Commercial Real Estate Investor's Contrarian Take: Why Inflation Will Drop to 2-3% by 2023

Phil McAlister [00:00:00] The raw number of people working is, is still below the pre pandemic peak. Or it might be like just getting back to it. And if you were to sort of trend the pre pandemic numbers and then look at how far below we are that trend line, we're probably six, seven, 8 million jobs below that. So there's still, even though the unemployment rate is low, there's still probably six or 8 million people not working that would otherwise be working had it not been for COVID. This is Michael Ring. I'm a cattle and crop farmer from Northern Illinois and you're listening to the Vance Crow podcast.

Vance Crowe [00:00:30] Welcome back to the podcast. I'm glad you're here. Today we have a man named Phil McAllister. I really didn't know very much about him. Ben Anderson said he was an optimist and had different perspectives than me on the economy. And so I thought, Hey, that'd be great. I would love to talk with somebody that has some perspectives. And I was absolutely astounded by this interview. It is enjoyable. We talk about everything from inflation and how quickly that's gonna go up. Does it come down? What's going on with the supply chain? We end up talking about the stock market and how the Fed ends up impacting everything from housing prices to the risks that people are willing to make. And I really feel like this is one of those conversations that if you're really well versed in the economy, you're gonna find what Phil is saying, very nuanced and and interesting. And if you don't know very much about economics, we do break down a lot of concepts as best we can to make this something that anybody can understand, even if you're not particularly interested in banking or the Fed or the stock market. So I really hope you enjoy this. You probably noticed I'm crazy busy. We are doing a build out of the legacy interview studios. If you're interested in having me do a private interview to talk with one of your loved ones about the five areas of their life, their childhood, their career, their marriage, parenting, and the legacy that they wanna leave behind, then you can go to Articulate Ventures and book an appointment. We are now booking out in-person events for June, so if you'd like me to do one of your loved ones, just make sure you sign up soon 'cause they're going fast. All right, without further ado, let's go to my interview with Phil McCall.

Vance Crowe [00:02:02] Phil McAllister, welcome to the podcast.

Phil McAlister [00:02:05] Hey Vince, thanks for having me.

Vance Crowe [00:02:07] So you came to my attention because my executive producer Ben Anderson, said, you are one of the rare positive outlook people on the economy. And he thought this was so rare and so unusual that he thought we'd have a good discussion. So maybe just to start off, what do you think the state of the economy is right now?

Phil McAlister [00:02:27] Well, that's a good question. And you know, I mean I think positive or or how you frame, if somebody's positive about the economy is probably a relative term in a lot of ways where we're at right now. But I think, you know, what we're facing right now is a situation where all of the things that we're really great about the economy, you know, over the past two years are all kind of facing the other direction kind of all at once. You know, when it comes to inflation raging or everybody sees the latest prints and thinks it as raging, I think that's probably more or less seen its peak and it's probably headed the other way. And I also think that's gonna be accompanied with, you know, slower GDP growth as well. So I think, you know, to this, to the effect that I'm a contrarian at all, it's probably just that I see the economy heading back to sort of that slow inflation, slow growth mode that we had been in over the past 10 years rather than kind of seeing the, the crazy stuff that's been happening over the last two.

Vance Crowe [00:03:23] So when you think that inflation is going down, like a lot of people right now that have that sense, say, Hey, we've hit peak fuel prices, you know, gas isn't gonna go up that much higher and then it starts to go down and then prices start coming down as a result of that. Is that kind of where you're at? Or what other signals do you have that inflation's gonna slow or peak?

Phil McAlister [00:03:41] Yeah, so I mean I, I would probably take it back first to thinking through like what actually causes inflation and what, you know, if you get that right, then I think you have a better idea of understanding why, you know, or at least in my opinion, why I think it's kind of starting to head the other way. So if you think about it, really there's four different ways you can get inflation. You can get, you know, demand outpacing supply in the real economy, people just wanting to buy more stuff than the economy can make at a given point. You can have supply come down relative to demand, like for whatever reason people just can't make enough stuff at the time. And then you can have monetary variables as well. You could have, you know, the demand for money going down, like people just don't want money, they don't think it's worth anything, so they want to give it up for something else. Or you can have a supply of money go really high and without any more goods and services being produced, which is what people would say like when the Fed prints money, right? I think when people try to pin all of this inflation on the fed, they might be a little bit, you know, misunderstanding or not misunderstanding, but, but they're, they're missing the broader picture of what's been happening with inflation. You know, if you think back to what happened in 2020 2021 with, you know, COVID hitting and then the massive, massive amount of fiscal stimulus, the PPP loans, the enhancement employment benefits, you know, the eviction moratorium, all that stuff together, just, you know, jammed all this money into the economy all at one time. Nobody cared whether or not you actually needed it. It was just like, hey stuff, the money in there, get people spending and, and hope that it kind of bounces things back. And at the same time you had less people working.

Phil McAlister [00:05:14] The people that were working had to, you know, be spread apart and for safety reasons and for whatever other reasons couldn't work at full capacity. So you had that demand, you know, jump at the same time as supply was being suppressed. So the natural outlet would be higher prices in that regard and that's exactly what we had happen. But now you look at it and all of those things are pointing in the other direction. And then to kind of address the fed piece of it really quickly,

Vance Crowe [00:05:42] Wait, when you say they're all headed in the other direction, what do you mean by that?

Phil McAlister [00:05:45] So PPP loans are gone. The child tax credit's gone, eviction, moratoriums are being lifted, there's no more enhance unemployment benefits, there's no more stimulus checks coming. That's all been kind of pushed through the system. And you did have that like one time sort of elevation in price levels that you've seen, but now you know, people are getting back to work, supply chains are healing all of those, you know, demand factor, the artificial demand factors that came from the government are gone. And then if you look at sort of the fundamental underpinnings of demand, you look at real disposable incomes down, you look at, you know, final sales, the last GDP number was really rough. You know, it went from estimations at the end of the year. Estimations for first quarter GDP were like four or 5% from some economists. And then over the course of the quarter, it just kind of slowly tailed down to the point where we saw a negative print. And yeah, some of that has to do with inventory numbers and things like that, but I mean, all of those sort of fundamental, you know, underpinnings of where the consumer's at, you look at consumer confidence is just in the tank. Small business confidence is, is as bad as it is in recession. So, you know, it's hard to see where, you know, all this new demand is gonna come from going forward. Now that sort of the, the temporary kind of demand has gone away. And then obviously the supply side, you still have problems in China with COVID and there's the Russia, Ukraine situation that kinda is, is making things a little bit wobbly, but in general, you know, businesses are making their products, people are back to work, they're figuring out ways to get around these issues. So I think both of those two key factors that we're influencing inflation are both pointing in the other direction now.

Phil McAlister [00:07:19] So then that really just leaves sort of the fed and whether or not you think the money printing is, is causing the inflation, which we can kind of dive into next, unless you wanted to cover anything else on that.

Vance Crowe [00:07:27] Yeah, I mean I'm absolutely interested in that. I think maybe before we go there, it's, it's very good for us to talk about supply chain because from my vantage point, it seems as though many of the supply chain issues that people thought were gonna clear up haven't cleared up at all. You know, if somebody's going to buy furniture right now, it's 26 weeks out and that's on rather rather run of the mill things. If you look at egg prices, they continue to rise. If you look at little brackets that go on to build a, a hoop house for greenhouses, things that are incredibly simple, just very slender pieces of metal with a hole punch through them, you can't even get those. So from my perspective, the, if I look at just a, a, a wide basket of things that people are trying to get, they seem to be very difficult and those don't seem to be alleviating and I don't think you can pin all of those on China, you know, 'cause egg production is domestic, you know, you don't need the tin snips to come from from China. So to me the supply chain is really still backed up.

