There’s a lot of doom, gloom, and uncertainty out there.
MANY of the super-smart people we hang out with are preparing for a really ROCKY road ahead.
Of course, we’re big fans of being prepared. As we often say …
“Better to be prepared and not have a crisis, than to have a crisis and not be prepared.”
You may recognize this as a variation of Les Brown’s more famous quote …
“Better to be prepared and not have an opportunity, than to have an opportunity and not be prepared.”
But … perhaps obviously … no one can prepare for everything.
So we think it’s important to have some idea about what kind of crisis or opportunity you’re preparing for.
After all, it could be staring you in the face … but you can’t see it because of all the noise.
Now before we exit the philosophical … keep in mind: crisis and opportunity are often two sides of the same coin.
And speaking of dichotomies …
… we’ve noticed that people with a lot to lose tend to focus on the dangers and downside …
… while those still building tend to focus on the opportunities and upside.
Again … both crisis and opportunity exist concurrently.
Remember this when you’re listening to someone … including yourself … and considering the pros and cons of any deal, market, or economy.
So let’s talk about some of the SCARY stuff first …
The virus is still here. Lockdowns are easing in some places … and getting worse in others. There are diverse approaches and results.
We’re not smart enough to know what’s fact or fiction, but we can see how people in power have turned a health crisis into an economic crisis.
Temporary closures and layoffs are becoming permanent. Some say the personal economic damage will be long-lasting.
Of course, businesses and individuals collectively form a society and operate together in a supporting financial system.
But lockdowns mean money stops flowing. No revenue. No paychecks.
This disruption damages businesses and individuals, but also undermines society and threatens the financial system.
No revenue or paychecks mean missed rent and mortgage payments. Debt goes bad. This is how an economic crisis becomes a financial system crisis.
In 2008, we learned what happens when even a small portion of debt goes bad. While 2008 was a sub-prime crisis, 2021 could be a prime-time crisis.
Meanwhile, when people and business can’t pay rent, distressed owners start dumping properties into a soft market and property prices collapse.
You either have cash flow, have cash reserves, or you must sell assets to raise cash … usually when everyone needs cash also (i.e., the worst possible time).
Read that last line one more time. It’s a REALLY important concept.
This is why cash is king in a crisis. And the time to aggregate cash is BEFORE the crisis hits. Arguably, time is running short.
We could go on a mini-rant about how zero-interest rate policy completely discourages savings (cash reserves) …
… and encourages people and businesses to devote their free cash flow to ever higher piles of debt to speculate on anything they think is “going up”.
And now, without cash reserves or free cash flow, falsely smug with a balance sheet stuffed with air …
(“air” is when assets whose prices are far higher on paper than when brought to market to actually sell) …
… players from Main Street to Wall Street are completely vulnerable to something no one thought possible, much less likely: a global lockdown.
But that’s exactly what happened. You probably couldn’t have scripted a better set up to destroy the economy and financial system. It makes you wonder.
But back to the cash crunch …
The Fed has … at least temporarily … stemmed the cash crunch by creating trillions out of thin air to prop up everything until the world gets back to the old normal … or maybe it’s a “new” normal they’re aiming at?
We’ll keep you posted …
Meanwhile, let’s look for the silver lining …
Hey, it’s almost Halloween, so we needed to freak everyone out first. But we’re not hiding under our sheets.
Although we’re admittedly biased, we think real estate will fare better in this crisis than the last one.
That’s not just wishful thinking. There’s a case to be made.
(Side note: this will likely be a very hot topic on our next Investor Summit … with lots of time and REALLY smart people to rub brains with. Join us!)
This Crisis Didn’t Start in the Mortgage or Real Estate Market
The 2008 crisis started in sub-prime mortgages … then infected bond markets … and ultimately disrupted the flow of cash into real estate.
Real estate felt it first and worst. And bore the brunt of the blame for a crisis Wall Street created.
But that was then. This is now. People aren’t fleeing AWAY from real estate right now. They’re fleeing TO it. Prices aren’t collapsing. They’re booming.
We’re not saying real estate can’t or won’t go down. We’re simply pointing out the foundation for Crisis 2021 is very different than that of Crisis 2008.
The Fed is Smarter
You have no idea how hard that was to write. But the truth is the Fed reacted MUCH faster to this crisis than the last. It seems they learned from 2008.
Sailing into the 2008 crisis, the Fed was in denial. This time, they immediately dropped rates, printed nearly $4 trillion, and propped up stocks and real estate.
Interest Rates are at Zero … Probably for Years
Yes, we know that’s bad for savers and bond investors … which is one of the reasons it’s good for real estate.
First, it keeps mortgages cheap. This keeps financial “air” coming into the jump house. Unlike 2008, there’s been ZERO hesitation by the Fed to run the pump.
Next, it means the four-decade old “strategy” of using bonds for fixed income is headed to the scrap heap.
The only people buying bonds now are speculators hoping to flip … or naive investors seeking safety, but actually taking HUGE risk.
If that just went over your head, sorry we don’t have time to explain here … but we’re working on a whole series of tutorials for our YouTube channel, so stay tuned.
The point is we think low rates will drive both institutional and individual investors into real estate … both debt and equity.
Boomers Need Real Yields
The Fed has already told the world they’re committed to MORE than two-percent per year inflation … and zero interest rates for years.
They’re willing to “overshoot” their long-time target because inflation has (allegedly) been too low for so long.
Of course, in the real world, interest rates lower than inflation means people trying to create passive income with interest-bearing accounts are actually LOSING purchasing power.
In 2020, the demographic of people trying to retire on savings is WAY bigger than it was in 2008, while rates are lower and inflation is higher.
All this means there are trillions of dollars in boomer savings which could be seriously interested in enjoying the financial results real estate can provide.
That’s why we’re convinced syndication is the BEST opportunity in real estate today … both for the entrepreneurs organizing them and for the passive investors funding them.
Institutional Money Has the Same Problem
Pensions are a mess. Bonds aren’t the answer. Stocks are arguably over-valued.
And while dividends are nice, unlike real estate, when a business fails, there’s nothing. At least when a mortgage or lease goes bad, you have options.
Big money sees it … and we’re seeing them make their moves. Hedge funds, foreigners, public pensions … they’re all seeing the opportunity in real estate.
And the more central banks dilute currency, suppress interest rates, and inflate paper asset bubbles … the better real assets like real estate, gold, energy, and agriculture will look.
Home Equity is a Fast Path to Pump Funny Money to Main Street
Like it or not, the Fed appears committed to distributing currency to Main Street. They may have only one trick (printing currency), but they have lots of distribution channels.
Stimulating bank lending and buying mortgage-backed-securities are two of the Fed’s go-to methods for fueling real estate equity growth and conversion of same into spendable cash.
The only worry the Fed seems to have about a real estate bubble is how to blow it up bigger faster.
Politicians, bankers, corporations … everyone … benefits when real estate is pumped up. No one in power is interested in pushing it down. All the pressure is UP.
We’re not saying there isn’t downward pressure. A weak economy or damaged financial system will affect real estate too.
The difference is when a business fails, there’s nothing left. Its equity is gone. Its debts go bad. It’s all goodwill and paper.
Real estate is REAL … and it’s essential. Like high ground in a flood or a life raft on a sinking ship, desperate money will look for safety in dangerous times.
While there are certainly dangers on the horizon, there are also some valid reasons to see sunshine for real estate.
Your mission is to see both crisis AND opportunity … and to be SMART and DILIGENT about how you navigate them.
Until next time … good investing!