The Effect of World Events on Your U.S. Real Estate – Lior Gantz | PREI 082
I just got back from IMN’s 5th Annual Single Family Rental Investment Forum in Miami, Florida. I was on a panel there speaking. What I enjoy about these events is that I get to network with people from all around the country and even out of the country and talk about the future of real estate investing, what is happening in the markets, the tightening of inventory, the growing rental pool, the effects of policy, monetary and fiscal, as well as geopolitical events. There’s just a mixed bag of topics. It’s all fascinating. This is a good segue into today’s show. Sometimes I talk to you about tactical items, whether it be asset protection or evaluating a neighborhood or finding a good deal. But you need to counter that with understanding some strategic related topics. It’s good to understand the tactical side of things, but it’s also good to understand the bigger picture, the strategic items, things that can or will affect your real estate investing, the strategy you have, where you invest, when you invest, that kind of stuff.
Today’s show is more about macroeconomic stuff. We’re bouncing all over the place talking about different subjects but they all tie in. It’s good to have that big picture, 50,000 foot level view, of your real estate investing. It doesn’t matter whether you don’t have property yet or you only have one property or maybe you have a large portfolio of a hundred units. It doesn’t matter. You just need to understand this even if it’s at a high level.
Thomas Friedman, he is a US journalist but he’s really an author and three-time Pulitzer Prize winner. He’s a very smart guy. He’s written many books on the subject of world events, economics, geopolitics, and how that all plays into the US economy. I like one of his quotes. He said, “In Globalization 1.0, which began in 1492, the world went from the size large to size medium. In Globalization 2.0, the era that introduced us to multinational companies, it went from size medium to size small. Then somewhere around the year 2000 came Globalization 3.0. At that point, the world went from being small to tiny.” You can see that the smaller the world gets, the more we are affected and impacted by events that happen outside of our borders.
All real estate may be local but that doesn’t necessarily shield one market from major events occurring thousands of miles away. In today’s global economy, important geopolitical events have consequences that can easily ripple across the planet. It can and will affect you. Election results, economic policies and international relations all have spillover effects on global real estate, whether directly or indirectly. These create incentives for buyers to be drawn toward or even repelled from various geographic markets. You’ve got to watch these bigger picture items because it can give you clues as to when or why to move into a market or when or why to move out of particular markets.
Some factors are purely financial in nature, like changes in currency values or tax treatments. For example, the provincial government of British Columbia in Canada imposed a 15% tax on foreign investment last August. That’s a law that would have added $300,000 to the price of a $2 million home in the Vancouver market. We all know that Vancouver is very, very expensive. It’s much like the San Francisco market here in the US. There are many parallels to that. There’s a lot of investment capital coming in from other countries, foreign capital. As a result of this tax, house prices in the area fell 5.3% in November and that’s the largest monthly decline since 2012. From January 2016 to January 2017, house prices in Vancouver fell a whopping 18.9%, that’s almost 19% in one year. It reduced the foreign investment rate from 13% prior to August of last year to a low of about 4% right now. The foreign investment capital has dried up considerably and that lack of demand, that lack of capital has let prices slide in the Vancouver market. They’re really seeing a correction right now.
Other policies that may make destinations less or more appealing by easing or restricting immigration, that’s one thing. Cross-border trade is another thing. In worst case scenarios, geopolitical events can escalate into full-fledged military conflicts and that could displace entire communities and endanger lives. By nearly any standard, 2016 was extraordinary. There were a lot of events going on politically, starting with Great Britain’s Brexit vote and then that rippled through major elections across Europe and the United States. Populism has been turning the status quo upside down. While it may be tempting to view populism as a rigid and inflexible movement extending across borders, this would be an oversimplification of the various forces that play in each election. It would encourage faulty assumptions about how developments may unfold in 2017 and beyond. Donald Trump may have earned his fortune in real estate, but his broader policy positions and their implications on US real estate will only begin to take focus after about his first year as President. It just takes that long for changes to be implemented and start taking effect.
