Nov 17, 2023

Ben Miller thinks inflation is over — and a recession is coming.

Among economists, his views are increasingly unusual.

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Ben Miller thinks inflation is over — and a recession is coming.

That, fundamentally, is what caught my attention about his writing and economic views. Miller is the co-founder and CEO of Fundrise, the largest direct-to-investor alternative asset manager in the U.S. 

His position there gives him a unique perspective on this current economic moment — a perspective he describes simply as having “skin in the game.” Unlike many economists and pundits, Miller is making bets about the future of the economy that he can lose in real tangible dollars, not just reputation. 

In our conversation, we talked about why he’s confident a recession is coming, how his prediction is tied to interest rates, and why his past warnings of a recession haven’t yet come to fruition. For context, it is worth noting this interview was conducted on November 1 — over two weeks ago — and before the latest inflation numbers came out. Those numbers have decreased the likelihood of any more interest rate hikes and increased optimism about the so-called “soft landing” (that is, a slowing of inflation without a recession).

Our conversation, below, has been lightly edited for length and clarity. And while we do discuss some predictions about the future of the economy and investment markets, this interview does not constitute financial or investment advice.

Isaac Saul: Ben Miller, thank you so much for coming on the show. I appreciate it.

Ben Miller: Yeah, thanks for having me.

Isaac Saul: So I wanna talk a bit about some of your views on this economic moment and where the economy is right now. I think you've taken a heterodox position compared to some of the other economists that I’ve read, so I'm fascinated to pick your brain about that. But before we jump in, I want to introduce you to our listeners. So could you just tell us a little bit about your background, how you got into writing about economic policy and macroeconomics more broadly, and a little bit about what you're working on right now?

Ben Miller: Great, let me actually work from the present to the past. So, Fundrise has a couple million users. We have about $7 billion in real estate. We bought a couple billion dollars in real estate, or $1-2 billion in real estate almost every year for the last few years. We have dozens of bank partners, from as big as there are to small ones. We have a hundred software engineers. We really operate across the entire country. So it's given me a lot of background in what's happening in a lot of different parts of the economy, and that's basically where I spend my day. 

And in terms of background before I co-founded Fundrise, I was in commercial real estate and tech from 1999 through 2010, and I went through the great financial crisis, which was like the pandemic; anybody who was in business at that time was scarred from it.

I came away from it extremely skeptical of all mainstream authority and all financial institutions. Maybe I'm biased from that experience, but it undermined my confidence in the financial industry.

Isaac Saul: I think that's a justifiable position to come out with after walking through that fire, for sure. So let's jump right into it: We have a low unemployment rate. We just got another really strong growth report. Today, the Fed said they're going to hold off on raising interest rates for now. Obviously, interest rates are high — high contextually for over the last 10 or 20 years. We have inflation clearly. But I think a lot of economists frame this as being maybe a peculiar, but overall strong and healthy economy. 

And I think it is probably fair to classify your view as a bit more pessimistic than theirs, maybe because of that bias that you're describing. So I don't want to sit here and say, “Tell me why the economy sucks,” but tell me why you're worried. I'd like to understand what's really concerning you right now.

Ben Miller: So I've been on a pretty consistent position that we'll have a recession, and that's become an extremely rare point of view — in the minority, if you will. So why do I come to a different conclusion than most economists at the moment? I think about this as an analogy.

If I told you to go cross a minefield, an economist might say, “Here's your chance of being blown up: 20%.” But then if you ask the person who's going to cross the minefield how to rate that risk and whether they would do it, they're going to reach a completely different conclusion. So it's a very different analysis being a player versus a pundit.

And I feel like that's the seat I'm in. If you're a business person, essentially, there's a very asymmetric risk dynamic here, because nobody's saying that the economy is about to go boom. It's a question of how much it’s going to slow. Interest rates, at least if you're a borrower, went from 3-4% to 7-10%. 

The stock market's down. Most markets are down. Things are definitely on the down compared to the last 10 years, so you're not missing a lot of upside by being conservative. And if an economist gets it wrong, they get scolded. But if a business leader or an entrepreneur gets it wrong, it's catastrophic.

So I think that a lot of my perspective comes from the cost of being wrong. It's much more one-sided than a purely objective question about whether or not there'll be a recession.

Isaac Saul: That makes sense to me. So when you look out at the landscape, I think the traditional view is that the measures that we typically consult to think about whether a recession might be coming are sending pretty mixed signals. I'd be curious to hear what signals you're looking at and how you're viewing them today.

