Don’t get lost in the lag …

Investors and economists often talk about cycles … business cycles, credit cycles, even news and legislative cycles.

Cycles are the ebb and flow of causes and effects sloshing around in the economic sea we all swim in.  They’re big picture stuff.

For nose-to-the-grindstone Main Street real estate investors, cycles are barely interesting, seemingly irrelevant, and mostly boring.

But a danger for Main Streeters is not seeing something dangerous developing on the horizon.  Another danger is getting lost in the lag.

The lag is the gap between when a “cause” happens and when the “effect” shows up.

For example, in a typical supply-and-demand cycle, a shortage of homes could cause prices to spike.    The effect of the supply-demand imbalance is higher prices, which in turn becomes a new cause.

Rising prices causes builders to increase production … and existing property owners to put their homes on the market … thereby increasing supply.

As supply grows, price escalation slows. If supply overshoots demand, prices might actually fall.  If you’re structured for only rising prices, you might have a problem.

Of course, there are other factors affecting pricing such as interest rates, wage growth, taxes, labor and material costs, availability of developable land, and on and on.

But our point is … an amateur investor often doesn’t see the cause for price escalation (or anything else) until the effect happens.

Once prices rise, they jump in to ride the wave … believing prices will go up tomorrow because they went up yesterday …  and their speculation only adds to the demand and fuels the fire.

At least for a while …

What’s often overlooked is the production pipeline … until the supply shows up and softens pricing.  Near-sighted investors often get lost in the lag.  They’re not sure where they are in the cycle.

It’s what happened to “GO Zone” investors after Katrina and Bakken investors during the shale boom.

Folks bought in during a boom, not considering the “production lag” … and didn’t structure for a slowdown.  When it happened, they didn’t have a Plan B.

It’s a simple example … and before 2008, that was about as deep as our analysis ran.

But the pain of 2008 opened our eyes … and 10 years later they’re still as wide open as we can keep them … because we know there are cycles as sure as the sun comes up.

That knowledge isn’t bad.  In fact, it’s good.  Because when you see the bigger picture, you also see more opportunity.

So we study history for lessons … current events for clues … and we talk with experts for different perspectives.

It sounds complicated … and maybe it is a little … but it’s like the old kids’ game, Mousetrap.

There’s a lot of fancy machinery hanging over our heads …and it’s just a series of causes and effects.  “A” triggers “B” triggers “C” and so on … until it’s in our faces.

But even at the street level with our nose on the cheese, if we watch the machinery, we can see events unfold and still have time to react appropriately.

So let’s go past a simple supply-and-demand example.

Back in 1999, Uncle Sam decided to “help” wannabe homebuyers get Fannie Mae loans … so the government lowered lending standards and pushed more funds into housing.  It seemed like a nice thing to do.

But at the time, observers cautioned it could lead to financial problems at Fannie Mae … even to the point of failure.  It took nine years (lag) … but that’s exactly what happened.  Fannie Mae eventually failed and needed a bailout.

But before things crashed, it BOOMED … and people made fortunes. We remember those days well.  It was AWESOME … until it wasn’t.

Folks were profitably playing in the housing jumphouse from the time the easy money air pump switched on until the circuit blew.  Lags can be a lot of fun.

Because few understood why the party started and why it might end … most thought the good times would roll forever.  So they were only structured for sunshine.

Oops.

People who urged caution at the height of fun … like Peter Schiff and Robert Kiyosaki … were derided as party-poopers.

Of course, they both did well through the crisis because even in the boom they were aware of the lag and the possibility of a downturn … and were structured accordingly.  Smart.

Now, let’s go beyond supply, demand, and mortgages … and look even further up the machinery …

In late 2000, Congress passed the Commodity Futures Modernization Act of 2000.

Doesn’t sound like it has anything to do with real estate … BUT …

This was the birthplace of unregulated derivatives … like those infamous credit default swaps no one in real estate ever heard of …

… until they destroyed Bear Stearns and Lehman Brothers in 2008, while bringing AIG to the brink of bankruptcy, and nearly crashing the financial system.

This mess got ALL over real estate investors in a big and painful way … even though there was an 8 year lag before it showed up.

Remember, for those 8 years a lot of the money created through derivatives made its way into mortgages and real estate … adding LOTS of air to the jumphouse.

Back then, real estate investors were riding high … just like today’s stock market investors.

And those who only measured the air pressure in the jumphouse … ignoring other gauges … didn’t see the circuits over-heating … until the system failed.

Then the air abruptly stopped, the inflated markets quickly deflated, and the equity-building party turned into a balance-sheet-destroying disaster.

And it happened FAST.

Which bring us to today …

The Atlanta Fed recently raised their GDP forecast for the booming U.S. economy.

Stock indexes are at all-time highs.  Unemployment is low.  The new Fed chair says, “The economy is strong.”

Some say these are the effects of tax cuts and a big spending bill.

Makes sense … because when you measure productivity by spending, when you spend, the numbers move.  Spending, or “fiscal stimulus” is an easy way to goose the economy.

But some are concerned this is a temporary flash fed by debt and deficits.

Others say it’s fiscal stimulus done right … kindling a permanent fire of economic growth and activity.

Could be.  After all, Trump’s a real estate guy, so he understands using debt to build or acquire long-term productive assets.

Real estate investors know better than most that not all debt and spending are the same.

Of course, government, geo-politics, and a national economy are a much different game than New York City real estate development.

And there are certainly some cracks showing in all these strong economic numbers …

A strong U.S. dollar is giving emerging markets fits.  Home buyingbuildingappreciation, and mortgages are all slowing.

We’re not here to prognosticate about what might happen.  Lots of smart people are already doing that, with a wide variety of opinions.

We just keep listening.

Our point today is … there’s a lag between cause and effect smart investors are wise to consider.

When lots of things are changing very fast, as they are right now, some are tempted to sit out and see what happens.  Probably not smart.

After all, the air in the jumphouse could last a while.  No one likes to miss out on all the fun.

But others put on sunglasses, toss the umbrella, and go out and dance in the sunshine … without watching the horizon.  Also not smart.

Dark clouds could be forming in the distance which might quickly turn sunshine into storm.

The best investors we’ve met take a balanced approach … staying alert and nimble while enjoying the sunshine, but not getting lost in the lag.

Changes in economic seasons aren’t the problem.  It’s not seeing them coming and being properly 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.

This is getting old … and that’s good

Even though there are many interesting economic developments to talk about, we’re going to focus on an oldie, but a goodie … senior housing.

