T-Bills get 5.5%. Cap rates on decent Midwest homes are a conservative 9%, but there is actual work to do, and it dries up your liquidity if there is indeed a major shock like 2008.
Competition is still fierce. The I-will-buy-your-house mailers still stream in. Some of the overleveraged are selling into the market, but there aren’t any screaming deals anymore, and if there are, they get bid to low returns with lots of improvement work to be done. The incredible thing is one actually has an alternative to working investment right now. The S&P 500 seems over-valued at a 5.5% discount rate. Doesn’t raising the discount rate lower asset prices, so they can deliver a return in excess of the risk-free 5.5% rate? So if you don’t have a great attorney and good private deal flow to take advantage of the alternative lending market, or want to start a new business to grind out, what is an entrepreneur to do?
It seems like there are two main financial camps right now in the non-value add money management business. The first camp thinks we will essentially pivot at the end of 2023/early 2024 with a recession. We’ll have a “credit event” with deflation. The second camp thinks we’ll have a soft or no landing at all. Rates will drift higher but not actually shatter the status quo. Mathematically, the first group thinks that the Fed will be forced to sink short-term rates to re-steepen the yield curve after a deleterious event. The latter thinks the 10-year will drift higher to re-steepen the yield curve, because the economy will chug along – higher for longer.
The jobs market is still strong with positive numbers each month. Businesses have learned since the great recession not to over hire, and they value their good employees more. The excess of employees and bad capital was cleared during this time as well, so many businesses have grown strong from a solid base of grinding it out through the tough times being wary of potential bad times. Additionally, the wealthy are flush with cash. T-Bills yield plenty for them to keep the economy going. Housing subsidies, SNAP and available healthcare keep the poor in their homes spending money. Good labor is scarce, so companies are paying the working class better. Most people have locked in their mortgages at low long-term rates. Pensioned and wealthy baby boomers hum along. The entire housing stock of the United States of America has been upgraded, so capital improvements have been amortized to a great extent and aren’t needed as much. Big commercial real estate deals in office and elsewhere will have to be re-capitalized, but banks will probably take the brunt of the losses and curtail new lending as a result.
Perhaps it’s just the overleveraged that will be squeezed beginning later next year?
A risk is that banks get more money pulled from them and refuse to renew the loans of those who heavily financed all their assets. The government spends more, but the Fed is unable to lower rates, because they need to counter the fiscal inflationary effect. The government is forced to cut programs due to the crowding out of private investment. So we have a bogged down economy with high interest rates.
So put most of your new money in T-Bills for 6 months, relax and plan a new business to start.