Phil McAlister [00:08:30] It is. And it'll continue to be, you know, what I'm kind of more referring to is sort of in rate of change terms. All of the, the steep increases are gone now and we've sort of found a new level and over time, you know, even if, even if production kind of stays where it's at now as demand kind of falls off, you know, incrementally from here on out, that rate of change is gonna be to the positive. But it doesn't mean the problem's gonna be solved anytime soon. I just think think, you know, month over month things get a little bit better and a little bit better so that, you know, an inflation number in the eights comes into the sevens and the mid sevens and the low sevens and the sixes and so on. So it's still gonna be high higher than we're used to seeing, but in rate of change terms it's gonna start heading in the other direction. Whereas, you know, a a a big contingency of the crowd out there thinks it's kind of gonna be runaway inflation from here on out, whereas I think it's sort of gonna just normalize over the next few months, if that makes sense.

Vance Crowe [00:09:20] Yeah. And when you think about that then do you think that prices will then go lower? Does that mean there'll be pressure on them to like decrease or are you just saying, hey, we just won't in continue the increase of prices that we've seen?

Phil McAlister [00:09:34] It's possible. I, I think you have to allow for the possibility that there could be true outright deflation at some point. Like if a economic recession gets bad enough, you know, I think the odds of a recession have been building over time. You can never, you know, say for sure that something like that's gonna happen until you see, you know, more evidence come out over time. If there is a really deep recession and the Fed keeps raising rates right into it, you know, something like that could cause like true outright price deflation. But I think that my sort of general main thesis is really just the idea that yeah, it's gonna start to normalize over time and it's gonna, and we're gonna find ourselves back in that same one, one and a half, 2% inflation kinda growth numbers, which are driven sort of by our longer term fundamental demographic and, and debt problems that we've got going on.

Vance Crowe [00:10:19] Man, you are a contrarian. You may be the only person I've spoken to in the last year that believes that inflation will stay at or, you know, return to one to 2%.

Phil McAlister [00:10:29] Yeah, no, and like I said, not, not overnight. I, I think as the year rolls on you'll start seeing it in the, maybe, you know, making up a number 'cause I don't have a crystal ball, but I think you'll start seeing it, you know, travel into the sevens and the sixes and the fives by the, by the end of the year. And then, you know, this time next year when those CPI numbers are have, are gonna be comping year over year to the base that was this crazy march and April that's right around the time where I think you'll probably start being back into that two 3% range that we're more used to seeing. So yeah, definitely don't think it's gonna be like, Hey, we're gonna wake up one day and the c p's gonna surprise everybody by being, you know, 2% or something when everybody thought seven. But I think that's just kind of the way the, the way the arrow's pointing.

Vance Crowe [00:11:07] And so when you look at the Fed actions, what do you see has been the, the result of what they've done so far and where do you think they're headed?

Phil McAlister [00:11:17] Yeah, I mean, so the Federal Reserve I think is poorly understood. Well I shouldn't say that 'cause I'm, I, I don't necessarily know better than anybody else, but the way that I think about it is different than the way a lot of other people do. I think a lot of people think that they are these like wizards on high that are carefully controlling the economy and pulling every lever and making sure that, you know, the right amount of people are employed and the price, you know, but I don't think they have that much control.

Vance Crowe [00:11:41] Can I give you what my impression is? Yeah,

Phil McAlister [00:11:43] Absolutely.

Vance Crowe [00:11:44] My impression is that they're an extremely hierarchical organization where there is one or two small groups of people that have a single lever that they can push all the way down or bring back to zero, but there's no reversing it, right? So they, they can, they can put more money into the system, maybe you could say they have two levers they, because they can change what the interest rate is on that printing of the money. But that there's not only is there no wizardry, it's the, the gears that they have are predominantly bully pulpit and signaling to people how expensive it is to denominate things in the dollar. But that's all the power they have and everything else they do is public relations. All the vice presidents, they have all the analysts, all of that is designed to be smoke and mirrors is probably an unkind way to say it, but in my opinion probably accurate.

Phil McAlister [00:12:36] No, I totally agree. I totally agree with you on that. And, and they don't even have the right tools for the job. I mean even the interest rates that they can control, they can control the short term interest rate that banks lend to each other overnight, but they still don't even really control, you know, once you get to the 10 year treasury or further out from there, that stuff is controlled more by the expectations for inflation and GDP growth in the economy. So, you know, a good example of that would be like 2018 October of 2018 fed raises rates, the 10 year treasury's at three and a quarter. People all around the world are saying that treasury's gonna go to four, it's gonna go to four and a half. We're in a new regime. Well, what actually happened was the re the 10 year treasury went from about three and a quarter in October of 18 to about one 50 by the time the middle of 2 20 19 rolled around. And this was when the fed still said they were gonna be hiking. They said there was gonna be four more hikes in 2019, they hiked again in December and changed it to three hikes in 2019. And then by March of 2019 they said, nah, just kidding, we're not gonna hike anymore. And then they were cutting by the middle of 2019. So like

Vance Crowe [00:13:34] Yeah, which means that their power was, was jumping in and saying, spend your money today because it's gonna be, you know, take out your loans, do everything you can right now. So they're trying to front run the economy and just keep pushing it until eventually people say, well, you know, maybe what you're saying isn't true. And then so they have to put it up just a little bit to make everybody believe we can do this. But I I don't think they have any intention of putting up the in interest rates to try and scale back inflation.

Phil McAlister [00:14:05] Yeah. And, and, and I don't even think that they really can control the broader economy or the, the unemployment rate nearly as much as, as people want to believe they can either, I mean, raising a short-term interest rate can make it harder for people to borrow certain types of money and it can be make it harder for banks to lend money because their cost of funds relative to what they can get for it can change and that can, you know, change growth rates a little bit and stuff like that. But I mean, at the end of the day a lot of these employment decisions are made by, you know, entrepreneurs in the market trying to figure out what price signals are telling them and where things are going. And it's just so much more complicated than the Fed and they're not, you know, it's not like they're raising rates so this is gonna happen or they're cut rates and that's gonna happen. I think that's just sort of an oversimplified, you know, like you said, just kind of jawboning about that kind of stuff rather than what, what you could actually like find in the data. So

Vance Crowe [00:14:51] Yeah, when I look at banking, one of the things that I didn't understand until I dug into it more is that a bank has deposits. So people come in and they say, Hey, keep my money safe and, and in exchange for this give me, you know, a small percentage of interest, which hasn't been anything for 20 something years and you're a fool to leave your money in a savings account because it's just gonna get burned off to inflation, right? But that bank, that's the lumber that they have to be able to go out and build stuff, right? This is the raw materials they have with deposits, but because that interest rate has been so low, then they have the, like the more money they have in deposits, the more liabilities they have because they still have to pay interest rates out to those people that have deposited that money. So they, you know, push that lever down and they pushed it down so far that the, their normal investors and their requirements from, from their federal regulations and state regulations make it so they're not actually able to, they've l to basically everyone they can. And now the only people they can loan to is through the small business association, the SBA, which is where you get to make a loan, somebody comes to the bank and they say, Hey, I want a loan. And the bank gives it to them lending with their own money, but 80% of that loan is guaranteed by the government, right? Which means the risk profile is nowhere near the same and many of those banks specialize in either doing the loan processing, which is a complex thing 'cause you gotta be able to do the DMV style, get in line, put this paper here, this document there, and then if once you get those loans taken care of, most of the time people push them into a secondary market.