National Real Estate Investor just released their latest Seniors Housing Market Study and the headline hints that opportunity in the niche might be … growing old …

“High construction levels are tempering some of the enthusiasm in the seniors housing sector.” 

Although cautionary, it’s hardly doom and gloom compared to this cheery report from Attom Data Solutions …

Foreclosure Starts Increase in 44 Percent of U.S. Markets in July 2018

Or this one …

One in 10 U.S. Properties Seriously Underwater in Q2 2018

Or this one …

U.S. Median Home Price Appreciation Decelerates in Q2 2018 to Slowest Pace in Two Years

BUT, as we’re fond of pointing out, the flip-side of problems are opportunities.

And because real estate is NOT an asset class any more than “Earth” is an asset class, there are lots of niches, sub-niches, and micro-trends to dig into to find deals.

Besides, every time some casual observer scans a scary headline and walks away, it leaves even more opportunity unclaimed for those willing to look a little closer.

So let’s see what we can glean from these articles …

First, the “underwater” report illustrates the point that real estate can’t be an asset class because even a sector as broad as “housing” behaves very differently in different places …

“… the gap between home equity haves and have-nots persists because home price appreciation is certainly not uniform across local markets or even within local markets.”

As long as this is true, there will always be “haves” and “have-nots.”  We’re not sure about you, but we’d prefer to be “haves.”  So that means picking the RIGHT markets.

Of course, “markets” aren’t just geographic.

A market can be a product type … single-family housing, multi-family, mobile homes, student housing, senior housing, medical, office, retail, resort, and on and on.

A market can also be a price-point.  “Low-income” is different than “work-force,” which is different than “executive,” which is different than “luxury.”

Consider this quote from the “appreciation” report …

“Price-per-square foot appreciation accelerates for homes selling above $1 million.

You get the idea.  As you continue to parse real estate into geographic, demographic, and economic niches, sub-niches and localities, you can uncover hidden opportunity.

This kind of analysis is the “work smarter, not harder” alternative to simply looking at hundreds of properties along with all the other deal-hunters.

So with that backdrop, let’s go back to our lead headline about what’s happening in seniors housing …

“Seniors housing has carved out a larger place in investors’ commercial real estate portfolios due to the compelling demographics and a track record as a steady performer in both up and down market cycles.”

BUT …

“… survey indicates a note of caution creeping in because of how much new supply is coming into the market.” 

First, “hint of caution” isn’t “OMG, the sky is falling” … so that’s good.

We’ll just hit one more quote, then look at how to go sub-niche as a way to mitigate the potential negative consequences of “too much supply.”

“…respondents in this year’s survey remain confident in seniors housing’s stable fundamentals.  A majority are optimistic that both occupancies and rents will continue to increase …”

So clearly, there’s a LOT to like about the senior housing space.

Of course, it’s this very bullishness which attracts new development and increased supply.

HOWEVER, there’s an angle to consider … and the hint is that this article is written to, and about, commercial … largely institutional … investors.

To them, senior housing means big buildings … like those featured in this report from the American Seniors Housing Association.

And remember, when big institutional money is looking for yield, they need big institutional properties to buy or build.

But as our good friend Gene Guarino tells us, there’s a sub-niche of the senior housing niche that’s too small for the big players, but plenty big for Main Street real estate investors …

Residential assisted living homes.

RALs are where you take an existing McMansion in a residential neighborhood, make some modifications, bring in a specialized manager,  and house a small group (8-16) of seniors who need assistance with their daily care.

But unlike a regular boarding house, these things cash-flow like CRAZY.

We won’t get into the mechanics of all that now.  You can learn more here.

Our point is this is RALs are a sub-niche where you can ride a demographic wave (boomers’ parents … and eventually boomers themselves), an economic niche (million-dollar plus homes), a hot niche (seniors housing, and especially assisted living) …

… and avoid the challenge of excessive inventory created by big institutional money.

Think about it …

There’s not yet a practical way for institutional money to come in and build large supplies of residential assisted living facilities.  They can only build “big box” facilities.

If and when they overbuild, it will mean the big box facilities will be forced to lower prices to attract residents from each other.

BUT, the big box operator has a BIG, all-or-nothing facility, meaning it can’t easily reduce room count to match demand. They either own and operate the entire big building or they don’t.  There’s no in between.

So over-supply means they’ll need to cut SERVICES in an attempt to preserve profitability.

Contrast this to a RESIDENTIAL operator …

Let’s say you have six of these houses in an area where the big boxes overbuild.

Will YOU feel the price pressure?  Sure.  At least a little bit.

BUT … remember, the senior resident who ends up living in a big box is often a different customer than the one in a residential assisted living home.

Many will pay a premium to live in a home rather than an institution.

So right out of the gate, your sub-niche of the senior demographic is arguably less price-sensitive, and your residential home is a very different value proposition.

But let’s say you do get squeezed and lose a few residents.  If you can’t replace them with profitable residents, you can always sell one of your six homes … into the single-family home market.

After all, it’s not like you’ve got a 125-bed single-purpose property.  In other words, you have a Plan B exit strategy that feeds into a different niche …. home-owners.

It’s MUCH easier for you to navigate the ramifications of an over-build … so you can ride the hot wave with less risk.

Even better, if the big box operators’ profit margins get squeezed, don’t be surprised if they take notice of your high profit margins and make you an offer.

We could go on, but you get the idea.  There are always niches and sub-niches when you’re willing to dig a little deeper.

So when you read headlines about macro-trends, keep in mind opportunity is often micro … and often requires more thought.

In this case, the cautionary headline about over-building serves as an example of how to ride a macro-trend, while avoiding dangers created when big money overcrowds a space.

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 dichotomy economy …

Have you noticed a bit of division in the news … over just about EVERYTHING?

As you may know, we obsess on all things economic and how they affect Main Street real estate investors … and try to steer clear of the more divisive topics.

But even the financial news is a polarized collection of confusing banter.

On the one hand, we see reports about low unemploymentGDP growth over 4 percentrising consumer confidence, and record high small business optimism.

That all sounds awesome.

On the other hand, we read about record levels of household debtstagnant real wages, and growing government deficits … at a time when interest rates are rising.

Then there’s the ballooning corporate debtgrossly underfunded pensions even as boomers are retiring at 10,000 plus per day … and the hard-to-understand impact of a strong dollar on pretty much everything.

All that sounds mostly scary.

Sure, you could say it all blends together into a balanced and comfortable investing climate …

But that’s like saying if you have one foot in a bucket of boiling water and the other in a bucket of ice water … on average you’re comfortable.  Probably not.

