What Does a Chinese Yuan Reserve Currency Mean for Real Estate Investors?

While American media is focused on the chances of a Thanksgiving weekend terrorist attack (not to make light of those concerns)…a group of international bureaucrats will be meeting to decide if the world will take a step closer to a Chinese yuan reserve currency.

On Monday November 30th, the International Monetary Fund (IMF) votes on whether the yuan (the currency of China, also known as the renminbi) gets into the Special Drawing Rights (SDR) basket.

Who cares?

China does.  They care a LOT.  And YOU should probably care too…even if you don’t know it yet.

What is an SDR?

Special Drawing Rights (SDR) are the currency of the International Monetary Fund.

The SDR “basket” is a collection of “premium” currencies whose values collectively determine the value of the SDR using a special formula.

Confused already?  That’s okay.  Just don’t give up….

Remember all those real estate investors in 2005 that didn’t pay attention to Wall Street…thinking what do stocks, bonds and derivatives have to do with Main Street real estate investing?

In 2008 we all found out.  Oops.

So here’s a quick primer on the situation (for a better understanding, read Jim Rickards’ books Currency Wars and Death of Money)…

In the U.S., when an individual bank runs low on cash, they can borrow from the central bank (the Federal Reserve).  All major countries have a similar system.

But where do central banks go when they need to borrow?

So here’s where it gets a little complicated. But stick with us because we plan to show how it matters to you and your Main Street investing.

A little history…

What is the IMF?

The IMF is the International Monetary FundPrior to 1944, countries settled trade in gold.  So if you imported more than you exported, you owed someone a pile of shiny yellow metal.   Or at least a claim ticket for it.  Makes sense.

After two world wars, most of the world’s gold and remaining production capacity was primarily in the United States.

After all, it’s hard to export anything when all your production capacity and infrastructure was bombed to smithereens.  So almost by default (not that Americans weren’t smart and didn’t work hard) the U.S. had the world’s dominant economy.

In 1944, at the Bretton Woods conference, a NEW financial order was set up…and the U.S. took over for Great Britain as the financial capital of the world.

Remember the golden rule?  He who has the gold, makes the rules.

That’s what happened in Bretton Woods.  The U.S. had the gold, so King Dollar was crowned.  For most folks reading this, it’s the only system you’ve ever known.The dollar become the world's reserve currency at the Bretton Woods conference in 1944

But that doesn’t make it permanent.  In fact, history tells us that dominant economies, currencies, governments and systems eventually change.

Anyway, the idea of a central bank for the central banks also came out of Bretton Woods.  They called it the International Monetary Fund or IMF.

Five years later, it launched.  Keep in mind that these things take time.  It’s easy to miss…or forget…that fundamental change is happening.

Basically, the IMF is the central bank to the central banks.

Twenty years later, in 1969, the idea of a special currency for the IMF came up.  They called it “Special Drawing Rights” or SDR.

Lame name, but lucky timing (probably just a coincidence…) because just two years later, in 1971, the U.S. defaulted on the Bretton Woods agreement with the “Nixon shock”.

That’s when President Richard Nixon shocked the world on national TV announcing he was closing the gold window “temporarily”.  (Still closed today by the way…)

But don’t take our word for it…watch Nixon make the announcement yourself:

The ORIGINAL Bretton Woods deal was that countries holding paper dollars could turn them into Uncle Sam and get real gold.  In essence, the dollar was as good as gold.

But when Nixon suddenly changed the deal (reminds us of the exchange between Darth Vader and Lando Calrissian in Star Wars – The Empire Strikes Back below), it meant all countries holding U.S. dollars formerly redeemable for U.S. gold now simply held green pieces of paper with pictures of dead U.S. leaders.

Now…to no surprise…no one wanted or trusted U.S. dollars.  So the dollar crashed.  Gold and inflation soared.  The U.S. economy and stock market tanked.  “Stagflation” became the term to describe a new strain of economic malaise.

Research it yourself.  There are many important lessons to be learned about how a major economic policy change ripples through economies.

And sometimes the UNTHINKABLE happens.

For example, in a vain attempt to contain the inflation unleashed by his default on the gold dollar, Nixon instituted a wage and price freeze:

After defaulting on the Bretton Woods gold dollar standard, Nixon imposed a freeze on wage and price increases

Who would think that in the Land of the Free, it would be a FEDERAL CRIME to give an employee a raise…or to raise the price of the merchandise in your OWN store?!?

But it happened.  In America.

The point is that defaulting on the Bretton Woods promise to redeem dollars for gold was a HUGE reset.

The gold dollar was dead.

BUT…the U.S. still had a strong balance sheet, a big army, huge manufacturing capacity…and a plan.

Shortly thereafter, the petro-dollar was born.

“Petro-dollar” just means that the U.S. dollar became the currency which worldwide oil transactions were settled in.  It created a huge and ever-present permanent new demand for U.S. dollars.

Now there’s SO much more to say about that…but not today.

Again, we encourage you to study the history of the dollar, gold and oil.  Or come to a live event and buy us a beer or two or three…and we can talk about all this until the wee hours (that’s what happens after a few beers…)

Back to our story…

So now we’re in the petro-dollar era and the IMF is there with its SDRs and the SDR value is based on a “basket” of currencies it’s indexed to.

The SDR basket is made up of all the “best” currencies…the U.S. dollar, the British pound, the Japanese yen, and the European Union’s euro.IMF Special Drawing Rights (SDR) are valued based on a basket of currencies including the U.S. dollar, Japanese yen, British pound, EU Euro. China wants their yuan (renminbi) included.

That’s a pretty exclusive club considering there are 190+ countries out there.

China wants the yuan to join the SDR club.

But at the last vote in 2010 (these things only get looked at every 5 years), they got voted down.

Not dissuaded, China went to work.  We chronicle much of this in our special report on Real Asset Investing.

But this time, it seems China has a Plan B…in case the IMF slams the door again.

So while they’re working to comply with IMF requirements, China’s also taken steps to go independent if need be.

Does China want a yuan reserve currency?

We don’t know.  If Beijing calls us with a heads up, we’ll be sure to pass it along.

But how often can you trust anything ANY government says?  It’s better to WATCH what they DO.

