11/24/13: Follow the Money – Clues Where the Economy is Headed

John Denver once sang, “Life on the road is kinda laid back.”

Not for us.  But thank God we’re real estate guys.  For you youngsters, this is a reference to a classic John Denver tune, Thank God I’m a Country Boy.   You know…John Denver?  Rocky Mountain High?  Blond hair, little boy haircut, high voice?  No?  Just stay up late one night and watch some infomercials about 70′s music….

Anyway….

This episode is from yet another out-of-office experience for The Real Estate Guys™.  This time, we’re in the fabulous city of New Orleans for the 2013 New Orleans Investment Conference.  We attended this event last year and it was so much fun, we came back this year.  The to-die-for grilled oysters at Drago’s may have influenced our decision.  ;-)   We’ll be back in 2014!

For now, in the mobile studio-in-a-box for this jazzy episode of The Real Estate Guys™ radio show:

  • Your Duke of Discussion, host Robert Helms
  • His Dizzy co-host, Russell Gray
  • Best selling author and radio personality, Charles Goyette
  • Top performing mutual fund manager, Frank Holmes
  • New Orleans Investment Conference organizer and precious metals commentator, Brien Lundin

When you walk around the streets of New Orleans, which is VERY fun to do, you’ll see (among many things) collections of jazz bands performing.  It doesn’t take long to realize that the key to producing great music is the diversity of the ensemble.  Strings, winds, horns and percussion – and variations of each of those – all coming together to create a sound that’s unique to jazz.

We’ve been real estate guys for a long time.  And pre-mortgage meltdown, we were narrowly focused on all things real estate.  We lived, like many real estate investors, in a bubble (pun intended) – only seeing things from one point of view.  It’s like a one instrument jazz band.  It’s okay, but not as rich as full complement of instruments.

After being blind-sided by the crash (yes…we know we’re in good company, but that’s not much consolation when cleaning up the mess), we made a concerted effort to expand our minds by studying foreign markets, other asset classes, and trying to understand how global, economic, and yes, even political, factors affect real estate investing.  It’s something we thought was missing from most real estate related commentary and we’ve tried to fill that gap.

Along the way, we’ve met and interviewed many amazing and smart non-real estate people, like Peter Schiff, Herman Cain, Mike Maloney, Mark Skousen, Steve Forbes, and many more.

We’ve learned a ton.  And we’d like to think we’ve helped expand the perspectives of real estate investors around the world.  After all, the podcast version of the show is heard in over 180 countries.  Amazing.

But a funny thing happened as were preparing to go back to the New Orleans Investment Conference this year.  Conference organizer, Brien Lundin invited us to speak not once, but twice, on real estate. We’re obviously used to talking about real estate, but not to resource investors.

Our first talk (with the help of Summit at Sea™ faculty member John Turley) was about offshore real estate investing.

Our second talk was an updated version of a presentation we did at Freedom Fest 2012 on using real estate to short the dollar.  We expanded the discussion to include the idea of Real Asset Investing™ in the face of a fragile dollar.  You’ll be hearing more about this in the months ahead.  We think there’s a bubble brewing and the Real Asset Investing™ strategy is designed to not only provide protection, but produce profit.

Both talks were very well received even though the New Orleans Investment Conference isn’t really a real estate conference.  It’s more about resource investing (precious metals, mining stocks, oil and gas, etc.).

So why were The Real Estate Guys™ invited to speak at the New Orleans Investment conference?

Apparently, just as we’ve seen the benefit of studying other asset classes, the non-real estate investing community is beginning to see the wisdom of real estate as an investment, which to us, makes perfect sense.  After all, isn’t real estate the ultimate resource?

Of course, while we at the conference, we attended lots of sessions.  In addition to all kinds of investing experts, there were engaging panels and debates featuring a pretty well known cast of characters including Ben Carson, Charles Krauthammer, Ron Paul and our 2013 Summit buddies Mark Skousen and Peter Schiff (Peter’s coming back on our 2014 Summit at Sea!).

Even though you might think these guys all sing from the same songbook, there was quite a bit of disagreement among them, which we thought was helpful (and highly entertaining).  Next year, former Fed Chairman Alan Greenspan will be there.  We’re guessing that one will be entertaining too!

After listening to the sessions, we came up with the theme of “follow the money” for this episode.  And as much as we’d like to interview EVERYONE at the conference, everyone was very busy, and with only one hour for the episode we focused on three guests.

First, we talk with first time guest, Charles Goyette.  Charles is the author of the best-selling book, The Dollar Meltdown.  He just released his latest book, Red and Blue and Broke All Over – Restoring America’s Free Economy.  Charles is also the co-host of a daily radio commentary featuring legendary former Congressman and Presidential candidate Ron Paul.

You can probably tell by the book titles and his association with Ron Paul, Charles is a free market, small government, individual liberty guy who’s concerned about the direction of the U.S. economy.  While he doesn’t think America will fail, he thinks there are some choppy roads ahead.  He says the answer is to free the markets from overly burdensome government intervention.