Over the first half of this year, 2017, there’s little doubt the US economy will enjoy stimulus largely from a combination of tax cuts and government spending on infrastructure and national defense. This in turn should boost consumer confidence and drive the economy higher along with inflation and interest rates. As long as our GDP growth is sustained and comes from more jobs and higher productivity, inflation will be and should be manageable. One hallmark of US real estate, this is something to consider, regardless of who holds the Presidency, is the fact that personal property rights here in the US are held sacred. Those property rights are extended equally to foreign nationals. It doesn’t matter if you’re a company or a person or whether you’re a US resident or a foreign national, these property rights are very important because it’s the rule of law that makes the US so appealing to foreign nationals.
This appealing fact, especially to Chinese investors, is a huge draw for foreign capital. I just spoke with an investor in Sydney, Australia right before recording this here today. He’s in the process right now of getting pre-approved for financing so he can start buying a portfolio of properties here in the United States. He’s working with one of our investment counselors right now and putting those pieces in place. People get it and they will continue to invest in the US but in different places and to different degree.
Often, geopolitical events in other parts of the world can tip the scales in such a way that a safe haven in US real estate will still attract inbound investment in spite of other disincentives such as the exchange rate of their currency into ours, which can be dramatic. You may want to consider yourself as a global real estate practitioner. It’s important to stay dialed into these and other stories. Doing so puts you in a much better position to spot opportunities and understand where future business may originate from and why. Today, I have an interesting guest who happened to be in Israel when I interviewed him.
If you missed our last episode, be sure to listen to One Financial Advisor’s View on Real Estate Investing.
Enjoy the show!
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The Effect of World Events on Your US Real Estate – Lior Gantz
It’s my pleasure to introduce Lior Gantz of Wealth Research Group. Lior has been called a thrill-seeking entrepreneur by his team. As such, he has built and runs numerous successful businesses. He has travelled to over 30 countries in the past decade and pursued the thrills and opportunities, gaining valuable knowledge and experience. He is also the President of Wealth Research Group. Lior, welcome to the show.
Thanks for having me.
Lior, you are in Israel right now, right?
It’s a beautiful country and I’d love to make it out there one of these days. You spend half of your time in the US and then half of your time there. Why don’t you tell us about yourself and what you do with Wealth Research Group and why you spend half of your time in the US and half of your time in Israel?
I was born here in Israel so my entire family is here. We just had a baby so I can’t just ditch the grandmas. I’m going to be here for a while. Most of my partners and my friends, my clients, everything like that is in the US. It’s not a fair assessment to say we’re six months here and six months there. We travel around the summer so we don’t hit any winters. We follow the summers like four months, four months, four months, or something like that. We want to be in a perpetual summer condition. My wife is originally from the Ukraine, so she hates the cold right now.
With the Wealth Research Group, we started in early 2016. The reason we launched Wealth Research Group was before that, I was managing funds for high-end clients. In 2008, the crisis changed so many people’s perspectives about how to invest and how to live, how to save, what’s right, what’s wrong, what’s safe. Everything was changed fundamentally, especially in the US. In every Western country, it hit a very hot button in people’s psyche. I had a passion to create a business where I can help a larger group of people and have no threshold for entrance. A free newsletter was the ultimate way to do it and strengthen the financial fortress of people just using more education. Our subscribers are from anywhere from young individuals to retirees. It’s been very rewarding. We were ranked number one in the world in 2016 for what we do, which is focus on the natural resource sector in the stock market. It’s anything that has to do with commodities.
Right now, Marco, this might surprise you, but we’re also focusing on the marijuana legalization, which obviously you’re from California so you know how insane that process can be and how profitable it can be. There’s a lot that we do on that front. Mostly, we’re a very big picture-type newsletter where our signature reports and our data are about the big picture economy. We’re more talking about the risks of the entire monetary system as it’s built in a very experimental way because of the Nixon default in 1971 where it turned basically the entire financial system to be floating currencies against each other. There is no tangible asset backing anything in the world today. All countries issue is currency, which has no bearing on reality. This system creates a lot of problems and challenges for savers and investors. We immerse ourselves in research about this subject. That is the main focus of Wealth Research Group; how to handle today’s environment. On the website, that is the type of special reports that are featured. With the newsletter, obviously, you get our highest conviction ideas.
