General / Video Commentary
Ken Fisher Answers Your Questions on Home Prices, New Bull Markets, Inflation and More
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher answers viewer mailbag questions about falling home prices, new bull markets, inflation and more. Ken begins by discussing how falling home prices and a subsequent decline in new construction can negatively affect GDP growth. However, given the cyclicality of the Real Estate sector and its small size relative to the broad economy, falling home prices are unlikely to spark a recession on their own.
Ken then addresses what the start of the next bull market may look like. While no one knows exactly when a new bull market will start, it’s common to see pervasive investor skepticism during the bulls’ initial climb. Ken says current economic conditions are better than most people believe and, therefore, we’re likely to see positive economic surprises on a regular basis as 2023 progresses—a feature that could lift global stocks but likely requires investors to remain patient a bit longer. Finally, with some investors concerned that rising minimum wages could push inflation higher, Ken reminds us that well-known economist Milton Friedman demonstrated long ago that wages follow inflation, not the other way around.
Title screen appears, “Ken Fisher Answers Your Questions on Home Prices, New Bull Markets, Inflation and More.”
A man appears on the screen Wearing A navy suit, sitting in an office in front of a fireplace.
He begins to speak.
Ken Fisher: This could well be the quiet bull market, and it may be one with less fanfare and more skepticism about its validity.
A green screen appears showing litters sent to ken fisher being fetched. Underneath it is the title “Ken Fisher’s Listener Mailbag” with a mail bag illustrated next to it.
Seconds later, ken fisher appears again in the same position, same place.
A banner identifies him as Ken Fisher, Executive Chairman and Co-Chief Investment Officer, Fisher Investments.
Ken Fisher doing hand gestures with messages on paper in his hand, reading from them questions and answering.
Ken Fisher: So, viewers send in questions from time to time. And this is what I guess you could call a grab-bag collection of questions. And so, I've got some here that have been sent in and given to me. And let me just rattle through some.
So, with home prices sagging across most of America, how does that affect the economy?
And the answer is, well, home prices sagging do negatively impact GDP. If you want to think about it, home prices are a leading indicator, first of rents, as home prices fall rents fall later. There's a long history of that, takes about 15 months. And so, there's an offsetting good part to the bad part because a lot of tenants get a benefit from that. But additionally, it's true that home construction is a big part of the economy and then the things people put into the houses, sofas and refrigerators and all those things are big too. So, when home prices fall new construction tends to fall and you get a decrease in GDP.
This sector alone, however, in my opinion is not typically, it is very cyclical, but it's not enough by itself to drive us into recession. It does dampen the possibilities for growth.
As you know, everyone knows, in the aftermath of COVID residential real estate prices went through the roof and then more or less peaked out in 2022, and since then have been falling slightly. Mostly more than the prices going down, it's just been taking longer and harder for people to be able to sell a home at the same prices as before. But the fact is this is a slight negative to GDP. It's a slight positive on the inflation front with a time lag, and that's how it affects the economy.
Another: What will the start of the next bull market look like? You've said there's no capitulation in the form of massive selloffs trying to find a safe haven this time because all the safe havens are also down. Will the new bull market start slower and more indecisive compared to past bull markets?
So, I don't really know the answer to that because everything is not all the same. I will say to you that as we speak here in the middle of December, that which I referred to before as midterm election year, fourth quarter midterm miracle has worked almost perfectly with a very
robust fourth quarter, and no capitulation. And if that, as I think, is most likely to extend into a strong first couple of quarters into next year, which is those nine months being the most consistently profitable period in US stock market history, the nine months to begin the October 1 of the midterm election year, that does get you into new bull market territory.
And yet this could well be the quiet bull market. And it may be one with less fanfare and more skepticism about its validity. And that makes it perhaps have a stronger and longer base, because the less people believe that it's real and buy into it, the longer it probably runs.
But there's no real way to be sure about any of that. And all that you can say is, that for the most part, features now as I've written and said in so many places, look a lot better than people think they do, and therefore positive surprise is pretty likely on a pretty regular basis moving through early 2023. And exactly how that bull market takes form is beyond my ability to detail. I just think it requires a certain amount more patience. And this is a period where patience is a virtue. As Warren Buffett famously said, the stock market is a process of transferring money from the impatient to the patient.
