The Real Estate Espresso Podcast

Latest Episodes:

BOM - 21st Century Monetary Policy by Ben Bernanke May 31, 2022

Show notes

I met G Edward Griffin about six years ago. He’s a documentary film maker who wrote the book “The Creature From Jeckyll Island “ This book is a historical account of the formation of the federal reserve back in 1913 and the clandestine manner in which the Fed was conceived.

As real estate investors we hear reports about the Fed and how it influences so much of our investment environment. There is no shortage of people opinionated about the Fed. But how many truly understand the Fed and how it operates.

So when Ben Bernanke, chairman of the Federal Reserve during the financial crisis of 2008 and it aftermath wrote a book about the Fed and his personal perspective on the way in which the Fed plays a disproportionate role in influencing our economy, I just had to read it.

I also decided that I would share it with you. I’m not here to say that I endorse or promote everything that he has to say. But he has a perspective on the Fed that few others do and I feel strongly that something so vital to the underpinning of our financial system is worth understanding.

The book starts with a historic perspective from inception and how the role of the Fed has evolved over the years, through the Great Depression, two world wars, the entrenched inflation of the 1970’s and 1980’s, the financial crisis of 2008 and now most recently the pandemic and an unprecedented period of financial liquidity.

Fast forward to the pandemic, and it’s clear that the Fed didn’t have the tools to help the economy directly from the disruption of the pandemic and the lockdowns associated with it.

The tools employed by the Fed are new. Lowering interest rates would not put food on the table for those people who were forced to stay home for months during the period of social isolation.

Ben Bernanke was not at the helm during this momentous time. But he still has relationships with many of the people who continue to be directly involved in the decision making. He understands what rules needed to change in order to attempt bringing stability to the financial system. He is very quick to point out where the Fed has made mistakes in the past and made economic matters worse instead of better. His perspective is current to today’s dilemma of how to fight the inflation that has surfaced as a result of overshooting the stimulus initiated to fight the pandemic.

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Host: Victor Menasce

email: podcast@victorjm.com

Is Globalization Dying? May 31, 2022

Show notes

On today’s show we are looking at the question of whether globalization is dead. The conflict in the Ukraine has made it clear that some global supply relationships may be severed for years to come. The rise of China’s power and influence globally has given some reason to pause and question whether western countries should be manufacturing in China.

There is no question in my mind that globalization is changing, but the question is how?

If we look at the forces that affect globalization, they are best encapsulated in the concepts of the ground-breaking book “The World is Flat” by Tom Friedman. This book was originally published in 2005 before the advent of Facebook, or AirBnb, or Twitter or a host of things that we now take for granted. The trends he identified in that book have played out in a way that you would have think he scripted the outcome.

When we speak about globalization, we need to define it a bit better. Are we talking about finance, manufacturing, travel, real estate, agriculture, transportation, construction.

Historically, to act globally, you needed to be a country. Then as the industrial revolution progressed, you needed to be a company. Today, for the first time in history, it is possible for individuals to operate globally.

This a world where an entrepreneur like Elon Musk can subvert attempts by the Russian military to knock out the Internet in the Ukraine. Shortly after a tweet, there are hundreds of Starlink terminals in the Ukraine. Now there are more than 10,000 Starlink terminals and another 5,000 are on the way. More than 150,000 users from Ukraine are on Starlink on a daily basis.

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Host: Victor Menasce

email: podcast@victorjm.com

Building Ahead of Demand May 30, 2022

Show notes

On today’s show we are talking about getting ahead of demand. We have seen many businesses anticipate continuing growth and no changes to market conditions.

It happens in virtually every Industry. Even the most analytical companies in the world can get it wrong.

We saw several retail giants experience adverse conditions in the past quarter. Walmart, Target and Amazon were the most visible of these announcements.

Amazon surprised Wall Street with its first quarterly loss since 2015. That happens when expenses exceed revenues. So how did Amazon get it wrong? Did they hire too many people? Did they make too many financial commitments?

The company has been expanding quickly making investments in expanding their fleet of aircraft with their growing captive airline called Prime Air. They have been growing their network of distribution warehouses and fulfilment centres all over the world. Some of these facilities are company owned, but in fact many are leased from developers who built these giant buildings to Amazon specifications.

It seems that Amazon’s construction of fulfillment warehouses has gotten ahead of current demand.

Amazon spooked investors last month after reporting slowing growth and a weak profit outlook that it attributed to overbuilding during the pandemic when homebound shoppers stormed online. At the end of 2021, Amazon leased 370 million square feet of industrial space in its home market, twice as much as it had two years earlier.

