Old dudes like us have fond memories of beer-belly laughing out loud at the hysterical antics of Peter Sellers’ Inspector Clouseau in the original Pink Panther movies.

If you’ve never seen them, check them out.  Two of the best are Return of the Pink Panther (1975) and Revenge of the Pink Panther (1978).

Clouseau is a bumbling idiot.  But through sheer dumb luck he always ends up succeeding … in unexpected ways as a result of unintended consequences.

The Senate’s recent hearings on housing reform remind us of Clouseau.

The purported goal of the Senate shindig is to gather a group of big-brained housing industry leaders and experts to find a solution to the affordable housing “crisis”. 

But … as this Forbes article opines, some perspectives aren’t part of the conversation … perhaps for a reason.

Of course, you may have a differing opinion and that’s fine.  We have our own opinion too.  But that’s not the purpose of today’s muse.

We simply watch what’s happening today and consider how best to capture opportunity or avoid loss based on where things are likely headed tomorrow.

In this case, it seems Uncle Sam is looking for ways to make housing affordable.  That’s a noble objective.  Go team.

There are really just three basic approaches.

One is to increase supply relative to demand.  When supply exceeds demand, prices to drop.  That’s how abundance and productivity create prosperity.  

After all, lower prices make things more affordable to more people, right?

That sounds reasonable.  But it also sounds a lot like deflation.

And when bankers are in the room … the kind who make home loans secured by the dollar value of the property … they FREAK at the idea of falling prices.

So you’re probably not getting sincere ideas from bankers about how to lower prices.

Then there are the builders … 

While builders LOVE the idea of building more houses, they also want to earn a profit.   Profitable building is easier when prices are higher, NOT lower.  So you can guess which direction the builders are leaning.

What about the wizards of Wall Street? 

These guys make money shuffling paper.   So they just want LOTS of paper (i.e., mortgage-backed securities) created, so they have more chips to play with in their casinos. 

And Wall Street knows falling prices frighten the lenders who make the paper possible.  So it’s a safe bet Wall Street votes with the bankers for higher prices.   

Even at the Main Street level, there’s not much motivation to push prices down in pursuit of truly affordable housing. 

Real estate agents (the largest trade association in North America) aren’t raving fans of low prices as the preferred path to affordability … despite their rhetoric.

After all, real estate agents promote buying a home as a great “investment”.  No one wants to make an “investment” that goes down.  So higher is better.

Last but not least, there’s Dick and Jane Homeowner (often registered voters) … whom are keenly aware of their castle’s current market value, even though they have no intent on selling.

Of course, it’s fine for the prices of cell phones and big screen TVs to fall, but not home sweet home.  God forbid.

Plus, its fun for Dick and Jane to use their home equity to reset credit lines with debt consolidation loans, or to augment the falling purchasing power of their incomes.

And everyone knows home equity ATMs only work when housing prices steadily RISE. 

So yes, home BUYERS want the house affordable when THEY buy it. But after that … home OWNERS want up, up, up.  Sorry, next generation.  Figure it out.

When we asked then-candidate Donald Trump for his plan for housing , he simply said … “Jobs”.  Presumably, good jobs with higher pay. 

Higher pay leads to the ability to make higher payments which leads to bigger mortgages (happy bankers, happy Wall Street) which leads to HIGHER prices.

So it’s just a wild guess … but we don’t think there’s a chance in a very hot place that there’s any serious motivation to make housing affordable.

Not if “affordable” means “less expensive”.

ALL the incentives are to make housing MORE EXPENSIVE … but ACCESSIBLE.  That means more, cheaper, and easier FINANCING. 

So even IF the PTB (Powers That Be … it only sounds like Politboro) sincerely believe more and cheaper financing makes things more “affordable” …

(Hey, it worked for college tuition … oh, wait …)

… like Inspector Clouseau, they’ll end up pushing housing prices up by “accident”.   

That’s what happens when you use debt to pull purchasing power from the future into the present.

But whatever the motives, they certainly have the tools to make it happen … 

… lower interest rates, easier lending guidelines, government (taxpayer) guarantees, tax breaks … and the Fed’s all-powerful printing press.

Yes, we know all that is what first inflated and then deflated the housing bubble last time.

But smart, disciplined investors made not only survived the implosion … they made millions from the re-inflation.

So while this may not be the time to speculate on a housing price boom in the short term …

… it’s arguably a great time to liquidate equity, streamline expenses, solidify leases, and prepare for the long game.

