An economy in triage …

(Here’s a 5-minute money read)

You probably know the global economy caught a virus and suffered a massive heart attack. Cash stopped flowing, creating a cascade of problems …

… including individual cell damage, organizations and systems in danger of failing, and almost certainly … brain damage.

So the monetary doctors at the Federal Reserve are infusing enormous volumes of liquidity … perhaps hoping sheer pressure will force cash to flow.

Concurrently, Uncle Sam is injecting free money right into Main Street bank accounts …

… while local governments are selectively allowing certain chosen industries to provide “essential” products and services.

We’re not criticizing or complimenting. It’s simply an observation of what’s happening.

In recent rants, we suggested that insane, absurd, unsustainable levels of systemic debt is the primary vulnerability …

… the kryptonite of the “super” economy the United States was purportedly enjoying … right up until it wasn’t.

It’s a long, convoluted rabbit trail to explain, but the short of it is simple … when cash stops flowing, debts go bad.

That’s bad enough. But of course, it gets worse …

All that debt is underpinning artificially inflated asset prices (yes, that’s where the inflation ended up … they just call it “the wealth effect”).

As debts go bad, asset prices PLUMMET …

… UNLESS, the Wizards behind the curtain conjure many trillions of new dollars out of thin air to prop up … EVERYTHING … and push asset values back up.

Of course, all those dollars aren’t really free.

But no one in the White House, Congress, the Federal Reserve, or the mainstream financial media will say it, because …

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Henry Ford

But YOU should know it.

It’s the reason real estate investing has been arguably the most powerful and reliable builder of real wealth for many decades.

Properly structured income-producing properties allow investors to hedge deflation, ride inflation, and enjoy high after-tax yields on equity along the way.

Of course, there’s risk. And real estate investing is more work and takes more education than “invest and forget” or “buy low/sell high” paper asset investing.

But with ALL forms of investing … when external factors change, your investing strategy and tactics need to change too.

Right now, external factors are changing FAST. But it’s too early to tell if we’re facing an unpleasant cold front … a deadly blizzard … or a new ice age.

However it’s safe to say storm clouds have formed … and inclement economic weather is threatening to engulf the entire world.

This is notable because it usually takes a strong lead dog to pull the pack and sled through the snow … though that sometimes comes at a price.

China took on nearly $33 trillion in new debt to help pull the world out of the Great Financial Crisis of 2008. It’s doubtful they’ll do it again.

So contrary to popular myth, this 2020 crisis-in-waiting is probably NOT 2008 all over again.

Of course, the how and why won’t be clear until we’re on the other side.

But YES, the sun will come back out … eventually. Right now, it’s cloudy and cooling with very limited visibility.

So rather than delve into tactical details for right now …

(we’re interviewing many of our boots on ground teams and we’ll be talking on the radio show about what they’re seeing and doing right now)

… we think it much more useful to share what we’re watching and why …

Jobs

The MOST important thing is jobs.

When we interviewed then-candidate Donald Trump and asked about his housing agenda, his one-word answer was, “Jobs”.

But jobs are only the start of the financial food chain.

Tenants’ jobs provide your rent, which provides your mortgage payments. Obviously, homeowners’ jobs are the source of their mortgage payments.

Mortgage payments often get made to servicers, who in turn forward the income to investors often via mortgage-backed securities (MBS).

But when enough payments get missed, those MBS lose value. And if they’re leveraged, that loss in value triggers margin calls.

Margin calls then force leveraged paper investors to post cash or face a forced sale of their pledged assets at a loss.

(This is where all the excessive systemic debt is the biggest problem … in that regard this IS 2008 all over again … only bigger)

If you’ve ever been on the wrong end of a leverage stock investment and received a margin call, you know exactly what that’s like.

Sometimes, highly-margined paper traders need to sell anything and everything at ANY price in order to raise cash … or end up bankrupt like Lehman Brothers in 2008.

These fire sales cause paper asset prices to collapse, triggering more margin calls, and a vicious downward cycle of asset price deflation.

That’s financial system contagion and when you see RED flashing across all the financial market indices.

The “patch” is for the “Plunge Protection Team” and/or the Federal Reserve and their proxies to step in and bid up prices … the Fed’s “asset purchase programs“.

Of course, when this happens, markets see a blip up, and cash-starved traders “sell the rally” … which of course, creates more red.

Right now, the Fed is SO active, paper traders default to buying anything the Fed’s buying just to catch a free ride.

We wish real estate underwriting were so simple.

The REAL solution is productivity (jobs), NOT printing currency.

But neither the government nor the Federal Reserve can “create” jobs. The best they can do is foster an environment where private enterprise creates jobs.

Right now, just the OPPOSITE is happening. They’re shutting everything down.

Until that’s fixed and businesses have time to rebuild … economic malaise and financial system (credit markets, banks, currency) instability are likely.

Sorry to burst your bubble … oh wait, something else already did that.

The Dollar

As we’ve been pointing out for some time, the Federal Reserve is using their printing press to “borrow” trillions of new dollars from the purchasing power of ALL dollar holders worldwide.

Read that again. And if you don’t CLEARLY understand it, then make a note to study this topic until you do.

It’s probably the most important financial concept most people don’t understand, but should …

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” 
– John Maynard Keynes (look him up)

A fantastic resource for understanding the foundation of all this is The Creature from Jekyll Island by G. Edward Griffin.

Creature is a much more useful horror experience while sheltering in place than binge watching The Walking Dead.

And while you’re digging deep into the design of the dollar system, be sure to study its ascendancy to world’s reserve currency status in 1944.

Then go even deeper and consider what YOUR world will look like if the dollar loses that reserve currency status. Most Americans are NOT ready.

However, as we chronicled way back in 2013Russia and China have been on a mission since 2010 to knock King Dollar off the throne.

As pointed out in the opening session of the Future of Money and Wealth program, Russia and China are in a MUCH better position to pull it off today.

Are they? Will they? Maybe. Maybe not.

But it’s no secret they want to … and have been working on it for a long time. They’ve reiterated it in word and deed on many occasions over the last 10 years.

Which brings us to …

Gold

Gold is the oldest and most universal form of money.

“Gold is money. Everything else is credit.”
J.P. Morgan

And apparently, the rest of the world is adding to their gold savings ….

 

 

Again, this has been going on since 2009, when China publicly warned the U.S. about protecting the value of dollar.

But Uncle Sam’s debt swelled nonetheless.

And the Fed’s balance sheet exploded from $800 billion to $4.5 trillion in 2012 … and is now $6.6 trillion and still GROWING. That’s all freshly printed dollars.

