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Real Estate Economic Forecast Navigating Investments in Interesting Times
By David Campbell On 11/11/2012 · 2 Comments · In Inflation, Investment Training, Newsletter
Navigating Investments in Interesting Times
Economic forecast by professional investor David Campbell
As Americans and as investors, we are definitely living in interesting times. Regardless of how you personally voted last Tuesday, it is essential to feed the election results into your investor crystal ball so you have a more educated guess at where economic puck is going.
I will write about our economy in much more in depth in the future, but for now here’s my basic economic forecast. If you agree or disagree with this forecast, I would love to know what you’re thinking. Come participate in a dialogue on our Facebook fan page: https://www.facebook.com/cashflowinvesting
COMING SOON – GOVERNMENT DRIVEN ECONOMIC BOOM: On Tuesday, American’s reconfirmed they are in favor of a socialist economy. The people have empowered the present federal administration to spend more and print more to increase the power of our federal government. I believe that America is about to experience an economic “boom” led by a major expansion of federal government spending designed to help American’s feel that the socialist economic agenda is successful at growing the economy. The current administration will spend and spend and spend until they can say “I told you socialism would grow our economy”. The massive amount of federal government spending will be targeted at bringing a divided country together. Most Americans will think we are experiencing an economic boom but it will really be the printing press at work. Inflation is like a drug that makes you feel great until the buzz wears off; then you have an economic hang-over. I believe we are at the end of the economic hang-over created by the last boom and bust cycle. Expect to see a major expansion of social programs funded by the federal government. I don’t believe the declining value of the dollar will plummet society into chaos, however I am more confident than ever that high rates of inflation are imminent and inevitable. Caveat: local and state governments are being pressured to provide social services they cannot afford. Only the federal government has the power of the printing press. When you are looking for a state or city to invest in, consider the economic health of the local and state government. Although I love living in California, I will not invest here because the state is on the verge of bankruptcy and their aggressively high tax burden is causing jobs and people to migrate to the South and Southeastern states who are more job friendly. Texas is top of my list for states I want as a business partner. Retirees will have their fixed income eroded by inflation and will be more prone to relocate to lower cost parts of the country; especially those warmer states with no state income tax: Nevada, Florida, Texas
COMING SOON – AMERICAN ENERGY BOOM: The amount of untapped oil and gas reserves in America is staggeringly; America has more untapped oil and gas than all of the middle east combined. New technology (“fracking”) has given us a cost effective way to extract this resource. Low natural gas prices combined with EPA regulation uncertainty and lack of infrastructure in the North Dakota oil shale means extraction has only just begun. The current administration is likely to capitalize on aggressive natural resource extraction to help our country feel that their socialist agenda is creating prosperity. The current administration will expand and tax energy extraction like never before. Expect a surge of oil and gas production all over the US but especially in North Dakota and Texas. The taxes generated from the regulation and sale of this natural resource will provide much needed revenue to expand government social programs. This monetization of our oil and gas resources will strengthen the appearance that socialism is bringing prosperity to America which in turn strengthens the political power of the current administration. This revenue will create a lot of new jobs. Some of the jobs will be real (energy) and some will be artificially created through more and more federal stimulus.
INFLATION = CURRENCY SUPPLY x VELOCITY: Increased government hiring, increased entitlement programs, and an energy sector boom will stimulate velocity or the speed at which money circulates. The velocity of money will create inflation faster than increased supply of currency because the impact is more immediate. Many Americans are hoarding cash because of the economic uncertainty. As America emerges from the economic rock we’ve been hiding under, people will start spending again and that will rev our economic engine faster and faster. Most Americans are emotionally “done” talking about politics and are ready to watch the new Fall line up of TV shows, buy a new iPhone 5, and start shopping for Christmas. As aggressive government spending trickles down to job security and consumer spending we’ll see an uptick in the velocity of money. The reason we have been able to quadruple the money supply without seeing noticeable inflation is three fold (1) we exported most of this newly created money to foreign countries thus it is not circulating in the hands of consumers (2) consumer spending / velocity of money has been extremely low (3) Americans who want to borrow but do not qualify.