One of the best practical tidbits he shares is how to know a bubble from a boom.  It’s quite simple he says.  Just follow the money that’s driving the growth.  Is it from production or from printing?  If economic activity (measured in people working, products and services being produced) is driving the growth, it’s a boom.

However, if monetary stimulus (i.e., quantitative easing, artificially low interest rates, financial speculation) is the source, then get ready…it’s a bubble.  And he contends that while the Fed might attempt to mitigate or avoid a bubble bursting, ultimately the market is bigger than the Fed.  So it’s wishful thinking to believe the Fed can overpower market forces to stop a bubble from bursting.

Obviously, bubble watching is important to real estate investors.  When a bubble bursts or just passes lots of gas, it can be very disruptive to job creation, interest rate stability (especially if you have adjustable loans), and availability of capital to finance your real estate purchases and sales.

The theme of Charles’ new book is that freedom creates prosperity.  That connection is less obvious, but equally important (if not more so) than how to recognize a bubble before it bursts.

Charles Goyette’s contention is that when people are free to innovate and produce, and are left enough of the fruits of their labor and risk taking, that they will become highly productive.  In turn that high productivity creates abundance, affordability and excess capital to be re-invested in greater production and efficiency.  All of that means jobs, and the purchase of all the things necessary to build and maintain a thriving community.  Best of all, the prosperity extends farther down the socio-economic ladder to the working class (our tenants).

All of that bodes well for the local real estate market.

So, if Charles is right, a savvy real estate investor can look at the “freedom factor” of any given market and index its future growth prospects to its relative freedom factor strength (compared to other markets).  Later in the show, Frank Holmes talks about this exact phenomenon in Texas, which is home to some of the fastest growing cities and strongest real estate markets in the U.S.  So maybe Charles is on to something!

Speaking of Frank Holmes…

Frank is the next guy we talk to.  Long time listeners may recall our first interview with Frank a few years back.  We were impressed with his vast and amazing knowledge of global markets and the performance of his managed funds.  Now, here we are three years later, and Frank is still sharp as a tack, his funds are still top rated, and he’s as positive and optimistic about the future as anyone we’ve met.

Frank also takes up the theme of “follow the money”.  He says there’s big money on both sides of the political debate (big government versus small government) and both are super smart.  Dumb people seldom accumulate money and those that do don’t manage to hold onto it very long.  So whether or not you like their politics needs to be set aside so you can objectively ask, “What is the smart money doing and WHY?”

Did we mention that Frank’s a smart guy?

He goes on to give us important insights into the impact of the Unites States new found position as an energy producing powerhouse.  We’ve been following the oil and gas business for multiple reasons (local market job creation, support industry job creation, impact of production on absorbing inflation and slowing the dollar’s descent) and thought we were pretty sharp.

But Frank adds a new perspective we hadn’t previously considered.  Did we mention that Frank’s a smart guy?

He explains to us that the American economy has a HUGE competitive edge over foreign markets because of our cheap energy.  That’s right. CHEAP ENERGY.

Yes, we know that $4 gas doesn’t seem cheap.  But that’s an American paradigm.  Canadians pay $6 a gallon.  And it can be worse in other parts of the world.  And then there’s natural gas, where the edge is even bigger.  Foreign markets can pay as much as 3 times as much as American citizens and business.  Yikes!

“So what?” you might ask.  As did we.

The “so what” is that cheaper energy mitigates some or all of the disadvantage of cheaper labor.  Hmmmm……

We’ve been concerned that a falling dollar means rising (denominated in dollars) commodity prices (like food and energy, which are conveniently left out of the Consumer Price Index…but that’s a different rant…).  Rising prices combined with soft labor means tenants can afford less rent – and certainly are going to be resistant to rent increases.

So while Frank didn’t persuade us that we shouldn’t be prepared for a soft rental market, he did move us from “worried sick” to “moderately concerned”.  Maybe with a little more time, we could get up to “cautiously optimistic”.

As for Frank, he’s very optimistic about the U.S. being competitive in global markets.  We hope he’s right because that means less downward pressure on labor, which of course is positive for rental income. :-)

Last on our dance card is Brien Lundin.

We’ve really enjoyed getting to know Brien and his team.  They’ve been producing the New Orleans Investment Conference for many years and our interactions with him have been great.  He’s a real pro and is well respected in the investment community.

When he’s not producing the New Orleans Investment Conference, Brien writes a newsletter on precious metals.  We don’t talk too much about metals on this episode, but you can expect to hear more from Brien on The Real Estate Guys™ radio show, podcast and blogs.

For now, we reflect on another successful conference, the integration of real estate and resource investing, and we look forward to next year’s 40th anniversary New Orleans Investment Conference which will feature former Fed Chairman, the legendary Alan Greenspan.  THAT will be amazing.  We can’t wait!

Meanwhile, listen in to this episode of The Real Estate Guys™ radio show…brought to you from the floor of the New Orleans Investment Conference.

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