I know from just doing background for this interview that this summer, you were expecting there to be a recession. It didn't happen. Why do you think you missed that? And what are the signals that you're looking at in this moment going forward given some of that context?

Ben Miller: So there's two different questions: What am I seeing, and then how did I miss it? Because I definitely thought we'd be in a recession by now. 

Let me just do the second one first. At the end of the summer, when there was no recession, I started looking at the data and thinking, “What did I miss? How did I get this wrong?” Because I basically got it wrong. And one of the things I definitely missed was, if you go back and look at basically every recession since the beginning of Federal Reserve data, which is about 1950, what you find is that there's a long lag between when interest rates go up and when the actual economy slows down. 

There's a famous quote by Milton Friedman, [that monetary policy is about] “long and variable lags.” The lags can be as few as five months from the peak of interest rates. Interest rates, I think, peaked in July 2023. [Editor's note: They peaked in August]  I don't think I don't think the Fed is going to raise them again. They might, but I think it's likely they don't.

The lag is between 5 and 17 months. In 2008, it was a 17-month lag and rates went from 1% to 5.5% in 2005 to 2006 [Editor's note: they peaked at 5.25% in November 2006]. In 1979, they went from like 10 to 20 percent [Editor's note: from 10.01% in January 1979 to 17.61% in April 1980], and there was still a five-month lag. So the lag, I think, was the part I really misunderstood. It takes a long time for those interest rate costs to make their way through the decision-making of people sitting in my seat — people who are going to be spending money or borrowing money.

That would say we are about 10 months from seeing a recession. It doesn't mean it's going to be 10 — it could be 17 like it was in 2008. So that lag, I think, is deceptive. And every other time — every other historical period when the lag was happening — we had a similar dynamic, similar articles, and newspapers like The Wall Street Journal or Newsweek basically saying, “No, the economy is good. Some people are worried, but it's going to be fine.” It happened in 2007 and in 2000. There's nothing about what's happening now that is actually that different other than one main thing, which is the pandemic. The pandemic was singular.

If there's no recession, it's because of the pandemic and polished response related to the pandemic.

I think that's the primary mitigating factor. If I look at the math of it, there were trillions put into the economy, you can argue five-to-seven trillion. And that basically has to burn off before there'd be a recession. And this is why the Fed has interest rates raised so high: They're trying to prevent more inflation. So when I get down to the bottom line, it's not a question of what is going to cause the recession. Everybody's asking the wrong question. I think the question is: What's going to stop a recession? 

Because there's a recession after every rate hiking cycle in the history of rate hiking cycles, except for one. That was in 1996. There should have been a recession, but there wasn't because the Berlin Wall had fallen and the end of the Cold War caused a massive peace dividend, and that kept the economy out of a recession. So what's the equivalent to the end of the Cold War that would stop a recession? Because that's the only reason there wouldn't be a recession, which is something stopped it. The norm is a recession.

Isaac Saul: Just to sort of key in on this, it sounds like a primary signal that you're looking at is the interest rate signal, right? That seems like a core component of what's driving you to predict this incoming recession.

Ben Miller: Yeah, it's funny because everyone is looking for indicators, but the most consistent leading indicator of a recession has been interest rate hikes. And there have been interest rate hikes, there’s no question about that. And in the dozens of recessions after rate hikes, except for one clear example where there wasn't a recession after the Berlin Wall fell, there was — it just lagged. 

So you'd have to believe that the policy response to the pandemic, which was the CHIPS Act and the Inflation Reduction Act and all of those acts basically are enough to support the economy through this transition.

Isaac Saul: Got it. So from your perspective, in broad terms, how would you describe this economic moment that we're in? I think this dovetails into my world, which is more politics oriented, but I do think there is a really interesting debate happening right now about “Bidenomics” or the Biden administration's economic record. I'll just broadly lay out some of the kind of commentary that I see.

Pro: We have a low unemployment rate, we have wage growth, and GDP is strong. Con: We have really high inflation, and we have interest rates going up, which makes things like buying a house less affordable. And I think a lot of Americans are feeling like, because of that inflation, things just aren't very affordable right now — whether it's gas or food or a house or a car or whatever. So people have more money, but maybe they still don't feel like things are in their price range of affordability. 

And then these really traditional metrics we look at — like GDP and unemployment — seem to be pretty good. So I'd be very curious to hear how you think about where we are. Like you said, COVID is singular, and maybe it’s created a singular kind of economic moment?

