Time to Get Ahead of the Downturn? With Ben Miller

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0:25Is it time to get ahead of the downturn? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Ben Miller, co-founder and CEO of Fundrise. Hi, Ben. It's great to have you back on. Yeah, thanks for having me. So it's been quite a week, quite a week for you, because you just told us you're off a red eye. So thank you for persevering and joining us. But another big move in bonds, the 10-year sitting really close to that 5 % mark, a little less maybe than today, as you kind of stand still today. But we're right up against that level. Selling pressure, hitting equities once again.

1:00We're down across the board. Losses of over 1 % for the NASDAQ and S &P. And I think at some point during the day, by the way, the 10-year did top 5%, but it pulled back, so it was brief. And we've seen the dollar continue to move higher. And then now everyone worried about intervention. So we've got a lot going on. How are you feeling about the market environment right now? It feels like it's pretty much on track to the natural ways these things play out, right? The Fed raised rates. There's this lag. The lag is normally 6 to 12 months. and during the lag, it's such a long and variable lag, as Milton Friedman says, that people start to think, oh, there won't be a collapse.

1:52And the market's really finally rolled over in the last 30 days from being Fed-driven to being sort of now in the hands of the bondholders. The bond market controls the market now where it didn't before, and everything was Fed-driven. And the bond market is clearly in freefall. I mean, it's really driving everything else in the economy, the bond market's the most important thing happening in the US economy today. Yeah, absolutely. And the action, and it's worth reminding, we all, a lot of us know it and have been living it, but the bond market has just been whipping around so volatile. And we see these quick moves as everyone keeps changing their mind about the economy and recession and now having to deal with all this issuance and figuring out what's driving.

2:38Is it now a supply issue or fundamentals or both of them, right? So there's a lot going on. We had a lot of the guests both on the daily briefing this week, but also across our platform, really expressing concern about a large risk event. Let's have a listen to some of the highlights, and then we'll talk on the other side. We had rates pinned in negative territory overseas, pinned at zero here for a long time. What is that? That's holding a beach ball underwater, right? It's very unnatural. And when the beach ball finally lets up, you don't want to be the one to limit how high the beach ball is going to go if you're a trend follower, right?

3:16Here's the big issue. I think this is the first time in U.S. bond market history that we've seen three consecutive down years in the bond market. How many people are sitting on those capital losses and don't want to do anything different because of it? That stasis, in my opinion, is one of the things that's going to keep this train rolling until we get a cathartic type of event. So even though output is growing, it's not growing in the same way nor the same sustainable fashion as it did before 2008. So while we have variable short-run conditions here and there along the way, when you step back, you still see that silent depression in the background.

3:51People are holding equities because they think that if there's a correction, it will be for about two months and then it will go back up. And most likely, if it falls, they're going to buy more. That's very nice when we talk about it. But human psychology says that when the market falls 20%, you're selling, you're not buying. And that's the difference between retail and institutional money. And it's okay to be a spectator. I feel that we're in one of these time periods right now where I'm being very cautious. It's a good time to reduce leverage and have wider stops to let your trades breathe.

4:33So you can see the full interviews and episodes on our website for both the daily briefing, of course, which lives there, but all of the content we've been doing, realvision.com. And if you are on YouTube and you are not an RV, full RV member, not just a subscriber on YouTube, but an RV member, head over to the website and you can find signup trials. So Ben, it's funny because they're both in stocks and bonds. People are looking for sort of this capitulation moment. And it seems like they think that risk is mispriced. How are you thinking about this? Well, there's a lot of debate in the last 30 days about this term premium that basically what's happened, they call it volatility, but it's really prices have declined in treasuries by 20 % since May, right?

5:19That's a huge decline. And the debate you're seeing is basically that there's all this new supply of treasuries and there's all this borrowing and that's basically causing yields to go up. And I think that's part of the story. But to me, it's actually more fundamental. And the fundamental difference is that there's no demand. So I think it's a demand story and demand and money is called liquidity. And that's basically as the market rolls over from being a Fed-driven story to market-driven story, liquidity in the market slowly but surely been drained away. It's like the Fed actually intended that.

5:58They have QT, they have a trillion dollars QT going out the door. They raise rates. Banks basically are basically out of liquidity in most cases. So as liquidity leaves the system, we're seeing yields rise. So I think that is what's happening and also what happened. So in 2007, August 2007, I was at a beach house with a bunch of friends. I walk into the room, they're talking about bonds. I remember saying, bonds, oh my God, you're right. The bond market's collapsing. This is the beginning of the end. This is August 2007. And they look around at me and they say, no, we're talking about Barry Bonds.

