By Sam Ally
Here we are again, doomsday scenario looming, investors scrambling while others sit back like the cat that ate the canary. It’s in our faces everyday, you just can’t get away from it. They say stay off all media outlets, don’t pay attention to that crap, just keep your eyes on the prize. Certainly easier said than done right? It’s like a fiery crash on 275 or the Causeway or I-4 you just can’t keep your eyes off it. Crash, Crash, Crash, Recession, Recession, Recession. Look, we all know something is gonna hit the fan and it goes a whole lot deeper than just the real estate industry. In the wake of the recent and most likely brief uptick in mortgage originations (thanks to an encouraging inflation report convincing investors that the Fed is done hiking rates) Jean Boivin, head of the BlackRock Investment Institute, basically told everyone to hold onto their hats because he sees long-term borrowing costs in the U.S. staying high for years. There are similarities to what went on in the 70’s (after President Nixon ended the gold standard) taking shape here only much more severe. Numerous pundits have called crashes before and if you were born prior to 1987 you’ve lived through a couple, but this time I tend to agree that a long cold winter may very well be on the horizon for us all, the severity of which depends on how you’re positioned.
I don’t know enough to call a crash, however, for those paying attention to the signs we can certainly see the probability of one is elevated. There were a handful of crystal ball readers (now industry legends)that called the crash of 1987 and positioned themselves quite well for it. There are events that lead up to it, it’s not a random occurrence and we have a pretty wicked pot of stew brewing today that the puppet masters have been busy stirring up!
First let’s understand what a general definition of a crash is. If we use history as a guide we could say it’s when the market goes down more than 10% in a single day. That crash of 1987 I referenced, the market went down almost 25% in a single day. The crash of 1929 was actually two crashes on consecutive days, 12% and 13%. In 2011 we called it a Flash Crash which was about 10%.
I took a dive into our history and while we’ve had some volatile days especially during the financial crisis and the pandemic we haven’t had many others. If we had a crash of 10%, that would be 420 points in the S&P 500. Now that would certainly shake the tree.
As I mentioned those who saw it coming in ‘87 positioned (that word again) themselves to benefit from it and I think it’s time that you do some prepping yourself because it isn’t pretty. While it may not hit all at once, we could simply be in store for a decade long dose of turmoil and change. In following the money, I find those of affluence are taking a percentage of their performance and buying protection via index options, gold, bonds, real estate and OIL of course. “Buying upside” in these areas as they say is cheaper in the long run than waiting for the sky to fall.
Portfolio insurance costs money but it’s not about the cost is it? I find it curious that most are willing to insure their home (if you can get coverage here in Florida)and cars but not their portfolios which is certainly of greater magnitude isn’t it? Of course, some will say “Sam having insurance on your car is a precondition for driving a car, and having insurance on your house is a precondition for having a mortgage” and while they are right about that they miss the point. Insurance isn’t a zero-sum game. Much like flipping a house, your job is to mitigate the problems. When it comes to your portfolio you need to be able to offset potential losses because they are inevitable.
Now I’m not quite sure what NAR Chief Economist Lawrence Yun sees but he is predicting a “bright” future and expects “a 15% rise in home sales” signaling a dynamic & flourishing market. Gotta rally the troops I guess right? Contrarily, at a recent lender conference the prevailing sentiment was “Only in the case of another global catastrophe – economic, political, environmental, or public health – would rates return to the level persisting for the past decade or so”. Industry leaders predict ”for well-underwritten home mortgages we’ll see rates above 6% or more through the middle of this decade and for commercial properties with reasonable leverage, this would imply cap rates centering on 7% – 7.5%, depending on location and property type.” Personally, when I compare that to my first mortgage in 1986 @ 17.99% it doesn’t seem that bad.