Ben Miller: Yeah, it's difficult to separate out all of the policy responses before Biden and then some of the Biden economic policy, which is new. Because some of it was just more stimulus. The first bill in January [2021] was just very similar to previous stimulus bills. Then the new industrial policy is something different. And most of what we're suffering from today is from the earlier stimulus. 

I think the Biden economics, which I see on the ground, is still in its early days. I think we won't really be able to know the effect for half a decade to a decade. So conflating all of the things happening on the ground with Biden's economics is a little bit of a misunderstanding. We would be in this situation, to some extent, no matter what. It's just potentially we have more inflation and higher rates than we might have otherwise. But we essentially had to work our way through the demand shock and supply shocks from the pandemic.

Having said that, on the ground, I live in the transactions we do. We're in the market, borrowing or lending, and the data you see in the St. Louis Fed and other aggregate data is so lagging. I mean, you're talking about six to 12 months lagging from what's on the ground. I'll give you an example. 

So last September, in 2022, we started lending to multifamily developers who could no longer get bank financing. The bank financing had basically fallen off a cliff and [developers] needed to finish the projects they were doing, and they started borrowing from people like us.

And it didn't show up in Fed data that multifamily construction fell off a cliff until about May, and it really didn't become obvious to everybody until about July. So that's about a seven-to-nine-month lag. 

I say the same thing about rents. There's still rental inflation in the CPI, but on the ground there's no more — rental inflation is basically gone. I think rents or housing is about a third of all inflation, and it is close to zero at the moment, maybe even negative. And yet, if you go look at CPI print last month, it's still rising significantly. So there's just a very, very big lag.

That's why the Fed typically overdoes it both ways. They left rates low for too long, which is obvious now, and they'll leave rates too high for too long. So that's what I'm worried about: Essentially, the things I see on the ground will get more and more extreme, and by the time any institution is able to deal with it, it's going to be too late.

Isaac Saul: So I have two follow-up questions to that. One, does that mean that “real-time inflation,” what's actually happening right now, is probably lower than the numbers that we're seeing? Two, and maybe this is a 101 question, but how is it possible that you are working on data that is more accurate and up-to-date than the Fed? It seems like it would be much more important for them to have real-time, accurate data to present to the public. Why does that lag exist?

Ben Miller: So there are complex reasons and simple reasons. Let's talk about simple ones. The Fed got their data from the banks, and that basically will lag by a long time. And then partly the rental data that the Fed gets clearly comes in with rents much, much lower. And everybody in the industry knows that. Everybody can see that inflation has pretty much gone out of rental rates.

The other part is that the Fed's a little bit captured by their process. So for example, if you remember — I think it was October last year — inflation came in lower than people expected and there was kind of a rally. That was because one of the big drivers of that expectation was the way that health care inflation is calculated over this complex 12-month lagging equivalency, which is also how owner-occupied real estate is calculated. 

And so it's partly because I'm closer to the actual day-to-day work on the ground and then the Fed is ultimately a massive institution and anybody who's ever worked in or with a massive institution knows that they are by their nature extremely slow moving.

Isaac Saul: Yeah, that makes a lot of sense to me. So the first question is, do you deduce that inflation in that data that the public will start to see officially in the next six months is going to continue to trend downward? Do you think maybe this inflationary period is over?

Ben Miller: That’s what I believe. Virtually every driver of inflation is gone. What's left are a handful of wage-driven inflation attributes around the service economy. But even with that, most promotions and CPI increases happen at the end of the year. So here we are talking about all the stuff that’s happened over the last six or the last 12 months — that's not how we do it, but that's how most companies do it. 

And we've hired hundreds of people at the company. The wage market, or the labor market, is much softer — much, much softer. Our ability to hire is 10x what it was. It's incredible. It's the quality of the people, the salary expectations. I'm sure there are some concentrated areas where there are still broad wage increases, but when I think about our team's increases last year and the year before, we were [increasing salaries at] 15%. We'd been chasing engineers and having to chase salaries up for basically a decade. For me, inflation has been present throughout the economy for most of the last decade. The idea there wasn't inflation was a strange notion because I had to pay more for construction, more for wages, and more for everything. And the Fed would say there's no inflation.

So I think inflation is largely a problem of the past, and the new problems have to do with federal deficits and global instability. Whether those are inflationary or deflationary, I think that's a lot less clear.

Isaac Saul: I know a good deal of your experience and expertise is directly related to the real estate market. I'm curious how you view housing and real estate as an indicator for what's happening in the economy right now, and where you see that going in the next six months to a year. 