So before you misinterpret that I am rosy and bullish on the American economy, know this… inflation always leads to bubbles and mal-investment because it is difficult to know whether economic activity is a result of genuine consumer demand or government stimulus. We’re about to experience a period of prosperity that is part real and part stimulus. It will create un-uniform inflationary bubbles that will eventually deflate. Image it is 1999 all over again. Great fortunes will be made in the artificially stimulated and highly volatile stock market, the real estate market, and the energy sector. This next economic bubble could last for several years, but remember to question whether the prosperity we’re about to see IS REAL and whether it can be sustained. While it may seem tempting to invest for real estate appreciation in this next market cycle remember that you will need to time your exit carefully because each injection of stimulus will make the boom and bust cycle larger.
I advocate investing in income / dividend paying properties using high leverage and positive arbitrage. When the inflation happens, you can repay the debt using devalued currency, however if values decline you will not need to sell prematurely because you are collecting positive cashflow. I remain a fan of entry level housing and small retail properties that cater to low income demographics (Dollar General, Family Dollar, Dollar Tree, etc.) I want to own properties in geographic markets whose basic economy includes energy and/or agriculture because those industries are poised to remain relatively strong even if we experience stagflation. I want to stay away from owning properties in dense urban environments (e.g. downtown) that could be the gathering place for disgruntled mobs of people whose social benefits were protested or interrupted.
There is a small possibility that the current administration will socialize your existing pension plan, IRA, and 401(k) and force your hard earned retirement savings into a government facilitated plan like social security. Although I think the possibility of this happening is small, I think it is a risk worth mitigating by having your IRA self-directed into tangible assets or plan for your retirement needs outside of a traditional qualified contribution plan.
The second biggest risk to your financial future is socialization of your assets through devaluing of our currency. The number one biggest risk to your financial future is the failure to act when you see an opportunity. TODAY’S AMAZING BUYERS MARKET WILL NOT BE AROUND MUCH LONGER. Buy as much positively arbitraged real estate with 30 year fixed interest rate debt as you can and be vigilant.
I wish you much success navigating these interesting times.
Real Estate Investing Strategist
Founder of Hassle-Free Cashflow Investing
Office: (866) 931-9149 Ext. 1
About the author
David Campbell is the Founder of Hassle-Free Cashflow Investing an organization that helps train real estate investors and business owners and assist them with the acquisition of turnkey real estate investment opportunities. David is the CEO of a commercial real estate brokerage and property management company. His professional background includes production home building, commercial real estate development, apartments, condo-conversion, retail, and office.
Hey David. Enjoy reading your analysis. If I had to guess, I think there will be inflation due to money printing and increased money velocity if everyone jumps back into the market. However, here are some counter-arguments. First, the fed money printing only accounts for 10-15% of the money supply. The rest of the money supply is determined by fractional reserve banking. Due to increased regulation and bank caution, the money supply due to fractional reserve banking is reduced, such that the overall money supply is likely smaller. This, along with decreased consumer spending, is one reason why inflation appears moderate. I do concur that a lot of money on the sidelines and pent up consumer demand could increase money velocity suddenly and drive up inflation–in particular if banks start lending all of a sudden and thereby increase the supply of money. I believe, however, that the fed has the ability to curb the money supply further by increasing the interest rate banks are paid to keep reserves at the Fed. This would de-incentivize banks from lending, since they have easier money by keeping money at the central bank. I am not an expert and these are massively complex topics where lots of bright people disagree. I have even heard that a surge inflation could be beneficial to the economy by allowing people’s indebtedness to be devalued. Finally, I have heard theories that the constrained housing inventory due to banks holding back foreclosures along with extremely low interest rates will drive up housing prices, increasing comps used in appraisals, allowing many homeowners to re-finance, incentivizing builders to build, which will increase jobs and so on. I do think we will have a mini economic boom, and I also agree that it will be difficult to tell whether the inflation component of the boom will outweigh the real improvements in the underlying economy due to increased confidence and economic activity. Just my amateur 2 cents.
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