2023 Market Outlook: Don't Fight the Fed! No really. This time they mean it.
From the Desk of Gratūs Funds
By: Jason C. Weimer
Member Gratūs Funds
Savvy: as defined by the trending, AI-fueled ChatGPT bot:
- Possessing knowledge, experience, and discipline in investing.
- A savvy investor is research-oriented, focused on risk management, patient, disciplined, continuously learning, and goal-oriented.
- They adjust their portfolio based on macroeconomic and geopolitical events.
- They remain calm during market volatility and prioritize long-term returns over short-term gains or losses.
According to a study by Dalbar’s Quantitative Analysis of Investor Behavior, while indices have averaged around 10% through various time frames, the average retail investor has garnered just 2.6% annually!
We hope that’s not you, but statistically, we know that is most Americans. We know because that was us some 20 years ago.
After years of trailing indices, I embarked on a journey to improve.
On that journey, as I studied the most successful investors, I discovered a massive gap between the behavior and investments recommended to the masses and the behavior and assets the wealthy were using.
I discovered that while the wealthiest and most successful investors like Warren Buffett, Elon Musk, and the Harvard and Yale Endowments did some traditional investing, the lion’s share of their fortune was often made AND kept in buying, building, or creating alternative assets.
After learning this and then experiencing it firsthand through all kinds of markets and conditions, I had two questions:
- If this was true, why would you do anything else?
- Also, if this was true, why wasn’t this truth screamed from the mountaintops?
While there are many valid strategies, we will release a deep dive content series on the insights we’ve gained on our money journey, all to equip you better to win your game of finance.
For this letter, we’ll focus on the major themes we see in the marketplace today and how to position you best to win 2023!
This is why Gratūs Capital was created, to help you win the battle of finance, so you can win the war that matters most, the pursuit of the mystery and wonder of your God-given purpose.
Winning 2023 – Big Picture First
What environment are we in?
As savvy investors, we must first understand what macro currents we’re operating in before we look at any specific market or deal.
The first question I always ask myself is, are we in an expansionary or a contractionary market? While both markets have tremendous opportunities, our strategies are quite different.
New money flows into the system in an expansionary market, raising all boats. Conversely, a contractionary market is when that new money is being sucked back out of the economy, reversing the upward pressure on prices and forcing price consolidation from the previous expansionary period.
While often much shorter, for the forward-thinking investor, contractionary markets offer unique potential for BIG gains.
M2 – The #1 Economic “Party” Indicator
If the economy is like a bumping nightclub, the M2 money supply is the blaring beats fueling the party. And boy, since COVID have we fueled the party. Here below is a simple chart of our total money supply since 2015.
We can see three distinct periods from the FRED 2015 to 2023 M2 data.
- 2015-2020: Normal M2 Expansionary Environment
- 2020-2022: Historic Explosive M2 Growth due to trillions printed to cover the COVID Relief Bills
- 2022-2023: Historic Reversal of M2 Growth, seeing the first contraction of M2 since 1960.
During COVID, we printed trillions to cover the cost of our COVID relief bills.
This showed up in the M2 Money supply exploding from $15.47 trillion in February 2020 to $21.636 by mid-2022, a massive increase of 40%!
Roughly speaking, that’s 40% MORE dollars chasing the same number of goods, or in many cases, fewer goods due to supply chain issues.
What do historic amounts of money creation lead to? Historically high prices.
Back to our nightclub. In late 2021, Mom and Dad, or the benevolent overseers of the Federal Reserve, started to take notice of the party. They said, “Ya, we hear the music getting a little loud, but just give it a few minutes, and it’ll be fine. Just fine.”
Then a few months later, with the music blaring louder than ever, they quickly recanted, saying, “THE MUSIC IS WAY TOO LOUD! So not only are we going to turn it down. We’ll pull the plug on the jukebox, load it on a truck, drive it out to a cornfield, and bury it.”
What did historic inflation lead to? A historically restrictive Fed policy.
As fast as they printed the money to turn the music up, so to speak, they raised interest rates even faster in an attempt to hoover vacuum up those 40% extra dollars sloshing around the economy to slow or stop the inflation party.
We are experiencing one of Fed’s most historical contractionary monetary policies.
The Fed decides the fate of the economy. The Fed and the Fed alone can flood the market with new money to support assets or starve it of cash, eventually placing more significant pressure on asset values.
If the Fed continues this course, it’s not a question of if but when we will have a liquidity crisis.
While many are calling for a “soft landing,” our view….Please don’t count on it.
Good News! Opportunity in 2023
As savvy investors, we find great opportunities in expansionary and contractionary environments. However, contractionary settings often offer the best deals.
Gratūs started in one of the worst contractions in history, the Great Financial Crisis of 2008. Amid the chaos, Gratūs could raise funds and buy aggressively at generational lows because we studied and had a plan.
This market reminds us of A LOT of 2008. We are ready.
While tremendous opportunity exists in a down market, it can be stressful. So here are some essential items to keep your cool and make the most of it.
Keys to Converting Opportunity in a Contraction:
- Remember, it’s temporary. Focus long term. The average down market is only 6-18 months.
- Stay Calm. FOCUS on what you want to see, Opportunity! Not FEAR. FEAR is a liar.