But before you pull the sheets over your head and hope it all blows over, consider this pearl of wisdom from Atlas Shrugged author, Ayn Rand …

“You can avoid reality, but you cannot avoid the consequences of avoiding reality.”

Of course, we’ll never unpack all this with today’s simple commentary …

… but we hope to encourage you to watch what’s happening, get in conversations with similarly engaged folks, and consider how all these things can and do affect YOU and YOUR investing.  Because they do.

For now, let’s just take a VERY simple investing principle and see if it helps us make sense of this schizophrenic financial world …

Would you borrow money at 2 percent if you could invest it at 4 percent?

 Most investors and businesspeople would.  So on its face, the borrowing isn’t the big problem.  It’s maintaining a positive spread.

This is the world real estate investors live in … borrowing and investing at a positive spread.

Of course, it gets a little trickier when rates are rising.   But the fundamentals of the game remain the same.  When rates rise, you MUST increase earnings, or you lose.

So it’s not just how much you borrow, but what you do with the proceeds.  If you borrow to consume or retire less expensive debt, you’re in trouble.

If you borrow to invest in growth, to acquire higher-yielding assets, to start profitable businesses … debt can be your most valuable tool.

Right now, Uncle Sam is borrowing and spending at a wicked pace.  The multi-trillion-dollar question is whether the borrowing will pay off.

The most recent 10-year Treasury auction saw a record amount of U.S. debt offered and scooped up by investors … at a yield under 3 percent.

(We watch the 10-year because it’s the most correlated to mortgage rates)

So it seems bond investors aren’t overly concerned about Uncle Sam’s debt-levels and capacity to repay with a comparably valued dollar.  For now.

And in spite of the highly touted tax cuts, federal income tax receipts actually GREW nearly 8 percent in the first 10 months of 2018.

BUT … while income is up, deficits and debt are up MORE.

As investors, we understand it sometimes takes time for investments to pay off, so it’s probably not time to judge … yet.

However, this is something we’ll continue to watch carefully.

If the investments pay off, especially in a way that resurrects rust belt markets… there could be some serious real estate investing opportunities on the horizon.

If they don’t, and this is all just a debt-driven faux boom, the end game could be a collapsed currency, ugly recession, and interest rates even the Fed can’t hold down.

Of course, if all the “bad” stuff happens, there’ll be lots of quality assets available at fire-sale prices … for those with enough foresight to liquefy some “boom” equity and keep it at the ready.

Of course, probably the BIGGEST opportunity in either scenario is to have a large network of aware and prepared investors on speed-dial … so you can put together investment funds to ride the wave or pick up the pieces after a crash.

The bottom-line is …

… it’s not external circumstances that primarily control individual success or failure, but rather the individual investor’s awareness, preparedness, and propensity to ACT as circumstances unfold.

How are YOU preparing?

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.

Home-building bust … good, bad, or ugly?

One reason we write is because very little mainstream financial commentary addresses the unique needs of real estate investors.

Most financial pundits think of real estate merely in terms of home prices, home builder stocks, and maybe real estate investment trusts (REITs).

Their preferred investment strategy is buy-low-sell-high … usually based on divining things wholly outside an investor’s control.

It’s more like gambling than investing.  They even call their positions “bets”.

Of course, the buy-low-sell-high trading mentality encourages the churning of holdings … which generates commissions and short-term capital gain taxes.

That’s nice for Wall Street firms and the government which protects them, but not so much for Main Street investors trying to build reliable retirement income.

And if you watch the financial news, you’ll notice any discussion of yields and earning is generally in the context of their impact on share prices.  So back again to the buy-low-sell-high mentality.

But long-term income-property real estate investors look at the world VERY differently than the players and pundits of Wall Street.

For real estate investors, it’s all about acquiring streams of cash flow …

… collecting contracts (leases) with people and businesses who work every day and send us a piece of their production.  It’s a beautiful thing.

And even though we LOVE equity … we know REAL equity growth is driven by cash flow.  More cash flow equals more equity.

Of course, the purpose of equity is to acquire more cash flow.  Managed properly, they feed each other.  It’s a virtuous cycle of compounding wealth.

Best of all, with real estate, many of the factors affecting cash flow are very much within the control of the investor.

With that said, we still watch mainstream financial news for clues about what’s happening with the financial system, geo-politics, and macro-economics …

… and we carefully consider how those higher-level factors can directly impact Main Street investors.

So when the June new housing stats came out, here are some of the headlines that popped up in our news feed …

Weak Housing Starts Hurt Homebuilder Stocks
– Barron’s, 7/18/18

Housing Permits Soften, Starts Plummet
– Mortgage News Daily, 7/18/18

Slump in London House-Building Weighs on UK Housing Starts – U.S. News & World Report, 7/25/18

There are lots more, but you get the idea.  Pretty gloomy.

But these stories are just clues in the news.  We still need to figure out why it’s happening, what it means, and how it affects Main Street real estate investors.

Big picture, there are those who think housing is a leading indicator of a healthy economy.  So when housing is doing well, it drives economic growth.

We’re not so sure.  It seems to us housing is a trailing indicator … a reflection of economic growth.

After all, who buys a house so they can get a job?  Buying a home is sign of economic success, not a creator of it … at least not for consumers.

So we think a weak housing market is a reflection of a weak home-buyer.

This begs the question … WHY is the home-buyer weak?

We tossed in the UK article to highlight this weak housing-start situation may not be reflective of issues at merely the local or even national level.

So even though real estate is LOCAL … certain factors affecting it are MACRO … perhaps even geo-political or systemic.

But because we’re news hawks at every level … local, macro, geo-political, and systemic … we’re aware of some of those potentially contributory factors.

But let’s start with the basic economic principle of supply and demand. 

And remember … we always break out “capacity to pay” from “demand” because it makes us focus on factors of affordability.

Think about it …

“Demand”  alone for housing is fairly universal.  Nearly everyone wants a home … a bigger home, a better home … so demand in terms of desirability is almost a given.

But just because someone WANTS a home doesn’t mean they can AFFORD one.  So much of housing demand pivots off of demand’s “capacity-to-pay”.

And then there’s inventory … of both houses (supply side) and people (demand side).

Generally speaking, the world is increasing in population, though not always in any given geographic area.  So it’s certainly possible for an area to lose population, and demand for housing along with it.  Think the fall of Detroit.

But because the slowdown in home-building appears to be occurring in diverse locations, we’ll toss out the notion it’s driven by a slump in the supply of people and a shrinking demand for homes.

