In case you missed it, President Trump just announced his proposed budget.
Two items caught our attention.
First, there are big cuts to social programs. With 43 million people on food stamps and many of those being renters, there’s an obvious ramification for landlords.
As we said back in 2015, “…if the government subsidy goes away or is reduced…or if interest rates on your tenants’ consumer credit goes up…then it becomes even harder for them to pay you rent.”
Hopefully, it’s both an obvious conclusion and one you’ve seen coming. It hasn’t happened yet, but it’s inevitable because of the math behind the problems.
So be cautious about a portfolio overly dependent on government subsidies.
But something else popped up which is perhaps less obvious … and more exciting.
President Trump proposes selling off half of the U.S. strategic oil reserve to raise cash to pay down the national debt.
We’re not here to say whether that’s a good or bad idea. We’re not that smart.
Besides, our orange Trump phone isn’t ringing, so the White House hasn’t asked our opinion anyway.
But when things are happening which have direct economic ramifications, we’re interested in how they might affect real estate investors.
It’s a bit of a rabbit trail. But because oil is an impactful component of economic activity, we think it’s worth the effort.
To start, the immediate benefit of selling the reserves is reducing interest expense. This is especially beneficial when interest rates are rising … or threaten to.
Of course, money saved on interest can be redirected into paying down more debt … OR, it could be used for investing into income producing activities and infrastructure.
Now we’re not inside Donald Trump’s head, but we are real estate guys.
So we wouldn’t be surprised to see the president direct more money into income producing activities and infrastructure. After all, that’s how real estate guys think … we don’t spend, we invest.
Of course, this begs the question … what kind of activities and infrastructure are most likely to get attention, and what kind of jobs will they produce … and where?
Real estate investors want to get to popular places and product types BEFORE they become popular.
So putting on our orange comb-over thinking cap, we think the-real-estate-guy-in-chief wants to create domestic manufacturing jobs. It’s just a wild guess … based on what he overtly says he wants to do.
But the challenge for a domestic manufacturing agenda … as our good friend Peter Schiff points out … is the factories and supply chains needed to support it have long gone to China to take advantage of cheap labor and lax environmental laws.
So while a viable long-range strategy might be to create a more factory-friendly environment in the United States … the U.S. needs good, solid middle-class jobs NOW … or as close to now as possible.
So what kind of industry would be ideal for creating U.S. based jobs fast?
It would need to be something that could ONLY be done in the U.S., so there’s no temptation to take the jobs off-shore.
And ideally, it would be for a product with both domestic and global demand.
After all, a nation can’t get rich selling to itself. It needs to export.
Of course, demand would need to be big enough to make a real contribution to economic activity.
And it would also need to be a product with supply and distribution chains which either already exist or could be ramped up quickly.
Hmmm … we think it all points to energy.
After all, the U.S. has huge oil and natural gas deposits. So the jobs to harvest, process and distribute them would all have to be created right in the United States.
And even though global demand for energy ebbs and flows, the long-term need for energy grows steadily along with global population and economic activity.
Remember, it was the energy sector which dominated the post-2008 U.S. job growth. Many real estate investors rode that wave … especially in Texas.
Price wars with Saudi Arabia curtailed that growth, but with the Saudi’s still hurting over the last oil price war, maybe they won’t want to get into another.
And if the U.S. oil strategic reserve “savings account” is low, Uncle Sam’s in a better position to step in and provide some extra demand if prices need a boost.
So if a Trump Administration is pushing a pro-energy agenda, it checks a lot of boxes, even though it may miff staunch environmentalists.
Again, we’re not advocating one way or the other.
We’re just observing and speculating about what might be happening, how it might play out, and how real estate investors might find opportunity.
So we went digging in our news feed for any interesting developments in the world of energy.
Here’s something we found a little off the beaten path …
LNG is Liquified Natural Gas. And it’s headed to Europe … one of Russia’s biggest customers. Interesting.
But more interesting is this quote from the OilPrice.com article, referring to a report by the U.S. Energy Information Administration (EIA) …
“According to the EIA, the U.S. is set to become a net exporter of natural gas on an average annual basis by 2018, due to declining pipeline imports, growing pipeline exports, and increasing LNG exports.
By 2021, four LNG export facilities that are currently under construction are set to be completed.”
Okay. So this is probably a bazillion dollar business emanating from somewhere … where lots of people will need to do lots of work to make it all happen. Jobs!
This took us on a hunt to find additional information about WHERE this LNG was coming from … because maybe those real estate markets are about to experience growth.
We found the EIA’s Annual Energy Outlook for 2017. Actually, it was easy to find … because the OilPrice.com article linked to it. Yeah, we’re sleuths.
The EIA report is 64 pages long with charts, graphs and maps. On page 46, one map shows which U.S. regions they project to “lead growth in tight oil production.”
On page 60, there’s similar information about natural gas.
Now, we’re not saying these are treasure maps telling you where to invest in real estate.
But it is a starting point for an investigation into where future job growth might occur … through natural economic forces, geo-politics, and a new U.S. administration eager to stimulate domestic production job creation.
But don’t just stop there. Consider also the supply chain.
It takes big, heavy, expensive equipment and infrastructure to harvest, process, store and ship energy.
These suppliers and sub-contractors might not necessarily be tightly geographically linked to the natural resources. So look for them not by geography, but by working your way through the supply and distribution chains.
Because while energy production might create a surge of “primary” industry jobs, primary industry growth often gives rise to “secondary” (supply and distribution chain) jobs … sometimes in other areas.
Could this be the beginning of a resurgence of job growth in rust belt states?
We don’t know. But that’s another box President Trump would like to check, so it’s a development worth watching.
Until next time … good investing!
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