Pension Crisis Threatens Property Owners

Pension Problems Piling Up …

Anyone paying attention knows the world is facing a global pension crisis.  And if you don’t think it will affect you … think again. 

Consider this report recently issued by the Federal Reserve Bank of Chicago …

How Should the State of Illinois Pay for Its Unfunded Pension Liability?  The Case for Statewide Residential Property Tax 

“The State of Illinois has a very large unfunded pension liability and will likely have to pay much of it off by raising taxes.” 

And guess what?  Illinois isn’t the only place with pension problems.  California is a HUGE mess too … as is much of the country.

According to this report from The Pew Charitable Trusts, only four states had at least 90% of the assets needed to pay promised benefits.

It’s BAD.  And the Federal Reserve apparently wants to tax property owners to fix it. 

“In our view, Illinois’s best option is to impose a statewide residential property tax …”

“ … the tax rate required to pay off the pension debt over 30 years would be about one percent.”

 But it gets WORSE … are you sitting down?  This is SHOCKING …

“There are good reasons to pay off … pension debt through … residential property tax … home values go down …”

“ Current homeowners would not be happy, but … would not be able to avoid the new tax by selling their homes … because home prices should reflect the new tax burden quickly.”

In other words, prices will crash, and upside-down homeowners are trapped.

Nice.

In a presentation at Future of Money and Wealth, we warned that financially strapped governments would turn desperado.  This is a classic example. 

This isn’t hyperbole or conspiracy theory.  We don’t make this stuff up.  These are the Fed’s OWN WORDS.  You can (and should) read them yourself. 

Here’s a link to a PDF we highlighted to make it easy for you.   And here’s a link to the Chicago Fed’s website where you can see the source with your own eyes.

The writing is on the wall.  Property owners are easy prey because the asset is right out in the open.

BUT … the low hanging fruit are properties in jurisdictions where the desperado taxman has authority.

That’s why many savvy investors park wealth in non-domestic property … in countries where the tax burden is small.

If you’ve been following us for any length of time, you’ve been bombarded with invitations to come to Belize.  And this is another one. 

We don’t understand why EVERYONE reading this wouldn’t drop everything and immediately register for the next Belize discovery trip … and learn how to invest in offshore real estate.

You don’t need to be a multi-millionaire to diversify your wealth internationally.  But you do need to get educated and connected.   

The Belize discovery trip is a great way to start.

And the trip is not just relatively affordable … it’s FUN! You get a multi-day semi-private educational tour personally led by our very own Robert Helms.

And one last suggestion on the educational front …

We videotaped the entire 14 hours of the Future of Money and Wealth conference … and you can click here to order the entire collection of Future of Money and Wealth presentations and panel discussions.

In spite of all the rosy economic rhetoric … and yes, there are some good things happening … there are still some BIG landmines out there.

This latest trial balloon from the Fed should be a wake-up call for all real estate investors.  Isn’t it prudent to explore options while there’s still time?


More From The Real Estate Guys™…

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

The future of interest rates …

Interest rates are a big deal for real estate investors … for many reasons.

The first and most obvious reason is because interest rates are the price of the money you borrow to invest with.  Higher rates mean higher payments and less cash flow.

Of course, even when you pay cash for your properties, your tenants probably carry consumer debt … car loans, credit card, and installment debt …

Higher rates mean higher debt payments for your tenants, so less of their monthly budget is available to pay you rent or absorb rent increases.

Also, your property values, exit options, and liquidity are all affected by interest rates.

Higher rates mean buyers have less capacity to bid up comparable properties … and fewer buyers can afford to buy your property when you’re ready to sell.

For these reasons and others, most real estate investors and their mortgage advisors pay very close attention to interest rates …  especially when financing or re-financing.

But there are other very important reasons for real estate investors to care about the future of interest rates …

Interest rates are a barometer for the health of both the currency and the overall economy.

Last time we looked, most real estate investors transact and denominate wealth in currency (dollars for Americans) … and your rental properties, tenants’ incomes, and overall prosperity all exist inside of the broader economy.

So the potential for big changes to either the currency or the overall economy matter to real estate investors just like they do to paper asset investors.

In fact, based on the amount of debt most real estate investors use, interest rates are arguably even MORE important to real estate investors.

We’re just a couple of days away from our Future of Money and Wealth conference … with nearly 400 people coming … and right now we’re thinking a lot about the dollar and interest rates.

Peter Schiff is speaking.  Peter wrote Crash Proof in 2006 and released it in 2007.  Back then, he loudly warned of an impending financial crisis whose roots would be in the mortgage market.

Sadly, back then we didn’t know Peter, and we didn’t read his book.  Then 2008 happened, and we were blindsided by the financial crisis.

So now we read more … a LOT more.

We make time to listen to people like Peter Schiff, Robert Kiyosaki, and Chris Martenson.  And we work hard to share them with our audiences.

A very interesting book we just finished is Exorbitant Privilege by Barry Eichengreen.  He’s Professor of Political Science and Economics at Cal Berkeley.

Eichengreen published Exorbitant Privilege in 2011, which means he probably wrote it in 2010.

Keep this in mind as we share these prophetic excerpts from Chapter 7, “Dollar Crisis”…

“What if foreigners dump their holdings and abandon the currency [dollar]?  What, if anything, could U.S. policymakers do about it?”

“It would be nice were this kind of scenario planning undertaken by the Federal Reserve and CIA … it would have to start with what precipitated the crash and caused foreigners to abandon the dollar.”

Note:  Eichengreen probably didn’t know at the time that James Rickards, former attorney for Long Term Capital Management (the hedge fund at the center of the near financial meltdown of 1998), was participating in precisely this kind of planning, which Rickards describes in his book Currency Wars, published a year after Exorbitant Privilege.

Back to Eichengreen’s prophetic 2011 commentary …

“One trigger could be political conflict between the United States and China.  The simmering dispute over trade and exchange rates could break into the open …

“… American politicians … could impose an across-the-board tariff on imports from [China].”

WOW … Eichengreen wrote that at least 7 years before this March 22, 2018 headline from CNBC:

Trump slaps China with tariffs on up to $60 billion in imports: ‘This is the first of many’

Back to Eichengreen in 2011 …

“Beijing would not take this lying down.”

CNN Money on April 3, 2018:

China to US: We’ll match your tariffs in ‘scale’ and ‘intensity’

Eichengreen in 2011:

“Or the United States and China could come into conflict over policy toward rogue states like North Korea and Iran.”

If you’ve been following the North Korea drama, you probably know this one’s been back and forth.

Last summer, China seemed to side with North Korea.  Then they tried to take a neutral position.

But recently Kim Jong Un paid a secret visit to China.  Of course, no one really knows what that was about.

But based on recent trade policy it seems the U.S. isn’t sucking up to China for help with North Korea.  So maybe the U.S. and China disagree on North Korea?

Now STAY WITH US … because the point of all this is … according to Eichengreen …

China’s relationship with the United States and the U.S. dollar has a DIRECT impact on the future of YOUR money, interest rates, and wealth.

And if you’re like most Main Streeters, you may not completely understand the connection …

… just like we didn’t understand what Credit Default Swaps had to do with our real estate investing in 2008 … until everything suddenly imploded …

… despite reassurances from the wise and powerful man then behind the curtain of the Federal Reserve, Ben Bernanke.

And the point here isn’t Iran, or North Korea, or tariffs, or trade wars … it’s about whether China gets upset enough with the U.S. and opts for the nuclear option …

Eichengreen in 2011:

“… China [could] vent its anger and exert leverage … by … dumping [Treasuries] … would send the bond markets into a tizzy … interest rates in the United States would spike.  The dollar would crater … could cause exporters, importers, and investors to abandon the dollar permanently.”

Obviously, there’s a LOT more to this topic than we can cover today.

Our point for now is that way back in 2010-11, Eichengreen envisioned a scenario in which conflict with China could create a dollar crisis.

As you can see, today’s headlines are living out his concerns.

When you read Eichengreen, like Jim Rickards, he talks about things reaching a tipping point … where everything happens fast.

We lived that in 2008 and it was NO FUN.  But that was only because we were on the wrong end of it.  While we got slammed, others made fortunes. They were informed and prepared.  We weren’t.

So be cautious of normalcy bias and complacency when it comes to contemplating the possibility of a dollar crisis.

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

Until next time … good investing!


More From The Real Estate Guys™…

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

The Future of Money and Wealth

The world economic order is under-going massive change right now.  We’re literally watching it unfold in the daily news.

Yet few investors really understand what’s happening and why … or what they can do to both grow and protect wealth during these historic times.

 

“Those who can’t remember the past are doomed to repeat it.” – George Santanya

 

In two power-packed days our all-star line-up of notable experts will explain …

 

  • How the U.S. dollar is under attack and what it means to Main Street investors

  • What are the best and worst investments based on what’s happening now … and where it’s headed

  • How savvy investors are preparing to be on the right side of an historic wealth transfer most people don’t see coming

 

Remember, the flip side of crisis is opportunity.  But pretending everything is fine … and not being prepared in case it’s not … can be dangerous and expensive.

 

“Maintain unwavering faith you can and will prevail in the end, regardless of the difficulties, and at the same time, have the discipline to confront the most brutal facts of your current reality.” – Jim Collins, Good to Great

 

Click here now to learn more about The Future of Money and Wealth >>

 

 

Expert Insights from the New Orleans Investment Conference

We were lucky enough to spend some time at the New Orleans Investment Conference, the longest-running investment conference in the United States.

In this episode, we chat with three expert guests. They share their expertise on all things investing, from cryptocurrencies to gold, the Federal Reserve to commercial real estate, the international oil market and the U.S. dollar.

Our guests touch on real-estate-specific issues, but they also give us the big picture about what’s going on in the financial space … and how that will affect investors of all types.

PLUS … our three guests have never before been featured on The Real Estate Guys™ show. Listen in to hear brand-new, timely insights from these money pros!