Vance Crowe [00:16:29] So they take that money that they've just lent out as an SBA loan and they say, Hey, who wants to buy this we'll trunk, we will bundle all these together and sell them. And so, so much of what the lending is going on right now is hyper impacted by the, the government intervention through the SBA lending,

Phil McAlister [00:16:51] Right? Yeah. And it's, it, it has a lot of rhymes with the do or not the.com bubble, but the housing bubble era, right, where you had people lending because they could offload a lot of the risk to the agencies through the government and they could take the fee income that comes from that and then just kind of put the risk off on somebody else. So, you know, and it's the same, the same thing with the SBA now. And it's one of those things where be because of the debt problems, the demographic problems that we have, we have this slow growing economy and in slow growing economies you have kind of crappy GDP growth, you have low inflation and there just aren't a lot of lending opportunities. So for these banks that have these big balance sheets and you know, they're never gonna be allowed to, you know, fail or go under. So they've gotta find some way to deploy that money and it just funnels itself into the, you know, those areas where they could offload the risk and kind of skew it in their favor that way. So, and I think, you know, it's almost like water finding its path, you know, to the easiest way for it to flow and it just, it's gonna go that way. It went to housing last time, now it's, you know, gonna find other ways to, to work its way into the economy. So I think you're spot on on that.

Vance Crowe [00:17:51] So what do you think the Fed is actually going to do? I remember reading something on your substack back in January where you didn't think they were actually gonna raise rates and then they did just not very much. I mean, depending on where you're sitting, they either raised them a lot or didn't raise them very much, but you're in real estate, so to you these lending rates actually do matter. 'cause that's gonna show up in mortgages, that's gonna show up in, you know, what is it gonna cost for me to buy a house? How wide, you know, how, how big is my budget? Do you think that the raise that they just made was very big and how much do you think, how long does it take to show up into the market?

Phil McAlister [00:18:27] Yeah, so a couple of things on that. I mean, I think a lot of the raise that they did, they talked about it so much that if you looked at like the, the two year treasuries is a really good example of that because a two year, it's a short enough term that it's gonna trade a lot closer to some of those other short term rates. So like a three month treasury is gonna be like pinned to the federal funds rate pretty closely because there's gonna be arbitrage opportunity if it, if it's not. But the two year treasury that yield started shooting up before the Fed ever started hiking because the market just started discounting the fact that it was probably gonna happen. The tenure didn't move up very much at all for a while until the Fed actually did start hiking. And even then, I don't think that like the tenure treasury moves very much with the Fed. I think that went up because Russia, Ukraine happened and some traders temporarily thought that, you know, rates were gonna go up there and just the whole inflation outlook changed pretty dramatically when, you know, oil prices shot up and food prices shot up and all that kind of stuff. But I was definitely wrong about thinking that the Fed wouldn't hike much. I thought it was gonna be like a 50% chance or so that there'd be no hikes. Maybe 25% would be one and done, 25% would be two and done. So now you know, they've basically done their two so you know, if they raise again, I'm already wrong on that opinion, but what I was, the reason I was thinking of that is because historically speaking the fed's been pretty beholden to financial markets and they've been more interested in kind of, you know, listening and watching what's happening and then kind of reacting sort of the same way they did in 2019, right? In 2019 they claim they were gonna hike until the 10 treasury started dropping and economic activity started slowing down the stock market got a little wobbly and then they were like, yeah, just kidding guys, we're not gonna do it.

Phil McAlister [00:20:05] So I thought that was gonna be the same case here because as I was looking at economic activity through the end of the year, again, you're seeing GDP start to roll over all those big spikes in income were rolling over, you know, all of the sort of leading indicators on the ISM numbers and the new orders. Everything was starting to slow down, you know, and in rate of change terms, everything in the economy just moves in cycles, right? So as those rate of change was peaking and heading the other way, you, you, you know, we could see that the economy was probably gonna start slowing down a little bit and I thought the Fed was gonna see that just maybe they'd be a little bit late to the party and once they did they would kind of stop with all the rhetoric. What I didn't notice, and I think Russia, Ukraine hurt quite a bit, is that when oil prices spiked from, from the higher than they already were, obviously from the war and gas prices spiked and food prices spiked. That's the kind of stuff that your typical consumer and your typical, you know, voter sees and feels very, very quickly. And I think it, it changed the fed's mentality or the Fed at least started to think like, okay, our main goal now has to be to crush this inflation. You know, they wanna, you know, Powell thinks he's, you know, Volcker and he's gonna be like the hero that steps in there and you know, does the right thing by hiking rates really high and crushing inflation and helping everybody out and, and whatever. So I think that's where I mis you know, misjudge the, their resolve to be able to actually come in and, and do what they're doing. So we'll see if they keep going. I mean the market is still claiming and they're still claiming there's a lot of hiking left to do, but you see what's happening with stocks already and you know, real estate because interest rates are going up.

Phil McAlister [00:21:37] So, you know, I think the next few months will still be interesting to watch.

Vance Crowe [00:21:42] So let's talk about like how interest rates actually, you know, hit people, right? How, how do, like why does changing a number about the way that banks work? My understanding, and we, this is a, a great way to segue into your expertise in real estate is that if you raise the interest rate and you make it a little bit more expensive to get a mortgage, somebody instead of over the 30 years, they may be increased the price of that by 20, $30,000. It's not huge when you're talking about five bips the but, but it, you know, it's substantial. So once that happens, then you start slowing down the number of housing transactions that happen. 'cause you just price some of the houses that people wanted to buy outta the market. There's now there is a limit to how much money people have in their budgets to how much they can spend. And so suddenly you have a small percentage of houses not selling in the way that they were before. And what people don't often realize is every time a house sells, a lot of people make money on that transaction because you've got two real estate agents that both get paid out of that. You get a title company that's done the work to make sure, is this the house you say that it is. Then you've got people coming in to do inspections, you've got plumbers coming in. Once somebody gets into the house, they wanna get new carpet, so they're going to Home Depot and they're buying other things. And then, you know, you've got moving trucks for two different people and then another house transacts because somebody's gotta move somewhere. And so the, the reason I go through explaining all of that is just changing.

Vance Crowe [00:23:13] Who can buy what houses by a tiny amount impacts millions of transactions that happen. Where else, what am I missing in that? And and where else does changes to interest rates show up in people's lives?

Phil McAlister [00:23:27] So that's definitely true and I mean most of my real estate background is on, on the more commercial side, apartment buildings, things like that. Single family can be driven by a lot different things. And, and, but you're absolutely right that, you know, it touches a little bit of everything, but how it's also very, very complicated. And we don't live in a, a world like the, the phrase that economic or economic professors like to use is to set a bu which means all else being equal. If one change happens, what else happens? But the reality is we don't live in a world like that. We live in this world where everything is chaos and rapidly changing and you know, stochastically moving around and impacting each other. So, you know, a lot of different things are happening all at one time. So yeah, absolutely. When, when interest rates go up on the margin, it's harder to afford a house when you would expect less houses to be bought or prices to have to adjust. That being said, there's so much demand out there for housing right now and there's so little supply of housing that people are gonna just pull every lever they can to figure out a way to continue buying a house right now. And the big thing is when you look at sort of the millennial generation, demographically speaking, a lot of people don't realize this, but the two largest population segments in the country are like the 25 to 29 year olds and then like the 24 to 28 year olds and the, and the early thirties are, are really big too. And the average first time home buyer age is like 32 years old. So you've got the biggest chunk of the population that we've ever had on a numbers basis. On a percentage basis it was still the boomers, but on a numbers basis, you have more people than ever just now coming into the age where they're gonna wanna start buying houses.

Phil McAlister [00:25:02] And at the same time, inventory supplies of existing houses are as low as they've ever been and they haven't recovered at all. So, you know, anytime a house comes up, people are trying to figure out some way to buy it because you know, it's also pretty inelastic demand, right? When you're like a young person, if you've got a family on the way or something, like you don't wanna live in your in-law's basement forever, like that sucks. You're not gonna do that for any longer than you need to. So you're gonna try to find a way to get out there, maybe you're gonna buy a little bit less of a house, but you know, there there's this sort of floor in demand for housing that that's not gonna, you know, the higher interest rates in my opinion, aren't gonna cause a crash unless the interest rates go to like, you know, 12% or something crazy. But, but this isn't the great financial crisis where it was banks not knowing what they had and like these horrible loans on everyone's balance sheets that, that nobody wanted to touch. And so they kinda shut off the liquidity piece. This is, you know, there's like fundamental demand out there so that anytime there is a dip, I think it gets bought by those people that need those houses. But you know, other, other areas of the economy that might be impacted by interest rates. You know, I guess when you talk about interest rates in the Fed, the other thing you gotta talk about is the, the term interest rates is kind of a bit of a misnomer because there's interest rates for everything and some of 'em are related and some of 'em aren't, right? So when the Fed raises the short-term interest rate that affects people that borrow with short-term rates and people that borrow, you know, to do a carry trade, like borrow short lend long kind of stuff or like a mortgage.

