The Three Horse Economy – Week 2

Horse #1 – 2017 Tax Law: The tax law enacted in late December of 2017 is truly a remarkable piece of legislation and a major positive economic force. If you remember our blog in January, we stated that estimates of the amount of capital orphaned overseas was between $500B and $8T. We based our estimate of the impact of bringing that money back into our economy on the lowest estimate, $500B. During the second week of January the announced repatriation of funds exceeded $500B from the first three companies that stated they were bringing funds back to the USA. It makes no difference what companies do with repatriated money – bonuses to employees, stock buyback, or capital expenditures. The fact is that the money will go into our economy and the multiplier effect will magnify the impact of those dollars. The full impact of the new tax law will not be seen until the last quarter of 2018. It is easy to expect that we will exit 2018 and enter 2019 with the economy like a horse in full gallop. That means 2019 will also be an excellent year for the American economy. In turn, the American economy will set the stage for the growth of the world economy. For those of us that remember the growing economy enjoyed after the Reagan tax cuts, this economy is going to be better than that one. 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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The Three Horse Economy – Introduction

A Three Horse Race: I have never witnessed an occasion where all of the economic forces are positive. The normal condition is that there is a combination of forces, some that are positive and others that are negative economic trends. However, usually one economic force is so strong it overpowers all others. Now in my 46th year of land brokerage, we are experiencing a truly unique situation. There are three forces that are of such significance that it is difficult to know which one will be the dominant. Over the next several weeks we are going to describe those forces and share our opinion as to what we believe will evolve in the American economy over the next 12 months. 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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Repricing – Financial Markets – Week 7

Zimbabwe: A small country by the name of Zimbabwe recently came to my attention. It has been reported that Zimbabwe followed the classic socialistic method of government ownership of assets and Quantitative Easing to an extreme. The central bank has created as much money as the government wanted. The result is predictable… absolute economic turmoil. The most fascinating bit of information is that the rate of┬ádaily inflation in Zimbabwe is 98%. People there try to get paid daily so they can rush out and buy something with the money before it devalues again. I don’t envision anything like that happening here in the United States, but is is an illustration of the importance of having adults running the government and financial system. One final note about Zimbabwe. The economy of Zimbabwe will ultimately collapse. It could be the straw that breaks the back of the global economy. Venezuela is a great candidate for that distinction, but Zimbabwe is even closer. China would set off a tsunami economic chain reaction. In every case the re-pricing of assets will...

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Repricing – Financial Markets – Week 6

Venezuela: This is an amazing economic story receiving very little press coverage. Venezuela has some of the largest oil deposits, some of the most fertile agricultural land in the world, and a hard-working, well-educated population. Yet is is an economic basket case after 20 years of socialism. The average Venezuelan has lost 20% of their body weight over the last year and anyone that can flee the country is doing so. The Cubans are running the Venezuela internal security systems in return for access to some of the oil. But the oil system has been so poorly managed that it is near collapse. Russia and China also have loans secured by Venezuela’s oil. The global price of oil should continue to be in the range of $40 to $60 per barrel for as long as the eye can see. There is just simply too much oil available. Those figures are a fraction of what Venezuela needs as a sales price for their oil in order to balance their budgets. Until complete collapse occurs, there is no relief for Venezuela. Russia, China, and Cuba will sooner or later effectively own Venezuela. None of those countries’ economic systems are viable. When Venezuela collapses, the ripple effects will hurt the global economy. Assets will be repriced....

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Repricing – Financial Markets – Week 5

Japan Quantitative Easing (QE): Although Japan has recently reported some inflation consistent with their stated objective, their Quantitative Easing (QE) has continued unbounded. When The Fed cut back QE in the US the amount of QE provided by the Bank of Japan (BOJ) and the European Central Bank (ECB) increased their QE in order to provide the same total QE to the global economy. Now the ECB has indicated that they are going to start tapering back their QE effective the summer of 2018. Bank of Japan has not made any such statement. Assuming that they do not by themselves increase the QE in the global economy by an amount equal to what the ECB was doing, there will be a significant reduction in the liquidity available to the global economy. While ultimately healthy because some assets are bubbles (Bitcoin anyone?), the reduction in liquidity will be another source of re-pricing of...

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Repricing – Financial Markets – Week 4

Global Markets and China: We continue to be concerned that the Chinese banking system is struggling even though it has just been bailed out for the third time. In fact, the entire Chinese economic system is a bubble waiting to burst. The global economy is so intertwined, it is impossible for one country’s economic activity to not impact the rest of the globe. Especially when the country is a big player like China. Chinese banks have been playing games providing high yielding investment products in a manner that has not been regulated. The bank regulators in China have begun to force their banks to reduce these products. If the bank regulators in China are successful in forcing the banks to pare back some of their “creative” loan products, the normal result will be that those banks will have to (1) raise equity in order to have an additional capital cushion, or (2) they will have to cut back on their loan portfolios, or (3) some combination of the two. Whichever of those three alternatives occurs, this is a significant reduction in the amount of capital available to the second largest economy in the world. The result will impact the global economy and the re-pricing of all assets will...

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