In this episode you’ll hear from:

  • Your top-dollar host, Robert Helms
  • His dollar-short co-host, Russell Gray
  • The godfather of real estate, Bob Helms
  • President of Neptune Global, Chris Blasi
  • Author of Fed Up, Danielle DiMartino Booth
  • Senior editor of the website International Man, Nick Giambruno

Listen



Subscribe

Broadcasting since 1997 with over 300 episodes on iTunes!

real estate podcast on itunesSubscribe on Androidyoutube_subscribe_button__2014__by_just_browsiing-d7qkda4

 

 


Review

When you give us a positive review on iTunes you help us continue to bring you high caliber guests and attract new listeners. It’s easy and takes just a minute! (Don’t know how? Follow these instructions).

Thanks!


 

Cryptocurrencies and precious metals, oh my!

Chris Blasi is an expert in all things money. He founded the precious metals exchange Neptune Global and has patented a new way to invest in metals.

We asked him to give us his insights on the cryptocurrency trend.

“Cryptocurrencies are all the rage,” he told us. That doesn’t mean they’re always the best choice.

Cryptocurrencies are digital currency backed by blockchain software. That means it is susceptible to the same issues as other software, like code issues, storage databases, and scaling.

Bitcoin is the big name in cryptocurrency right now, but there are hundreds of initial coin offerings, or ICOs, put on the market every day as people create new cryptocurrencies.

These cryptocurrencies have cost investors millions, Chris warns. “People need to step back and look at the market more closely” before making the jump to investing in cryptocurrencies, he says.

“Cryptos are actually a polar opposite of gold,” Chris says. Gold is a tangible asset, while cryptocurrencies are entirely digital.

That doesn’t mean he’s saying yay or nay to digital currencies … only cautioning investors to understand what they really are.

“Cryptos offer speculative gains,” he notes. “Do your homework and invest in moderation.”

Nick is actually an expert in gold … he developed a patented unit of trade for precious metals, the PMC ounce. It’s a unit of trade that corresponds to proportions of physical gold, silver, platinum, and palladium.

Using real-time technology, investors can buy and sell PMC ounces of metal immediately through Neptune Global.

The goal is to offer a turnkey precious metals fund … backed by real assets. And the PMC ounce has been architected to capture the blended return of each metal, smoothing out the volatility of trading in just gold or silver, for example.

Fed up with the Federal Reserve

Danielle DiMartino Booth has dipped her feet into all matters related to money. She has experience in private and public equities, worked as a finance journalist, and spent nine years at the Federal Reserve. She recently published the book Fed Up, her take on what’s wrong with the Federal Reserve.

We started by asking Danielle to give us an overview of the Federal Reserve.

The Fed is a quasi-public organization that is intended to function as the central bank of the United States.

Unlike some conservative politicians and finance experts, Danielle doesn’t want to abolish the Fed. She gave us her take on what we need to do to reform the Fed:

  1. Go from a dual mandate to a single mandate. The current Federal Reserve operates on a dual mandate of 1) protecting the value of our dollar and stabilizing prices and 2) maximizing employment. Danielle is in favor of completely dropping the labor mandate, which she believes would help keep both inflation and the value of the dollar in check.
  1. Reduce the number of local Federal Reserve banks from 12 to 10 and add a bank to the West Coast. In a largely cashless society, the need for so many districts has clearly dissipated, says Danielle.
  1. Hire knowledgeable people who represent regional economies. Get rid of the majority of the regulators in the Federal Reserve. Instead of hiring PhDs, hire people who actually understand the inner workings of the U.S. financial system.  Give each district a permanent vote on the federal open market committee, and change the complexion of the Federal Reserve board so it’s composed of people who are actually on the receiving end of the policies the Fed makes.

Danielle is ridiculously knowledgeable about the Fed, but she also had a lot to say about real estate. We asked for her thoughts on the real estate market.

“Investors are missing the forest for the trees,” Danielle says. “I’m seeing the forest.”

Danielle notes that commercial buildings are overbuilt right now, and that abandoned B- and C-class malls and retail structures can only be repurposed for so long. That glut of overdeveloped, centrally located land will cause an oversupply problem, she says.

Another problem? “There are not enough low-cost homes.” We are facing a housing shortage that will only get worse in the next 20-30 years.

The people who benefit most from the overall real estate situation, Danielle says, are the people who are perceptive and get in while the fire is still burning and prices are at rock bottom.

The yuan, the petrodollar, and what it means for YOU

Nick Giambruno is a reporter and editor for Casey Research, specifically their International Man website.

We asked him about an intriguing article that appeared in the news for about a half second.

It’s about China’s hopes to price oil in the yuan (instead of the U.S. dollar) using a gold-based futures contract.

Why is this significant? Nick walked us through what this could mean.

If China is successful, “This will usher in a new era in the international monetary system,” says Nick.

A quick history lesson:

  • In 1971, Nixon ends the Breton-Woods system; the dollar is no longer backed by gold
  • To preserve the value of the dollar, Kissinger creates the petrodollar system, in which the U.S. government agrees to provide protection to Saudi Arabia in exchange for oil being priced in U.S. dollars
  • The petrodollar system gives other countries an incentive to hold U.S. dollars

If China goes forward with its new money mechanism, it could divert 400-600 billion dollars in oil sales every year that would normally go through U.S. currency.

This could have a HUGE impact on international financial markets. Oil is the most valuable commodity in the world right now … essentially, Nick says, “China is going for the jugular of the U.S. financial system.”

How does the breakdown of the petrodollar concern you? “The breakdown of the petrodollar will have clear consequences for interest rates.” And as we all know, interest rates are the price of money.

We hope you learned something new from our expert guests! Now go out and make some equity happen!


More From The Real Estate Guys™…

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

Fed rate hike looms …

Do you remember the opening scenes from the classic movie Mary Poppins?

The camera focuses on a weather vane changing direction as observers comment …

Looks like the winds are changing over 17 Cherry Tree Lane” … home to one George W. Banks.

But today it’s the Fed’s Janet Yellen – not Mary Poppins – bringing winds of change. 

And it’s not over Cherry Tree Lane, but 1600 Pennsylvania Avenue … home to one Donald J. Trump.

According to CNBC, “It’s (almost) official:  The Fed is raising rates next week.”

“If there were any doubts about whether the Federal Reserve would be hiking interest rates this month, Wednesday’s blockbuster jobs report almost completely removed them … pushed market-implied probability of a Fed move to 92 percent …”

Of course, interest rates are the price of money … or rather, currency … in an economy. 

And because the U.S. dollar is the reserve currency of the world, Fed policy affects the entire world … including lowly real estate investors, our tenants, and their employers.

So will the Fed raise rates?  And if they do, what does it mean to investors … real estate and otherwise?

Let’s just do a short re-wind … 

Right after the election last November, we said, “… the odds [of an interest rate increase] are probably higher now because we’re guessing the Fed isn’t a fan of Donald Trump.

Of all the aspects of a Trump administration, the one we find MOST fascinating is the dance between President Trump and the Federal Reserve.”

Of course, now we know the Fed actually did raise rates … albeit only a token amount … in December.

Then President Trump gave his first big speech to Congress.  And as we observed shortly thereafter, the stock markets LOVED it.

Now the markets think the Fed will raise again in March, so the stock market’s pulling back.

Dizzy yet?

Not if you’re a real estate investor.  You’re just watching all the gyrations, and collecting your rent checks each month.  Market fluctuations are bo-ring … in a GREAT way!

We like to point this out when talking to whip-sawed stock investors about the calming benefits of investing in real estate.  Sometimes a little boring is fun.

However, with the probability of a Fed hike looming, here are some things for real estate investors to think about …

Mainstream financial pundits ASSUME a Fed rate hike is automatically bad for real estate. 

The theory is higher interest rates make homes less affordable. You hear this ALL the time.

And when newbie real estate investors hear this, they get nervous about investing. But there’s so much more to the story …

First … if fewer people can afford to buy homes, then more people need to rent!  Duh.  And who’s that good for? Landlords.

Next, higher Fed rates are usually introduced as a tool to slow inflation as measured by the CPI or Consumer Price Index.

Well, a higher CPI is usually the by-product of higher wages … which is usually the by-product of a tight labor market. 

Go back and read the CNBC excerpt.  The Fed is expected to raise rates because of the “blockbuster” jobs report.  In other words, a tightening labor market.

Now we’re not saying the U.S. economy employment situation is great and wages are rising.  But perhaps the Fed is trying to get ahead of the curve.

Then again, this Bloomberg article suggests wage growth might NOT accompany this jobs “boom.” So maybe the Fed agrees and won’t raise rates. Or maybe they will anyway.

The point is NO ONE KNOWS … and it doesn’t REALLY matter.

If rates don’t rise, the stock market will roar a while longer.  Great!  More time for stock investors to take profits, and move some paper wealth into nice, boring real estate.

If rates do rise, there will be fewer qualified home-buyers, which leads to more people needing to rent some nice, boring real estate.  Great!

If job growth stagnates and wages fall, there will be fewer homebuyers, less new build inventory expanding competitive supply, and more renters seeking out AFFORDABLE markets and property types.

And as long as you’re okay investing in nice, boring, affordable markets and properties, you’ll be there to meet the demand. Great!

Of course, if job growth continues and wages rise, so will rents and mortgage rates.  A rising economy lifts all assets.

And for real estate investors who’ve locked in nice, boring, long-term fixed financing on their nice, boring properties … you’ll have lower fixed costs against those rising rents. 

This means better cash flow and equity growth.  Great!

The point is that if real estate investors focus on affordable markets and properties, and structure deals with sustainable financing and cash flows …. it doesn’t matter much which way the wind blows or how hard.

Until next time …. good investing!


More From The Real Estate Guys™…

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

How The Fed Rate Increase Affects Real Estate Investors

janet yellen fed rate increase

Overview

The Fed FINALLY raises rates for the first time in nearly a decade. Now what? How does a Fed rate increase impact real estate and real estate investors?