Vance Crowe [00:26:25] Explain that, what do you mean? The the, you're starting to get into more complex areas.

Phil McAlister [00:26:29] So yeah, so if you're gonna, you know, certain fact areas of the economy or certain, like hedge funds will all they'll literally do is like borrow short term money really cheap and then borrow money and like leverage that up and then let lend the money or buy bonds at, you know, 2%. So if, so if the yield curve is really steep and the Fed funds rate and the three month treasury is, you know, 50 basis points and the 10 year treasury is 300 basis points, you can essentially borrow money short term and just keep rolling it over and lend it at 3% and leverage that up and you can make 8, 9, 10, 12% gains on that every year. When the fed flattens the yield curve by raising the short end of the, of the curve, that trade kind of goes away. You know, inter, you know, real estate, there's several loans within real estate. Some people do like long-term fixed rate loans where they'll price something off of a 10 year treasury. Those people aren't gonna be affected as much as the people that are are pricing their loans off of, you know, the, so FR rate SOFR rate, which is essentially just a short term variable rate. So when that one moves with the Fed, those people are gonna get hit really hard, whereas the people that have sort of that fixed rate debt aren't. So it's, it's much more complicated and, and like there's a lot of different ways that it can impact you, but at the end of the day, what really happens is the most interest rate sensitive stuff gets hurt the most and the least interest rate sensitive stuff kind of just kinda goes along with its business. So you

Vance Crowe [00:27:50] Are in commercial real estate, which is a fascinating thing. If you're starting to sell buildings that are, you know, renting office space or like, it's really hard, you, you really have to make a guess about what do you think is going to happen in the world right now? Because you have to ask yourself like, okay, people were working from home now businesses want them to come back, will they come back? What sort of offices do they want? How much are they willing to spend? So what's going on from your perspective in the commercial office space?

Phil McAlister [00:28:20] Yeah, office isn't something that I've been too focused on. It's a lot of apartments, storage, medical office, industrial, that kind of stuff, keeping it, we do keep an eye on the office market obviously. It's just, it's one of those things where I think there's gonna be a lot of turmoil, which also means there's gonna be a lot of opportunity, right? I think businesses are probably not gonna get rid of office altogether, but all indications are that like a hybrid work is, is here to stay. So, you know, on the positive side of things, you know, people that really understand, you know, the, the employer base in their area and what they want and what they're looking for and how they're gonna attract people to come back to the office. I think there's some interesting opportunities to, you know, find like a suburban office complex that's closer to where people are working from home. That maybe you're gonna have people come in two or three days a week and you wanna renovate that and make it an exciting place to work where there's more like entertainment options and places to hang out and that kind of stuff. I think you'll kind of start to see that trend. But you know, i, I do worry that sort of the central business district, you know, dense office space is just, there's just not gonna be nearly the kind of demand for that as there as there was in the past.

Vance Crowe [00:29:24] It's fascinating. It's gonna change literally the shape of the United States in my opinion. And one of the most interesting parts that you mentioned about, you know, people doing hybrid work from home, well all that class B office space. So for people that aren't into real estate, i, I just got a crash course in it because we were looking to build out a new, off a new studio. So we're looking at space and there's really a, a giant gulf between what's considered a and then below that B and then lower than that. And the, and the letters just indicate how are the amenities, what's the quality? You know, if you go into rent a space or you're gonna have a bunch of, you know, carpet problems and is the infrastructure good and do they have security people, it's, it's a little bit nebulous what the difference is between A, B and C. But right now, at least in St. Louis, what I have seen is they're trying to build up as much a or a plus as they possibly can because they assume if you're gonna have office space, you're gonna wanna make it as attractive as possible to your people, but you don't need that much of it. So you have the same office budget in your, in your, in your in the budget line and you now are shrinking that down for the number of offices that you have. So the quality of offices goes way up. But then the, the, all the people that are owning the buildings with Class B office space in St. Louis are saying we're not putting another dime into this, we're having trouble getting over 50% occupancy. And so like the, then they don't fill those places up, which means you have less money to invest into those spaces.

Vance Crowe [00:30:56] So they continue to degrade very rapidly and, and I think many of them are hoping somebody's gonna come along, buy the building, knock it down and put something up new. So it's, it's a very interesting thing. Is that what you, I mean I know you're not in the commercial office space, but is that kind of what you're seeing as well?

Phil McAlister [00:31:13] Yeah, I think so. And it's gonna depend on the markets as well, right? And who's attracting workers to where? So each market, each city's gonna be a little bit different, but yeah, I think what'll probably happen is that those class B and C office players, they're, you know, a few of them that are in the right spots are probably gonna get bought up and, and renovated and made into nicer class a product. But a lot of 'em are probably gonna have to just hold on by the skin of their teeth for as long as they can until it just doesn't make sense anymore. And then when the basis for that building is low enough for somebody else to come in and tear it down or do something else with it and, and they can make money on it, that's probably what's gonna happen. Which obviously is gonna cause some pain for some people, but it's also gonna allow for some really new cool, exciting stuff to happen and over time. So, you know, it'll be interesting to see how that goes and you know, if, if some talented people jump into that space just for those reasons because you have this like cool blank canvas of like, hey I've got this really cool piece of real estate, it's downtown, it's in the cool spot, the demand for office just isn't there, but like what other kind of cool stuff can we do here? So it'll be fun to watch.

Vance Crowe [00:32:13] So let's talk about your area where you really do shine. You were talking about places like dental offices, kind of suburban, industrial areas. Tell, tell me a little bit more about where you focus and how is that market looking?

Phil McAlister [00:32:26] Yeah, so a lot of what I look at is, you know, multifamily and then self storage are probably the two biggest ones right now. Both of those have have been just completely on fire over the past couple of years and I'm still, still generally pretty, pretty bullish on both sectors, but it's definitely kinda shifting to sort of a new, new market dynamic a little bit where, you know, rent growth is still strong and a lot of our, a lot of the best markets it's gonna stay strong, but you know, I don't think 10, 12% rent growth is gonna keep happening in multifamily properties very much longer. So,

Vance Crowe [00:32:59] And 10 12, that's being conservative. I mean I know I got a buddy that's in the real estate market and he is raising rents. 40% still has no problem renting those, those, those rents. So whether they were depressed before or what it is, but it's so you're being very conservative in that number.

Phil McAlister [00:33:15] Yeah, I mean some markets like Phoenix, you know, 20, 30% is, is definitely something that people have seen too. So, but you know, longer term rent growth in the two to four, 5% range is in, in good markets is gonna be what you're seeing. So, you know, I think there are some people that probably got too far out over their skis, you know, and borrowing short term money and assuming that rents were gonna go up 15, 20% and when, you know, they renovate the, the property and that doesn't come true, they might get into some trouble. So there may be some, you know, some distressed assets and some ability for people to maybe get a good deal by people that kinda screwed that up. But I think overall sort of the long term fundamentals, again kind of talking about the demographic profile that we see a lot of people wanting to get out onto their own, those people, you know, for better or worse because houses are so expensive and because in rates are high, some of those people just are gonna be renters, right? And, and I think you're gonna see a shift in what they prefer as well. So like a lot more single family rental units or or apartment complexes that are, that are built like single family where they have kind of small single family homes or duplex homes and things like that, getting a lot of attention and an area that I really like a lot for that purpose to kind of tap into that same tailwind, right? Millennials are aging, they might not wanna live in a 600 square foot shoebox in the city, but they are still gonna be renters. So if they can get a, a bigger unit with a garage and maybe a little yard space or something, I think that area is, is really interesting as well. So it's, but you know, it's gonna be one of those things where you're just gonna have to pay close attention to where the trends are going and not, not invest in a deal that requires that kind of crazy rent growth to continue, right?

