Conservation Easements – Not a Positive Force in Virginia – Week 1

Introduction: Under Governor Mark Warner, Virginia created the opportunity for land owners to place conservation easements on their land in return for receiving Tax Credits. Tax Credits are a vehicle that benefits wealthy individuals who can buy Tax Credits at a discount and then use the Credits to pay the taxes that they owe. The net effect is that the wealthy get to pay their taxes for about $0.75 or $0.80 on the dollar. Like many government programs that sound great to politicians, the details are called “unintended consequences”. Conservation Easement Tax Credits are certainly in that category. It is also obvious Governor Warner was not thinking of the “average Virginian” when he championed this idea that so benefits the wealthy. An industry has been created to create and transfer Conservation Easement Tax Credits. When the legislature is in session, that industry always publishes a variety of articles talking about the many positives of the Tax Credit program. Never have I seen a rational discussion about Conservation Easement Tax Credits that also covered the enormous downside of this seriously flawed program. As a true believer in free market capitalism being the best way to allocate resources, over the next six weeks I would like to provide you a very brief summary of some of the most serious negatives associated with Conservation Easement Tax Credits. Stay...

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Six Important Trends to Watch – Week 6

The European Economy: Data coming out of Europe continues to reflect concern to anyone watching European economics or Global economics. It appears that many of the Euro countries’ economies have weakened significantly, including that of Germany, which has been the economic engine of Europe. Brexit and the never-ending debate about how to exit is creating tremendous uncertainty for businesses. There will be unintended consequences from Brexit but the never-ending debate and inability to come up with a plan resulting in constant delays of a hard exit is probably worse than just leaving. Because of the uncertainty, businesses are hesitant to make investments; consumers will diminish their purchases; and the result is a slowing economy. Combined with the turmoil in China, the turmoil in Europe will have a negative impact on the global economy. The United States, because of the 2017 Tax Act, will continue to have a strong economy but it will not be as strong as if the global economy was also humming along. 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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Six Important Trends to Watch – Week 5

The Chinese Financial System: The phrase “Unsustainable actions continue until they don’t” is absolutely appropriate relative to the Chinese financial system. Analyses being published about China’s banking system and financial markets continue to highlight the irregularities that suggest that their banking system once again needs to be bailed out. Th size of the current potential bailout being discussed is similar in size to the TARP that was passed by Congress in September of 2008 as our financial markets were collapsing. Although China’s banks do not appear to be in as bad of shape as our American banks were in 2008, they have very significant challenges and some may not be viable. Some of the facts that recently came out include the following: The state-controlled industrial firms that are the biggest borrowers of the biggest banks in China are earning a 4% return on their assets while the average bank lending rate is 5.6%. That is unsustainable. The amount of bad debt being held by the banks far exceeds the loan loss reserves of China’s banks; The small Chinese banks are the primary lenders to the small, private businesses in China. Yet the small banks are the ones that are having the greatest difficulty in being profitable. The Chinese Vice Premier recently instructed the large banks that they needed to increase their loans to small businesses by 30%. That is sort of like pushing on a wet noodle. Chinese banks will probably need hundreds of billions of dollars in new capital by the 2020’s. Clearly, if it wasn’t for the fact that the Chinese government owns the majority of the big banks, that banking system would have already collapsed. Eventually global currency traders will start factoring in the instability of the Chinese banking system. When that happens, the Chinese currency will become unstable and the resulting economic ripple effects will quickly move around the globe. It is critical to remember that land is the source of all wealth. Every product...

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Six Important Trends to Watch – Week 4

Residential Mortgage Rates: Following The Fed’s announcement that they will keep interest rates steady, residential mortgage rates dropped by about 80 basis points. Whereas in November 30-year mortgage rates were almost at 5%, the current interest rate on 30-year mortgages is in the very low 4% range. That does not sound like a huge difference, and you may wonder why residential mortgage rates impact the land market. But there is a significant relationship. Lower mortgage rates revive new home construction thereby reviving demand for land that can be developed into residential communities and timber. The revival is most obvious in the housing market. But the same pattern holds for whether it is commercial real estate or agricultural land. Please do not be lulled to sleep by this stability. We are going through a transition and this is the peak of the real estate market for this cycle. 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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Six Important Trends to Watch – Week 3

The Federal Reserve: Earlier this year we expressed concern that The Fed had been too aggressive in their Quantitative Tightening (QT). Apparently, The Fed realized that fact and has announced that they are going to keep interest rates steady for a period of time. There were a variety of economic reasons given for doing so, an inverted yield curve, low inflation, etc. We believe that The Fed will be on hold from now until after November of 2020 because The Fed does not want to be seen as attempting to influence politics. The fact that The Fed has indicated that they are on hold for 2019 has allowed interest rates to decline, and that in turn has stimulated the real estate industry. This very positive economic force will probably last until the end of 2020. However, after the 2020 election and two years of stability, The Fed will probably once again start raising interest rates and attempt to reduce the assets on their balance sheet. It is critical for the future health of the United States economy that The Fed diminish their involvement in the financial markets by reducing the amount of financial assets on their balance sheet. But higher interest rates mean lower real estate values. Therefore, we believe the next 12 – 16 months is the peak of the real estate market for this economic cycle. Anyone interested in selling land should see this as an attractive time to sell it, not wait until The Fed again starts their QT. 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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Six Important Trends to Watch – Week 2

Timberland: Over the last few years, the stumpage value of timber has either been stable or declined. The reasons for this situation are the following: Imported timber is significantly less costly than timber grown here in the United States; The mills that use fiber have diminished in number and are now located so that they have much less competition between mills for the same fiber; There has been such aggressive planting of timber over the last two decades that there is now a surplus of timber compared to demand. Like any commodity, the demand for timber goes through peaks and valleys. The current combination of the three above-mentioned items is not a short-term situation, but rather has some long-term aspects. A stable price for timber means land prices are relatively stable. However, it may take some period of time before the supply versus demand shifts, and we once again see rising timber prices. 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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