Is THIS the next crisis?

We’re just back from yet another EPIC Investor Summit at Sea™.  If you missed it, be sure to get on the advance notice list for 2020.

It’s hard to describe how transforming and powerful the Summit experience is.  So we won’t.

Instead, today’s focus is on the flip side of the Fed’s flop on interest rates … in context of the #1 thing Robert Kiyosaki told us he’s MOST concerned about.

We recently commented about the Federal Reserve’s abrupt reversal on plans to raise rates and tighten the supply of money (actually, credit … but that’s a whole other discussion).

The short of it is … there’s more air heading into the economic jump house. 

Based on the mostly green lights flashing in Wall Street casinos since then, it looks like the paper traders agree.  Let the good times roll.

Real estate investors care because the flow of money in and out of bonds is what determines interest rates.

When money piles into bonds, it drives interest rates LOWER.

Not surprisingly, as we speak … the 10-year Treasury is yielding about 2.3% … compared to nearly 3.3% less than six months ago.

While a 1% rate change may not seem like much, it’s a 43% decrease in interest expense or income (depending on whether you’re borrower or lender).

So as a borrower, your interest expense is 43% lower.  Obviously, with record government debt and deficits, Uncle Sam needs to keep rates down.

But as a lender (bond investor) you’re also earning 43% less.  And yet, lenders (bond buyers) are lining up to purchase.

That tells us they probably expect rates to fall further and are speculating on the bond price.

But whatever the reason, they’re buying, so bonds are up and yields are down.

As you may already know, lower Treasury yields mean lower mortgage rates.  So this headline was quite predictable …

Mortgage Rates are in a Free Fall with No End in SightWashington Post, 3/21/19

Falling mortgage rates are bullish for real estate values because the same paycheck or net operating income will control a bigger mortgage.

This purchasing power allows buyers to bid up prices … IF they are confident in their incomes, and IF their incomes aren’t being directed towards rising living expenses.

So lower interest rates don’t automatically mean a boom in real estate equity.  But they help.  We’ll probably have more to say about this in the future.

For now, let’s take a look at the other side of falling rates …  the impact on savers and especially pension funds.

Remember, if you’re investing for yield, your income just tanked 43% in only six months.  Unusually low interest rates creates problems for fund managers.

During the Summit, Robert Kiyosaki revealed he’s VERY concerned about the global pension problem.

Low interest rates are only one part of the problem.  A much bigger part is the demographics and faulty model underneath the pension concept.

The net result is there’s a growing disparity between pension assets and liabilities.  And it’s not a good one.

Like Social Security, both public and private pensions worldwide are on a collision course with insolvency … led by the two largest economies, the United States and China.

This problem’s been brewing for a long time.  But it’s a political hot potato and no one has a great answer.  So the can keeps getting kicked.

But we’re rapidly approaching the end of the road.  And this is what has Kiyosaki concerned.

Yet few investors are paying attention … probably because it all seems far away and unrelated to their personal portfolio.

However, the pension problem has the potential to affect everyone everywhere.

The reasons are many, but the short of it is the problem is HUGE and affects millions of people.  The pressure for politicians to do SOMETHING is equally huge.

Peter Schiff says the odds of them doing the right thing are very small.

Our big-brained pals say it probably means 2008-like mega money printing and bailouts … except even BIGGER.

So what does all this mean to Main Street real estate investors?

Keep in mind that some of the biggest pension problems are states and local municipalities.  California and Illinois come to mind.

Unlike private corporations, public pensions don’t have a federal guarantee.

But even if they did, Uncle Sam’s Pension Benefit Guaranty Corporation (PBGC) is in trouble too.

According to this government report, the PGBC will be broke in 2026

“ … the risk of insolvency rises rapidly … over … 99 percent by 2026.” – Page 268

Sure, the Fed can simply print all the money needed to save the PGBC … and Social Security … and more … but at the risk of ruining faith in the dollar.

As we detailed in the Future of Money and Wealth, China’s been systematically moving into position to offer the world an alternative to the U.S. dollar.

Will they succeed?  No one knows, but it’s yet another story we’re paying close attention to.

Meanwhile, unlike Uncle Sam, states and municipalities can’t just monetize their debts away with a little help from the Fed.

Of course, we’ll bet if the stuff hits the fan, the Fed will “courageously” attempt to paper over it … just like they did with Fannie Mae and Freddie Mac in 2008.