Right now, it seems to us that China looked at what the U.S. did to be top dog at Bretton Woods and are copying it as best they can.

It’s a long list, but some notable items are:

Pay close attention to that last one.  We think this will be a BIG story in the not too distant future.

In 2015, China formed its own international bank (the AIIB – Asian Infrastructure Investment Bank) in spite of U.S. resistance…and wooed dozens of countries to join, including Uncle Sam’s “pal”, Great Britain.

It’s kind of like, “If you can’t join them, beat them.”  Or at least show you’re ready to beat them if necessary.

But no one wants to fight the U.S. toe to toe…including China.  Better to get voted in with a yuan reserve currency.

Of course, the U.S. has an effective veto with over 16% of the IMF voting rights (it takes 85% to pass).  So even if Uncle Sam’s buddies don’t back him again, he can still stop China from getting in the club.

But we think China’s ready for that.  And we think Uncle Sam knows China’s ready.  So we wouldn’t be surprised if Uncle Sam cries…well, uncle.

But who knows?  We’ll find out soon enough.

THEN…it will be interesting to see what happens next.

If China gets in, it’s like adding a new stock to the S&P 500. It creates an immediate spike in demand for the new stock…and something gets dumped to make room.

Art Cashin, Director of Floor Operations at UBS and famed commenter on CNBC has been quoted saying…

Art Cashin is the Director of Floor Operations for UBS and has traded on the stock exchange for 50 years. He says a yuan reserve currency would mean trillions of dollars would shift into yuan denominated assets“If [SDR] approval were given, we could be looking at shifts in the trillions of dollars.”

We’re not that bright, but when a BIG shift happens we know to pay attention.

In that same article, Lombard Street Research’s chief economist and head of research, Diana Choyleva was quoted…

“’If the yuan goes in the basket, then the likelihood is that the Chinese would prefer a gradual depreciation of their currency against the US dollar.’”

And if the yuan is NOT accepted?

Choyleva says…

“The Chinese leadership is not going to wait another five years…And they will not be so keen to be such a responsible global citizen….If the yuan is not accepted in the SDR, they will go for a one-off large devaluation and that would then be … a financial crisis, specifically, a real-economy crisis with the resulting impact on the …markets.”

Another financial crisis doesn’t sound like any fun.

It SEEMS like Uncle Sam and China are actually working closely together to gently ease a Chinese yuan reserve currency into the club.

But like raising kids, adolescents always think they’re ready too soon…and parents always hold on too long.

China’s clearly growing up.  And China’s financial decisions affect Americans…even real estate investors on Main Street.

This headline is a case in point:

U.S. Steel to Lay Off Thousands of WorkersU.S. Steel announced thousands of layoffs partially because of a strong dollar against the Chines yuan

“…U.S. Steel blamed the temporary closure on tough market conditions ‘including fluctuating oil prices, reduced rig counts and associated inventory overhang, depressed steel prices and unfairly traded imports.’”

“Earlier this year, U.S. Steel permanently shuttered a longtime plant outside of Birmingham, Alabama, laying off 1,100 workers. That closure came on the heels of a string of layoffs in Texas, Arkansas, and Indiana, among other states.”

Those are all working class jobs in great rental property states.

Getting closer to home now?

The article continues…

“[China’s] recent slowdown threatens to exacerbate problems for American steelmakers, as Chinese policymakers look to boost exports and more steel hits the global market.”

The Chinese policies referred to include tweaking the relative strength of the yuan…because a cheaper yuan means cheaper goods into the U.S., which costs U.S. jobs.

And this is just ONE industry.  Think of ALL the other industries China is involved in…especially in any markets YOU are invested in.

So what’s an investor to do if there is a Chinese yuan reserve currency?

Pay attention.

Watching two elephants dance isn’t exciting.The United States and China are two elephants locked in a strategic dance for dominance. Will the dollar remain the reserve currency of the world or will the yuan become the reserve currency of the world?

They aren’t graceful and they move slowly.

But when you’re locked in the same economy and those elephants can crush you, you’re wise to stay alert.  And everyone knows we need more lerts. 😉

So REALLY get to know YOUR markets, demographics, ultimate income sources, and critical dependencies.

You want to see weakness or opportunity before others so you can move in or move out ahead of the crowd.

Remember, it takes time to tweak a real estate portfolio.  Of course, compared to the dancing elephants, you’re a water bug.  But you still need to be looking and moving ahead

Focus on macro trends.

China’s been working on getting into the SDR club more than a decade.  The dollar’s recent strength is an aberration in a well-chronicled 100 year slide.

You’ll lose sleep…and hair (we know)…trying to understand every tick in some chart.  Looking at the big picture smooths out a lot of  the noise.

Watch for game changers.

A yuan reserve currency could be a real game changer for U.S. investorsBretton Woods in 1944 was a game changer.  A fundamental change to the global financial system.

The Nixon Shock in 1971 was a game changer. Another fundamental change to the global financial system.

China’s ascension has been a slowly developing game changer.

It used to be Americans could just go about their business.  The rest of the world was too puny to really severely impact the mighty U.S. economy and dollar.

Now, when China gets a cold, so does Uncle Sam.  You can read it in the news everyday.

Is adding the Chinese yuan into the IMF SDR a game changer?

We don’t know yet.  Could be.

Or maybe the Chinese will do a reverse Nixon shock. We’re pretty sure THAT would be a game changer. (Think about it…)

Invest in things that are REAL and ESSENTIAL.

It’s our recurring theme.  Housing, food, energy, commodities.  All have roots in real estate.  Sure, they can go boom and bust.  But they’re ALWAYS needed.  Pets.com?  Not so much.

Use financial structures which can withstand economic pull backs.

The flirty girl at the frat party might get a lot of attention, but she’s not the one you take home to Mama.

Bubbles and leverage create lots of sexy opportunities, but when the glitter rubs off, you want to be with markets, product types, demographics and teams which are in it for the long haul.

Credit lines, equity and buyers all can (and usually do) disappear when you need them the most.  They’re fickle.Sometimes cash in hand is the best way to prepare for a financial crisis

A little cash on hand can be your best friend in a downturn.  If you have your chips on the table and get a bad roll, you’re out.  Donald Trump told us he learned it’s ALWAYS good to have some cash available in the down times.