We’re really big on education. We always talk about continuing to educate yourself and learning what you can. That’s just not real estate; it could be economics, it could be history, it could be world events, geopolitics. Everything you just listed could be a long episode in and of itself. You made a good point about 1971 when Nixon took us off the gold standard. He closed the gold window on August 15th. At that point, money was no longer money. Money became a currency and every world currency floated against each other. We went from this asset-backed system to a faith-based system. Really, if you look at it, it’s like a Ponzi scheme because we have to continually add more debt, more currency, and more liquidity into the system each and every year to pay for the interest of the previous year. By definition, we are effectively living in a worldwide Ponzi scheme.
That has significant effects on real estate investors because it naturally puts us into an inflationary environment. You know as well as I do that as an investor, you need to understand inflation and the effects of it and how you could benefit by investing in, I know you love precious metals so it could be precious metals, it could be real estate. At least those are my two favorite asset classes when it comes to inflation. I would just encourage our listeners to go to Wealth Research Group and learn more about you and the type of information that you put out and look at other resources as well.
You mentioned real estate and precious metals as some of your best inflation hedges. I would say there’s one that outperforms both of them if we’re talking about mild inflation, = normal inflation, 2%, 3%, 4%. These are certain types of stocks that are far superior to anything else. The ultimate type of inflation hedge, if we’re talking about a normal environment where it’s like 2% to 4%, I’m saying normal because it’s normal for this type of environment. It’s not normal universally. In the world we live in, 2% to 4% is where central bank’s target inflation. For that type of environment, a certain kind of stock, I call it a wealth stock. That’s also on the website. If you want to check out and download one of the reports on the wealth stock, it’s right there on the top menu.
Anyway, the idea behind it, you’ll find it very simple to understand, is there are some types of companies that are able to grow their product line or their service and price it, inflation -adjust it, and it won’t hurt their consumer. The consumer will not consume less of the product and they’ve raised their price. Not every industry can do that. Not every industry can match inflation all the time, raise their prices and still have the same amount of consumers. But there are some industries, there are some companies that can do that. Those are the best proven inflation hedges over time. They compound at far superior rates to anything else that you can find in the financial industry for a high degree of safety.
That’s just a repricing of their product or service, not change in the value of their stock on the stock market. Is that right?
It would follow suit. Remember, inflation rises, some companies cannot pass on that inflation to the consumer. They lose market share. They lose margins. Their margins shrink. They lose their market share, their consumer base. These companies, it’s like a magic company. It’s so efficient for the capital markets. They can raise their price and they would lose zero clients. The clients are very hooked on the product or they just choose that brand over anything else. It doesn’t matter if it costs $3 or $4 or $5 more or even $1 more, whatever the industry is. There are a few companies like that. These are the types of companies that Warren Buffett has also specialized in over the last 60 years. I love these companies so much that I’ve actually written extensive reports on them on the website. You can go ahead and check that for free on our Wealth Stocks tab on the top menu on the left side. For people who are looking for a safe way to grow their passive income, these companies, they’ve been able to grow their profits through the great recession. 2007, 2008, 2009, they chugged along and grew their profits. It’s an insane type of company that can do that.
Real estate and precious metals are not the only way to safeguard against inflation. They just happen to be my two favorite and that’s where I focus on and educate myself on and stick to. I will download your report and research it for myself just to expand my knowledge and I might go in that direction. There’s a bunch of stuff happening right now and over the coming weeks and months, what you might call major world events. I just want to get your opinion on how that could affect real estate and the real estate markets, particularly here in the US. We live in a global economy now and you can’t completely ignore world events or geopolitics or anything like that as much as some people find that they hate the topic or it’s just completely boring to them or completely foreign to them.
At the end of the day, it can and eventually will affect you. Today, as we record this, just within the last 30 or 60 minutes, The House has voted against repealing Obamacare. That Obamacare replacement bill has officially passed The House. Now, it’s moving on to the next step. There’s a lot of momentum and traction there. My question to you is this, how can this Obamacare repeal and replacement affect the US economy, and more particularly, the real estate market? Because I know this is getting a lot of momentum right now.
