I'm sorry I've been away the past few weeks. My full time job has me working early in the morning through late at night. My free time has been spent putting in the hours trying to keep pace with everything happening in the global financial markets. The additional hours needed to formulate my thoughts into words here on the site have not been available. More free time will be coming, and there is a lot to discuss in the coming weeks.
Fortunately, not that much has changed in terms of my outlook on the world. While my view has changed little, I can feel the collective psychology of almost everyone around me (business associates, the media, friends, etc.) changing rapidly. This is the power of a bull market in financial assets, and the current mania is fascinating to watch unfold.
Almost everyone has forgotten what occurred back in 2008. Much more importantly, if they do remember, they seem to have forgotten what caused the great crash (debt growth and loose monetary policy). Some people still remember snapshots of that period (I sometimes hear people reference the movie "The Big Short"), but people in general are far more confident their financial assets (stocks, bonds and real estate) are much safer today than they were in March 2009.
I feel another event, similar in magnitude to 2008, is approaching. I do not have an algorithm or mathematical series of models to tell me this is the case. I'm just using common sense. We know with a quick study of financial history that excessive debt and loose monetary policy have been the underlying cause of every great financial crisis over the last 100 years. Over the past 8 years we have experienced the largest combination of excessive debt growth and loose monetary policy in history. If it did not lead to a massive crash it would be the first time in history. It would be similar to a meth addict taking an enormous steady dosage over an eight year period and experiencing no long term negative effects on their body. The only question we have to ask is "when will the negative effects of the drugs finally reveal themselves?"
Based on the belief a large scale "risk off" event is approaching, my life has been dedicated toward preparing for its arrival. I'm not talking about buying guns, water and growing food in the basement, I'm talking about learning the skills and making the contacts needed to become a large scale buyer of assets when fear returns to markets.
My field of study has centered around the commercial real estate market for two main reasons:
1. Leverage - Unlike stocks, bonds and commodities, real estate allows buyers to finance 60% to 100% of the purchase with borrowed money. The deeper your understanding of how commercial deals are financed, acquired and managed, the more leverage you can acquire through partnerships and lending relations.
2. Tax Advantages - The government needs to provide housing, particularly lower income and middle class housing, in order to keep up with a growing population. The tax laws in place exist to incentivize investors to use their capital to make this housing available. This will make the apartment sector an attractive asset class after prices plunge back to earth.
The global bond market bubble is the engine fueling asset bubbles almost everywhere. This has become known as "the reach for yield." As yield has disappeared from global bond markets (bond rates continue to move down or below zero as bond prices rise), investors have sought out other asset classes to find a return. Unlike technology, home builders, or financial stocks in previous stock manias, dividend payers (stocks with yield) have been the darling of the most recent ascent. Assets that have no yield (commodities, cars, fine art, land, etc.) become more attractive when alternative assets yield nothing as well.
The same applies to the commercial real estate markets where the rush for yield has felt like a tidal wave. The ability to borrow money increases a buyers "cash on cash return." This return is measured by the annual cash flow you receive relative to the amount of actual cash it took you to purchase the property.
There are two scenarios that could occur which would prick the current global financial asset bubble:
1. A risk off event where deflation takes control. This would likely lead to a final surge lower in bond yields while stocks, real estate and commodities sell off simultaneously.
2. The 35 year bond bull market ends. Yields finally bottom and begin a multi-year rise. Asset prices that have been rising with the tide of lower yields will now be fighting the current as rates rise.
I should note that even if we move through phase one first, bonds will ultimately bottom following that period and we will begin phase two. At some point, yields will reach their mania bottom and it will signal the beginning of a very painful period for all related asset classes.
The goal during this coming period will involve two major steps:
1. Asset preservation. Cash will be king, with the potential for precious metals outperforming everything. The precious metals out-performance is certainly not a certainty, so cash should always be the primary (largest) holding.
2. Asset accumulation. Just as every man woman and child on the planet wants to own as much real estate, bonds and stocks as they possibly can today, the absolute opposite will occur at the bottom. People will be saying how important cash is to a portfolio and how "saving money" and not "speculating" is the key to financial success. People won't believe they were unable to see the "obvious" disaster coming and promise themselves they will only invest a very limited amount of money in the "dangerous" financial markets moving forward.
This will be a once in a lifetime opportunity to purchase assets. Stocks, bonds and real estate will be available at bargain basement pricing.
Some of the people I work with on a day to day basis can see the potential trouble in the commercial real estate sector, but you have to close your eyes and immerse yourself into what that future world will look like in order to understand the full ramifications.
Investors have oceans of capital lining up at their doors to purchase property today. Some of these investors believe if things slow down then their $5 million credit line will fall to $4 million, but that's not the way things work. The money to invest or refinance in new commercial real estate projects will disappear overnight and move from $5 million to zero. Things do not occur in a calm, linear, fashion on the downside. They occur in a panicked hysteria. The bullish irrationality that exists today is just a small taste of the bearish irrationality that will exist during the coming decline in prices.
The human mind works to make things simple to understand so we can move back to more important things as soon as possible (like food, survival or pleasure). For this reason, investors always tend to extrapolate the future forward based on how the markets have performed in recent years. At tops, it feels as if markets will move up forever, and at bottoms it feels like they will never stop falling.
I've spent the last 8 years working in three main fields of commercial real estate (management, finance and acquisition). I've been fortunate to gain a strong understanding, from the inside, of how these three crucial components work toward building a successful portfolio. I have always taken positions that were geared toward preparing myself for the next major reset in financial markets, and I am fortunate to do consulting work today with some of the brightest minds in this field.
Try to close your eyes and imagine how everything will be occurring in your world on the backdrop of financial panic. If you can put yourself in that world mentally today, when it eventually arrives it will provide you with the confidence to take action. Hopefully, it will also keep you from getting swept away in the current mania as we approach the crest of the tidal wave.
Something truly terrible is coming, and we should all be excited for its arrival. I look forward to the day when this site will be focused on accumulation, instead of preservation. Stay tuned.....
Fore more see: What Is Helicopter Money?