You’re not alone if you’re confused by the Fed’s recent mixed signals on inflation and its rate hike agenda to combat it. It’s not clear even the Fed knows what direction it’s heading.
In early February, the Fed’s policy-making committee approved a quarter-point interest rate hike – its smallest increase in several months – signaling confidence that its prior aggressive rate hikes were working. This signaled an easing of the Fed’s aggressive rate hike agenda. This sparked a mini rally in the markets as investors took the news as good news that inflation was finally under wraps.
Fast forward to this past week – the first week of March – and the Fed is now singing a different tune. One reason for this is there are signs that inflation is far from being under control.
On Tuesday, Federal Reserve Chairman Jerome Powell cautioned that interest rates are likely to head higher than central bank policymakers had expected. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said in prepared remarks for appearances this week on Capitol Hill.
The risk of the Fed’s proposed increase in pace of rate hikes is a recession. Former Treasury Secretary Larry Summers is in this camp. He doesn’t believe inflation is under control either and still believes a recession is on the horizon as the Fed continues its fight against inflation. “The process of bringing down inflation will bring on a recession at some stage, as it almost always has,” Summers said.
It’s easy to get caught up in all the madness, and that’s exactly what most investors do as they run in every direction, following the herd across a sea of uncertainty and volatility. The problem is that when dealing with uncertainty, losses are aggravated, and the road back from losses becomes steeper and steeper as uncertainty devolves into a downward spiral.
Smart investors don’t follow the herd. They hedge against uncertainty by gravitating towards certainty. They do this not only in the markets they choose to shop in but also in the types of assets they allocate to.
In terms of markets, savvy investors hedge against uncertainty by investing in illiquid private markets instead of the liquid public markets driven by herd behavior and irrational investor sentiment and emotions triggered by social media, cable news, media talking heads, the internet, socio-political turmoil, and economic signals. Illiquid private markets are insulated from wider market volatility – offering investors certainty and a clearer path in times of uncertainty.
Investing in private markets is one way sophisticated investors hedge against volatility and uncertainty. Another strategy is to invest in assets with a track record of reliability and stability in uncertain times – particularly tangible assets that offer resilient income and growth even in an environment marked by inflation and recession.
So what assets are ideal in uncertain times?
The ultra-wealthy always lean on commercial real estate (CRE) and investments in income-producing private companies (Private Equity or PE) to create certainty in uncertain times. CRE and PE investments that offer resilient passive income and growth in the face of recession and inflation offer peace of mind from uninterrupted income.
If you can invest in an asset that will continue to pay even in the face of job loss, job reduction, or reduced buying power – pay that will keep pace with inflation – how much better off will you be than the average worker who has no fallback plan? CRE and cash-flowing PE investments have always been the go-to fallback plans for ultra-wealthy investors.
According to the latest asset allocation report by Tiger-21, a peer-to-peer investing network of ultra-high-net-worth investors ($50M minimum of investable assets to join), the rich have increased their allocations to CRE and PE compared to a year ago:
Investing in certainty is not all that exciting for the average investor accustomed to the roller coaster ride of following the herd, but investing in certainty separates the ultra-wealthy from the middle class.
Investing in certainty is the overriding objective of smart investors, and the following elements are what they seek when evaluating investment opportunities to achieve their objective:
- Passive Income.
- Tangible Asset.
- Capital Preservation.
- Tax Benefits.
- Insulation from Volatility and Inflation.
- Multigenerational Wealth.
- Leaving a Legacy of Charity.
Are you concerned about market uncertainty? Then allocate to certainty.
Allocate to private alternatives like CRE and PE that offer reliable income and growth in times of uncertainty and volatility.