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Host: Victor Menasce

email: podcast@victorjm.com

Fabian Fraser May 29, 2022

Show notes

Fabian Fraser is a big city guy who moved to a small city and discovered opportunity for multi-family investment in unexpected places. On today's show we're taking a look at how affordability has pushed people to smaller communities where the vacancy rate has been very low and rent growth has been well above market averages. To connect with Fabian, email him at fabian@yadagroup.ca

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Host: Victor Menasce

email: podcast@victorjm.com

Sandhya Seshadri May 28, 2022

Show notes

Sandhya Seshadri is based in Dallas Texas where she specializes in repositioning multi-family apartment complexes. She too made the transition from the world of micro-chip design into the world of real estate investing. To connect or to learn more, visit multifamily4you.com ------------------- Host: Victor Menasce email: podcast@victorjm.com

Interest Rate Mania May 27, 2022

Show notes

It seems like we can’t go more than a few days without talking about inflation or interest rates. On today’s show we’re taking another look at how interest rate policy can be effective at fighting inflation, and where higher interest rates will make no difference at all.

We keep hearing from the Federal Reserve board of governors that they will continue to increase interest rates until inflation is brought under control. It’s as if there is a scientific relationship between higher interest rates and lower inflation. On today’s show we’re going to look deeper at this question and see if we agree with that notion.

In my mind, Interest rates affect capital expenditures, and they affect the cost of financing operating capital. If interest rates go up, my costs go up as a business owner. It means that I may have less money to spend on my business for things like staff and labour. It means the cost of borrowing go up. The biggest costs for borrowing are on buildings, equipment and inventory.

In the broader economy, interest rates can also affect consumer spending on discretionary items. That’s partly why an increase in interest rates will cause a reduction in GDP and risks pushing the economy into recession.

The increase in fuel prices is a global phenomenon, that has more to do with global supply and demand, geopolitical factors involving Russia, and less to do with loose monetary policy by the Fed. Cheap money would theoretically help the oil industry increase production, but we have had cheap money and money printing for more than a decade and frankly that has not benefited the energy industry very much at all. So raising interest rates won’t cause the price of oil or natural gas to go down.

Some items in the economy can be considered highly inelastic with price. For example, if your distance to work is 20 miles, you are going to drive 20 miles to work, even if the price of gas goes up by 50%. This may reduce your spending elsewhere in your monthly budget. But if the Federal Reserve raises interest rates, you are not going to drive a shorter distance to work, and you are not likely to change.

To that extent, the change in interest rates won’t affect the price of energy. Since there is a direct connection between economic output and energy consumption, an increase in energy prices will always cause prices to increase across the board in virtually every sector of the economy.

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Host: Victor Menasce

email: podcast@victorjm.com

How Quickly Do You Make A Decision? May 26, 2022

Show notes

On today’s show we’re examining why the stock market has fallen so quickly. If you go back to 2008 and 2009, when the market conditions changed in real estate, why did prices seem to drop quickly?

It turns out that when you make a decision to purchase any investment, most investors have a due diligence process that they follow. In our case, our due diligence checklist consists of two checklists. The first checklist is designed to kill the deal quickly. If the deal isn’t dead after the first checklist, then the second checklist kicks in. There are a total of more than 50 items on the two checklists. For complex deals, there are additional checklists that need to be adhered to.

Making a buying decision requires a lot of work. It’s a slow process that takes weeks, and sometimes it takes months in order to get to the point where all of the criteria are met.

By contrast, when we make a decision to sell, there are only two questions to be answered:

How much will we get for the sale?

When will we get our money?

Both these questions are relatively easy to answer compared with all of the effort associated with a purchase. The net result is that a purchase happens very slowly, but a sale can happen very quickly by comparison.

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Host: Victor Menasce

email: podcast@victorjm.com

A Nickel Is A Nickel. Or Is It? May 25, 2022

Show notes

On today’s show we are going to take a fresh look a money. It used to be the case that a nickel was a nickel was a nickel.

It was made of nickel. It was worth 5 cents and you could buy bubble-gum with it or take a short bus ride.

But today we are taking a dive into the various new types of currency that are in existence or being proposed.

These are new types of currency are all different.

First of all, the biggest question underlying any currency is trust. Currency ceases to be effective as a means of exchange or as a temporary store of value of the confidence is not there. There are numerous checks and balances that governments have put in place to instill that confidence. We can debate whether that confidence is deserved, but that might be a topic for another day.

We have cash dollars

Dollars in a bank account

Dollars in a payment account like Paypal or Venmo

Money market funds held by a major bank

Digital currency

Crypto currency

Stable coins

Programmable coins

If you are holding a $100 bill, you can go fill your gas tank with that $100 bill. We don’t need to spend much time on cash currency. But what about all these others? How are they different from each other?

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Host: Victor Menasce

email: podcast@victorjm.com

Falling Lumber Prices May 24, 2022

Show notes

On today’s show we are taking a look at what is happening with construction materials and how this might affect construction projects that you have in your current plans for this year.