6:32Because he had broken the world record for home runs. And I don't know anything about that. But so this is really reminiscent. I was going to say, when you walked in, thank God they were talking about Barry Bonds. Otherwise, you're in the wrong beach house. If you're in the beach house and people are talking about treasury bonds, you got to get a funner beach house. That's for sure. Yeah. Yeah. That's definitely right. But this is so reminiscent of the 07 to late 08 period where the credit market basically started to lose liquidity, started to freeze up, and it goes through a period of uncertainty.

7:09But the trajectory is clear, right? There's going to be less liquidity over the next 6 to 12 months because rates are staying high and the QT roll-off is still in play. the cascading effects of that happening everywhere. And there's still more treasury issuances. So that's soaking up the RRP, right? The reverse repo market. If you look at the RRP, right, it was at 1.9 trillion and it's fallen to 1.1 trillion in a relatively short time. And it's looking like it's basically like on a trajectory to get to zero by March. The second it gets below, closer it gets to zero, the more likely you'll see a true liquidity crisis and the Fed's going to have to intervene.

7:57So it's crystal clear to me that we're headed towards another crunch or crisis. And it's really only a question of how you prepare for what you're going to do about it, because there's really no stopping it at this point. Yikes. Okay. So what is that fallout as somebody who's obviously trying to prepare for it. What does that fallout look like? And we're super interested to hear your point of view, because when you hear the narrative for some people, because everyone's looking for like the break, right? Like what's going to break first. And when you listen to some people, they say, well, in 07, 08, the great financial crisis that you referenced, it was the investment banking area that, you know, that just imploded.

8:44And that took everything down with it. This time around, it's going to be private, the private market, because that's where all the activity's been. You know, investment banks that had their handcuffs put on them and the regulation. And so in the zero interest rate, low inflation environment, private credit went crazy. The private markets went crazy. So that's where the excesses are probably. And that's going to go down. Or the pension system that ate up all these treasuries that are. Where are you most concerned about? What do you think the sort of fragile point is? Yeah. I mean, I think that's difficult to predict because you didn't mention it, but AIG was a huge blowout, Fannie Freddie.

9:27So it wasn't just the investment banks. I mean, the essence of it is where there was high leverage. And so you have to say, well, where is there a high leverage again? And there's a lot of leverage. And actually, funny thing enough is like, typically, the treasuries are highly levered. And I believe one of the reasons you're seeing treasuries sell off is that there's actually there's forced selling going on. Like they have to sell because nobody would want to sell treasuries today and take that loss unless they have to. So where is there a lot of leverage? I mean, everywhere, right? There's tons of leverage.

10:02Well, we had zero interest rates. Of course, there's leverage everywhere. You had to. Otherwise, you had no returns, right? Yeah. So, I mean, so the banks obviously have huge market-to-market losses that they haven't recognized, insurance companies, pension funds, private equity funds. So, I think it's sort of beside the point exactly where it blows up. The point is that whether it blows up or there's just a deep decline because of the lack of liquidity in the market, there seems, I mean, on the ground, that's what's happening on the ground. We are a buyer and seller. We own$7 billion real estate.

10:40We're frequently in market. And we were in market buying something. There were 30 bids for this property a month ago, 30 offers. Now there's only one left. in my career it's very rare to see people withdraw offers let alone dozens of people be like i know i put an offer in but i'm walking away from this offer and people are and that is a kind of a a sign of fear and capitulation and so the commercial real estate market is you know it prices off of treasuries and so we used to price at a four percent cap rate Now, treasuries are at five. And long-term, 30-year treasuries went to 315 today. So there's a huge amount of embedded losses in the system.

11:36And unfortunately, that means decline one way or the other. So at the risk of oversimplifying this, how do you survive that kind of situation if you're operating a real estate fund? Yeah, I mean, it's sort of a tried and truism, right? Which is that you have low leverage, you have liquidity, you don't have office building, you have rental apartment buildings. There's lots of lower risk strategies. And one of the reasons why I'm so convinced there'll be a downturn is that for 15 years, zero interest rate essentially rewarded risk-taking and punished and punished risk management. I mean, essentially risk management, anybody who managed risk didn't get venture funding, didn't get promoted.

12:29And so risk was the only way to go get, get, you know, make your way. And so that's why there's so much risk that's sort of taken on and hidden in the system. And so now we're in this period where that risk now is, but we're going to pay for it. And so it's, but it's, so there's being too conservative, overly defensive, being liquid. So none of this is, I mean, this is all pretty boring stuff. You hold on and then if you're lucky, you can basically buy the bottom. That's the, that's the main goal, but we're not at the bottom yet. That's for sure. Hey everyone. We're going to take a quick break right now to hear a word from our partners.