Meanwhile, at a recent investor conference, the keynote speaker was heard saying “With Interest rates ripping higher combined with out-of-control government spending, hell, even Stevie Wonder can see there is stress in the markets”. Navigating the end of the debt cycle isn’t an easy task and we’re beyond the point of no return. The prevailing question at this conference was “will there be a housing collapse”? The panel was split, but I’m not so sure it will be a housing collapse as there is something much deeper going on here. The following are some of the key points tossed out so you can chew on the following and make up your own mind:
Those bullets paint a pretty ugly picture if you are not cash heavy and over levered. It’s telling me, higher expenses, lower wages, discrepancy spending is history and side hustles will continue to be necessary for millions just to keep the wolves at bay and feed their families. Ultimately, when the government spends more they are more aggressive in taxation, and of course, collections. Hmm, I recall something about 86,000 new IRS agents so the puppet masters knew all along what was going to happen. The gap between the haves and have nots will expand massively.
And from the “kick em while they’re down” section, we have a convergence of supply-demand fundamentals and political pressure that’s going to generate another massive oil price spike — one on par with what we saw in 2008. Global demand has increased to over 103 million barrels daily with China consuming 70% of that. They hit 16 million barrels a day early this year!! Between Biden’s two-faced energy policy stifling production while drawing on our reserves, Opec teaming up with Russia to cut supply an additional 2 million barrels a day & the war in Israel, this shite is getting serious~!.
Inflation is an indicator of a failing currency, as I mentioned I wasn’t convinced that a housing collapse is on the horizon but I do believe that we may now be looking at a Currency collapse as the deglobalization of the dollar appears imminent. The BRICS alliance growing from its original 5 members to 11 is far superior to the United States & to me is a sign that the dollar may be nearing its end as a global currency. Emerging market countries Brazil, Russia, India, China, & South Africa have welcomed Argentina, Ethiopia, Iran, Saudi Arabia, Egypt and the United Arab Emirates. Their goal is control or dominance over gold, energy, & currency. It won’t be overnight, but things certainly are coming to a head.
Now that I’ve dumped all of that in your lap, here are the top 5 items “the money” will be eyeballing, let’s call it food for thought:
The Debt Crisis: interest rates continue to escalate impacting credit cards, mortgages auto & student loans. Most carrying debt will be unable to save for their future.
Equity Investment Challenges: For those of us raising capital the competition for investment dollars will continue to be a grind. What we may think is paltry, investors feel a 4 -5% return with minimal risk via risk free savings accounts and short term securities provides a reliable comfort zone. Raising capital in 2024? Get ready for the fight of your career as competition will be fierce, have your shite together!
Unemployment and Inflation: And now for our next trick ladies and gents, our 2024 high wire act. Low unemployment that’s a positive sign right? Not so fast, The Federal Reserve is battling the increasing federal funds to beat down inflation, but projections indicate unemployment may rise to 4.4%. Which edge of the sword do you want? Authors note, the government’s playbook of looking at GDP and Unemployment are stale and archaic, we’re missing something that will be revealed within the next year.
A Nation of Renters: The B2R strategy is being employed by many of us quite profitably, but how long will it last given these considerations: A surge in rental prices, layoffs, home & multifamily builders dialing things back due to construction prices and cost of capital, equals greater housing shortages leading to government intervention. Can you say Rent Control?
Time to pay the Piper: Property values on a downward trend because of increasing cap rates, interest rate increases are escalating credit delinquencies and over $1 trillion in commercial loans maturing in 2023-24 is an ugly mix percolating. Most of the debt is held by local and regional banks and that doesn’t bode well for lending or real estate markets. Remember I mentioned funds like Blackstone going all in because they can. Can You?
I know I’ve painted a one sided and rather bleak picture, however, I believe there is plenty of opportunity through all of this. Capitalism finds a way to meet the needs in exchange of value. Food, housing, energy, healthcare, be into things that are REAL, Essential & Affordable. It’s high time to preserve assets and equity during this cycle, work with lenders, and focus on the fundamentals of operations and management.
The views, thoughts, and opinions expressed in the article belong solely to the author
Sam Ally is V.P. Investor Relations @HIS Capital Group . To learn more about the profitable strategies HIS Capital is employing to thrive, or if you’re seeking an equity partner to capitalize on viable opportunities, contact him @ 407-494-3329 or via s.ally@hiscapitalgroup.com