I know the personal, on-the-ground experience that we're talking about is a pretty interesting part of this. I'm 32. My wife and I had a brief period where we were thinking about buying a house. Friends of ours are very much at that age where they're starting families and buying houses. And the stories we hear and have been hearing for the last two years basically is that you talk to a realtor, you put in an offer, and then the next day you find out somebody came in and offered 10% over the asking price with cash and just snatched it up. 

There was this insanely hot market that felt impenetrable for a lot of middle-class people. And now it seems like the big thing everybody's talking about is just the fact that mortgages are getting so much more expensive because interest rates are going up. So I'm wondering what you feel like the current state of the real estate market is, and where it sort of fits into this broader picture?

Ben Miller: Right, I mean it goes back to the experience I had in 2008. Everybody looks back and says it was so obvious, and they make movies about it. In 2007, 2006, I had friends who were buying houses, flipping houses. The lesson for me there is if I see something on the ground, and I see it really widespread, that's real.

So, yes, the market was hot. And the market's no longer hot, right? That's an example of how inflation has come out of the market. And so, on the ground, real estate's broken into two kinds: investment real estate and consumer real estate — real estate you live in.

Homes are both, but primarily they're a consumer asset. People buy the home they can afford, and the fact that it makes returns is secondary. If you ever try to buy a home, you have a budget, and then you end up buying more than you can afford so you can get what you want. The investment side of it is more of a financial decision. You look at yields and debt and prices and basis, and that part of the real estate market is in decline. It's in recession. I mean, it's already in recession. Every major indicator in the real estate industry is down by probably 80%. 

So multifamily construction — down 80% on new starts. The amount of bank lending — 80% down. The amount of transactions — 80% down as of today. The Fed data says maybe 50, 60% down, but they're lagging probably another 20, 30%. So how does that then feed into housing? 

The 2008 experience I think was actually an aberration. Typically housing doesn't fall. It's usually fairly resilient to downturns, and that's one of the reasons why the 2008 bubble happened. People thought it was always resilient, but it actually wasn’t because of the adjustable rate mortgages and subprimes and stuff. But the point is that I don't think that housing, in terms of the homes, is very vulnerable. Maybe it is by a few percent, but if you look at the NASDAQ or Russell 5000 or commercial real estate or most S&P 500 stocks, most things from 2021 are going to be down 20-30% because interest rates are up. Even treasuries, the safest assets in the world, are down 20, 30, 40%. Basically, the asset prices of things that are priced by the cost of money are down, in a bear market.

And the consumer is mostly lagging the investment market. In 2007, the credit markets froze up in August, and it didn't feed into the broader economy and the stock market until October 2008. So the credit markets are the leading indicator, and the credit markets today are much deteriorated. It's not totally frozen, but it's in pretty bad shape. That's just why I look at that as a sign of the health of the underlying market, and it says it's a time to be very cautious. Whether or not it's a recession is secondary to what you're gonna do about it. In all circumstances today, you want to be cautious; risk is not going to be well rewarded.

Isaac Saul: So, when you say that, are you talking about individual consumers and retail investors, or do you mean more broadly in terms of the people making macroeconomic policy having a lower risk threshold than maybe normal?

Ben Miller: I think of it as a singular, but definitely the institutional investor, which I have day-to-day experience with, is very much on their heels. Equity in the institutional real estate markets are basically gone. Over the last 30 days, with the treasury yield spiking on the long end of the curve for the 30-year [treasury note], that really is the final nail in the coffin. I think that there's going to be a lot of consequences of that, but it will take a while for that to feed into the market.

I'll just give you an example. I'm on the phone with one of the most premier investment banks, maybe the most premier one, and I said, “OK, what's happening? How is the market reacting to that?” And he says, “Well, basically, we don't know yet. The market's still processing it.” And this also happened in February 2020. 

I remember, I went to my board at Fundrise and asked for the authority to short the market. Because the market takes a while to process things. It took a while to process the pandemic. Even though it was sort of obvious, prices peaked in February, even though you could find lots of stories and videos about China all through February. So it lags. People normally take the present as normal. And that normal can disappear overnight. But there's an embedded endowment effect, a psychological bias that the present is somehow a preferred state.

Isaac Saul: There's an interesting implication happening with our conversation that I'm curious to pick at. In your view, you know that when interest rates go up you can expect a recession to follow. And recessions are bad, broadly, for the American economy. I think that's a fair statement. So there's an A to B there that people are connecting that means it was wrong to raise interest rates. I've also seen in some of your investor letters you've written, and I pulled a quote here, “We do not believe the country can continue to grow at the historic pace afforded by the old (near zero) interest rates while simultaneously having to borrow at the new ones.”