Because when Uncle Sam is working on making something “affordable”, it usually means that something is showing serious signs of slowing and needs a boost. 

Of course, when you find reasonable deals in relatively affordable markets and you have a GREAT boots-on-the-ground team, it’s also a great time to use cash flow real estate to stock up on cheap long-term debt.

Remember, real estate … even housing … isn’t an asset class. 

Every individual neighborhood and property is unique.  So while deals might be harder to find, they’re still out there.

And if the cash flow makes sense, you’ll weather the storm … warmed by the notion that everyone with power to influence policy will be voting for HIGHER prices year in and year out … forever. 

Of course, they might break the financial system or crash the dollar trying to do it … so it’s smart to be prepared for that too.

That’s why we like gold, oil, agriculture, and paid for properties in non-leveraged markets … including, and perhaps especially, in non-domestic markets.

Real assets like food, commodities and land tend to hold relative value when currencies struggle.

Gold and silver can almost always be easily converted into any currency … and are a useful way to store liquefied equity privately outside a fragile financial system or hostile jurisdiction.

And if the dollar continues its long-term slide relative to gold, a little gold might go a long way toward retiring dollar denominated debt (like a mortgage).

That’s where we think gold bugs and real estate bugs don’t understand each other.  We know.  We spend a lot of time with both.

Gold is great for reducing counter-party risk and hedging against a falling currency.  But gold doesn’t cash flow.

Real estate is great for using cheap long-term debt to create tax-free cash flow and long-term equity growth. But it isn’t liquid and it takes a long time to retire the debt.

But putting gold and leverage cash-flowing real estate in a falling currency environment together makes each much more powerful.

It takes time to get your mind around it … but we encourage you to dedicate a little of your financial education time and budget to learning more. 

Because once you understand how gold and real estate make each other better, you’ll probably be more excited about both.  We are. 

Until next time … good investing!

We’re still just a little more than a week removed from a mind-blowing 9-day mind-meld with brilliant thought leaders, niche experts, and seasoned investors and entrepreneurs …

… so we’ve been busy catching up on the news and looking at the world through our freshly expanded paradigms.

There are two things bouncing around our brains we think are important, but few real estate investors are paying attention to …

Gold and oil.

Sure, both these “commodities” fit well with real estate in a strategic real asset portfolio.  And if you’re not sure how all that works, you can start with these past podcasts about gold and oil.

But bigger picture, both gold and oil probably drive more of geo-politics than most casual observers realize … and both are quasi-proxies for the dollar.

In other words, when you understand what’s happening with gold and oil, you have insights into the future of the dollar … and some of the things governments are doing to either defend dollar dominance … or break free from it.

Of course, if you earn, invest, borrow, or denominate wealth in dollars, the future of the dollar should be of great interest to you … even if you think of the dollar as being as permanent and reliable as air (it’s not).

As real estate investors, our primary interests (besides occupancy and cash flow) are demographics, migration trends, local economic strength, interest rates, taxes, and the supply and demand dynamics in our local market.

But all of that sits on the foundation of a functional financial system with two primary components … credit and currency.  Gold and oil provide insight into both.

Oil is important at both the macro and the micro level.

In the macro, it takes energy to drive economic activity.  When energy’s expensive, it drives up the costs of everything and is a drag on economic activity.

At the micro level, high dollar-denominated oil prices drive up the cost of living for your dollar-denominated tenants.

But for metros where oil is big business, oil also means local jobs.  Remember, Texas and its robust energy sector were the primary driving force for U.S. job creation coming out of the 2008 recession.

Investors who realized this (like our pal Kenny McElroy) strategically invested in those markets while most people were hiding under the sheets.

So whether or not you’re interested in oil as a direct investment, paying attention to the oil business can be a great way to pick markets likely to hold up well if oil prices rise.

Oil also has a potential impact on credit markets and interest rates.  Billions of dollars of debt has been created to fund shale oil production.

If oil prices drop, it both undermines the ability of regional oil economies to grow … but also for those employers to service their debt.

In the macro, if a big chunk of the debt goes rotten, credit markets could tighten.  Think about what happened in 2008 when sub-prime mortgage debt went bad.

So again, whether you’re an oil investor or not, the oil industry has a direct impact on your real estate investing.

Watching oil helps you see what’s coming sooner … so you have time to position yourself to capture opportunity and mitigate risk.