Phil McAlister [00:34:49] You have to give yourself some cushion, give yourself some, some time on your loan so that you know, the bank doesn't come knocking before you've had a chance to kinda realize your growth prospects. But overall, I think, you know, real estate's a pretty good place to be when we have what we have now, which is sort of that slower economy and then inflation inflation's starting to head, head back down.

Vance Crowe [00:35:07] So what's it like for you right now, putting deals together? Is it, it seems like there are a lot of people that want to take their cash out of things like the stock market and be able to put it into hard assets. Is that what you're seeing?

Phil McAlister [00:35:19] Yeah, it seems like real estate's still pretty strong demand. I, you know, I think some of the craziness has come outta the market there again too, you know, a year ago what you'd see is a deal would hit the market and every buyer was trying to preempt it and take it off the market before, you know, they even called for offers and every, every offer was going, you know, what didn't matter what the broker

Vance Crowe [00:35:37] Whispered

Phil McAlister [00:35:38] As the potential price, the prices were going higher than that. Everybody was trying to offer, you know, all of their earnest money to go hard day one, which means even if you back outta the deal and due diligence, the seller gets to keep your money. Like everybody was doing whatever they could to get deals and people are still being aggressive, but you know, now you're hearing more and more about, you know, a few less buyers at the table, a few less buyers, you know, doing the crazy stuff. So definitely, you know, no signs of anything like crashing, but you're, but things are coming back to earth a little bit. So something to keep an eye on, you know, and if that demand keeps falling off, maybe there will be a, a meaningful price adjustment. But I don't see anything, you know, that would suggest that there's gonna be blood in the streets anytime soon.

Vance Crowe [00:36:19] So I think right now it's very easy to be a person that feels like the economy is headed over a cliff, right? It's, it's, i I like, I personally can feel my own kind of chicken little nature coming out saying, hey, you know, protect the money that's there. It, it's better not to try and grab these last few percentage points of gain better to protect your wealth. How, how are you viewing the world and like what should people be looking at that maybe they're overlooking when they have that kind of pessimistic look?

Phil McAlister [00:36:50] I mean, I tend to be the same way and you know, I I have done a lot of research into kind of what does well under what circumstances. So when you have both a slowing GDP number and slowing inflation numbers, that's when things usually tend to be the worst for risk on assets like stocks and things like that. And I think that's what you're seeing now. I am optimistic by nature and, and I wanna be bullish. I think bullish people are the ones that have the most success in life because they see opportunities and they go chase 'em down and make things happen. But right now we are at a, at a bit of a turning point there where you, where I think you can be patient, I don't think you need to, you know, go hide in a hole forever and not do anything, especially on the real estate front. But I think that there could be, you know, if the fed stays really hawkish now, you know the, for the same things that I've been talking about with inflation, the 2021 numbers from public publicly traded companies, the earnings were as good as they've ever been and their profit margins were as high as they've ever been. But now that inflation is also squeezing their profit margins and now they're gonna be reporting earnings up against the best quarters they ever had at the highest profit margins they ever had. So, and we're already seeing it with the companies that are reporting now as the year rolls on, more and more of them are just gonna be coming out saying like, look, we're just not making as much money as we used to make and you know, the market's gonna react to that. And I think it's already kind of discounting some of that coming down the pipe. So

Vance Crowe [00:38:14] My personal hypothesis with the corporations is the thing that is not being reported is during, you know, COVID hits, people get sent home, you're nearing retirement age, you now are having to adapt to, to using all the levers that used to work for you if you're at the middle, upper management, even even upper management where it's relationships, it's how you talk over lunches with people. It's how you get together, you make things happen. It starts realizing like, hey, I'm gonna be in a new paradigm, probably better just for me to retire. So those people after about a year of COVID start retiring and now the corporations are saying, well we've gotta promote people only they've been way lagging on how many people they've promoted over time. So you have these young people in the areas you're talking about that are looking to buy houses and now these people are getting bumps that are two to three levels above where they were before. So they're getting way big paycheck increases. But that the hidden secret to most of corporate America is that the jobs that people are doing at this upper level management is not what you can write down in a job description. It is complicated. It's relationships, it's figuring out how to make the gears work even when you can't write down everything. And so now you've had people in those positions for about a year and a half that were handed these things as people parachuted out the back of the company and they hadn't been doing long-term succession planning and it would take about a year for problems to start showing up for supply chain issues where the guy that used to know who to call at the trucking company to get things resolved, how do you get that, you know, that that one press to be able to keep working even after the hydraulics are out, those people aren't there anymore.

Vance Crowe [00:39:53] And I think you're gonna start seeing corporations have massive issues that it's difficult to show up on an expense report. It's difficult to report on this, how does that show up? But that the succession planning things that they didn't do years ago are gonna really show up at the exact same time that you're right, not only are they bringing in the highest profits and then inflation starts slowing things down, you're gonna start seeing like, oh all of these things stacked on top of each other. So my guess is large capitalized corporations are gonna be in big trouble in the next six months. How does that sit with you, that hypothesis?

Phil McAlister [00:40:31] I think it makes a lot of sense and I think, you know, I agree with the conclusion and I never really thought about that issue of the talent, not, you know, the managerial talent not really being up to snuff. I think that only adds onto kind of the stuff that I had already been thinking about in terms of them just being up against really tough, you know, margin compression and, and tough comps and, and then the economy reverting back to a slower position. And I think you're absolutely right on that. And then I think if you just kind of take another step back and you look at like big picture, what's going on here? I know you had Lacey Hunt who, like, if there is a such thing as an econ crush, I mean that guy's gotta be it for me. He's awesome, but

Vance Crowe [00:41:07] He won't come on during moments of instability. I've known Lacey for years now and anytime I write him when things are crazy, he's like, I'll wait till things slow down a little bit.

Phil McAlister [00:41:15] That makes sense. Yeah, it sounds like him a little bit, but you know, I, I really agree with his, his idea that, you know, what, what's happening right now, you know, our working working age population, you know, 15 to 64 is shrinking to flat, you know, it's not going down like crazy, but it's not growing productivity is, is as bad as it's ever been in terms of productivity growth for each employee that is working. You know, the birth rates are low. So at the end of the day, an economy really only grows as fast as workforce is growing and as fast as the, the productivity of those workers is growing. So all of that stuff is, is pointing in the same direction, which is that, you know, what you can expect sort of over a long term, if unemployment's pretty low, is that our economy's gonna grow at one to two, two and a half percent. I mean that's about as good as what's baked in the cake for us. To the extent it's gonna grow more than that, it's gonna grow more than that because the unemployment rate was high and it's coming back down. But once it's kind of at low levels, that's really all you can expect. The only way that that grows from there is if you get more workers coming in somehow like immigration or you know, a big population boom so that 20 years from now it goes up or, or you, you find some way to make people way more productive than they already are, which is, you know, maybe some technology or, or training or education or something. But there's really nothing on the horizon on either of those fronts that would suggest that like yeah we've got a big structural change in what's happening. So when, you know when stock prices are valued in such a way that like the economy's gonna grow like crazy and then sort of economic gravity takes hold again, I think it's only natural that the valuations associated with that are gonna adjust.