In this episode, Robert and Russ discuss the short term and big picture impact of the Fed’s long awaited move…and what it might mean for real estate investors.

Discussing what the Fed rate increase means, coming just in time for Christmas:

  • Your happy and jolly ho-ho-host, Robert Helms
  • His brimming with Christmas spirit helper, co-host, Russell Gray

Listen

 

Subscribe

Broadcasting since 1997 with over 300 episodes on iTunes!

real estate podcast on itunesSubscribe on Androidyoutube_subscribe_button__2014__by_just_browsiing-d7qkda4

 

 

Review

Like the show? Help us reach new listeners by leaving us a quick review on iTunes. It takes just a minute of your time, and it would really help us out. Thank you so much!! (Don’t know how? Follow these instructions.)


(Show Transcript)

Welcome

Robert: Welcome to The Real Estate Guys Radio program. I’m your host Robert Helms. Let’s say hello to our co-host, financial strategist Russell Gray.

Russ: Hey Robert.

Robert: And Ho, Ho, Ho.

Russ: Yes I am. (laughter)

 

Discussing The Fed Rate Increase

Robert: Yes you are. We love this time of year, lots of great stuff going on hopefully with people you care about a lot and stay warm. Today, we are going to talk about really the thing everyone has been talking about the last few weeks, which is the interest rate increase by the Federal Reserve. They’ve not done it for years and years and years, and finally Janet Yellen stepped up and despite our friend Peter Schiff saying she’s not going to be able to raise the rate, raised the rate in a range of up to 25 basis points.

Russ: Right, so just no investor left behind, a basis point is one one hundredth of a point, 25 basis points would be one quarter of 1%.

Robert: So, previously the target range was between zero and 0.25. Now the target range is between 0.25 and 0.50.

Russ: Yeah, and actually I listened to one of Peter’s podcasts the other day that was talking a little bit about that. This is a very difficult thing to interpret. Obviously, you can see how large the Fed’s influence is. Every financial talking head on earth has been watching and waiting for this move. There are people listening to this podcast that were in junior high school the last time the Federal Reserve moved the interest rate up. And, it was a very, very minor move. It had been extremely well telegraphed.

The purpose of telegraphing which is, the Federal Reserve coming out, “Hey, we’re going to do it, hey, we’re going to do it, hey, we’re going to do it,” is giving everybody plenty of notice to reorganize their positions, restructure their portfolio to adjust for whatever they think is going to happen as a result of this raise in the rate.

Robert: Which is why, in the news you hear that this was already priced into the market.

Russ: Right. Of course because of that, sometimes the market does things you don’t expect. Theoretically this was a tightening which would be constricting of the money supply. Normally, that would mean the stocks would go down, and yet the day it was announced, the stocks went up. Part of that is because the announcement was accompanied not just with the move itself but with the tone. The tone was dovish, meaning they are less likely to move quickly and aggressively.  This isn’t maybe necessarily the first round in a rapid volley of rate increases. It was really communicated that this was going to be a very delicate, very slow, very tender, very gentle move …

Robert: Which it kind of had to be given the fact that there’s not been a move in nine years.

 

Looking At The Big Picture

Russ: One of the big concerns around the world is the strength of the dollar. We’ve talked about that in our blogs and our newsletter. It’s hard to spend a bunch of time in the space and not get disconnected from what’s going on on the street, right?

But you have to understand that corporations have been making decisions about taking their profits and borrowing at cheap rates, then reinvesting in their stock. That creates better earnings per share which creates a wealth effect, which means people are more prone to go out and spend. That means that they might buy a house, they might push up the demand for houses.

These macroeconomic things do trickle down to main street. Obviously, job creation is huge. One of the things that came out of this the day that this interest rate was raised was that oil dropped 3%. Oil has already been an 11 year lows.  Then within a day or two it dropped another 1%.  That’s a 4% loss. You’ve got oil that was priced over $100 a barrel, now all the way down in the $30s.

The reason that’s significant to real estate investors or anybody who cares about financial markets is you have these banks and these major bond buyers have been funding the borrowing of these energy companies to go out and develop oil.

A lot of them are pumping oil right now at losses, like it’s on the P&L and it’s a loss, but it’s cash flow that keeps the doors open a little bit longer hoping that the rates are going to come up.

Just saw an article on the Wall Street Journal the other day talking about banks and how banks are betting by continuing to extend credit to these leveraged operators, these oil operators, that the oil price is going to go back up, and they are going to be able to save themselves. If the banks get that bet wrong, those debts will go bad and it could be a whole lot bigger than the subprime crisis ever was.

 

The Energy Industry’s Impact On Real Estate

Robert: I seem to remember a lot of real estate investors that had that same kind of mindset that, “Hey, next month the prices are going to go up and next year the prices are going to go up. Every market goes up.” And, lo and behold, that isn’t the case. A lot of folks in oil are super concerned about this.

Your point is a good one. It’s not only that some producers of oil today are continuing to produce oil even at a loss. It’s that of course exploration stops, new drilling stops, all of that means those jobs stop and many of those jobs are tenants.

Russ: That’s the main point, because if you go back and you net out all of the job creation from 2009 until today, it doesn’t mean it’s the only place the jobs were created. But if you look at the gross number of jobs created and the gross number of jobs lost, there was a net number. If you look at that net number, you could assign 100% of that net number to the oil and energy space. That’s how important it’s been to this US recovery. Right now, it’s arguably one of the most distressed areas of the economy.

fed rate increase impact on oil industry - pic of oil fields at sunset

If you’ve invested in marketplaces that are strong in energy or are strong supporters of companies or areas that are strong in energy, that’s where we talk about the concept of primary and secondary, even tertiary jobs. The secondary and tertiary jobs, a lot of whom are your tenants are all based upon the income being derived in the selling of oil. In fact, congress and the president just lifted a 40 year ban on oil exporting. I’m sure part of that is to try to figure out a way to generate more revenue in the oil space.

Oil is something I think we all need to be paying a lot of attention to because of the impact in the debt markets and the bonds which, come right back into the availability of credit and mortgages just like the subprime prices. It’s had a lot to do with the net job creation as I mentioned earlier.

And so again, that has been a big story in the economy and the recovery since the great recession. If that job creation begins to slow down, that will have a net effect on the price of real estate, the number of tenants, demand, the strength of wages, job creation and all of those things. That’s a very important point.

If those debts go bad and it rolls into the banks, that’s where we had the big bail out last time. So, today with the Dodd-Frank rules, it’s not as easy for them to bail out. And that means if they can’t go to that path where else might they go, we don’t know. It’s very, very uncharted territory.

The good news in all of that of course is that any time there’s chaos, any time there’s uncertainty, any time there’s change, there’s going to be little gaps, little pockets of opportunity for the people that are thinking about things that are paying attention.

fed rate increase wish i had a crystal ball to see the future

I wish I could sit here with a crystal ball and say, “Hey everybody, look, here’s where all the opportunity is,”. I’m not that smart. I think I’m smart enough to know I need to be paying attention and spending a lot of time listening to what people are saying about it and trying to figure out, “what does this mean to me? What does this mean to real estate investors? What does this mean to the cost and supply of money? What does this mean to credit? What does this mean to jobs? What does it mean to income? What does it mean to taxes? Where’s the opportunity going to be?”.

 

The Process Will Take Some Time

Russ: I think it’s a process that will unfold over time. It’s not just going to show up on your door step in a little package for the holidays and go, “Hey guys, here’s where the opportunity is.” It’s going to be something that unfolds over the next few years.

Robert: That’s such a good point, any time there’s major market news, there’s whatever reaction, but a lot of times you hear this whole thing about, “Well, you know that’s already been priced into the market. People knew that was coming. This is obviously something that was anticipated.” And so we can’t expect it all to happen on day one.

If you think just in a logical point of view, all right. If the rate goes up, that’s going to have some effect. We have to first step back and say, “what rate are we talking about?”. This isn’t the rate that your credit card charges you. This isn’t the rate of home loans. Let’s talk about what exactly this rate that got hiked by the Federal Reserve really is?

 

Which Rate Got Hiked With The Fed Rate Increase?

Russ: Yeah, this is the federal funds rate. This is the rate that the banks loan to each and overnight lending. It’s designed to prevent a liquidity crisis. It means that if Bank A has more withdrawals than cash on hand or deposits coming in rather than run out of money and have to close the doors, they just borrow from another member bank.

Robert: At a nominal and in this case interest rate.

Russ: Yeah. There’s another rate that didn’t get announced, and it’s not the rate that everybody is focused on. But, it’s the rate that the Fed pays on banks on their excess reserves on deposit with the Fed. If they get a good rate, a higher rate, it encourages them to put more money there which pulls money out of the economy.

That’s why this is considered to be tightening. This is not accommodative, and yet you can make the argument that the interest rates historically are still so ridiculously low and the Fed has still kept all of these assets, four trillion dollars of assets they purchased going through the crisis still on their balance sheets.

So, this is a long way from being tight, and it is a long way from not being accommodative. The Fed is right in telegraphing everybody, this is going to be done very, very, very slowly.

 

Pay Attention To Long Term Trends

The danger is that as investors we don’t pay attention to the little changes that are setting the direction and the tone for what’s coming five and 10 years down the road.

As real estate investors, we arguably have to be even more tuned to that because when we are making investment decisions, we don’t jump in and out of position the way stock and bond traders do.

What we do is we evaluate a market. We look at its economic drivers. We look at its economic prospects, it’s migration in and out. We look at the legislative environment and how friendly they are to business and job creation.

Then we make a decision to really get married or at least get into a long term relationship with that market. Then we sign on a 20 or 30 year mortgage. And, we put a bunch of capital in there, and we’re prepared to be in there for several years if not decades.

When you are investing that way, you have to pay attention to these long term trends, because like everybody who’s trying to figure this out, we all want to be ahead of the curve.

