Avoid getting caught in this trap …

A long, long time ago in a world without video games, we played a boardgame called Mousetrap. Since a picture’s worth a thousand words …

image

To see it in action, click here.

As you can see, Mousetrap is a pretty elaborate set up where an initial action sets off a chain reaction of subsequent actions …

… until finally the unsuspecting mouse is caught in a descending trap.

Credit markets are a lot like Mousetrap …

… and the further back you can see through the chain of events, the more likely you are to see what’s coming … and avoid getting trapped out of position.

The Great Financial Crisis of 2008 taught us how dangerous it is to keep our noses myopically to the real estate investing grindstone … falsely aloof and insulated from the turmoil of credit and currency markets.

When the trap fell, we were caught … illiquid and upside down … with not enough time to react.

So we’ve learned to pay careful attention to the machinations of the markets. And right now, there are a lot of moving parts.

Depending on how long you’ve been watching, some of the action may seem disconnected and even irrelevant to your daily real estate investing.

Be careful.

Gold, oil, trade, tariffs, currency, and bonds are far more intertwined than most folks realize … and they all conspire together to impact credit markets and interest rates.

And last time we looked, credit markets and interest rates are very important to serious real estate investors.

By now, you’re probably aware the Fed dropped interest rates for the first time in 11 years.

Granted, it wasn’t much … only 25 basis points (.25%).

But the stock market didn’t like it. And neither did President Trump, who was unabashed in his displeasure with the Jerome Powell led Fed.

So that’s one piece of the puzzle.

You’ve also probably heard that the U.S. and China have been engaged in an economic pissing contest for quite some time.

Here again, President Trump is displeased with China’s trade policy with the U.S. and he’s been using tariffs to goad them to the negotiating table.

But the last round of talks didn’t end well, so Trump slapped more tariffs on the Chinese exports to the United States.

Once again, the stock market didn’t like it much.

Let’s take a time out here to remind ourselves that when money flees the stock market, it usually ends up in bonds. As demand for bonds goes UP, interest rates go DOWN.

Then, as interest rates do down, investors go back to stocks in pursuit of yield, and everything reverses. It’s an ebb and flow of funds which creates a degree of equilibrium.

Or at least that’s how it usually works …

Sometimes, when investors don’t like either stocks or bonds, they buy other things for safety … including gold and real estate.

This is a far more interesting development and something we discussed at length in a recent commentary.

But that was before China allegedly punched back at Uncle Sam’s latest tariffs by allowing their currency to fall below the politically significant 7:1 ratio to the dollar.

Now before your eyes glaze over, it’s not as complicated as it seems. And as we’re about to point out, it has more of an impact on your real estate investing than you may realize.

When China allows its yuan to weaken relative to the dollar, it takes more yuan to buy a dollar. More significantly, it means dollars will buy more Chinese goods.

In other words, it makes Chinese goods cheaper for Americans … effectively negating the punitive impact of U.S. tariffs. It’s like blocking the punch.

The Trump Administration wasn’t happy about China’s “block” and, for first time since the Clinton Administration, decided to brand the Chinese as “currency manipulators”.

Without getting into the weeds, it means the conflict is escalating … and the two heavyweight economies are turning a gentleman’s disagreement into a street fight.

With the two economies highly intertwined with each other … and very influential around the globe … this altercation has the potential to impact virtually everyone world-wide … including Main Street real estate investors.

Of course, we’ve been talking about this since 2013 when the clues in the news made it clear the dollar is under attack by China (and Russia).

We’re not telling you this to brag. We’re simply saying these are events which many people have seen coming … and have been preparing for.

And it’s not over by a long shot.

So if want a broader context for what you see reported in the daily news, you might want to check out our Real Asset Investing report and our Future of Money and Wealth video series.

And if you’re not sure why all this matters to a lowly Main Street real estate investor, consider this headline …

China could unleash this weapon on the financial markets to wallop the USYahoo Finance, August 6, 2019

“They [China] could start selling Treasuries which is what they use to benchmark the yuan to the dollar and that would be the doomsday scenario.

