Clues in the News — Bears, Bailouts and the 3-Headed Monster

The global shutdown from COVID-19 concerns have spun headlines that scream of businesses small and large under EXTREME distress. 

This leads us to ask a question you’ve heard us ask before … is it possible to see the forest for the trees?

We’re trekking into the headlines to discover bears, bailouts … and a 3-headed monster. 

In this episode of The Real Estate Guys™ show, hear from:

  • Your intrepid host, Robert Helms
  • His imaginative co-host, Russell Gray

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Finding Clues in the News during COVID-19

With so much going on today … it’s time for another edition of clues in the news!

When the world changes, investing strategy changes. With COVID-19 disrupting economies, financial systems, and daily life, we’re experiencing something like nothing we’ve seen in modern history. 

Sheltering in place might protect you from the virus … but taking the same wait and see approach to investing is like pulling the sheets over your head while the house burns down. 

Now is not the time to be complacent. 

Even though there are a lot of things to be concerned about in the news right now … there’s also a lot of things to be excited about. 

Rent and unintended consequences

The big question on everyone’s minds is what happens when the rent comes due. When $81 billion in rent payments come due … and many Americans can’t pay … what do landlords and tenants do?

Several governors have put moratoriums on evictions of any kind for a month or several months. 

But that leaves many real estate investors and property managers thinking, “Is that just giving everyone license not to pay rent?”

We can’t say what’s going to happen … but we know that this situation is going to change things. 

What we can say is that a theme that we are going to see throughout the rest of 2020 and beyond is going to be … unintended consequences. 

At the end of the day, everyone is under intense scrutiny and under tremendous pressure. Sometimes, this can cause what we call an “icy road” reaction. 

If you’ve ever lost control on an icy road … then you know that humans tend to overreact. Then that overreaction creates another reaction that you overreact to again. 

The result … you’re fishtailing out of control. 

One of the biggest lessons YOU can take as an investor is to stay calm, divorce yourself from your feelings politically, and look at what is really happening. 

Only then can see what choices you are going to have to make and what aspects are in your control that you can respond to. 

As this first month comes and goes, it may be a good idea to take a look at your rental portfolio, see the effects … and make plans and predictions based on the clues you see. 

Mortgages and the Fed

Many of the same lessons apply to the folks who can’t make their mortgage. But some unique considerations and clues lie here, too. 

The mortgage industry is seeking billions in federal help as homeowners stop paying their loans. 

Here’s an industry that was at the epicenter of the last downturn … and the perfect example of those unintended consequences. 

If the tenant can’t work, they can’t pay. And if they can’t pay you, you can’t pay the mortgage. 

The challenge is in the Fed’s zeal to keep interest rates down and to keep people borrowing to prop up real estate prices, they’ve stepped into the market as an artificial player. 

They’ve purchased around $183 billion of mortgage-backed securities … which means they bid up the price of securities to push interest rates down. 

That act, which the Mortgage Banking Association seems to have not anticipated, now means they are getting margin calls … having to come up with lots of cash. 

We don’t think the Fed went in planning to blow up the mortgage banking business … but the unintended consequences mean they might. 

Keeping an eye on the Fed and on bonds can yield valuable clues as we move forward. 

The goings on in oil   

What about what’s happening in oil?

When oil prices are lower … then there’s less incentive for producers to pull the oil out of the ground and send it anywhere. At these prices, it’s difficult to make money. 

But when oil prices are low, it can be a boon to your tenants. 

The reason oil is low and available is because no one is consuming it. We’re not going to work. Airlines aren’t flying. Demand is down. 

But Russia, by refusing to participate in OPEC has driven the price down, too. 

That’s going to hurt the U.S. … which just achieved energy independence in terms of being a net oil exporter on the backbone of shale. 

But here’s the dirty little secret … most of that was driven by debt. The shale industry is horribly in debt … and that debt is all potentially in danger of going bad. 

We’ve been very concerned about the level of debt in the oil industry and whether or not the industry would actually become profitable enough to be able to service it without being able to roll it over. 

This is one that you should be paying attention to … not just for the oil jobs and not just for the cost of production and cost of living for your tenants. 

The industry hasn’t broken yet, but it’s definitely showing signs of weakness. 