This is a very slow moving curve. It’s easy to fall asleep at the wheel. One day you wake up and everything has changed, and by the time you figure it out if you’ve been asleep, everybody else ahead of you has figured it out. Now you are all rushing towards the exit and the exit is crowded. So, you want to be paying attention early.

Robert: When we come back, we’ll talk about the myriad ways that this interest rate hike can affect and will affect real estate investors, and we’ll make some best guesses as well. You are tuned to The Real Estate Guys radio program. I’m your host Robert Helms.

 

Come To Our Goals Retreat

Robert: Welcome back to The Real Estate Guys Radio program. Thanks for tuning in to the show. If you are trying to figure out what you want to do with the rest of your life, come on out and join us at Creating Your Future at the 2016 goals retreat. It happens the second weekend of January in beautiful San Diego, California.

You can really get your life on track and spend some time figuring out what you want to do when you grow up. You’ll find all the details on our website, RealEstateGuysRadio.com under events.

 

Will The Fed Rate Increase Impact Mortgage Rates?

We’re talking about how the Federal Reserve interest rate increase will affect you as a real estate investor. I think one of the things to talk about of course is we think interest rates, we think mortgages. If you have a mortgage in place, that’s a fixed mortgage, this does not affect that in any way, shape or form.

Part of the reason that as real estate investors we look at encumbering property with leverage is that we love the magnification of return.

However, given what the market gives us and Russ you were talking about before the break, we are in it for 20, 30 years. If the mortgage money at the time is affordable, like it has been for many, many years, then lots of real estate investors opt to get into fixed rate product and that makes a ton of sense, and it has for a long time.

We’ve been through the other side of it. We have enough gray hair to have been through the time where adjustable rate mortgages made a lot more sense for particular investors in certain situations. It’s always about you and your investment strategy. How long are you going to hold the property. Is this small increase also going to eventually translate into an increase in mortgage rates?

Russ: I think the thing to think about is, just really understanding where mortgage rates come from. It’s gotten to be a lot more complicated which again opens up a much bigger discussion because you have many of the rules, kind of the cause and effect things that we get used to when we try to figure out how things are going to work. And they don’t work the way they are supposed to.

That’s because you have people who are trying to create outcomes by moving results. They move numbers on the results column.

And so the causation doesn’t seem to match up, you are like, “Okay, I don’t understand, if this then that, but that didn’t happen, why didn’t that happen?”.

This is because somebody is manipulating the result to try to make it look like something else.

There’s a lot of that going on. You can call it conspiracy theory. You can call it professional management of markets. You can call it smoothing out the rough edges and stabilizing the economy. It doesn’t matter what you call it. I think everybody agrees it goes on. It just makes the job of figuring out where things are at quite a bit more complicated.

In the basic picture of where mortgage rates come from, it’s based on supply and demand. If you have a lot of people who want to borrow and not very much money available, the lender can charge a high rate and the weaker people get priced out, and only the strongest people can borrow.

fed rate increase on mortgage rates - supply and demand chart

You flip it over and there’s a lot of money that needs to be lent and there aren’t very many borrowers. Everybody is dropping their interest rates offering free toasters, we’ll pay you points …

Robert: Or lowering their standards.

Russ: Or lowering their standards trying to get more people to borrow. We’ve been in a very, very, very accommodative scenario where there has been a lot of money pumped into the market, specifically the goose real estate.

And largely it’s done that, you have a lot of prognosticators out there saying, “We are in a bubble and the bubble is about to burst.” In some markets I suppose you can make that argument because a bubble is when the incomes that need to debt service the mortgage don’t go up as fast as the payments do.

In other words …  and that can happen because the rates adjust but … If the load of debt just gets so high that that monthly payment gets to be too much, even if it’s a fixed rate based on how fast incomes are rising, you are going to hit a plateau where people just can’t borrow anymore, unless either the rates come down or their incomes go up. Well, nobody is running around saying that incomes are going up at any substantial level.

Now, the Fed says they think that’s going to happen. So, part of the effect of the mortgage industry is what’s going on with incomes. Supply and demand in what we call capacity to pay which comes from income.

 

We’re In New Territory

It used to be anyway that when the stock market was hot, money would come out of bonds, people would sell their bond positions and they would go into the stock market to participate in the growth. That would make less money available in the bond market which would mean less money available to lend, which means that rates go up.

Typically, when the stock market goes up, rates go up. That’s the way it used to be. Post crash that changed. Pretty soon bonds were able to go up, which meant interest rates went down and stocks were able to go up. That didn’t seen to make sense based on the old rules but it made a ton of sense when you realized the market had been flooded full of money.

Robert: How much quantitative easing and money printing and the money had to go somewhere, the squish factor. When there’s more money injected and you squeeze your hand around it, where is it going to come out? We don’t know. It’s going to come out somewhere.

Where it didn’t go is into the hands of businesses and even into real estate investors hands to go do something with it. A lot of that money got stuck.

Russ: Yeah, the money that did end up in the real estate space went in through hedge funds who bought for all cash and didn’t even use mortgages. You’ve had that … I’m not going to call it a distortion, but it was definitely a new factor that didn’t exist in real estate 15 years ago.

Robert: Add that you have the knee jerk reaction of lenders and rightfully so of all the crazy loan products that they got stuck with in the downturn, and all the defaults, and all the foreclosures and all of that meant that the lending standards increased.

It became harder and harder and harder to get a basic consumer loan. Even if you had a good job and good credit. More hoops. More Federal regulations. More state regulations. Harder to get a loan even though you can say interest rates are low and it’s an affordable time to leverage, not everybody could get a loan.

 

Challenges Force Ingenuity And Create Opportunities

Russ: Historically, the last time this happened was after the savings and loans collapse which is only the birth of creative real estate. If you really think back and you go back and you look at the history of real estate in modern history anyway, in terms of creative finance, a lot of that was birthed when we had those ridiculously high interest rates in the wake of the savings and loan crisis.

Robert: Of course, see, people figure it out. When there’s a challenge it also creates an opportunity. When interest rates went to 18, 19, 16, pick a number, when interest rates were like that you got creative. You figured out a way to make it happen and there were all kinds of crazy fun interesting ways that the folks did that. A lot of that has continued on today in various formats.

Russ: That was really the birth of the non-agency lender, the brokerage channel about 30 years ago and it grew to where it was originating three quarters of the loans, the real estate loans in the country.

Robert: And if you have a tin foil hat, this is where you would put it on and say, and the entire meltdown was orchestrated to remove that channel, but we are not going to go there.

 

The Impact On The Mortgage Industry

Russ: Yeah, we definitely had some people in the mortgages who felt that way. I was in that channel, and I got wiped out as a result of it. So, I know exactly how that felt like, but, whether it happened on purpose or whether it happened by accident, at the end of the day, it happened.

The role of the government and government lending came back. Well, if you’ve been paying attention, you are seeing more non-agency money coming available, more private money coming in. More money has been printed. More money is looking to get into the mortgage space. So, coming back to rates.

Now you’ve got the agencies who are subsidized, right? That’s why Fannie and Freddie keep losing money more often than not. Sometimes they make money but more often than not they lose money. They are a subsidized rate. They have access to money cheaper because the interest rate on a mortgage is based on risk.

When you are lending money, buying a mortgage bond, if I’m buying a mortgage bond issued by Fannie or Freddie, I had prior to the crash and implied the government guarantee but not an overt government guarantee. Today, I have an overt government guarantee.

Robert: I’m not sure that’s any better.

mortgage industry and fed rate increase

 

Russ: Which means it’s less risky. Which means that I will accept the lower interest rates. When I don’t have that overt guarantee, if I’m another provider of funds in the marketplace, I have a higher cost. But, I may be able to compensate for that with more efficient operations or whatever. So I go in and I try to compete, but I also may compete a little bit off to the fringe. We are seeing more of those non-agency players come back in and begin to compete.

Robert: By the way, on next week’s program, you are going to meet one of those folks. You are going to learn a lot about these new loans that are available to real estate investors, including the fact that you can basically forget about getting Freddie and Fannie’d out today. There’s a lot of new alternatives, excited to talk about that next week.

Russ: Yeah, a lot of people are motivated to see people be able to finance real estate. We’ve always made the argument that the powers that be, whoever they are, whether it’s government, politicians, banks, private industry, the largest trade association in the country is the realtor organization.

You look at all of that, you say, “There are so much political and financial benefit to seeing real estate get propped up, even if it has a problem,” like it did. It just had the biggest problem ever in 2009.

You see everybody rallying around and if you are willing to wade into the mess, you actually can make a lot of money. A lot of people made a lot of money coming out of 2009 and there are some of us that are sitting around looking, “We hope this is a bubble. We hope this thing pops. We hope that this quarter point interest rate increase actually pops it a little bit and some of the prices will come down,” because the rents probably will not come down as far as the prices will.

If that happens and money remains cheap and we get to go in and purchase, we’ll actually get a chance to scoop up some bargains. That’s obviously what everybody is hoping for.

Robert: Before we are done today, we’ll talk about some of the strategies that you might consider given what’s happened.

 

Mortgage Interest Rates And What to Watch

Russ: Yeah, so in terms of the interest rates themselves, obviously mortgage interest rates are going to stay very low. If you really want to get some idea about where they are headed, I would pay attention to the 10 year Treasury bond.

That’s really the epicenter of where risk pricing is in the debt market, at least as far as mortgages are concerned. If you can imagine the 10 year bond yield at the center of a bull’s eye, then each concentric ring out is a little bit more risky. And you could make the argument that real estate is just slightly more risky than the government bond. So, there’s going to be a little bit of a spread.

You can go further out all the way to another topic that’s been quite a bit in the news lately – junk bonds that are way out in the outer rings, because these are basically poor credit corporations that are borrowing to fund maybe negative cash flow operations, like we were talking earlier about the oil companies.

And they’re high risk, high rewarded investments. If you make that loan and you get it right meaning I buy that bond and loan that money company and they pull themselves out of the fire, they owe me a lot of money. I can do real well.

