Global Negative Bond Yields & How This May Affect U.S. Real Estate
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Eric: Hello and welcome to another episode of the invest Florida real estate show. This is your coaster Eric Odom along with Stephen Silverman Stephen crazy week.
Steven: Very crazy week and crazy times because there’s just so many things going on now.
Eric: Yeah. I mean, I think it’s time for us to have that that discussion.
I’m not sure we’re going to provide a lot of clarity for you, but I think it’s important to have the talk. You know, it’s an it’s a I’m not even to get into the political side of things because you know, I think a lot of us are just suffering from burnout of just constant craziness, but you know, but passed all the political stuff that’s going on.
There are some really insane things happening on the world economy and, we know how it affected us last time when things went sideways in the world. We saw in 1998. We saw in 2008 now we’re you know, very long in the tooth and this in this expansion period And so it’s I think it’s important for us to least to talk about what’s going on.
Of course, if we had Clarity would you know we. We would we would provide it for you. But I think more than anything. We’ll just for talk about some points that I think maybe you need to be paying attention to and just have your head on a swivel and terms of your individual market and what you’re going to do going.
What you going to do going forward, but don’t ignore these things that are that are happening. I mean, I think you’ve got to think clearly about how this is going to fit into your investment strategy going forward. What’s happening overseas is going to have an impact What’s Happening Here is going to have an impact in terms of the inverse yield curve and some other things that have started to occur over the last few days.
So, Steven, we actually had something very good happened. You know, we had somebody left a good review and we love reviews
Steven: Right and left a good review of let’s certainly encouraging.
Eric: Yeah, my preference is to have the reviews where people criticize your manner of speaking in your English capacity.
Steven: We got one Review like that. So, what why don’t you get a partner who can talk English?
Eric: Yeah, we need some of this.
Steven: Wow. I have some comments about that. But I think he has someone has to be offline.
Eric: He had something against Africans. That’s an issue. Yeah, no Africans on the show. But I don’t I think he was joking Steven, but this guy actually pretty serious.
So, it does help us when you guys leave comments because our guests that we work hard for you to try to bring on the show. They want to read and see what people are saying. Is it worth their time to come onto the show and talk with us and so it does help if you not had a chance to do that?
I would appreciate if you go onto the iTunes Store or to go onto Google play or Stitcher or any of the other Distributors syndicators of podcast and leave us a review. It helps us a great deal. But I would do want to read one from Green Man gave us a recent review here. It says thank you for bringing on informative guess with experience and practical knowledge.
It’s exciting to listen to and fun to play Monopoly my mind, which you guys rolling the dice keep up. The great work green man. We really appreciate you taking the time to leave that review for us. It is Meaningful. And anybody who is so inclined to do so would appreciate you two to do also Steven anything else before we get rolling in?
Well, I guess we are talking economics today.
Steven: We got a lot to talk about. So, let’s rock and roll.
Eric: Let’s roll on
Steven: Today we have with us. Neal Bawa, Neal is affectionately known as the mad scientist of multifamily, he is a technologist and entrepreneur Neal is CEO and founder of Grocapitus a commercial real estate investment property.
He acquires commercial properties all over the US he’s covering portfolio is over 2,000 units are over a hundred and eighty million dollars’ worth projected to increase to three thousand units. In the next 12 months he is active in student housing and he is in nine different states Neal also serves a CEO of multifamily University and impart and apartment investing education company.
He is a top-rated speaker at conferences and events throughout the country nearly 5,000 students’ attendee’s multifamily seminar series each year. Neal’s management techniques and revenue optimization techniques for multifamily are considered unique in the industry Neal. Welcome to the invest Florida show.
Neal: Thank you guys. I’m delighted to be back on the show.
Eric: Yeah. Yeah, we are. I really enjoyed having you the first time and if our listeners might remember Neal, it’s probably been a little over a year maybe about 14 15 months since Neal’s been on the show, but he’s a very. Numbers base guy and Neal actually had we’ve been communicating back and forth about some of the things that Stephen and I had wanted to get on the show some of the topics and you know Neal had sent over a PowerPoint presentation that he had done and in regards to what’s going on in the market from a from a Global Perspective in the United States and also abroad.
And I thought it was very pertinent because of what you know, what’s happening right now with the fiscal and monetary system that what what’s going on to have Neal talk about it because he’s a knowledgeable guy and he’s really studied this situation. So, we’re really looking forward to getting into this with you today Neal.
Steven: It’s nice to get out of the weeks Neal. So, we are looking just to get the overall big picture. Maybe we can just start off your analysis of what’s going on a global basis.