Now, the backside of doom and gloom is opportunity. And if you can secure cash flow and be on the right side of events as they happen, opportunity can be found. 

For more clues in the news … listen to our full episode!

More From The Real Estate Guys™…

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The root of the real crisis is being exposed …

It’s no secret we’re a couple of older dudes who got creamed in 2008. But like the economy, we bounced back. Unlike the financial system, we got the lessons.

Read that again and think about it.

If you got on board the real estate gravy train after the last crisis, congratulations … and welcome to your first crash. It’s looking to be a whopper.

For those who went through 2008 like we did, welcome back! We’re about to take a wild ride … and it should be a THRILLER.

The big message is: this is NOT the time to take a wait and see approach to portfolio and opportunity management. Things are moving too fast.

Investing intelligence is a blend of emotional control technical knowledge, and intellectual discipline.

Stress in the real world is where you test your skills. And yes, it’s a little unnerving.

Anytime the stakes are high and you’re pressed to edge of your confidence, it’s tempting to hide, deny, procrastinate, or complain about things you can’t control … to the detriment of diligently working on the things, you can control.

So rather than dive into the weeds of the plethora of clues in the news … they’ll always be there … we think it’s a good time to do some diagnosis.

After, all prescription without diagnosis is malpractice. You can’t know what to work on if you don’t understand the root of the problem.

In this case, we think there are two primary roots of the current crisis … one you can control, and one you can’t.

Let’s start with the root cause of the current crisis that you can NOT control.

It may or may not be interesting to you … and you might not agree with the premise … but be patient and work through it.

It’s arguably the most obvious yet misunderstood contributor to the malaise the coronavirus crisis is exposing.

In one word … debt.

Absurd, insane, unfathomable and unsustainable levels of debt … which has spread like a cancer throughout the global financial system.

The current metastasization started in 1913 with the founding of the Federal Reserve system, which gave bankers and politicians the ability to create unlimited amounts of debt.

The Federal Reserve Act and the 16th Amendment also created the income tax and the IRS, effectively equipping the government to use the productivity of the people to make the debt payments on all that debt.

Armed with this powerful new temptation, it took less than two decades to blow up a bubble known as the Roaring Twenties.

The expansion of credit led to mass consumerism, a stock market boom, and the nation’s “wealth” (based on inflated asset values) to double from 1920 to 1929.

Of course, the party ended in spectacular fashion leading to the Great Depression.

Sound familiar?

When debt bubbles implode, asset prices collapse … and the FIRST place this symptom manifests is in the stock market.

The Great Depression led to an unprecedented consolidation of power when President Franklin D. Roosevelt declared a “war on poverty” and gave America “The New Deal”.

So before there was World War II, FDR was already a wartime president.

Wait, we’re having deja vu.

FDR’s New Deal included Social Security, a proliferation of agencies and regulations, and the effective confiscation of the citizens’ gold.

FDR’s initial phase-out of the gold standard allowed the Fed to print virtually unlimited amounts of dollars.

In fact, the Chairman of the New York Fed admitted in a 1946 speech that there was no need for taxes to pay for anything because the Fed could print unlimited amounts of dollars.

He confessed the only reason for taxes was to “express public policy in the distribution of wealth and income” and in “subsidizing or in penalizing various industries and public groups”.

In other words, taxes allow the government to pick winners and losers in what is supposed to be a “free” market.

Wait, we’re having deja vu again.

Events like the Civil War, the Panic of 1907, the Great Depression, and 9/11 … demonstrate how crises always result in bigger, more powerful government and less personal freedom.

We’ll leave it up to you to decide if big government and less freedom is good or bad, but the facts are indisputable.

After 1933, it was illegal for Americans to own gold, while foreign holders of U.S. dollars and bonds could redeem dollars and U.S. bonds for physical gold.

But when the world realized the Fed was printing WAY more dollars than there was gold, it became obvious that the “official” gold price of $35 was too low.

So the world, led by French President Charles de Gaulle, started showing up at the U.S. “gold window” to redeem paper dollars for real gold.

By 1971, the U.S. gold reserves had dropped from 20,000 tons to less than 9,000 tons with no end in sight to the hemorrhaging …

… so President Nixon abruptly “closed the gold window” … effectively defaulting.