So don’t envy the guy getting lucky with the hot deal when it’s all sunshine.   Otherwise, you’ll certainly be envying the guy with the stable portfolio when the clouds come.

Now if you’ve read this far, we’re guessing you’re SERIOUS about understanding these chaotic times.  We are too.

So if you REALLY want to jump start your learning…

We invite you to invest a week to sharpen your understanding of economics, investing and real asset portfolio strategies aboard our 14th annual Investor Summit at Sea.

One of our discussion topics will be The Future of Money and Banking…with Robert Kiyosaki, G. Edward Griffin and experts in economics, precious metals, crypto-currency and alternative banking.  Not to mention real estate, tax and estate planning, asset protection and more.  Your brain will hurt.  But you’ll LOVE it.

>>> Click here now to learn more about the next Investor Summit at Sea.

Meanwhile, stand by….and we’ll let you know whether there’s a Chinese yuan reserve currency in your future.

08/16/15: Clues in the News – Is a Squeeze on Rising Rents in the Future?

There’s been lots of talk in the news lately about how and why rents are rising.rents are rising and rents are too high

Of course, if you’re already a landlord, that’s not bad news.  And those who invested in residential rental property a few years back hit the trifecta of low purchase price, falling interest rates and rising rents.

But that was then and this is now.

Is the party over?  Did you miss the boat?  What’s happening today…and where are things headed?

All great questions!

Squeezing their way into The Real Estate Guys™ studio to look for answers in this edition of Clues in the News™:

  • Your plum of a pontificator and host Robert Helms
  • His orange-you-glad-he’s-not-the-host co-host Russell Gray

We like to look at the news for a lot of reasons.

The Real Estate Guys look for Clues in the News to help listeners be more successful at real estate investingFirst, the news helps us see the big picture events which affect our real estate investing.  And we’re especially interested in anything that affects our rental income, our interest expense, or the supply and demand of properties.

Real estate investors tend to live in their own little world…finding deals, servicing tenants, managing cash flow and dealing with vendors.

It’s EASY to get lost in the weeds and miss a macro-trend that could have a HUGE impact on your business.

For syndicators, the news provides insights into the concerns and competing opportunities your investors have.  When you are well-informed, it makes a positive impression on the people who are…or are considering…investing in you.

For this episode we hone in on reports of things that have the potential to put the squeeze on the rising rents so many landlords have been enjoying.

U.S. Health Spending – $3.1 Trillion a Year and Growing

One thing we like about real estate…especially residential real estate…is keeping a roof over their head is a HIGH priority to tenants.  That means with all the things competing for their available income, landlords are high on the list.Healthcare spending is on the rise which could put the squeeze on rising rents

However, healthcare is pretty high on the list too.  And with the new Obamacare mandate forcing everyone to buy insurance or pay a penalty, more of a tenant’s available money is going to healthcare.

This article also says out-of-pocket expenses are on the rise too.  Which, again, means more competition for available cash flow…and a potential restriction on the rising rents trend.

The GOOD news is that if you own property in an area with a strong healthcare industry, your local employment and wages might be above average.  So there’s always a silver lining.

Social Security Disability Fund to Run Dry Next Year

With nearly 100 million people deriving some form of income from the U.S. government, the odds are high that some of your rental income comes from government sources.  So it’s smart to pay attention to any potential cuts.

Social Security it running out of moneyAnd with the substantial increase in people on disability provided through the Social Security Administration, it’s pretty big news when the trustees are reporting there will be NO cost of living adjustments in 2015…and the Social Security Disability Fund will be BROKE by the end of 2016.

Will Congress allow the fund to go broke?  Probably not.

But if they don’t handle it soon, an AUTOMATIC 19% cut kicks in…the same way the mandatory “sequestration” cut in the general budget kicked in when the government couldn’t pass a budget.

If you have tenants who rely upon Social Security disability payments to help with rent, the next year or so could mean a squeeze for your tenants, and therefore for you too.

From Rents to Haircuts, Americans Start to Feel Price Hikes

For some reason, The Fed has been trying to get inflation up to at least 2 percent.  Looks like it might be working.As the cost of living rises, it's harder for people to make ends meet

And while it’s been nice to see the upward pressure on rents, when it hits our tenants’ pocketbooks in other “essential” areas…like haircuts, healthcare and coffee…it means the tenant gets squeezed.

You can only squeeze so much before something’s gotta give.  And that something might be your ability to raise rents…or even maintain the rents you’ve raised already.

Of course, all of this presumes your tenant’s have a paycheck to divvy up.  So this next headline also caught our attention…

Layoffs Surge As Oil Price Outlook Remains Sober

Falling oil prices were supposed to be a big boon to consumers.

falling oil prices has lead to widespread layoffs in the oil industryBut with reports of inflation kicking in and gasoline prices not falling as far or as fast as oil prices, it doesn’t seem like cheaper oil has meant lower living costs for everyday people…like your tenants.

On the other hand, the oil industry had arguably been the brightest star of employment over the last several years.  But with oil prices depressed, not only has the job growth stopped…it’s going backwards.

And as we emphasize on The Real Estate Guys™ market field trips, certain industries are employment magnifiers because they funnel money into a region from outside.

So not only does the primary industry create jobs, but the revenue it generates purchases supplies and services from secondary or support industries.  These are sub-contractors, parts and materials suppliers, and vendors of all kinds.

But it’s even bigger than that…because the employees of BOTH the primary and secondary industries ALL consume local retail services, such as restaurants, dry-cleaners, automotive sales and service, healthcare and yes…residential real estate.  These tertiary industries also provide local jobs.

So if it employment is MAGNIFIED by the growth of a PRIMARY industry like oil…what happens when layoffs occur at the primary level?

That’s right.  The LAYOFFS ARE MAGNIFIED too.

So as strategic real estate investors, it’s important to consider where your rental income REALLY comes from.  And how these news headlines could trickle down to YOUR bottom line.

But lest you think it’s all gloom and doom, it’s important to remember that there’s always opportunity.