What mostly, throughout history, drives real estate prices are the job market and the credit markets. Obviously, behind those two are demographics. Those are the big three items that drives real estate prices over time. First of all, you talked about the global geopolitics. Global geopolitics right now has a large effect on the US because there are many Asian buyers that come in to the US and buy for cash. They buy the real estate for cash. Is that correct?
It’s very true, especially in the gateway cities like San Francisco, New York, Miami. In fact, I was just having this conversation over the last two days at the IMN event in Miami, where I just came back from last night. Yes, there’s a lot of capital coming in from China and other countries too. These are cash purchases.
These are geopolitics events that are happening halfway around the world that are affecting how the US looks to foreign investors as a safe haven. I know inside the US, there are all types of tensions and the Populist movement that elected Trump over establishment. Hillary has gained a lot of momentum and is gaining a lot of momentum in Europe as well. In France, right now, Marine Le Pen is going to be the second round, very populistic vote. There’s so much about real estate being a safe haven and not just an investment. It’s bricks and mortar. It’s not paper. You can look at it. There’s an element to real estate which makes it so tangible that a lot of people get burned in the stock market or just very fearful, they flock to real estate.
That also is a fourth element to the price which wasn’t there before. Before the Fiat monetary system, before 1971, people would not buy real estate as a safe haven because a safe haven from what? There was nothing to save yourself from. Now, with countries going into inflations. If Marine Le Pen wins, the European Union will probably be in a dissolvement process because she’s against the Euro. She wants to close borders. She’s very similar to what Trump is doing with regards to US security, where he wants to create a country that is not globalistic. We have a lot of things moving in the real estate market. What’s very important right now is the difference between states in the US with regards to income tax. That’s driving a lot of demographics to move.
You have a quarter of the country retiring, 80 million people, and they’re looking to move to hot states instead of the cold weather states. They have all sorts of other demands where there’s good nurseries and good hospitals, etc. That’s what drives a quarter of the people. Now, you’ve got the millennials which have just surpassed, in numbers, the Baby Boomers, a few millions more. It’s nothing exciting but it is the first generation that’s bigger than the Baby Boomers. They have different ideas on what being an American is and what a career is. They’re moving to other states. There’s so much going on in the US. What I think is very exciting also is the oil industry and the renaissance of the natural gas industry in the US. If this continues along, in a few years, the US will be a net exporter of oil and natural gas. Would you ever figure that this day would come?
The US used to export inflation to the Middle East and get back petroleum. Now, the US, they’re building liquefied natural gas ports where you take the natural gas, you liquefy it, it becomes less in volume and then you can export it to other countries because the US has a hundred years of natural gas reserves. Many high paying jobs are where nat gas and oil fields are. There are many things that are affecting right now the real estate market throughout the US. To answer your question, the average investor who’s thinking about where to invest, he doesn’t have to think about all of this in order to make a good purchase. What I think it boils down to is tapping into a well-proven turnkey strategy. You don’t have to reinvent the wheel. It’s not like there are 320 million people in the US listening to the same news, to the same data, and each of them has to process it on his own. It’s inefficient.
The better way to do it and the way I’ve done it is to find a connection with a person or a company that I trust and start working with them because they’ve done all that work for me. It’s all baked in the cake anyway. All the prices and all the areas are already priced for you. All you need to do is to think whether or not the numbers work for you, and whether or not you think that particular area is in growth mode. When I say growth mode, what I like to buy is real estate that also cashflows but also has room for appreciation.
The way I do that is, it’s just a rule of thumb, you don’t have to follow this rule of thumb, but if the average income is less than three times the home price, then that market has room to grow. It’s very affordable and people can raise prices on their homes and other people will still buy them. If that market cashflows and is less than a 3:1 ratio, that’s a market I want to be in. These are secrets or they maybe not even secrets to some of your listeners that are very savvy, but I call the Chambers of Commerce in the city. I learn which companies are entering and which companies are heading out. I want to see that there’s job growth downtown. They also have occupancy levels for the offices. They have occupancy levels for commercial real estate. They have a lot of data that is very good.