13:10We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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14:18That's such an important point that you just brought up. That is so true. That you not only did you... I remember talking to all sorts of different people about this deal. People who are investors. I had talked to Howard Linsen, who did a lot of VC investing. Couldn't invest. They didn't because the model that he was looking for. I'm not going to invest in this sort of amount of money valuation risk taking because it's not prudent. But yet you couldn't find a deal because that was just the environment it was. And that's just one example of many who have come on these programs and kind of described that.

14:51But now's the reckoning for that, right? Because there is leverage everywhere. This is a great question from Boris. And we'll come back to sort of your thoughts about commercial real estate in the bottom. But I think this you sent over some some charts that I think are very because now we're very instructive. because now I'm going to say, okay, what happened? So there's leverage everywhere. So it doesn't really matter where the blowup is. We just need to know it's happening. So then what happens after that? And this is Boris's question. Hello from Germany. Hi, Germany. My question is discussions have considerable negative outlook, the tone, the sentiment.

15:24However, as we discuss this, should it already be priced into a great extent? Perhaps a good time then to buy stocks, question mark. This is the, I think that Michael Nicolett has brought this up in the highlight. We just did. Everybody's looking for the bottom, thinking the bottom's priced in. And to be honest, there are certainly people, Raoul kind of has a view about that as well. But he's longer term, but you know, there is this feeling, okay, maybe all the bad news is priced in already. I don't think that based on the chart you sent over, that's your feeling, is it? Yeah. I don't know if you want to bring this chart up.

16:00Yeah, maybe we can bring the one Brian and then we'll walk through the other ones. But that one right at the end that shows the, because the historic, or do you want to do a historical one? Should we do the forecast for 24? Do you want to pull a certain time? Let's do the table first because it's helpful to get a historical context of what normal is, right? Okay, yeah, let's try to pull that up. Okay, recency bias. It's hard for people to remember something that goes back 10, 20, 50 years. But here's a chart of the last six recessions. And in every recession, it was preceded by rates rising significantly.

16:39I mean, in 2005, rates went from 1 % to 5.5%. And that basically is very similar to what happened just now. And it took 17 months before the market collapsed in October 2008. So there's a long lag every single time on average 10 months. But last time in 08, it was a 17-month lag. It was a long lag. And during that lag, people debated whether or not we were at the bottom. And in that lag, and I think it's true in most lags, the equity market is actually lags, is the lagging indicator, not a leading indicator. And so in July 06, they hit the top of rates. Market collapses in 08. We don't bottom until eight months after the recession is called.

17:29So that's 20-some months from when the rates peak. So I think you should expect the credit markets to be the best leading indicator, and the equity market's basically a lag. And so you just saw treasuries fall 30%, 40%, 50 % in the last year or two, and the stock market's only fallen 15%. So I don't think that's tenable over the long term. Typically, if rates have increased this much and treasuries and bond markets fall this much, the equity market can't be out of step for that long. It's unsustainable. And so then you have to have a view that if you think stocks are going to maintain, then you have to view that rates are going to fall.

18:16So this is super interesting. And by the way, I just mentioned Raoul. Well, I think that's his point of view. We're going to replay part of this when he and I do an AMA coming up. And we'll dig into that because I think some of you are probably wondering about that. But Ben, part of this then when you're figuring out the lag is understanding when credit markets peak, right? Because I think one of the problems is they bounced up yields. We thought that was the peak. And so people are kind of calculating that lag. And then they went down and up again and down and up again. So do you think we're at peak now?

18:49And I'm going to bring in a comment from Christopher, one of our very smart community members, saying that he got a flash today from a serious source hinting at 6.5 % Treasury yields. Does it feel like the market can, even if it's an overextension, can kind of freak out and go that high? Or do you feel like we're at peak now? Yeah, I agree with that. I agree that, I mean, one of my indicators is the RRP, right? Again, it's the how much in reserves do banks have sitting at the Fed? And they had$2 trillion, and now it's down to$1 trillion. And it's been in free fall. So if that falls to half a trillion or even less, I think you'll start seeing the market really start to seize up.

19:38And then what you'll also see is more pressure on yields to go up because there's going to be liquidity shortfalls. So as liquidity disappears from the market, yields actually increase. So until the market really starts to have it, I think it's crisis. It really has room to continue to deteriorate. And the Fed's telling you, stay at the short end of the curve, stay at 5.5%, you get 5.5 % if you're a money market. So stay at the short end of the curve. I'm not saying you should try to call the bottom. I'm not trying to call the bottom. And so it's more about defense than offense for the time being.