But many observers contend the Fed’s recent inability to “normalize” either rates or their balance sheet means they might not have the horsepower.

In other words, it may take MORE than just the full faith and credit of the United States to persuade the world the dollar is still king.

Oil and gold might be more convincing.  Perhaps this explains some of Uncle Sam’s recent foreign policy moves?

Of course, that’s conjecture FAR above our pay grade.

But until the pension problem becomes a full-blown crisis and federal policy makers attempt to ride in on their white horses …

cash-strapped states and municipalities are on their own … and likely to do desperate things in their attempts to stay solvent.

Some will adopt policies designed to attract new business and tax revenue.

But we’re guessing most will push the burden onto consumers, businesses, and property owners.  That seems to be the way politicians roll.

So when you’re picking states and cities to make long-term investments in, pay attention to the fiscal health of the local governments.

And if your tenants are counting on private pension benefits, they may not be aware of 2014 legislation allowing a reduction of those “guaranteed” benefits.

If YOU have any direct interest in private pensions, you should read this page.

You’ll discover that plan participants can vote against a reduction. But even if most who vote reject it … if not enough people vote, it can pass anyway.

For retired carpenters in Southwest Ohio, benefits drop on April 1, 2019 … along with their ability to pay you rent.

The bad news is the pension problem is a slow-motion train wreck.  It’s rolling over small groups of people a little at a time … but it’s building momentum.

The good news is it’s slow-motion right now, so  there’s time to watch, learn, and react.

But Kiyosaki says it’s a big deal that’s probably going to get a lot bigger. 

From a real estate investor’s perspective, some markets will lose, and others will gain.

Choose carefully.

Until next time … good investing!


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Social Security, Inflation and Real Estate …

If you’re relatively young, Social Security is probably just an abstract concept and another bite out of your paycheck.

But before you tune out,  consider that the U.S. Social Security program creates both problems and opportunities for real estate investors of ALL ages … including YOU.

Big picture …

Social Security and Medicare make up about 42% of federal program expenditures.  They’re a BIG chunk of Uncle Sam’s spending.

According to this Congressional Research Service report on Medicare and this Social Security Administration Trustees’ Report … both are headed towards insolvency in the not-too-distant future.

That’s bad.

Worse … both are “pay as you go” programs.  That’s not our description.  That’s exactly the way the U.S. government describes them.

The programs don’t really have any money.

The only “assets” these programs have are YOUR taxes … and IOUs from Uncle Sam.  The CRS report explains it on page 5.

Of course, IOUs from Uncle Sam are also backed by taxes … and the Federal Reserve’s printing press (which means inflation).

According to recommendations by the SSA Trustees in their report, the answers are … wait for it …

… raise payroll taxes and reduce benefit payments.  

Shocker.

You probably know payroll taxes are paid by working people (your tenants) and their employers.

Higher payroll tax obviously means less take-home pay to live on … including paying their rent to YOU.  So you may want to pay attention to the direction of payroll taxes.

But what about benefit reduction?  How does that matter to real estate investors?

There’s the obvious impact on tenants who rely heavily on Social Security, disability benefits or Medicare to help them with their routine living expenses.

Reduction in subsidies means those tenants have less money to pay rent … and less flexibility to absorb increases to rent or other costs of living.

But there’s a less obvious angle to consider … one we pay close attention to … and that’s the Fed’s printing press.

We trust at this stage of your financial awareness, you’ve heard of John Maynard Keynes, the father of the “Keynesian economics” you hear about.

Here’s a long, but powerful statement made by Keynes in his book The Economic Consequences of the Peace …

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflationgovernments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.  By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.  As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

There’s SO much we could say about that quote … but read it and re-read it a few times.   You’ll view the news in a whole different light.

For now, let’s get back to Social Security, inflation … and YOUR real estate investing …

As you can guess, cutting benefits overtly is not a politically popular solution.

Neither is raising taxes.

Yet according to the people in charge of these programs, that’s EXACTLY what needs to happen.

And it is happening … but “in a manner which not one man in a million is able to diagnose.”

That is … cutting benefits and raising taxes are both cleverly hidden inside how Uncle Sam and the Fed handle inflation.

When most people think of “inflation,” they think of Uncle Sam’s official gauge of inflation … the Consumer Price Index (CPI).

It’s well known that the Fed has a stated goal of 2% per year inflation … every year … year in and year out.

That doesn’t sound like much. And whether it’s good or bad depends on which side of the coin you’re on.

