This ONE chart tells a BIG story …

Most investors don’t really know what it means … or what to do about it …

Real estate investors are more likely to be interested in grading slopes than yield curves. And the Fed’s balance sheet? That’s REALLY esoteric and boring.

BUT … the Fed is the most powerful and influential financial force in the world … affecting the stock and bond markets (where mortgage rates are set), the economy, and even geo-politics.

The Fed seems to prefer hiding in the shadows …

… except when diverting attention from charts like the one below with cryptic congressional testimony and occasional PR appearances on TV.

This chart shows the Fed’s ballooning balance sheet …

The numbers might be too small to read, but they’re too big to comprehend … with over $7 trillion of assets (nearly double from just 4 months ago).

You may or may not know what it means, but set that aside right now … and just look at the slow and stable trajectory leading into the end of 2008 …

… and the “big” spike at the beginning of 2009.

Bring back any memories?

We found flipping the chart over helps …

Now, instead of looking like a positive, happy, upward trend … it looks more like the way it felt …

… like you were paddling along on a river until late 2008 when … whoosh! You went into a rough patch of white waters.

Then after a bit of a bumpy ride, you settled into a deep but slow descent into “the eye of the storm” (yes, we just mixed the metaphor) where it seemed stable and trending up.

Then some headwind … you might say your momentum was tapering … and then a little teaser turbulence right before …

WHOOSH!!! Over the waterfall.

This is what it FEELS like for investors riding waves of Fed liquidity via “quantitative easing” (Fedspeak for printing unfathomable amounts of dollars).

Of course, the Fed doesn’t really “print” … that’s so 20th century.

Here’s the official explanation straight from Fed Chairman Jerome Powell’s appearance on 60 minutes:

60 MINUTES: Fair to say you simply flooded the system with money?

POWELL: Yes. We did. That’s another way to think about it. We did.

*** (ANOTHER way to think about it? What’s the first way???) ***

60 MINUTES: Where does it come from? Do you just print it?

POWELL: We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury Bills or bonds or other government guaranteed securities. And that actually increases the money supply.

Hopefully, that’s VERY clear.

The Fed, by their own admission, simply conjures dollars out of thin air and uses them to buy government-backed debt.

Keep this in mind when you’re perplexed about why the government not only grows its own debt but seems all too willing to guarantee private debt also.

But don’t think about all that too much now. Let’s focus on the discussion at hand …

The Fed’s balance sheet shows HOW MUCH digital money the Fed conjures out of thin air … as reflected by how much government-backed debt they own.

Think about this …

The Fed creates dollars out of thin air at no cost. At this point, it has no value because it cost nothing to create.

Those fresh dollars only become valuable later when someone who did real work and produced a real product or service is willing to trade their product for those previously worthless dollars.

Doesn’t seem quite fair to the person doing real work. But that’s a rant for another day.

Of course, the Fed doesn’t actually put the money directly into circulation. They loan it to the government, who then must spend it into circulation.

Seems like a pretty good deal for the government. They get to spend lots of money to buy nice things … like votes.

If we didn’t know better, we’d be tempted to think the Fed and Uncle Sam have a bit of a racket going.

Nah.

So if the Fed prints dollars for free and then loans them to the government, wouldn’t this make them separate parties?

Good catch. Yes, they are. Of course, that’s also another rant for another day, and not our point right now.

Today, we’re less concerned with who the Fed is … and more focused on what they’re doing and what it REALLY means to Main Street real estate investors.

It’s a bit more complicated than just interest rates and inflation. Sorry. But it’s important because what’s brewing isn’t your run-of-the-mill financial crisis.

Back to our story …

So the Fed prints money from nothing and lends it to Uncle Sam. But when the government borrows money, who pays it back … and how?

Hint: The Federal Reserve, the income tax, and the IRS were all created at the same time as part of the 16th amendment in 1913.

Why?

Well, it seems there was a financial crisis in 1907, and the politicians and their funders decided to “fix” the situation.

Of course, “fix” is a word subject to interpretation …

“Repair, mend” … OR … “to influence the actions, outcome, or effect by improper or illegal methods”.
– Merriam-Webster Dictionary

And since we’re quoting …

“Never let a crisis go to waste.” 
– Saul Alinsky

“Never let a good crisis go to waste.”
– Winston Churchill

“You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”
– Rahm Emanuel

You get the idea. Exploitation of a crisis is a standard operating political principle that’s been around a long time. And the consequences often land on Main Street.