20:18There's plenty of time to come off the sidelines once you sort of see the wreckage. But to think that this 15-year cycle of zero interest rates and$7 trillion of money printing is not going to have sort of the symmetrical down from it is, I think, is like naive. So let's pull up your other chart. Thank you, Christopher, for flagging that, because it was great to get Ben's thoughts on that. Let's pull up this chart now, because I think that kind of move in treasuries and that kind of market event creates a lot of pain, as we know. And so you were talking about, and we've heard this, right? Stocks and bonds can't both be right.

20:58What's happening here? So this is pretty frightening. but this is your forecast for 2024 if we see this based on what's happened historically. And you sent some great charts because it looks similar, right? The dot-com bubble looks similar. Great financial crisis looks similar in all of these instances when you're putting that lag into place. But this is a lot of pain ahead to Boris's point, a lot of pain ahead for stocks still. Yes, this is simply taking the historical averages and applying them to the present situation. And so you wouldn't see the market finally roll over or capitulate, you know, break down until May 2024.

21:40On average, it could be longer, could be shorter. But we're still a ways before we sort of get to the average lag. And then from there, the equity market falls further because you start seeing as earnings decline and you start seeing unemployment spike. Like, that's another, I mean, unemployment typically is very, very healthy. Like, it's very low unemployment going into a recession. Everybody says, but unemployment's so low. So unemployment's a lagging indicator. And unemployment really bottoms even after the stock market. And so on average, the U.S. would lose 3 million jobs if we go into a recession.

22:20And so I think, like, what about the current situation where we think is better than average? We have higher debt loads, more treasury, more demand on debt, higher leverage in terms of across the economy. And so the only two advantages we have, which I think are what's slowing down the downturn, is that there's a lot of people who have locked in, corporations, homebuyers, a lot of locked in, so that's delaying. And then also you have a lot of stimulus, right? And that stimulus is basically providing a positive support to the economy. But those two things are both, they burn off over time. And so time's against those two things.

23:04And until basically the Fed essentially starts giving relief to the market, we're going to continue to see decline. I mean, until the Fed provides material relief to the market, we will continue to see declines. That's almost definitive. And so in the meantime, that just means you have to be on defense. 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.

23:34So what do you make of the idea that if we were to see the bond market start to, you could argue maybe the Fed's already lost control of the bond market, but if we really start to see a rapid increase in Treasury yields, It's just it's not sustainable in order to pay the interest on the debt. They're just going to roll over that whole connection to the debt. And so in one way or the other, they're going to come in. And that's what's going to prevent this next thing from happening. Because after the great financial crisis, they figured out they have all these tools. And one way or the other, they're going to come in, whether it's yield curve control, whether it's they're not going to call a QE, but another type of QE, just generally, That's what's going to re-provide the liquidity before.

24:19So it's not that they're saving the stock market, but too many things are going to start to blow up. They can't pay the interest on the debt, so they're just going to have to come in. And they'll do it under whatever guise they can, a new acronym. Yeah, I definitely agree that just like BTFP, its bank term funding program where they came in and provided liquidity to banks during the Silicon Valley bank crisis, that the Fed is likely to do sort of activity to try to help the markets. But I think they're likely to pick winners and losers. It's not going to be a broad-based stimulus like we saw in 2020.

24:57And, you know, I mean, I think that it's easy for me to imagine something that looks like yield curve control, where they roll their$7 trillion portfolio over towards the longer end of the curve to try to bring the curve down. They try to basically bring the banks into the treasury market. So I definitely see them operating on the margins to try to keep the treasury market healthy. But in all the circumstances we're describing, we're describing more problems, worse, more challenges. And so that's why you want to counsel patients and not try to get ahead of the Fed. You know, the Fed is like, it's so fascinating.

25:36They really are the indicator. Like when the Fed basically starts dropping rates, that's usually telling you that there's a problem. And if you look at the past downturns, actually the Fed was dropping rates in 07, right? The Fed was dropping rates in 01. No, it was in 2000. Like the Fed was dropping rates before the - Beware the pivot, because it means more trouble's coming before. Yeah, the crash happened after the Fed dropped rates. Yeah, I know we forget like that. It's been it's been sort of turned into something that means they're going to open the spigots and it's going to send stocks up.

26:13But that's not always how it's played out. Like that got condensed somehow along the lines. Right. I mean, the two important historical lessons, right, is long and variable lags, long variable lags. So just like it takes a while for the Fed to slow the market, it'll take a while for the Fed to speed up the market. And two, the Fed's obsessed with not having inflation come back again. So I think they're going to pick winners and losers in the market. But I think that they're not going to want inflation to come back. So they're going to be parsimonious in their stimulus. And that's going to mean a lot of pain probably for normal people.