Before I jump into the history lesson for the day, let me set the context by explaining the elementary moral of the laws of economics. As they say, “economics is the painful elaboration of the obvious.”  And while this old joke is true, the laws of economics do not bend or bypass stature. This is why we call them laws. There is no immunity to a government or an individual who accumulates too much debt. You either have to spend less and balance or face insolvency.  The same law of economics applies to the United States Federal Government.

Our first option is to implement austerity measures. Australia, among other countries, should be looked to for inspiration.  Australia went through a downgrade experience. In 1986, both Moody’s and Standard and Poor’s downgraded Australia’s foreign currency rating. Australia was downgraded a second time in 1989, after little action was taken to make the necessary changes. The shockwaves of the second downgrade sent Australia into a deep recession. The treasurer, Paul Keating, cautioned that Australia was in jeopardy of becoming a “banana republic.” Instead of running budget deficits and playing the blame game, he altered the direction and, after two years, delivered the first surplus. “But that did not get our credit rating back,” Keating said. “We did not recover our AAA rating until 2003.” It took a little over 17 years after that first downgrade for to Australia completely recover.

Canada also endured a manifold stage downgrade over a period of several years. In October of 1992, S&P dropped Canada’s foreign debt rating by one notch from AAA to AA+. Interestingly, there was little impact on Canadian markets. Moody’s followed S&P and downgraded the foreign debt rating by one notch. The 10-year note increased 0.45% over the subsequent months and stocks plunged 6%. In April 1995, Moody’s downgraded Canada again. In reaction to the downgrades and severe negative economic news, Canada enacted strict budget reforms. Prime Minister Jean Chrétien slashed federal spending by a monstrous 20%.  He fired 23% of public sector workers, raised taxes, cut defense expenditures by 15%, lacerated certain subsidies by 40% to 60% and eradicated some ministries completely. Canada did not regain the prestigious AAA rating until 2002.
There are two things to be cognizant of in the next few years. Both Australia and Canada reported minor hiccups in economic growth after the 1st downgrade. It was only after the second downgrade did both countries experience a chain reaction to brutal economic consequences. They also reacted with swift and bold changes only after the second downgrade. If history is any guide, not much will change with the 1st downgrade. As it sits now, S&P has the United States on a negative outlook. It only seems reasonable to assume we will be downgraded again. A second downgrade seems especially eminent because Congress has such a wide ideological rift in remedy for the debt problems. The second thing to be aware of is the status of other AAA rated countries. Besides Australia and Canada there are 12 other countries with a AAA credit rating. The other countries are Austria, Denmark, Finland, France, Germany, Hong Kong, the Netherlands, Norway, Singapore, Sweden, Switzerland and England. In the near future, I can see most, if not all, of the European nations challenged with a downgrade. France and England seem especially vulnerable in these volatile times.

Option number two is to inflate our way to “prosperity”. Quantitative easing is a fancy way of saying the Fed is going to print (or as they say “digitize”) money to ease our debt and stimulate the economy. Hoping that this will pave a way for a brighter economic climate is just as wishful as magically finding the other side of the rainbow. It does not work. The by product is always inflation or hyperinflation. Inflation is a law of economics. History is my witness.

Think Weimar Republic, Germany, post World War I. The German Mark ratio to the U.S. dollar was 4 to 1 near the end of the war. It was 8 to 1 in 1919, 250 to 1 in 1921, and 2000 to 1 in 1923. Hyper-inflation hit so hard that newspapers sold for $100 billion marks! It was reported that most people were paid by the hour so individuals could purchase goods during their lunch break before the mark slipped further into the value of nothing.

In 1989, after years of massive budget deficits that were financed with borrowing from abroad, the Argentinean government resorted to the printing press. Hyperinflation soon kicked in. It was reported that grocery stores did not price any inventory. A man with a microphone would broadcast the prices of numerous items, frequently increasing the price every few hours by 30% or more. Workers would get their pay in cash and dash to the store to buy anything. By the end of the week their pay would be worthless.
Zimbabwe has been plagued for years with colossal deficits. In 2008, Zimbabwe’s annual inflation rate reached 516 quintillion per cent, that is 516 followed by 18 zeros. For the common Zimbabwean, the end result is atrocious. They must spend money as soon as they get it before it loses its value. The dysfunctional economy means that goods are in dreadfully short supply and they must spend hours searching for things to buy.

Of course, these are extreme examples however it goes to show, inflation is not a theoretical issue; it is reality. There are many other examples such as Hungary (1946), Japan (2001), and the United States (1933).The history and consequences of hyperinflation is required material in most Latin American schools. The United States is not exempt to these fundamental laws. Expect QE3 to be on the horizon despite many assertions to the contrary.