Of course, Nixon knew the dollar would collapse causing inflation.

So in an attempt to preempt inflation, Nixon also made it illegal for private businesses to raise prices or pay higher wages.

Yes, history buffs, in the “land of the free”, the government, unilaterally and without warning, mandated price and wage restrictions to private businesses … to “protect” everyone.

Of course, price controls didn’t last because they don’t work. More recently Venezuela tried it, and it didn’t work there either.

The Venezuela government said stores couldn’t raise the price of things like toilet paper. So when you showed up at the store, there wasn’t any.

To find toilet paper in Venezuela, you had to buy it on the street … and it cost a lot more than the official price.

Wait … we’re having deja vu again … again. That’s so weird.

So back to the dollar collapse after Nixon’s default …

In just a few years, gold went from $35 per ounce to $800 per ounce. Or more accurately, the value of the dollar crashed against gold.

Dollar holders smart enough to redeem their paper dollars for gold early did well. Those who didn’t, not so much.

By now, you may be recognizing some eerie parallels between the past and present. History doesn’t always repeat itself but often rhymes. That’s why we study it.

The point is these events kicked off an entire 49-year history … from 1971 to 2020 … of unhindered, exponential, and unsustainable expansion of debt.

If 49 years rings a bell for you, go look up the biblical concept of jubilee. It’s weird how all this is unraveling after 49 years. Probably just a coincidence.

(For more perspective on how the past helps predict the future, consider investing in our Future of Money and Wealth programYou’ll probably wish you bought it two years ago, but better late than never.)

Of course, YOU can’t stop Uncle Sam from spending trillions of dollars …

… or the Fed from printing trillions to fund government spending, push down interest rates, buy up toxic assets, and pump up asset values.

They’ve already begun doing all those things. The big question is whether the dollar can carry the load. It survived the 70s … mostly.

Time will tell what happens this time.

For now, it’s important to realize what the Fed is doing … and what history says is likely to happen when they do. Being confused or afraid isn’t a wise option … it only feels safer.

It’s like standing at the beach watching the distant tsunami coming toward you … it seems slow at first … then it’s on you. It can be hard to believe and scary.

But turning around so you can’t see it won’t make it go away.

So today, the COVID-19 coronavirus has stopped the economic heartbeat of the globe. Cash is not flowing, which means debt service is going to become a real problem real fast.

Remember, back in 2008, it only took a relatively few sub-prime mortgage borrowers to miss payments … and the financial system nearly collapsed.

The current debt crisis is probably going to be a LOT bigger. It could easily be The Real Crash Peter Schiff has vociferously warned about.

Of course, if the world had less debt and more savings, we could all shelter in place for a few months and everything wouldn’t unravel.

But the world is awash in debt, has little savings, and without productivity to service all the debt, a chain reaction of defaults seems virtually certain.

The government, the Fed, and the banks all appear to realize the gravity of the situation … and unlike 2008, they’re sprinting to get in front of it.

It really all comes down to the Fed and the dollar. The Fed is willing to print as many as needed to buy up everything and send everyone money.

It seems like either the debt will go bad (deflation) or the dollar will (inflation) … or both. And it’s all out of your control.

So what’s a real estate investor to do?

We’ll take that up in Part Two. Stay tuned …

Podcast: Clues in the News – Bears, Bailouts and the 3-Headed Monster

Dire headlines scream of businesses – small and large – under EXTREME distress because of the global shutdown.

Is it possible to see the forest for the trees?

Tune in as we trek into the headlines to discover bears, bailouts … and a 3-headed monster.


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

Crisis Investing Lessons — Navigating Uncharted Waters

Crisis is part of the investment game … and while the COVID-19 virus crisis is unlike any we’ve seen in modern memory, it’s not the first … or the last … crisis you’ll face as an investor. 

The good news is that history shows us two things. 

One … the human race will survive. And two … the backside of all busts is a big boom. 

Until the crisis passes, we all need to find a way to survive … physically and financially. 

Today, we’re talking about how lessons learned from the 2008 crisis can be applied to what we face today. We are focusing on how you can not only survive … but also thrive!