And while not really a headline, a recent newsletter we subscribe to from a new contributor to The Real Estate Guys™ blog brought us this news:

A New Opportunity to Build New Detached Homes for Rent

John Burns Consulting provides intelligence to the real estate development industry.  They point out that 10 percent of homes are purchased by real estate investors…like you.

But until recently, new home builders ignored this segment of buyers in favor of selling to owner occupants.

Well, a funny thing happened on the way to the bank…residential home ownership has fallen to a nearly 40 year low.

So builders had realized they might want to serve the growing segment of the market…landlords.

And there are a LOT of reasons to be excited about a better opportunity to buy brand new homes designed with the landlord in mind.

First, tenants prefer…and will pay more for… a brand new home.  That improves your gross income.

Also, brand new homes have NO deferred maintenance.  This keeps your capital expenditures low at acquisition and for the first several years of ownership.  So you add lower expenses to your higher income.

So far so good.

Add to this that the smart builders will value engineer their products to provide a lower cost without a corresponding loss of rent-ability.  That is, the amenities which a home BUYER requires…at extra expense…are less important to renters.

This means you pay less for the same rental income.  Nice!

So even though there are headlines which point out some of the challenges, we know that the flip side of every problem is an opportunity.

This could explain…

Why Most Americans Are Investing in Real Estate, Not Stocks

According to this article from CheatSheet.com, a recent Bankrate.com survey says Americans’ first choice for investment is…real estate.

Makes sense to us.

So listen in as we discuss these and other topics as we search for Clues in the News™!

Listen Now:

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

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

11/2/14: Clues in the News – Election, Market Direction and Alan Greenspan’s Warning

There’s lots of news affecting real estate investors…and most of it doesn’t have anything to do with real estate.

In this episode, we read between the headlines to what’s in the news that real estate investors should be paying attention to.

In the broadcast newsbooth for this informative edition of Clues in the News:

  • Your anchor and host, Robert Helms
  • His dead-weight co-host, Russell Gray

In case you were in a coma the first week in November, the Republicans took over the U.S. Congress by winning a majority in the Senate and strengthening their hold on the House of Representatives.

Maybe that makes you happy.  Maybe it doesn’t.  But it doesn’t really matter how you, or we, feel about the results.  It happened.

So the next questions are…what does it mean, what happens next, and how is it likely to affect real estate investors?

The Election Results are a Barometer of the Mood of the Market

We think it’s pretty obvious the electorate isn’t happy with the state of the Union.  After all, happy prosperous people don’t vote to rock the boat if everything is smooth sailing.

So all’s not well on Main Street in spite of a booming stock market, allegedly low unemployment and continued low interest rates.

Since your tenants are part of the electorate, we’re guessing their pocket books aren’t overflowing with joy…or money…right now.  So we continue to favor affordable markets and product types, and nothing in the election or other news changes our mind.

The Maestro Sings a New Song

As we discussed in a recent blogpost on Alan Greenspan’s Shocking Confession, Alan Greenspan seems to agree that Fed policy hasn’t done much to help the real economy.  No wonder the voters threw a fit.

Also, Greenspan said that the timing of rising interest rates might be outside the Fed’s control.  If so, this affirms that it’s a good idea to grab as much cheap money as you can reasonably control with conservative cash flows and lock in fixed rates for the long term.

Last, but FAR from least, according to the Wall Street Journal, Greenspan said, “gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”

Considering gold was tanking as he was talking, it seems like Alan Greenspan is concerned about “the policies conducted by governments”.

So in spite of the dollar’s recent surge and gold’s recent decline, for long term investors, it seems that even Alan Greenspan is a fan of real asset investing.

Maybe one of the governments he was talking about is Japan…

Bank of Japan Stuns Financial Markets with Massive Stimulus

So the whole world watches the Fed announce tapering and then, to many pundits’ surprise, actually do it…all the while touting the “robust” U.S. economy (funny…seems no one told the voters, who apparently missed the memo).

Then, as soon as the Fed’s expected tapering is done, the Wall Street Journal reports Japan’s “stunning” announcement of a MASSIVE stimulus package.

According to the Wall Street Journal article, “Japanese policy makers jolted global markets” by taking “Japanese economic policy into the uncharted territory of extreme stimulus“.

How extreme?

Well, according to Bloomberg, who also published an article on the move, the Bank of Japan “plans to buy 8 trillion to 12 trillion yen ($108 billion) of Japanese government bonds per month.”

For perspective, the QE that the Fed just finished started at $85 billion per month and tapered down.  That means the Japanese QE is 27% bigger than the U.S. program at it’s PEAK.  That’s massive, especially considering that the Japanese economy is only 1/3 the size of the U.S.

The Bloomberg article quoted the chief economist at Japan Macro Advisors as saying, “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018 or risk becoming a failed nation.”

So we have a few observations…especially if you’re sitting there thinking, “What the heck does Japan have to do with my rental house on Main Street, USA?

First, we’re in a GLOBAL economy.  Just think about how much foreign money is buying U.S. stocks, real estate and bonds.  Not to mention, how many Japanese companies employ U.S. workers?  And how many U.S. companies earn profits selling to Japanese businesses and consumers?

In a global economy, when a major component (Japan is #3 behind the U.S. and China) fails, EVERYONE is affected.

Right now, no one is saying Japan will fail.  And if it did, no one knows for sure what that looks like for everyone else.  But it bears watching, which is why we are.

Also, Japan has been a major purchaser of U.S. Treasuries.  In fact, according to the Unites States Treasury website, Japan is the second largest owner of U.S. debt behind China.  If we had to guess, we wouldn’t be surprised to see some of all that stimulus end up in U.S. Treasuries.  After all, if the Fed and China are curtailing purchases, either bond prices will drop (interest rates will rise)…or someone (Japan?) will need to fill the void.

The point is that when ANY central bank prints gobs of money and buys bonds, it affects interest rates for everyone…including Main Street real estate investors.

But it isn’t just bond prices and interest rates which are affected…

Back to the Wall Street Journal article, which says that the Bank of Japan will expand its asset buying program to include “not just more government bonds, but also stocks and real-estate funds.”

In our travels, we talk to lots of Main Street real estate investors and agents.  We hear reports all the time that foreign buyers concerned about the safety of their money are parking it in U.S. real estate.