But, the flipside of that is they could completely default and then I get maybe pennies on the dollar if I’m lucky in a bankruptcy proceeding or whatever.

So, mortgages tend to be very near, and they are the beneficiary if you will of the flight to quality just like bonds are. As people get nervous about all the gyrations in the economy, they jump into treasury and the dollar which is why both the dollar has been strong and treasuries have been strong. That pushes yields down. When people are bidding up the treasury bonds, bidding up the price to buy them, the inverse of that is you are bidding down the yield.

I would say that if this quarter point raise creates uncertainty in the market, and clearly the stock market is not liking it. It liked it the first day, maybe that was plunge protection team trying to create a PR move, but since then, hasn’t liked it so much.

If that trend continues and people will start looking for safety, you are going to see them move more and more into bonds. If that happens then you are going to see to see those 10 year yields begin to come down. That would be reflected in mortgage rates.

Personally, and I’m hardly a genius at this, but I’ve been watching these markets for a very, very long time, I really don’t see mortgage interest rates running away.

Does that mean you should run around and use adjustable rates? I don’t think so, only because the chances of them going up substantially versus the chances of them going down substantially, I think you have a greater chance of them going up substantially just because of where they are at.

They are so far near the bottom right now, why take a chance, right? Because if all of a sudden the credit market sees up or we get a big boom of inflation and we have to raise interest rates real high to cool it off or everybody runs out of bonds because bonds are losers in an inflationary environment. Everybody will be running into stocks and other places, money would be coming out of the bond market, then the bond prices will go down, bond yields will go up more, mortgage rates will go with them.

That’s the way it works, again, these markets are managed, manipulated, whatever you want to call it. They don’t always act the way they are supposed to act, at least in the short term, but if you watch them over the long term, usually the market behaves as you would expect it to do. But you have to just look at it over the longer term.

Robert: We are talking about how the Fed rate increase hike is going to affect us as real estate investors, more when we come back.

 

How The Fed Rate Increase Impacts Real Estate Markets And Tenants

Robert: We are talking about the recent hike of the interest rate, and it’s really a range of interest rate that the Federal Reserve has come out after all these years of no change and said, “We’re going to raise it, we are going to raise it, we are going to raise it.” They finally did and there has been all kinds of market reaction to that.

Russ: Yeah. This really affects financial markets a lot more than it does at least directly real estate markets, but then again it affects the way banks and corporations behave which ultimately will affect real estate investors. Those are all things that we need to be concerned about.

Robert: One of the things is, as we look at real estate investors, I’m looking at any change in the marketplace, whether it is, like we talked about the price of oil, some of that is good, right? My tenants can now afford rent if gas cost them less.

At the same time, if my tenants have jobs in those industries, they could be at risk. Part of what you do is you look at which tenants are being affected the most by any change you hear about and are those tenants, if they are your tenants going to be able to pay. The durability of your rent is a thing to consider in any news event.

 

A Strong Dollar Making An Impact

Russ: Yes, you obviously need to stay focused on what’s going on in your regional economy, your local economy because that’s where you are living.

The only exception would be … We talked about farm land investing. If you are investing in farm land, it’s maybe less important that you get the geography right except for the quality of the crop. But, what you are really interested is getting the commodity right and then it can be shipped anywhere in the world. Commodities in general right now have been suffering, and that has been a direct result of the strong dollar.

Think about this. If you have a local economy that is commodity dependent, we’ve been talking a lot about oil and gas. But, it isn’t just oil and gas, it’s any commodity. Minors our laying off right now. If you are in a mining community, coal, copper, zinc, if you are in lumber, there are commodities right now that are being hurt because commodities are priced in dollars and the dollar is getting stronger.

strong dollar with a fed rate increase -

The dollar is getting stronger, not just because of the quarter point rise, but it’s also getting stronger because when the Fed does this it actually creates difficulties in the emerging markets. This is where your head is going to explode.

Robert: Follow along here, it’s not that difficult to grasp, but you are going to have to think a little bit.

Russ: I’m not going to profess to be an expert in foreign exchange and currency markets, but I’ve been paying a lot more attention to them lately because the last time that Janet Yellen did not raise the rate in September, she said it was because of what was going on in emerging markets.

The concern was that the dollar was getting too strong relative to emerging market currencies. When emerging market currency or any other country’s currency goes down, it makes their exports less expensive for their foreign customers to buy.

It’s like you lowering your prices and being more competitive on the open markets. Conversely when your currency gets strong, then it makes your product less competitive in the global market.

Robert: With a strong dollar right now, there are some good things about that, the challenge is exports of the US become expensive to other places.

Russ: Right. If your local economy is being largely driven by a company that does a lot of exporting, especially when it’s doing exporting to a country like China who has been on a little bit of a decline, and on top of that, they have been devaluing their currency, the Yuan in relationship to the dollar, it means those dollar denominated exports from the United States trying to be sold into China or other countries are now more expensive which means it’s harder for the US company to compete.

It’s one of the reasons why a lot of the US companies who are selling abroad don’t necessarily like a strong dollar policy. Now, the good news is that the dollar is able to buy the more labor, the dollar is able to buy more land or capital equipment or whatever in the markets there’re in.

Robert: Quick aside, right now is an excellent time in certain foreign real estate market to be an investor in real estate. There are sales because of the exchange rate and we look to exploit when those things happen either way. So, again, a strong dollar isn’t a bad thing necessarily it depends on which side of the equation you are on.

Russ: Coming back into an interest rate rise, creating a strong dollar, a stronger dollar and now a stronger dollar creating pressure on commodity prices downward which we are seeing. And again, we’ve talked a lot about oil but other places.

Australia and Canada are two countries that have been okay places to invest in, especially Australia over the years, but now they are suffering. They are suffering partly because the Chinese economy is down and Chinese economy has been the largest consumer of commodities in the world.

With that demand down, those sales are down. And on top of that, the dollar value of the sales is down because the commodity’s prices have gone down in dollars.

Again, it kind of makes your head want to explode, but if you just spend time thinking through it, it is logical. And if you start to pay attention to it little by little, it will start to make more and more sense. Then you just have to keep following the path all the way back to wherever you are invested.

We have listeners all over the world. We have people listening to us in Canada, in Australia, in Hong Kong, in addition to in the United States and many other countries. A lot of you are on the other end of a strong dollar. You are on the end where it takes more and more of your local currency to purchase the dollars you need. In many countries, real estate sales are denominated in dollars, not the local currency for this very reason.

Robert: Good point.

Russ: Because it’s more stable currency. Now when you go to buy, it’s going to cost you a lot more of your local currency. So, as an American, we can come in using our dollars and purchase your assets and get more for our money, whereas the reverse is true. If you are there and you are trying to purchase real estate competing with Americans coming in with dollars using your local currency, you need more of it.

And so as you are thinking about all of this, especially if you are an international investor, you need to be thinking about the role of the dollar in your local economy and the relationship of your local currency to the dollar and how that could that affect both the price of the real estate but also the jobs that might support the people who are going to be using the real estate.

If you are in a resort community it can be good, because now you get strong dollars coming into the resort community and you are doing well.

If you are in a community where maybe it’s local industry and they are trying … And their biggest customer is the United States and they are trying to sell, that could be okay, because they are going to do well.

If you are there and you are trying to sell something that’s going to be denominated in dollars, now you are going to have a problem. So, talk to the people who you know who are in these different businesses and begin to understand what it looks like through their perspective.

I think one of the best things you and I are able to do Robert is we get to travel around a ton. We get to talk to a lot of different people who look at the problems and the challenges and the opportunities through different lenses. And then we can begin to take all those little pieces of the puzzle and put them together and get a broader perspective. In fact that’s the Summit coming up at the end of February. We get a chance to do that.

We get probably 100, 120 investors from all over the world, they come in, we sit down we have these conversations like, “Okay, what’s life for you like now that the dollar has gotten so strong. What’s that doing for you in your local economy and how does the Fed …” Because everybody around the world is watching what the Fed is doing, it’s not just the United States is fixated on it. It’s everybody because it affects everybody.

The dollar is the global reserve currency. And even though it’s diminishing in its role, it’s still the big horse by far and away. Anything the Fed does affects the value of the dollar globally which affects every man, woman and child on planet earth that conducts business in any way, shape or form. It’s very, very important for you to pay attention to it even though it’s a little bit of a brain strain.

 

Join Us On The 14th Annual Summit At Sea

Robert: Well, what’s great about being on the Summit this coming year is the fact that we’ll be able to have those conversations with Mr. G. Edward Griffin who wrote, ‘The Creature From Jekyll Island’, a wonderful expose on the Federal Reserve. Great, great book, great, great man.

2016 Summit at Sea - 640x150 (1)

Robert Kiyosaki who certainly has his mind all over economics and just to hang out with that guy is brilliant. We are going to have an owner of a bank and a gold expert.

We’ve got lots of great people coming and of course we’ll talk oil because oil is in the news. Oil is going to affect us in real estate in a lot of different ways.

Join us there’s a few cabins left for the 14th Annual Investors Summit at Sea. Get all the details on our website at RealEstateGuysRadio.com under summit.

When we come back we’ll talk more about things you can do in light of the new Federal Reserve move. You are tuned to The Real Estate Guys radio program. I’m your host Robert Helms.

 

Learn How To Raise Money For Bigger Deals At The Secrets Of Successful Syndication

Welcome back to The Real Estate Guys radio program, thanks for tuning in to the show. If you’ve ever thought about doing bigger deals by raising money from other investors, then you owe it to yourself to come out to The Secrets of Successful Syndication that happens January 29th and 30th in Phoenix, Arizona.

The amazing Ken McElroy will be there, Attorney Mauricio Rauld and a great, great cast of faculty, including a couple of new folks this time around. To get all the details at realestateguysradio.com under events.

 

More And More Renting Households

Talking today about how the Federal Reserve rate increase here is affecting real estate investors. I think the main thing to focus on is where is housing going, where is affordability going, where are tenants going?

