The world has gone MAD …

In case you haven’t noticed, there’s a LOT going on in the world as we sail into a brand new investing decade …

In addition to wars and rumors of wars, a growing number of notable people are publicly expressing concerns …

… not just about the economy and financial markets, but the system itself.

Perhaps the most notable is Ray Dalio of Bridgewater Associates, the largest hedge fund in the world.

In a recent article, Dalio warns …

“The World has Gone Mad and the System is Broken”

Dalio’s essential thesis is the system of free money has created a series of negative trends that will eventually converge into a fundamental and epic re-set.

“This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.”

Of course, just because he’s successful doesn’t mean he’s right. But Dalio is certainly well-qualified to have an opinion worth paying attention to.

But as we’ve learned from studying smart people, understanding what they’re saying takes some time and effort.

We think it’s worth it. Because any “big paradigm shift” involving the financial system affects EVERYONE … including lowly Main Street real estate investors.

If you’re new to this discussion, consider making a modest investment of time and money to watch our Future of Money and Wealth presentation, “The Dollar Under Attack”. It’s helped a lot of real estate investors see a bigger picture.

It’s important to understand the difference between the “economy” (activity) and the “system” (the structure supporting the activity … including currency, banks, credit, and bond markets).

Remember, the economy was humming along leading into 2008 … booming, in fact. But the system was faulty under the hood, and ultimately broke down.

Just like a car, the economy can go faster or slower … but only while it’s mechanically sound.

If the vehicle’s systems fail, then the car is incapable of speed … and may not even run at all.

Then, when the car breaks down, your skill as a driver is meaningless, except perhaps for avoiding catastrophe when it happens.

In all cases, you end up on the side of the road going nowhere.

The same is true with the financial system and your skill as an investor. If the financial system fails, it can sideline a lot of people … including you.

Of course, the financial system, like a car, has gauges … indicators of performance, health, or impending failure.

But not all gauges are easily seen. And reading them requires education.

That’s why we hang out with smart people like Chris Martenson, Peter Schiff, Brien Lundin. G. Edward Griffin, and Robert Kiyosaki.

Even better, each of these guys are connected to lots of other smart people like Danielle DiMartino Booth, Mike Maloney, Grant Williams … and many more.

You may not yet be familiar with some of these names. Except for Kiyosaki, none of them are serious real estate investors … and that’s GOOD.

As we learned (the hard way) in 2008, when you live in an echo chamber of people who all hope … even need … the economy and financial system to be functional …

… there’s a tendency to ignore or discount even the most obvious problems.

As Upton Sinclair said …

“It is difficult to get a man to understand something when his salary depends on his not understanding it.”

There were warning signs leading up to 2008. Peter Schiff and Robert Kiyosaki both saw them and publicly warned people. Very few listened.

Unsurprisingly, both Schiff and Kiyosaki stopped getting invited on to mainstream financial shows. Wall Street’s not likely to advertise on programs outing a failing system.

And people making millions in the mortgage business weren’t interested in hearing how the mortgage markets were about to implode. Ditto for real estate, stocks, and bonds.

However, smart investors are wise to look beyond their own normalcy bias and the filtered news which is produced by people whose livelihood depends on a rosy narrative.

Risks are ever-present … and the worst are those you don’t see coming.

But before you go full fetal freak out, we’re NOT saying the end of the world is nigh. After all …

“A bend in the road isn’t the end of the road … unless you fail to make the turn.”
Helen Keller

But if Dalio and others are correct, then there’s more than a reasonable probability of substantial changes to the financial environment we’re all operating in … then it’s worth preparing for.

After all, it’s better to be prepared and not have a crisis, then have a crisis and not be prepared.

Remember … ignoring risk isn’t optimism, it’s foolishness.

Legendary real estate investor Sam Zell says one of his greatest assets is the ability to see risk and move forward. You can’t navigate a hazard you don’t see.

So what are some things our smart friends are watching heading into 2020?

Gold, oil, debt, the Fed’s balance sheet, bonds, and interest rates.

These are like the dashboard gauges for the health of the financial system.