No wonder the world went to work on breaking their dependency on the dollar.

You may know gold is at all-time highs against every major paper currency in the world … except the dollar.

Stated inversely, paper currencies have collapsed to their all-time lowest values against gold … and the dollar is getting there … probably soon.

The ultimate currency insiders … central banks … accelerated their gold acquisition over the last two years. Hmmmm ….

What’s in YOUR safe?

Bringing it Home to Main Street

It’s no secret all us outsiders are on the front end of what looks to be a severe economic contraction.

Individuals, businesses, industries, asset classes, and even countries …are going to feel it. Real estate is not immune.

But even as you prepare for the worst, there are bright spots …

U.S. Manufacturing and Agriculture

In the short term, it’s ugly.

But long term, it seems policymakers and John Q. Public realize it’s important to have more manufacturing back in the United States.

Shortages of masks and medicine sent a message. We’re guessing many industries will consider or be coerced into moving.

So we’ll watch for opportunities in currently overlooked geographies where a migration of manufacturing might create a resurgence in real estate.

Energy

Again, energy is depressed right now because of a temporary collapse in demand.

But that also means choice assets are on sale. Meanwhile, less efficient production is going off-line … perhaps permanently.

So unless you think economic activity has ceased forever, then at some point the demand for energy should rebound … even more so if more manufacturing makes its way back to the USA.

Cheap Debt

Stimulus almost always means free money.

While borrowing to spend is stupid, borrowing low and long to invest high and short can be very smart … and profitable.

And right now, credit markets haven’t collapsed … yet.

So, it’s probably still a great time to quickly load up on cheap dollars, some precious metals, and high-yield debt secured by real estate you wouldn’t mind owning.

Distressed Assets

Of course, tough times means wrong-footed investors will need to let go of nice properties in good markets because they’re only structured for sunshine.

They’re selling because they have a problem, and when you buy … even at a discount … you help solve their problem.

And while it’s nice to buy at the very bottom, what really matters is where everything is at 10-20 years from now.

So, don’t be shy to buy if a deal makes sense … even if there’s a chance more air will come out. After all, you don’t know what will happen tomorrow.

Until next time … good investing!

 

Doing what you can to weather the storm …

Welcome to Part 2 of our discussion on the root cause of the current coming financial crisis and what you can do to survive and thrive.

We got a lot of positive feedback on Part 1 (thanks for that!) and folks have been anxiously waiting for this Part 2.

Fair warning: This is a whopper … and we didn’t get to everything. This easily could have been a three- or four-part series … or even a book or full day webinar!

(We’re working right now on the webinar … stay tuned!)

For now, we’re guessing most HIP (Hunkering In Place) people have more time these days, so we’re hoping you won’t mind the “bonus” material in this edition.

Last time we highlighted how the world is saturated in absurd, insane, unsustainable amounts of debt.

Debt is the cancer the Coronavirus crisis exposed, but the financial system disease pre-existed the virus. It’s been a concern of alert investors for years.

That’s because even the slightest disruption of payments can trigger downward spiral contagion of margin calls, fire sales, asset price deflation, and a lock down of credit markets.

That’s what happened in 2008 … and this portends to be MUCH bigger.

With global economies operating skeleton crews, commerce has declined precipitously and cash has stopped flowing.

It’s a global economic heart attack.

And with layers and layers of hypothecated debt daisy-chaining balance sheets of governments and financial institutions around the world …

… a wide-spread disruption of payments is an abject financial catastrophe of biblical proportions.

That’s why the PTB (powers that be) are desperately funneling freshly printed money directly to anyone (which is everyone) who has payments to make …

… while concurrently putting a faux bid on critical credit assets to prop up values and balance sheets.

And that’s just what we can see. Who knows what’s happening behind the curtain.

One thing few people are tracking or preparing for is the possibility the dollar might not be strong enough to paper over a global debt implosion.

It’s unnerving … yet important to pay attention because it takes time to react and things are happening big and fast.

So ready or not, the storm is here. However, the worst hasn’t hit yet … and when it’s over (this too shall pass), we expect there will be lots of opportunity.

Your mission is to get in position NOW so you can cash in when the clouds clear.

So if you haven’t read part 1, click here now to catch up.

Remember, there’s nothing you can do about events and circumstances outside your control. So while politics and philosophy are interesting …

… it’s best to focus on the short list of things you CAN control … so you can better react to those things you can’t.

Here are some suggestions …

Get Centered

First and foremost is MINDSET. How you think and what you believe affects your actions … and your actions determine much of what happens to you.

Mindset matters even more when facing adversity and chaos. Times like these can quash your enthusiasm and optimism.

You won’t see opportunities you don’t believe are there. And you won’t work or sacrifice to prepare if you’re convinced your efforts are futile. Hope is powerful.

Hope isn’t an irrational fantasy. In addition to the prescient warnings history gives us about the possible and probable dangers in the future …

… history tells us that tough times don’t last because humans always find a way to both survive and thrive. If they didn’t, we wouldn’t be here.

Of course, just because some people thrive … doesn’t mean YOU will. But if some can, then so can you … and it starts with mindset.

Get Smart

Equip yourself with knowledge, wisdom and perspective. It’s important to increase your education in the things that matter most.

If all this financial system, macro-economic, geo-political mumbo-jumbo is new to you, it can be overwhelming. But so was algebra … and most of us figured it out.

Think about how much time, effort, energy, money, and thought you put into earning, spending, saving, and managing “money”.

Then remember that all those activities fit inside a complex system … with powerful people and institutions either influencing or directly controlling critical factors.

Can you afford NOT to take your financial education SERIOUSLY?

Of course, you’re reading this, so we’re preaching to the choir. Your mission is to go evangelize to the world.

Every person you inspire to take effective action to grow and protect their wealth makes the very society YOU live and invest in more prosperous … both for you and everyone else.

We’re all in this together and we need each other to succeed. And speaking of others …

Get Connected

The next thing you can work on is your network … or what our friends Chris Martenson and Adam Taggart at Peak Prosperity call “social capital”.

The old cliché, “It’s not what you know, but WHO you know that’s most important” became cliché for a reason. It’s TRUE.

Your network of fellow investors, mentors, advisors, and boots on the ground teams are essential sources of wisdom, intelligence, deals and capital.

Yes, it’s temporarily harder to get together physically in today’s wild world of compelled isolation …

… but it’s also never been easier to find and connect with other people through technology.

Of course, reconnecting with your party friends from college and complaining about being locked down isn’t what we’re talking about.

Be diligent to build relationships with the RIGHT people … those who are realistically optimistic, studious, thoughtful, connected, and active.

