11/2/14: Clues in the News – Election, Market Direction and Alan Greenspan’s Warning

There’s lots of news affecting real estate investors…and most of it doesn’t have anything to do with real estate.

In this episode, we read between the headlines to what’s in the news that real estate investors should be paying attention to.

In the broadcast newsbooth for this informative edition of Clues in the News:

  • Your anchor and host, Robert Helms
  • His dead-weight co-host, Russell Gray

In case you were in a coma the first week in November, the Republicans took over the U.S. Congress by winning a majority in the Senate and strengthening their hold on the House of Representatives.

Maybe that makes you happy.  Maybe it doesn’t.  But it doesn’t really matter how you, or we, feel about the results.  It happened.

So the next questions are…what does it mean, what happens next, and how is it likely to affect real estate investors?

The Election Results are a Barometer of the Mood of the Market

We think it’s pretty obvious the electorate isn’t happy with the state of the Union.  After all, happy prosperous people don’t vote to rock the boat if everything is smooth sailing.

So all’s not well on Main Street in spite of a booming stock market, allegedly low unemployment and continued low interest rates.

Since your tenants are part of the electorate, we’re guessing their pocket books aren’t overflowing with joy…or money…right now.  So we continue to favor affordable markets and product types, and nothing in the election or other news changes our mind.

The Maestro Sings a New Song

As we discussed in a recent blogpost on Alan Greenspan’s Shocking Confession, Alan Greenspan seems to agree that Fed policy hasn’t done much to help the real economy.  No wonder the voters threw a fit.

Also, Greenspan said that the timing of rising interest rates might be outside the Fed’s control.  If so, this affirms that it’s a good idea to grab as much cheap money as you can reasonably control with conservative cash flows and lock in fixed rates for the long term.

Last, but FAR from least, according to the Wall Street Journal, Greenspan said, “gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”

Considering gold was tanking as he was talking, it seems like Alan Greenspan is concerned about “the policies conducted by governments”.

So in spite of the dollar’s recent surge and gold’s recent decline, for long term investors, it seems that even Alan Greenspan is a fan of real asset investing.

Maybe one of the governments he was talking about is Japan…

Bank of Japan Stuns Financial Markets with Massive Stimulus

So the whole world watches the Fed announce tapering and then, to many pundits’ surprise, actually do it…all the while touting the “robust” U.S. economy (funny…seems no one told the voters, who apparently missed the memo).

Then, as soon as the Fed’s expected tapering is done, the Wall Street Journal reports Japan’s “stunning” announcement of a MASSIVE stimulus package.

According to the Wall Street Journal article, “Japanese policy makers jolted global markets” by taking “Japanese economic policy into the uncharted territory of extreme stimulus“.

How extreme?

Well, according to Bloomberg, who also published an article on the move, the Bank of Japan “plans to buy 8 trillion to 12 trillion yen ($108 billion) of Japanese government bonds per month.”

For perspective, the QE that the Fed just finished started at $85 billion per month and tapered down.  That means the Japanese QE is 27% bigger than the U.S. program at it’s PEAK.  That’s massive, especially considering that the Japanese economy is only 1/3 the size of the U.S.

The Bloomberg article quoted the chief economist at Japan Macro Advisors as saying, “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018 or risk becoming a failed nation.”

So we have a few observations…especially if you’re sitting there thinking, “What the heck does Japan have to do with my rental house on Main Street, USA?

First, we’re in a GLOBAL economy.  Just think about how much foreign money is buying U.S. stocks, real estate and bonds.  Not to mention, how many Japanese companies employ U.S. workers?  And how many U.S. companies earn profits selling to Japanese businesses and consumers?

In a global economy, when a major component (Japan is #3 behind the U.S. and China) fails, EVERYONE is affected.

Right now, no one is saying Japan will fail.  And if it did, no one knows for sure what that looks like for everyone else.  But it bears watching, which is why we are.

Also, Japan has been a major purchaser of U.S. Treasuries.  In fact, according to the Unites States Treasury website, Japan is the second largest owner of U.S. debt behind China.  If we had to guess, we wouldn’t be surprised to see some of all that stimulus end up in U.S. Treasuries.  After all, if the Fed and China are curtailing purchases, either bond prices will drop (interest rates will rise)…or someone (Japan?) will need to fill the void.

The point is that when ANY central bank prints gobs of money and buys bonds, it affects interest rates for everyone…including Main Street real estate investors.

But it isn’t just bond prices and interest rates which are affected…

Back to the Wall Street Journal article, which says that the Bank of Japan will expand its asset buying program to include “not just more government bonds, but also stocks and real-estate funds.”

In our travels, we talk to lots of Main Street real estate investors and agents.  We hear reports all the time that foreign buyers concerned about the safety of their money are parking it in U.S. real estate.

Obviously, when any central bank is printing money like crazy, smart investors in ANY nation move quickly to get into real assets. But here’s where it gets a little complicated.

Right now, the dollar is “strong” because major currencies like the Yen and the Euro are being destroyed faster than the dollar.  So any commodity denominated in dollars gets cheaper (gold, silver, oil, etc).

Worse, there’s strong sentiment, if not substantial proof, that nearly every asset market is largely manipulated by central banks, which makes investing in many asset classes a risky business.

So, in addition to the cultural appeal of real estate for Asian investors, even die-hard paper asset investors are looking at real estate as a solid place to store and build wealth.

In addition to foreign capital moving into U.S. real estate, lending is starting to loosen up both in government and private loan programs.  This means more purchasing power moving into real estate.

We think this is bullish for real estate prices in the near term, though it will be mitigated by the weakness of U.S. home buyers.

But before you get too excited about all the equity happening to you, remember to pay attention to rents.  Because right now, asset values are growing faster than incomes.  This means housing is becoming less affordable for both renters and home buyers.

The last time this happened, lots of us made tons of money on appreciation (get ready, because equity is happening again), but real estate quickly went from being a sound investment to simply being another hot money wave to ride.

We’re not saying don’t ride it.  Quite the contrary.

Just remember to structure your deals so that when the wave goes out again (and it will)…that you can hold on for the long term.  When the tide goes out, everyone can see who’s been swimming naked.

Meanwhile, we’ll be here watching the headlines for Clues in the News.

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