Of course, the good news and bad news about real estate is it moves slowly.

So while you have plenty of time to be proactive IF you’re paying attention, it’s really hard to act fast if you’re not.  That’s why we pay attention.

What about gold?

On the macro level, gold is a good gauge of how the world feels about U.S. Treasuries and the dollar.

When things get choppy in stocks, paper investors worldwide tend to flee into Treasuries for safety.  After all, Treasuries are backed up by the Fed’s printing press.

Of course, what does the Fed print?  U.S. dollars.

But to quote Watto from Star Wars – The Phantom Menace … 

“Republic credits are no good here.  I need something more … real.”

That is, when investors worldwide are looking for safety … and they don’t trust the paper … they go into gold.

So what does that mean to real estate investors?

Remember, mortgage rates and availability derive from healthy bond markets … most notably, U.S. Treasuries.

The 2008 Great Financial Crisis had its genesis in a broken bond market … mortgage-backed-securities.  When those went bad, frightened investors worldwide piled into Treasuries … and rates fell.

But what happens if investors worldwide don’t trust Treasuries?

You don’t have to wonder.  China came out in 2009 and scolded Uncle Sam about the size of the deficit and all the dollar printing doing on.

Why did it bother them? Because they own TRILLIONS in U.S. bonds.  They don’t want to get paid back in diluted dollars.

But Uncle Sam’s debt, deficits, and printing have BALLOONED since then.

So it’s no surprise that China … along with Russia and several other countries … have been diligently accumulating and repatriating gold.

They’re getting out of dollars and Treasuries to do it.  And who can blame them?

Paper money has an atrocious long-term record as a store of wealth …

Source:  World Gold Council 

Consider this when you think about where you’re storing YOUR long-term liquid wealth.

Meanwhile, there’s just a little more to the developing story of gold … and the story behind the story.  It’s a little complicated, but interesting and noteworthy.

After the 2008 crisis, the world’s bankers got together in Basel, Switzerland to come up with voluntary rules to prevent another financial crisis.  The agreement is called the Basel Accord.

A provision in the agreement, known as Basel III (the agreement’s rolled out in phases) allows financial institutions to consider gold “Tier 1” capital.  So adding gold is supposed to make banks more liquid and stable.

This is a bit of a promotion for gold.  Some observers think this means demand for gold will increase, but we’re not smart enough to have an opinion on that.

But there are a couple of things we are thinking about …

Perhaps most obviously, international bankers apparently consider gold more valuable than simply a “barbarous relic” with no place in a modern monetary system.

Keep that in mind when you hear people criticize the placement of gold in a portfolio. If gold can make a bank more stable and liquid, can’t it do the same for you?

To be clear, we’re not fans of gold as an investment.  It’s just an alternative to cash … a way to store long-term liquidity while hedging against a declining dollar and bank counter-party risk.

But the more interesting aspect of gold’s now elevated role in bolstering the banking system is why it’s necessary in the first place.

Is it because the banking system is still fragile and in need of support?  Is it because the world needs more leverage to expand … and so more collateral to lever?  Why not just use Treasuries?

We don’t know yet.  But we’ll be checking in with our big-brained gold experts to see what they think.

Meanwhile, we encourage you to think outside both the real estate and mainstream financial media boxes.  It seems like oil and gold might be trying to tell us something.

Are you listening?

Until next time … good investing!

Even though most of us will never become billionaires, it’s sure fun trying.

But if we want to have a chance of making it BIG, it’s probably smart to watch and listen to those who’ve actually done it.

After all, as Tony Robbins says, “Success leaves clues.”

To which the Godfather of Real Estate, Bob Helms, adds … “You don’t need to give natural childbirth to a good idea … you can adopt!”

So when multi-billionaire real estate investor Sam Zell has something to say, we pay attention and take notes.

In a recent appearance on Bloomberg News, Zell reveals what he’s doing right now and why.  It’s a short clip, and you can watch it here.

There are some great pearls of wisdom to glean … and if you’ve been followingThe Real Estate Guys™ for a while, some of them will sound familiar.

But that’s not because we’re super smart.  It’s more because we’re well- informed from spending quality time with lots of really smart people.

Sam Zell is buying gold … for the first time in his life.

We think that’s REALLY interesting.

Of course, we’ve been following gold for quite some time … for a lot of reasons.

