the impact of higher rates hitting and the bank situation, the credit tightness because of what happened with regional banks. And it feels like that's kind of gone to the back burner. Where are we with commercial real estate, the state of commercial real estate? Yeah. Yeah. So I cover a lot. And luckily, we don't invest in office. We never really had much exposure to office.

20:32You can say we were smart and lucky. I'll say we're lucky. So that's a really good illustration of the destiny of something. And in the short term, there's uncertainty. The office industry will go through a major downturn. There's no question about it. It's already happening behind the scenes. I don't know if it's 20 % of office gets foreclosed or 50%, but it's something huge, just absolutely catastrophic. It'll cost hundreds of billions of dollars. And, and, you know, the negative of that is that, you know, there's a lot of equity wiped out. A lot of lenders are going to see huge impairments and, and downtown cities are going to suffer.

21:16Those are for, those are, but the gift of it is that there will be a rebirth. And a lot of downtown offices will eventually end up much more vibrant, but it's going to take 10, 15 years. I mean, this is going back, this all happened before to downtown real estate in the 70s and 80s. And there was a huge downturn. And most of those downtowns really, I mean, there was crime and derelict buildings. And what came out of that, New York had the art seen in Soho. People could live in Soho for$100 a month. And now it's$5 ,000,$10 ,000 a month. So this cycle, this is what I focus on. But I think this is how most fortunes are made by focusing on the real economy.

22:09That's what I've found in my experience. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

22:23you don't invest in commercial real estate. What part, uh, sorry, office space, I should say, in the commercial real estate area, what do you concentrate on? I mean, what, where have you, and what do you feel bullish about there? If it's office spaces hurt, we have Christopher asking about digital reality trust. I don't know if you're familiar with that, but it looks like They do data centers. So what do you see working in commercial real estate? Yeah. I mean, so commercial real estate or real estate, it's a levered play on GDP. And the asset classes that have been growing have been residential, especially in the Sunbelt.

23:03And we own 20 ,000 residential units in the Sunbelt. Industrial and industrial is basically both of those plays. And then we don't own data centers, but if you look at all three of those places, what's underneath of those drivers, you know, it's technology. Industrial has been going gangbusters because of e-commerce. And the growth in the Sunbelt has been amplified by work from home. And digital reality trust or data centers, obviously a technology place. So that's why you look at the big trends, the big things matter more than the small things, at least if you're operating at scale. And so when I look at data centers, the amount of compute that we're going to need to basically build the sort of next generation AI applications is going to be vast.

23:54I mean, basically, electricity will become like the scarce resource.

24:03And playing that trend, whether you're doing it by investing directly in the tech or into the real estate underneath of it or some other part of it, I think is the exception, as I'm saying. There's going to be a recession, but I think AI is a generational change. So when Sam, our guest on Monday, brought up, and it was the first person we played in the highlight clip we ran, was talking about the infrastructure, the infrastructure spending that's already been committed and is starting to, with the same thing, a lag, but make its way into the economy. and his feeling was that was underappreciated.

24:41Does that offset some of the other issues coming from higher rates and the hit to the economy that you think hasn't been felt yet? Can those things offset each other? Yes and no. So yeah, we see that also. We own industrial and some of our super large properties that have half a million square feet. We've had TSMC and ASML and these critical companies come to us to lease the buildings because they're here, all of their vendors are here, and they're basically driving the Phoenix economy. I think the Phoenix economy, which is typically a boom-bust economy, has this singular$80 billion investment from Intel and TSMC and ASML and other companies that are going to transform that basin into basically our silicon manufacturing center of America.

25:41So the reason why I said yes and no is that there's going to be winners and losers in this recession. And I think that this sort of onshoring or changing supply chains is definitely going to have benefits to workers, benefits to certain sectors, benefits to certain regions are going to do well. And there's going to be parts of the economy that just get wrecked. And there's no question that that's going to happen because it's just you can't survive on 8%, 10 % interest rates and an inverted yield curve in perpetuity. Most of the commercial real estate, one of the things why you've seen delays is you can buy derivatives or interest rate swaps or interest rate caps that can shield you from the changes in interest rates.

26:35And that's great, but they have a duration. And so you see there's huge companies, tens of billions of dollars sized companies that have interest rate caps. they're going to expire in the next 24 months. And when that happens, or even sooner, when that happens, they're going to have immediate losses, just giant losses. And those companies will suffer at the same time they'll be AI. And so it's not going to be like a singular event across all of the country and all of the sectors of the economy. Yeah, that's interesting. We've had other people also bring up this suggestion. It's almost like a rolling recession, you know.

27:17So two questions related to that, because that to me sounds less worse than the kind of, you know, cataclysmic. Great recession, near depression that wipes out everything in the economy that we kind of went through in the great financial crisis. So two things. If we are going to get, though, pain to come, and it sounds like you're saying there's a lot of complacency about that right now, we're not taking into effect that lag. Is the central bank able to be more reactive now post the great financial crisis, as opposed to looking to the 60s, 70s, 80s, where we had these lags? they have more tools now, right?