And speaking of principles that have been around a long time …

“The rich rules over the poor; and the borrower is servant to the lender.” 
Proverbs 22:7

Interesting.

We’re guessing you’re smart enough to put all that together for yourself. Must be nice to print money out of thin air and buy up trillions in debt.

Meanwhile, back on Main Street …

You don’t need to be a rocket surgeon to know you can only extract so much tribute … even at zero interest … before the burden is simply too much.

As we noticed last September, there were signs of severe systemic stress BEFORE the COVID-19 crisis hit.

Now everything is moving much faster … so it’s important to pay close attention and be ready to react to both the approaching dangers and opportunities.

Obviously, dollars are nearly free right now. It’s probably not a bad idea to grab all you can while credit markets are still functioning.

We’re noticing small businesses and commercial properties coming on the market at an increased pace … and with “price reduced!” in the pitch.

That’s a clue the crisis sale might be starting.

You also may have noticed precious metals are catching a bid in dollar terms. That’s talking head jargon for gold and silver prices are going UP on dollar price.

This indicates more dollar-denominated investors are choosing to keep some liquidity in precious metals versus currency.

This makes sense as every other currency in the world is already at all-time lows versus gold (i.e., gold is at all-time highs in every currency except the dollar).

When the Fed is printing trillions of dollars each year … and Uncle Sam is aggressively putting them into circulation … the historical result is a falling dollar.

And despite what you may hear on financial TV … we think it can be strongly argued this is setting up a perfect storm for leveraged income-producing real estate.

Remember, Wall Street and the TV gurus who promote them believe investing is “buy low, sell high”.

But real estate investors think “cash flow” … which is the only reliable source of equity. Income creates real equity.

Meanwhile, strategic real asset investors put it all together into a bigger picture …

Real estate (especially residential) is a sector strongly supported by the most powerful constituencies … politicians, bankers, and voters.

That’s a lot of love … and a great place in line when emergency help is doled out.

More importantly, debt is the real investment.

Income property mortgages are essentially a big short of the dollar with a great feature: the income from the property makes the payments.

So while you may not be able to print money like the Fed, using the right real estate debt is pretty close. And …

… the Fed is ALWAYS working on making debtors winners.

And when you use debt to convert real estate equity into precious metals, you have a very powerful shield against a falling dollar.

Yes, it’s true the dollar is catching the “best last paper currency standing bid” …

… but the dollar’s relative strength against other paper currencies at the same time it’s showing weakness against gold …

… is a major clue there’s some real-world weakness likely coming for the dollar in the not-too-distant future.

Yes, we know this is a lot to absorb. It’s why we keep repeating ourselves.

But rather than getting bored, we hope you’re getting inspired to study and prepare. This is a whole new ballgame.

This four-phase cascading crisis is still very early in its life-cycle.

It’s not the time to succumb to a short attention span.

Boots-on-the-Ground Market Insights: Precious Metals

Boots-on-the-Ground Market Insights: Precious Metals

June 2020

Precious metals diversify any real estate investment portfolio AND protect against inflation …

As the Fed shows no signs of a halt in printing money, Russell Gray, Co-host of The Real Estate Guys™ Radio Show interviews Dana Samuelson, president of American Gold Exchange and lead numismatist to discuss the state of Precious Metals and what we can do to hedge against disaster.

Listeners will gain knowledge and perspective on the current state of Gold in an ever-changing environment while also learning practical strategies within the market.

Here’s some of the areas Russell & Dana discuss …

• High Grading and a Halt in Exploration – The lag in supply vs. demand
• Cost of Oil – How the cost of oil plays a role in the value of precious metals
• Printing of Dollars – How this plays a BIG role in the health of Gold
• What’s Happening with Gold and Other Currencies – Discover the clues that we need to be paying attention to on a global scale
• Converting Equity to Precious Metals – How to hedge against loss as Credit Markets constrict
• And much more!

Simply fill out the form below to access this edition of Boots-on-the-Ground Market Insights: Precious Metals …

 

First Name * Last Name * Email * Phone Comments WATCH NOW

Golden Opportunity with a Silver Lining — Crisis Hedging with Precious Metals

We’re living in a time when the U.S. dollar is under pressure to support a struggling global economy. 

So, investors are joining central banks and turning to precious metals to hedge up their portfolios. 

Gold and silver are solid forms of liquid reserves. As the COVID-19 health crisis evolves into an economic pandemic … real estate investors should consider these malleable assets. 

Our good friend Dana Samuelson is here to talk about precious metals and investors like YOU. 