We’ll assume there’s plenty of people who want housing.

Now on the housing supply side, we find another clue here …

U.S. home sales sag as prices race to record high
– Reuters, 7/23/18

“ … a persistent shortage of properties on the market drove house prices to a record high.”

Hmmmm … that’s weird.

Low inventory explains slow sales and higher prices.   But wouldn’t both of those things entice home-builders to build MORE … not less?

After all, if buyers are bidding prices UP, the opportunity to earn profits should entice builders to increase production to cash in.

Yet there’s a reportedly low supply of houses, and apparently strong demand reflected by rising prices … and for some reason home-builders are slowing down.

Again, the market’s natural reaction SHOULD be to increase supply … which then drives down prices … and makes housing more affordable to more people.

But that’s not happening.

We think it’s because it can’t.  After all, a home-builder can only drop prices so far before it’s no longer economical to build.

As we’ve discussed previously, one of the first casualties of tariffs was lumber costs.  Steel is another.  And of course, there’s the labor shortage driving up costs in residential construction.

To top it all off, there’s the well-publicized increases in interest and energy expenses … which add costs to almost everything.

So with nearly every component of cost on the rise, builders can only drop prices so far … then they either can’t build, or they need to charge more.

But charging more means buyers must be able to pay more …

Maybe when builders are looking at their market studies, they’re not seeing an increase in buyer’s capacity to pay.

When mortgage rates are going up faster than paychecks … and inflation, gas prices and tariffs squeeze consumers … it drags DOWN their capacity to pay more for housing.

So after digging deeper, it seems there’s some understandable logic to the slowdown in housing permits … in spite of low inventory and rising prices.

Is that bad?  It depends.

Remember .. when people can’t afford to buy, they need to rent … from YOU.

When housing crashed in 2008, it was a huge BOON to investors in affordable housing.  The demand for rentals went UP.  Many real estate investors made fortunes.

So the lesson remains … the flip-side of problems are opportunities when you’re aware and prepared.

Right now, in spite of reports of a booming economy and high consumer confidence, it may not translate quickly into a boom in home-buying or home-building.

That might make Wall Street worry, but for Main Street real estate investors focusing on affordable markets and product types …

… or specialized niches like residential-assisted living or resort property which cater to affluent people …

… there’s still a lot of opportunity to build reliable long term wealth through real estate. 

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.

Profits, jobs, and opportunity …

In spite of rising rates and concerns about bubbles … real estate is looking pretty good right now.  At least the right real estate in the right markets.

Of course, “real estate” can mean a lot of different things.  In this case, we’re talking about good ol’ fashioned single-family residences.   Houses.

Yes, we know mortgage rates are rising.  But that just means it’s harder for renters to buy a home … which keeps them renting … from YOU.

And if you proceed with caution, there are some reasons to pursue single-family homes even though prices have recovered substantially from the 2008 lows.

Consider this Yahoo Finance headline:

Small business earnings hit all-time high, NFIB declares

“Small business earnings rose to the highest levels in at least 45 years last month, according to the results of a survey from the National Federation of Independent Businesses (NFIB) …” 

“ …  the 17th consecutive month of ‘historically high readings.’”

That’s good news for small business owners … and for the U.S. economy.  It’s commonly believed that small business drives a majority of job creation.

So perhaps this CNBC headline isn’t a big surprise …

Job openings hit record high of 6.6 million

Of course, job creation is good for landlords.  It’s a lot easier for tenants to pay rent when they actually have jobs.

But there’s the issue of wages.  Even though the unemployment rate fell below 4% … which is considered “tight” … wages still haven’t risen substantially … yet.

Meanwhile, life is getting more expensive as rising interest ratesgas prices and healthcare premiums are among several factors squeezing household budgets.

While jobs are good, it’s hard to save up for a down payment when living costs are going up faster than paychecks … which keeps people renting.

And if all that isn’t a big enough challenge, there’s the problem of high housing prices.  Obviously, higher prices also make it harder for renters to become homeowners.

So all that’s not horrible news for landlords … especially those who are investing in more affordable markets and property types.

But there are two more parts to the story …

First has to do with a deeper dive into the jobs market.  The April jobs report didn’t seem great at first blush.

But in the past, the reports looked great at first, then you’d drill down and discover the jobs created were low-wage service industry jobs.

Notably, recent jobs reports reflect a subtle but important shift in the composition of jobs.

So while the quantity of jobs created might be not bad … the quality is actually looking pretty good.

According to this Wall Street Journal article, manufacturing added 24,000 workers in April … after adding 22,000 and 31,000 in the last two months.

“While manufacturing employment has been generally declining for decades, hiring picked up in the sector over the past year.” 

Way back our 2011 blog, What Washington Could Learn from Real Estate Investors, we argued that not all jobs are equal. We like what’s happening.

Seems to us if the American economy can keep this up, it’s a tailwind for housing … in spite of rising rates, inflation, and high debt levels.

And speaking of wind …

As we discussed at length during Future of Money and Wealth, the entire financial system is based on debt.  So to grow the economy, debt MUST grow.

The why and how of all that is too big a topic for today’s discussion, but if you take it at face value, it really explains a lot.  It also has some big ramifications for real estate.

After 2008, lenders ran away from real estate … but debt still needed to expand.  So new debt-slaves borrowers were needed.

Student debt soared.  Sub-prime auto loans spiked.  Credit cards hit record highs. Corporations borrowed heavily to bid up their own stock.

But today, students are reconsidering the value of a financed college education.  Auto sales are slowing.  Credit card losses are mounting.

Corporations are slowing down their borrowing … with nearly 14% of the largest companies unable to pay their interest payments from earnings.

In fact, a recent Bloomberg article quotes Gregg Lippman of “Big Short” fame as saying corporate debt will trigger the next financial crisis.

“ … corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe …”

“The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis …”

So let’s wrap this all up and put a bow on it …

If it’s true debt MUST expand, lenders will be looking for where they can make loans.  Remember, your debt is their “investment”.

There are already tremors in the debt markets.  Lenders will be looking for quality.

Similarly, there are tremors in the stock markets.  Investors and consumers will be looking for an alternative for their wealth building (remember, consumers consider their home an investment).

So we think there’s a good chance the focus will shift to real estate again.  Just like it did in the early 2000s.

Yes, we know the run-up from 2000 – 2008 ended badly.  But not for everyone.

If you buy the right markets, use sustainable financing structures, and pay attention to cash flow, there’s an argument to be made that single-family homes still have solid potential for long-term wealth building.

