In the last article, I mentioned attending the New Orleans Investment Conference in October and the group of brilliant thought leaders who are “in the trenches" regarding investing and the economy.

I also said that I would be sharing the wisdom and insight from some of these speakers and panelists, as well as the importance of standing on the edge of the coin for you to determine the best path moving forward.

Sharing this next speaker would help also set the stage for the climate we are dealing with today and will help to provide some context for the others I will be sharing in the future.

Although Mr. Larsen tends to focus more on stock market investing, he was spot on about his comments regarding the current issues we are dealing with, including real estate.

Highlights From Mike Larson

Mike Larson serves as Vice President and Editor-in-Chief at the Money show in Sarasota, Florida. He oversees all aspects of investor education in conference planning in the firm's content operations.

Safe Money Investing in an Unsafe World

“Considering the market and economic backdrop from 36,000 feet up, we've had surging inflation, soaring house prices, and multiple side effects from the geopolitical arena, particularly in Eastern Europe from the Ukraine invasion. That has forced the Fed to tighten monetary policy at the fastest rate we've seen in decades since the late 1970s or early 1980s.

You've already seen short-term interest rates rise by about 300 basis points or three percentage points, which happened in only seven months. This is a massive shift from their previous way of operating.”

Mr. Larsen presented all of this in a game called “How it Started, and How it's Going,” hence, the above title.

The Economy - How it Started.

Last year, the economy in the US grew by almost 6%, and that's the fastest full-year clip that we have seen since 1984, despite the ongoing pandemic. Of course, much of this was just the bounce back from COVID and the effect of the stimulus.

How It's Going

We've had two negative consecutive quarters of growth or lack of growth, resulting in a shrinkage of 6.6%, which did meet the technical definition of recession. Despite how you spin this, many argue that we are definitely in a recession.

The Stock Market - How it Started

There was massive growth if you look back at the rebound off the COVID lows through the rest of the back half of 2020 and through 2021.

Below is a chart of the NASDAQ (from May-Nov. 2021). You could pick any significant market index, and stocks were soaring. Everybody felt wealthy, and it was a great time to be an investor.

Initial public offering (IPO) volume surged, and we didn't just see the traditional standard companies that could raise money. There were all kinds of junk money-losing tech companies that could raise billions or hundreds of millions of dollars with astronomical valuations and no actual business model. It was like the dot-com era in 1998-99 and before the bust in 2000. IPO volume in 2021 soared around $30-40+ billion per quarter, totaling 420 companies that raised a combined $134 billion.

How it’s Going

We've given back all of those gains that were made in 2021. When the stock market suffers as it has, the environment for raising equity, as well as the environment in terms of credit market risk, is radically different now than it was back then.  

From the beginning of 2022 through the end of the third quarter, 116 companies raised $7.5 billion. That’s a 94% plunge in the amount of money raised in the IPOs via equity issuance.

Real Estate - How it Started

Coming out of the COVID low, when interest rates were slashed to zero and hundreds of billions, if not trillions of dollars, were thrown at the economy, we saw housing in the peak months of 2021 and late 2020 appreciating more than 19%. That even eclipses the rate of appreciation we saw leading up to the most significant US housing bubble in history (2006-7).

How It's Going

The chart below from Redfin looks at what a person could afford on a $2500 mortgage payment. In the mid-2010s, one could buy a house worth roughly high $400’s to $500K. As interest rates fell in 2021, that amount increased to around $534,000.

What do you get when you combine rapid appreciation in house prices with a surge in the cost of financing and no significant income growth? With an interest rate of 6.66% as of early October, the same mortgage payment will buy a $379,000 house. This is roughly a 30% decline in affordability!

Inflation - How it Started

Treasury Secretary (And past Fed Chair) Janet Yellen gave a speech in April of 2021, where she mentioned that the problem for a very long time had been inflation that's too low - not inflation that's too high. Her view was that the risk was asymmetric, meaning she worried much more about the long-term or adverse consequences of not doing enough rather than what might happen if they did too much.

How It's Going

This June, we hit a high rate of about 9.1% year over year, which was the fastest since 1981. As we are all aware, it hasn’t slowed down yet. It's been persistent and broadened to more than just supply chain issues, gas, and groceries. Service inflation just hit one of the highest levels since the mid-1980s.

In summary, here’s what Mike Larson shared regarding “Safe Money Investing in an Unsafe World”:

• “The environment has changed. What you need is a different investing approach. You can't go back to investing in 2022 as you might have invested in 2021, 2020, or even before the pandemic.”
• “If you're going to have money exposed to the stock market, make sure it's a smaller pool of money than you used to, but within the market, make sure you're playing defense.” His favorite picks:
  • Energy – especially green energy, is the strongest performer.
  • Utilities
  • Healthcare
• “You want to own more gold. That’s why you want to own and have exposure to precious metals for safety and inflation protection.”

In our 45 years of investing, Mr. Larsen's conservative approach makes sense in times like these. Having been through and survived the 1980s, I still believe it's wise to stay anchored to tangible assets such as those mentioned above as well as real estate. Although there are still good deals in real estate, they are fewer and farther between due to our current economic circumstances, so it's more important than ever to choose wisely and do your due diligence.

Stay tuned as we share more lessons learned from this conference and other sources we’ve sought out to figure out “which way the puck is headed.”

As we mentioned before, there is no question that significant changes lie ahead, and it’s best to be prepared and informed as well as you can. For those who are ready, we believe that great opportunities lie ahead.

“What we know about the global financial crisis is that we don't know very much.”

Paul Samuelson

More to follow…

If you have questions about any of this or want to learn more about taking advantage of the possible financial opportunities, please email me at the address below or schedule a call.

Investing for Impact,

Randy Hubbs

[email protected]