It was April of last year I began pounding the theme of Everything Has Changed In 2018 into the consciousness of investors. As we are now at the midway point of Q1 2019, another theme is becoming readily apparent.
The theme of 2019 will be A Game of Unintended Consequences. The Fed has done something that is unprecedented in modern economic times. The message they have given the markets since the crash of Q4 2018 is that equities are the economy. As a result of this A-HA moment by the Fed, they have abandoned all conventional, accepted thought as to their role within the grand scheme of the economic landscape.
By basically admitting that they have no desire to take the Fed Funds rate to the neutral target of 4% while normalizing the Fed balance sheet to anywhere near its pre-crisis levels, they have essentially told the markets that they are fine with a soft-QE, with the possibility of moving towards a full QE if the economic situation worsens.
Judging by the reaction of the markets to this soft-QE it has been enough to reignite the equity markets, which should in turn bolster the economy moving forward.
The unintended consequences of such a policy come in the form of the sector that stands to benefit the most from inordinately low interest rates during an economy that is running at above average levels. Much like 2002-2003, when the Fed overreacted to the bursting of the internet bubble, determining then, much like now, that equities were too important to the economy, a low interest rate policy will ignite the animal spirits in real estate.
Real estate moving into 2019 and beyond, with a record low unemployment rate, rising wages, low interest rates and millennials who are on average 30 years old, will be a primary beneficiary of the evolving economic environment.
Homebuilders, mortgage originators and servicers stand to benefit the most. Those companies providing streamlined/low cost methods of finding, financing and buying a home have inordinate upside, as millennials balk at having to sign reams of paperwork while paying unreasonable commissions for the privilege of somebody telling them where to sign.
Already in listening to the earnings calls for homebuilders and real estate related names, we are seeing CEOs express markedly increased optimism at the environment that has been developing in Q1. As the economy accelerates into Q2 and interest rates remain at reasonable levels, I would expect that the real estate market will serve as a reflexively positive factor in the resurgence of both equities and the economy at large.
That's all for tonight.
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