Just go watch It’s a Wonderful Life to remind yourself of the value of social capital.

Okay … we’re guessing by now we’ve already lost some of the left-brained engineers. But if you don’t make mindset, education, and strategic relationships a priority …

… all the tactical training in the world can’t help you because you probably won’t have the emotional, intellectual, or relationship capital to take action.

If money solved all the problems, we wouldn’t be having a crisis.

Now with all that said, let’s take a look at a few things the window of opportunity could be closing on. If you can’t focus on everything, these are worthy of top of list consideration …

(Remember … we don’t give professional legal, tax, or investing advice. We simply share ideas for your consideration as you consult with your own advisors and mastermind group.)

Get Liquid

Cash is like oxygen.

If it stops flowing in from commerce, you need to breathe from your balance sheet … by either liquidating assets or tapping into credit lines.

When you know you’re headed underwater, it’s smart to take a DEEP breath … before it’s too late. History says when you need credit the most, it’s least likely to be there for you … in spite of the marketing slogans.

Look at an experienced player like Ford Motor Company. They borrowed heavily in 2006 ahead of the 2008 crisis … and survived without a bailout (unlike GM).

And Ford just did it again.

They’re not the only ones. MANY seasoned CFOs are drawing down credit lines even as credit markets are tightening.

Meanwhile, in a desperate attempt to keep credit markets open and backstop everyone, the Fed is printing as many dollars as it takes … and it’s taking a LOT.

We think investors who get liquid while they have equity and access to affordable credit will be happy campers down the road.

After all, in a crisis cash is king. Or is it?

Actually, it’s liquidity that’s king. So while dollars are the life-jacket du jour right now, they may not be the lifeboat you’re looking for.

Get Real

Even though we’re The Real Estate Guys™, we’ve been around long enough to remember when dollars and money were the same thing.

The coins we’d buy our comic books with were made of silver. And dollars the U.S. printed were simply coupons redeemable for the real money … gold for foreigners and silver for citizens.

Of course, all that changed decades ago. In 1965, the United States stopped minting money and started minting zinc-plated copper tokens.

Gresham’s Law says when bad money is introduced into an economy, the good money goes into hiding. Good luck finding a silver coin in your change at the grocery store.

In 1971, President Nixon told the world their gold-backed dollars were no longer gold-backed. But while the dollar stopped being money, gold didn’t.

That’s why that $35 ounce of gold in 1971 is now worth $1600. The gold didn’t change. It’s still 1 ounce. It just takes a lot more dollars to buy it.

So an ounce of gold in 1971 was a better long-term store of value than 35 dollars.

There’s SO much to say on this one topic. For now, we’ll focus on just a few important points …

Precious metals give you a place to park liquidity outside of counter-party risk where you can pivot into virtually any currency. Those are two nice features in many forms of crises … including a dollar crisis.

Precious metals are real … just like real estate. When currencies fail, anything real is worth more than paper money. Look at toilet paper in Venezuela.

People are confused and confounded by metals because they think of them like a share of stock or a piece of property … just a something to flip for capital gains … in dollars.

Part of getting real is learning to think of wealth and profit in non-dollar terms. It’s not easy … especially for Americans.

So while traders use metals (or more accurately, futures contracts) to flip for dollars … cash flow investors complain precious metals don’t produce a yield, so what good are they to hold?

Yet, Mr. Cash Flow himself, Robert Kiyosaki, is a serious collector of metals. Think about that.

We find it easier to think of precious metals as equity.

And when we have equity in properties and we’re not ready to use to buy more properties, we’d rather have it in metals than in dirt.

As much as we love real estate equity… it’s very fickle, fragile, illiquid, non-private, and accessible to predators.

At the Future of Money and Wealth conference, we explained a simple strategy to convert real estate equity into precious metals …

… while improving cash flow, privacy, asset protection; reducing taxes and counter-party risk;

… and simultaneously hedging equity against both inflation and deflation.

Whew! That’s a lot of output from one simple strategy. And you can’t do it with paper assets.

Folks who were there in 2018 and acted on this idea are likely VERY happy they did. They probably made MANY times what they invested to attend the conference.

Of course, there were also those who “saved” by NOT attending. Remember, how you think affects what you do, which affects your results.

The MAIN point is it’s not too late to take a good look at precious metals as an alternative to cash (especially in the bank) for your liquid reserves.

Get Protected

This is probably the most boring of preps, but still super-important for anyone with a lot to lose. Crises can make people crazy.

Frightened people are buying guns, dogs, and security systems to protect against the possibility of desperate and hungry street thugs from taking their treasures.

But when stuff gets weird, street thugs aren’t the only people who are desperate and hungry.

So are opportunistic tenants, employees, customers, and their lawyers.

If your lawsuit protection and insurance structures aren’t updated and robust, NOW is a great time to evaluate them.

The best time to repair the roof is while the sun is shining. The next best time is when dark clouds are forming, but the deluge hasn’t hit yet. Like NOW.

Get Going … and Going … and Going …

You probably know there’s a WHOLE lot more to riding out this storm.

Here are some closing tips … and we’ll have a lot more in the Crisis Investing webinar we’re putting together.

This is probably a great time to revisit your financing and lock in low rates long term on properties you plan to keep.

It’s a great time to review or develop a serious tax-saving strategy to help pay for your “roof repairs”.

Explore all your options under the various stimulus bills and loan programs.

Consider helping your tenants explore their options for financial help. After all, some of those funds can be used to pay you rent.

Be proactive with your lenders to be sure you understand your options if you do suffer a reduction in rents.

That’s defense. But you can’t score without paying offense.

Even if you’ve restructured and gotten liquid, you might need extra reserves to ensure your own stability through the storm. But it’s hard to play offense without resources.

So if you don’t have enough funds to capture all the opportunities you anticipate, the timing has never been better to learn to raise private capital.

Sure, lots of stock market millionaires may find themselves demoted to the thousandaire club.

But the multi-millionaires … the millions of people with a few million or more left over … even after a nasty bloodletting … are going to be eager to rebuild.

Those folks have capital to invest. And while they may be interested in real estate, they may not want to get their hands dirty.

YOU can help them … for a slice of the pie. When you get a few of those people on your bus … all your little slices add up, so you can play big without taking big risks.

Lastly as we’ve been saying since 2008, markets and teams matter.

Picking the geographies, demographic, product types MOST likely to prosper in the coming economic environment is a more important than ever. And wherever that is you’ll need to have (or be) a great boots on the ground team.

With all this stimulus still rolling out, it’s not yet clear where, when, and how the trillions will make its way to Main Street.

But the Fed and the politicians are DESPERATE to get the cash into circulation.

