The mother of all private equity firms just issued a warning …
Blackstone Group Warns of the Mother of All Bubbles
Investopedia via Yahoo Finance – 11/11/19
According to the article, Blackstone’s “… biggest concern is negative yields on sovereign debt worth $13 trillion …”.
Remember, the 2008 financial crisis was detonated in bond markets … and the bomb landed hard on Main Street real estate.
So yes, this is something Main Street real estate investors probably want to pay attention to.
In fact, the article says Blackstone “… sees a troubling parallel with the 2008 financial crisis …”
Keep in mind, Blackstone manages over $550 billion (with a B) … which includes over $150 billion of real estate equity in a portfolio of properties worth over $320 billion.
So Blackstone has both the means and the motivation to study these things intensely … and they think about real estate too.
Of course, this doesn’t mean they’re right. But they’re certainly qualified to have an opinion worthy of consideration. And right now, Blackstone is worried.
And they’re not alone …
“Fifty-five percent of more than 3,400 high net worth investors surveyed by UBS expect a significant drop in the markets at some point in 2020.
“… the super-rich have increased their cash holdings to 25% of their average assets ….”
Of course, they’re talking to paper asset investors, but the sentiment applies to the overall investment climate, which also affects real estate.
Also, by “super-rich”, they’re talking about investors with at least $1 million investable. So while that’s nothing to sneeze at, it’s also not the private jet club either.
So from behemoth Blackstone Group to main street millionaires, serious investors are worried right now.
Should YOU be worried too?
Probably. But it’s not what you think …
In fact, according to this article, Blackstone’s CEO Stephen Schwarzman believes worrying is fun …
“In his new memoir What it Takes, the private-equity titan advises readers that worrying ‘is playful, engaging work that requires you never switch it off.’
This approach helped him to protect Blackstone Group investors from the worst of the subprime real estate crisis …”
There are some really GREAT lessons here …
Worrying is something to be embraced, not avoided.
Many people believe investing and wealth will create a worry-free life. Our experience and observation says this is completely untrue.
In fact, to adapt Ben Parker’s famous exhortation to his coming of age nephew Peter Parker in the first Tobey Maguire Spider-Man film …
“With great wealth, comes great responsibility.”
Worrying is the flip side of responsibility. They go hand and hand. If want wealth, you need to learn to live with worry.
Worrying isn’t about being negative or pessimistic.
In Jim Collins’s classic book, Good to Great, he says great businesses (investing is a business) always “confront the brutal facts”.
That’s because you can’t solve a problem you don’t see.
But missing problems isn’t merely a case of oversight or ignorance. Sometimes, it’s bias or denial.
In fact, one of the most dangerous things in investing is “normalcy bias”.
This is a mindset which prevents an investor from acknowledging an imminent or impending danger and taking evasive action.
Mega-billionaire real estate investor Sam Zell says one of his secrets to success is his ability to see the downside and still move forward.
Threats often aren’t singular or congruent … they’re discordant.
According to this article …
“CEO Steve Schwarzman of Blackstone searches for ‘discordant notes’, or trends in the economy and the markets that appear to be separate and isolated, but which can combine with devastating results.”
This is the very concept of complexity theory that Jim Rickards explains in his multi-book series from Currency Wars to Aftermath.
The point is that major wealth-threatening events seldom occur in isolation or without a trigger and chain reaction that is often not obvious.
It’s why we think it’s important to pay attention to people and events outside the real estate world.
The more you see the big picture and inter-connectedness of markets, geo-politics, and financial systems, the more likely you are to see a threat developing while there’s time to get in position to avoid loss or capture opportunity.
Cash is king in a crisis.
This might seem obvious, but there’s more to it than meets the eye. After all, cash isn’t king in Venezuela … because their cash is trash.
Americans don’t think of cash apart from the dollar. And their normalcy bias says they don’t need to.
It’s true the dollar is king of the currencies … for now.
Yet as we explained in our Future of Money and Wealth presentation, the dollar has been under attack for some time.
But even as high-net worth investors, the most notable of which is Warren Buffet, build up their cash holdings, it’s a good time to consider not just the why of cash … but the HOW.
The WHY of cash is probably obvious …
When asset bubbles deflate, it takes cash to go bargain hunting.
It’s no fun to be in a market full of quality assets at rock bottom prices … and have no purchasing power.
But the HOW of cash is a MUCH more important discussion … and too big for the tail end of this muse. Perhaps we’ll take it up in a future writing or radio show.
For now, here are something to consider when it comes to cash …
Cash is about liquidity. It’s having something readily available and universally accepted in exchange for any asset, product or service.
So, “cash” may or may not be your local currency.
Even it is, perhaps it’s wise to have a variety of currencies on hand … depending on where you are and where you’d like to buy bargain assets.
It should be obvious, but cash is not credit.
So, if you’re counting on your 800 FICO, your HELOC, and your American Express Black Card for liquidity, you might want to think again.
Broken credit markets are often the cause of a crisis, so you can’t count on credit when prices collapse. You need cash.
Counter-party risk is another important consideration. This is another risk most Americans seldom consider … but should.
That’s because one of the “fixes” to the financial system after 2008 is the bail-in provisions of the Dodd-Frank legislation.
“With a bank bail-in, the bank uses the money of its unsecured creditors, including depositors and bondholders, to restructure their capital so it can stay afloat.”
Investopedia – 6/25/19
Yikes. Most people with money in the bank don’t realize their deposits are unsecured loans to the bank … or that the bank could default on the deposit.
That’s why the recent repo market mini-crisis has so many alert observers concerned. Are banks low on cash?
As we’ve noted before, central banks are the ultimate insiders when it comes to cash … and they’ve been stocking up on gold.
Maybe it’s time to consider keeping some of YOUR liquidity in precious metals.
You can’t win on the sidelines.
Even though serious investors are increasing liquidity in case there’s a big sale, they aren’t hiding full-fetal in a bunker. They’re still invested.
This is where real estate is the superior opportunity.
It’s hard to find bargains in a hot market when your assets are commodities like stocks and bonds. Price discovery is too efficient.
But real estate is highly inefficient … and every property and sub-market is unique. So compared to paper assets, it’s a lot easier to find investable real estate deals … even at the tail end of a long boom.
Of course, if you’re loaded with equity, it’s probably a smart time to harvest some to build up cash reserves. Just stay VERY attentive to cash flow.