In this episode of The Real Estate Guys™ show, hear from:

• Your shiny gold host, Robert Helms
• His tarnished co-host, Russell Gray
• Precious metals expert, Dana Samuelson

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Hedging strategies for your portfolio

Today we’re talking about the safety and hedging strategies real estate investors can employ with precious metals. 

Real estate investors tend to look at life … and investing … transactionally. But traditional investing is really about building a portfolio. 

A portfolio consists of different components. When you apply portfolio theory to your real estate investing, you can use some of the same financial strategies that paper asset investors enjoy using the real assets you prefer. 

What are real assets? Real assets are things that are physical and tangible. They don’t really rely upon a counterparty risk. 

Building a portfolio of diverse real assets is important … and today we’re talking about a component that can be an important part of your portfolio mix. 

There’s the possibility that because of this economic shutdown, the Federal Reserve is going to print so many dollars that it will begin to damage currency. How do you hedge against that?

One way is to invest in assets that don’t have counterparty risk … like precious metals. 

Dollars haven’t existed forever … but gold and silver have. 

Why gold and silver?

Our guest today knows a lot about these precious metals … Dana Samuelson. Dana is one of the best resources out there on gold and silver investing. 

“Gold and silver are malleable, so they have been used as money and currency since ancient times,” Dana says. 

Unlike paper money, gold doesn’t really change its value. It is the same today as it was a hundred years ago in terms of purchasing power … in fact, it has actually gained value against printed currencies over the hundred years. 

Gold is up over $300 an ounce in the last 12 months relative to the dollar. 

One thing investors do need to understand is that when you buy an ounce of gold, it doesn’t have an ROI. It doesn’t earn interest. 

What it does is preserve its value at whatever time, place, and currency you want to compare it to going forward. 

So, we don’t all think of gold and silver as investments as much as we do a hedge against inflation and a way to keep money safe. 

Gold and silver have always been fantastic as far as preserving purchasing power, and there are multiple ways to invest in metals. 

Ways to invest in precious metals

You can of course buy precious metals outright by the ounce. But you can also invest in funds. You can invest in ETFs. You can even invest in mining companies. 

But, many of the alternatives to buying gold and silver outright do come with some counterparty risk. That’s why buying metals outright is so popular. 

When people think of gold bullion, they think of gold bars. These bars are minted privately. Most major mints have since replaced bars with round bullion pieces in the United States. 

The U.S. mint has been making one-ounce gold and silver Eagles since 1986. Other countries … like Canada, South Africa, China, Australia, and Austria … also make round coins as alternatives to bars. 

Up until 1933, people had a choice on the street between a $20 gold coin or a $20 paper bill. 

That means that there are a lot of older, classic coins that survive today and are many times scarcer than modern bullion pieces. These coins have collector value that is above and beyond their intrinsic metal value. 

Just like in real estate, there are typically additional fees when you buy or sell coins, but those are fairly nominal. 

In the past few months, Dana has seen a strong demand for the physical product of gold and silver coins. 

Getting into the game

What advice does Dana have for new investors to the precious metals game?

“I would try and determine what your overall strategy is and how much you really want to put into this market over, say, the next six months,” Dana says. “I would definitely get started sooner rather than later.”

Dana recommends cost averaging your purchases over the next two to four months since precious metals tend to sell off with stocks as people rush to liquidity. 

Cost averaging is a great way to get in and keep your prices low. 

You can also look at the gold to silver ratio to see how many parts of silver it takes to equal one part of gold. Simply divide the gold price by the silver price. 

Historically that ratio has been anywhere from 20:1 to 40:1. In the past several weeks, that ratio has moved all the way up to as high as 125:1 … which means silver is dirt cheap. 

One reason silver is lagging behind gold is that gold represents true portable wealth. “You can carry $150K to $200K worth of gold in your hands. It’s about the size of a paperback novel,” Dana says. 

Silver, Dana says, is more spending money to use on the street if there is a problem with currency. 

“I would advise listeners to think about allocating 40% of their funds to gold and maybe 60% to silver right now,” Dana says. 

For more about investing in precious metals … listen to the full episode!

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Podcast: Golden Opportunity with a Silver Lining – Crisis Hedging with Precious Metals

Gold & Silver

Gold & Silver

 

Protect yourself against inflation and preserve wealth with precious metals … lasting assets with lasting value!

 

 

This is still true now!  Gold and silver are REAL assets with REAL value … and an unwavering rock for core stability in any investors portfolio. 

Precious metals are ALWAYS worth something … and tend to become more valuable when paper money fails.  In actuality, gold and silver HOLD their VALUE while other currencies continue to be devalued by governments and banking institutions. 