Right now, at least three are blinking red … gold, debt and the Fed’s balance sheet.

It’s also important to note that those three are also leading indicators for bonds and interest rates.

That’s because if the world loses faith in the dollar, they won’t buy U.S. debt, which is growing at a staggering rate.

In spite of all their bickering, Congress and the White House manage to agree to big time spending.

And if the world loses its appetite for U.S. debt, then either interest rates rise (something which directly affects nearly all real estate investors) …

… or the Fed needs to buy up the new debt with freshly printed money. This is called “monetizing the debt” … and would show up on the Fed’s balance sheet.

Some say this “monetization” could lead to hyper-inflation. Others think it means the U.S. could go into decades-long stagnation like Japan.

Maybe.

The difference is Japan doesn’t issue the world’s reserve currency and enjoys a friendly relationship with the country that does (the United States).

So we’d say the United States situation isn’t exactly the same as Japan. But what do we know? We’re just two dudes with microphones.

Maybe there are clues in the news …

The world’s super-rich are hoarding physical gold
Yahoo Finance, 12/10/19

Hmmmm … it seems the “fear” trade … those looking to park wealth someplace “safe” are choosing gold … in addition to, or instead of U.S. Treasuries.

If instead of Treasuries, you’d expect interest rates to rise as bond prices fall due to less bidding.

But while there’s currently only a little upward pressure on rates, it’s not much … so someone must be buying them. Chris Martenson says it’s the Fed.

In other words, the Fed might be starting to monetize the debt.

So it’s notable the “super-rich” are following the lead of the world’s central banks in acquiring gold. No surprise, as of this writing, that gold is trading at a 7-year high.

In other words, if Chris Martenson is right, everyone (except the Fed) would rather own gold than U.S. debt denominated in U.S. dollars.

But we know Uncle Sam can’t default. The US can print an unlimited number of dollars. So no one is avoiding Treasuries because they don’t think they’ll get paid back.

The concern must be the value of what they’ll get paid back with … the dollar.

Think about your paradigm of wealth. Do you denominate wealth in U.S. dollars? Are you ready for a “big paradigm shift”?

Buckle up.

The new decade should be an exciting ride … scary and dangerous for those not strapped in with the right education, information, portfolio structure, and tribe.

Education, preparation, and tribe have never been more important. If you’re not seriously investing in those things, perhaps now is the time to start.

Meanwhile, we’re bullish on Main Street.

We think real people who do real work and own real assets will fare much better than those counting on paper promises from Wall Street, bankers, politicians, and pensions.

If you’re a fan of real estate and other real assets, you’re already on the right track. Now it’s time to take it to the next level.

It might be time to start worrying …

The mother of all private equity firms just issued a warning …

Blackstone Group Warns of the Mother of All Bubbles
Investopedia via Yahoo Finance – 11/11/19

According to the article, Blackstone’s “… biggest concern is negative yields on sovereign debt worth $13 trillion …”.

Remember, the 2008 financial crisis was detonated in bond markets … and the bomb landed hard on Main Street real estate.

So yes, this is something Main Street real estate investors probably want to pay attention to.

In fact, the article says Blackstone “… sees a troubling parallel with the 2008 financial crisis …”

Keep in mind, Blackstone manages over $550 billion (with a B) … which includes over $150 billion of real estate equity in a portfolio of properties worth over $320 billion.

So Blackstone has both the means and the motivation to study these things intensely … and they think about real estate too.

Of course, this doesn’t mean they’re right. But they’re certainly qualified to have an opinion worthy of consideration. And right now, Blackstone is worried.

And they’re not alone …

More than half of the world’s richest investors see a big market drop in 2020, says UBS survey
CNBC – 11/12/19

“Fifty-five percent of more than 3,400 high net worth investors surveyed by UBS expect a significant drop in the markets at some point in 2020.

“… the super-rich have increased their cash holdings to 25% of their average assets ….”

Of course, they’re talking to paper asset investors, but the sentiment applies to the overall investment climate, which also affects real estate.