In the past two months we have seen lumber prices fall from their peak in March of $1,450 per 1,000 board feet to a new low of $667 per 1,000 board feet. Prices had dropped in April and then jumped back up to approximately $1,000 per 1,000 board feet in anticipation of the increased construction activity of the spring and summer.

The drop in prices is coming from a number of factors on the demand side of the equation.

New home sales are down across both the US and Canada. But the decline in housing starts is only 0.2%. That is not enough to cause a substantial impact on lumber prices. The major sell off in shares of national home builders like DR Horton and Lennar reflect an expectation that the combination of rising interest rates and rising construction costs will reduce demand for new homes.

Some builders have stockpiled materials in order to secure supply and as spot prices fall they will want to consume their own more expensive inventory and buy new inventory when the low priced material works it’s way through the supply chain.

I’ve had several discussions with contractors who have experienced massive scheduling problems as a result of material shortages of all kinds. The common lament is that they get booked for a job only to arrive onsite and experience material shortages. The sub trades are then left with no work instead of having too much work. Large scale projects are generally optimized to maximize the efficiency of the scarce resource which is human labor. But when the scarce resource is material and changes from one week to the next, it can cause delays all over the construction project. Scheduling of trades in this environment has become much more difficult and it’s common for a construction site to sit idle for weeks at a time.

If the foundation is done and you have the wood and the framing crew, you should be good to go. You might be tempted to think that you should be able to make forward progress on structural framing, but that is not the case. Let’s imagine for a moment that the scarce resource is roof trusses. If you are going to wait 12 weeks to get roof trusses, you have to wait to start framing your structure until you can take delivery of the roofing structure. You can’t leave a partially framed structure exposed to the weather for months. It will suffer damage from wind and rain and will not meet the specifications when you are done. You then face the more expensive demolition and rework.

Even if housing starts don’t drop at all, supply chain constraints elsewhere in the process are slowing the entire construction process, making it much less efficient than in the past. That inefficiency translates into a fall in demand for materials because houses and apartments are taking longer to build.

My prediction is that we will continue to see lumber prices fall over the summer months. Some general contractors are fully booked for 2022, and are accepting large scale projects for 2023. But then others are recognizing the inefficiencies inherent in the current situation and are willing to accept new projects on very short notice as gap fillers.

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Host: Victor Menasce

email: podcast@victorjm.com

A Train Wreck In Slow Motion May 23, 2022

Show notes

On today’s show we are talking about resilience in our daily lives. This past weekend my home city of Ottawa Canada has a line of summer thunderstorms come through the region. It was a few degrees warmer than usual and a bit on the humid side. By mid afternoon the sky had darkened . Then all the cell phones started chiming a severe storm alert in unison.

Then suddenly this wall of wind hit thrashing the trees in all directions. Frankly, I’m surprised that the trees were left standing at all.

Naturally we lost power. After the storm subsided we drove around the city looking for a restaurant that had electricity. There were vast areas of the city with no electricity and a few intersections that did have power.

Let’s be clear. What happened is an inconvenience. We might be days without power. We have no internet connection at home and the local cell tower has exhausted its battery backup.

We will probably lose the content of our freezer in this extended power outage.

We rarely even think about food insecurity let alone plan for that risk.

But this year 2022 is a year like no other. We are emerging from two years of global pandemic and that feels awesome. But at the same time we have a devastating war raging in Europe. Crops that needed fertilizer this year didn’t get it.

Agricultural problems can’t be solved with money. If you and I were stranded on a desert island and if I have a case of bananas and you have $1M in cash, I’m rich and you are hungry irrespective of how much cash you have.

Food and fuel security are at the foundation of our western society. They are so foundational that they are taken for granted.

We talk about affordability when it comes to housing. The basic rule of thumb is that housing should not exceed 30% of household income.

We don’t even calculate the percentage of food as a fraction of household income. But there are parts of the world like the Philippines where for major portions of the population food makes up 70% of household income. A 10-20% increase in food price here in North America is an inconvenience and for some households it’s a problem. Nobody wants to pay $2 for a head of lettuce, or $5 for Broccoli. But if food makes up a large percentage of your household expenses, you don’t have much tolerance for inflation before your very survival is threatened.

We are already seeing social unrest in Peru, and Sri Lanka. The unrest was enough to force the resignation of the prime minister.

The food shortages that are forecast for later this year will be like watching a train wreck in slow motion.

I feel like I need to emphasize that I’m not a pessimist. If you have been following this show for a while you will know that I predicted the pandemic before it was mainstream news. I predicted the surge in inflation before the official reports. I predicted the fall in lumber prices before they happened. And I predicted the fall in the stock market. But with any of these predictions, it’s hard to know the precise timing. You can be prepared, or you can be surprised.

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