We are at the crossroads of a very important historical decision. Quantitative easing is the hail marry of economics. It is the last resort. For the sake of the future of this country, I hope we can find a way to reduce federal spending and find a way to balance. It really is the only way of out of this hole.
Brandon Saylor
-Associate

I know it has been a while but I truly want to get back into the swing of things and keep this blog going.  Once recognized as one of the top ten commercial real estate investing blogs in the country….now….just another blog…maybe worse.  I hope to fix that in the next coming months.  So….I would like to kick things off …..again….

I would like to introduce you to my buddy and colleague, Brandon Saylor….he’s a writer and a good one at that…..check out his latest below.  Brandon is sometimes controversial but….I agree with most of what he says…if not all.  With Brandon’s permission….I will be posting Brandon’s writings on this blog.

Brandon Saylor

Anatomy of an Economic Bubble

This recession has taught me a lifetime worth of knowledge. Observing the catastrophic meltdown that occurred in 2008 seared lessons within me. One of these fundamental lessons is the understanding of economic cycles and the red flags of danger. In short, the economic meltdown of 2008 began with the bubble bursting of credit markets affecting everything from real estate to the stock market. It is paramount to understand the anatomy of a bubble and the natural economic cycles that ebb and flow through time. Below are the main stages of a bubble.

There are no time limits between each stage. The “stealth phase” is the 1st phase in which the asset is adhering to its core fundamentals. Subsequently, the “awareness phase” is when the value of the asset begins to rise above its fundamental value. In the third phase, the asset value explodes as the media begins to remark about its escalating value. A swelling number of investors eulogize the merits of the asset as they merge with the cause.

In the final phase, the value of the asset begins to dissipate. Many naive investors still believe it will continue to increase in value. The daunting reality sets in that the asset is overpriced and everyone tries to get out. Unfortunately, many are left behind as the value of the asset plummets to its long term fundamental value.

Conceivably, the most legendary and oldest, well-documented instance of a speculative bubble is the “tulipmania” that hit 17th century Holland like a bomb. The tulip became an instant hit upon its introduction to Western Europe in the mid 16th century. Dutch collectors developed a hierarchy of tulip varieties based upon their species and coloring. Because it was impossible to determine which variation would bloom from a particular bulb, the tulip grew into an asset of speculation. Before the 1630s, the bulbs were popular among the extreme wealthy and were flaunted to exhibit class. By the mid 1630s, the obsession caught on with the middle class and lower socioeconomic classes. The increased demand caused the price of the bulbs toescalate dramatically.

The market reached its pinnacle in late 1636 and early 1637, after the bulbs had been seeded to blossom the following spring. People mortgaged their homes and traded in their savings in order to buy rare and exotic bulbs to resale at higher prices.

In February 1637, as winter turned to spring the bulbs were close to flowering, consumer confidence evaporated and the market suddenly crashed. As the price collapsed, nobody would buy the bulbs, even though they offered them at one quarter of the sums they had paid for them. The tulip bubble burst is alluded to in the recent sequel of Wall Street 2.

Economic bubbles are a reality of any capitalistic monetary system. The point of this email is to recognize the red flags before it is too late. The first red flag is to recognize the larger macroeconomic forces that dictate the market. It is now understood the catalyst for any bubble begins with easy money. The Austrian School of Economics believes “asset bubbles occur when there is an extended period of low interest rates coupled with an expansion of credit. The availability of cheap money encourages speculation in one or more asset classes causing the price to escalate rapidly exceeding their underlying fundamental value.” The availability of cheap money promotes an over abundance of growth. Consequently, a bubble ensues. Bubbles can be an excellent way to make money if you get in at some stage in the “awareness phase” and get out before you reach the inevitable landslide. The key to success is to not be trapped when the eruption begins.

What is the next bubble? In the past decade, we have had the escalation and crash of the dotcoms, the oil bubble and the monstrous credit bubble following the oil crash. Is the stock market the next big bubble? The Dow Jones industrial average is now trading at 86% of its all time high of 14,164.53. Is it gold? Gold is constantly breaking record prices for the value of a troy ounce of gold. Could it be the bond market? Another energy bubble? At this point, it is hard to determine which market/asset is going to be the next bubble. However, armed with the knowledge of warning signs it will be easier to decipher the craze when an asset is going gangbusters.

Ultimately, there are two things about economic bubbles I want to leave with you today. Greed intensifies the problem and it is the definitive drive to astronomical prices. As they say, “Avarice has ruined more souls than extravagance.” And ask yourself does this type of speculative behavior make sense?  Does gold trading at $1,455/oz make sense? Is the stock market value reflective of the health of the economy? Does $107/ barrel of oil make sense? If common sense does not fit the reality of the time then maybe it is a good time to get out before it is too late.

Have a great weekend my friends!