The good news … We’ll cover this in more deep down next week. I know we keep teasing next week’s show but before we are done I’ll tell you why I’m excited about the four at least guests we’ll have next week, is that, there are more and more renter households.

More people today than in a long, long time are renting. They are choosing not to or they can’t afford to own or they can’t get loans. So there’s more renters.

That bodes well for real estate investors. Interest rates continue in spite of this, uptick from the Federal Reserve continue to be great. Again, next week we’ll learn about some loan programs that aren’t dependent on your credit, which is fabulous. So, all in all, not a bad time to be in the real estate investing business.

 

Pick The Right Markets

Russ: No it’s great. The key is just to make sure that you pick rock solid markets and diverse markets. The things we preach about here all the time.

You know you want to have those wide variety of the diverse drivers. You don’t want to be in the one trick pony town where it’s all about the one industry or the one company.

You need to make sure that you are diverse and then invest in the bread and butter properties. Invest in things that people will always need that aren’t fads, that are affordable. Think about your macroeconomic considerations within the scope of maybe a state and it being job friendly, aggressive …

Robert: Or tax friendly.

Russ: And tax friendly. Those are things you’ve got to watch the big baby boomer demographic. You need to watch what the millennials are doing because they’ll begin to give you some indication to what they are thinking and where they are moving.

 

Keep An Eye On Bond Markets And Stay Liquid

I think that it’s important to pay attention to the credit markets right now because … Especially like … I don’t know if you saw this Robert but a couple of big bond mutual funds basically blocked their investors from being able to liquidate. The idea of a mutual fund is, you are able to go in there and get your money out whenever you want. It’s highly liquid.

Robert: Right, I can sell, I can buy into it, it’s liquid.

Russ: We teach our syndicators, don’t ever do this which is exactly what these bond funds do and that is they invest long but they have this mismatch maturities where they are giving you basically demand, like a demand deposit but they are making these long term investments.

Well, if they have too many people coming who want their money out they have to begin to sell these assets at whatever price they can get. The problem is when too many people get spooked. This is always the danger in paper markets, when you can move in and out.

Too many people get spooked, then everybody comes looking for their money and it’s just like a run on the bank, the only difference is it’s run on a bond fund.

This is what blew up the financial crisis in 2008. This has the potential to do it again. You definitely want to be watching that. Everybody is paying more attention to it now. You want to be paying attention to that. Use financial structures that you feel very comfortable with being stuck within the long haul.

Don’t get penny wise and pound foolish. Don’t think, “Oh, I can save an extra $100 a month if I use this super teaser rate deal,” when the probability is rates are on their way up, not on their way down. I would be very, very careful about that. Some people will use these balloon payment loans where it’s 30 year amoritized, so you get a low payment but it’s all due in five.

Robert: Meaning that in five years you have to refinance it?

Russ: Yeah, you either have to refinance or sell and that’s all predicated on the value still being in the property, meaning that you can still qualify, or there’s lenders out there.

Back in the day when condo hotels were all the rage, a lot of these developers’ projects were all predicated on your take out buyers, the people you are going to sell the finished inventory to having access to credit markets that would finance those purchases. When those loans went completely away, then there was no liquidity and these developments failed.

Things can change. They start in the credit markets.

Most real estate investors aren’t trained and don’t really pay attention to the credit markets. I think big picture lesson from 2008 that we’ve harped on for years now is savvy real estate investors got to pay attention to these credit markets.

When the big elephant in the room, the Federal Reserve comes in and finally after nearly 10 years actually begins to move the rate, you have got to perk up. You’ve got to pay attention, because the last time they did this was 2006. They went into an aggressive rate hiking cycle and it led directly to the crash. This time they came out with a much more metered or muted languaging.

Robert: But they did also talk about gradual increase over time, this has definitely set the stage for more small increases. If you just step back and look, that means it’s probably an excellent time to make sure your financing is in place. Is it long term, if your strategy is long term? If you still have properties that you haven’t re-fied, now is the time to take a look back.

You’ll definitely want to pay attention to the next week’s show because of that. Real estate and these markets move slowly, and overnight reaction is not the ultimate reaction. Your mission is to pay attention now more than ever before, you better be paying attention.

Russ: And really know your demographic. Know where their money comes from, not just that they have income or they’ve had a job for a couple of years, but what industry they are in, who their employers are, who the major employers are in the area?

They may not be the people you are renting to directly but you may be renting to people they do business with. They may be an engineer or a scientist or whatever that is a home owner, but they do business with the guy at the laundromat. They go the restaurant. They are getting their car done. They are doing business with the local merchants, and these people are the people that you are actually renting to.

Without these primary people in the marketplace, those jobs go away. Pay attention to that, because, again, the markets are fragile … My estimation anyway, I think the markets are fragile right now.

Even though things are booming, things that boom can dry up in an instant when people get spooked. The evidence that these big mutual funds had to shut down not one, not two but three of them. The first time I read about it, it was only the one. Then it was another one. Then it was another one. If that’s a trend that continues, you could begin to see bond markets lock up.

When this happened in 2008, it all unraveled very, very quickly. If you’ve got credit lines out there that you are counting on for liquidity, I wouldn’t do that. That would make sure I have some real cash on hand, so that if things tighten up you do have some liquidity that isn’t a credit line.

 

Go Out And Make Some Equity Happen

Robert: One of the big differences between our show and a lot of real estate shows is we spend some heady time in the clouds talking about broader picture, economics.

To make up for that next week it’s all about single family houses. We’ve got a bunch of great guests next week and a lot has changed in the single family marketplace, including financing. You are going to learn next week about some great alternative financing that real estate investors should be excited about.

Until then, it’s the most wonderful time of the year, make sure you are given big hugs and high fives to the people that matter in your life, and let’s all get excited for a new year which is coming before we know. Until next week, go out and make some equity happen.


Listen on YouTube

Want More?

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

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.

Fed or Foe? Two Valid Views on the Federal Reserve

What is the Fed? Friend or foe? Love it or hate it, the Federal Reserve of the United States is arguably the most powerful financial force on earth. 

Fed policies affect interest rates, prices and credit…not just in the United States, but around the world. Ben Bernanke and Ron Paul have two very different answers to the question, “what is the Fed?”.

Former Fed chair Ben Bernanke has been touring the country promoting his memoir The Courage to Act.  Co-host Russell Gray stopped by a San Francisco Commonwealth Club meeting where Bernanke was speaking…just to hear what Big Ben had to say for himself.

Meanwhile, host Robert Helms sat in on a Simon Black Sovereign Man conference featuring long-time Fed critic, ex-congressman and multi-time Presidential candidate Ron Paul.

Then we sat down with the microphones and chatted about what we heard and how it relates to real estate investors.


  • 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.


In the studio to reflect on the very valid, but polar opposite views of Ben Bernanke and Ron Paul on the Federal Reserve…

  • Your very valid host, Robert Helms
  • His in-need-of-validation co-host, Russell Gray

Long time listeners know we aren’t raving fans of the Federal Reserve system.  So we confess that right up front. We’re a bit biased when it comes to answering the question, “what is the Fed”?

With that said, we’re huge believers in “getting a 360” when it comes to studying any topic…and especially one as important as the Fed.  In fact, in our Recommended Reading bookstore, we feature several books on what is the Fed.

Some, like G. Edward Griffin’s iconic Creature from Jekyll Island, view the Fed as a nefarious creation of elite collectivists intent on world domination.  Scary stuff, if true.

Others, like David Wessel’s In Fed We Trustheap kudos on the Fed…and Ben Bernanke in particular…for saving the global financial system with bold action in 2008.

Obviously Mr. Bernanke concurs…as he named his memoirs, The Courage to Act.

What is the Fed?

That’s a loaded question in itself.  The standing joke is that the Federal Reserve Bank is not federal (i.e., it’s not a governmental agency, but rather a private company), is not a bank, and it has no reserves.The Federal Reserve Bank has the power to print money.

But for sake of this discussion, suffice it to say that the Federal Reserve Bank is the United States’ central bank.

The Fed issues the currency (those green pieces of paper with pictures of famous dead politicians on them)…called Federal Reserve Notes (FRNs).  You probably refer to them as “dollars”, but that’s technically incorrect.

Of course, that opens up a HUGE can of worms about the difference between currency (FRNs) and money (dollars – which used to be specific amount of silver and gold).  But we won’t go there….at least not today.

So as you can see, right out of the gate … “what is the Fed?” is complicated topic.  But it’s one worth studying when you consider what Henry Ford (the guy who created the Ford Motor Company) said…

Henry Ford said it's better people don't understand the banking system or there'd be a revolt by morning!“It is perhaps well enough that the people of the nation do not know or understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.” – Henry Ford

Why would he say that?

Well, since Mr. Ford is no longer with us, we can only speculate.  But the gist of the comment is plainly understood.

Obviously, he felt the citizens would not be happy if they knew how money and banking worked.

And that’s exactly what Ron Paul thinks.

Ron Paul has been an outspoken critic of the Federal Reserve for the four decades he served in Congress.

He wants the Fed audited.  He wants the Fed more transparent.  He wants the Fed accountable.

Ron Paul wants the Fed ABOLISHED.

Yet other people are convinced the Fed is an essential part of the U.S. financial system.Ron Paul want to End the Fed - what is the fed

The Fed is the Bank to the Banks

If you’ve ever seen the movies It’s a Wonderful Life or Mary Poppins, you’ve seen a run on the bank.

This is when depositors come wanting their money back, but the bank doesn’t have it.

That’s because the banking system business model is fundamentally flawed.  A bank borrows short by paying you interest…at least they used to…on your demand deposits.  The means you can pull the money out any time you want…as in “short” notice.  They, they lend long…like a 5 year car loan or a 30 year mortgage.

So the amount of actual cash on hand is very low compared to potential demands on cash (withdrawals).  The number is something less than 5%.

No wonder they run out of money!

The idea of a Central Bank (like the Fed), is to give the banks somewhere to go when they run out of money.  It’s like a payday loan for banks.