What I also like to see is the amount of permits that have gone for the last nine months. I want to see if there’s a spike or if it’s very moderate. I don’t want to be after a large spike in the permits because that means that I can wiggle along and get better prices. The last thing that I always check before I choose on a market is I want to check how affordable it is. That’s when you want to call a few brokers or a few real estate agents and you just want to make sure if it’s a buyers’ market, if it’s a sellers’ market. What’s going on? Which neighborhoods, which zip codes? Do your research on what’s hot and what’s not and then have a better idea. I tend to stay away from large economic data when it comes down to real estate purchase. If you want to take this a year earlier, if the UK would have chosen to stay in the Euro or if it chose to break out of the Euro and do the Brexit, it would change nothing about whether or not I close on a property or not.
You’re saying that the effects that are happening in the Euro zone are not going to have an effect here in the US on real estate?
They will in a very moderate fashion. Therefore, it’s much more important to focus on what’s going on inside the US territory and not look at Brexit. For instance, like I said, you don’t have to search what’s going on in China to see. Call your title agent and ask him who’s closing on all these properties and they’ll tell you there are Chinese and Asian buyers. Now you know that there are Asian buyers in the US. You don’t need to research China’s economic condition in order to make your own conclusions. What I’m telling you is, you should simplify this and just look at what’s going on inside the US and then you can say, “They’re buying here. That means they’re looking for safety here, etc.” It’s much more simplified than trying to research why the Chinese are coming to the US.
Just wrapping up the whole Obamacare thing, clearly this is job-driven and demographic-driven as far as the net effect on the US real estate market. One thing that gets swept under the rug or is not talked about is last year in 2016, six and a half million taxpayers had to pay $3 billion in Obamacare penalties for not having health insurance. That just means that the consumers had $3 billion less to put into the economy and spend on food and their own shelter and consumables. That affects people’s ability to buy or save for housing or buy investment properties. There are definitely these unintended consequences that come out of this. Really, it’s just a tax. They call it a penalty but it’s a tax. That’s out of the pocket of most middle-class Americans that now can’t spend that or invest it into real estate or precious metals or whatever. There’s this trickle-down effect to that. It doesn’t get talked about enough.
Anytime the government does anything, it disrupts the free market. It always has these unintended consequences. That’s why you see Trump, a guy who’s been in the real estate world since he was out of his mother’s womb, and he wants to lower taxes substantially. Why does he do that? Because he’s banking on the fact that this will create economic activity and growth, and the US will be a 400 million people population by the end of the century. It’s a country that is in growth mode. It’s not Russia. It’s not Japan. It’s in growth mode. There are plenty of real estate opportunities for developers, for new housing, for expansion and every city that can expand its territory.
Lowering taxes and increasing the fed rate, the interest rate, is what usually fuels economic activity for real estate because banks don’t want to lend when the interest rates are so low. They want to lend maybe to institutional, commercial type but not the retail crowd. The retail crowd, which always thinks backwards because, that’s why they’re called retail, says, “Right now, interest rates are very low which means the economy is very slow. I should probably wait before I buy a house. I should probably rent now.” Obviously the other way around is the correct one. They should be all over these low interest rate loans, but what they’re always thinking is the other way around. They’re thinking, “It’s very scary now. I’ll probably buy it and the house will go down in value or go down in price.” When they will start taking out loans is the day their mortgage broker will call them and say, “The Fed has just raised rates again. We’re going to raise rates. Are you going to take a mortgage out now or when it’s 6%, 7%?” That’s when they’ll do it.
It’s the fear that drives them.
It’s always like that. Millennials are starting to forget 2008 and they want the American dream. They want it back. They want it in a different way than previous generations wanted it. Home ownership is definitely not going to wait. In fact, it’s bottomed about a year ago and it’s in a major uptrend. America on sale, no more. It’s a long gone idea. Right now, you’re going to see prices going up again in many of the major cities that go up first and then you’ll see that throughout the country. The major banks: Citi, Wells, JPMorgan, the big issuers of mortgages, what they have done until now is take all of this stark money and all of these very low interest loans. They’ve just created an arbitrage for themselves. They went into Muni bonds or other types of bonds and they just had 2% spread. They were happy with it because you’re talking billions and billions of dollars.