Neal: Yeah, and I think that that is very pertinent today. So, in the past the before the 2008 crash our economy was you know connected to the global economy but was still somewhat insulated in that something that happened in Asia or in the Eurozone took 12 to 18 months to actually trickle down to the US economy.
So, there was this time to react this time due to change things as time for that effect. To be to be factored into whatever the heck we were doing and here’s what’s happened guys that’s changed. So now we have a true global economy because we are the reserve currency of the world and also the safe haven of the world.
We now get affected very quickly by what’s going on in the global economy, and I have to tell you. Today is actually a great day to talk about this because the stuff that is happening on a worldwide basis is so ridiculously bizarre that I can’t imagine anything like this happening. So, we have an economy a Powerhouse economy.
Like Germany. Germany is a manufacturing Powerhouse; you know strongest economy in the Eurozone yesterday for the first time in their history. They sold 30-year bonds at negative yields. That means that if you want to buy a German 30-year Bond, you have to pay for the privilege of lending money to the German government for 30 years.
This is very important for people that are in real estate in the US to understand because this is like an 800-pound gorilla that affects everything that is happening in Tampa. Everything that is happening in San Francisco and I’ll explain why this stuff is so important. But I’ll also explain why it’s so ridiculous, right?
So as of yesterday, Bloomberg reported that 17 trillion dollars, that’s not 17 million. That’s not 17 billion. That’s 17 thousand billion dollars of bonds and worldwide have now gone negative. But what that means is that those bonds yield has fallen below zero and it has never happened in the history of the world before we were at thirteen trillion back in the 2014 timeframes and we sort of adjusted but 17 trillion dollars of negative yielding debt.
Now, what does that mean for us? You know if I’m buying a single-family home in Tampa. What does that mean for me? Well, it means everything because that’s 17 trillion dollars is a market that is much larger than the US commercial Market the U.S. Real estate market and imagine how crazy those fund managers are going right now because if 40 or 50 percent of their portfolio their huge massive portfolio somewhere in the Eurozone or Japan if it’s negative, they’re not making any money. They’re making nothing. In fact, negative yield. They’re losing money. But let’s by buying bonds.
Eric: Let’s go into the mindset of somebody that would buy a negative yielding Bond deal. Is it being it is it because they believe deflation is coming or what? What’s the driver for investors to invest in a negative yielding ball?
Steven: Political uncertainty maybe.
Neal: I think all of those right, so the first thing is whenever there’s political uncertainty The Playbook says buy bonds, right because bonds basically are like cashed to those sorts of people sure. The second thing is that it is because people are brainwashed that portfolios have to be a combination of stocks and bonds and these days more and more portfolios are actually now have a third component in the pie real estate, but still that’s new that’s just happened in the last few years.
Most portfolios are stocks and bonds regardless of whether it’s a billion-dollar portfolio rip. It’s a trillion-dollar portfolio. And so, people have been brainwashed into that. Second, many countries if it’s a public fun. Let’s say it’s an it’s a pension fund. They are required by law to hold a certain percentage of their assets as bonds.
So, they don’t want to hold them. They want to get away from bonds because they realized that negative bonds are a massive risk to their portfolio. They don’t want to be losing money on 40 or 30 percent of their portfolio. So, one of the interesting things that had that’s happening worldwide right now.
That really plays into real estate and stocks is that more and more fund managers that are that have trillion-dollar portfolios with a “T” are actually asking their governments to make changes so that they can have less bonds and more risk Assets in their portfolio stocks are risk assets real estate our risk assets.
There are also other kinds of risk assets and in more and more fund managers throughout the world are saying. You realize that there’s 17 trillion dollars of negative yielding debt we’ve got to change something. Otherwise, we cannot hit our deals. We cannot pay pensions. We cannot pay social security and so ridiculous crazy things are happening worldwide.
But they’re not happening here yet. Right. So, we have a 10-year treasury that basically pays out to percent and we might say that’s a very small amount of money. Well, it’s the best in the world among the developed economies. Where fought much better than Germany at zero Denmark is doing crazy things and this happened last week, and it was it was a warning Bell the size of Godzilla.
A bank in Denmark a few weeks ago started selling 30-year mortgages at negative interest rates. You know what that means. I take out a four hundred-thousand-dollar mortgage and in 30 years, I pay no interest and I don’t even pay a hundred percent of the principal back. I pay ninety six percent of the principal back.