I wonder how you think about that macroeconomic policy from the Feds. Was it the right call to raise interest rates? Should we bring them back down now? Is that sort of an implication to take away from your concerns? Just trying to connect the dots here, I wonder how you think about the response that we've had to this moment and the pandemic and whether we're addressing inflation the only way you can, and this is just part of the pain that we have to go through, or if there are things that you would do differently if we could snap our fingers and make you the head of the Fed.

Ben Miller: I'm not as critical of the Fed in that I think that they had to raise rates. And if I am critical of anything, it's that they shouldn't have been at zero for the last decade. They should have brought them up sooner. And then they should have certainly brought them up sooner after the pandemic. This is an example of lag, right? 

In May 2021, the world returned to normal and our rent growth in our properties across however many, about 20,000 apartment units, went from 3% a year for the previous decade and decades to 20%. There's an extraordinary increase in rents. 20%, in May, 2021. The Fed didn't start raising rates till March, 2022. It was 11 months later.

That's what I mean by lag. If anything, the Fed should actually move faster. And I think that they have moved a lot faster. I think they learned their lessons, but I'm not sure that on the back end they're going to come down as fast as they need to. I expect that they’re not going to. So for me, the present Fed policy seems like the right one. It's the past Fed policy that I'm critical of, Qualitative Easing, all the money printing, all the zero interest rates. If we do have a soft landing, then the clear takeaway was the rates should never have been at zero.

That was excessive, and a big mistake. If the Fed is right now, then they were wrong then. And I think zero-interest is much more extreme than the current rates at five. There's nothing extreme about it at the moment.

Isaac Saul: Right. Interesting. We addressed this a little at the top, but I do think your perspectives here break from some of what you might read if you open up the Wall Street Journal or Bloomberg or your typical business-oriented news websites. I wonder why that is. Why do you feel like you are coming to a different conclusion than some more “mainstream economists” who are writing about this?

Ben Miller: OK, well, let's start with, I could be wrong. Right? [laughs]... The mainstream economists are looking at all the stimulus and tight labor markets, and they're basically saying, “There's a lot of good things here.” I think, again, because I'm the one that's across the minefield. Nassim Taleb, who wrote Antifragile and Black Swan, he says “skin in the game.”

I have skin in the game, and when you have skin in the game, you behave differently, you have different opinions. I really think that's the structural difference, not that I have more information or secret insights, it's just that this is not theoretical for me. So I think that I end up taking a different position as a result.

Isaac Saul: Yeah, that makes a lot of sense. I know we're coming up on time here, but I'm curious to hear your perspective on if there are any signals or anything you could see that would change your mind here. What kinds of information, over what period of time, might flip your position here? You expected this to happen this summer. It didn't. You looked at why that was and I think the takeaway for you sounded like you underestimated this lag effect that now you feel like you have a better grasp on. So you're still expecting this to come, but what would you need to see in order for your mind to be changed?

Ben Miller: I believe either the Fed needs to start lowering rates sooner or there's some kind of surprise to the upside. So a surprise to the upside would be peace in Ukraine. Something like that, I think, would have significant positive effects for so many reasons. I think it’s not out of the realm of possibility that there's some kind of truce.

I mean, by no means am I making a prognostication here. I'm just saying there could be some sort of upside that you're not expecting at the moment. I don't think it's AI in the near term. We work with some of the tech, and it's going to be a while before there's real gains from it. I think it's mostly that the Fed is more on top of it than I'm expecting.

They've done a really good job over the last 12 months. I mean, it took them too long to get there, but once they got there I think they've really been on point. So it could be that they are more agile than they normally are, and they start bringing things down and they're thoughtful on the balance sheet side. Because they did this thing called the bank term funding program, where they basically flooded the banks with liquidity after Silicon Valley Bank went out of business. That was really clever. So it could be that the Fed just outperforms my expectations. 

I think that's the biggest likely surprise. And that would be wonderful.

Isaac Saul: Yeah, I think it would be wonderful. Ben Miller, you are the co-founder and CEO of Fundrise, if anybody wants to go check that out. Also, where can people keep up with some of your economic writing and musings? How's the best way to follow you?

Ben Miller: I'm on Twitter @BenMillerise and we write a lot of stuff on Fundrise, that's for sure.

Isaac Saul: Awesome. Ben, thank you so much for the time. I really appreciate it.

Ben Miller: Yeah, thanks Isaac.

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Isaac Saul
I'm a politics reporter who grew up in Bucks County, PA — one of the most politically divided counties in America. I'm trying to fix the way we consume political news.