That’s why gold and silver have been at the core of wealth and monetary systems for centuries, and why  … smart investors look to these assets to preserve personal wealth and hedge against inflation. 

Precious metals like gold and silver are one of the few asset classes that hold their purchasing power in times of uncertainty. 

In fact, after the 2008 housing crisis, Gold and silver overperformed projections as demand soared for the next few years … 

And in 2020 … Public demand for deliverable hard asset precious metals is actually stronger than in 2009! 

And you can’t just pull out a printing press and produce more gold and silver to meet increasing demand on a moment’s notice.  

Some argue against the metals because of their lack of liquidity, but when you find yourself needing liquidity …

 You can borrow against your gold and silver reserves! 

In addition to being desirable and valuable … Silver offers significant utility as well!  It is an essential material for electronics, cell phones, solar panels, and consumer products like jewelry, silverware, and mirrors. 

As silver is more abundant than gold, it is less expensive and can be bought in more incremental varieties and liquitied in smaller incremental quantities as well. 

One thing to pay attention to for spotting opportunities in the precious metals space is the gold/silver ratio … measuring the strength of gold versus silver prices. This ratio shows investors how many ounces of silver it takes to purchase one ounce of gold. So, a ratio of 25 to 1 means it takes 25 ounces of silver to buy one ounce of gold. 

The gold/silver ratio can be a valuable tool to determine the right time to buy gold or silver.  Some investors choose to buy silver when the ratio is high and switch to buying gold when the ratio falls. No matter how you buy …

Gold and silver are lasting assets to secure your portfolio with lasting value! 

Explore the resources below to get to know this market better … 

Radio Shows

• Ask The Guys — Equity Sharing, Self-Directed IRAs, and Gold 
• Ask The Guys — Recession Preparation, Note Investing, Gold Strategies
• Clues in the News — Stocks, Negative Rates, Oil, Gold and You
• Ask The Guys — Syndication, Apartments, Gold and More 
• Ask The Guys — Infinite Returns, Gold, Cap Rates, and Cash Flow

Reports & Articles

• Boots-on-the-Ground Market Insights: Precious Metals – June 2020
• Real Asset Investing
• Physical Precious Metals — A Guide to Getting Started

Upcoming Events

• New Orleans Investment Conference

Boots-on-the-Ground Teams

• American Gold Exchange — Dana Samuelson

Clues in The News

• Golden Bulls: Visualizing the Price of Gold from 1915-2020 – 27 May 2020
• Gold Asia Price Forecast: XAU/USD holds near $1690/oz, bullish – 6 May 2020
• A New Day Has Dawned for Gold And Silver – 6 May 2020
• Global Recession: Is It Time to Look at Gold? – 6 May 2020
• Gold: the hedge against currency collapse – 6 May 2020
• Gold:Silver ratio at record levels despite demand surge for investment silver – 6 May 2020
• Second COVID-19 Wave Could Up the Ante for Gold Prices – 6 May 2020
• Gold rises with trade-war tensions – 4 May 2020 
• Gold’s bull market gathers strength – 20 February 2020
• Gold’s quietly spectacular 2019  – 9 December 2019

Crossbreeding billionaire brilliance …

Personal development guru Tony Robbins reminds people …

“Success leaves clues.”

The idea is that success isn’t purely a product of blind luck or extreme innate ability. For guys like us, that’s REALLY good news.

Success is much more a matter of developing the knowledge and discipline to take aggressive action based on proven patterns and principles.

So if you carefully observe both what a successful person does and how they think, you can often replicate their thinking, behavior, and results.

Similarly, if you’ve had success in one area of life, you can probably apply those principles to other endeavors and achieve success there too.

That’s why we pay attention to successful people … even those who aren’t real estate investors.

So we perked up when we saw this headline …

Warren Buffett offers his 2 best pieces of advice for aspiring young investors

– Yahoo Finance 4/28/20

Of course, notwithstanding his investment in Berkshire Hathaway Home Services, Warren Buffet isn’t really a real estate guy.

But Warren Buffet is arguably one of the most successful, famous, most admired investors in modern history. There’s probably a lot to learn from him.

And since we need a timeout from our intense monitoring of the macroeconomic tsunami forming on the horizon …

(we’ll do a deep dive on our upcoming Crisis Investing webinar)

… today we’re looking at what real estate investors can learn from Warren Buffet.