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 margin is calling …

Shhh … do you hear it?  It’s the margin calling …

“Margin” is a term we hear all the time but can be a little confusing … because it means different things depending on the context.

But margin comes up often in financial conversations because it’s an important concept … and worth taking a look at.

In stock trading, margin is debt secured by the stocks you’re buying.  It’s like the way real estate investors use mortgages to acquire property.

Typical margin leverage with stocks is fifty percent.  So you put in half and borrow the rest.  If the stock goes up, you get to keep ALL the gain … just like real estate.

BUT … if the stock goes DOWN … you get a “margin call” … which means you need to bring in cash to restore the loan-to-value ratio.  No fun.

We’re sure glad that doesn’t happen in real estate!

The term “margin” has another important meaning.  It’s the “edge” or “fringe” … things that are farthest from the center of the target.

So when you think about your personal budget, you have things at the core … food, clothing, shelter, medical care, etc.

Out at the far edges … the margin … are highly discretionary, non-essential expenditures.  These are things you can easily live without, but you enjoy when you’re flush.

These are the first things to get cut when you’re squeezed.

Households, corporations, even governments all have “core” expenses and activities … and “marginal” expenses and activities.

Again, when prosperity recedes … things at the margin fall off the target.

Our point in all this is you can learn a lot about the direction of the economy simply by watching what happens at the margin.

Make sense?

That’s why this headline caught our attention …

Rising Home Prices Push Borrowers Deeper Into Debt

– Wall Street Journal, April 10, 2018

“ … higher mortgage rates make homeownership out of reach for many,

pressuring lenders to ease credit standards.”

“ … rising debt levels are a symptom of a market in which home prices are rising sharply in relation to incomes, driven in part by ahistoric lack of supply that is forcing prices higher.”

Hmmm … some of that doesn’t make sense to us.  But before we go there, consider this headline …

Home builder confidence slides for fourth straight month

– MarketWatch, April 16, 2018

“The 69 reading is still quite strong. In the go-go days of the housing bubble, between 2004 and 2005, sentiment averaged 68. Still, the fact that confidence is declining so steadily is notable. When NAHB’s index started to fall in late 2005, it was one of the signals that foreshadowed the coming housing bust.”

“ … builders are keeping the pace of construction slow and steady. And they’re worried about their costs.

And then there’s this one …

US home building rose slightly in March, led by apartments

– Associated Press via ABC News, April 17, 2018

“… driven by a big 16 percent gain in apartment buildings. Single-family home construction slipped 3.7 percent.”

“There is a severe shortage of existing homes, which has pushed up

prices in cities around the country … That’s lifting demand for new homes.”

Again, a few things here that don’t make sense to us.  And we could probably write a book just on the excerpts from these three news articles.

But let’s see if we can unpack all this briefly …

First, rising mortgage rates and prices are causing people at the margin of prospective home-ownership to remain tenants. Not great for them, but not bad for landlords.

Usually when prices rise based on DEMAND, builders ramp UP production to profit by selling into the increased demand.

So it seems to us home-builder confidence should be growing.  But it’s not.

That makes us think the number of people who can afford to buy isn’t growing either … it’s shrinking.

That’s because when prices rise faster than incomes, the ability to borrow eventually peaks.  Falling interest rates can delay the problem by getting more mortgage for the same payment.

But now that rates are rising, it seems people at the margin are getting pushed off the back of the affordability bus.

That may also explain why apartment building is growing, but single-family home building is declining.

It may also explain why Freddie Mac is lowering lending standards.

They can’t create jobs or increase incomes, but they can make it easier to borrow in spite of rising rates … and they are.

Freddie’s making it easier for first-time home buyers to get in and push up the market from the bottom.  It’s like the air inlet in an inflatable jump house.

The concern is when lower lending standards act as the air pump trying to compensate for higher interest rates and insufficient income … how long can the debt inflation go before it tapers off … or worse?

Don’t get us wrong.  We LOVE passive equity.  It’s fun to buy a property and just watch the equity grow.

But the market giveth and the market taketh away … unless you’re smart enough to get your equity off the table with cheap long-term debt while both are still available.

As John F. Kennedy said, “The best time to repair the roof is when the sun is shining.”

The sun is shining on real estate right now.  Enjoy it. But be sure you’re preparing your portfolio for stormy weather.

It’s probably smart to have some cash on hand … to be prepared for credit markets to tighten unexpectedly … and to lock in long-term rates where you can.

It’s also wise to pay close attention to cash-flow and avoid dependence on market factors to increase rents or values.

Make sure your deals pencil TODAY … based primarily on things you can reasonably control.

Sure, you might have to walk on some marginal deals … even though they’d be “winners” as long as the tide is high and the sun is shining.

But if the tide goes out and the storm comes, then marginal boats sink.  And if they’re tethered to your best boats, they ALL sink.

Now if you just can’t resist taking a chance on a marginal deal … consider structuring it so it can’t take down the rest of your portfolio if things don’t go as planned.

Until next time … good investing!


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

Home prices surge … and subprime is BACK …

We’re just two weeks removed from our incredible Future of Money and Wealth conference … an it was an EYE-OPENER.

(If you missed it, you’ll be glad to know we video-taped the ENTIRE event and it’s in postproduction right now.   Click here to pre-order at a really great price.)

Meanwhile, now that we’re getting back to our normal routine, we noticed some real estate related news that looked interesting …

Home prices surge to a near four-year high, Case-Shiller shows 
– MarketWatch, April 24, 2018

“Rather than moderating, as many economists expected, home prices are accelerating.  The 6.8 percent annual gain … was the strongest since mid-2014.”

“ … finally broke above the peak it last touched in 2006.”

Hmmm …. is that good?

It kind of feels good.  Then again …

Subprime mortgages make a comeback—with a new name and soaring demand
CNBC, April 12, 2018

“The subprime mortgage industry vanished after the Great Recession but is now being reinvented as the nonprime market.”

A rose by any other name?

“allow … borrowers to have FICO credit scores as low as 500 … can take out loans of up to $1.5 million … can also do cash-out refinances … up to $500,000. Recent credit events, like a foreclosure, bankruptcy or a history of late payments are acceptable.”

“ … will also securitize them for sale to investors.”

Uh oh.  We’re having flashbacks …

“Big banks are also getting in the game, both investing in the securities and funding the lenders …”

Like “too big to jail fail” banks?