(By the way, Russia’s already done it, but they’re small fry compared to China.)

“While China has reduced its holdings of Treasuries in recent years,
any amount of pronounced dumping could send U.S. interest rates skyrocketing.

Remember, this is Mouse Trap …

Think about what “skyrocketing” interest rates would mean to an economy bloated with record levels of consumer, corporate, municipal, and federal debt.

As we discussed exactly one year ago, America’s debt could be an Achilles heel China could attack by dropping the interest rate bomb.

Back then, this was considered an extreme view … highly unlikely because dumping that many Treasuries at once could cost China billions.

But China’s been stocking up on gold … perhaps as a hedge against collapsing the dollar?

And when you consider the cost of “war” … even a trillion dollar loss is less than what the U.S. has spent in the Middle East.

So it’s not too far-fetched to think China might consider the loss just the cost of winning the trade war.

Let’s bring it back down to Main Street …

We’re not saying interest rates will skyrocket. But they could. There’s a lot more room to rise than decline.

And if China is playing a different game than Uncle Sam thinks, they may make a move few expect.

Is your portfolio fortified to withstand a sudden spike in interest rates?

“The time to repair the roof is while the sun is shining.” – John F. Kennedy

Think about it. Pay attention. Inspect the roof … and make repairs.

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.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

Tariffs, Taxes and Trade Wars – Insights for Real Estate Investors

There’s a lot of talk in the media about tariffs, taxes, and trade … what does all of that really mean for real estate investors?

As a real estate investor, you need to understand what is going on economically. What’s happening at an international level can trickle down to your local playing field.

To help you navigate the news, we brought in our good friend Peter Schiff. Peter is an author, stock broker, and financial commentator … and he has some strong ideas to share.

Learn to more successfully sail the economic sea and weather financial storms.

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

  • Your financial seafaring host, Robert Helms
  • His economically seasick co-host, Russell Gray
  • Author, stock broker, and financial commentator, Peter Schiff

Listen

 


Subscribe

Broadcasting since 1997 with over 300 episodes on iTunes!

real estate podcast on itunesSubscribe on Androidyoutube_subscribe_button__2014__by_just_browsiing-d7qkda4

 

 


Review

When you give us a positive review on iTunes you help us continue to bring you high caliber guests and attract new listeners. It’s easy and takes just a minute! (Don’t know how? Follow these instructions).

Thanks!


Tariffs and the big picture

If you’re the type of investor who reads the headlines … and you should be … then you’ve probably seen lots of talk about tariffs, taxes, and trade.

But most investors don’t understand what these headlines mean for their money.

What’s the deal with these three big “Ts” … What are they? How do they work? And why do they impact your business?

As a real estate investor, you’ve got to understand the economic and financial sea that you swim in.

You need a basic understanding of all things economic.

Tariffs … in particular … are a great place to start.

Before 1913, the United States didn’t have an income tax. Instead, we funded our federal government through tariffs.

A tariff is a tax on people that want to sell in our markets … and today, President Trump is using tariffs as leverage in negotiations to level the international playing field.

You may agree or disagree with these politics … but whatever your personal opinions, you still need to know what such action really means for you.

Any kind of tax or tariff affects how much things cost in our economy … and it can also affect where jobs are created … which affects where people live.

By instituting tariffs, the federal government hopes to bring more manufacturing jobs back to the United States … potentially resurrecting manufacturing ghost towns.

Real estate investors need to look out at the horizon and see the bigger picture. You want to be riding the wave … not chasing the trend.

That’s why we asked our good friend Peter Schiff to share his knowledge and experience with us.

The US-China trade relationship

Peter says a great place to start increasing your understanding of the current economy is to look at the US relationship with China.

According to Peter, China does TWO big things for the US … they supply us with real goods, and they lend us money.