After all, at nearly 90 years old, Buffet has seen his fair share of crises. Few people on earth are as experienced at navigating stormy economic times and building wealth in spite of frail financial infrastructure.

So according to the Yahoo Finance article and accompanying interview video, Buffet’s first tip is to learn accounting.

Tip number two is do NOT invest based on charts (an approach referred to by stock traders as “technical analysis”), but rather to focus on “buying good businesses instead.”

As with most brilliant people, there’s a lot of wisdom packed into just couple of sentences. So let’s take a moment to unpack it and look for principles we can apply to real estate investing …

TRADERS attempt to buy low and sell high … going from cash to asset to cash. The mindset is to accumulate cash.

INVESTORS seek first to acquire a stake in a profit-generating enterprise. They focus on accumulating cash FLOW … or what we call the ongoing efforts of others.

Of course, they’re happy to buy low and enjoy some capital gains too. But the purpose of buying is to acquire cash flow.

In real estate, flippers and wholesalers are TRADERS … they hustle to go from cash to asset to cash.

The difference between a stock and real estate trader is the real estate trader has the ability to improve the asset (add value).

So the real estate trader has some degree of control over creating the capital gain they wish to realize. The stock trader does not.

But whether in stock or real estate trading, the long-term financial performance (the accounting) is less important than the short term “mood of the market” (the technicals).

If the market is hot and new buyers are piling in … especially if those buyers are equipped with cheap credit … then it’s a lot easier to sell high to the next guy.

This investment philosophy is sometimes called “The Greater Fool” because your exit always requires someone coming along willing and able to pay more.

And when rising prices are dependent upon healthy credit markets and abundant jobs, and one or both crash, the line of greater fools gets short real fast.

So the challenge, as many traders just discovered, is hot markets can turn cold quickly … and you can end up a reluctant long-term holder.

Of course, with leverage (margin on stocks, or mortgages on real estate), you may not be able to hold on for the long-term. Then it’s a wipe out.

Mortgages are far more forgiving than margin debt on securities, but negative cash flow on a negative equity property is no fun either.

On the other hand, real estate INVESTORS are much more like Warren Buffet …

… except instead of buying businesses, real estate investors are looking to populate portfolios with profitable cash-flow producing properties.

This is a very timely discussion, because in challenging times like these, QUALITY matters.

And when it comes to sound investments, quality is cash flow.

To survive and thrive long-term, it’s important to look for sound properties … in relatively strong markets … managed by great teams … and serving a viable demographic.

Yes, many markets are weak now … and getting weaker. Ditto for demographics. But some aren’t. And some are well-positioned to bounce back better when things open up again.

So it’s not all doom and gloom. In fact, markets which are dipping now, but positioned to bounce back soon, could present great acquisition opportunities.

This isn’t the time to sit out or tip toe through the trauma.

However, you’ll need to know how to look at the operating financials of an income property … the accounting of real estate.

Warren Buffet says, “that’s got to be like a language to you.”

In other words, you’re not looking at the entrance price, exit price, and profit potential. You’re looking at how to hold for the long term in between.

The Yahoo article refers back to an annual letter Buffet sent his investors way back in 1988 …

“Our favorite hold time is forever.”

– Warren Buffet

In Seven Habits of Highly Effective People, Steven Covey explains it’s important to “begin with the end in mind.”

When you approach real estate as a commodity to trade with your end game being cash … then you’ll focus on short term circumstances and structures to produce short term results.

Then, at the end of the transaction all you end up with is cash.

Worse, cash in the bank pays next to no yield, and with the Fed printing trillions, there’s a possibility (probability) cash will lose value.

So to protect your “profit” you’ll need to quickly find another asset to buy.

But when you approach real estate as a “going concern” … a business … then you underwrite, structure, and manage it very differently … for the LONG term.

It’s not a date, it’s a marriage.

This matters more than ever right now …

It’s not a stretch to think prices for many properties will be falling as the damage done by the COVID-19 shutdown permeates through the economy.

We expect a big chunk of the damage to metastasize through credit markets, further weakening the economy and letting a lot of air out of property prices.

This is a very challenging environment for real estate traders. It’s hard to buy low and sell high when prices are falling faster and farther than any value you might add.

Meanwhile, many investors will sit on the sidelines and let viable deals go by because they don’t want to “pay too much”.

But if you have a 10 or 20 year hold horizon (remember … “our preferred hold time is forever”) …

… it’s less important what you pay today versus having a viable property and structure you can live with long term.

Sometimes prices can fall so you could theoretically buy lower. But if it’s because the availability of capital or credit if limited, it might hider your ability to buy with an optimal structure.