You can bet we’ll be watching how all this plays out and which markets benefit most … as should you … and all the people in your strategic network.

One thing is certain …

No matter how the world changes, people will still need real estate to live, work, farm, and play on.

So stay tuned because as you can tell, we have a LOT to say on this topic. After all, we’ve been preparing for this time for over a decade.

Until next time … good investing (from a safe distance)!

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!

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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.


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Welcome to uncharted territory …

Even for a couple of old dudes, we’ve never seen anything like what’s happening now.

And we’re not just talking about the COVID-19 pandemic, though it’s proving to be the proverbial “black swan” financial pundits have been watching for.

Preppers (financial and otherwise) are feeling slightly vindicated, while mockers perhaps a little foolish. Peter Schiff is suddenly getting popular again.

Meanwhile, folks who were asleep at the wheel are snapping awake to find they’re on a collision course with a financial crash … and they’re not buckled up.

Of course, there’s the news … and the news underneath the news that the clues in the news help us find.

With all the chatter right now, it’s a little scary.

It’s important to stay calm, think clearly, and engage in quality conversations with experienced, informed, and diligent investors.

That’s what we’re doing … and because our ability to travel and attend conferences is currently curtailed, we’re using alternatives.

It’s more important now than ever to get and stay connected.

Our mission this muse is to point out some things we think are very important for investors and entrepreneurs to consider as we all sail into stormy uncharted waters together.

First of all, we’re thankful to live in a world where news and perspectives are readily available.

Access to information and ideas helps each of us find our tribe and feel connected … even in the midst of isolation and potential quarantine.

Thank you for being a part of our tribe.

In a world full of fear, uncertainty, and doubt, there’s likely to be some emotional conflicts about what’s right, who’s right, what should be done.

The truth is … nobody really knows.

So here are a couple of principles we mutter to ourselves in those times we get upset or stressed out …

“There are three sides to a coin. Head, tails, and the edge. The only way to see both sides of any issue is to stand on the edge.” 
– Robert Kiyosaki

“When emotions run high, intelligence runs low.” 
– Blair Singer

In times like these, we think you’ll find those principles useful.

While we’re on the topic of helpful principles gleaned from the minds of smart people …

“Be fearful when others are greedy, and greedy when others are fearful.” 
– Warren Buffet

Most of the world is hunkering down. When you don’t know what to think or do, it’s easy to sit out and hope … or to follow the herd.

We’re not fans of either approach. Just like a physical disaster requires brave first responders, so do financial and economic disasters.

We’re not saying this is a disaster … yet. But it’s not fear-mongering paranoia to suggest it could turn into one pretty quickly.

Better to be prepared and not have a crisis, than have a crisis and not be prepared.

Of course, bad times aren’t the end of the world. They’re just part of the cycle of life.

Our friend and history buff Simon Black often reminds us that over centuries, through wars, pandemics, oppression, and natural disasters … somehow, someway, humans rise to the occasion.

We come together, we figure it out, and we go on to build a better world.

Sure, there are a lot of rocks, potholes, and pitfalls on the road to recovery. But as a little orphan once said …

“The sun’ll come out … tomorrow. Bet your bottom dollar that tomorrow … there’ll be sun.”
– Annie

With all that said, we’re going to take a quick tour through the HUGE amount of clues in the news. If you’re new to all this, it might seem confusing or irrelevant.

That’s what we used to think before 2008.

Then after getting smacked down, we realized the warning lights were flashing the entire time. We just didn’t know what they meant.

So don’t get bored, irritated, or discouraged. Just dig in and keep studying … especially if you’re in the camp of people caught flat-footed by the recent turn of events.

The stock market is tanking. Everyone can see it. It’s what most people talk about.

But contrary to popular tweets, the stock market isn’t a proxy for the economy … or the financial system.

The news is warning us the financial system is in deep distress …

The Fed’s hair is ON FIRE. Back to back emergency rate cuts.

And they’re putting ONE TRILLION DOLLARS PER DAY into the repo market … which was flashing trouble way long before COVID-19 showed up.

The Fed also cut rates to ZERO and pledged to buy up $700 billion in Treasuries and mortgage bonds. The last time they did that was the 2008 financial crisis.

The Fed also dropped bank reserve requirements to ZERO. So your bank doesn’t need to have a single penny in reserve to back up your deposits.

Meanwhile, the Federal government (which is different from the Federal Reserve) is planning a $1 trillion fiscal stimulus (spending) plan to help boost the economy.

But the Federal government doesn’t have a trillion dollars. Apple probably still has more cash than Uncle Sam.

And because there’s already a huge cash crunch, the Federal Reserve will need to print all those dollars … and buy Uncle Sam’s bonds, so Uncle Sam can spend.

But how do you boost an economy that’s shut down? You can’t step on the gas of a parked car and expect it to go fast.

Worse, many businesses and jobs may not survive an extended shut down … or even a substantial slow down.

For example, the oil industry was almost the sole job creation vehicle for the U.S. coming out of 2008. To get there, the shale industry took on TONS of debt.

You could argue whether the debt made sense at $60 a barrel.

But at less than $30, many oil companies will go bankrupt. Until and when they do, lots of jobs will be lost.

Perhaps, it’s obvious that job losses make it hard for tenants to pay rent … which will eventually make life hard for landlords.

So although real estate is insulated from the price declines Wall Street is facing, it’s not immune. And some of these “cures” could be worse than the disease.

But we’re not saying the Fed or Uncle Sam should or shouldn’t be doing what they’re doing. It doesn’t matter what we or anyone thinks SHOULD happen.

This isn’t a policy discussion. It’s a REALITY discussion because it’s happening.

But if the Fed blows up its balance sheet to ten trillion or more, what happens to the dollar? Over-printed currencies fail. The dollar isn’t immune.

And if production is shut down because no one’s going to work, what happens to production? Are empty shelves the exception … or the rule?

Lots of cash and empty shelves in Venezuela. Yikes.

There’s more bad news, but we know you can only handle so much.

So take a deep breath …. exhale slowly … ahhhhh …..

The world isn’t ending. It’s changing. The pace of change just accelerated, which means you need to process and react faster.

It’s not too late to look at your portfolio, sources of income, strategic direction … and do a SWOT analysis … Strengths, Weaknesses, Opportunities, Threats.

They’re all present … if YOU are.

People, businesses, and money will all migrate in search of safety.

So certain markets, asset classes, investment vehicles, and structures will lose.

Some will win.

Your mission is to look at the landscape of the changing reality and make good decisions about where YOU go from here. Get in a position to thrive.