Now, when the Fed is raising rates, what it’s trying to provoke is the banks easing up lending requirements again and making money again, like banks do by loaning out. The US is moving right now towards a country where the age bracket of 35 to 49, the peak earners, have just surpassed for the first time in fifteen years, the age group that’s before them, the 20 to 34. The broke people are less than the middle-income people right now. Whenever you see that, you can go back all the way to the First World War. You see every time that transition happened, there is a boom in the stock market and in the real estate market. As contrarian as it sounds, with all the problems, with all that national debt overhanging everyone, $20 trillion with everything, you’re going to see in the next few years, there’s going to be a correction first. But after that, there’s going to be a major boom in the US. It sounds so contrarian right now, but I think that’s the next decade for the US.
I hope everybody caught that. What you’re saying is even if we run into a stock market correction or a strong or deep recession, there’s massive opportunity coming out the other end of that because of housing demand. Is that what you’re saying?
I tend to agree.
I think the major opportunity is in lease options because a lot of people who want homeownership are still afraid to take a traditional mortgage. A lease option feels comfortable to them. That’s one thing that is important. I also think senior housing and anything that benefits the elderly community is going to be doing very well. Like I said, developers that are going to find the best and most desirable market for these peak earners are going to do very, very well. I think there’s going to be a new type of investor who wants to be a turnkey investor. He’s going to own 30 or 40 properties in Jacksonville, Florida and then he’ll find online a guy who owns a bulk of properties in Vegas and they’ll just swap titles because the guy who lives in Vegas for twenty years wants to live on the coast now in Jacksonville and the other guy wants the action of Vegas. They’ll swap titles and they’ll swap lifestyles.
You’ll have this European community where people own so many properties for a few generations, like in Europe where most of the people are renters because properties have been owned for generations upon generations. I think the US is becoming such an environment where real estate investors could accumulate 50, 60 homes throughout their lifetimes because it’s very affordable. They can choose to live where they want to live, next to their properties or maybe swap titles. In the future, that’s a huge part of what’s going to happen in the US, this landlord type of country.
We’ve been moving in that direction for the last ten years, towards the renter’s nation. Because we went down to about a 63% ownership rate across the country, and this is nationwide, from about a peak of about 69%. That trend is expected to continue down past the 60% range. We could be in the upper 50% range. It’s not quite Europe but we’re getting there.
Because many of these purchases are cash, these people are owning the properties free and clear. They have no real risk of default. That’s why I’m saying they will keep accumulating more and more assets.
We’ve talked about Europe two or three times here just briefly. I’m not sure what the major event is that’s coming up on May 7th, which is right around the corner.
It’s the second round of the French elections, meaning that if Le Pen ends up winning, they might declare that they want to do some sort of Frexit or whatever you want to call it. They want to exit Europe.
It’s the next Brexit, it’s Frexit. It’s such a disaster over there. It seems that 50% of the Euro is on their way out. The ECB, European Central Bank, has this endless bond-buying program, the equivalent of what we have here in the US as quantitative easing. That has to come to an end. They’re just going to print their way to oblivion. Now, France is on the chopping block here and they’re looking to leave the Euro. If that happens, it’s just going to completely unwind. What kind of implications does that have to us as real estate investors here in the United States?
Some countries in Europe are going to become cheap, especially the weak countries. The South countries are going to become cheap. In France, it’s already starting. France is becoming cheap. People are exiting France. They’re moving to other countries. There’s exporting opportunities to take their families outside. Obviously, because of the refugee camp and not because of the Euro. They leave to other parts of Europe. There’s a major, major refugee crisis in France and Belgium and other countries. I travel to Europe quite extensively. That’s one of the most amazing things. I wouldn’t be surprised if there would be a Muslim country in Europe in the next 20 to 30 years. There has to be some solution to this. There are so much of them that are coming from the Middle East, fleeting very dangerous countries and you can’t blame them. They have nowhere to go. That’s something that’s affecting Europe in a big way.
For opportunities, you might want to look at the Southern countries, like Greece, very cheap. If you’re into real estate in a touristic way, there are amazing opportunities in the islands. Greece is mainland and there are the islands. It’s like two different countries. The mainland is more robust and industrialized in the major cities. The village area, there’s nothing to do there for real estate purposes.
You’re talking about investment opportunities outside the United States. You’re talking about Americans or other people investing in European countries, right? That’s essentially what you’re talking about.