Also, real estate isn’t a static commodity. If the property is in good shape and you pass at the higher price, the lower later price could be because the condition of the property or tenant mix deteriorates.

So sure, you might wait and get the lower price, but is it a better buy? Maybe not. That’s why we say if the deal in front of your make sense, buy it.

Lessons from Warren Buffet’s career suggest that quality is present in all markets.

The time to buy is when an individual deal makes sense and can be structured for the long haul.

If the bust becomes a boom, all ships rise with the tide.

But if the boom becomes a bust, only the well-structured property ownerships will survive to the next boom.

Investing is different than trading. And success is simply a matter of focusing on the relentless execution of the boring basics.

Sure, it’s fun to flip the hot property and find yourself neck-deep in a pile of green paper.

And if you’re short on liquidity, you may need to do that from time to time (though we prefer syndication as a preferred path to having more cash to invest with).

But if you’re aspiring to build a portfolio of properties and a pile of passive income, then it’s wise to take a long-term approach and focus on fundamentals as a proven path to resilient prosperity.

Until next time … good investing!

Inflation or deflation? That is the question …

Just when you thought things couldn’t get any more insane, the price of oil dropped all the way to NEGATIVE $37.

Of course, it bounced back to a positive (but still very low) price of about $12.

We’re guessing there’s a big opportunity somewhere in all of that … just like if rents crashed temporarily. We’ll look into it.

Meanwhile, Uncle Sam is rolling out Free Stimulus Money Phase whatever … all freshly printed by the (privately owned) Federal Reserve.

We’re not sure how many dollars the Fed can print before dollar-holders start moving into something else. Russia dumped dollars for gold quite a while ago.

Looks like Bank of America thinks more investors will follow suit …

Bank of America recently RAISED its 18-month dollar price target for gold to $3,000 an ounce … 50% higher than gold’s all-time high …

… because “the Fed can’t print gold.” (the title of B of A’s report).

So it’s not just Peter Schiff, Robert Kiyosaki and Jim Rickards who think the dollar could be headed down … and gold is where many will flock for safety.

If you’re a nose-to-the-grindstone Main Street real estate investor and haven’t paid any attention to the dollar, gold, and oil …

… it’s time to wake up and smell the crisis.

Because as we discussed in our last muse … and the one before that … the fundamental flaw in the financial system is too much debt.

We won’t beat that horse again except to say it seems the Fed is betting the dollar is strong enough to paper over all of the debt and neither will implode.

So the question every investor … including real estate investors … should be considering is …

… will this economic shutdown and money printing result in inflation or deflation?

Inflation makes your rents (and expenses) go up. At least once it makes its way through the entire system.

Of course, wages haven’t seen much inflation in a long time. So demand-driven rising rents actually pushed some people down the ladder or out onto the streets.

Inflation causes equity to happen all by itself … no hammer, paint, or new carpet needed.

Inflation makes debt easier to pay off.

That’s why all borrowers, including indebted governments, LOVE inflation … and central banks work furiously to create it.

Of course, deflation is the opposite of all that.

Deflation causes equity to disappear and wages and rents to decline. It makes the mortgage payment harder to deal with.

Deflation causes debts to go bad, which is why banks (lenders) are scared to death of it.

Once a deflationary spiral begins, it’s really hard to stop it. Ask Japan.

Deflation (or preventing it) is what the Fed’s “price stability” mandate is REALLY all about.

So the Fed’s not interested in keeping prices low … it’s trying to keep them HIGH and rising at least 2% per year.

But as the Rolling Stones said and the Bank of Japan can attest … you can’t always get what you want. At least not exactly when, where and how you’d like.

So will it be INFLATION or DEFLATION?

Yes. At least in terms of prices. Both can be present at the same time, and we’re already seeing it. Gold is up while oil is down.

That’s because rising and falling prices are factors of currency supply, leverage, and supply vs. demand.

When the Fed prints money, it increases currency supply. If you focus solely on that, you see hyper-inflation. After all, they’re printing TRILLIONS.

But when credit markets collapse (the reason the Fed is printing), leverage decreases … letting air OUT of prices.

That’s why real estate values plummeted in 2008. Anything dependent on financing falls when financing fails.

And when supply is short in the face of demand … prices rise … if you can get product at all. Think of recent price gouging in medical masks or toilet paper.

Conversely, when demand disappears in the face of strong supply … prices collapse … as just happened in oil.

Currency supply, leverage, supply and demand are like three tension wires holding an old-fashioned TV antenna upright.