The remaining four percent is paid by the lender. This is not a joke. This is an actual mink. You can Google the bank and you can go out and get a 30-year loan for free. Right. Now that bank has costs everybody in that ecosystem that that made that loan happen had cost. So, the bank isn’t just eating the $4,000 they’re eating all of those costs and this is stunning.
That the fact that that mortgages are negative in in Eurozone means that it’s going to affect us. So maybe we can also talk about what all these crazy things that are happening all this stuff. How does it affect us in the next 18 months because boy it is going to affect us big time?
Eric: Let’s talk about it.
Neal: So, the first thing is this that there is a search for yield those people that have 17 trillion dollars of negative yielding debt in their portfolios, whether they’re the Japanese whether they’re the Eurozone people whether they’re Americans because you know, we’ve. We’ve been buying their bonds for a while to it’s not just them buying our bonds.
We buy theirs too. Well, those portfolio managers are freaking out because they’re saying how is it that no part of the world is in a major recession right now. The US economy is doing really well. The German economy is doing really well. But bonds are at neck are negative. We’ve got to change the way we think we’ve got to basically put more money into risk assets.
So more and more, you know builds are appearing in legislators and parliaments of these countries saying we’ve got to rebalance our portfolios and start doing the less bonds, right and portfolio and. Trump is actually fueling the fire. He said yesterday. I admire Germany’s negative yields because he says the country is being paid to borrow.
So, this is the absolute wrong attitude. I’m sure the Federal Reserve right now is going please could you know Trump just shut up. He doesn’t know anything about monetary policy. It does. No actually anything about this. The worst thing that you could do is basically have a country that has negative yields because it really affects the growth of that country.
It’s a good thing that we are at positive yields, but our politicians want to go Germany’s route. Why because they can lend, they can basically borrow more money. You know, our treasury is financing our ridiculous trillion-dollar deficits with these kinds of Treasury bonds and of the treasury bond of the U.S.
You know, the 10-year bond goes from let’s say 2% where it is right now or little under to 0 guess how much more money we could borrow. And that’s the only thing that politicians are thinking which is crazy because in the long run these things all damaged economies and the eurozone’s economy has been at 0 for 7 or 8 years and we’re seeing the kind of crazy damage that’s happening mortgages that are below 0% not just bonds but mortgages below zero percent.
So, the impact on us is multifold number one. Money is going to flow from the Eurozone and from Japan into the US economy. It’s going to flow into our risk assets into our stocks into our real estate because they’re looking for yield. They’re desperate for yield because they need to hit a certain amount of yield to keep paying out their pensions or whatever it is that they’re doing.
And so, so you’re going to start seeing an inflow of money coming in from everywhere in the world to us because we are the only developed economy that is actually issuing money out. So, this might extend are already fairly outrageous real estate and stock bubble make it significantly bigger and it is going to be really hard to bust the bubble.
Because everybody else is making way less money than we are. Everybody else is issuing bonds at zero. How do you bust a big breakup that bubble the moment there’s a dip a whole bunch of whole amounts of money basically comes in saying hey, it’s a buying opportunity? Let’s go by U.S. Stocks.
Let’s go by U.S. Real estate. That’s what I’m seeing already happening and it’s accelerating
Eric: now you guys out in, California. You know where we consider secondary or tertiary market in Tampa here, but we’ve certainly heard the stories of Miami the international flows that it’s drying up in one area, but it’s picking up from other countries. What are you guys seeing out there of you of the on the west coast? What are you seeing in terms of the investors that are foreign investors that are coming into you?
Neal: It’s changing. So, what’s what we are seeing is that the immigration-related money is drying up. So, Miami obviously has immigration-related money that comes in from Brazil and it comes in from Cuba and it comes in from you know, whole bunch of countries.
It’s doubt that part of it is true. It’s drying up but it’s it same thing for California, California gets a lot of money from Mexico and it gets a lot of money from China and India and that seems to be slowing down because of our current immigration policies being more restrictive and you know, the limit being raised for the eb-5 investors, you know, now they have to put in millions instead of 500,000 to get a Visa all those things are affecting that market negatively.
And Miami and California are actually the ones affected the most but on the other hand institutional money coming in from the people with trillion-dollar budgets appears to be accelerating simply because they have no other place to put their money in and the U.S. Seems like a safe haven.
I mean I got have to say this and what I’m saying, I know I’m what I’m about to say sounds absurd, but I think about what I’m saying, you know, we are the best-looking pig in the pigsty. There’s no other economy in the world that has our level of unemployment our level of growth or you know track record of growth over the next last five years.