Yes. That is an option. If you’re looking to stay within the US or if you’re looking to get exposure to European real estate without buying actual real estate, you can do that through REIT. REITs are Real Estate Investment Trusts. You could buy them in a very liquid way, Marco, on the stock market. Some of them, they yield 8%, 10%, 12%. They’re very liquid. What they do is they manage properties, they run properties either within the US or outside. That’s another option for people who want to invest. The other thing about REITs is you can gain exposure to markets that you can’t otherwise. For instance, I’ve invested in a REIT that rents office space to the United States government. It’s a very unique type of REIT. You can own REITs that operate nurseries or hospitals. You can gain exposure to a lot of other sectors that, as an average investor, you are blocked from.
Lior, if there is an unwinding in the Euro and the currency falls apart, the Euro is a major world currency and there’s other world currencies pegged against it. It would be disastrous for world markets if the Euro fell apart and disappeared. It may be a long shot, but I don’t think anybody has an answer to the question of what would happen to world markets and the US market and the US dollar as the world reserve currency if that was to happen. If you were to look in your crystal ball, what’s the likelihood of that happening? How do you think that would affect the US real estate market and us as investors?
I can only tell you my educated guess. The idea is the European Union will unwind in a more beautiful way than in a more panicked way. Everyone knows there are problems. They can come to the table. They can revalue and reprice national currencies if that was the case. The public will start liquidating in advance the Euro and that would create a panic situation. In that kind of situation, the US dollar would gain in value probably a lot because it would appear again to be a safe haven currency. Obviously, it’s a safe haven as compared to other countries and not on an absolute level. It would raise the value of the US dollar, and that would deter foreign investors from buying on the initial thought process. On the second thought process, they would say, “Where would I rather own my real estate, in a crumbling continent or in a reviving continent?” It might create a situation where the US dollar is valued higher and real estate prices rise. It would be like the vet is happy when the dog is sick. That situation where Europe is crumbling would be beneficial on the short-term to the US real estate market and to the US dollar as a whole.
There might be a capital flight to the US because everything’s falling apart in the Euro and everybody’s scared. They don’t want to be in an unstable market. Yet at the same time, if the US dollar is going up in value, it makes it less attractive to foreign investors because everything becomes more expensive here when you convert it to their currency. It’s a tug of war there, a give and take. At the end of the day, what will win out is the fact that capital needs to go where it’s going to be treated best and it’ll still come to the US.
It already does. So many people are buying treasuries over European bonds because European bonds are actually in negative territory. 2% sounds amazing for so many people that can invest in Swiss bonds or German bonds that are negative yields.
Which is still crazy because even at 2%, when you adjust for inflation, you’re still at a negative rate of return. It’s a losing proposition no matter what you do.
You’re buying into a loss but you’re just saying, “I’m going to lose.” This is not something that an individual needs to do but large insurance companies, they have to safeguard billions and billions of float, cash, premiums that they receive and they might need to pay back at some point. They can’t lose that money. They would say, “I’m going to buy this bond and I’m probably going to lose 2% a year but it’s better than exposure to other stuff.”
Quick answer for a quick question. June 14th, the next Fed meeting, they’re going to be talking about a possible rate hike. Do you think it’s going to happen?
You think that they need to curb inflationary fears.
Inflation is leveled off, but they’ll still raise it.
Ray Dalio, on a previous episode, we had the audio from his amazing work on how the economy works. Guys like Ray Dalio and Warren Buffett, two of the smartest and wealthiest people that we know, they seem to be pretty optimistic on the US economy but at the same time they’re fearful or warning of a market crash. My question to you is this. We have a lot of clients that have a fair amount of capital in the stock market. They may have been pulling it out but they’re still there. I think the writing’s on the wall. They’re starting to feel what other people feel in terms of a major stock market correction. Do you see a stock market correction heading our way in any time soon? How big do you think it could potentially be?