Also, by “super-rich”, they’re talking about investors with at least $1 million investable. So while that’s nothing to sneeze at, it’s also not the private jet club either.

So from behemoth Blackstone Group to main street millionaires, serious investors are worried right now.

Should YOU be worried too?

Probably. But it’s not what you think …

In fact, according to this article, Blackstone’s CEO Stephen Schwarzman believes worrying is fun 

“In his new memoir What it Takes, the private-equity titan advises readers that worrying ‘is playful, engaging work that requires you never switch it off.’

This approach helped him to protect Blackstone Group investors from the worst of the subprime real estate crisis …”

There are some really GREAT lessons here …

Worrying is something to be embraced, not avoided.

Many people believe investing and wealth will create a worry-free life. Our experience and observation says this is completely untrue.

In fact, to adapt Ben Parker’s famous exhortation to his coming of age nephew Peter Parker in the first Tobey Maguire Spider-Man film …

“With great wealth, comes great responsibility.”

Worrying is the flip side of responsibility. They go hand and hand. If want wealth, you need to learn to live with worry.

Worrying isn’t about being negative or pessimistic.

In Jim Collins’s classic book, Good to Great, he says great businesses (investing is a business) always “confront the brutal facts”.

That’s because you can’t solve a problem you don’t see.

But missing problems isn’t merely a case of oversight or ignorance. Sometimes, it’s bias or denial.

In fact, one of the most dangerous things in investing is “normalcy bias.

This is a mindset which prevents an investor from acknowledging an imminent or impending danger and taking evasive action.

Mega-billionaire real estate investor Sam Zell says one of his secrets to success is his ability to see the downside and still move forward.

Threats often aren’t singular or congruent … they’re discordant.

According to this article …

“CEO Steve Schwarzman of Blackstone searches for ‘discordant notes’, or trends in the economy and the markets that appear to be separate and isolated, but which can combine with devastating results.”

This is the very concept of complexity theory that Jim Rickards explains in his multi-book series from Currency Wars to Aftermath.

The point is that major wealth-threatening events seldom occur in isolation or without a trigger and chain reaction that is often not obvious.

It’s why we think it’s important to pay attention to people and events outside the real estate world.

The more you see the big picture and inter-connectedness of markets, geo-politics, and financial systems, the more likely you are to see a threat developing while there’s time to get in position to avoid loss or capture opportunity.

Cash is king in a crisis.

This might seem obvious, but there’s more to it than meets the eye. After all, cash isn’t king in Venezuela … because their cash is trash.

Americans don’t think of cash apart from the dollar. And their normalcy bias says they don’t need to.

It’s true the dollar is king of the currencies … for now.

Yet as we explained in our Future of Money and Wealth presentation, the dollar has been under attack for some time.

But even as high-net worth investors, the most notable of which is Warren Buffet, build up their cash holdings, it’s a good time to consider not just the why of cash … but the HOW.

The WHY of cash is probably obvious …

When asset bubbles deflate, it takes cash to go bargain hunting.

It’s no fun to be in a market full of quality assets at rock bottom prices … and have no purchasing power.

But the HOW of cash is a MUCH more important discussion … and too big for the tail end of this muse. Perhaps we’ll take it up in a future writing or radio show.

For now, here are something to consider when it comes to cash …

Cash is about liquidity. It’s having something readily available and universally accepted in exchange for any asset, product or service.

So, “cash” may or may not be your local currency.

Even it is, perhaps it’s wise to have a variety of currencies on hand … depending on where you are and where you’d like to buy bargain assets.

It should be obvious, but cash is not credit.

So, if you’re counting on your 800 FICO, your HELOC, and your American Express Black Card for liquidity, you might want to think again.

Broken credit markets are often the cause of a crisis, so you can’t count on credit when prices collapse. You need cash.

Counter-party risk is another important consideration. This is another risk most Americans seldom consider … but should.

That’s because one of the “fixes” to the financial system after 2008 is the bail-in provisions of the Dodd-Frank legislation.