-Brandon Saylor

Good stuff huh?

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Until next time….rob

Today’s post is actually an interview I did with my friend Steve Maxwell from DealAnalysisGuru.com.  In the interview, Steve and I discuss the process of getting to a purchase agreement on a commercial deal.  In other words, explaining the process of getting a commercial real estate deal locked up under  a purchase contract.

In the interview, I answer questions regarding LOIs (Letter Of Intents) and purchase agreements.  The call is broken up into three segments.  The interview was conducted over the phonse so, the call gets dropped a couple times.  But none-the-less….there is some good information.  The links to the calls are provided below.

P.S.  Make sure you check out Steve’s site www.DealAnalysisGuru.com

Interview links on The Process of How to Get a Deal Under Contract:

1. Interview part 1
2. Interview part 2
3. Interview part 3

Until next time……rob

Anyways….

One of the biggest lessons I have learned in my limited time in real estate investing is that the people to learn from are those with real experience.  As with many of you, I started with books and “boot camps”….and in some cases that works well with residential investing.  But with commercial real estate, the stakes are much bigger and the learning curve is much steeper.  But the “gurus” don’t tell you that.

My biggest mistake was I did not research the people I was learning from.  Learning how to invest from a “guru” that had limited experience with commercial real estate was a big mistake.  Even more of a mistake was learning from gurus who were using other people’s experiences and successes as their own to sell their program.  Yes…this happens a lot more than we think.

Luckily, I was so hardheaded and ignorant, that I took the information with confidence and pushed through.  Sometimes you can push so hard that you take down a wall.  Fortunately, at the time, it was the right wall.  But, with that said, there were a lot of mistakes that only guidance from experience professionals could have helped me avoid.

Now…what I am NOT saying is…”it takes years of experience to start investing in commercial real estate.”  That is not what I am saying at all.  But….what it does take is the correct education and guidance.  Honestly….this is the best way and your success can be realized much faster than you think or what others tell you.

So…you are probably expecting a sales pitch here….but on the contrary, here are some tips on how to get started on your own….that is right…. how to get started without a flashy package and a smooth talking guru….

Rob’s thoughts are ideas on getting started in commercial real estate:

1)  Keep your money for now. Thinking about spending 2K, 5K, 10K on a good looking”how to invest in ……” package where the marketing says “20K in value…but for a limited time….only $4,999.00 you can have the plan to wealth…and my personal phone number.”  When you hear that….tighten up…have a cup of joe….and remember my words here…KEEP YOUR MONEY.

2) Buy a good book on commercial real estate. Don’t buy a book from a “guru” where all the information in the book is to push you to a boot camp.  Now…there are good books out there that are trying to sell you something, but they give you a lot of value too.  One of my favorites is Investing in Commercial Real Estate for Dummies by Harris and Conti.  A great book in explaining the basics.  Another of my favorites but will bore you to tears is The Handbook of Commercial Real Estate Investing by John McHan.  The importance of reading up on commercial real estate is to see if you even have a true interest.  If the books above get you excited, you may have commercial real estate in your blood.

3) Take a Real Estate Licensing class. I recommend Kaplan based on my experience.  The licensing class does not mean you have to get a license.  It is a good course to get you familiar with the laws, codes, etc., in your area for not only real estate but property management as well.  I learned a lot in my licensing class.  More than I thought I would.  But I also learned that one of my instructors had no clue about commercial real estate….just residential 

4) Take the Certified Commercial Investment Member (CCIM) courses. This is the boot camp you want to attend.  Yes…it is somewhat expensive and time consuming.  There are four classes and each class lasts five days.  But, if commercial investing is where you want to be, this is the course you want to take.  This will help you analyze projects at depths you had no idea existed.  You will also learn how to do demographic studies, leases, etc.  Plus the networking at these courses are invaluable.  When you finish all the courses, you will have an opportunity to get certifed but you will have to meet some strict and demanding guidelines just to qualify to take the final test.   But…I digress.

5) Find a friend, make a friend. Find someone in your local area that is successful at doing what you want to be doing and follow their lead (also known as modeling).  This is by far the best advice I can give you.  If you have a great interest in commercial real estate, finding someone who is a success at it is the best thing you can do for yourself.  This may take some time and it is uncomfortable at first….but well worth it.  Chances are this person/mentor will be a real estate agent/broker/CCIM investor.

If you do all the above and still want to go to a smooth talking guru…..by all means….but I definitely went full circle starting out with gurus and ending up with the “right way.”  Real experience from real investor is by far the best way to find success in commercial real estate.

Until next time…..rob

So….A big thank you to all of you for reading and following us here at the www.TheRealWealthBlog.com

Keep on a look out for our new “Community” site where all our resources are free.  No joke!

Until next time…..rob