If you own real assets, you get richer in nominal terms.

If you use long-term debt, like mortgages, you get richer in real terms.

That’s too big a concept for today, but one EVERY real estate investor should know like their name.  In fact, it’s a big part of what Robert Kiyosaki will be talking about at our next Investor Summit at Sea™.

But just because you own properties doesn’t mean you’re home free (punny, we we know) because …

… for folks who don’t have assets (like your tenants) … inflation means it costs more to live.  To see it in dollar terms, use Uncle Sam’s inflation calculator.

Based on the CPI, a tenant in October 2018 would need $1,542 to purchase items that cost only $1,000 in October 1998.

That’s means they need more than a 50% increase in take-home pay over 20 years … just to keep the SAME standard of living.

Similarly, for programs like Social Security … with  built in cost of living adjustments (COLAs) … a $1000 benefit in 1998 now costs Uncle Sam $1542.

No wonder the debt is swelling.

Of course, it didn’t take Uncle Sam long to figure out keeping the CPI lower than real-world rate of inflation, would effectively cut benefits without political fallout.

In other words, as Peter Schiff often points out, the CPI probably UNDER-reports the ACTUAL rate of inflation … which means the reality is even harder for the working class than the CPI indicates.

So it’s important for investors of all types to get the best measure of real-world inflation possible.  And the CPI is arguably not it.

That’s why many investors turn to Shadow Stats or the Chapwood Index.

The Chapwood Index is handy for real estate investors because it breaks inflation down by city.  That’s important because unlike stocks, bonds, and commodities … real estate is a LOCAL investment.

Here’s where it all comes together …

Even though Uncle Sam is motivated to keep inflation LOW for CPI purposes, they have no choice but to print gobs of dollars to fund the huge and growing debt and deficit.

Meanwhile …

Income producing, leveraged real estate is arguably (and by far) the safest, most powerful hedge against long-term inflation.

But again, rental property investors must stay alert to the pressure inflation puts on their tenants.

Remember … just because nominal GDP is growing, it doesn’t mean your tenants are getting more purchasing power.

So be careful to select markets, product types, and tenant demographics that fit well into what’s happening in the big picture.

Until next time … good investing!


More From The Real Estate Guys™…

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08/16/15: Clues in the News – Is a Squeeze on Rising Rents in the Future?

There’s been lots of talk in the news lately about how and why rents are rising.rents are rising and rents are too high

Of course, if you’re already a landlord, that’s not bad news.  And those who invested in residential rental property a few years back hit the trifecta of low purchase price, falling interest rates and rising rents.

But that was then and this is now.

Is the party over?  Did you miss the boat?  What’s happening today…and where are things headed?

All great questions!

Squeezing their way into The Real Estate Guys™ studio to look for answers in this edition of Clues in the News™:

  • Your plum of a pontificator and host Robert Helms
  • His orange-you-glad-he’s-not-the-host co-host Russell Gray

We like to look at the news for a lot of reasons.

The Real Estate Guys look for Clues in the News to help listeners be more successful at real estate investingFirst, the news helps us see the big picture events which affect our real estate investing.  And we’re especially interested in anything that affects our rental income, our interest expense, or the supply and demand of properties.

Real estate investors tend to live in their own little world…finding deals, servicing tenants, managing cash flow and dealing with vendors.

It’s EASY to get lost in the weeds and miss a macro-trend that could have a HUGE impact on your business.

For syndicators, the news provides insights into the concerns and competing opportunities your investors have.  When you are well-informed, it makes a positive impression on the people who are…or are considering…investing in you.

For this episode we hone in on reports of things that have the potential to put the squeeze on the rising rents so many landlords have been enjoying.

U.S. Health Spending – $3.1 Trillion a Year and Growing

One thing we like about real estate…especially residential real estate…is keeping a roof over their head is a HIGH priority to tenants.  That means with all the things competing for their available income, landlords are high on the list.Healthcare spending is on the rise which could put the squeeze on rising rents

However, healthcare is pretty high on the list too.  And with the new Obamacare mandate forcing everyone to buy insurance or pay a penalty, more of a tenant’s available money is going to healthcare.

This article also says out-of-pocket expenses are on the rise too.  Which, again, means more competition for available cash flow…and a potential restriction on the rising rents trend.

The GOOD news is that if you own property in an area with a strong healthcare industry, your local employment and wages might be above average.  So there’s always a silver lining.