“With a bank bail-in, the bank uses the money of its unsecured creditors, including depositors and bondholders, to restructure their capital so it can stay afloat.”
Investopedia – 6/25/19

Yikes. Most people with money in the bank don’t realize their deposits are unsecured loans to the bank … or that the bank could default on the deposit.

That’s why the recent repo market mini-crisis has so many alert observers concerned. Are banks low on cash?

As we’ve noted before, central banks are the ultimate insiders when it comes to cash … and they’ve been stocking up on gold.

Maybe it’s time to consider keeping some of YOUR liquidity in precious metals.

You can’t win on the sidelines.

Even though serious investors are increasing liquidity in case there’s a big sale, they aren’t hiding full-fetal in a bunker. They’re still invested.

This is where real estate is the superior opportunity.

It’s hard to find bargains in a hot market when your assets are commodities like stocks and bonds. Price discovery is too efficient.

But real estate is highly inefficient … and every property and sub-market is unique. So compared to paper assets, it’s a lot easier to find investable real estate deals … even at the tail end of a long boom.

Of course, if you’re loaded with equity, it’s probably a smart time to harvest some to build up cash reserves. Just stay VERY attentive to cash flow.

Nine lessons from Lehman Brothers …

This past September 15th marked the 10th anniversary of the collapse of the iconic Wall Street investment bank, Lehman Brothers … after 158 years in business.

While there were several notable events which heralded the arrival of the greatest financial crisis since the Great Depression of 1929 …

… Lehman’s failure can arguably be considered the “shot heard around the world”.

As recounted in David Stockman’s epic tome, The Great Deformation, the guys in charge of the Federal Reserve and U.S. Treasury at the time, Ben Bernanke and Hank Paulson, proclaimed …

… “the financial system had been stricken by a deadly ‘contagion’ that had come out of nowhere and threatened a chain reaction of financial failures that would end in cataclysm.”

Apparently, Bernanke and Paulson weren’t followers of Robert Kiyosaki or Peter Schiff.

Because both Kiyosaki and Schiff appeared on national television warning people … that in spite of all the rosy economic reports, there was BIG time trouble brewing.

In fact, in this now infamous interview with Wolf Blitzer on CNNKiyosaki specifically warned about a Lehman Brothers collapse.

And in this contentious TV appearance, Peter Schiff was mocked by well-known economist, Art Laffer, for his passionate concerns about the dangerous proliferation of sub-prime mortgages.

Of course, Kiyosaki and Schiff both turned out to be right.  But as you may have noticed, they’re not on financial TV too often any more.

We’re guessing it’s because their viewpoints don’t fit the Wall Street “sunshine” narrative.

That’s why we make it a habit to get together with these guys … and others … who aren’t singing from the Wall Street hymnal.

Meanwhile, it’s hard to believe Lehman collapsed 10 years ago.

There are Millennials now well into their business and investing careers who were just in high school back then … and have no real recollection of what happened or why.

So just as Americans commemorate the anniversaries of tragic events such as Pearl Harbor and 9/11 to honor heroes, mourn victims, and remember important lessons …

… perhaps the anniversary of the fall of Lehman is a good time to consider what can and should be learned from economic policy gone bad.

“Those who fail to remember history are doomed to repeat it.” 
– George Santayana

We’re certainly NOT mourning the loss of Lehman.  Extinction is a healthy part of the cleansing process when cancerous enterprises infect a financial system.

And there’s probably an argument to be made that Goldman Sachs, AIG, and other foolish actors should have been allowed to fail too.

After all, when you look at how and why they got into trouble, to bail them out is essentially absolving them of the consequences of their reckless behavior.

Worse, it creates moral hazard … enticing Wall Street gamblers to continue to take big chances with their clients’ savings …

… knowing they keep all the upside but can push the downside to Main Street, both directly and indirectly through government bailout.

And as many real estate investors discovered the hard way, Wall Street’s gambling addiction absolutely impacts our Main Street investing.

Real estate didn’t cause the Great Financial Crisis … it was a victim of it.

Of course, the crisis also created fabulous opportunities for the aware and prepared.  There’s ALWAYS a bright side for the aware and prepared.