We get everything from China. It’s all manufactured products that make our lives better.

People go to Walmart and buy cheap stuff … and where is it coming from? China, of course.

China is also the biggest buyer of US bonds … which means they are our lender. They are lending us money that we would otherwise not have.

While the federal government talks about losing $500 billion a year to China, Peter thinks the US is still getting the better end of the deal.

China supplies us with real goods … and in exchange the US gives them a stack of paper that is arguably worth less every day that they hang on to it.

So, if the US places tariffs on China and enters a trade war, who is worse off in the end?

Peter says the Chinese will still have all their stuff … and we’ll just have a stack of paper.

The US government hopes that by instituting tariffs, companies will make their products in the US instead. Peter says that is easier said than done.

Pulling together the infrastructure, raw goods, and man power to manufacture these products in the US could take years … and it will cost businesses more money … not to mention a major shortage of goods in the meantime.

Peter explains that switching the US back over to a more manufacturing-based economy would require tremendous changes … and most likely result in a huge depression until the new economic flow was established.

“When we were a big manufacturer in the past, we had limited government, lower taxes, fewer regulations, a lot of savings, and a skilled workforce. We don’t have that stuff now,” Peter says.

Peter does mention that the US is probably going to have to make some of these changes eventually … but proposed tariffs and trade wars would accelerate the timeline in a painful way.

And the United States doesn’t realize how painful it will be.

If tariffs make it harder for the Chinese to sell stuff to America … they’ll sell it domestically instead.

As the Americans get poorer … the Chinese would be getting richer.

Right now, the Chinese labor, and we get the fruits. Suddenly, they would get both.

And what about our intellectual property?

“They’re going to keep ripping off our intellectual property because we can’t stop it, but now they’re not going to be giving us this big subsidy by loaning us money and supplying us with goods,” Peter says.

Preparing for a drop in the dollar with gold

Another notable headline today … the Chinese and Russian governments are buying gold and putting it away.

Peter says that the Chinese and Russian governments recognize that the dollar’s day as the reserve currency are numbered.

Nobody knows when the dollar’s time will be up … but if it loses its role as the primary reserve asset for central banks, what will take its place?

Right now, what gives a currency value are the foreign reserves … we’ve got this huge pile of US dollars that gives currency value.

Before central banks used other currencies as their reserves, everybody used gold. That’s what backed up your paper.

Originally, the transition from the gold standard to the dollar standard happened because the dollar was as good as gold.

US Federal Reserve notes were obligations of the Federal Reserve to pay. So, foreign central banks held Federal Reserve notes, which were redeemable on demand in gold.

Then, in 1971 the US said it would not give other countries gold for these reserves. The value of the dollar went down … and the value of gold went up.

All the central banks kept holding the dollar as a reserve even though it wasn’t backed by gold anymore.

Peter says that the US has borrowed so much money … and printed so much money … that it is heading for a currency crisis.

“In that environment, central banks are going to have to show that their currency is backed by something,” Peter says.

Some banks are buying more of other currencies … like the euro or the yen … but if people lose confidence in the dollar, the same could go for other currencies.

“I think that central banks are thinking they better have actual money in gold, because in the future, gold could be a much more important component of their reserves,” Peter says.

And if the price of gold continues to rise, the appreciation alone is going to increase the percentage of their reserves that are in gold.

Preparing yourself for the future

So what’s an investor to do?

Peter recommends getting out of US stocks in general … and bonds are way over-priced right now.

“If you’ve been fortunate enough to have invested in US stocks and seen a big gain, you need to cash in. Take that gain before the market takes it away from you,” Peter says.

That doesn’t mean you shouldn’t own stocks … Peter says it just means to think about moving out of dollar-dominated US stocks.

Consider taking a look at foreign stocks … emerging markets and developed markets are looking really good right now.

These stocks are international and derive their revenues outside of the US. If the dollar crashes … these stocks will rise in proportion to that decline.

