Investing: How to be a Smart Investor in a Tumultuous Economy – Part II
ByHey....thanks for coming back! We sure do appreciate it. A repeat reader is a compliment....for sure! Please make sure you subscribe!
Greetings from El Paso, TX…..yup…I am still here. BUT….tomorrow, going on an hour and a half drive to take the kids to White Sands National Monument. I am sure you cannot wait to hear how it goes.
Anyway….as I pour over the economic news today….I stumble across a story from London (The Independent) stating that we (the USA) are entering the next Great Depression. Wow…can these people be serious? I am not sure how realistic this article is…BUT “perception is truth”….right? Either way….with all this doom and gloom in the national and world media….is it possible that it is a self fulfilling prophecy? Well….not so long ago, I remember Robert Kiyosaki’s thoughts in his book, Prophecy. I also remember the writings of the the great economic prognosticator, Harry S. Dent in his book, The Next Great Bubble Boom. Cycles…Cycles…Cycles….add the sub prime debacle and (Fill in the blank with your own thoughts)….and tada!
So….without further delay…..let’s bring in my economist pal from www.livingwaterfunding.net, Paul Lufkin, to tell us his thoughts….moving forward. To be very honest, his post today did bother me a little bit. Not because I disagree with him but because I am highly leveraged in many of my commercial deals. The thought of banks calling in loans was the last thing on my mind…… now I am thinking….is it really possible?
Investing: How to be a smart investor in a Tumultuous Economy – Part II: Specific Real Estate Investments that do well in an inflationary environment
When seeking to optimize your investment in Real Estate during an inflationary environment, you first have to ask yourself, what kind of inflationary environment am I or will I be making my investments in? There are basically three kinds of inflationary scenarios to be concerned about: Slow Inflation, Stagflation, and Hyper Inflation.
The first inflationary scenario (Slow Inflation) has to do with the type of inflation we experienced up until that last couple of years or so. Ever since Milton Friedman http://en.wikipedia.org/wiki/Milton_Friedman took the economic world by storm through his adopted and accepted monetarists policies (basically increase the money supply each year ever so slightly so as to constantly fuel an ever growing economy) our country has had a slight rate of inflation every year.
In this “slow” inflation scenario, real estate has been a favorite investment ploy because the borrow, buy/build, collect rents, hold, and exit favorably strategy would favor the slow increase in money and its resulting growing economic engine would outrun the slower increase in land. The result is that real estate would predictably go up each year and a very comfortable industry and a whole litany of players have enjoyed this . . . up until now.
So what are we currently experiencing? That “slow” monetarist inflationary environment is over and will be gone for a long, long time. Unfortunately, we have gone to the monetarist policy well one too many times. We now have way too many dollars in circulation and more are being created at an accelerated rate (billions being “created” daily by the Fed). Our monetarist nation has become somewhat akin to a heroin addict needing more and more just to sustain.
The immediate result of this is that we are in a period of rising prices and falling asset values, otherwise known as stagflation, our second inflationary scenario. The best real estate to own during stagflation is real estate that is free and clear of loans. Why? Well to back up a little bit, the nature of stagflation is that real estate is not traded worldwide as easily as oil, precious metals, and food. These “commodities” go up in price because our falling dollar is causing us to be outbid by those countries for these items with stronger currencies. Real Estate goes down during a stagflationary recession because it doesn’t enjoy the world market commodity status and demand such as oil, precious metals, and food. Also people are finding it harder to make ends meet as their day to day expenses go up and job prospects go down causing them to downsize their living arrangements. Ben Bernanke said today we are probably heading into a recession. I got news for Ben, we are already functionally there!
But still, why is owning land free and clear during stagflation is an advantage? Because banks are caught, they are trying to shore up their balance sheets by calling in loans and not making as many new loans. Banks are desperately trying to raise cash that makes them look better (and not primarily borrowing from the Fed either). Only the most marquis loans are being originated now. You want to own land free and clear now so you won’t be caught by loan calls and because of the next possible inflationary scenario: hyper-inflation.
In hyper inflation, the central bank in order to stave off a depression floods the country and the world with so many dollars that the dollar eventually becomes worthless. Did you know that 70% of the present world’s entire currency is made up of dollars? One of the fundamental reason our dollar is tanking right now is because the world is selling out on the dollar. They can see the handwriting on the wall and they are trading their dollars in for Euros, gold, silver, and other currencies. Indeed the Muslims are working on a gold backed dinar as I write this.
At this point the outlook is a little foggy, and only the most astute dare enter. This economic pressure has to unwind somehow. There is a raging debate among investors in the know as to whether we are headed for a basically deflationary wind down of our economy (dollar stronger, economy plummets) or an inflationary explosion (continuing and accelerating weaker dollar, and economy continues on for a short while). If we enter into the hyper-inflationary scenario, then you need to own land free and clear to back your ability to borrow as much as you can to get as much real estate as you can reasonably manage. All hyper-inflationary scenarios end with a massive deflationary bang. The key would be to get in debt on the way up and then liquidate real estate necessary to eliminate debt before the deflationary pop. Your debt would be fixed to old dollars (smaller) where your real estate you sell will be valued in hyper inflated dollars (greater) enabling you to make out very well.
I’m of the mind we are going to hit a deflationary wall however and avoid the hyper-inflationary scenario altogether, so stay tuned for my next article – Part III Specific Real Estate Investments that do well in a deflationary environment.
Wow….it is like waking up from a great dream by drops of water falling on your face from the hole in your roof. Wholly smokes…I surely hope it does not go this way.
Thanks Paul (I think)…..until next time…….
Related Websites
5 Comments
April 14th, 2008 at 3:19 am
Beginner Investing…
Interesting – because that is the same thing I found out last Thursday….
April 16th, 2008 at 2:58 pm
What happened last Thursday?
April 27th, 2008 at 5:25 pm
Eric…
Nice!…
July 5th, 2008 at 11:23 pm
Joelle…
Every great dream begins with a dreamer. Always remember, you have within you the strength, the patience, and the passion to reach for the stars to change the world….
July 8th, 2008 at 5:07 am
el paso texas real estate…
Now is the time to invest in US property, Don’t abandon it, invest in it….