⏲️ Waiting For Lower Interest Rates? Here’s How Long It Could Take.

What’s on the Menu 🍴

Yes, it’s true…

Rates are falling.

But people are still confused about what to expect for the future, so we’re diving into the data to remove emotions and focus on the reality.

Let’s go!

• The Disinflation Continues 📉 

• What To Do When People Freak Out? 😱

• Waiting For Lower Interest Rates? Here’s How Long It Could Take ⏰

• Buy A House Now OR Wait For Lower Interest Rates? 📺

Today’s newsletter is a 4 minute read.

The Disinflation Continues 📉

The CPI inflation report for the month of November was released Tuesday morning. Let’s dive into the data shall we?

The headline year-over-year inflation figure came in at +3.1%, in line with market expectations, and down from +3.2% in October.

Inflation was raging at over 6% when we started 2023, but despite some bumps along the way we’ve seen some real progress lately.

Lower energy, food, and used car prices are contributing, as well as a softening of shelter & rent inflation.

The CPI excluding shelter costs is now at just +1.3% year-over-year, well below the Fed’s stated 2% inflation target!

Shelter costs are heavily time-lagged, as actual rent prices have already fallen in many areas lately:

This of course bodes well for CPI readings going into early 2024.

There are still some areas of concern however…

Services inflation (excluding shelter) ticked up in November to +3.5% from roughly +3% in the prior month:

Areas like transportation services are still running hot, and services inflation could be a sticking point for the Fed to NOT reduce interest rates in early 2024.

So once again there’s probably a little something in the CPI report for inflation bulls & bears to point to.

But if we zoom out and look at the big picture, especially on a global basis, inflation rates are still broadly moderating.

That’s good news overall even if it’s not happening as fast as we would prefer!

What To Do When People Freak Out? 😱

Anytime bitcoin’s price puts in a fast pullback, the media likes to write headlines like:

“Bitcoin’s down X% because [insert fabricated reason]”

But the reality is markets go up and down…

And like I wrote about in Monday’s newsletter, the best way to zoom out and judge an asset’s performance is by looking at the CAGR (compound annual growth rate).

Key Example: Over the past 2 months, bitcoin’s had 8 weeks of green price action. This means the probabilities of a pullback are well over 90%.

We warned our members of the Wealth Building Community that a drop in prices was likely coming this week…

And like to be the calm, stoic voice of reason in a sea of emotional influencers and journalists.

So, next time you see a headline declaring “doom and gloom”, just ask:

“How does today’s short-term market reaction fit in my long-term expectations of this asset?”

Waiting For Lower Interest Rates?
Here’s How Long It Could Take ⏰

A lot of people are depending on interest rates to head back down soon.

They want rate relief for buying a new home, lowering variable debts, or refinancing debt.

The market currently predicts that rates will start dropping as early as spring 2024:

Are investors betting on rate cuts too early?

Let’s look at some history to see how long rates have stayed elevated in the past.

In several periods between 1965-2000 we experienced rapid inflation spikes similar to our most recent episode. And with higher inflation comes higher interest rates in response.

Those spikes took years to resolve before they eventually moderated.

We witnessed interest rates putting in higher highs from the 1960’s all the way through the 1980’s:

Using history as a guide, rates can sometimes stay elevated for up to 5 years.

So what factors will matter most this time around as we try to predict the path of interest rates?

1. Unemployment Rates: If people are employed, they can spend. If they can spend, the risk of inflation will likely remain a concern for the Fed. Retail sales have been okay, but not exceptional lately. Yet the unemployment rate remains VERY low (3.7%).

2. Energy Prices: These are critical input costs for many businesses. If energy prices rise they eventually get passed through via price increases. Lately energy prices have declined, but there’s always the looming risk of rapid spikes higher due to geopolitical events.

3. Consumer & Business Debt: How well consumers and businesses handle their debt can dictate whether the economy booms or busts. If consumer debt as a percentage of disposable income doesn’t get too high, the economy can cruise at an optimal speed.

4. Fiscal Spending: The private sector is wealthier than it otherwise would be when the government is running heavy fiscal deficits (as it is now). Elections can cause big changes in fiscal spending though, and 2024 will be a major election year.

5. Asset Prices: Changes in home prices and stock prices can also cause big changes to spending via “wealth effects”. This makes for a circular relationship as lower rates can sometimes lead to higher inflation and vice versa.

These are just a few of the many important indicators to pay attention to.

History shows us that rates can stay elevated for longer than people think, therefore we don’t expect the market to predict rate cuts perfectly.

Will the Federal Reserve nail this current cycle with a “soft landing” of the economy while bringing interest rates back down? Can they avoid a reacceleration of inflation?

2024 will be a pivotal year in learning the answers to those questions. Stay tuned!

Buy A House Now OR Wait
For Lower Interest Rates? 📺 

This housing market hasn't gone as planned. As we've seen interest rates rise, we haven't seen the "housing crash" everyone was hoping for.

This is leaving a lot of people who want to buy a home scratching their head on what to do going forward.

In today's video, Nikki compares 3 different housing scenarios:

1. Buying today at a lower price and higher interest rate

2. Buying later at higher price and lower interest rate

3. Buying now at a higher interest rate, then refinancing

Food For Thought 🧠

"Risk comes from not knowing what you're doing.”
- Warren Buffett

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.