The trick for the wizards behind the curtain is to balance them so prices remain “stable” … which for the Fed means plus 2 percent per year.

The trick for a lowly Main Street investor is to watch all this …

… and then accurately anticipate what’s likely to happen and auickly position to avoid catastrophe and capitalize on opportunities.

It’s also important to consider whether the factor causing the shift is permanent or temporary.

Will oil demand be this low forever? For a while? For a season? What about unemployment? Dollar demand?

We know … it’s a little complicated. But it’s not rocket science. And it’s worth the effort to gain context for all the non-stop info in the daily financial news.

Armed with context and information, your mission is to thoughtfully consider what to do in different scenarios.

This is a VERY IMPORTANT exercise RIGHT NOW … because everything is changing so fast.

The time to design the fire escape isn’t when the house is on fire. And there’s already a fair amount of smoke. This is no time to hit the snooze button.

We’re going to leave you with some questions to ponder for now, while we get back to work on the upcoming Coronavirus Crisis Investing webinar …

If unemployment remains high and wages fall, then which geographic markets, demographic markets, and product niches are likely to win and lose?

If credit markets seize up as badly or worse than 2008, how will your current portfolio of deals, debt and equity be affected?

If real estate prices collapse, what can you do NOW to mitigate the risks and capitalize on opportunities?

And the super-bonus extra-credit question …

If the dollar loses reserve currency status, what happens to your portfolio, liquid net worth, and purchasing power? How can you hedge?

Hey, no one said real estate investing is paint by numbers.

Diligent investors need to think, imagine, and mastermind with each other to find creative ways to survive and thrive.

You can’t control external factors, but you can decide how to react. Do your best to accept the challenge and enjoy it.

After all … “We’re all in this together.”

Until next time … good investing!

An economy in triage …

(Here’s a 5-minute money read)

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

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

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

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

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

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

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

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

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

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

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

As debts go bad, asset prices PLUMMET …

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

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

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

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

But YOU should know it.

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

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

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

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

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

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

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

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

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

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

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

So rather than delve into tactical details for right now …

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

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

Jobs

The MOST important thing is jobs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We wish real estate underwriting were so simple.

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

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

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

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

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

The Dollar

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

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

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

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

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

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

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

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

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

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

Are they? Will they? Maybe. Maybe not.

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

Which brings us to …

Gold

Gold is the oldest and most universal form of money.

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

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

 

 

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

But Uncle Sam’s debt swelled nonetheless.

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

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

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

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

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

What’s in YOUR safe?

Bringing it Home to Main Street

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

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

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

U.S. Manufacturing and Agriculture

In the short term, it’s ugly.

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

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

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

Energy

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

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

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

Cheap Debt

Stimulus almost always means free money.

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

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

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

Distressed Assets

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

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

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

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

Until next time … good investing!

 

Fed drops a BOMB … but will it work?

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

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

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

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

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

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

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

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

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

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

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

Let’s break the topic into bite size pieces …

First, the CONTEXT …

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

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

… since October 2008.

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

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

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

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

But there’s a MUCH bigger question to consider …

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

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

We think there are a couple of issues at play …

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

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

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

Make sense?

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

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

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

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

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

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

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

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

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

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

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

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

Here’s the important point …

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

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

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

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

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

Maybe … but we think not.

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

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

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

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

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

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

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

Three words: Shrinking. Cap. Rates.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ask the Guys — Equity Sharing, Self-Directed IRAs, and Gold

It’s time for Ask The Guys … the episode where you ask, and we answer!

In this episode, we have another fantastic collection of questions from our fabulous listeners. 

We’re taking on equity sharing, self-directed IRAs, gold, and MORE!

Remember … we aren’t tax advisors or legal professionals. We give ideas and information … NOT advice. 

In this episode of The Real Estate Guys™ show, hear from:

• Your wise host, Robert Helms
• His wise-guy co-host, Russell Gray

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Where to begin in real estate

Our first question comes from Lloyd in Canton, Georgia. His dream is to own two to three homes that he can rent out … but he wants to know where he should begin and what to watch out for. 

The whole idea of having rental homes is so you can get your money to work instead of you. 

Some people who buy single family homes like to do the work … fix them up, make them nicer, improve them, and then rent or sell them. But many people just want to sit back and let money make money. 

Where you start depends on your personal investment philosophy … who you are as an investor, what real estate you want to do, and how involved you want to be. 

You also want to think about what your investor resources are. There are seven we highlight … cash, cash flow, equity, credit, time, talent, and relationships. 