So while it’s interesting that Zell is buying gold for the very first time in his long and uber-successful investing career … what’s even MORE intriguing is WHY.

In the interview, Zell offers up two reasons.  One is obvious.  The other is more subtle … and leads to some even more subtle lessons.

All this from a guy who wrote a book titled Am I Being Too Subtle?

First, Zell says he’s buying gold because of the supply and demand dynamic.  He overtly states he sees gold supply constrained going forward.

It’s obvious from Zell’s comments that it’s important to understand supply and demand when investing in anything, because …

When supply is low relative to demand, there’s opportunity.

Yes, we realize that’s Investing 101.  But it’s also a GREAT reminder that even at the billionaire level, successful investing is based on basic, timeless concepts.

However, there’s MORE to be gleaned from Zell’s comments about gold …

While he openly explains that he sees the supply being constrained, he onlyimplies his confidence in persistent demand for gold.

 After all, if supply drops … but demand drops too … there’s no imbalance, and therefore, no opportunity.  Zell’s too smart to miss that.

So Zell must see gold demand holding … or increasing.

That means the supply and demand dynamic in gold is SO compelling that billionaire Sam Zell is buying gold for the FIRST time in his EPIC career.

That’s telling in and of itself.  But wait!  There’s more …

In addition to constrained supply combined with persistent and growing demand going forward … Zell must think the opportunity in gold is quite good right now relative to other investment options.

Which begs the question …

What’s different in TODAY’s world to push the prospects for gold so high up Sam Zell’s priority ladder?

After all, he’s been around a LONG time … through stock market crashes, recessions, financial crises.  What’s different NOW that makes gold alluring? 

That’s a topic too big for this commentary … and our limited brains …

… but it will be a hot topic of discussion with gold experts Brien Lundin, Dana Samuelson and Peter Schiff aboard the upcoming Investor Summit at Sea™.

We’re guessing part of the answer is wrapped up in Sam Zell’s second subtle comment …

Sam Zell is buying gold as a “hedge.”

Hmmmm … that’s interesting.   A hedge against what?

Investopedia defines a hedge this way …

“A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security.”

Well, THAT’S interesting.

So Zell is using gold to “reduce the risk of adverse price movement in an asset.”

And he apparently considers gold to be highly useful as “an offsetting position in a related security.”

Which begs yet another question …

What asset / related security is Zell worried about … for the first time in his long and illustrious career?

Our guess is it’s the U.S. dollar.  In fact, we’d bet a beer on it.

And there’s one more clue we think bolsters the argument Zell is hedging the dollar …

Zell is bullish on oil.

 Wow.  What a coincidence …  our recent episode on precious metals was immediately followed with an episode on oil and gas.

Maybe Zell’s been listening to The Real Estate Guys™ radio show???

Um, probably not.

More likely, we’re learning a lot from all the smart folks we hang out with and listen to … and we’re starting to think like billionaires.  We hope so.

So why oil?

Also coincidentally … just a week before the Sam Zell interview was published, we published our weekly newsletter and talked about … oil.

So we won’t take time here to explain why we think oil could be a big story going forward.  You can read our thoughts here.

But this Zell interview affirms what we and many of our big-brained pals have been monitoring carefully for several years …

The dollar is under attack … from both internal and external forces.

So anyone who earns, invests, borrows, lends, or denominates net worth in dollars … most likely YOU … should probably take steps to become more aware and better prepared.

After all, if multi-billionaire real estate investor Sam Zell is hedging against the dollar … it’s smart to pay attention and consider doing the same.

It’s hard to watch the financial news these days and not get the feeling the fragility in the financial system we’ve been concerned about … is starting to show.

We grew up in California and learned as kids how to react to an earthquake …

Get away from glass and hide under the shelter of a desk or doorway … because stuff was probably going to start falling.

Fragile things shatter in an earthquake.  They can’t handle the pressure.  The key to safety is to get to the sturdiest parts of the structure until the shaking subsides.

Of course, when it’s clear and bright … the windows are the most fun.  You can bask in the sunshine of hope and opportunity.

But when the foundation is shaking, it’s time to find shelter … FAST.

You’ve probably noticed stock prices slipping.  Even the fabled FAANGs (Facebook, Amazon, Apple, Netflix, Google) are ALL now in bear markets.

So what?  After all, we’re real estate investors.  What do we care about stocks?

We don’t.  At least not directly.  But all these markets are like gauges on our financial dashboard … and when they start flashing red, it’s wise to investigate.