Peter also believes that investors should have some sort of gold in their portfolio. It’s a good way to get diversified.

There’s no sure way to know what will happen in the future. We can only do our due diligence and make an educated guess.

Remember that not every strategy works for every investor. Find what works best for you. Always talk to an expert that understands your financial needs and situation.


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.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

Keeping it real in the face of tariffs and trade wars …

When you trade in highly liquid, lightning fast, electronically enabled casino markets … you watch the news like a ten-foot tailgater at 100 miles per hour.

And that’s who most of the mainstream financial media cater to.

The more fear, uncertainty, drama, and doubt … the better (for ratings).  So they pour fuel on the fire.

The current drama du jour is President Trump’s up and down trade war with China. 

Paper markets are gyrating as nervous traders try to time the trends and skim “profits” from the volatility.  Politicians use every twist and turn as tool to score political points.

Meanwhile, on Main Street …

… folks get up every day and do their jobs, collect their pay, pay their bills, and largely ignore all the drama … most of which they don’t understand anyway (as if anyone really does).

That’s why investing in Main Street is SO different than investing in Wall Street.

Because while stock prices race up and down with every breeze of news or rumor … paychecks and rents remain relatively stable.  Boring.  But stable.

Of course, this doesn’t mean real estate investors can afford to be ignorant, naïve, or cocky.  Real estate’s stability and resilience isn’t invincible.

The pain of 2008 made it very clear – what happens on Wall Street can bleed over to Main Street … rare as it might be.

Fortunately, real estate investors can usually follow the proceedings from a comfortable distance … with plenty of time to react and avoid mishaps.

Besides, more often than not, many of the “doomsday” fears just fade into the archives of “breaking news” that didn’t actually break anything.

So life goes on.  People go to work and pay rent.  Passive income flows.  Equity happens … at least for those who aren’t paralyzed by all the drama.

Sure, we think it’s vitally important to watch macro-trends.  And we do.

Macro-trends provide clues about long-term migration patterns … warnings of systemic breakdowns (credit, currency) …

… and insights about whether any key drivers in our markets and niches of choice might benefit or suffer from whatever’s developing.

But once you’re in a market you like based on macro-factors …

… the real work of real estate investing is building and working with your local team … and closing on deals that make sense and are structured to withstand a macro storm or two.

Once you master this, you’re not just a successful investor in your own right … you also have the potential to become a hot property yourself.

Because even though the Wall Street roller-coaster is exciting for the young and daring …

… after a few harrowing experiences, many Main Street investors would prefer to reach for the brass ring of prosperity from the much calmer merry-go-round of real estate.

When it comes to their life savings, most folks want stability, ease, and an after-tax growth rate in excess of real world inflation.

Ideally, they’d love to simply park their money in a boring bank account and collect a steady stream of interest income.

The problem is it doesn’t look like banks will be paying anything remotely resembling an inflation-adjusted positive yield any time soon.

That’s a big reason why income-producing real estate is very attractive right now … perhaps more than ever.

Of course, real estate investing is very messy and inconvenient to most people.

Wall Street and banks are easier, but at the price of nauseating volatility, minuscule yields, and high taxes … now or in the future.

So when YOU know how to produce predictable, high-yield (after tax) passive income through an inflation-hedged vehicle like real estate … you’ll find more than a few folks willing to invest in YOUR deals.

But whether you decide to fly solo or pilot a plane full of limited partners, real estate remains appealing as a stable investment in uncertain times … perhaps more so now than ever before.

So grab your popcorn and watch all the geo-political and Wall Street drama from a safe distance.

Just be careful not to let all the commotion keep you parked in the garage.

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.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

STRONG economy, BUT ….

This may be one of the most interesting times in economic history. 

The pace and amount of change is creating significant challenges and opportunities for both investors and entrepreneurs … not to mention policy makers.

It’s fun to watch, hard to keep up with, and impossible to avoid.