Obviously, when any central bank is printing money like crazy, smart investors in ANY nation move quickly to get into real assets. But here’s where it gets a little complicated.

Right now, the dollar is “strong” because major currencies like the Yen and the Euro are being destroyed faster than the dollar.  So any commodity denominated in dollars gets cheaper (gold, silver, oil, etc).

Worse, there’s strong sentiment, if not substantial proof, that nearly every asset market is largely manipulated by central banks, which makes investing in many asset classes a risky business.

So, in addition to the cultural appeal of real estate for Asian investors, even die-hard paper asset investors are looking at real estate as a solid place to store and build wealth.

In addition to foreign capital moving into U.S. real estate, lending is starting to loosen up both in government and private loan programs.  This means more purchasing power moving into real estate.

We think this is bullish for real estate prices in the near term, though it will be mitigated by the weakness of U.S. home buyers.

But before you get too excited about all the equity happening to you, remember to pay attention to rents.  Because right now, asset values are growing faster than incomes.  This means housing is becoming less affordable for both renters and home buyers.

The last time this happened, lots of us made tons of money on appreciation (get ready, because equity is happening again), but real estate quickly went from being a sound investment to simply being another hot money wave to ride.

We’re not saying don’t ride it.  Quite the contrary.

Just remember to structure your deals so that when the wave goes out again (and it will)…that you can hold on for the long term.  When the tide goes out, everyone can see who’s been swimming naked.

Meanwhile, we’ll be here watching the headlines for Clues in the News.

Listen Now:

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show!  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

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

8/3/14: Clues in the News – Banks, Millennials, the Middle Class and Interest Rates

U.S. home ownership is around a 19 year low…banks are lowering their standards for jumbo loans…millennials aren’t buying houses…and the middle class is moving inland to more affordable markets.

Other than that, there’s not a lot going on. 😉

But what do all these headlines mean to everyday real estate investors?

Behind the shiny silver microphones to explore the Clues in the News:

  • Your clued in host, Robert Helms
  • His clueless co-host, Russell Gray

We like to watch the news.  Each headline is like a piece of a jigsaw puzzle.

Each headline adds to the bigger picture of challenges and opportunitiesViewed separately, it’s hard to see the big picture.  But when you look at a series of headlines, they start to tell a story.

So when we’re not sitting in the studio or gallivanting around the world seeking out interesting guests and real estate markets, we bury our noses in the news.

For this episode, there were a few headlines that popped out.

First, Reuters reports that Wells Fargo is loosening their lending standards.  But this time, it isn’t for the lowly sub-prime borrower…it’s JUMBO loans.

So it’s no surprise that Bloomberg reports million dollar home loans have surged to new records.

Why?

Well, partly because, as CNBC reports, millennials aren’t buying homes.

We also see that banks are showing interest in cash out refinances and home equity loans.

So on the one hand, this is all very exciting.  We’re having flashbacks to 2003.

Yes, we know it all ended badly.  But everyone made a ton of money until the music stopped.

Maybe it’s possible to take all the lessons from the last crash, and use them to prepare better for the next one?

We think so.  But, as we’ve been discussing in our weekly newsletter, this isn’t your parent’s real estate market…which is both good and bad.

Of course, bad can be good too.

What’s good is that interest rates remain low and lenders are opening up to allow more people to qualify.  They’re also creating loan programs which permit the repositioning of equity.

What’s bad is that first time home buyers aren’t pushing up the demand. In fact, a lot of the price appreciation is the result of hot money looking to real estate for yields.  This includes both foreigners and hedge funds.

Of course, because hedge funds and foreigners don’t use loans, prices are up, but lending is down.

That’s bad for lenders, but good for borrowers…because as lenders try to create business, they lower their standards and their interest rates.

Meanwhile, every day real estate investors aren’t competing heavily with home buyers…at least not yet.  And that’s good.

In fact, home ownership is at a 19 year low.  The inverse of that is there are more people renting.  Great!

It also means that without home buyers to bid up prices, even though prices are up in many markets, they are still at or below replacement costs.

In short, houses and the mortgages to buy them remain on sale!Time to fill up the shopping basket with investment real estate!

How long will this window last?  We don’t know.

But when you can buy a real asset for less than it’s replacement cost, and lock in low cost financing for the long term, it seems like you’d want to get all you can.

Of course, as we always say, market and team selection are important factors.  And being sure to structure your deals so you can weather the next financial crisis….whatever that looks like, and whenever it comes.

For those with money in the bank, the latest inflation numbers should be giving you fits compared with real estate.  Sure, there’s no guarantees with real estate.  But it seems like the only thing a bank account can guarantee is the long term loss of purchasing power.  The need to hedge inflation seems obvious.

With savers are being crushed by Fed policy, no wonder everyone has piled into the stock market.  If you recall, this is exactly what happened last time.

Do you remember what came after the last stock market bubble?

Yep.  It was the real estate bubble.  But if you structure your deals right, even if there is a bubble, as long as you have the cash flow to service your low fixed rate loan, you have a fighting chance.  We know many investors who rode out the last crash…and we took notes.

So it seems to us that properly structured income producing real estate could be one of the hottest investment opportunities right now.

We’ll keep watching the news to see if the forecast is changing…so listen in for each edition of Clues in the News!

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

2/23/14: Clues In The News – Cloudy With a Chance of Sunshine

Have you heard?

There’s been some bad weather lately….and it seems to have sub-marined much of the U.S. economy.  At least that’s the official spin.Severe weather is being blamed for gloomy economic data

But is it all doom and gloom or is there a chance of sunshine?

Here to rise above the clouds of confusion to see what the latest economic stats mean to real estate investors…

  • Your sunny host, Robert Helms
  • His gloomy co-host, Russell Gray

You may have heard it said, “Figures lie and liars figure.”  And we’ve learned that 87.2% of all stats are made up.  Or is it 27.8%???

So when you hear about new housing starts, existing homes sales, mortgage applications and jobless claims, they’re all a bunch of stats that the tea leaf readers on TV and newspapers try to interpret.

The problem is those financial talking heads, as smart and attractive as they may be (at least when compared to the hosts of The Real Estate Guys™ Radio Show), aren’t real estate investors.  So the paradigm, spin, interpretation and context they have is all for paper asset investors and real estate owner-occupants.