This is a newsletter, not a seminar, but let’s see what we can reason together in the next few minutes about what’s shaking in the financial world … and where it might be headed.

The first place to look is the most important financial market there is … bonds.

Of course, real estate investors should watch the bond market for clues about the direction of interest rates.

But while interest rates are interesting … credit markets are what REALLY matter.

That’s because credit markets both create and price the currency which fuels everything else. 

Credit markets are like the big reactor core in the Star Wars Debt Death Star.  They’re both the fuel source and the weak spot at the same time.

To take the metaphor a conspiratorial step further … credit markets are also the source of the Emperor’s power.

And as Peter Schiff persistently points out … when the original Debt Star blew up in 2008, the Emperor wasted no time in building a bigger, deadlier version.

The obvious implication is the next explosion could be a LOT bigger.

Now in a plain vanilla stock market dip, some (usually innocuous) event spooks highly-leveraged paper traders.  They sprint to the exits … and stock prices fall.

But then they calm down and the next day they’re back out there snapping up bargains.  This “buy-the-dip” strategy has been the name of the game for several years.

But the longer-term downtrend suggests something is different this time.  Perhaps worries the Debt Star is running out of power?

The Bitcoin crowd has been chanting “buy the dip” also … but here too, it seems the Farce is strong … and the downtrend has more gravitational pull than past dips.

Clearly, nervous stock investors aren’t piling into Bitcoin for safety.

Of course, the usual safe space for snowflake stock investors to hide is bonds.

But if gobs of money were pouring into bonds … interest rates would be falling.

While rates have certainly moderated the last few weeks from their upward trend, it’s hardly a serious decline.

So … nothing happening now has us disagreeing with our recent conversation with David Stockman on the direction of rates.

And we certainly would NOT be using short-term debt on tight-cap properties hoping to re-fi to lower rates in a year or two!  If that’s your plan … be careful.

Then there’s oil.  You’ve probably heard the price has fallen.  We’re guessing your tenants like it at the pump.  Businesses too.

Obviously, energy costs … just like interest and taxes … RAISE the costs of operating a business, a household, and an economy.

President Trump’s a business guy.  So to no surprise he prefers ALL three lower … so more profit gets to the bottom line.

But oil … like gold … is MUCH more than just a commodity. 

Both have significant connections to the future of the U.S. dollar … and all three are powerful tools in geo-politics.

Just last year, we pointed out China’s noteworthy moves with both oil and gold.

And just because things are moving slowly, doesn’t mean they aren’t moving.

All that to say … we’ve been paying close attention to this for several years … and it seems to us things are picking up speed.

We keep them on our radar … and yours … for TWO reasons …

First … major financial events often seem to show up suddenly and shock the world … but they usually had a long and obvious (in hindsight) build up.

We’ve learned to look further out so we have more time to re-position.  After all, the blessing and curse of real estate is it moves slowly.

So real estate investors are wise to pay attention to early warning indicators … and then rearrange portfolios to both mitigate risk and capture opportunities.

Second … when economic and financial earthquakes first tremble … it’s smart to seek shelter under sturdy structures.

For that reason, we think it’s likely to see MORE money moving into real estate in search of stability (and tax breaks).

But just because real estate is stable doesn’t mean YOUR portfolio is.

As we learned in 2008, bad portfolio structure crumbles when hit with tremors from a Debt Star explosion.

However, when those market forces clean out weak portfolios, there are bargains galore … for those who are ready, willing, and able to take advantage.

Ironically, consumers are tapping home equity like it’s 2007.  We’re guessing holiday shopping will be solid.  But it won’t make those borrowers wealthier.

Savvy investors are grabbing equity too … and using it both to purchase strong cash flows … and to hold in reserve.

It’s always good to have some cash if market tides turn.

YOUR mission is to be among the aware and prepared … and NOT among the unaware and unprepared.  It could be a good time to increase liquidity.

Are we saying another crash is coming?  No.  But we can’t say it’s not.

Right now, there are tremors.

So while you’re thinking about your goals for next year … including how to invest your educational time and money …

… we encourage you to make getting better educated, better connected, and better structured a top priority … so IF things turn quickly …

… YOU can sit safely inside your reinforced portfolio chomping on popcorn and watching the fireworks.

And if the fireworks turn out to be a dud … you’re really no worse off for being prepared.

Until next time … good investing!