Understanding How “This Time Is Different” to Make Great Investment Decisions – Week 7

What is Different This Time – A Second Wild Card: The second wild card is the ripple effects of the stronger US Dollar created by The Fed as it raises interest rates. Raising our interest rates results in a stronger US Dollar. When the US Dollar strengthens, other currencies lose value relative to the US Dollar. As a result, emerging markets have all sorts of negative economic impacts. The short-term result is a slowing global economy. A slowing global economy sends ripple effects globally. Exactly how those ripples will impact the USA economy is unpredictable with any precision. That is the point where this “Normalization” transition could become bumpy. Add a Black Swan Event to the mix and serious problems could occur. The difficulty is accurately estimating the time required for all of these moving parts to move into harmony. Until that point is reached, our economy is subject to volatility and problems. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is...

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Understanding How “This Time Is Different” to Make Great Investment Decisions – Week 6

What is Different This Time – The First of Two Wild Cards: It is absolutely critical that The Fed return interest rates to whatever is “Normal”. But that transition is the event where in every previous attempt in history to “Normalize” resulted in total economic collapse. If The Fed had asked my advice, I would have recommended that they pause for one year whenever they increased interest rates by 1% per annum, four 0.25% increases per year. The one-year pause would allow the markets for financial and real estate assets to adjust. One wild card in The Fed’s current plan of action is that without a pause in the interest rate increases, the portion of the real estate market that does not have Section 179 assets is negatively impacted by interest rate increases UNTIL household income (HHI) increases enough to offset the higher mortgage rates. Therefore, how rapidly the HHI increases becomes a limiting factor to economic stability and recovery. HHI will increase and we will get to the point that because of higher HHI the higher interest rates will not be a drag on the economy. I believe that the same group that designed the 2017 Tax Law to underwrite support for the financial markets and commercial real estate, also relied on faster economic growth to spur low unemployment and creating a shortage of workers forcing employers to increase wages or HHI. As we said earlier, higher HHI will stabilize the non-commercial real estate market. Once...

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Understanding How “This Time is Different” to Make Great Investment Decisions – Week 5

What is Different This Time – The Real Estate Market: In our previous blogs, we have illustrated the fact that rising mortgage rates typically mean a reduction in the value of real estate. There are a number of facts in addition to interest rates that determine the severity of the impact of the increasing interest rates, such as household income growth, rate of inflation, etc. Just focusing on increasing interest rates and therefore, higher mortgage rates, one would expect the real estate market to suffer severe problems. Once again, the 2017 Tax Law gives reasonable hope that a transition will be bumpy but achieved without too severe a disaster. The key in the real estate arena are the Section 179 assets, typically equipment. From a seminar I attended, it appears the 2017 Tax Law broadened what qualifies as Section 179 assets. If this is correct, it could create an incentive to invest in commercial real estate because of the increase of the after-tax return on commercial real estate investments. The effect is similar to the decrease in corporate tax rates working to increase corporate profits to offset the effects of stock values of increased interest rates. Once again, the change in the Section 179 assets may offset some of the effects on real estate values of increasing interest rates. The group that designed the 2017 Tax Law were Absolutely Brilliant. I am not saying it is perfect, but the 2017 Tax Law provides our economy with a reasonable chance to transition back to normal without a financial catastrophe. Pray it works, because the alternative is total collapse. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land....

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Understanding How “This Time is Different” to Make Great Investment Decisions – Week 4

What is Different This Time – Financial Markets: The 2017 Tax Law has numerous positive benefits. In this case, we are going to focus just on the values of stocks and other financial instruments. In our last blog, we talked about how higher interest rates should lead to lower asset values and quantified that impact on the real estate arena. You will recall that higher interest rates could mean a reduction in values of approximately 25%. If the financial markets, including publicly traded stocks, suffered a 25% decline, that would be called a financial panic. The stock market volatility over the last few weeks reflects the stock market attempting to calculate the impact of higher interest rates on stock values. If the 2017 Tax Law did not exist, the higher interest rates appeared to be permanent, and nothing else changed, then the impact would be a financial crisis similar to the Great Recession or perhaps even the Great Depression. Fortunately, the 2017 Tax Law was passed. We are experiencing the potential problems of transitioning away from QE, Quantitative Easing. Raising interest rates as part of normalization simply exacerbates the effect. Therefore it is critical to understand one of several IMMENSE BENEFITS of the 2017 Tax Law is the reduction in corporate taxes. That single event dramatically increases corporate profits. The increase in profits could easily offset the increased cost of money, called interest rates. The result…the stabilization of stock values. That is not the same as removing volatility from the stock market. Whereas normally rising interest rates would mean lower stock prices, because of the 2017 Tax Law we have enjoyed both rising interest rates (Normalization) and a rising stock market. The result is a VERY STRONG possibility that the financial markets may remain stable contrary to every other transition out of Quantitative Easing that has occurred in the economic history of the world. The group that designed the 2017 Tax Law were Absolutely Brilliant. I am not saying it...

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