That’s a developed economy in the world where else can the money go but to come to the U.S. And I know that we’ve got our own massive challenges, but the problem is when other people look at their challenge’s hours appear trivial and technically the reserve currency of the world can actually. You know push up their debt a lot further than everybody else.
We are at a hundred and four percent of GDP in debt, which is I think a disgusting number but why do why would you know as you’re the Eurozone care about that then they’ve got countries are two hundred percent of debt and they are not the reserve currency of the world. Japan’s over 250 China’s over 250 of you know in GDP.
So, why we worry about our debt. The question is should we be worrying about it at this point? You got to be pragmatic about it. It seems like this is a race to the bottom and everybody else seems to be tanking their currency and their debt much worse than we are.
Steven: So, let me ask you a question in your conversation. You mentioned the word with a big “B” in front bubble. And so, can you speak to do feel like we’re in a bubble now in the U.S. Even though it can be extended.
Neal: I think so. So, by traditional valuations. Multifamily appears to be in a bubble and some parts of single-family Market in the US are in a bubble.
So, I look at Denver, right? I look at prices in Denver in 2006. And today were up 40 or 50 percent. It’s some crazy number. I look at it, you know parts of Miami. I look at New York San Francisco Bay area for sure. So, there’s definitely. A significant number of markets that are in a single-family bubble multifamily appears to be in a bubble in many markets around the U.S.
The problem is this the words that were most important in what I just said is by a traditional standard by traditional measurements and I am of the opinion that traditional measurements of risk are breaking down. And that is what you know, if you listen to Bloomberg everyone’s basically saying that it seems that the past in the past and the future might actually be different for this time.
And these are not you know, some Fringe guys like Peter Schiff talking about it. These are Main Street commentators that previously have always said no, it’s not any different everything reverts, you know, there’s a reversion to Norm and at this point. It’s possible that there may not be reversion to mean it’s possible that there may be a new mean here and that new mean is driven by the fact that world growth is slowing and a yield of real estate.
Even at these crazy prices is so much better than the alternatives. That it may be difficult for us to prick our bubble. Will it burst sure everything bursts at some point, but I think that it’s very difficult to burst this bubble with so much pressure so much money sitting on the sidelines and so much money at negative yield.
It’s very difficult for us to do. To burst the bubble. Maybe it can be slowly deflated. That’s you know, that’s very hard to do. But I do think that there is a bubble by traditional valuations.
Steven: So, in terms of where we are now in the you mentioned recession last time, we had a recession. Really?
It was something in banking that then fell upon real estate and it seemed to happen economy by economy and then became Global and if we earn our global economy, what’s the possibility of recession and how do you think it would happen?
Neal: I think that the Eurozone drags the U.S. Into a recession that there’s no reason for the U.S.
To go into a recession at this point of time. I think our economy is doing really well remarkably. Well, right we’re in this. Are the Goldilocks zone that I’m nobody could have predicted three or four years ago and but I but the problem is I mean you look at what is happening with Brexit in England, you know as we talked about a little bit earlier, you know, the a lot of high-end London real estate.
Now it’s not as big as the global financial crash of 2008. It’s definitely a smaller market and it’s less of a contagion because these are at least we know where the money is, and which banks are going to be insolvent in in London as a result of it. But I do think that it could drag us into a recession.
And when I say recession, I don’t mean Global Financial crash. I mean regular vanilla nine-month typical recession, it could drag Us in there. It may not be England. It might be Italy, Italy has more bad bonds today and bad debt today than we did in 2008 as a percentage of our economy. So, they’re in a bad position Greece’s at once again in a bad position.
So is Japan so we’ve got a lot of countries out there that are in. Desperate trouble compared to us and one of them could easily drag the world economy into recession which drags us into a recession. So, I give it a higher than 50% chance of recession in the next 12 months
Eric: yet folks in Florida where driven are foreign buyers and this is significant number. It was the majority of the value of Florida real estate and I thin, First part of this, this decade foreign buyers and they’re the ones you really pull this pull us out of the recession the pullback that we were having and it’s important to note that Britain Germany, Canada and Brazil over the last decade have been the biggest consumers foreign consumers of Florida real estate.
And if you have a situation where you hiccup in in in the UK, we’re definitely going to feel it here. Because there they are a significant piece of the demand of the of the Florida real estate market. So, the Florida listeners, that’s something to definitely I’ve been banging the drum on this ever since break that happened.