We’ll be talking about this a LOT in the weeks and months ahead. Stay tuned!

Is this a cure for coronavirus?

There are SO many things happening in the financial news and markets right now, it’s hard to focus on any one thing and say it’s the biggest story.

Obviously, the coronavirus panic is dominating headlines and airwaves everywhere.

And many of the other major stories such as stocks, bonds, interest rates, and oil prices all seem to be considered somehow a derivative of the coronavirus.

Of course, we just keep asking … what does all of this mean to real estate investors?

Two weeks ago, we posited interest rates would fall as investors piled into U.S Treasuries for both safety and speculation.

Of course, we were right … but not because we’re brilliant, but because it was SO obvious.  As Treasury yields collapsed, mortgage rates followed.

And because you never know how long these “sales” on cheap money are going to last, it’s a good idea to watch for clues … and then move quickly when opportunity presents itself.

The odds are the coronavirus scare will last months … but your uber-cheap mortgage can last for decades. Nice.

Last week, we dug a little deeper into the WHY behind collapsing rates after the Fed came out with an “emergency” rate cut.

Though billed as a preemptive strike to stop recession, most pundits viewed it as a lightly veiled attempt to calm traders and boost stock prices.

How’s that working out so far?

Of course, WAY before coronavirus, we’ve been pointing out …

… the financial system is fragile,

… the Fed’s intervention in the repo market is a potentially ominous sign,

… and gold could be flashing a “bridge is out” warning even as the U.S. economy is hurtling down the highway at a decent clip.

In other words, the coronavirus might not be a cause, just a catalyst.

Which brings us to the theme of today’s muse …

Insulation matters. And when the climate is extreme, people who don’t have it, want it.

Right now, MANY people are discovering their portfolios are naked and exposed to the extreme hots and colds of publicly traded financial markets.

Equity investors are experiencing nauseating drops and dizzying bounces … all within an overall trend which is flirting with becoming the mother of all bears.

Income investors are watching yields collapse 30-50% from already anemic levels. Savers and income investors were already suffering. Now it’s torturous.

When yields aren’t enough to live on, you have no choice but to consume equity.

And it’s hard to ride the equity roller coaster back up if you to get off at the bottom to eat.

It’s like a starving farmer who eats his seed corn has nothing to plant for food in the future. He eats now but is doomed in the long term. Equity consumption is suicidal.

So while the coronavirus might threaten your physical health, the vast majority of people who catch it will survive and go on to thrive.

But the effects of the panic on fragile financial markets are definitely making paper asset investors’ portfolios sick … and recovery could take a LOT longer.

Of course, most real estate investors are doing what they often do when these things happen … much popcorn, watch the fireworks, and cash rent checks.

Sure, if the storm is bad enough, it can blow your insulated, brick real estate portfolio over too.

But compared to the poor folks living in straw portfolios built only for sunshine, real estate looks pretty darn secure.

So it’s no surprise, that even the mainstream financial media are pointing out the safety features of real estate … at least what they think is real estate …

Don’t Panic – Buy REITs
Forbes, 3/9/20

These are the safest and highest dividend-yielding REITs as the coronavirus spreads, BofA says
– MarketWatch, 3/7/20

REITs And Bonds Rose Last Weeks As Global Stocks Fell
Seeking Alpha, 3/10/20

Of course, REITs are still publicly traded stocks … essentially a mutual fund collection of individual properties all put into one fund and offered in the Wall Street casinos.

So, while real estate is attractive in times like these, REITs are still subject to Wall Street volatility …

REITs fall in February amid broader market sell-off
Institutional Real Estate, 3/10/20

Perhaps obviously, the further you are away from Wall Street, the more insulated you are from insane volatility.

Of course, as a real estate investor, YOU already know this. That’s why you read commentaries like this, and probably don’t have much exposure to Wall Street.

But remember there are MANY MILLIONS of people who haven’t discovered real estate investing … yet. Or only think of it as Flip This House.

Of course, true real estate investing is about using low cost, long-term debt to acquire passive income and generous tax breaks …

… and enjoying superior cash-on-cash yields (compared to bonds), while benefiting from long term inflation … insulated from short term deflation.

Real estate is slow, boring, and STABLE. And right now, stable is sexy.

As we’ve said before, you’re not seeing headlines announcing rents have collapsed 50% in the last 90 days because of coronavirus. That’s short-term deflation.

And ten years from now, when this current panic and its ramifications have joined all the other freak-outs of the last 100 years in the dust bin of history … do you think it’s more likely rents and real estate values will be up … or down?

History says “up” in dollar terms … because the dollar has a 100+ year history of losing value against REAL assets.

And most of what’s going on right now … more printing, more debt, more deficits … is BAD for the dollar in the long term.

Sure, most people can’t escape the temptation to gamble. “Buy low, sell high” brainwashing makes it nearly impossible to resist Wall Street volatility.

But SOME people … especially more seasoned folks … will decide the Wall Street roller coaster is more nauseating than intoxicating … and they’ll want off.

So while we’re concerned about the coronavirus panic and its near term effects on the economy and the financial system …

…. we’re SUPER EXCITED about the lessons being learned by Main Street Americans.

Because when more of Main Street gets back to real investing … in real assets and cash flow …

… it could create a big flow of funds out of Wall Street into Main Street … where the real wealth comes from and belongs.

Last time we looked, there’s usually BIG opportunity when money starts moving. The key is to put yourself in a good position to help facilitate it.

So whether you choose to borrow lots of money flowing into bonds and acquire properties in your own account …

… or you decide to start a syndication business to raise private equity to pair with abundant and cheap debt …

… this isn’t a time to be hiding under your sheets with a bottle of hand sanitizer.

Yes, be careful and stay healthy.

But keep your eye on the long-term big picture. It’s easy to get lost in the hype and miss big opportunities that grow out of the chaos.

Fed drops a BOMB … but will it work?

You probably heard the Fed just dropped their interest rate target 50 basis points … which is economic geek speak for half a percent.

If you’re a devoted market observer, you’ve probably seen a dozen reports with as many interpretations about why they did it and what it means to everyone … except YOU.

That’s because mainstream financial media doesn’t talk to real estate investors. In fact, they barely acknowledge we exist …

… and they surely have NO idea how we think or what we really do.

They just look at investing through their “buy low, sell high” paradigm …

… and are therefore understandably obsessed with trying to divine which direction the next bloviation from the Eccles building will send the paper trading lemmings scurrying.

To Wall Street, “investing” is sprinting in and out of positions faster than the crowd. Miss a step and you get trampled.

And MOST of what they think and say means NOTHING to Main Street real estate investors.

