A 5-minute muse …
After several weeks of confronting the brutal facts with our COVID-19 Crisis Investing Series …
… and chasing shiny objects in our Making Sense of Silver Series …
… it’s time to consider the BRIGHT SIDE of the crisis for REAL ESTATE investors.
So grab a lollipop, slather on some sunscreen, saddle up the unicorn, and let’s trot to the pot of gold at the end of the real estate rainbow …
U.S. Junk Bond Market Sets Record-Low Coupon in Relentless Rally
– Bloomberg, 8/10/20
“ … junk bonds at record-low yields amid a rally triggered by the Federal Reserve’s historic support for the market and heavy inflows into funds that buy the risky debt.”
Don’t see the sunshine yet? Hang tight …
“Can-maker Ball Corp. pays 2.875% yield on 10-year debt. Rate is the lowest ever for new issue due in at least five years.”
“Record low” … “historic” … those are words used to describe EXTREME events.
And sure enough …
Desperate hunt for yield forces investors to take ‘extreme risk’
– Financial Times, 7/26/20
“The hunt for yield is getting harder than ever for fixed-income investors.”
“Roughly 86 percent of the $60 trillion global bond market … yields no higher than 2 percent — a record proportion – with more than 60 percent … yielding less than 1 percent …”
In case it’s not yet obvious, the Financial Times continues …
“This has pushed investors into riskier segments in search of income, compelling them to lend to lower-quality companies and countries.”
In the classic movie, Papillon, the hero gets tossed into solitary confinement and is fed only small amounts of bread and water.
To survive, he eats the insects crawling around inside his cell.
But starving people do extreme things. Remember the Donner party. (Not sure we’d call that a party.)
Spoiler alert: Yield starved paper asset investors might even stoop to investing in real estate.
So … are interest rates headed up any time soon?
According to Peter Schiff, the Fed is trapped in a monetary policy “roach motel” of their own making.
Ten years of zero interest rates to “fix” the 2008 crisis created an even MORE HUGE bond bubble (high bond prices create low interest rates).
Those bloated bonds are margined and splattered all over the balance sheets of “too big to fail” (TBTF) institutions throughout the global financial system.
If rates tick up … even a little … bond prices fall and those bond-bloated balance sheets implode … taking the financial system with it.
It’s like you owning hundreds of houses with 90% financing controlled by special mortgages which require 10% equity at ALL times.
If the property price falls, you MUST sell (at a loss) or pay down the loan to 90% of the CURRENT (now lower) value. That’s called a margin call.
Of course, if there’s not enough cash, you need to dump your houses on the market, which crashes the price, creating more losses and margin calls.
This predicament is foreign to real estate investors because mortgages don’t work that way. But it’s commonplace on Wall Street.
So if the Fed lets rates rise, it implodes the bond bubble and crashes the financial system. That’s why they’re trapped and the dollar is on the altar.
So it seems Zero Interest Rate Policy (ZIRP) is likely the norm … as long as the Fed can print dollars to buy bonds.
But again … while ZIRP might save the financial system … it’s starving income investors. That’s the problem … and the opportunity.
So, in desperation, these yield-starved investors are dumpster diving looking for scraps of yield anywhere they can find it.
Enter the Real Estate Fairy Godmother …
“My child, why eat garbage in Oz when real yield awaits you in Kansas?”
Real estate investors know it’s not rocket science to find yields over 2 percent. And real estate investors are HAPPY to pay 3 or 4 percent to borrow.
Real estate arguably provides far more attractive risk-adjusted returns than junk bonds.
So Main Street real estate can feed the yields these income-starved investors need … if only they knew how to use their ruby slippers to get back to reality.
Instead, they’re crawling around junk bond markets devouring what amounts to return-free risk. After all, after inflation and tax, how much real yield is there on 2.875% annualized? Not much, if any.
Meanwhile, there’s a growing rag-tag army of real estate entrepreneurs serving up hot deals on Main Street. It’s like a soup kitchen for yield-starved investors.
But Mom and Pop paper asset investors don’t know about it. So they’re buying the junk food they’re sold.
Robert Kiyosaki has complained for years about the lack of real financial education in the school system and mainstream media.
… mainstream financial media’s mission is to promote and protect Wall Street and the paper asset casinos. They ignore real estate. They don’t understand you and they don’t talk to you.
Sure, Wall Street might discuss home builder stocks, REITs, and hedge funds as vehicles to funnel money through Wall Street into real estate and mortgages.
But there are layers of limousines, penthouses, private jets, and big bonuses between individual investors on Main Street and the Main Street real estate producing the profits.
Seems like a whole lot of skimming going on.
We think a flatter model … where Main Street invests directly in Main Street can help #cancelwallstreet … (could this be a movement?)
It keeps more meat on the bone for the people doing the real work … Main Street savers (the money) and Main Street syndicators (the deals).
The pot of gold at the end of the real estate rainbow …
Some of the Fed’s TRILLIONS and TRILLIONS of new dollars will eventually find their way into real estate.
Consider how real estate is WAY better than bonds for yield-starved income investors …
First, real estate’s yields are higher. Plus, they’re backed by real collateral.
Compare that to a junk bond. What if Ball Can can’t pay? What do the bond holders get? Cans?
When you buy a mortgage (i.e., lend against real estate), and the borrower goes bust … you get the property AND the rent.
As a landlord, if the tenant fails, you can put in a new one. The income is more diversified.
But if Ball Can defaults on their bond, the lenders can’t just insert another borrower to take over the payments. It’s single point failure.
Sure, there’s hassle in the real estate. But when things go bad, there’s also places to land before total loss.
When Wall Street “works” on paper, it feels good and seems easy. But when it doesn’t work, it can fall apart fast and there’s no plan B … except the Fed.
The Power That Be (the PTB) have your back too.
Wall Street Wizards feed their families (and their egos) betting on the Fed “put”.
They know the Fed will print UNLIMITED dollars to bail out bad bets.
So it’s all upside for the gamblers, while the downside is subsidized by all dollar-holders everywhere. But the world is waking up to this game.
Meanwhile, like it or not, agree or disagree that it’s fair or not, the fact is that real estate investors enjoy support from the Fed and Washington too.
Yes, it’s true politicians sometimes vilify landlords (as they do Wall Street … wink, wink) and occasionally throw down some public-appeasing rhetoric or legislation.
But it’s mostly theater. The Fed and the politicians NEED real estate investors.
Watch what they DO … not what they say.
Consider the notion that COVID-19 crisis stimulus … PPP loans, enhanced unemployment, and direct-deposits into Main Street bank accounts … are indirectly aimed at real estate.
That’s because stimulus funds help make sure people have money to pay their rents and mortgages.
It’s intended to flow through the recipients and their landlords to the lenders. In fact, the entire financial system is designed to do this.
Real estate investors position themselves in the flow of funds in order to create cash flow and equity.
As long as the debt-fueled system exists, real estate is arguably the BEST tool to benefit from it.
Remember, real estate serves an essential human need … and is particularly important in the financial system the PTB protect.
So unless private property rights are abolished, or Uncle Sam gives everyone a free house, or Elon Musk invents a new tech to shelter people without land …
… real estate will be with us for the long term and remains high on the priority list for everyone from Main Street to Wall Street to Washington DC.
It’s disconcerting when the earth is shaking beneath your feet. The current crisis is nerve-racking. Loose hands and weak wills are going to get bucked.
But if there’s a pot of gold at the end of the rainbow when the stormy clouds clear … and we’re guessing it will be sitting on a piece of real estate.
Keep calm and keep cash flowing.