You got to pay attention to the UK and Florida and some other states. Because they are significant buyers of real estate here and you take that piece of the equation out and your demand dries up. It can’t help but affect prices. So, it’s something to keep in mind
Steven: So, Nealwhat happens if we do have a recession because if its traditional markets have been changing some of the traditional tools because with our interest rates so low, how do we combat a recession like we have done in the past?
Neal: Well, I think that the tools are the same their effectiveness is going to be reduced. So, it is very clear that the US Federal Reserve has a Playbook and they’re going to double down on that Playbook right their strategy is known as. You know pretend and extend or extend and pretend whichever one in colored and there’s very clear indication that they are doubling down on that strategy.
So, we have an economy that’s growing 200,000 jobs, you know a month at you no less than four percent unemployment. Right and we have just cut interest rates. I think that if you told Volcker in the 80s that we just did that, you know, he would not be would not believe you know, Federal Reserve official would have believed you even 10 years ago that we would be cutting interest rates at less than four percent unemployment and a healthy economy.
This is a sign of two things. Number one cutting interest rates have long-term consequences and they’re going to catch up with us. Right we’ve done this for eight years. And now we’re seeing the consequence of cutting interest rates worldwide and those consequences means slowing growth for everyone in the world including us.
The second piece of it though is they are going to double down one thing that has been proven which is interesting is that. Nothing bad happens when you cut interest rates below zero, we didn’t cut them below zero in the global financial crash, but other countries did nothing really happened to their economies at all.
So, I think that it is possible that if we go into another worldwide recession, maybe not as bad as 2008. I think 2008 was a crazy outlier. It’s very difficult to have or another recession as bad as that one. And so, I think what will happen is that. That other countries will cut them to below zero and we’re going to cut them back to where we were hopefully, we don’t need to go negative.
But if they need to, they will go negative and also, I think what we’ll start doing is quantitative easing which again is good for Real Estate quantitative easing. We know a lot of people call it money printing it’s not really money printing its liquidity you basically are flooding the banks with liquidity and almost forcing them.
Through monetary tools to learn. Almost pushing them to lend it’s like the bank has to lend money out, which means that lending standards get looser. So, I think that’s what we’ll see in the next 12 months will see The Return of quantitative easing or QE will see lower interest rates. I bet you they’re going to.
Cut interest rates again in September or December or both and when that happens it actually in a way supports the real estate bubble right lower interest rates and higher liquidity. How can that not be supportive of real estate, you know, if you go into a recession of course real estate is going to suffer prices will go down rinse will go down.
But the beauty of it is the same damn thing that happened in 2010 11 12 13 when we came out of a recession. It can be expected when we come out of this one. We have a monetary policy system which basically loves blowing asset bubbles. So, when we come out of this recession, I expect we’re going to blow an even bigger bubble.
Eric: Yeah, I think in this in the short term. Most of what you talked about Real Estate Investors are listening to this podcast. They had that’s great man. Real estate prices are going to continue to increase and I’ll continue to speculate and that’s it’s not all unicorns and sunshine roses. And if you look more to the midterm and the long term and I think that’s the point that you’re trying to make correct.
Neal: Exactly. Yeah. Absolutely. I feel that we are at the point where. The one thing I would say to people is follow what the Federal Reserve of the U.S. Does because it almost seems like what the politicians do doesn’t matter. It doesn’t matter. So, a too many people are worried about our debt. I’m not and people might say Neal.
We’re spending a trillion dollars a year that we don’t have how can you not be worried about it? The answer is that we’re probably going to be the last Domino to fall and there’s people ahead of us that are doing things much worse than us, and I’m more worried about that. And when they do those things are fed is going to basically use tools.
And those tools are going to help real estate. None of that means that real estate will do well in the upcoming recession. It didn’t do well in the last one. It’s not going to do well in this one, but I would still hold through that recession. The only thing that I would change has I would change my Approach.
During the recession or when I see GDP going negative. I’m going to change my Approach from trying to make money for my investors to just Capital preservation. You know, I’m not going to raise rents aggressively. I’m not going to rehab units aggressively. I’m not going to you know, try to basically do those kinds of things.
I’m just going to try and hold my way through the recession. Knowing that at the end of the recession, I’ll be rewarded with crazy ridiculously low interest rates for another three or four years and I could just make money from that. I mean, I almost feel sick when I say stuff like this because what we’re really doing is stealing trillions of dollars from the Savers and handing it to people that are in Risk markets like me.