So what do all these economic metrics mean to real estate investors?

First, home sales get divided into two categories.  The biggest chunk is EXISTING home sales and is reported by the National Association of Realtors. Existing home sales is an indicator of prosperity because new home buyers are entering the market and existing home owners are moving up. Presumably because they can afford to.

But take by themselves, existing home sales don’t tell the complete story.  And for investing purposes, you have to dig down into geographic regions, price categories and buyer demographics.  After all, who’s buying and who’s not, which area is hot and which is cooling, and whether prices are rising or falling, all begin to shine the light of opportunity or danger on specific places, price points and property types.

New and existing home sales are considered a leading indicator of economic recoveryFor example, if you knew that the fastest growing segment of price point was in the $1 million and up price range and the fastest declining segment was in the <$100,000 price range, would that affect where you might choose to flip versus where you might choose to invest in rental property?

The other component of housing sales is NEW home sales.  But it’s a much smaller chunk.  So why do so many talking heads care so much about housing starts?

Think about it.  People who watch financial shows are often trading stocks.  If housing starts are slow, it means home builder stocks are negatively impacted.  Whereas if existing home sales slow, it only means some real estate agents don’t make as much commission.  Sad for real estate agents, but meaningless to stock traders.

Another index that stock traders fixate on is home builder confidence.  The idea is that if home builders are optimistic they’ll build and sell new homes.  They means demand for labor and materials, plus all the goodies new homeowners spend money on when first moving in.

Sounds good.  But if more people are buying homes, does it mean less people are renting?  Which is better for landlords?

Again, the news is prepared for the audience it’s presenting to.  And if you’re a real estate investor, financial TV is NOT talking to you.

Before we leave the topic of housing, think about this:  Lots of people, including those who pull the levers of the macro-economy, think housing LEADS economic recovery.

Really?

Now, we’re just a couple of dudes on the radio, but it seems to us that housing REFLECTS economic recovery.  See the difference?

If someone is overweight and they stand in front of the mirror, they can see the reflection of their condition.  But the image in the mirror isn’t the person’s actual body. It’s only a reflection.  So if someone didn’t like the condition there body was in and they modified the mirror to make their reflection thinner, does it make their actual body thinner?  Of course not.

So, if people buy houses because they’re selling below replacement cost in the wake of a recession, and government subsidized interest rates and tax incentives make is easier to make a down payment and stretch the monthly payment into a bigger loan; or the down payment is coming from cashing in stocks whose value was inflated by easy monetary policy, does the activity reflect a healthy and robust economy?  Or is it just a funny mirror that makes you appear to be in better shape than you really are?

We think housing is strong when people have good jobs and incomes, living costs are low, and they’re able to save up enough for a down payment and qualify for a loan.  That is, the  housing sale is a reflection of their success, NOT the cause of it.

If that’s true for an individual, wouldn’t it be true for a collection of individuals like a country?

We think so.

So do people have good jobs and incomes?

The jobless claims and labor participation rate says no.  And with healthcare costs, food and energy costs rising, people are actually being pinched.  Are these the conditions we’d expect in a healthy economy and a sustainable housing recovery?

Probably not.

Does this mean we’re bearish on real estate?  Not at all.  In fact, we still think this is a good time to acquiring income producing property in the right markets and price points.  Though we do encourage caution in the aggressive use of leverage.  We still see downward pressure on wages and discretionary income for the working class.  So for long term buy and hold, cheaper markets with a good business climate and low costs of living are probably safest.  Along with fixed rate loans and good operating margins.

If you’re a fix and flipper, the higher priced markets actually look better.  At least according to the stats.

The point is, like any business, you must know your target market.  If you want to sell the use of your property to a long term tenant, that’s a different game than flipping a pretty property to an owner-occupant.  And the clues you need to make better decisions are in the news every day.

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed. Visit our Feedback page and tell us what you think!

9/15/13: Clues in the News: Fools Rush In – Beware the Jobless Recovery

We like real estate.  We think real estate is a GREAT investment…maybe the BEST investment.

BUT (and yes, it’s a big bubble of a but), not all real estate is the same.  And not all real estate markets are the same.  And not all real estate market booms are the same.

So, because we’ve been around the block a couple of times (in The Godfather’s case, a couple of thousand times), we know there’s more to a great real estate market than just rising prices.

Fortunately, there are many clues in the daily headlines that help us figure out if the enthusiasm for appreciation is a new gold rush for real estate investors or simply a fool’s gold head fake.

In the studio to sift through the daily dirt of mainstream headlines in search of nuggets of investing gold:

  • Your powerful prospector of broadcast gold, host Robert Helms
  • His dead-pan co-host, Russell Gray
  • Regular contributor, that silver-haired real estate claim-staker and The Godfather of Real Estate, Bob Helms

A lot of things have been going up lately:  Housing prices, housing sales, home-builder confidence, multi-family rents, interest rates, jobless claims….hey wait! Who snuck those last two things in there???

Yes, it’s true.  There’s some seriously concerning news hidden inside all of the happy housing news.

Now this doesn’t mean you can’t make money in this market.  Au contraire, mon ami!  It means there’s a LOT of money going to be made.  But (there it is again), one should proceed carefully because once a market starts to move, whether it’s gold, stocks or real estate, it’s important not to chase it.

Here’s where real estate shows it’s amazing awesomeness.

As we’ve said a zillion times, real estate isn’t an asset class and there’s no such things as one big real estate market.  An ounce of gold or a share of Apple stock is EXACTLY the same, AND it trades for virtually the SAME price anywhere in the world.  So whether you buy  it in the U.S., France, Argentina or Nigeria (wait, we’ve heard you can special prices on gold in Nigeria…at least that’s what the email said….), it’s the SAME.

Contrast this with real estate, where a property’s value can vary not just from state to state or county to county, but right down to the neighborhood, property type, condition and terms of the deal.

The very inefficiencies that make real estate anathema to paper asset traders, make it a value hunter’s paradise!  And what can YOU personally do to fix up an ounce of gold or a share of Apple stock?  We’re guessing it won’t do much good to throw carpet on your Kruggerand or put sod on your Apple stock, but those things might make your real estate worth more.

