I've been offline (at least here) for the past couple of weeks due to a request at my work to take the lead in renewing one of our largest clients, and since I do this blog on my time, I had to defer my next post. Apologies to those looking for my regular contributions on a more regular basis. I'll endeavor to consistently deliver one new post a week from now on.
My intention was to make the next post about investing in Timeshare properties. I promise I'll get to that next. However, since my last post, we've seen the economic storm clouds continue to darken in the investing space. I want to provide you a better understanding of its cause, likely effects, and what you can do in preparation for the coming storm.
First, let me summarize the developments that have churned up this tempest:
The Fed and other central banks that created the conditions that led to the 2008 financial crisis made no attempt to fix the financial system. Instead, they doubled down on the same flawed policies that led to the crisis in the first place. Accommodative monetary policy pushed massive amounts of low-cost (i.e., low-interest rate) money into the hands of corporate interests. This allowed unprofitable companies, called zombie companies, and marginally profitable companies to continue to exist instead of being driven into bankruptcy. Had this happened, it would have given a natural lift to better-run profitable competitors and restored the economy to better health.
Corporations have engaged in massive financial engineering of their stock prices through stock buybacks, especially since 2008.
These buybacks have been very effective in increasing stock prices. So much so that it is estimated to be the most significant contributor to stock gains since 2011.
Since stock buybacks were legalized (they were illegal until 1982), C-suite leadership of publicly traded companies has obsessed more over how to increase stock prices than how to improve efficiency or expand productivity. Much of their compensation has come from these inflated stock grants, which has been a boon for these executives, of questionable long-term benefit to investors and a detriment to employees' and corporations' health.
Spend-and-ask-questions-later policies at the state and federal levels of governance have created more debt than we as a nation have ever had in a time of peace. Granted, we've been in a continuous proxy war somewhere in the world for the past thirty years. Still, the impact of our current debt loads has been minimized by low global interest rates for the past 20 years. With global rates rising, our national debt service costs are set to become the biggest line item in the federal budget.
The corruption in our government is not limited to elected officials. The fine bureaucrats at the Bureau of Labor and Statistics appeared to be cooking the books on the jobs report a week before the midterm elections. The Federal Trade Commission and Department of Justice have redefined the meaning of anti-trust in the modern economy. They now favor the formation of oligarchies of as little as four or five companies to dominate significant segments of a marketplace. This has reduced competition for employees and, thereby, growth in employee salaries. It has increased prices due to a less competitive marketplace. Finally, it has stifled innovation as oligarchies have less impetus to improve products.
The 2022 midterm election problems have further eroded confidence in the legitimacy of governance at the state and federal levels. This decreasing confidence has a major impact on investment. After two years of left-leaning governments denying landlords the ability to collect rents, real estate investors now question the rule of law in some municipalities. Barring a connection that will "protect" their investment, new prospective investors will choose not to invest.
The spike in 30-year mortgage interest rates from 3.25 percent to over 7% this year has driven potential homebuyers to the sidelines. Rising interest rates have crushed their ability to afford the higher mortgage payments as salaries have lost ground against inflation. Increases in food and energy prices had already tapped their ability to save.
The higher interest rates should decrease the prices of single-family housing. This would make it easier for more young families to enter the housing market. However, inexplicably, Freddie Mac and Fannie Mae (the quasi-governmental agencies created to improve the levels of home ownership amongst US citizens) have lent money to massive hedge funds. Why? To facilitate their purchases of single-family homes at the expense of US citizens. Government-backed corporate purchases have added pressure to housing costs rather than easing them. This is government-corporate cooperation at its worst. Fascism exemplified.
The FTX fraud debacle has placed a large part of the Cryptocurrency market in jeopardy and pulled the curtain back on the depth of corruption in the economic and political structures of the nation. The highly connected leadership of FTX raised billions of dollars by exploiting those connections. Though the red flags were everywhere (questionable qualifications, business practices, and finances), FTX managed to operate under an apparent mantle of protection from media and regulator scrutiny. FTX reportedly received financial injections through dubious Ukrainian contracts. They then effectively paid for protection through massive "news grants" and political donations to the politicos in power (who had sent the money to Ukraine in the first place).
Considering the many ways government and corporate interests have cooperated to the detriment of US citizens in recent years, it can be a bit disheartening. But it's been happing for a very long time. We need honest, representative leadership in the government ranks. Until voters gain the ability to understand what needs to change and why we will continue with corrupt people in charge.
We are much less a republic today and much more of a fascist state. Politicians are no longer beholden to the citizens but to the corporate interests that shovel a mountain of money into their campaign coffers. The corruption in government regulatory agencies today is markedly higher than in decades past, since at least the 1920s. If you know history, you recall how that worked out.
So what is a newer investor to do? Let's review the seven principles of investing I've presented to date:
1. Fantastic opportunities exist in every economic and market condition.
Okay, so even though we see significant stress and corruption in the marketplace, there are still excellent investment opportunities! Places I've been investing in the past few days and weeks include:
Oil & Gas funds - In keeping with the dominant narrative on fossil fuels, the Biden administration has taken significant steps to curtail new fossil fuel exploration. Existing reserves are fast becoming a more precious commodity. Despite the runup we've already seen, this sector will continue to rally for the next two years.