“It’s large financial institutions. A lot of people with private capital sitting on the sidelines …” 

Okay.  Let’s take a deep breath and try to figure out what’s really happening, and how it might impact all us lowly Main Street real estate investors …

First, does this mean another grandiose sub-prime implosion that drags the global economy into yet another Greater Recession?

Not sure we’d bet on that happening again.  At least not the same way.

Peter Schiff tells us he thinks the real crash will be the dollar.  He thinks when the debt markets implode, central banks will destroy the dollar in a vain attempt to reflate asset prices and save banks.

Wow.  That’s pretty apocalyptic.  But hey, it’s Peter Schiff.

James Rickards thinks the stage has been set to replace the dollar on the world stage with the IMF’s SDR.  Not sure what that means?  Read Currency Wars and The Death of Money.

But no one we’ve talked to think it’s all going to happen in a day. It’s a process.  And if you’re paying attention, you can see it coming and take pre-emptive action.

Of course, that’s a big topic and too much to dissect in this missive.  That’s why we hosted Future of Money and Wealth … and video-taped the whole thing.

Some of what we learned is that as the dollar begins to fail, dollar denominated bonds would fall out of favor.  After all, who wants to loan “strong” dollars today and get paid back late with weaker dollars?

Foreigners buy fewer U.S. longer-dated Treasuries at auction 
– Reuters, April 23, 2018

Well, THAT’S interesting.

Less bidders on bonds usually means interest rates rise …

Mortgages, other loans get pricier as 10-year Treasury rate tops 3% 
– USA Today, April 24, 2018

Okay, that’s getting closer to home … literally.

But usually when the world isn’t buying bonds (and yields rise) … the money goes into stocks and stocks go UP.  But they went DOWN.

Hmmmm…. it seems the paper players of the world aren’t wild about bonds or stocks.

Since stock investors aren’t piling into bonds for safety, where are they going?

Could be cash … for now.  That would explain the aforementioned, “… a lot of people with private capital sitting on the sidelines.”

We can’t claim to be paper asset experts … far from it.  But it seems to us if there’s cash on the sidelines, the issue isn’t liquidity as we’ve heard some say.

And if there’s plenty of cash … and plenty of stocks and bonds to buy … then maybe the issue isn’t liquidity or inventory, but quality.

Think about Detroit real estate at it’s worst.  There was PLENTY of properties.  And they were cheap.

You could buy a whole house for $2500.

But few did.  In fact, they bull-dozed lots of properties because on one wanted them.

The problem wasn’t price or availability, it was quality … or lack thereof.  No sale.

So MAYBE paper asset investors are a little afraid of stocks and bonds right now.  Maybe they’re starting to look for more real alternatives.

That’s what happened at the turn of the century.  Stock and bond investors poured into real estate and mortgages.  From their perspective, they’re safe.

Real estate is like that loyal, sometimes boring best friend in high school.  When things are free and easy, you hang out with your party pals … but when life gets hard, it’s that old faithful best buddy you lean on.

There’s a LOT of debt in the world right now.  More than ever before.  Much of it created in the last 10 years … providing the jet fuel for some pretty powerful paper pricing runs.

Of course, some of the cheap money has also made its way into real estate.  So real estate’s been good too.

But it’s quite possible the party is coming to an end.  Rising rates and declining stock prices could be warning signs.

And yes, a slowdown will probably impact real estate PRICES … especially for homes, which get overbid in good times.

However, incomes and rents are often less affected by downturns, making income producing properties much more stable in slowdowns.

And if you’re smart enough to lock in low cost long term financing, you’ve got a real competitive edge in a rising interest rate environment.

Meanwhile, if history is any indicator, when the paper party ends … it usually means an increased interest in real assets … especially real estate.

At least for now, it seems to us the volatility caused by rising interest rates is a MUCH bigger deal to the paper crowd than for real estate investors.

BUT … even Main Street investors should be paying attention to Treasuries, interest rates, the dollar, gold, and energy.  They’ll provide early warnings for bigger concerns real estate investors should be aware of.

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.

High performance wisdom for the New Year …

Sometimes the most profound tidbits of wisdom are unexpectedly found in unlikely places.

Here’s a great one we picked up along the way …

“Most people figure it out … eventually.  The GREAT ones figure it out EARLY.”

We heard this during a casual conversation in the bleachers at a small college football game.  The subject was athletes, but it really applies to any endeavor … including real estate investing.

Most of us want to be great.  We want substantial success by whatever criteria we define it.  And we usually want it quickly … which brings us to our next profundity …

“More sooner is better.”

It all SEEMS so obvious.  But too often we find ourselves distracted and delayed with half-started projects, trivial pursuits; urgent, but unimportant tasks.

Meanwhile, minute by minute life speeds by … and we fall further behind.

But over time, we become more productive.  Through trial, error and pain we slowly learn to focus.  We gain skills and get more organized.  We learn when to say yes and when to say no … eventually.

But … the GREAT ones figure it out EARLY.

And when it comes to skills, organization, wisdom, discipline, and all the results those bring … more sooner is better.

Of course, this applies to ALL of life … including the business of real estate investing … so let’s think about HOW we can “figure it out” faster.

First, no matter how old you are, today is as young as you’ll ever be.  And no matter how young you are, it almost always seems life is too short.

So using today as ground zero, the goal is to figure it out early … and gain more (knowledge, wisdom, relationships, assets, cash flow, etc.) sooner.

Another lesson from athletics is learning to slow down and relax in order to go faster.

If you’ve ever been trained to sprint … or watched a slow-motion video of a world-class sprinter … you’ll see they’re very focused, relaxed, fluid … with no wasted motion.

Amateurs are tight … they try too hard … they’re inefficient … and they waste a lot of energy.  They work harder to go slower.

Sound familiar?  Sometimes the busiest people are the least productive.

Now here’s the next paradigm breaker … direct from furry green lips of Master Yoda in The Last Jedi 

“The greatest teacher, failure is.”

Of course, this doesn’t mean we seek failure.  Or does it?

While we don’t set out to do something intending to fail, whenever we attempt something we always run the RISK of failure.

So occasional failure is inevitable … especially when doing something new.

But just as you don’t have to save money in order to invest, because you can syndicate capital from people who’ve already saved it …

… you can syndicate wisdom from people who’ve already failed and gotten the lessons.

Or, as Bob Helms, the Godfather of real estate says …

“You don’t have to give natural childbirth to ideas.  You can adopt!”

 So we don’t seek out failure, but it’s not bad to seek out failures … people who’ve already failed and gained valuable wisdom through the process.