I would say in the coming two years, there will be a moderate to large correction in the stock market, yes. I don’t see a 50% correction, if that’s what you’re asking. But a 20 to 30% correction, very, very doable. All of the historical ratios are far and above what’s normal P/E ratios. Let me give you something that will shock you. In 1980, it took the average salary two and a half weeks to buy a point in the Dow. It now takes the average salary 27 weeks to buy a point in the Dow. How is the 500 largest companies in the US, if they’re not obtainable to the people who work for those companies, how is that not an expensive stock market? The Buffett Indicator is GDP divided by equity prices. His sweet spot is 0.6, that’s where he loves to buy stocks. 0.9 is his high threshold, that’s where he stops or just very selectively or does private companies and stays away from public trade companies. It’s now at 1.2. It’s double what he thinks is a bargain. It’s 33% higher than when he stops buying heavily into stocks. It’s very, very high.
The reason that stock market prices are high is because interest rates are very low. It’s like a weight on stock prices. As the Fed continues to raise rates, stock market prices will go down. There’s not even a question about this. In fact, most of the buying right now in the stock market, in the large companies is the companies that themselves buy their own shares. They’re loaning money very cheaply and they buy their own shares. It creates a very nice profit brochure and people buy into that. With that said, it’s not like I’m going to liquidate my entire portfolio, not at all. Some companies, I bought the positions in very attractive prices. There’s no reason to sell something that you bought at a very good price. If it pays out a dividend and it’s a great company, you can buy more shares. But why sell? If you buy a great piece of real estate that is dishing out rents and the price of the real estate of your holding goes down, would you sell it just because of that? No, because the rents are great and probably in some cases, increasing. Definitely, there’s going to be a buying opportunity, if anything, when these kinds of heavy corrections come.
You definitely have to be more selective if you’re going to be in the equities market. Those dividends you’re talking about is the equivalent of the cashflow in real estate. If you’re buying just for the sake of capital growth, you’re a speculator. If you have dividends and you’re getting cashflow, you have a real rate of return at that point. This needs to go out as at least a caution if not a warning to people who are vested and especially heavily vested in the stock market. What we’re ultimately saying is it’s not a question of if there’s going to be a major correction, it’s more of a question of when it will happen. There’s a saying, “It’s better to be out of the market a year early than a day too late.”
The idea is to have allocations into multiple asset classes. This is definitely not the time to be heavily weighted into US equities. That time was eight years ago when they were generationally low. The idea is right now, Trump has created an environment where so many people who were afraid of the stock market and voted for Trump, they piled in to the S&P 500. That’s the worst time you want to get in, when all in this retail crowd is buying shares. It’s a very good time to be cautious and selective and take profits.
It’s historically long. We are due or maybe overdue.
It was the third until recently, now we’re the second. Let that be a sign. Lior, you’re a wealth of information, I didn’t ask you half of the questions I wanted to ask you here. There might have to be a part two down the road. I really appreciate you spending time. Please do me a favor, tell our listeners how or where they could find you and where they can find those reports you were talking about early on.
Basically, Wealth Research Group is mainly a newsletter that arrives at your email box about every three or four days. It’s with our highest conviction research, anything from personal finance and just more personal advice to big picture. The added value is that we do marathons where we cram in on a given sector for 40, 50 days, speak to countless management teams and then we issue a time-sensitive suggestion either in the resource sector, like gold and silver companies. We recently featured a cobalt company. I don’t know if your listeners are aware of Cobalt and its importance to the electrical vehicle. It’s a nightmare of supply because half of it is in the Congo and it’s cramming in on those mines. There’s going to be a huge supply shortage. We recommended the company that has a cobalt asset in North America, which is very unique. It’s where Elon Musk said he would try to source his cobalt from.
As I said, we are heavily looking into companies that are in the marijuana space as well, especially within California, the major markets in the US. Marijuana is amazing because of one thing, the demand is already there. It’s not a market that is in growth mode, it’s a market that’s moving from illicit to legit. All these profits, they are already there. Just going to move into the private and the public sector where you can be part of that. It’s an amazing process as well. Go back to 1933, we had a President whose father was one of the largest companies in the alcohol business, the Kennedy’s. Definitely a lot of things going on there. Take us for a test drive. It’s a free newsletter.
Lior, I really appreciate your time today. Thank you so much. We will connect soon. Let me know when you’re in California.
Thank you very much, Marco. Will do.
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