Phil McAlister [00:42:48] So that's kind of what I see happening. But you know, I would just call myself a temporarily, you know, napping bull or something because I do think, I'm not like a perma bearer that's always gonna think, you know, you just gotta stay outta the market 'cause you're gonna get your face ripped off. But like I, I would love a chance to, you know, put more money to work in, in more risky assets when the time comes. I just think maybe, you know, you could still see it get worse before it gets better.

Vance Crowe [00:43:12] There's something about the demographics explanation that, that people use when they're describing where did all the laborers go? That feels really unsatisfying because it's the, you know, like where did all the servers go? Where did all the people that worked at the grocery store go? Where did I, I mean you can imagine like with labor, you know, construction, electricians, plumbers, they got plenty of work, you know, so much demand. But the other ones that were more stable, like my local coffee shop not very far from my house, maybe a half mile the, like they have to shut down their, their like seating area every once in a while 'cause they can't get enough workers. And you could say, well that's because they're not paying enough or, and maybe that's the issue, but where did these workers go?

Phil McAlister [00:43:58] Yeah, that's a really good question. I mean, I think some of 'em probably did get bid away to higher paying jobs because everything was so short that, you know, everybody probably lowered their hiring standards a little bit. So you could get, you know, you could go from making 12 bucks an hour at a cash register to maybe making 17 or 18 or 20 to construction site or something. And then another piece of it, which you would expect to return back to normal here over the next several months as well is that a lot of people just left the workforce and just decided not to work. So like if you look at forgetting about the unemployment rate for a a second, which is low, if you just look at the number of people that are working, just the raw number forgetting about the unemployment, which says like, are they looking for work and are they full-time or part-time or whatever the raw number of people working is is still below the pre pandemic peak. Or it might be like just getting back to it and if you were to sort of trend the pre pandemic numbers and then look at how far below we are, that trend line, we're probably six, seven, 8 million jobs below that. So there's still, even though the unemployment rate is low, there's still probably six or 8 million people not working that would otherwise be working had it not been for COVID. So a lot of that is just when you think about the raw, the sheer amount of money that was made available to a lot of people, you know, when you're a a when you're working a cash register or you're doing one of those jobs, like those aren't fun jobs, they're not great jobs, obviously people can take a lot of pride in what they're doing in any job, I believe. But if you're not making all that much money to begin with, and now you can go, you can get your $400 a week unemployment benefit, you can get your $600 a week enhanced unemployment benefit.

Phil McAlister [00:45:29] You can get a couple hundred dollars a month in child tax credits. You can get a stimulus check for a few grand every so often, and nobody can kick you outta your apartment if you decide you don't wanna pay rent anymore. Like it's, it's the smart move not to work because you're making a few thousand bucks a month that can cover your rent or anything else that you need, and you can stay home with your family. You can do what you wanna do for a while. So I think a lot of that was, you know, when all that stuff was available to people, they were just making the rational decision that anybody would make. Like, if I could replace my income and not have to go to work, not have to pay for gas, pay for dry cleaning, deal with my boss, do all that stuff, like I'm just gonna, I'm gonna hang out for a while. So I think that legacy is, is still hanging around with some people, but you would think that now as economic reality sets back in, that those people start coming back into the labor force trying to find, you know, new sources of income. But I think that is a, an important piece of it that a lot of people didn't consider.

Vance Crowe [00:46:23] Yeah, I mean, it's, it's funny when I look at the amount of stimulus that people got, I know that my own personal spending is, is probably wildly higher than somebody that's making $15 an hour as a, as a cashier. But it did not appear to me, I mean, how long can $2,000 last? I mean, it's is that, is that a month of work? Is that three months of work? I mean, even if it's free and it's non, it's, I mean, I actually think it was taxed, but at that, at that level of income, probably not. I, I, it to me, the, the stimulus and the, the amount of money they were handed out seemed like way below what it would take to, to take somebody completely outta the workforce. But you know that it's been a long time since I've been making $15 an hour. So I I I also understand that I don't have a great perspective on this from what it looks like at that level.

Phil McAlister [00:47:14] Right. No, that's a good point. But I mean, if you think about it, like, okay, so let's just make a hypothetical couple with two kids, right? So there's four people and they live in a 202 bedroom apartment, and it's a thousand bucks a month for their rent, right? Well, if both parents go on unemployment, there's about 800 bucks a week. That's a weekly number. If you get the enhance unemployment benefits, you know, I think it was 600, then it went down to four or something like that. So let's just say it's another four each. So now you're at 1600 bucks a week coming from that. And then if you get the child tax credits that came through for two kids, that was probably another 600 bucks a month, right? So now you're,

Vance Crowe [00:47:48] No, now you're talking about $60,000 a year,

Phil McAlister [00:47:50] Right? So on $60,000 a year, like you can, you can make your rent payment, you can have a little food. Like, and, and anybody would do it if I was in that similar situation. It's stupid to go to work. Like, you know what I mean? Like, I'm gonna spend all that time away from my family and, and doing things that I don't wanna do and I can, you know, you know, kind of replace that for a while. So, you know, I think it was that unemployment piece and the enhancement unemployment piece that really allowed people to stick around for a while because it wasn't just the couple grand in stimulus, it was kind of everything all, all together at once. So

Vance Crowe [00:48:23] I wonder if watching the workers disappear had any impact on people that were originally advocating for universal basic income. Because it seems to me that those people really believed that you could both hand out money and because the people that were advocating it for it the most seemed to me to be college educated people, right? They've got these white collar jobs, they're able to, you know, work from home. And so they're saying, oh, I want to be magnanimous and make sure everybody has the money that they need, but they also wanna be able to order their, their groceries and have it delivered, and they want to have somebody be able to service their car and they want to be able to, you know, do all these other things. I wonder if any of them had the realization that the, that if you hand out free money, people will stop working because they're working for money.

Phil McAlister [00:49:10] Probably not, probably not. I mean, those people, I, you know, look, I not, they're good hearted people and they want what's best for people. So, you know, I'm not gonna bash them for, you know, wanting what they think is best for somebody else. And I can understand the sentiment behind that, but I, I, my experience is that a lot of those people also are so convinced that they're right about things that it couldn't possibly be that they, that they made that mistake.

Vance Crowe [00:49:31] So what do you think about some of the other fiscal policies that people are trying to put forward? Like, Hey, maybe we should absolve all student loan debt. What, what would that do to the economy if you wiped out all federal, all federally guaranteed student loan debt?

Phil McAlister [00:49:47] Well, I think, you know, over the short term, and for a certain subsection of people, it would be great, but it's like anything else that the government does. It's that the government really can't do anything that benefits everybody on the whole, they can really only take something from somebody and give it to somebody else, right? The government doesn't earn money, the government doesn't produce anything, doesn't add any value to society. It just shuffle stuff around. So every dollar that they take to pay off somebody's student loans is a dollar they have to take from somebody else that produced it. So whether they're gonna borrow it and inflate it away later, or tax it away later, or they're gonna tax it, now that money has to come from somewhere. So on balance, it's not gonna help everybody out. It's gonna make things slightly worse for everybody because we're gonna have a little bit more debt and a little bit less productive economy, right? Because the more debt you have, Lacey Hunt, again, the more debt you have, the worse the economy gets, the slower the economy grows, and the kind of the worse off Everybody is in aggregate, but it's great for a politician because they can say, look at this awesome thing that I did to kind of solve somebody's problem. So whether you're talking about student loan forgiveness or you're talking about stimulus payments, or you're talking about, you know, whatever the, the government program du jour is gonna be, it's just doesn't have the type of impact that sort of the, the Keynesian economist wants you to believe it has. There's the fiscal multiplier, which is, you know, the number that they'll tell you, like, if the government spends $1, it's gonna create $5 in the economy or, or something along those lines. That fiscal multiplier is maybe one, it's maybe less than one. So that means if the government takes a dollar from me and gives it to you, the net benefit is, is basically zero.