The key is to find the right people … and then get close enough to learn from them … and it’s about MUCH more than simply information.

It’s about culture.  It’s about the environment you’re in … the peer group you’re a part of … the ideas, attitudes, and opportunities you’re consistently exposed to.

As the new year rapidly approaches and you consider how to “figure it out” faster in 2018 … so you can get more sooner … take a strong look at your environment.

Do you have enough exposure to people who are pushing themselves through failure and are striving diligently to figure it out faster?

Are you as focused as you need to be to avoid resource-wasting distractions?

And perhaps most importantly, do you have a healthy attitude about your own failures … or do you let setbacks put you on the sideline too long?

Here’s more wisdom from brilliant minds … 

“Winners are not afraid of losing. But losers are. Failure is part of the process of success. People who avoid failure also avoid success.” – Robert Kiyosaki 

“I never see failure as failure, but only as a learning experience.” – Tom Hopkins

(By the way, both Robert and Tom will be with us again for our next sensational Investor Summit at Sea™)

Every year, in every economy, people find a way to win … and others find a way to lose.

And if both can happen in the same conditions, then the difference must be in how each individual behaves in the same environment.

Most of us are somewhere in the middle of the pack in whatever we’re working on … some folks are ahead of us, and some are behind.

In a marathon, each runner has to run their own race … but smart ones use the power of the pack to pick up the pace and pull them forward.  Sometimes it’s uncomfortable.

Of course, if it were easy then everyone would do it, and the achievement would be unremarkable.

“What is the point of being alive if you don’t at least try to do something remarkable?” – John Green

We hope you’ve had a successful 2017 and are eagerly looking forward to a remarkable 2018.

We appreciate having you in our audience and hope to see you very soon at a live event.

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.

Intoxicating investments can be toxic …

It’s the time of year to get together and have a good time celebrating the holidays.  Sometimes this involves indulging in some intoxicating activities.

Those who want to enjoy themselves know their limits … and prudently rely upon a sober person to get them safely home.

Naturally, we’re talking about investing.

Just take a look at just a few of the many recent intoxicating headlines …

It’s important to remember … investing vehicles are supposed to get us to our financial destination SAFELY.

Crashes are DANGEROUS … which is why sobriety is advised.

Of course, in a room full of intoxicated partiers, a sober person can come off as a party-pooper … and NO ONE likes a party-pooper.

So let’s see if we can serve up some investing eggnog and with a dash of optimism … and no nasty hangover or risking a life-threatening crash.

First, let’s take a quick dive into the aforementioned headlines …

Housing

Home-builders are REALLY confident … presumably because they believe conditions are ripe for them to buy land, materials, and labor … turn them all into homes which they can sell at a profit.

That’s because home prices are UP … unlike those dark days in the wake of the recession when existing homes were selling below replacement cost … making it nearly impossible for home builders to build profitably.

Stocks

The U.S. stock market … and most global stock markets … have been rocketing higher.

In fact, the U.S. stock market has taken out all-time highs … over SEVENTY times in 2017 … an all-time record.

All this amid rabid share buybacks by corporations flush with cheap cash from low interest rates… and now from tax breaks which appear inevitable in the new tax bill.

Of course, when corporations take stock OFF the market (reduce supply), while demand surges as bullish investors are piling in … prices rise.  Go stocks!

And speaking of rising prices …

Bitcoin

Of course, the meteoric rise of Bitcoin is THE asset price boom story of the year … perhaps of our lifetime.  It’s gotten to where accidental Bitcoin multi-millionaires are even starting hedge-funds.

Are we jealous?  Maybe just a lot.  But we’re not sure missing the Bitcoin boom makes us stupid … any more than Bitcoin billionaires are suddenly investing geniuses.

“Stupid is as stupid does.” – Forrest Gump

Pre-2008, we knew a lot of people who thought they were real estate investing geniuses because real estate was going up fast everywhere.

They’d put $20,000 down and buy a little house, and a year later it was worth $100,000 more.  There’s NOTHING wrong with that.

BUT … it’s a mistake to think you’re an investing genius because you bought a bubble asset at the right time.

Of course, if you’re not smart enough to get out before the bubble deflates, it can take all gains … and your investing “genius” … with it.  We know.

“I may be drunk, Miss … but in the morning, I will be sober … and you will still be ugly.” – Winston Churchill

Rising asset prices are FUN.  Easy equity is intoxicating.  Who doesn’t like to see the spread between assets and liabilities grow?

But asset price parties can turn ugly fast if you’re not careful, which brings us to the point of today’s musing …

In good times and bad, always remember what REAL investing and wealth are …

… and no matter how intoxicated with bubble wealth you are, be sure you get home safely.

How?

To our way of thinking, the purpose of investing is to accumulate units of real value and the productivity of others.

Wealth is measured by how many useful items you own … like buildings, trees, crops, barrels of oil, ounces of strategic or precious metals, etc.

These are things people MUST have in order to live, work, or make things of value.

When you have more units of real value, and more people sending you a portion of their productivity, you are WEALTHY.

And when you pick items of real value which also reduce exposure to counter-party risk, your wealth is even safer.

Intoxicated investors look at their balance sheet and celebrate their net worth … perhaps even borrowing heavily to spend on consumption.

In fact, this is EXACTLY what the government and banks WANT you to do.

Sober investors look at their balance sheet as merely a tool for building their CASH FLOW statement.  Spending comes out of the productivity of the asset … not it’s equity.

This is no small differentiation … because what you do with equity defines you as an investor.

The investor who buys low, sells high, skims some spending money, then pushes the stack back in and rolls the dice again, needs to keep playing the game … or the cash flow stops.

You can be a full-time investor, but you’re still on the treadmill.

The investor who buys low, then uses equity gains to acquire streams of positive cash flow will eventually become free from the need to personally produce to eat.

Robert Kiyosaki calls this “out of the rat race” … and it’s an enviable place to be.

The world is awash in paper (balance sheet) equity right now … in stocks, real estate, and now cryptos.  None of them are bad.  Equity is awesome!

But the market giveth equity … and the market taketh equity away.

We think it’s smart to take equity off the table before Mean Mr. Market takes it first … and then use your new equity to acquire productivity … cash flow.

It’s even better when you can pair equity with cheap long-term debt, so you can own MORE units of real value (properties) and income (tenants).

Of course, the right real estate is an ideal vehicle to acquire an income producing asset with cheap long term debt.

If prices decline, the income provides a basis of value and control.  And if prices take off, your bigger collection of assets will create even more equity faster.