Basically money is being transferred from anyone that’s on a fixed income Social Security or pensions and being handed off to anybody that is in stocks and real estate and I don’t think that changes because it is I mean you’ve already seen what’s happened in the last two or three months. Our Federal Reserve is cutting interest rates at 3% unemployment
Steven: It’s so interesting to me what you were saying because. reading the paper every day. It always felt to me like it was an aberration. Why are they cutting it? I don’t know but it can’t last, and I’ve always been thinking they have to raise it back up again soon. So, it’s an opportunity to try and buy or do things but the prospect of it going even lower is a whole different scenario that just honestly didn’t cross my mind.
Neal: Well, I want to talk about that. Right? So, a lot of people say Well, they’re just doing it in. Oh, they don’t have to do it. They have a choice. I don’t really see it as a choice. Imagine this you’ve got the rest of the world cutting interest rates. So, everybody’s talking about cutting interest rates.
All the bonds are going negative. And here we have a Federal Reserve that has an economy strong enough so that they could hold or raise interest rates people think they have a choice. Well, they don’t have a choice because our economies are so connected. Imagine what would happen if we raised interest rates today?
Okay. So, we raise rates guess what happens we’re now offering three percent on treasuries on 10-year treasuries massive amounts of money floods into the U.S. That money makes our dollar so strong that within three months our exports take a catastrophic hit and we go into a recession. Maybe it’s a delicate Balancing Act.
You cannot allow your currency to get so strong that our exports get damaged. And so, the FED, I don’t think they have a choice right now to cut interest rates. I think that they have no choice at all. They have to follow everybody else down because if they don’t and a big gap opens up then our exports get crushed.
Eric: So, what’s the bottom line here Neal? I mean, what are you telling your team members to do in terms of outlook for investing in buying additional holding additional real estate assets. What are you how are you telling people about you know how to deal with this pending crisis?
Neal: So, I mean, here’s a list number one.
Expect a recession in the next 12 months. If you’re if you’re doing rehab projects finish them by then finish them quicker the moment you start seeing a single quarter of negative GDP growth are basically become very conservative at your assets. Whatever you’re buying. Now is a good time to be buying, you know, B assets rather than see C assets might you know class C assets kind of you know, the workforce assets might be under over performing at this point, but they traditionally don’t over perform during a recession.
Keep in mind that the average tenant in a class C has less than four hundred dollars in the bank if they’re ours get cut or they lose their job. They’re going to stop paying rent. And so, you’re going to see some of those challenges. So now is the time to be a little careful to be buying a better class of assets, even if it means less cash flow, but it’s also a time to recognize that that what is going to happen over the next 12 months is going to create another buying opportunity for real estate and I think for those of you that are in stocks, it’s going to create another.
Buying opportunity in stocks because you can see a dip in real estate. You see a dip in stocks and hopefully my point is when’s that dip ends. The pickup will be even larger than it has been in the past. So, time to be time to be careful. Because I think that the Goldilocks economy that we have cannot last and I do think that there’s at least a 50% chance of a recession within the next 12 to 18 months.
Steven: So really like start to build start building cash reserves and more conservative kind of assets cash reserves so you can take advantage of when the dip comes.
Neal: Make the cash reserves are really key. So, we are looking at all of our projects and we’re beginning to tell our investors, and this is just a new thing for us because obviously things are moving fast in the world economy.
We’re telling investors something like this. My job is to give you cash flow when the economy is like it is today the Goldilocks economy my job changes when I get close to a recession, and so if I sense maybe 1/4 of negative GDP growth. I’m going to stop Distributing your cash and I’m going to start building a war chest.
It’s still your money, but I’m holding it if growth turns positive again, great. I’ll send you that money. If growth stays negative. I’m going to hold on to that cash and any new cash that comes in. I’m going to keep adding to that war chest. Because God only knows how long that recession will last, and that cash will help me get over this hump on to the other side where the Federal Reserve would have made life much simpler for me with quantitative easing High liquidity and low interest rates.
So, I do get benefits on the other end, but we’ve got to get through the recession if it happens.
Steven: Well, it’s certainly a whole different scenario from the Lost recession. I mean, I woke up from the last recession wondered how that whole thing happened, but it was catastrophic having some kind of a game plan is really an interesting scenario for all of us. It’s just always so hard to see the wood from the tree. So, I appreciate your perspective on that.
Neal: What sounds good I once again, as I said, this is not necessarily a good thing for. The world economy or the US economy in the long term, but in the short term, it seems that the Federal Reserve and all the entire banking system are the friends of real estate in the friends of stocks.
But being part of a bubble is always unnerving and so. I’m slightly excited and also slightly nervous about what the next 12 to 18 months holds.