The changing future of money and wealth will affect everyone … believe it or not, like it or not, prepared or not.

Aside from growing threats to dollar dominance in global trade … there’s a tug-of-war going on between stimulating and constraining the flow of dollars through the economy.

We recently said the rollback of Dodd-Frank might increase community lending … especially into real estate.  This stimulates the economy.

But the Fed decided to raise interest rates again … ever so slightly … and toss in some hawk talk (more hikes coming this year).

Obviously, higher rates mean fewer borrowers qualify for loans, and those who do can’t borrow as much.  This constrains the economy … and directly affects real estate investors.

Earlier this year, Uncle Sam implemented tax cuts and a ginormous government budget.  Tax cuts leaves more money in the hands of individuals and corporations, hoping they’ll spend it.

That’s stimulating … IF they really deploy the funds.

Of course, even if individuals and corporations won’t spend, the government is going to (shocker, we know).  This generally stimulates the economy.

Meanwhile, rising prices … led by gas prices and healthcare … and let’s not forget tariffs … mean dollars don’t go as far, so people can’t buy as much.  This constrains economic activity.

Dizzy yet?  It’s like watching a tennis match.  And we’re not done …

The dollar is strengthening because of an improving economy, rising rates, and its safe-haven status in times of geo-political uncertainty (like now).

strong dollar makes foreign products cheaper for Americans.

Domestically, this can stimulate activity … if people buy more stuff … if it’s made overseas … and if it’s not subject to tariffs.

On the other hand, a strong dollar makes exports harder to sell, which is a drag on sales made to foreigners.  This potentially constrains cash coming into the USA.

Meanwhile, a tight U.S. labor market and the rising wages we’re told will follow tends to increase people’s ability to borrow and spend.  This stimulates the economy.

Unsurprisingly, both consumer confidence and small business confidence are VERY strong right now.

People and businesses generally feel good about their economic future.

When people feel good, they spend, borrow, and invest.  All are stimulating to the economy.

So on the surface, the U.S. economy seems to be leaning towards growth and stability.  And because a rising tide lifts all boats, real estate investors should be very happy right now too.

Still, there’s an obvious tug-of-war going on between stimulating and constraining the economy.

The challenge (and opportunity) is that SO much is changing SO fast.  Too much stimulation is a problem and so is too much constraint.

And with so much happening at once, it’s probably dangerous for an investor to put TOO much emphasis on any one thing … or prepare for only one outcome.

After all, the economy is a very complex system.

Investors who bought too much into the sunshine narrative leading up to 2008 weren’t prepared for a storm. When it came, many got washed away.

Those who bought too much of the gloom and doom story missed out on one of the best real estate cycles in recent memory.

So it’s important to listen to a variety of viewpoints … then have a plan for variable outcomes.

For years, we’ve talked about the benefits of healthy tension … opposing forces tugging hard at each other.  Just like an old-fashioned rooftop TV antenna …  it’s the tension between opposing positions that creates stability.

So we like all the debate and chatter in the market right now. It’s less confusing than comforting.  It helps us see both the opportunities AND the risks.

Robert Kiyosaki reminds us all the time to stand on the edge … so you can see both sides of the coin.  And there’s no one-size-fits-all answer.

We think it’s important to keep in mind that strong economy and astrong financial system are two very different things.

It’s like getting into a boat and thinking it’s seaworthy simply because it’s fast.  A bad hull with a slow leak will eventually sink even the fastest boat.

Right now, even though corporate profits are up and more jobs are being created, interest rates are rising in the largest sea of global debt in history.

As we learned in 2008, when debt goes bad, financial ships can sink VERY fast.

But dangerous global debt levels is only one of several concerns about what some consider to be a fragile financial system tasked with supporting robusteconomic activity.

Will it hold up?  What if it doesn’t?  How will you know things are starting to break?  What will you do if it does?

Sunshine is awesome and we should all enjoy it.  But it’s always smart to watch the weather reports … and pack an umbrella just in case.