Phil McAlister [00:51:17] It just, it just transfers. When the fiscal multipliers at one, it means it didn't really do anything. So, you know, you can argue from a political standpoint or a moral standpoint how much of that kind of stuff the government's gonna do, but from an economic standpoint, it, it, there's really not much on the fiscal side that the government can do that can really make things better by, by taxing and spending. Really what they need to do is get, you know, get the budget under control, get that debt to GDP down, and let more of the, a bigger share of the economy go toward the private sector where it's allocated based on price, discovery and, and resources being sent to the place where they can do the most good for the most people.

Vance Crowe [00:51:53] I, I agree with you that about your, and I actually think is very well put, the way you described how the government actually works and that they don't add value, they're just moving things from one place to another. My sense on the student loan, if you absolve that, you will see even further inflation because it will be like you've just given a stimulus check to everybody that has student loans for $150 a month, or $200 or $500, whatever that amount that you were allocating out of your budget from cash to paying that bill, now all of a sudden you're going to have that in, in your, you know, bank account. And it again, would be foolish for people to keep it in cash because it would just be burned away to inflation. So likely they will use it on consumables, right? They'll, they'll improve their lives, they'll, they'll get a better car, they'll move into a nicer apartment, they'll be able to afford food more. Like I, they, they may make very rational, very positive decisions for their lives. But that then you've, you've done nothing to create more value in the economy. You've just added more dollars chasing the same amount of goods. And so for me, that, that will be in every single crevice of our entire economy will be people with more money that initially might give you that little bump, but ultimately will make it far more expensive for everyone. And, and in my opinion, inflation is just a tax, it's just an another way of describing attacks.

Phil McAlister [00:53:15] Yeah, no, I completely agree with you. And that's exactly probably what would happen. And then, and then obviously again, going back to sort of those fundamental underpinnings, since there are not a, a new wave of people coming in and, and growing the workforce base and people aren't getting more productive, then, you know, after that short term little boost that you get, it all kind of fades away again. So you know, that economic gravity is just, it's gonna be there and it's gonna, it's gonna pull us back to, you know, where, where things are headed kind, no matter what they do over the short term. And that the same thing is true with the Federal Reserve. You know, how much money they decide they're gonna print or whatever else. Like, you can't really escape the ultimate economic gravity that, that we're facing. So,

Vance Crowe [00:53:53] So you mentioned Lacey Hunt, and you seem to have a very sophisticated take on the, on the economy. Where, where do you get your news? What is your, what are you taking in, in order to be able to come to the conclusions that you have right now?

Phil McAlister [00:54:06] Yeah, I mean, I, I follow a lot of people and I, and I do, I try to do a decent amount of my own work in terms of like, getting into numbers and, and trying to see what relationships exist and what don't try to do a lot of reading. You know, I, I dug in really deeply into sort of the Austrian economist viewpoint a lot, you know, with Hayek and Meis and some of those guys and don't necessarily agree with all of it, but I think that was was great. And I've read a bunch of Milton Friedman's books and that kind of stuff and, and now I do a lot more just kinda following, you know, Twitter profiles, you know, following people that I think are really smart writers, you know, don't miss anything. Dr. Hunt does john hussman hussman funds.com. He puts out a, a market comment every, every so often, probably about monthly. He's really good about like the Fed and the economy, understanding what's really going on with a lot of that stuff as well. And then really it's just kinda like you, you know, you just find a fun rabbit hole to go down and you, and you read about it and learn about it and talk to interesting people like, and, and just kind of go from there. So it's just kind of a fun, a fun sort of exploration activity for me, I guess you'd say.

Vance Crowe [00:55:06] So for the listeners of this podcast, the Austrian economics is probably where many of them, maybe not where they're exactly lie, but I would say a lot of the, the audience here is somewhere on that, you know, Hayek real dollars real value. What, what exactly do you have anything that comes to mind when you say you don't agree with that, that, that you could call to mind that would be worth talking

Phil McAlister [00:55:28] About? Well, I think, excuse me. I think one of the big things is that the Austrians, I don't think they're necessarily wrong about monetary policy, but I think the way that it works now versus the way that it worked when those guys were writing about it, is a little bit different. And I think, I think admittedly the big and the biggest thing that Austrians and, and I believed as well that was kind of wrong, was that when the Fed started printing money after the great financial crisis in 2008, 2009, was that we were gonna have this massive hyperinflation and like, Hey, why didn't we actually have it? And I think the reason is that when you think about how the Fed operates or how money's actually created, I think there's kind of a, an interesting kind of wrinkle there that people maybe didn't consider that might explain it. And that is that, you know, when the Fed buys bonds, what's actually happening, you gotta kind of trace through like the lifecycle of the bond in the first place, right? So think about bonds and bank reserves and currency deposits all as government liabilities. Like they're all in the same bucket. They're a liability of the federal government. Some of 'em have different characteristics, some of 'em pay some interest, so their duration is longer, but they're all sort of a government liability, right? So what really creates a new government liability is when the treasury spends and a deficit and issues bonds, right? They take money from me, take a thousand bucks from me, they give it to you, and they say, and so there's just a transfer. But now they also give me a, a treasury bond for a thousand dollars. So there's a thousand dollars in new government liabilities that exist in the world that didn't before. Obviously the banking system can create money too, but we're just talking about the Fed for now. But now the Fed comes along and decides they're, they're gonna do qe, right?

Phil McAlister [00:57:03] Well, what they're now doing is they're buying my bond from me and they're replacing that with a reserve in the banking system and then a deposit in my, in my bank account, right? So all what they've actually done is they've swapped out my bonds for this zero duration, you know, a future liability that had duration and that I was willing to hold over a longer period of time. And they've replaced that with something that has no duration whatsoever and no, no interest rate. So now like, just because my save, like I saved that money because I produced more than I consumed and I wanted to save it somewhere. Now just because my savings has been converted to a different form doesn't mean I'm gonna go out and buy like Cheerios and toothpaste and diapers with it, right? So like, it's not gonna go into the CPI because it's, it's savings and savings is gonna remain savings in some form. Like, you don't change, you don't change what you're like, what the savings is gonna do just because it's changed form. Like you need more people to actually want to buy consumable goods for inflation in consum in the CPI to go up. So what happens is, I get my money, now I have it and I wanna save, but now I gotta find something that has a yield. So now I flip that to somebody else, right? And I say, Hey, I'll take your bonds, or I'll take your stock, or I'll take whatever, but now that person has that money, they're a saver too. They don't want to take, you know, they don't sell their stock so they can buy underwear. They're, they're doing it again because they wanna save. So now the more the Fed buys, the more they're converting those bonds into zero duration, like hot potatoes is what John Huffman calls them. And those people just have, and everybody has to hold those at some point.

Phil McAlister [00:58:36] Like, even if I buy stock from you, well now you've gotta hold 'em and you don't want 'em, so you go buy stock. So that's what happens is like that, that money starts chasing around assets in the economy more and more. And that's how you get, you know, really inflated real estate prices, really inflated stock prices because you know, everybody is trying to exchange that money for something else. Yeah,

Vance Crowe [00:58:57] You're describing, and it's a totally different, well, not a totally different context, but the, one of my biggest concerns about the economy that seems like every, everybody just says, oh, this is just a natural part of it is 4 0 1 Ks. And you know, the, the big problem with this is every single month or every single week, I, I guess you get this like pump of blood into that system, right? People take a percentage of their, their wages and they say, I don't want that in cash. I don't want it in my checking account. I certainly don't want it in my savings account. Put it over here in the 401k. And not only does that artificially give the stock market this inflation and just constantly keeping the price up no matter how much money comes out the bottom. And of course, eventually if you have more people retiring than you do pumping into that, then you run into some problems. But for many years it's been going like this plus by making it into a 401k to tax shelter it by pushing the time horizon out for when people can withdraw that you're now changing their risk profiles completely. Because yeah, you can sell any one individual stock, but you can't get it outta that system. And so to me, this is one of the things that isn't considered when people are talking about this, is just how much of the risk calculation people are making is about time horizons. And we have artificial time horizons that are imposed upon us because of the amount that you would have to pay in capital gains if you took it out early or, or penalties for removing it early.