Steven: I’d love to ask you a tangential question because the bigger biggest lender in the world now is China, how do they get it? How do they get affected by this and they’ve been manipulating currency? Also, I guess to try and. Counter
Eric: Everything the whole cat that does talk about the craziness of the of China because you have these tariffs going on and so they’re deep they devalue their currency, right? And then of course, they’re the largest holder of US debt they get paid back at it and appreciated currency. Essentially. It’s all these a big Mickey Mouse game.
Steven: Yeah. So, I mean, I’m trying to get a handle on, and I really understand China. It’s beyond my pay grade, but I’d love to see if you have any thoughts on that.
Neal: Well, I think that the Chinese cannot, you know call their debt on the obviously they are huge holders of ours cannot call their debt to us easily because they know what that will do.
I mean basically they are part of the world economy and it would create a catastrophic crash. I’m or I’m more worried about the trade War getting worse. I mean I’ve seen these things are trade war is kind of like a war. Right a regular War right and in a regular War people don’t use common sense.
I mean once you get Beyond a certain level everybody’s just trying to kill each other and I see that there’s a I see that there that that’s beginning to happen. Now in this, you know Trump versus China sort of debacle. And so, there’s in my mind. I see it getting worse. A lot worse before it gets any better now back to your question on what is you know, what is what is China mean as an X Factor?
Well, I have to say no one knows there’s more and more articles about what happens if we get into a situation like 2008 this time. We’re more of the assets are held by China given that in the past. All the banks were talking together, but China has Shadow banking that basically is not part of the world system.
They’re not transparent and their reaction is something that is very difficult to understand and remember that in 2008 2009. There were lots of horse-trading Banks got together Road off each other’s debt did all kinds of stuff and those banks have been collaborating for decades before that and they’ve been collaborating for the last 10 years, but the Chinese banks are not in there.
We don’t know how they’re going to react if something bad happens. So, the only answer I can give you is your right. It’s a massive X Factor and nobody knows. What they’re going to you know, react like if something does happen in terms of a recession, I mean remember a vanilla recession doesn’t affect anything, you know, we’re talking about potentially something that’s more drastic than that
Eric: And I think everybody that was actually engaged in. In their profession in the last recession is constantly looking for the boogeyman around every corner. You know, we me personally when I watched The Big Short live living a parallel universe of what went on there. There’s so many signs and keys that we actually talked about and we severely underestimated the.
The eventual outcome and so, you know you talk about China you talk about Briggs you talk about these other things that we’re all sort of looking for this this next boogie man, of course, no recession to our sessions are like they’re triggered by different things. They’re different severities, etc. Etc. But I don’t think anybody had lived through the last one will ever recover mentally. And I’ll prop perhaps a little bit over cautious in many instances. So, it’s great to have this these conversations to at least hash it out. You know.
Neal: Yeah, and I think that the things that happened last time nobody thought about them. Well this time it could also be things that nobody knows about there’s like we talked about Brexit being a weird sort of thing obviously, you know, that is much higher this time, you know, 10 years later. We piled on trillions of dollars of debt. So, we don’t know how that would affect us. If we had a recession. I do feel that there’s a there’s a silver lining. I think the banking system is much more ready this time. I think the fact that the FED is already cut interest rates show that there are much more responsive than they were in 2007 when they should have been cutting interest rates and they weren’t so the fact that they’re doing it at this point of time means that. It is likely to be a shallow recession, or we might narrowly avoid one having said that the yield curve has in bed. He has inverted three times in the last two weeks. Well, you know, they say that if the yield curve inverse that that tells you there’s a session is coming
Eric: For Dixon next 18 months.
Neal: well. It’s now happened. He exactly 18 months from our 12 to 18 months from now. Well, it’s inverted three times in the last week today arms are offering lower, you know, a higher interest rates than fixed rate loans so you can get a 30-year loan. Let’s get a lower interest rates then an adjustable mortgage. That’s a very bizarre situation. Don’t you think?
Eric: Yeah. Yeah, I mean logic obviously with the inverse the inverse yield curve tells us if you go back and take a look at the history when it happens. It definitely is not a good harbinger of what’s happening in the near term that people are concerned about what’s going on in the near term. So, I and I you. Your head spinning with so much of this data. People say well, no, it’s different this time. And this is why it’s different in inverse. Your color is not that big of a deal and of course every ounce of my mind says I’ve seen this in verse you’ll cover before I know where it leads. So, I you know, I don’t know this era of fake news. I don’t really know
Steven: but it is interesting just in perspective for Real Estate because I remember. Meeting with one broker and he told me what a tough time he had in the in the late 80s or 90s. And when the recession came in 2008, he looked at that as an opportunity, although. Nobody expected to be quite that opportunity, but you know you learn by experience. And the first one I really went through was 2008 and it was a shocker for me just to see what happened. And so now you realize that if things do improve after those recessions that you have to be on the lookout for them and be ready and as Real Estate Investors, we should all position ourselves like that.