We’ll have much more to say on this important topic in the near future …

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.

Trump’s tariffs and your real estate investing …

Let’s take off our blue, red, and orange team colors … hold hands … and take a real-world look at trade tariffs in action.

Most nose-to-the-grindstone real estate investors may not pay attention to, or understand, trade tariffs … or how they could affect real estate investors.

But, like many things we obsess about after 2008, tariffs might mean more to your real estate investing than you realize.

Consider this headline from National Real Estate Investor Online …

Construction Costs Spike for Multifamily Projects 

It’s short and you should read it, but here are some quick highlights …

  • The cost of construction is rising for apartment developers and contractors … including materials, labor, and leasing.
  • Lumber prices are “out of control” having “increased substantially” … with March prices up 25 percent over January and February.  Yikes.
  • “The U.S. has added trade tariffs to Canadian lumber of over 20 percent over the last year” and “government policy is also pushing up the price of steel”. 
  • “Prices of construction materials are outpacing consumer inflation by a factor of two”. 
  • “Contractors have been forced to offer higher wages to attract more workers.” 
  • “… apartment projects are becoming more expensive to build … ‘You can only pass so much of that on to consumer,’ says … the National Home Builders Association.” 
  • “The number of job openings in the construction industry rose to record-breaking or near-record-breaking levels in each of the last five months of 2017 …” 
  • “The number of people employed in the construction industry rose … more than twice the growth compared to … overall non-farm payroll.”

Okay, so there’s the foundation.  Now let’s unpack it …

First, a boom in apartment building has caused a glut in some markets leading to rent concessions.

If increasing leasing expenses, construction loan interest; materials, and labor costs are all increasing … builders will need to either raise rents or stop building.

Both can be good for nearby owners of existing inventory over the long term.

But in the short term, be attentive to property maintenance and customer service … or you might lose some tenants to those short-term concessions.

But beyond the impact on builders, what about the impact of tariffs on markets, labor, and industries?

If tariffs successfully reset the pricing of commodities like lumber, steel, copper and concrete, there are many potential ramifications.

The motivation behind tariffs is to wean domestic buyers off cheaper foreign goods … and make it more profitable to produce those goods domestically.

The goal is to create domestic jobs in lumber, steel, and mining.

In other words, if Chinese steel or Canadian lumber become more expensive, it could pull up domestic prices to where it’s profitable for businesses to expand domestic production … and hire more workers.

This could mean job growth and subsequent housing demand in those markets which produce these items.

So we’re watching this whole tariff tussle carefully for clues about which geographic markets might end up catching a boom … just like the energy industry markets did after 2008.

But rising commodity prices can creep into consumer goods too … making MANY things more expensive.

And if prices rise faster than wages, people will actually be poorer in terms of purchasing power … which puts downward pressure on prices … including rents.

Squeezed far enough by rising costs of living … people will move to more affordable housing … and even to more affordable areas.

So again, this is something to pay attention to.  In spite of the current economic “good times” … we’re still fans of the more affordable markets and properties.

Lastly, we’ve learned to be cautious about construction driven employment and wage booms.  We think it’s dangerous to invest long-term based on a short-term boom.

Think about it … construction is about building something.  But after it’s built, the work is done.  Then what do those workers do?

Unless there’s perpetual building, workers need to change industries or move to where there’s more building going on.

So it’s good to remember that housing is a reflection of economic growth, not a driver of it. Housing is built for and occupied by people who work at something else.

In other words, you don’t want to be buying apartments to house people who are building apartments … or anything else that will be “done” at some point.

Whereas a business is a “going concern” and generates on-going revenue, sustainable jobs, and a long-term pool of tenants.

So even if you’re a residential investor, pay attention to commercial, industrial, warehouse, and office in terms of construction, absorption, and occupancy.

These are leading indicators of where residential property demand might increase.  Because when businesses are expanding in an area, it’s a pretty safe bet residential will too.

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.