Another one. You often mention that many ideas you have worked because few people pay attention to them. If most were to listen, they would not work. With so many now advocating the use of passive index funds, would this apply here as well?
If the majority of investors ended up in something like an S&P 500 index, would this end up producing low returns?
No, I don't know that that's true if you define it correctly. Let's just define it. If they're buying the S&P 500 or some comparable type passive indexes, and they're being passive with them, meaning they buy them and they just sit on them, that is not going to move the market up or down compared to the market.
The tool itself of these passive instruments that mimic an index are pretty near perfect for mimicking an index. Therefore, if they're all buying the S&P 500, and if you define the market as the S&P 500, you get that less the small cost of owning the index.
The problem, as I have said at varied times in the past, is that most people don't do that. Most people buy the S&P 500 index or some other thing like that, small cap index, you name it, I don't care, the Nasdaq. You can pick any passive index you want. And the tool does what you want it to do, but the people don't use the tool passively. They buy it thinking it'll do well. When it doesn't, they sell it. They get out at the wrong time, they buy something else and they shoot themselves in the foot.
This is a little bit like trying to use a flathead screwdriver as a chisel, or trying to use a flathead screwdriver to put in a phillips screw, or trying to put in a screw with a hammer instead of a screwdriver. There's nothing wrong with the tools. The tools are all fine. They're just being misused.
And it's really common for people to buy an index fund and not treat it passively, but instead, in it and out it as opposed to just sitting passively.
Almost no one, I don't want to say no
one, almost no one truly treats passive products passively. And that's the problem.
The last one for this grab bag section is, how does minimum wage affect inflation? It took a huge jump this year and is set to take another jump next year.
People have gotten this one wrong most of my life. When I was a young man, long time ago, back when dinosaurs were still floating around. That was a joke—not a good one, but it was a joke.
Back in those days, there was this concept of cost-push inflation that was ubiquitous among economists. Milton Friedman, in one of his less-noted accomplishments, proved demonstrably that wages follow inflation. Inflation doesn't follow wages. Once you get that in your bones—that wages follow inflation, inflation doesn't follow wages—you know the answer to this question. That this is following the inflation, it's not causing inflation.
Now, let me just speak about inflation for a moment. We got all these products. They all got a price.
That's the price level at a moment in time. Then something may happen in some form of a dislocation that causes this price to go up. That price going up is not inflation. That price going up is a problem associated with that product category. And in that as it goes up, if everything else remains the same, some other price has to go down. Because if you want to keep buying some of this, you got to buy less of something else, putting downward price pressure on that other thing.
But we, intentionally or not at times, may as a society accommodate that by allowing money growth to spread that across other prices. That's inflation. And in fact, you always have quite a lot of products that are having their price go up because of problems associated with those particular products. Like happened earlier this 2022 at the beginning of the year with semiconductor shortages in some categories of semiconductors, integrated circuits. These kind of things are happening all the time. That in and of itself is not inflation. That's product specific.
It's the accommodation of that that spreads it across everything else, trying to lubricate the system so to speak, intentionally or unintentionally, that's the inflation.
It's the money accommodating the disruption, the created money accommodating the disruption.
Any particular wage problem, like associated with a union strike, or prices going up in one particular category of labor—again, that doesn't cause inflation. It's following inflation or singularly a disruption in a category. Unless we accommodate with money creation and spread it across the broader category of prices, it's not inflation. A price going up makes another price go down if prices are otherwise stable.
The reality of minimum wage is also true. And mind you, I feel a great deal of empathy for anyone who works for minimum wage because it says that they don't have enough human capital and or skill and or luck
to be able to work for a higher wage, which is what surely happens for people that have more education, more skill, more capability, more experience and more luck.
A green screen appears with a sentence “Rising wages are a symptom of high inflation, not the cause of it.”
I feel empathy for these people, but the reality is, overall, that price going up just means in and of itself, another price going down.
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I hope this has been useful in understanding these grab bag questions that come to me. Keep sending them in. I'm delighted to try to answer them when I can.
Thank you very much for listening, and I look forward to being with you for another grab back session next month.
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A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
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