Neal: I do think that one of the nice things is you’ve kind of seen this before once and if the Playbook Remains the Same. Then I think that there’s a high chance that real estate will come out of it the same way. So I think I’m more prepared to look at it both as something that I’m cautious about but also something that I have some excitement about and I think other people are feeling the same way this I don’t think that what’s what might happen this time in terms of recession might be different from 2008 in the sense that it.
It will end up with the bank’s taking the same sort of actions to bring the economy back. But I encourage you I think that today if you’re a real estate investor, you should be reading Bloomberg. You should be reading what’s happening in the financial world because the stuff happening in the last week or two has been extraordinary including that Danish Bank doing 30-year mortgages at under cost under 0% So definitely. There’s something weird happening and it’s happening very quickly.
Steven: it’s a progression, you know Neal as you get older you mature but it seems to me that aging is a terrible price to pay for maturity. But you know now
Neal: what now what it’s unavoidable you might as well get maturity because you’re going to get older anyway
Eric: Neal. We really appreciate the time you spent with us today. Is there anything else you’d like to? You’d like to add before we let you go.
Neal: Yes. I do want to point out that. One of the key demographic Trends in the in the country is that because of all this stuff that we’ve talked about today. We’re America’s middle class basically is being lost people, you know, a lot of the middle class are getting pushed down.
They can’t afford homes anymore. The homeownership rate has been falling since 2005. I fundamentally believe that being a landlord is one of the best things that you can do for yourself in the next 30 Years. So, none of the things that we talked about change that I think you want to be a landlord.
Obviously, you want to be cautious and all that stuff that we talked about today but have a long-term plan to be a landlord because if you look at the history of other European nations in Japan, actually when these sorts of things happen, and Savers get punished. More and more people have no recourse but to be landlords.
I do think that we’ll see that the percentage of Americans that lives in a single-family home 20 years from now is much lower than it is today, which means that they have to live somewhere so fundamentally the concept of being a landlord. This is a great time to be a landlord. I think for the next 10 to 20 years.
Eric: Good. Good advice, Neal. I would remind people if you haven’t had a chance Neal is a very numbers oriented analytical guy. I’d encourage you to listen to the last podcast talking about multifamily. Also, Neal if folks want to get hooked up with some of your educational seminars and what not how or they got a deal for you. How can they reach you?
Neal: The best way to reach me is through my website, which is multifamilyU.com that’s multifamily followed by the letter “U” .com. You’ll see about 50 webinars from us including one called how the banking system changed real estate forever. So that’s is some of the content here was about that one, but you’ll also see lots of single family and multi-family analytics webinars that point out the best in the worst cities in the U.S. To invest in tools techniques processes systems. To make real estate investing work and all of it is really offered for free. So, check out multifamilyU.com and you’ll see multiple ways through that website to connect with me personally.
Eric: Neal’s got a great system. I mean we talked about it on the previous podcast of trying to put together an algorithm of where he would predict in advance where the best real estate markets are going to be to invest in over the next X number of years as I think it’s definitely worth. The worth listening to that and some of other of the courses that Neal talks about he’s not your typical guy. Rah-rah guy in terms of multi families a very takes a very analytical approach and a very numbers-based approach and he tries to teach you what’s inside his brain and how he got to where he got. Steven a anything before we let you go.
Steven: No, I enjoyed the session with the mad scientist. It’s it was just very Illuminating. So, thank you Neal and thank you. We’ll catch up with you again in the near future, hopefully. We’ll have a mild recession, or maybe we’ll all have.
Eric: Don’t want when I was rooting for recession.
Neal: I was shooting for one. I’m just hoping we escaped one and given the actions taken by the are fed. I think that there’s a good chance that we might Escape, but who knows they’ve learned from your home.
Neal: Anyway. We hope we are so let’s end at hope. I’m a hopeful individual and I hope that we escape it.
Eric: All right.Thanks Neal. Thank you, Neal.
Neal: Thanks so much, bye-bye.
Eric: And, that was Neal Bawa while he’s talking high level economics. We’ve had him on the show before always appreciate Neal in sight. He certainly analytical guy and a numbers base guy. And so, it’s great to have him kind of come on and talk.