In a financialized economy, it’s easy to obsess over the dollar, Bitcoin, gold, forex, the Fed, interest rates, stock indexes, etc.
Financialization is when an economy emphasizes making money from money … as opposed to making money from making things.
Think of it as the difference between Wall Street and Main Street.
But there’s currently a subtle shift taking place we think is noteworthy. We call it …
It’s said Donald Trump got elected by working-class people … those who aren’t at the financialization party.
These are folks whose manufacturing jobs trickled overseas for the last three decades.
When you’re underemployed with no savings, you can’t play financialization. Your balance sheet is missing all those paper assets being pumped full of air from cheap money.
Wall Street’s trickle-down has been Main Street’s “bleed out.”
Does 3-D printing trump paper printing?
When we first asked then-candidate Trump about his plan for the American real estate dream, he simply answered, “Jobs.”
Since then, Trump has been emphasizing manufacturing jobs. We think the distinction is important.
Manufacturing jobs … or the lack thereof … is something multi-time Summit at Sea™ faculty member Peter Schiff has railed about for years.
Peter insists no economy can print its way to prosperity.
Peter contends a prosperous economy MUST produce things … and not just blow up paper asset bubbles.
Simply making money from money isn’t enough to keep Main Street off the welfare rolls. There’s no role for them in play in a financialized economy.
Main Street needs good-paying jobs … the kind that come from production and not just consumption.
For residential real estate investors, it’s more than just a philosophical discussion.
It’s central to strategically selecting the right geographic markets, demographics, and product-types.
After all, real estate is about the local economy … and the flow of cash from productivity into rents. In short, the best tenants have jobs.
Not all jobs are created equal.
While any rent is good, to really understand your real estate investing, it’s a good idea to look further up the food chain … to see what’s trickling down and from where.
People who pour coffee, clean clothes, mow lawns, cut hair … activities we call tertiary employment … usually do so for folks with primary or secondary employment.
So if Acme Manufacturing sub-contracts to Dan’s Welding … and Reuben the welder is buying coffee from Bonnie the barista (your tenant) …
… where does YOUR rent REALLY come from?
And what’s the core economic strength of the local economy … the coffee shop, the welding shop, or the manufacturing company?
What happens to the local economy if Acme moves away? Who does Reuben weld for so he can buy coffee from Bonnie?
Sure, Acme might not be the only primary employer in the market …
… but if the reasons Acme moved also motivate others to leave … the market loses eventually its anchors and starts to bleed out.
Financialization vs Industrialization
“Trickle down” can be a polarizing term. But it doesn’t mean the same thing to everyone.
President Trump has the White House, so whether we like or agree with him or not, he’s pulling the levers and we aren’t.
After a year of observing, it seems like Trump’s got his own version of trickle-down and is pushing it forward.
Trickle-down Reagan-style was running up the debt and military spending, which pumped lots of cash into the economy and created a boom.
Yes, tax reform was involved … which blew up real estate and the savings and loan business. But that’s a discussion for a different day.
Reaganomics “worked” because starting out, the US had a good balance sheet, lots of manufacturing capacity, and high interest rates.
Just like a household with very little debt, lots of income, and adjustable rate loans in a falling rate environment … you can rack up a LOT of debt for a long time before it starts hurting.
Trickle-down Greenspan / Bernanke / Yellen style was financialization. De-regulation opened the door, but cheap money from the Fed fueled it … and continues to.
Advocates of trickle-down financialization say pumping up paper assets will make uber-rich people uber-richer … on paper.
Then, the theory goes … the uber-rich will lend to Main Street, who will then spend on Main Street … and eventually the cheap money ends up with Bonnie the barista.
Sounds a little like leftovers to us, but you can decide for yourself if it’s working. We think Trump’s shocking win says Main Street didn’t think so.
Trickle-down industrialization appears to be Trump’s game plan.
The idea is to create an environment attractive to Acme Manufacturing to start, return, and expand … on Main Street.
It’s a mix of Reagan-style tax cuts and military spending, more Greenspan / Bernanke / Yellen-style cheap money pumping the stock market …
… but it’s all strategically aimed at boosting domestic manufacturing.
If Trump can get his agenda implemented, only time and math will tell if it works.
Oh, and about that math …
How do YOU measure success?
Now that we’ve got you jazzed about… okay, moderately interested in … paying attention to the direction of domestic manufacturing …
… we’re going to complicate things ever so slightly. But for good reason!
We live in a world of perverted units of measure. It’s something Steve Forbes warned us about the very first time we talked to him.
Most reports we read measure productivity in dollars. But a fluctuating dollar can give false readings.
Think about it …
If your business produces 1,000 widgets per month at $100 each, you have a $100,000 per month business. Good job.
If inflation (a falling dollar) causes your widgets to go “up” to $120, you’re a $120,000 per month business … BUT, your production is the SAME.
Have you grown? Not in terms of real production.
THIS is why it matters to real estate investors …
If at the $120 price, 10% of your customers can no longer afford your widgets, your production falls by 10% to only 900 widgets per month.
At $120 each, 900 widgets sold is $108,000 per month.
Measuring in dollars, your business is UP by 8% … from $100k/mo to $108k/mo. Your look good on paper (there’s a lot of that going around) …
But by production, you’re DOWN by 10% … so you need 10% less labor, supplies, space, sub-contractors, etc.
It’s like reverse-trickle down, but not really. Money isn’t flowing up. It’s really more like bleeding out. This is why some folks don’t like inflation.
Here’s the point … and thanks for sticking with us …
The U.S. economy looks good … measured in dollars. But some say there’s still a LOT of work to get real productivity up.
Still, the November jobs report had a ray of sunshine with a spike in manufacturing jobs … and this article says U.S. manufacturing executives see growth in 2018. Good.
But if those indicate this is the front-end of trickle-down industrialization that brings prosperity to Main Street, it could be a fun ride for real estate investors.
We’ll keep watching … and so should you.
Until next time … good investing!
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