Investors like Kiyosaki and his real estate guy, Ken McElroy, made fortunes buying up bargains in the wake of the crash.

It’s usually the smart money that cleans up messes made by dumb money.

But we’re not here for a post-mortem on the 2008 financial crisis.  We’ve covered that extensively and you can find those episodes and blog posts in our archives.

Today is all about facing the future empowered with important lessons from the past …

Lesson #1:  Listen to all points of view with an open mind. 

Be mindful of normalcy bias, confirmation bias, echo chambers, and of course, sales agenda.

When the downside is left out of the discussion, you’ll end up with potentially disastrous blind spots.

But if all you see is doom and gloom, you don’t act.  And that’s bad too.

Lesson #2:  Study and think for yourself. 

Your financial future is too important to rely solely upon the Cliff’s notes and conclusions of financial pundits.

There are plenty of understandable investments, including our obvious favorite … real estate.  There’s no reason to abdicate the responsibility of understanding to others.

Sure, you can delegate the work of investing to others.  But not the understanding.

YOUR financial education is important, whether you get your hands dirty with the deals or not.  So make financial education a priority.

Lesson #3:  It’s never as good as it seems … and it’s never as bad as it seems.

It’s easy to get lazy in a boom … and paralyzed in a bust …  so keep looking for opportunities and keep your money working … in both economic sunshine and rain.

Lesson #4:  Take what the market gives you.

The market’s bigger than you are, so you can’t make demands.  It’s going to do what it’s going to do.  And it will change.

So when the world changes, you’ll need to adapt.

Resist the temptation to doggedly adhere to a now less effective strategy simply by taking on excessive risk … or reducing your return on investment targets.

There are almost always alternative opportunities you can move to.

Sure, it takes time and effort to learn new niches.  But so does recovering from a bad deal, or earning back lost opportunity from putting your portfolio in sleep mode until your preferred niche comes back to life.

Lesson #5:  Cash reserves aren’t idle. 

They’re actively providing insurance coverage for a liquidity crisis.  That’s worth something.  Think of the lost opportunity cost as an insurance premium.

So no matter how hot your niche is, be cautious of being over-invested.  If you think having cash reserves is expensive, try being illiquid when credit markets seize up.

Besides, it’s no fun staring at a market full of bargains, but without any purchasing power left.  You never know when the market’s going to have a BIG sale.

(That’s another reason why we LOVE syndication.  When YOU don’t have the resources to capitalize on bargains, you can always find investors who do.)

Lesson #6:  The economy and the financial system are NOT the same thing.

There’s a big difference between economic indicators … and the strength and stability of the financial system.

Study BOTH for clues about opportunities and risks.  In the boom leading up to the financial crisis, the economy was HOT.  But the financial system was frail.

Sound familiar?  It should.  History may not repeat itself, but it often rhymes.

Lesson #7:  Defense wins championships. 

The old sports adage very much applies to investing.

Billionaire stock investor Warren Buffet says Rule #1 is, “Don’t lose money” and rule #2 is, “Remember Rule #1”.

Billionaire real estate investor Sam Zell says a secret to his success is his skill at understanding the DOWN side.

Remember, there’s ALWAYS a downside.  Ignoring it doesn’t make it go away.  And if you don’t see it, it just means you’re not seeing the while picture.  Get experienced eyes on the deal to help you.

Lesson #8:  You can’t make a profit on property you don’t own. 

If you fail to buy property because of fear … or you lose a property because of greed … you’re not going to grow your portfolio or achieve your financial goals.

So yes, look at the downside.  But then look for ways to mitigate it.

When you’re done, weigh the upside against the downside … compare it to other opportunities concurrently available … and if it looks good, do it.

Over-thinking can be just as bad as not thinking.

Lesson #9:  Never over-expose your portfolio to any one deal … no matter how good it looks.

Firewall sections of your portfolio through entity structuring, selective and restrictive use of personal guarantees, and syndication.

As you can see, there are MANY lessons to gleaned from reflecting on financial history … and listening to smart people with diverse perspectives, experiences and expertise.

Until next time … good investing!


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