So when a bank doesn’t have enough money to satisfy customer withdrawals, they can go to the Fed and borrow.  Later, when they get some money in from new deposits or loan payments, they can pay it back.

Obviously, we’re WAY over-simplifying this.  But that’s the basic model.

The Fed Creates the Currency Out of Thin AirThe Federal Reserve can create money simply by printing it....or more accurately, adjusting computer balances of the member banks.

So where does the Fed get the money to lend?

It prints it.

Bet you wish YOU could do that.  But you can’t.  So don’t try.  It won’t end well.

When Panic Strikes…

When the 2008 Financial Crisis struck, financial markets froze up.  It’s a long convoluted story, and if you’re super interested, then you’re a sickie like Russ, and you’ll enjoy plowing through ALL of the books in the Banking and Economics section of the bookstore.

The short of it is that major banks, insurance companies and investment houses all ran out of money…at the same time.

How could that happen?

Leverage.

Wall Street created trillions of dollars of faux financial assets called “derivatives”.  Basically it’s debt secured by debt secured by debt secured by debt.  Get it?

Even though there were BILLIONS of dollars in the financial system, they were holding up MANY TRILLIONS of dollars of debt.

And when the sub-crime…oops…sub-prime…crisis hit, some of that debt went bad.

Normally, that’s not a big deal.  Which is probably why Ben Bernanke assured the world the sub-prime contagion wouldn’t spread.

Famous last words.

Ben Bernanke assured the world the subprime contagion wouldn't spread. Famous last words. In fact, the contagion spread like wildfire and caused an unprecedented collapse in financial markets and housing values.In fact, it spread like wild fire.

That’s because when the sub-prime debt went bad, it set off a daisy chain reaction of ALL the derivatives (debt secured by debt secured by debt secured by debt…secured by sub-prime mortgages).

And each layer had a margin call.  So when the sub-prime loan went bad, the value dropped relative the derivatives backed by it, so the bank that pledged it as collateral got a margin call.

That means they need to put up cash.  Except they didn’t have enough.

So they tried to sell some of the derivatives they had to raise cash.  But no one wanted to buy them.  Seems the word on the Street was the paper (debt) was bad.

Now, in a “no bid” environment, prices were in free fall.  Margin calls were everywhere.  More and more derivatives were hitting the market with no bid…leading to more margin calls, defaults and widespread panic.

Ben Bernanke to the RescueBen Bernanke was nicknamed Helicopter Ben because of his commitment to aggressively expand the money supply to stave off deflation and depression. Friend or foe, what is the fed.

It’s a big long story…but the short of it is this:  Ben Bernanke printed over $4 trillion dollars and started buying up all the bad debt.

The Fed put a “bid” under the market to stop the margin calls.

Then they made huge emergency loans to private businesses.  Like the $80 billion loan that saved AIG Insurance.

They allowed Goldman Sachs and other investment banks they liked (then Secretary of the Treasury Henry Paulson was the former CEO of Goldman Sachs) to become deposit banks so the FDIC fund could be raided…oops…used to save them.

Lehman Brothers wasn’t smart enough to get their CEO into Treasury, so Lehman went bust.

So Ben Bernanke had the courage to act.  And according to people like David Wessel, Richard Duncan and Bernanke himself…Ben’s bold action saved the financial system.

Good job.

Who Broke the Financial System?

Ron Paul, Peter Schiff and other critics of the Federal Reserve System claim that the entire problem was originally caused by Federal Reserve activity in the years and decades leading up to the financial crisis.

You can (and should) read more about that in Peter Schiff’s books, Crash Proof 2.0 and The Real Crash.

Who Cares?

Hopefully, when it comes to understanding, “what is the Fed”, YOU do.  After all, the Fed’s decisions impact every aspect of the economy including interest rates, employment, wages, cost of materials, availability of credit and more.  All those things directly affect you, your tenants, the value of your savings, and the price of your properties.

But we make distinction between politics and investing.

We have an opinion about how things SHOULD be.  Sadly for us, things aren’t that way.  You may have your own opinion and you may agree or disagree with us.

That’s okay. It’s what makes the world go around.

But when it comes to investing, whether we like the Fed or not, and whether or not we agree with the Fed, politicians or each other…what matters is making sure we understand what is the Fed and what’s happening so we can try to anticipate likely outcomes and position our portfolios to roll with the flow.

Will there be inflation or deflation?  Will interest rates rise or fall?  Will employment improve or weaken?  And on and on and on…

The Elephant in the RoomThe Federal Reserve system is the elephant in the room few are willing to acknowledge as the potential source of much of the financial instability in the world

So just like being locked in a room with a huge elephant which could EASILY CRUSH YOU…

So, what is the Fed? It doesn’t matter if you think the Fed is evil and is trying to destroy you…or if the Fed is just a big, lumbering oaf…

If you’re on the wrong end of it, you get CRUSHED.

So pay attention to the Fed.  Try to see if from all angles.  And when it moves, make your adjustments to make sure you’re safely positioned.


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.

Alan Greenspan’s Shocking Confession

The Real Estate Guys™ just returned from the New Orleans Investment Conference where we (and some of our listeners) had a chance to hear from the Maestro himself, Dr. Alan Greenspan.

The Real Estate Guys Radio Show host and several listeners with former Fed chairman Alan GreenspanIf you’re a long time follower of The Real Estate Guys™ radio show and blog, you know we pay close attention to the Federal Reserve because of it’s strong influence on interest rates, the value of the dollar, and asset prices (like real estate).

In fact, many economists and market pundits believe Alan Greenspan’s policies when he headed up the Fed (1987 to 2006) led to the real estate boom and ultimate bust in 2008.

Coming into the conference, we’d heard rumors that Greenspan was singing a strikingly different tune…about a great many things…than when he was at the helm of the most powerful financial institution on the planet.

Now it should be plainly obvious that Fed policy is hugely important to everyone who owns an asset, runs a business, earns a paycheck, has a savings account or pays on a loan.

So now that he’s on the outside, knowing exactly how it works on the inside, what is Alan Greenspan saying today about the Fed, the dollar, the future of interest rates, and what investors can and should do?

First, he says the bond-buying program known as QE didn’t help the “real economy” (i.e., jobs for the middle-class, real wage growth, or increasing purchasing power and consumer demand).

However, he admits QE did boost asset prices.  So stocks, bonds and real estate are all artificially higher because of easy money.

In other words, the Fed helped the rich get richer, while doing nothing for the middle-class and poor.

But as if THAT admission wasn’t enough, the Wall Street Journal’s article covering Mr. Greenspan’s speech to the Council on Foreign Relations on October 29th said this:

“He also said, ‘I don’t think it’s possible’ for the Fed to end its easy-money policies in a trouble free manner.”

Shortly after Greenspan’s comments, the Fed announced the end of its bond-buying program known as Quantitative Easing (QE).

Does this mean trouble is coming?

(Before you hit the panic button, remember that the flip side of every problem is an opportunity, so “trouble” is usually only bad for the unprepared…)

As real estate investors, not only do we care about jobs, wage growth and purchasing power (after all, it’s hard for unemployed poor people to pay rent), but we also care about interest rates.

So what does Alan Greenspan have to say about the future of interest rates?

Alan Greenspan says it's a good time to by goldBack to the Wall Street Journal article…

“He said the Fed may not even have that much power over the timing of interest-rate increases.”

“‘I think that real pressure is going to occur not by the initiation of the Federal Reserve, but by the markets themselves,‘ Mr. Greenspan said.”

What does THAT mean???

We’ve covered this in detail in previous blogs (just search our site for “Fed”), but the short of it is that without the Fed using QE to create demand by bidding (and buying) U.S. bonds, someone (the market) is going to have to step up and buy them…because if they don’t, the lack of bidding will cause bond prices to drop.

And when bond prices drop, interest rates rise.  So if the markets don’t bid strongly enough on bonds, then no matter what the Fed says, the markets will decide when and how much interest rates rise.

In other words, how the market feels about the quality of the debt (the likelihood of being repaid) AND the quality of the currency the debt is denominated in (purchasing power) makes a BIG difference in what yield investors will demand from the borrower.

Right now, investors still consider U.S. Treasuries as “safe”.  That is, there’s very little probability of default…in spite of past political posturing over debt ceilings. That’s because the Fed can print as many dollars as it takes to pay off the debt.

But when that happens, it reduces confidence in the dollar itself (the quality of the currency).  Because just like when a company issues more shares of stock against the same earnings and assets, the value of each share (in this case, dollar) is diluted.

Real Asset Investing - How to Grow and Protect Your Wealth Against a Falling DollarAs we chronicle in our special report, Real Asset Investing – How to Grow and Protect Your Wealth in the Face of a Falling Dollar, there’s already been substantial moves away from the dollar and dollar denominated assets and trade.

China has signed bi-lateral currency swap agreements with virtually every major country, which essentially facilitates their international trade without having to use dollars.  And China is the world’s second largest economy to the U.S….and closing fast.

Meanwhile, China and Russia have been stocking up on gold as fast as they can.  It seems they’d rather hold their savings in a tangible asset versus a paper asset…like the U.S. dollar or dollar denominated Treasuries.

And what does Alan Greenspan have to say about gold?

Back to the Wall Street Journal article….

“Mr. 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.”

It seems Alan Greenspan is a fan of real assets.  He sounds more like Jim Rickards (author of The Death of Money) than a former chairman of the Federal Reserve.

Yet gold tanked after the Fed quit QE!  And other real assets like real estate and oil have also been sliding.

So is Greenspan wrong…or does he know something is coming that will change the value of the dollar?

It seems that Greenspan is warning us that interest rates are likely to rise before the Fed is ready.  And if that happens, the Fed is likely to get back in the bond buying business to stop it.  Peter Schiff says there will be more QE programs than Rocky movies.

And every time the Fed exits QE, only to come back and do it again…and again (remember, this was QE3 with an Operation Twist thrown in between 2 & 3 for good measure), at some point the world loses faith in the dollar.