Meanwhile, issues critical to real estate investors (and syndicators) go completely ignored … leaving you to read between the lines for clues in the news.

Not to worry! Your friendly neighborhood compulsive-obsessive newshounds here at The Real Estate Guys™ radio show are here to fill the gap.

So … what’s a real estate investor to think … and do … in the wake of this latest extraordinary tactic by a clearly concerned Federal Reserve?

Let’s break the topic into bite size pieces …

First, the CONTEXT …

This is the Fed’s first “emergency” action …

(at least in terms of a big, unscheduled rate cut … pay no attention to the billions in “not QE” printed to plug the ongoing problems in the repo market)

… since October 2008.

Hmmm … that date seems oddly familiar … didn’t something big happen back then?

And if the economy is really as strong as everyone claims, WHY is this “shock and awe” unscheduled cut needed?

We’re being told this is in response to the Coronavirus threat to the economy. Some say the Fed’s move validates the fears of a global pandemic.

Weird. Weren’t all the recent press conferences designed to calm such fears?

But there’s a MUCH bigger question to consider …

If the threat of a pandemic has closed factories and broken supply chains, how does printing more money fix that?

Hint: It doesn’t. But it does create some other side effects investors … real estate and otherwise … probably want to pay attention to (more on that in a moment).

We think there are a couple of issues at play …

First, as we’ve been saying for the last few years, there’s an important difference between economic activity (the speed of the vehicle) and the financial system it runs on (the vehicle itself).

If your car is zipping down the road to riches at 75 miles per hour, you’re feeling like you’re making great progress.

But if you don’t notice the oil pressure dropping and engine temperature rising, you won’t know the vehicle is breaking down … and your trip is in jeopardy.

Make sense?

Gold, oil, the dollar, and interest rates are all important gauges on the financial system dashboard …

… right alongside the speedometer and tachometers of employment and GDP, which measure the speed of the economy.

We think there’s a possibility the Fed is injecting liquidity trying to lubricate an engine that’s on the brink of breaking down.

Remember, the repo market crisis all happened BEFORE the coronavirus showed up.

The second major issue helping put the Fed’s latest move in context is a variation on the same theme … interest rates.

But not the “let’s lower interest rates to stimulate this already red-hot economy” use of interest rates.

More like the “let’s put a bid on bonds to prop up fragile credit markets” kind of interest rates … the “black hole event horizon” kind (which is a much bigger discussion we’ve had before).

For today’s discussion, here’s what you need to know …

The Fed doesn’t “set” interest rates. They simply set a target at which to aim their “open market operations”.

This is a confusing way of saying the Fed will buy or sell bonds in the open market in order to manipulate interest rates up or down.

When the Fed sells, it adds to supply, driving bond prices down and interest rates up. That’s clearly NOT the plan right now.

So the flip side is the Fed plans to BUY bonds, bidding UP the prices, and driving interest rates DOWN.

Here’s the important point …

Bond traders KNOW this. And they also know the Fed will pay ANY price to make it happen.

Rising interest rates would be like SAND (or worse) in the financial system’s engine … triggering a wave of defaults, margin calls, and a liquidity crisis of biblical proportions. It would make 2008 look like a bad hair day.

So what do bond traders do? (And yes, you should care …)

Bond traders FRONT-RUN the Fed and PILE into Treasuries, bidding them up, driving interest rates DOWN … to ALL-TIME lows.

Yes, we realize many headlines claim “scared” investors are fleeing the “dangers” of the stock market to the “safety” of bonds.

Maybe … but we think not.

Our guess is it’s not fear, but greed driving the flurry of Treasury bond buying.

Meanwhile, let’s now quickly consider the potential ramifications for Main Street real estate investors 

The most obvious is what we discussed last time … low interest rates create a big opportunity to restructure debt and acquire new cheap debt.

We also think TRUE safety-seekers will start migrating into real assets … like precious metalsoil, and real estate.

Of course, we’ve been talking about this for years. But these macro trends roll out slowly, so we’re pretty sure there’s a lot of room to get on the long-term trend train.

And while we could (and probably should) discuss what the rise of precious metals and oil say about the dollar, we’ll probably save all that for the Summit … when he have all big brains with us.

The more germane discussion for real estate investors is the effect of low interest rates on income producing real estate.

Three words: Shrinking. Cap. Rates.

As Treasury yields fall, they pull down the yields on ALL investments, including rental properties.

Of course, as any seasoned real estate investor knows, falling cap rates mean RISING prices … and EQUITY for those who acquire real estate at the front end of the cycle.

As insane as it seems, this move by the Fed suggests the bull market in cash-flowing real estate might actually be getting a booster shot.

But BE CAREFUL … because it’s easy to get sloppy with underwriting and market selection when things get hotter and even more competitive.

Always remember, unlike stocks and bonds, people still need real jobs to make income properties perform. It’s hard for unemployed tenants to pay rent.

While admitting we’re far from experts on the matter, our guess is the coronavirus crisis will come and go like the many others before it.

So the real lasting impact may not be (hopefully) loss of large numbers of human lives … or even major disruptions to America’s economy or individual lifestyle and freedoms.

But it may wake America up to the vulnerability created by an over-dependence on Chinese manufacturing …

… and a renewed enthusiasm to bring more manufacturing back to the United States.

These are the kind of durable jobs with the potential to drive a sustainable surge in demand for real estate of all kinds.

Smart investors will be watching to see if and where these jobs end up … and will jump in to ride the wave as those markets revitalize.

Yes, these are troubling times. But they’re also full of lessons and opportunities.

The odds are good that the world will not just survive, but thrive, despite the consistent parade of threats and temporary turmoil.

Real estate investing is a long-term game played best by watching the long-term trends … and letting real estate do for you what it does best …

… providing investors with a way to profit from the long-term decline of the dollar while staying mostly insulated from the wild volatility of the Wall Street casinos.

Coronavirus could be coming to Main Street …

By now you’ve probably heard about the coronavirus. It’s big news and appears to be getting bigger … and there are MANY angles on the story.

Of course, we’re just The Real Estate Guys™ … not the virus guys … so we’re not qualified to have an opinion on the health risks or odds of a global pandemic.

But whether the coronavirus is truly an existential threat to all humanity … or just another run-of-the-mill frightening event that fades into obscurity …

… it’s certainly creating some economic upheavals all investors (even real estate investors) should be paying attention to.

And as long as we all survive long-term, the coronavirus crisis is raising notable concerns and creating short-term opportunities.

To be clear, we’re not making light of it … or suggesting that economic consequences are the most important aspect of the coronavirus story.

But since we don’t have the expertise or ability to change what’s happening or to advise on how to avoid the health risks … we’ll just focus on the investing considerations.