Plus, real estate allows you to use debt.  And last time we looked, which was just a moment ago, the Fed continues to print money (pending this week’s big announcement about “tapering”…or is it a tape worm?), so tomorrow’s dollars are likely worth less than today’s.  When this happens, it’s AWESOME to borrow, because you can buy stuff today (like houses) and pay back tomorrow (actually, over THIRTY YEARS) with cheaper dollars.  Loans on income producing real estate can be one of the safest ways to short a falling dollar.

But (that thing will not get out of our face)…before you get all hot and bothered and run out to start buying up any property you can find, be CAREFUL!  You should never get IN to a deal that you don’t have at least a couple of ways to get OUT of.

We’re not sure why, but rapid appreciation causes otherwise sensible investors to rush in and expect that prices will continue to rise, and trust that  liquidity will be there (in the form of “a greater fool”) when you want to realize all that wonderful equity.

Well, when an economy is hitting on all 8 cylinders and jobs are being created, real incomes are rising, and lenders are busily making loans to well-qualified borrowers, you might be able to drive your investment vehicle a little closer to the red-line of leverage.  However, as we learned in 2008, hidden forces can be forming that can pull the rug right out from under you pretty fast.

Today, those forces aren’t even all that hidden, which brings us back around to the headlines (and you thought we forgot).  Most of what we should be concerned about is right out in plain sight.  But for some reason, some investors aren’t seeing it.  That’s why we’re here.  To help you take a deep breath and stay sober when everyone else is drunk on QE fueled asset growth.  And you thought it was only stock investors who got drunk on QE.

So in this episode, we discuss the world’s fixation on the U.S. housing market and the general consensus that housing has put in a bottom.  But what bottom are we talking about?

Prices.  But when the headlines say that U.S. labor participation is down, jobless claims are up, interest rates are rising; and a quick trip to the grocery store and gas pump tells you that houses aren’t getting more affordable, it makes you wonder:  So where’s all that price appreciation coming from?

A little more digging and we find that a lot of investment capital has been pouring into real estate, especially single-family homes.  Except this time, instead of all the equity rich Mom & Pop investors buying 2 or 3 houses at a time, there are huge hedge funds buying 20, 30 or 100 at a time.  And many are paying CASH.

Meanwhile multi-family rents are rising and may have peaked temporarily.  Why?

Could it be that real people can’t afford to buy so they’ve been piling into apartments, which are more affordable than houses?  But the article we read suggests that while occupancies are up, which is usually a sign that it’s time to raise rents, most tenants can’t afford a rent increase.  And if a multi-family landlord tries to raise rents, he may find that his tenants will up and move to some place cheaper.

Oh!  Hold that thought.

This is our point.  Hot markets, speculative markets, higher priced markets – they appear tempting when prices are rising.  But if the fundamentals underneath the price increases aren’t sound, then when the tide of QE money recedes, as Warren Buffet says, we’ll see whose been swimming naked.

For residential real estate investing, we favor affordable markets that provide important quality of life infrastructure like transportation, medical, education and entertainment.  Because when people are squeezed, they will move to save money. But they don’t want to live poor.  And when they find they can have a nice suburban life in places like Atlanta, Memphis, Houston, Dallas or other similar big metros, for the same price they might pay to live in the rougher areas of San Francisco, Boston or New York, they’ll move.

That’s the beauty of real estate.  There’s no one “real estate market”. There are thousands of little ones.  And the advantage a Mom & Pop investor has is they can find those high quality, affordable areas and buy up assets that are still selling below replacement cost.  The key is understanding the fundamentals of the LOCAL market and having a great local team who can help you find the right deals.

We could go on (can you tell?), but you get the idea.  Don’t just rush in and buy any property anywhere just because you think it will go up.  It might.  But understand WHY and HOW it might.  Because it might not, and if you use a bunch of leverage with out a long term plan to service it (i.e., tenants employed in a strong job producing local economy), you might end up watching a painful replay of 2008.  Our friend (and 2014 Summit at Sea™ faculty member), Peter Schiff says the REAL crash is yet to come.

We hope he’s wrong.  But Peter Schiff was right about 2008. And after hanging out with on this year’s Summit, we think he’s a pretty smart guy.  But if you have the right properties, in the right markets, with the right financing structure and management team, you are very likely to whether any storm far better that those who are investing purely in inflated stocks for capital gains which are SOLELY dependent upon a greater fool coming in to buy you out at a higher price.

So learn to watch and love the headlines.  And if it gets too tedious for you, just tune in to The Real Estate Guys™ radio show.  We’ll watch the news and interview smart people to help us all understand it better.

One final word of caution:  Don’t let concern about the next crash keep you from investing.  In the face of falling dollar, sitting on savings could be the WORST thing to do.  Real estate investors are having a great time grabbing properties below replacement cost, locking on long term cheap debt, utilizing tax breaks to recoup upfront costs faster and positioning themselves to control one of the most fundamental and desirable assets in any market: the properties that people and businesses need to occupy in order to survive.

For now, listen to this episode and think about this real estate recovery and how you plan to take advantage of what’s happening right now.  Enjoy!

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed. Visit our Feedback page and tell us what you think!

6/23/13: Clues in the News – Students, Supply and Standards

Recent headlines proclaim that real estate is back!  While we’re happy to hear positive reports on real estate, the last run-up in response to Fed hyper-stimulation compels us to dig a little deeper.  Fortunately, there are lots of clues in the news that provide important insights into what’s happening in housing and what’s behind it.

In the studio to decipher the mysteries of the current headlines:

  • Your Sherlock Host, Robert Helms
  • His elementary Whassup co-host, Russell Gray
  • The Godfather of Real Estate, Bob Helms

After several years in the dumper, single family home residential real estate is making a comeback.  Recent headlines declare that a housing recovery is well underway.  Fed chair Ben Bernanke is hinting that he may begin to “taper” off the unprecedented levels of quantitative easing pumped into the world’s financial system every month.

Sounds great!  But is it?

It depends on how you look at it and what you do in response.  Sometimes it’s easy to get lost in the trees, but don’t worry.  That’s why we’re here.  We’ll take a look at the market from a bird’s eye view.