Phil McAlister [01:00:26] Yeah, no, that's a really good point. And I mean, just to, I guess put a cap on the last piece really quick, like from the Federal Reserve perspective, I think that's why that money doesn't necessarily juice the CPI, but it does juice financial assets for that same reason, because savers continue to save, right? They're not just gonna consume because their savings kind of change form. So I think that's where the Austrians maybe didn't quite get it right or didn't see that coming, maybe because they just saw money supply going up. And that's why if you look at like the velocity of money, it goes down just as fast as like the M two goes up because you're just not seeing that money stick around in the, where it gets calculated in the economy. It just goes off and swirls around in the financial markets instead. So, but what you said reminded me of somebody who's really smart guy, you can find him on Twitter as well, and he's done a lot of good interviews. His name is Mike Green, I think his handle is like prof plum, prof, plum 99, something like that. But he's really, really sharp on, you know, exactly what you said. And his whole take is that those 4 0 1 ks and, and even just ETFs that can trade in non-taxable accounts, the vanguard kind of Blackstone Yeah, the index

Vance Crowe [01:01:27] Index funds, yeah, all

Phil McAlister [01:01:28] Those index funds, those are completely passive. And they are, they literally just follow the dumbest formula ever, which is, if you give me cash, I buy, if you request cash from me, I sell. And it's just an algorithm that does that. So anytime you get an inflow from that, you get, they'll just, whatever the, the ask price is in the market, they'll just take it. So there is like, and as the balance of those funds versus like value investors that are actually making decisions based on the value of a company, as that mix changes and more and more stuff goes passive, you can literally just have a market that you know, is so less, so much less liquid than you would think because there's only a small pool of people that are actually trading and buying and selling at any given time. And this massive chunk of the market that is just basing it on flows. And if flows are coming in, they just buy, buy, buy, buy, buy. So you can have like these parabolic moves upward, and then if for any reason somebody decides they wanna sell in their 401k or these passive funds, you can have the exact same problem happen in reverse, where it just goes completely the other way and somebody asks for their money out of a Vanguard fund and they just sell, they just, whatever the, whatever the, the ask price is, they just take it. They just take it until, you know, until they're out of money.

Vance Crowe [01:02:38] Well, let's slow this down for people that aren't in and don't not involved in index funds. And two years ago I brought this up with a podcast guest and I got so much pushback from this because I was saying, look, it's fine if you have these passive investors, but to explain it, an index fund is where you say, I'm not gonna try and find the needle in the haystack of who's going to, you know, outperform expectations. And so I'm not gonna try and buy one stock. What I'm gonna do is I'm gonna go buy an index fund that is a compilation of a whole bunch of stocks. Maybe it's a representation of the market, so maybe it's a certain amount of the large market cap, the apple's, IBMs these kind of companies. And then you have smaller or midsize, you could also have index funds that are comprised of a little bit of pharmaceutical, a little bit of technology, a little bit of industrial, and you put all those together and instead of somebody buying a share of individual stocks, they're buying a share of a compilation of, of these stocks. And then those just move as a, as a basket. Like the s and p I'm buying the s and p 500, I'm buying all of them. So as long as the market overall does well, I'm going to do well. And if it goes down, my losses are hedged. Now this is a brilliant strategy and the numbers prove it out. If only a certain number of people are using this strategy, which the, oh, what was the guy's name? People are screaming at their, their podcast right now. The guy that started Vanguard

Phil McAlister [01:04:03] Vogel, right?

Vance Crowe [01:04:04] Yeah, Vogel, that's right. When he, when he put this together, when only a certain number of people are doing this, this is fantastic, right? They're figuring out how to ride the wave of people that are really deeply following the market. But if everybody starts putting their money into this now, the waves that slosh around in that market just, just could get totally outta control. And in my opinion, there are people that strongly disagree with me about this, but I have had serious reservations about index funds for years now, but people gen like the sentiment up until recently has been index funds are the only smart choice.

Phil McAlister [01:04:41] Yeah. And I would recommend people go find Mike Greed and listen to him talk about it. 'cause he's like a hundred times smarter than I am on this. But I think like the good, a good way to think about it is like, let's just assume that there's a hundred investors and that makes up the entire market, right? And then five of them become index fund investors, right? And every time somebody gives money to their index, they have to buy, well, there's 95% of the market that they could buy from, and those people are actually liquid in the market where they're willing to buy or sell at a given price. Well, so they buy, and now there are fewer of those people and more money in the index fund. And now, so as long as those flows keep coming into the index fund, they're gonna take a larger and larger percentage of that whole market, right? So, and then now assume at some point now it's 60 40, 60% index funds, 40% value funds, and prices just keep going up. And the more prices go up, the less people that actually buy stocks based on value are gonna be buyers because they're, they don't buy at those higher prices. Well, the, the, the, the more that proportion changes, the fewer people that are actually there willing to sell because the 60% is never selling, and now they all wanna buy and they have to take whatever price they need to take to be willing to get it from the other 40. And then when there's 30%, it's even more. And then when there's 20, right? So like the more share that passive gets, the less liquid. The other side of that trade is because they're all, they literally can't sell the, the algorithm says do not sell unless you take money out. And then the same thing can happen in reverse. Like if anybody in large numbers decided that they wanna pull money out of these passive funds, those passive funds don't have a manager that's sitting there thinking like, okay, what's the right price to take? Should I hold, should I buy, should I sell?

Phil McAlister [01:06:12] They just sell and sell and sell and sell, and now there's 20% of people, or you know, and it's not this bad, but just to use the example, there's 20% of people that are willing to buy and 80% that all wanna sell at the same time that are trying to sell to the 20, right? So the 20 just kind of let the price drop, drop, drop until they're willing to actually take it. So you can get like this massive ramp up and like a crazy free fall just from like the plumbing that's associated with these index funds.

Vance Crowe [01:06:36] Well, I, I have got to say, man, when, when Ben suggested you, I was like, all right, I'll go talk to an optimist. I had no idea, one, how eloquent you'd be. You've been absolutely great at explaining complex ideas and I really love that you come from a different angle on things. So I'm really glad you came on. But if people wanted to read some of your work, they wanted to find out more about, you know, your perspectives, where would they go to do that?

Phil McAlister [01:07:00] I'd say just follow me on Twitter, go to Phil McAllister and, and check me out. I mean, I'm not, I'm not doing any of this for money. I'm not trying to get followers or anything like that. I'm just, I'm just having fun. I love talking about the stuff. I love meeting new people and hearing cool ideas. So I don't have anything to like sell you. I write a, a substack called Macro Meets Real Estate, but again, that's like spotty. I write when I want to, when I have a cool idea and like, you know, so I'm not, you know, don't expect like a really great product out of me at any given point, but love to have conversations and meet exci, you know, interesting people and, and you know, look me up there and happy to chat with anybody.

Vance Crowe [01:07:32] And what real estate market are you in? If people were like, Hey, I want that guy.

Phil McAlister [01:07:36] Oh, well, you know, I don't, I I, my, my work thing is kind of separate. This is kind of a personal thing. I'm not really here on behalf of that, so I kind of keep that as a separate thing.

Vance Crowe [01:07:45] What region of the country are you in?

Phil McAlister [01:07:48] We do a little bit of everything. We, we, we kind of stay away from the coasts in most of the Northeast, but we're kind of a, a national player for the most part. Yeah.

Vance Crowe [01:07:55] Well, fantastic. I am Phil McAllister. I'm so glad you came on. You will be a regular guest if you're willing to come back.

Phil McAlister [01:08:02] Hey, it was super fun, man. Yeah. I really appreciate it. And yeah, happy to come back anytime.