It’s safe to say the coronavirus could be the proverbial “Black Swan financial pundits constantly obsess about.

No one saw it coming, and then … BOOM! It’s here. And it’s already having a profound effect on stocks, bonds, currencies, and commodities.

Of course, the big question is … what does the coronavirus mean to real estate investors?

In the short term, it creates an opportunity …

As freaked out paper asset investors jump into safe havens, lots are ending up in U.S. Treasuries.

This is bidding bond prices UP, driving bond yields DOWN …meaning interest rates are falling.

This pulls mortgage rates down and provides real estate investors with an opportunity to restructure existing debt and take on new debt

… and lock in those low rates for the long term.

Meanwhile, some safety seekers are piling into gold … and we think there’s two parts to that story … maybe three.

First, gold is the ultimate safe haven because there’s no counter-party risk (assuming you take physical possession) and you avoid specific currency risk.

In other words, you can store wealth in gold, and later convert it into ANY currency … not just the one you bought it with.

American brains often tilt here … because they only think in dollar terms. But the rest of the world doesn’t.

Sure, the U.S. dollar is still considered the “safest” currency … but as we explain in our Future of Money and Wealth video, “The Dollar Under Attack” … there are reasons to be careful of the dollar long term.

And enough investors in the world appear to agree … and they’re bidding up the price of gold in their flight to safety. That says something about the dollar.

But the BIG coronavirus story isn’t falling interest rates, spiking gold prices, or crashing stock markets …

As is often the case, investors and mainstream financial media pundits fixate (and trade) the symptoms … sometimes missing the real problem.

There’s a YUGE difference between a booming economy and a strong financial system.

During this U.S. election cycle, you’re likely to hear about the “booming economy” … and it’s true.

But even more importantly, it’s NECESSARY … and that’s the concern.

A global economic slowdown isn’t just inconvenient … it’s systemically dangerous on an epic scale.

This is what our big-brained friends help us understand and navigate.

The world is piled nose-high in debt … most of it at very low interest rates. And yet, it’s barely being serviced.

There are many tapped out “zombie” businesses who don’t even earn enough profit to pay their interest … which means their debt is a slow-growing cancer.

A spike in interest rates or a decrease in prices or economic velocity accelerates their demise … but that’s just the beginning.

Besides the obvious ripple effect of job losses through communities and supply chains … some of which would affect Main Street real estate investors …

… the potentially bigger problem is the ripple effect through financial system balance sheets which are holding bonds as ASSETS … assets they’ve borrowed against.

This is EXACTLY what happened in 2008 with sub-prime mortgage bonds.

It wasn’t the direct losses from a relatively small number of sub-prime defaults that imploded the system. It was the contagion because those modest losses were magnified by leverage.

But unlike real estate, when the collateral (the sub-prime bonds) declined in value …

… Wall Street loans come with cash calls when the “margin” between loan and collateral value shrinks too much.

Margin calls exploded throughout the system … forcing everyone to sell everything to raise cash. This crashed prices, triggering more margin calls …

… creating a vicious downward cycle until the bottom fell out.

So the Fed (and other central banks) stepped in with MASSIVE amounts of “quantitative easing” to put in a bottom and stop the free fall.

They printed trillions and bought the “toxic assets” no one else wanted. And as we now know, they’ve been unable to withdraw the patch.

After 10 years, the Fed tried to “shrink their balance sheet” and “normalize interest rates” (i.e., stop propping things up) …

… and they failed miserably on both counts. In fact, they recently had to take emergency action to blow it all back up.

So there’s a LOT of air in the financial system right now … all propped up by record levels of debt … which can only be serviced by a “booming economy”.

And that booming economy keeps the frailty of the system off many commentators’ radar … while “alarmists” like Robert Kiyosaki and Peter Schiff don’t get much media time to warn people.

That’s the way it was in 2008 … and that’s the way it is now.

The setup is the same as 2008 … just bigger. WAY bigger. And it’s all rooted in gobs of global debt …

China has taken on enormous debt to fund its phenomenal growth the over last two decades.

The coronavirus could push China into even greater debt … not to grow … but just to prop things up as their economy slows.

Corporations took on records levels of debt to fund stock buybacks over the last decade. Of course, this helped boost stock prices, but is it reliable wealth?

Households are also carrying record levels of debt … probably feeling rich because of high home and stock equity on their balance sheets.

Sure, inflated assets can make people feel rich … boosting consumer confidence … but how stable is it?

Equity is awesome … but it’s fickle. The coronavirus is writing a reality check for stock investors right now.

Meanwhile, the coronavirus is shutting down factories … even entire cities … which MASSIVELY slows economic activity … with global ramifications.

It’s like if you had a gigantic credit card with triple your annual incomes in consumer debt …

… but are barely able to make the payments working 60- or 80-hour weeks … and then your hours are cut.

Now instead of just getting by … you’re being swallowed by the debt.

Except it’s not just you … or a single corporation … or a few thousand sub-prime homeowners … or even a tiny country with a small global economic footprint.

It’s the ENTIRE globe … and it’s emanating from the second largest economy on the planet.

It’s hard for China to be the manufacturing engine of the world with closed factories and entire cities quarantined.

That means they use less energy, buy less commodities, export less products … which means shippers have less to ship, retailers have less to sell, and on and on.

ALL those businesses and employees in the chain … many of which are loaded with debt … take a big pay cut … putting all that debt in danger of default.

To “save” it all, central banks will need to print like crazy … and gold prices tell us smart investors are concerned about that.

Gold is at record highs against EVERY currency in the world … except the U.S. dollar (yet).

Ironically, the financial contagion has the potential to spread FAR faster than the coronavirus itself.

YIKES.

Okay, take a deep breath. It’s not Armageddon.

But as you might guess, a scary place to be is in investments that are front-line to fragile financial markets.

That’s probably why alert investors are exiting into safer havens.

Well-structured real estate investors are likely to fare better than most paper asset investors … because real estate’s fundamental model is far more stable.

Think about it …

Do you see any headlines that say, “Rents are crashing as coronavirus spreads” or “Tenants break leases to escape coronavirus”?

We don’t.

So while paper asset investors are watching their 401k wealth go up and down like a roller coaster …

… real estate investors are quietly endorsing rent checks.

But it’s not just the cash flow of real estate that makes real estate stable …

It’s the priority in people’s lives to make those rent payments … and the ownership of a physical, tangible asset that doesn’t disappear in crisis.

Yes, if the coronavirus destroys humanity, demand for rental property will implode. But that will be the least of your worries.