If you haven’t already, now’s a good time for a portfolio sobriety check.  It doesn’t mean the party’s over … but it just might make it a bit safer.

Happy holiday and until next time … good investing!


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

The MOST interesting story of the year …

What a wild ride 2017 has been … and 2018 is looking even MORE intriguing!

There’ve been SO many fascinating stories.  Trying to pick the MOST interesting is a real challenge …

… a historic and unorthodox Trump presidency

… the record-breaking ascent of the stock market

… the record-breaking U.S. and global debt

… the meteoric, hyperbolic rise of Bitcoin, and crypto-currency’s move from libertarian fringe to mainstream …

And of course, there’s the ongoing saga of China’s drive to dethrone King Dollar; the drama in the House of Saud; and the (allegedly) strong U.S. jobs market.

All these things affect the financial eco-system our real estate investments live in … so we pay attention to them.

After all, we don’t want our backs to the beach if a tsunami is coming.  We did that once and it was NOT fun.

So what’s the biggest story as we end 2017 and press into the new year?

We think it could be oil.  But perhaps not for the most obvious reasons.  Here’s why …

Currency is like the blood of an economy.  It circulates … transporting energy to individual cells … many of which are organized into vital functions.

We teach our syndication students the importance of designing an effective business model … a circulatory system … to be sure cash flows to all vital functions.

Failure to nourish all cells (individuals) and vital organs (critical activities conducted by groups of individuals) can result in sickness, permanent disability, or death.

This is true for individuals, for businesses, and for nations.

After World War II, the U.S. dollar was crowned the world’s reserve currency.

Backed by gold, the dollar circulated the globe … transporting economic energy to individuals, businesses, and nations.

In 1971, the gold-backing was removed, and the dollar became severely ill … with a disease called “distrustitis” … commonly known as rejection.  Nations didn’t want it.

So, they began aggressively trading in their dollars for gold …. bidding the price of gold up from $35 an ounce in late 1971 to nearly $700 in early 1980 …

Ironically, U.S. citizens were locked out of gold ownership until December 31, 1974 when President Gerald Ford revoked the ban imposed by President Franklin Roosevelt way back in 1933.So what does all this have to do with oil in 2017 … and why do we think it’s important heading into 2018? And how does any of this tie into real estate investing?  We’re getting there!

First, a little more history …

Uncle Sam discovered an un-backed dollar wasn’t very popular.  And when nations dumped dollars, it created The Great Inflation of the 1970s.

Back then, the cure for the dollar’s “distrustitis” was to force dollar demand through oil (the petro-dollar) and high interest rates (they reached 20% in 1980).

Cheap labor from China sucked up some inflation … while a recession slowed economic velocity to suck up even more.  But those are topics for another day.

The point is there’s a long linkage between the dollar, gold, and oil … and all three have substantial influence on geo-politics … even today.

Of course, now there’s a new kid in town … crypto (a.k.a. Bitcoin) … which started a ridiculous run in 2017 …

Interesting Image

 

Hmmmm … that chart pattern for 2017 looks a lot like when gold took off the last two times there were outbreaks of dollar distrustitis …

Probably just a coincidence.

But it makes you wonder if crypto and oil might get together as a way for Uncle Sam’s adversaries to escape the dollar … oh, wait …

Headline:  Russia may turn to cryptocurrencies in oil trade to challenge sanctions & the petrodollar

Headline:  Venezuela to Launch Oil-Backed Cryptocurrency

… which brings us to why we’re closely watching oil going into 2018.

In many ways, oil is the asset of choice to back currency.  It’s been the backbone of the dollar since the 1970s and the world knows it.

That’s because the world runs on oil.

And unlike gold, every productive nation MUST have oil.  It isn’t a philosophical commodity … it’s pragmatic.

As Investor Summit at Sea™ faculty member Chris Martenson reminds us, EVERY economy needs energy to operate.

Because oil is the world’s most in-demand commodity, whatever currency it trades in is sure to be in high demand.

China, the world’s #1 buyer of oil, knows this.  And they’re using their economic muscle to position their currency, the yuan, for a greater role in global trade …

Headline:  China will ‘compel’ Saudi Arabia to trade oil in yuan — and that’s going to affect the US dollar

Of course, with $20 trillion in debt and a debt-to-GDP ratio over 100% … more than THREE times what it was when high interest rates were used to crush inflation …

… the U.S. economy probably couldn’t handle 10% interest rates, much less 20%.

So if all the forces aligned against the petro-dollar succeed, might the U.S. experience some painful inflation?

Quite possibly.

Of course, when you own real assets … especially those which produce (like farmland or oil fields) … or channel productivity (like rental real estate) … you’re hedged … you preserve wealth.

But the key to PROFITING from inflation is to short the dollar.  And that’s done with debt.

When you can fix the debt and own the asset, as the asset’s dollar price goes up against the fixed debt, the debt becomes smaller.

Of course, as we’ve discussed before, income-producing real estate is the safest way to play this game.

Now if we’re Uncle Sam and worried oil might end up backing a rival currency, we need to prepare for role reversal.

When the world wants dollars, all Uncle Sam had to do is print and import.  The world gets dollars, and the U.S. gets stuff.  Nice.

But if something replaces the dollar, then Uncle Sam needs to export stuff the world wants, in exchange for whatever currency is now in demand.

Are we saying the world will stop taking U.S. dollars?  No.

But they might want a lot MORE dollars to buy the same stuff (inflation), which would weaken the U.S. economy.

Not surprisingly, the U.S. is taking steps to stimulate domestic oil production.

HeadlineThe GOP Tax Bill Is A Big Win For U.S. Oil And Gas

And agree with it or not, the Trump Administration is very friendly towards the oil industry.

Bringing this all back to Main Street and our daily real estate investing …

First, the relationship between oil and the U.S. dollar has the potential to impact the purchasing power of our dollars, interest rates on our mortgages, and the cost of living for our tenants.

We’re very interested in ALL those things.

Next, if Uncle Sam stimulates domestic energy production with investment incentives and regulatory easing, it might lead to economic booms in energy-rich geographies.

Remember, energy was a top driver of job creation post-2008 … with Texas being the biggest winner.

That’s what took us into Dallas after the recession … and keeps us interested today.

Oil, gold, the dollar, China, new faces on the Fed, tax reform, Bitcoin …

… are all converging in 2018 for potentially massive changes to the future of money and wealth.

And they’ll all be very important topics of discussion on our 2018 Investor Summit at Sea™ … which just might be the MOST important Summit in our history.

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.

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