As often as possible, put yourself in an environment where you will be around more experienced real estate investors and ask questions. Learning from their experience will help you make decisions for your experience. 

One of the first things you want to do is meet with a mortgage professional as quickly as you can. Don’t wait until you think you are ready to invest. 

It can take up to two years to really prepare your financials so you can borrow effectively. Find out how to manage your credit score and your documentable income. 

While you are doing all of that, you can work on aggregating a down payment, shop for markets, and building a team. 

Looking to do real estate full time 

Blake in Gretna, Louisiana, says, “Right now I have a trade job where I’ll currently be making about $80,000 a year. How can I invest this money properly in real estate so I can eventually do that full time?”

Rule number one is to live below your means. Live as frugally as possible until you can get a stake in the game. You don’t need a ton of money to do that. 

If you’re going to leverage at 20 percent down and 80 percent loan to value … lots of great rental properties sell for $60K to $100K. 

Whatever your situation, start where you are and with what you have. Get a mortgage professional … and start ratcheting up your credit score. 

You’ll also want to learn what debt-to-income ratios are. 

If you really feel like you want to be a professional real estate investor, then recognize that your current job is a means to an end. 

And, as we said before, start surrounding yourself with people who are already doing what you want to do. 

Put a lot of emphasis on putting together a good team. The most important thing you build is business relationships. 

Getting familiar with equity sharing 

Jacqueline in Punta Gorda, Florida, is interested in learning more about equity sharing. 

First, the basic premise of equity sharing is that you have two parties who are both involved in a transaction but who want different things out of the transaction. 

The classic equity sharing situation looks like this. 

You have a young couple. They’re making good money. They could afford to make a house payment, but they haven’t saved up the 20 percent necessary for a down payment. 

So, they go to somebody … family, friends, parents, or even someone non-related … who brings in part or all of the down payment. 

One person puts up the money. The other person makes the payments. Then, you split the equity in the future. 

Typically you would want both those parties to be on the title, and you’d work with a lending professional to follow particular guidelines. 

Equity sharing is common in single family homes, but you can equity share any type of property you want. 

Like any deal, before you have a deal in place, you’ll want to visit with a mortgage professional. 

You’d also be smart to get a real estate attorney in the specific jurisdiction that you’re going to be transacting in and talk about legal options and considerations as well. 

Depending on the situation, you may not want to be on the title or publicly recorded on the deed. There are various reasons for that approach … specifically with taxes. 

So, it’s smart to talk to a tax advisor as well. 

The low-down on self-directed IRAs

Carolina in San Dimas, California, says that she and her husband want to open a self-directed IRA so they can invest in real estate. But she doesn’t know where to start. 

There are several different ways to do this … and it can be a little complicated … but we’ll try to give a decent overview. 

In the tax code, there are provisions that allow you to accumulate wealth for the long term. You either get benefits when you put it in or as you’re building it and when you pull it out. 

Really, all IRAs are self-directed. All self-directed means is that you can invest in anything you want to that isn’t specifically prohibited by the IRS. 

The prohibited list is pretty short … less than 10 things. 

One of the challenging things with IRAs is that when you use leverage, you gain a benefit inside your IRA from something outside your IRA, which is the debt. 

That creates a tax issue if you’re not aware of it. So, you want to make sure you understand UBIT … unearned business income tax. Talk to your IRA provider about that. 

And since most people want to use debt when they use real estate, that’s really what you want to focus your learning on. 

Starting to invest in gold

Brendan in Johns Creek, Georgia, has a question about gold. 

“I just listened to an episode where gold sounds like it is completely liquid, like it can be swapped for currency anywhere in the world,” he says, “but as I research, it sounds like in a lot of precious metals investment you own it but it is stored somewhere else.”

When you go looking on the internet for ideas for investing in gold, you’ll find plenty of propaganda trying to persuade you to invest in a way where you don’t actually own gold. 

On the other hand, you could walk into a gold dealer in your local town and buy a number of gold coins and walk out, and it would be totally private. 

A lot of people who buy gold do it that way for privacy and actual control of their gold. And there isn’t any counterparty risk when the gold is in your physical possession. 

Not to mention that the exact opposite of that transaction happens if you walk in with gold. You’ll walk out with cash. 

Gold is portable and highly liquid. There are always bids on gold. And, we’ve seen the price go up pretty consistently for the last few years.  

More Ask The Guys

Listen to the full episode for more questions and answers. 

Have a real estate investing question? Let us know! Your question could be featured in our next Ask The Guys episode. 

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