- Raise Cash
- Defensive: Review Personal Liquidity Reserves, Check FDIC levels
- Offensive: If Possible, Raise Opportunity Cash. Don’t worry about selling at exact all-time highs. A good deal will more than make up for it.
- Be Patient. Often it takes a while for policies to take hold before good buying opportunities present themselves.
- Be ready. Once opportunity hits, it comes fast and hard. Go shopping ahead of time, and know what you want. When you see it, PLUNGE! Don’t worry about timing perfect bottom OR partner with someone experienced to do this for you.
- Watch Policy, Be Flexible: The Fed dictates what happens. While we think they will keep rates higher for longer, be flexible if things change.
Gratūs Plan for the Year
Current Portfolio: Our current portfolio is positioned well in either environment.
- Rents – We focus on the Midwest and other steady markets because while we may miss
out on explosive rent growth in up markets, we also don’t see the implosions in down markets. It’s just good steady markets and great places to live that meet our financial and growth criteria.
- Financing – Our average loan is fixed for five years, with plenty of time remaining, so we won’t be a forced seller into a down market.
2023 Gratūs Opportunities
- Forced Sellers – Due to our connections with developers and banks, we have access to a vast deal flow of potential opportunities. While we conservatively locked in long-term financing for ourselves, some are not. Forced sellers offer tremendous opportunities for those who are patient and positioned with capital.
- Fund Raising – This is why we are focused heavily on raising the next $5MM to $20MM so that we can be as proactive as possible in the coming months and years. We haven’t seen much real estate stress yet, but there will be opportunities if the Fed keeps it up.
General Market Overview:
As always, any perspectives or insights presented are not financial advice. Your personalized process and team are crucial to integrating information into your financial plans and strategies.
Based on the macro environment we see, these are some high-level dynamics we are factoring into our investment views.
Cash: Cash is King in down markets. An allocation to cash is vital to ample personal liquidity and converting on buying opportunities in a down cycle. Seeking a trusted advisor or investment partner to help skillfully allocate that cash at the appropriate time is also essential.
Equities: We see continued pressure on equity values until the Fed reverses its current policy.
Interest Rates: We anticipate rates to stay higher for longer than most investors expect.
Bonds: With continuing upward rate pressure, bonds will also skew downward in values unless held to maturity until the Fed reverses policy. However, panic selling in times of volatility could lead to lower bond yields and higher prices.
Precious Metals: While metals may experience some initial downward correlation with the economy, we believe the inflationary pressures on all commodities, especially gold, and silver, will eventually win the day, placing upward pressure on metals over the next 2-5 years.
Crypto: In our view, for similar inflationary reasons as metals and commodities, the incredible money printing exercise will continue to skew upward pressure on crypto as well, but beware, in our view, 70-90% will likely not make it into the world of Crypto 2.0. We see promise in some of the ISO 20022 coins that are focused on bringing the innovative efficiency of crypto to the traditional banking system.
Inflation: Counter to the narrative. Short of more massive spending bills, the big inflation spike has likely peaked as of June 2022. Prices will not return to where they were, but they will stop rising at the same rate they have been simply due to slowing new M2. But watch M2; the CPI follows M2 with a 16-19 month lag. So if M2 spikes again, expect it to start impacting prices in 16-19 months.
Private Real Estate: Office and retail commercial real estate continue to see pressure from the work-from-home and Amazon era. Multi-family and industrial have benefitted from these trends. With robust housing demand and affordability for new mortgages becoming a problem, well-chosen multi-family remains a strong, steady asset class.
Summary: The Fed appears serious about keeping rates higher for longer than most think. We see this placing continued pressure on the economy. However, we see tremendous opportunity for savvy investors focused on the long term, researched, and ready to capitalize. Cash is crucial to raise and maintain to make the most of this environment. If the Fed continues, it will reveal opportunities but remain flexible.
Gratūs is ready and excited for whatever the year brings. We are actively building a war chest to deploy. If you want to discuss strategies in more detail, reply to this message or website to schedule a time to connect.
Jason C Weimer
These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties that could cause Gratūs Funds actual results to differ materially from those contained in the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Gratūs Funds does not undertake any obligation to revise or update these forward-looking statements to reflect events or circumstances after such date or to reflect the occurrence of unanticipated events.
The information contained within this document is neither an offer to sell nor a solicitation of an offer to buy any securities described herein. An offering will only be made only by delivery of all the requisite offering documents. You should read these offering documents (including each of their Exhibits) in their entirety in order to understand fully all of the implications and risks of any offering of securities. An investment should be made only after careful review of all the offering documents. The information contained herein is subject to the representations provided in the offering document. Securities offered through Wealthforge Securities, LLC. Member FINRA/SIPC. Gratūs and Wealthforge are not affiliated.
Our Offering Circular and other offering documents may be found at www.sec.gov or on our website at gratusfunds.com/offeringcircular. An investor may invest no more than 10% of the greater of their annual income (including the income of their spouse) or their net worth together with their spouse excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence). Different rules apply to Accredited Investors and non-natural persons. Before making any representation you’re your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(c) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.
The offering materials and this document may contain forward-looking statements and information relating to, among other things, Gratūs Funds its business plan and strategy, and its industry. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to the company’s management. When used in the offering materials, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements, which constitute forward-looking statements.
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