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To investors,

Markets like certainty. This has been a major takeaway from the last few years of investing. A great example is what happened in the bitcoin and cryptocurrency industry after major events with cryptocurrency exchange CEOs.

David Pakman, Managing Partner of Coinfund, shared this chart with me recently:

It is the price of bitcoin, with each blue vertical line representing when a major crypto exchange CEO was ousted from their role — from left to right: Arthur Hayes of BitMEX, Sam Bankman-Fried of FTX, and CZ of Binance.

Shortly after each of these CEOs departed, markets rallied aggressively.

This chart shows that capital had been sitting on the sidelines, but once there was clarity in the market, investors deployed the capital and drove the price of bitcoin higher.

This phenomenon is not exclusive to crypto markets though.

Federal Reserve Chairman Jerome Powell gave a speech revealing the central bank’s plan to cut interest rates in 2024. The market has long been speculating on when these interest rate cuts would take place, but the Fed had remained committed to higher interest rates for a longer period of time in all of their communication until yesterday.

So what happened?

The market got certainty and investors deployed capital into the market. We saw the Nasdaq-100 hit an all-time high in after-hours trading. The S&P 500 is sitting near the all-time high level as well. Bitcoin jumped 3% on the news. Apple hit a new all-time high. The list goes on-and-on.

If I had told you that the Fed would crank interest rates at the fastest pace in history, yet the S&P 500 would be up 23% for the year, you wouldn’t have believed me.

If that wasn’t crazy enough, the S&P is on track this year to outperform the S&P in 2020. Interest rates are over 5% today, but they were dropped to 0% in 2020. That shouldn’t happen in financial markets, but here we are.

Investors hate chaos, uncertainty, and a lack of predictability. This is why the Fed spends so much time thinking about what words are used in a press conference or what information they are leaking to the press.

Plenty of uncertainty remains going into 2024 — will we have a recession? Will the Fed follow through on their plan to return to loose monetary policy? How will the geopolitical conflicts in Ukraine and Israel impact US monetary and fiscal policy? Will China make a move on Taiwan? Can consumers continue to spend at record levels without wages materially increasing? What happens to the housing market, which has reached the most unaffordable level in 40 years?

I don’t have answers to these questions. Investors have to consider each of them carefully. But fortunately, the Fed is still the big dog in financial markets. If the Fed cuts interest rates, and likely returns to quantitative easing as well, then asset prices are going to rip higher.

And if our current starting point is at, or near, all-time high levels, then we are going to see some fairly ridiculous return percentages posted in the next 24 - 36 months.

Hopefully this letter serves as a warning for you to consider the phase change we are undergoing right now and how it will impact your portfolio. The decisions you make today will likely determine your returns for the coming years.

Hope everyone has a great day. Talk to you soon.

-Anthony Pompliano

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Kevin Erdmann is one of the most interesting analysts when it comes to the US housing market. He writes on Substack at kevinerdmann.substack.com. He also has 2 books, called “Shut Out” and “Building from the Ground Up: Reclaiming the American Housing Boom.”

In this conversation, we go through ideas on how to make housing more affordable, how we get here, Federal Reserve, who is responsible, and solutions.

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Kevin Erdmann Explains Why Housing Is So Unaffordable

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