In this episode of The Real Estate Guys™ show, hear from:

  • Your thriving host, Robert Helms
  • His surviving co-host, Russell Gray

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Think and do

With so much going on in the world today, it is easy to get overwhelmed. 

Today, we’re talking about how to manage life when you find yourself in uncharted waters AND what lessons learned from previous crises can do for us in our current situation. 

We’re not here to tell you what is right and what is wrong. We’re here to talk about the facts and our own experiences. 

We haven’t seen everything … but we’ve seen a ton. We don’t know all the answers … but we have gotten pretty good at asking the right questions. 

One of our favorite sayings is, “Think and do is better than wait and see.” 

When there’s a crisis, the tendency is often to hunker down and wait to see what happens. But waiting and seeing has economic consequences. 

The big question now is …  what should we be thinking about?

Understanding what is happening in the market

Calmer heads always prevail. 

As real estate investors, we have a huge advantage. Markets like the stock market … or even the metals market … move instantly. That’s not true with the real estate market. 

If you look at what has happened in the stock market, with equity prices, and in bonds compared to what has happened in real estate … you’ll see a drastic difference. 

People who invest in stocks are seeing a market drop that appears already worse than the Great Depression. But your mortgage or your rent haven’t changed. 

That means that the person on the other end … the landlord or mortgage holder … their income hasn’t changed either. 

Now, that doesn’t mean it won’t. But the difference between now and 2008 is that in 2008, lenders were not ready to negotiate. They couldn’t see the ripple effect that would go through the financial system. 

But today, the Fed clearly sees it. Their reaction tells you they are bringing out the big guns early … and lenders are already beginning to contact people about ways to work things out. 

Even with all this intervention, there is still a chance that real estate investors will run into a cash flow problem … but the advantage is that real estate moves slower. You have more time to react now to future possibilities. 

Remember, the stock market doesn’t really reflect what’s going on in the economy. Stock prices are reacting to an anticipated slow down of corporate profits. 

There is plenty of cash out there. That’s not the problem. The problem is that it isn’t flowing. 

We’re basically watching an economic heart attack take place. It doesn’t matter what the blood volume is. The concern is that the blood isn’t flowing. 

So, you have to look at what is happening right now and make adjustments. Now isn’t the time to be a deer in the headlights investor. Now is the time to think and do. 

Making smart choices for your portfolio

We think that everybody listening in is going to want to own more real estate 10 years from now than they own today. 

Some of you may see opportunities … but you don’t have enough resources to take advantage. 

You can see bargains … quality assets going on sale. What do you do?

That’s why we are big proponents of syndication. 

We’re hearing on the street already that lenders are beginning to back off on their lending. If that is the case, it’s going to be a resurrection of private equity. 

When money goes looking for a safe haven after a nauseating ride on the Wall Street roller coaster … it often ends up in real estate. 

These investors are either on the equity side buying into real estate deals or on the debt side buying private mortgages and getting the yields. 

You have to be smart … but there is going to be a lot of money coming into real estate because of what’s happening. 

If you’re well-positioned and you underwrote your property correctly and you have a good lending partner, you’ll probably be ok. 

If you didn’t … well, there are going to be people who have to give up some real estate. 

If you’re in a good position, syndication can be a great way to get you ready to buy when those who need to sell make their move. 

And don’t forget that this doesn’t apply to just real estate. Real assets like metals and oil will have good deals, too. 

One of the biggest lessons we gleaned from 2008 is to keep your finger on the pulse of your markets and niches. 

Wherever you are in the world, whatever niche you’re in, whatever market you’re in … lean on your tribe. Enhance your participation in whatever forums or virtual meetups you have the opportunity to be part of. 

The closer you get to the front lines … the more real-time your information is … and the better you will be able to make decisions. 

For more lessons learned on investing during a crisis … listen in to the full episode!

More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

What the Coronavirus Means for Real Estate Investors

The COVID-19 pandemic and panic is well on its way to eclipsing the Great Financial Crisis of 2008 and the Great Depression of 1929 as the most devastating economic event in modern human history. 

But humanity has a way of surviving even the greatest calamities … odds are we’ll survive this one too. 

So, we’re taking a look at the current crisis through the lens of things we’ve learned from the past. 