First, let’s talk about rising home prices.  Where have we seen this movie before?  Oh yeah, after the Fed pumped a gajillion dollars into the economy to calm things down after the dot com bust and 9/11, real estate went crazy from 2002 to 2008.  Many people made a TON of money.  Very fun.

But then a not so funny thing happened on the road to riches.  The financial markets imploded when it was discovered that the “growth” everyone was so giddy about was based mostly on air.  That is, the underlying fundamentals were weak. So market values were much higher than incomes and affordability said they should be.  Ahhh…it all seems so clear now.  That’s what we love about hindsight…it’s 20/20.

The other great thing about hindsight is that it helps you recognize a mistake when you’re making it again.

So… is this housing recovery real?

Well, if you bought a property in the last few years and it’s gone up substantially, you might say, “Who cares?  I’ve got gobs of equity!  Just look at my balance sheet!  Isn’t it pretty?”

If you bought in the last boom and have been stuck with an underwater property that you’ve been keeping on life support, you’re probably thrilled all your sacrifice is now appears to have paid off.  We’re happy for you.

But just like last time, today’s run up in values begs the question: what is all this appreciation based on?  Is it sustainable?  Remember, when it comes to equity, the market giveth and market taketh away.

To figure all this out, we watch the news.  Hidden in the headlines are insights into what’s going on – along with lots of invitations to do more homework.  And when it comes to real estate investing, we love homework.

Understanding that real estate, like many markets, is driven by demographics, when we saw an article titled, “Here Comes a Millennial Housing Boom”, it caught our attention.  After all, look what a profound impact the baby boomer generation had.  And the millennial generation is even bigger!

But this isn’t your parent’s America.

We also discover that Gen Y’ers are facing a different set of challenges that some folks say will hinder those millennials from jumping on the housing bandwagon…even if they wanted to (more on that in a moment).

One of the biggest obstacles facing the next big wave of home buyers is student debt.  Today, many young adults are graduating with huge amounts of inescapable debt. This negatively impacts their ability and willingness to take on mortgage debt.  And without lots of entry level jobs being created, some graduates are doubting the value of that expensive diploma.

Speaking of expensive paper…

Millennials are looking at their parents’ recent experience in home ownership and are saying, “Really?  No, I don’t think I’m in a big hurry to take on a 30 year debt obligation on a property that might unexpectedly tank in value.”  And who can blame them?  Perhaps as home prices escalate, they’ll have a sense of urgency to get in before the market gets too out of reach.  OR…they may decide to move to a more affordable, lower taxed area (we think there will be much more of that in the future).

Now to entice Millenials (and anyone with a pulse and a paycheck) to take on more debt, lenders are starting to lower lending standards.  Remember, a deposit at a bank is a LIABILITY to the bank.  To offset this liability on their balance sheet, they need to create an asset.  From a banker’s perspective, your loan is an ASSET.  As the Fed pumps the system full of dollars, most of them end up in banks, which now need to make loans.

Again, where have we seen this before?  It seems eerily familiar.

Still, as borrowers, we love easy money.  But as we discovered in 2008, easy money can skew values to the upside.  And when the easy money goes away, so do the values.  So if all your investing is based on passive appreciation (no fix up or other increase in utility), it’s smart to pay CLOSE attention to where that appreciation is coming from.  And don’t ever bet the farm on it.

If supply is limited and demand is high, then competition for available product can push prices higher.  If demand is fueled by strong and growing incomes, then you can have greater confidence in the stability of the values.  That is, the fundamental under the values are more solid, therefore the values are more solid.

But if the price appreciation is based on a temporary shortage and/or a loosening of credit, the underlying value drivers can quickly change thereby quickly changing values.

So when we saw this headline: “Supply Crunch to Take Steam Out of Home Sales” it also caught our attention. What’s causing the supply crunch?  Will builders respond decisively and build more?

Builders want to build.  That’s how they make their money.  They’re like flippers on steroids.  But they won’t do it if there are no buyers or the market won’t give them a high enough price to make it worth the effort.  Because of the flood of foreclosures on the market for the last several years, homes in many areas have been selling below replacement costs.  In such conditions, builders can’t afford to build.

Now that some markets will allow builders to sell at replacement cost plus some profit, they’re coming out of the woodwork and starting to build.  No surprise, given the recent increase in home prices, that builder confidence has increased.  They see values reaching a point where they can begin adding to the supply.

Of course, from our perspective, the increases in new home building combined with the flushing of more foreclosures into the market puts a little downward pressure on prices by increasing supply.  Rising interest rates adds to the student debt issue and soft jobs market to further hinder affordability (demand).   But will looser lending offset this downward pressure?  Only time will tell.

Here’s the concern:  If the only thing propping up the housing market is easy money, then you can expect more price volatility.  So if you’re investing for short term capital gains without adding any utility to the property (i.e., pure speculation based on the rising home prices), be VERY CAREFUL.  Get in and out fast.

Of course, we don’t really consider that kind of activity “investing”.  It’s the real estate version of day trading.  It’s a business.  The IRS looks at it the same way, which is why your short term capital gains are taxed like ordinary income.

If you’re a long term investor, this market offers a lot of opportunity.  In many markets, prices are still relatively low based on rental income, in spite of the recent price run ups.  Looser lending just means easier access to loans, which if used responsibly, can magnify your equity growth rate, so we’re happy there.  Interest rates, though rising, are still ridiculously low compared to cap rates.  What’s not to like?

If you’re a real estate syndicator (building a portfolio with investors’ money), a little bull (as in positive sentiment) in real estate should make it easier to attract investment capital.  And if the stock market continues to gyrate in hyper-reaction to anything the Fed says, many investors will be ready to take their stock profits and find something less nauseating.  You can help them.  Check out our Secrets of Successful Syndication seminar for training on how to set up your own real estate investment fund.

In any case, it’s a good idea to watch the headlines for Clues in the News.  Staying aware and informed is a great way to recognize opportunities and challenges in time to take appropriate action.  Because at the end of the day, information with action is useless.  We’re much more into Education for Effective Action™. 🙂

Enjoy this edition of Clues in News!

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed. Visit our Feedback page and tell us what you think!

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