Social Security Disability Fund to Run Dry Next Year

With nearly 100 million people deriving some form of income from the U.S. government, the odds are high that some of your rental income comes from government sources.  So it’s smart to pay attention to any potential cuts.

Social Security it running out of moneyAnd with the substantial increase in people on disability provided through the Social Security Administration, it’s pretty big news when the trustees are reporting there will be NO cost of living adjustments in 2015…and the Social Security Disability Fund will be BROKE by the end of 2016.

Will Congress allow the fund to go broke?  Probably not.

But if they don’t handle it soon, an AUTOMATIC 19% cut kicks in…the same way the mandatory “sequestration” cut in the general budget kicked in when the government couldn’t pass a budget.

If you have tenants who rely upon Social Security disability payments to help with rent, the next year or so could mean a squeeze for your tenants, and therefore for you too.

From Rents to Haircuts, Americans Start to Feel Price Hikes

For some reason, The Fed has been trying to get inflation up to at least 2 percent.  Looks like it might be working.As the cost of living rises, it's harder for people to make ends meet

And while it’s been nice to see the upward pressure on rents, when it hits our tenants’ pocketbooks in other “essential” areas…like haircuts, healthcare and coffee…it means the tenant gets squeezed.

You can only squeeze so much before something’s gotta give.  And that something might be your ability to raise rents…or even maintain the rents you’ve raised already.

Of course, all of this presumes your tenant’s have a paycheck to divvy up.  So this next headline also caught our attention…

Layoffs Surge As Oil Price Outlook Remains Sober

Falling oil prices were supposed to be a big boon to consumers.

falling oil prices has lead to widespread layoffs in the oil industryBut with reports of inflation kicking in and gasoline prices not falling as far or as fast as oil prices, it doesn’t seem like cheaper oil has meant lower living costs for everyday people…like your tenants.

On the other hand, the oil industry had arguably been the brightest star of employment over the last several years.  But with oil prices depressed, not only has the job growth stopped…it’s going backwards.

And as we emphasize on The Real Estate Guys™ market field trips, certain industries are employment magnifiers because they funnel money into a region from outside.

So not only does the primary industry create jobs, but the revenue it generates purchases supplies and services from secondary or support industries.  These are sub-contractors, parts and materials suppliers, and vendors of all kinds.

But it’s even bigger than that…because the employees of BOTH the primary and secondary industries ALL consume local retail services, such as restaurants, dry-cleaners, automotive sales and service, healthcare and yes…residential real estate.  These tertiary industries also provide local jobs.

So if it employment is MAGNIFIED by the growth of a PRIMARY industry like oil…what happens when layoffs occur at the primary level?

That’s right.  The LAYOFFS ARE MAGNIFIED too.

So as strategic real estate investors, it’s important to consider where your rental income REALLY comes from.  And how these news headlines could trickle down to YOUR bottom line.

But lest you think it’s all gloom and doom, it’s important to remember that there’s always opportunity.

And while not really a headline, a recent newsletter we subscribe to from a new contributor to The Real Estate Guys™ blog brought us this news:

A New Opportunity to Build New Detached Homes for Rent

John Burns Consulting provides intelligence to the real estate development industry.  They point out that 10 percent of homes are purchased by real estate investors…like you.

But until recently, new home builders ignored this segment of buyers in favor of selling to owner occupants.

Well, a funny thing happened on the way to the bank…residential home ownership has fallen to a nearly 40 year low.

So builders had realized they might want to serve the growing segment of the market…landlords.

And there are a LOT of reasons to be excited about a better opportunity to buy brand new homes designed with the landlord in mind.

First, tenants prefer…and will pay more for… a brand new home.  That improves your gross income.

Also, brand new homes have NO deferred maintenance.  This keeps your capital expenditures low at acquisition and for the first several years of ownership.  So you add lower expenses to your higher income.

So far so good.

Add to this that the smart builders will value engineer their products to provide a lower cost without a corresponding loss of rent-ability.  That is, the amenities which a home BUYER requires…at extra expense…are less important to renters.

This means you pay less for the same rental income.  Nice!

So even though there are headlines which point out some of the challenges, we know that the flip side of every problem is an opportunity.

This could explain…

Why Most Americans Are Investing in Real Estate, Not Stocks

According to this article from CheatSheet.com, a recent Bankrate.com survey says Americans’ first choice for investment is…real estate.

Makes sense to us.

So listen in as we discuss these and other topics as we search for Clues in the News™!

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