We’re discussing where future opportunities might be and ideas for what investors like YOU can do when facing uncertainty. 

In this episode of The Real Estate Guys™ show, hear from:

  • Your keeping calm host, Robert Helms
  • His carrying on co-host, Russell Gray

Listen


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Broadcasting since 1997 with over 300 episodes on iTunes!

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Economic issues and COVID-19

There’s so much going on in the world. COVID-19. The Fed lowering interest rates to zero. Social distancing. Sheltering in place. 

Today, we’re going to be discussing one of the biggest questions our listeners have been pelting us with … what does coronavirus mean for real estate investors?

Let’s start with this truth … it doesn’t matter what we think. All that matters at the end of the day is what you think. We’ll just share some food for thought. 

Remember, we don’t give advice. We give ideas and information. 

What we have is our own perspective … and that doesn’t mean we are right. Right now, some of our very good friends have polar opposite opinions and positions on this topic. 

But that’s why we can talk about it! We can all respectfully disagree and share ideas so you can make your own decisions. 

We’re going to focus mostly on the economic issues surrounding COVID-19. 

From an economic perspective, this situation is what we call a Black Swan … something nobody saw coming. 

The first thing we have to do is accept that we can’t do anything about the coronavirus. It is out of our control. But we can control how we respond. 

There can still be opportunity

The fact of the matter is that when certain parts of society go away … even temporarily … it has a lasting impact. Those things don’t come back quickly. 

It slows the velocity of the economy. Even the Fed can’t speed that up. All they can do is try to increase the volume and hope the volume compensates for the velocity. 

We saw a bunch of money run from the stock market … which tanked … and that has an impact on people, especially retirees. 

That money moved into bonds, which drove interest rates way down … which actually created a huge opportunity for real estate investors to lock in mortgages at record lows once the crisis abates. 

But the flip side is that the Fed is printing a lot of money. The government is going into debt … and that changes the already frail economic system. 

The flip side of chaos, of course, is opportunity. There’s always opportunity to help the situation, because making money is a byproduct of providing solutions in the marketplace. 

SWOT analysis, potential outcomes, and diversity 

With a situation like this, there are short-term, mid-term, and long-term effects. 

Short-term there is a demand shift for certain types of real estate. Most month-to-month tenants aren’t moving over the virus. 

In fact … big picture … those tenants are probably staying put, provided they have income. If they were thinking about making a move, they are probably staying put. 

Now is a good time to do a SWOT analysis … strengths, weaknesses, opportunities, and threats … of your portfolio. 

Look at each individual property and ask yourself, “Where does the money come from? Where do the tenants work? What drives the local economy?”

Looking at the answers to these questions, you can make an educated prediction for what is going to happen in that sector in the future. 

You may even be able to make some moves now to reduce your risk or exposure … like refinancing debt, lowering costs, or tightening up expenses. 

Now, the challenge is that everybody is instinctively cutting back. That’s part of how we go into recession. 

If we cut way, way back and everybody withdraws … we’re going into depression. 

Then the question is, does the Fed and the government have enough firepower left to prevent that from happening … or are we about to go through a gigantic economic reset?

For those who have all their investment in stocks … it’s a scary time. The nice thing about real estate is that it’s stable. Stock investors might think it is boring, but it’s stable.

More of those investors are going to be looking to go into real estate … which means a huge opportunity for syndicators. 

If you’re thinking of making the move to real estate, you need to undertake that same SWOT analysis for the various real estate niches. 

And we can’t preach diversity enough. Diversity of income. Diversity of markets. Diversity of real estate niche. Diversity helps you weather the storm. 

Real estate for the long haul

At the end of the day, YOU are the only person who can decide what is best for you and your family. Do the work to get educated, analyze your deals, and do what you feel is right. 

The reality is that 10 years from now, this crisis is probably going to be in the history books. It’s going to be like 2008 … something that happened and changed the world quite a bit. 

But the long-term fact is that people will always be out there. They will need places to live. They will need places to gather. They’ll still need medical care and to eat. 

Real estate will always fulfill a potential need. In the long term, smart investments remain smart investments. 

Real estate is about buying and committing and being in for the long haul. 

For more on what the coronavirus means for real estate investors … listen to the full episode!

More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

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