Vacation rentals located in commercial zones - People will vacation with the last dollar they can muster. There is a history of municipalities implementing rent controls in times of heavy inflation. Or outright cessation of rental payment, as we saw during the pandemic. This is the one section of the real estate sector least likely to see government meddling. They will undoubtedly restrict vacation rentals in residential areas, but those in commercial zones (like timeshares) will continue to prosper.
Bitcoin via GBTC - This will require a post of its own to explain appropriately. Still, thanks to the FTX-induced crypto meltdown, we see blood in the streets for this asset class. Interestingly, the crisis is not related to the integrity of Bitcoin as an asset. This is a crisis of confidence in the exchanges most people allow to hold their cryptocurrencies. GBTC is a Bitcoin-holding trust (they buy and hold Bitcoin, that's it). However, the SEC has rejected their attempts to create a market-listed ETF without a reasonable explanation. This relegates GBTC to the Over-the-Counter market (called OTC). Here's where it gets interesting. The underlying Bitcoin held by the trust is valued 79% higher than you would pay to acquire all of the outstanding shares of GBTC. The manager of GBTC is suing the SEC to allow them to create a spot Bitcoin ETF. If they prevail (and they will), they will be able to unlock the actual value of their holdings. Current GBTC owners will be the first beneficiaries.
There are many fantastic investment opportunities in the current market, primarily marginal to the mainstream. Still, if you can spot them, good money will be made amid a tumultuous marketplace.
2. Be an optimist when it comes to investing in general and a pragmatist when investing in something specific.
There is talk of us heading into World War III or a one-world tyrannical government. I don't have a crystal ball and cannot dismiss these possibilities. If either happened, everything you own would be at risk, regardless. Instead of fretting over the bad things that could happen, be an optimist and hope for the best. Then be a pragmatist about where things will grow if life continues down a path that is neither of these things but something else.
3. Always look for opportunities to invest in productive assets.
What has been productive in the past may not be productive in the future. The office building market is headed for a reckoning to be sure. But what then? In the turmoil of that market, there will be a massive opportunity. Investors groups will form to repurpose those splendid edifices into something entirely different. Some will have it wrong, but others will be wildly successful. Be on the lookout for innovators who have solutions to the problems of the marketplace that resonate with you when you hear them. Common sense is worth more than intellect in assessing such opportunities. Favor investing opportunities that will pay a regular dividend as part of the plan to boost your income when others are losing income.
Step into the fray where there is fear, and everyone pulls what remains of their money to the sidelines. But bring litmus tests that can assure your success. Let's say you find a condo for sale for $100,000 that rents for $1,200 a month, with a $100 monthly HOA, annual taxes of $1,250, and homeowners insurance of $400; that's $14,400 in revenue minus $2,850. If you have a mortgage for 75% of the value at 8.5%, you can subtract another $577 a month, or $6,924 a year from the remaining revenue. That works out to $14,400 - $2,850 - $6,924 = $4,626. So far, so good. But this is a time of turmoil. Take your rents down 10% (lower income), assume one month a year is vacant (underutilization), and assume 10% of the revenue will be tied up in maintenance (higher maintenance). Now that equation looks like $11,880 - $2,850 - $6,924 - $1,188 = $918. If you're still cash flow positive after applying your risk management litmus tests, pull the trigger!
5. Four elements for assessing a non-productive asset for investment are (1) specifics, (2) environment, (3) timing, (4) and contingency.
If you are going to speculate, look for those investments that yield good answers when you ask (1) what the opportunity is (think internal factors), (2) whether forces external to the opportunity are favorable in the net analysis, (3) whether the time is right to invest in it and (4) whether it's triumph is contingent on another something that must exist to facilitate its success. A good example is Bitcoin when I first purchased it in 2015: (1) an innovative trustless system of value exchange (2) with regulators open to its existence and investors looking for an alternative to traditional financial systems (3) during a time of great financial anxiety (4) made easier to buy and sell through a reliable and easy to use platform that connects to the traditional financial system (that being Coinbase).
When the financial tide is receding, look for investments you can get your arms around. Simpler is better. There's nothing complicated or mysterious about owning a residential property. Or owning physical precious metals. But buy a REIT or "paper gold" ETF, and the uncertainty introduced to the investment are multifaceted. When faced with varying opportunities in the same space, favor the one that puts you closest to the decision-making that influences the investment.
When there's blood in the streets, if you're in a position to invest, you've already arrived at the place you want to be. Don't try to get this just right. If you've thoughtfully established your investment return targets, step into the fray with the above considerations in mind the moment the opportunities appear. Do not let the paralysis of other investors convince you to keep sitting on the sidelines. You will never time your investments perfectly. Only concern yourself with timing them profitably.
Things are going to get ugly. Maybe by year-end, maybe not till next year. My crystal ball remains fuzzy. But it will come, and when it does, keep the above principles in mind, and you may find yourself a successful contrarian investor.
I wish all my readers and your families a blessed and bountiful Thanksgiving holiday!
Until next time, may peace and prosperity be with you.
The Natural Economist
Next up (really): A deeper dive into investing in Timeshares…it may be the best “worst” investment you ever make.