And if the financial system implodes … as bad as that sounds … it will be bumpy for awhile … but a new system will be put in place.

So as long as you’re structured to weather the storm 

… with competitive rents and great customer service in markets with solid infrastructure and fundamentals …

… and stable underlying financing with enough cash flow cushion to absorb temporary softness 

… you might not get richer on your current holdings, but you can probably ride out the storm.

Of course, if you’re properly prepared, you’ll be in position to go bargain shopping in such a storm … which is exactly what Ken McElroy did in 2009-2012.

The world is volatile. Real estate is relatively stable compared to most other investments. But you still need to see the big picture and think ahead.

That’s why we hang out with people like Robert Kiyosaki, Peter Schiff, Ken McElroy, Brien Lundin, and other super-smart people.

After all, it only takes one good idea or heads up to make or save you a LOT of money when things get crazy. And you never know what that’s going to happen.

Until next time … good investing!

 

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Harvard study reveals surprising trends in rental housing …

The Joint Center for Housing Studies of Harvard University recently released a special report on America’s Rental Housing 2020.

There are lots of reasons to pay attention to housing … rental or otherwise … even if it isn’t your primary real estate investing niche.

Housing is much less a driver of economic health than it is a gauge of it.

When people are doing well, they buy homes or pay their rent. When people are struggling, it shows up in housing.

Sure, employment and wages can be up … but if rising wages aren’t providing REAL purchasing power, they’re deceptive.

When housing costs rise faster than wages for an extended period of time, it’s a clue that society is headed towards a problem.

This report reveals some of this is happening right now.

No society can be considered economically sound if its people can’t afford a place to live.

And no matter what niche you’re in, as an alert investor, it’s wise to consider how the overall economic environment affects you directly or indirectly.

Of course, there are ALWAYS reasons to be concerned … and there are ALWAYS opportunities. So no indicator is inherently good or bad … it’s just a clue to guide better investing decisions.

The report is 44 pages, but worth the read. You can download our marked-up copy here.

For now, here are some of our more notable takeaways …

“After more than a decade-long run up, renter household growth seems to have plateaued.”

ANY time a long-term trend shifts, it can be hard for nose-to-the-grindstone investors to see it … until it’s too late to adjust. That’s why we read studies like this.

And while the cause of the shift is yet to be disclosed …

(it could be more renters are becoming homeowners … or … more renters are becoming homeless … or something else altogether …)

… the important thing is demand for rental housing and apartments is declining for the first time in over 10 years.

Economics 101 says when demand declines, prices will probably follow. So landlords counting on growing demand for their properties should pay attention.

Of course, the flip side of demand is supply, and the report says …

“… continued strength of new construction …”

“…constraints in new supply …”

Hmmm … at first glance, this seems contradictory. Are more units coming or not?

The concern is a glut of new supply hitting the market just as demand is declining …

… because this would drive rents down and potentially negatively impact a landlord’s incomes and occupancy rates.

As an aside, remember what we call the “production lag”. This lag is often the cause of little booms and busts.

What happens is demand temporarily overwhelms supply and prices rise.

Then suppliers (builders) see those higher prices and high demand as an opportunity to feed supply to the market a profit.

So they ramp up production. But it takes time to build. There’s a lag.

And if too many builders all jump into the market with new construction …

… when all those units eventually hit the market, they can suddenly reverse the supply and demand dynamic … causing prices to retreat.

So tight supply triggers a price boom followed by a construction boom leading to over-supply … which triggers a bust. And it’s easy to get lost in the lag.

This is a normal ebb and flow every investor should pay attention to.

But this report talks mentions strength of construction at the same time it describes constraints in new supply. Weird.

Or maybe not …

The reason is found in market segmentation.

As we find in the report …

“New rental construction remains near its highest level in three decades … with a growing share in larger buildings intended for the high end of the market.”

Meanwhile, there’s a …

Dwindling supply of low-cost rentals …”

So there’s growing abundance in one segment… and constriction in another segment. But this still isn’t the whole story.

The report points out …

“… rising costs of housing development are a … key factor … particularly the soaring price of commercial land which doubled between 2012 and mid-2019.”

Another reason builders are focusing on the high income renter is …

“… the cost of labor, materials, contractor fees, and local taxes, also jumped by 39 percent over this period, or three times the rise in overall consumer prices.”

You may have heard policy makers proclaim there’s no inflation … or not enough.

But when it comes to housing, which is a significant and important personal expense …

… there appears to be LOTS of inflation … and it’s not just a supply and demand problem.

When it takes more dollars to buy land, labor, and materials … important components of cost … you have higher prices in spite of declining demand.

In fact, you have declining demand because of rising prices.

That’s inflation.

Of course, gold has been signaling inflation.

Gold was “up” nearly 19% in 2019 … which really means the dollar fell. So now it takes more dollars to buy the same stuff … and it’s showing up in real estate.

The important thing to remember is inflation doesn’t make anyone richer. In fact, as this report is pointing out, inflation makes most of society poorer.

This is probably the real reason why there’s an affordability crisis in housing.

But policy makers either don’t understand this, or they deny it, or they aren’t willing to fix the root cause (a failing monetary monopoly) … so they attempt to legislate away the symptoms.

“In the last few years, states and localities have increasingly turned to rent control as a means to protect households from larger rent hikes.”

But rent control doesn’t address the components of cost.

All rent control does is discourage builders and investors from putting capital into affordable housing in rent-controlled areas … making the problem worse.

Another “solution” revealed in the report … one which property owners of all stripes should pay attention to … are zoning changes allowing more density.

In other words, if land is too expensive, cram more units onto each parcel. As the report points out, local cities and states are changing laws to …

“… allow construction of duplexes and triplexes on lots zoned for single-family housing.”

Of course, these changes affect property values and communities where homeowners and investors already own properties.

This is another thing to watch for in areas where you already own residential properties … especially single-family homes.

It could be an opportunity to build a little infill project… scrape an SFR and build a multi-unit … or dump an SFR and get out before values fall.

There’s a LOT more in the report … including remarkable data showing the fastest growing demographic of renters is age 65 and up.

One of the challenges of rentals for seniors is that much existing inventory isn’t properly configured to meet their unique needs.

Of course, challenges create opportunities for real estate entrepreneurs.

The bottom line is the rental housing market is changing for economic, demographic, and political reasons.

Real estate investors are well-served to pay attention … and look past their recent experience or current market conditions in looking forward.

These trends are often subtle, but powerful.

When you can see them forming early, you have more time to make moves to capture opportunities and mitigate risks.

But you MUST be paying attention … and talking with other alert investors to help you interpret the data and hash out viable strategies.

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