It’s hard to watch the financial news these days and not get the feeling the fragility in the financial system we’ve been concerned about … is starting to show.
We grew up in California and learned as kids how to react to an earthquake …
Get away from glass and hide under the shelter of a desk or doorway … because stuff was probably going to start falling.
Fragile things shatter in an earthquake. They can’t handle the pressure. The key to safety is to get to the sturdiest parts of the structure until the shaking subsides.
Of course, when it’s clear and bright … the windows are the most fun. You can bask in the sunshine of hope and opportunity.
But when the foundation is shaking, it’s time to find shelter … FAST.
You’ve probably noticed stock prices slipping. Even the fabled FAANGs (Facebook, Amazon, Apple, Netflix, Google) are ALL now in bear markets.
So what? After all, we’re real estate investors. What do we care about stocks?
We don’t. At least not directly. But all these markets are like gauges on our financial dashboard … and when they start flashing red, it’s wise to investigate.
This is a newsletter, not a seminar, but let’s see what we can reason together in the next few minutes about what’s shaking in the financial world … and where it might be headed.
The first place to look is the most important financial market there is … bonds.
Of course, real estate investors should watch the bond market for clues about the direction of interest rates.
But while interest rates are interesting … credit markets are what REALLY matter.
That’s because credit markets both create and price the currency which fuels everything else.
Credit markets are like the big reactor core in the Star Wars Debt Death Star. They’re both the fuel source and the weak spot at the same time.
To take the metaphor a conspiratorial step further … credit markets are also the source of the Emperor’s power.
And as Peter Schiff persistently points out … when the original Debt Star blew up in 2008, the Emperor wasted no time in building a bigger, deadlier version.
The obvious implication is the next explosion could be a LOT bigger.
Now in a plain vanilla stock market dip, some (usually innocuous) event spooks highly-leveraged paper traders. They sprint to the exits … and stock prices fall.
But then they calm down and the next day they’re back out there snapping up bargains. This “buy-the-dip” strategy has been the name of the game for several years.
But the longer-term downtrend suggests something is different this time. Perhaps worries the Debt Star is running out of power?
The Bitcoin crowd has been chanting “buy the dip” also … but here too, it seems the Farce is strong … and the downtrend has more gravitational pull than past dips.
Clearly, nervous stock investors aren’t piling into Bitcoin for safety.
Of course, the usual safe space for snowflake stock investors to hide is bonds.
But if gobs of money were pouring into bonds … interest rates would be falling.
While rates have certainly moderated the last few weeks from their upward trend, it’s hardly a serious decline.
So … nothing happening now has us disagreeing with our recent conversation with David Stockman on the direction of rates.
And we certainly would NOT be using short-term debt on tight-cap properties hoping to re-fi to lower rates in a year or two! If that’s your plan … be careful.
Then there’s oil. You’ve probably heard the price has fallen. We’re guessing your tenants like it at the pump. Businesses too.
Obviously, energy costs … just like interest and taxes … RAISE the costs of operating a business, a household, and an economy.
President Trump’s a business guy. So to no surprise he prefers ALL three lower … so more profit gets to the bottom line.
But oil … like gold … is MUCH more than just a commodity.
Both have significant connections to the future of the U.S. dollar … and all three are powerful tools in geo-politics.
Just last year, we pointed out China’s noteworthy moves with both oil and gold.
And just because things are moving slowly, doesn’t mean they aren’t moving.
All that to say … we’ve been paying close attention to this for several years … and it seems to us things are picking up speed.
We keep them on our radar … and yours … for TWO reasons …
First … major financial events often seem to show up suddenly and shock the world … but they usually had a long and obvious (in hindsight) build up.
We’ve learned to look further out so we have more time to re-position. After all, the blessing and curse of real estate is it moves slowly.
So real estate investors are wise to pay attention to early warning indicators … and then rearrange portfolios to both mitigate risk and capture opportunities.
Second … when economic and financial earthquakes first tremble … it’s smart to seek shelter under sturdy structures.
For that reason, we think it’s likely to see MORE money moving into real estate in search of stability (and tax breaks).
But just because real estate is stable doesn’t mean YOUR portfolio is.
As we learned in 2008, bad portfolio structure crumbles when hit with tremors from a Debt Star explosion.
However, when those market forces clean out weak portfolios, there are bargains galore … for those who are ready, willing, and able to take advantage.
Ironically, consumers are tapping home equity like it’s 2007. We’re guessing holiday shopping will be solid. But it won’t make those borrowers wealthier.
Savvy investors are grabbing equity too … and using it both to purchase strong cash flows … and to hold in reserve.
It’s always good to have some cash if market tides turn.
YOUR mission is to be among the aware and prepared … and NOT among the unaware and unprepared. It could be a good time to increase liquidity.
Are we saying another crash is coming? No. But we can’t say it’s not.
Right now, there are tremors.
So while you’re thinking about your goals for next year … including how to invest your educational time and money …
… we encourage you to make getting better educated, better connected, and better structured a top priority … so IF things turn quickly …
… YOU can sit safely inside your reinforced portfolio chomping on popcorn and watching the fireworks.
And if the fireworks turn out to be a dud … you’re really no worse off for being prepared.
Until next time … good investing!
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