When THAT happens, interest rates go up, the dollar falls, and real assets like gold, housing, farmland and energy will be in demand…not just for their utility, but for their ability to retain value as currencies like dollars, euros and yen fail.

Fortunately, real assets are on sale right 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.

10/20/13: Real Asset Investing – Using Hard Assets to Hedge Against a Falling Dollar

The dollar has been on a steady decline since Nixon took it off the gold standard in 1971.  Since then, the dollar has lost a staggering 80% of its purchasing power.  Ouch.

The flip side of a falling dollar is that it takes more of them to buy anything that’s real.  That’s why that gallon of gas you could buy for 35 cents in 1970 now costs ten times as much.  And amazingly, gas is a product which has actually become cheaper to produce!  It’s also why gold, which was $35 an ounce in 1971 is now $1300 an ounce.  Or why that 3 bedroom house you could buy for $30,000 is now worth $300,000.

In other words, equity happens to those who own real assets when a currency declines, which is the topic of this episode.

In the studio for another powerful parade of playful pontification:

  • A man whose hard asset is his real talent for talking, your host Robert Helms
  • His inflated co-host whose value continues to fall, Russell Gray

Last episode, we talked about the government shutdown and the “threat” of a U.S. government debt default.  You know, like in “Put down that healthcare or we’re going to blow up the economy.” 

We’re not making light of it (well, maybe a little), but did anyone seriously think they were going to default?  No.  All the financial markets just yawned and munched popcorn while they watched the same movie play that we all watched in 2011.  Only this time, we didn’t even get sequestration.  All the theater’s fun, but we have work to do.

Now that it’s clear to all (as if it wasn’t before) that Uncle Sam has neither will nor the skill to curtail spending and Uncle Ben is handing the printing press keys to Janet Yellen-for-more QE, our focus is (as it was before) on how to position ourselves for the perpetual flood of currency.  Because we know that just standing here watching the waves come in is a good way to get washed away with the rest of the debris.

And all of this is happening against the backdrop of a disastrous roll out of the latest mega-entitlement program (Obamacare), as if the other two (Social Security and Medicare) weren’t already putting enough pressure on Uncle Sam’s budget.  Oh wait.  What were we thinking?  Uncle Sam doesn’t HAVE a budget!  No worries, because now he doesn’t have a credit limit either.  Problem solved!

Not really.  More like “Problem exacerbated”.  But that’s just what Uncle Sam is doing to HIMSELF.  Remember, now China’s making noise about Uncle Sam’s shenanigans.

China holds a LOT of U.S. debt.  And they’re smart enough to know that getting paid back in cheaper dollars is a rip off.  They aren’t happy.  The Chinese Premier was publicly taking the U.S. to task back in 2010 for out of control spending and printing.  Did we listen?  Noooooo…..

So the Chinese went and cut a deal with Russia to settle their trade without going through the dollar.  “Don’t worry.  This isn’t a repudiation of the dollar standard,” they said.  No. More like a warning shot across the bow, but Uncle Sam closed his eyes.

Now China is making a lot more noise about removing the dollar as the world’s reserve currency.  And not only are they making noise, but they’re busy cutting  many more deals to settle their international trade without using the dollar.  So what?

All that trade requires countries to buy dollars.  That’s DEMAND.  When they don’t use the dollar, demand goes down.  Combine that with QE (printing), which INCREASES the supply of dollars.  What happens when you decrease demand and increase supply?  Prices drop.  So hence, ergo, therefore my Dear Watson, etc., etc., the dollar’s future is murky.

Yes, we know it’s nearly Halloween and this all seems like a nightmare.  BUT….there’s actually a LOT of OPPORTUNITY in all of this.  So don’t go hide under your bed sheets just yet.

To thrive in all of this, you simply have to keep it real.  As in, REAL ASSETS.

Long time listeners know that after the Great Recession of 2008, we’ve spent a lot of time looking at the macro factors affecting real estate… because it makes no sense to build your real estate empire on the beach when there’s a tsunami coming.  The last tsunami caught us myopically counting doors, which we were buying everywhere and anywhere.  Today, we’re working hard to be a lot smarter.

In other words, market selection, price point, product type and financing structure have become VERY important for the long term buy and hold income property investor.

We learned the hard way that even through a rising tide (of easy credit) lifted all boats (asset values), when the tide recedes, only those investments with solid fundamentals weathered the storm.

Now, here we are in a jobless recovery and it isn’t credit (yet) that’s pumping up asset values.  In fact, interest rates are rising.  The FHA (the post 2008 supplier of “sub-prime” funding) needs a bailout.  And fewer people have good paying jobs.  And everyone is being squeezed by rising real world costs of living (forget the bogus CPI number).  So if higher incomes and looser lending isn’t pushing up values (yet), who is?

Investors.  Some call them speculators, but we’re not so sure.  We think it makes sense to buy real estate when you can get it below replacement costs, use relatively cheap long term financing when you can get it, and pick up tax breaks;  knowing that over the long haul, that debt will be easier to pay off with cheaper dollars.

In other words, Uncle Sam is a big borrower and he’s rigging the system to favor the borrower.  So we want to be borrower’s too.  And income producing real estate provides arguably the best vehicle for shorting the dollar through long term debt.

So if you’re not betting on short term price increases (it’s happening now, but could end tomorrow), then what you’re really doing is betting on LONG term inflation and controlling the asset with the cash flow and tax breaks generated by the property.  In that regard, the game isn’t much different than it’s always been.  In fact, it’s gotten better because the debt is cheaper and the prospects for long term inflation are high.

BUT, the weak economy created by QE creates some real budget challenges for the working middle-class, which means they have a hard time handling rent increases.  In fact, they may need to move to a cheaper property – maybe even a cheaper market.  That’s why picking the right market and price point is important.  We think there will be more demand for cheaper places in big markets with nice amenities.  So proper price point and market selection can be a hedge against a falling dollar.

Obviously, if the deal made cash flow sense when you bought it and you locked in long term financing, you have a much better chance of riding an asset valuation bubble up and down.  And as much as we like to reposition equity (the free duplex story in Equity Happens), there’s no guarantee the financing to do it will be there when the equity is.  If you can do it, great.  But if not, don’t get too attached to that equity and be prepared to ride the wave for the long haul.

So right now, we think the risk of rising interest rates justifies a slight premium to lock in long term financing.  After all, a falling dollar means any lender who loans for profit (as opposed to the Federal Reserve, who loans for political reasons), will want higher interest to compensate for the weak dollar.  So, borrowing long at fixed rates is another hedge against a falling dollar.

But any time you borrow, you put the collateral (the property) at risk if you suffer disruptions in cash flow.  And as asset prices rise faster than rental incomes, cap rates are pushed down, which makes it harder to have a comfortable cushion to weather weakness in rental incomes. (Cap rate is like the interest rate on the investment).

Since wages are slow to respond to “stimulus”, especially since the U.S. has shipped many of its blue collar jobs overseas in the name of “free trade”, how can a U.S. landlord (an any landlord for that matter) hedge against fragile rents?

Good question!  And it’s one we talked about a few episodes back when we looked at cash flowing oil and gas investments as a tool to supplement cash flow.  We won’t bore you with the details now, but you can learn all about it in our special report, Using Oil to Lubricate Your Real Estate Portfolio.  The bottom line is oil, like other commodities, is useful for hedging against a falling dollar.

And speaking of commodities….

Our friend Robert Kiyosaki says, “Savers are losers”.  He doesn’t mean that people should consume more than they produce.  Far from it.  He’s saying that it makes little sense to hoard anything that is decaying.  You wouldn’t buy a 10 year supply of fresh fish, right?  After all, over time the value decays along with the fish.  It’s a losing deal.

It’s the same with the dollar.  If the dollar’s value continues to decay overtime, why would you stock up on them?  Sure, we know that ALL currencies are fiat (unbacked by anything other than the trust of the seller and the taxing power of the issuer), but that just makes the dollar (at best), the least rotten fish in the market.

We also acknowledge that the world still does business (for now) in the dollar, so you have to enough dollars on hand to handle your daily transactions.  But why hold more than necessary?  And what’s the alternative if you want to remain reasonably liquid?

Since real estate investors, like many businesses, tend to have quite a bit of float sitting in their bank accounts, some are taking a chunk of those dollars and converting them to gold and silver bullion.

We know.  It’s a “barbarous relic”.  And it’s dropped in dollar value 30% in the last year (after 12 years of spectacular gains).  But we’re not talking about short term speculation in metals or using metals as a vehicle to accumulate more dollars.  Nor are we suggesting abandoning the fiat dollar and adopting a gold standard (though that’s not a half-bad idea!).

We’re simply saying, in the context of hedging against a falling dollar (or falling currencies of all types), that time-tested hedges are gold and silver.  So if you’re concerned about the long term value of the dollar, it might make sense to take 30-50% of your “always there” bank balance and put it in bullion.  You can easily convert it back to dollars if needed, but the plan is to just let it sit there (and grow), as a component of your liquid reserves  that is something other than dollars.  It’s not only a hedge against a falling dollar, but against counter-party risk (like a Cypress-style bail in).

Does your brain hurt yet?  Our hands our tired of typing.  Plus, it gets crowded when two guys are working on the same keyboard.

So we’ll close by letting you know we’re also looking into farmland investments as a hedge against a falling dollar.  It’s the same concept as combining traditional rental property with an incoming producing commodity investment like oil, except the tenants are trees and the commodity is food, not energy.  All under the banner of Real Asset Investing.  Because we think there’s a lot of air in the paper asset market right now, and it the stock market farts, not only will it stink, but people’s portfolios will get messy.  Not pretty.

So sit back, put your feet up (you’ve earned it, if you’ve read this far!) and enjoy the discussion of Real Asset Investing!

Listen Now:

  • Want more? Sign up for The Real Estate Guysfree newsletter
  • 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. Visit our Feedback page and tell us what you think!

Next Page »