The Real Estate Espresso Podcast

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Shifting World of Social Media Jan 27, 2021

Show notes

On today’s show we’re talking about relationship building in an era of social isolation. We’re social creatures and there’s nothing like speaking with people and having real conversations with people.

I see it with kids who are interacting on role playing games where they will be playing the game in teams, connected by headset and conversing with friends across town or sometimes on the other side of the world.

Well now the adult version of that is taking the business world by storm. It’s a new social media application called clubhouse. Some of you may have heard of it. Most of you are probably unaware of what it’s all about. So today’s show is dedicated to bringing you into the current decade kicking and screaming. I’m here to tell you that this new way of interacting is going to be as huge as Facebook or LinkedIn. No doubt, Twitter, Facebook and LinkedIn will respond with a competitive offering of their own. Who knows, maybe Google will jump into the fray. But at a time when several social media companies are under federal anti-trust investigations, it would be difficult for any of these entrenched companies to grab a dominant position in an emerging technology especially if they try to do it by acquisition. There is no way the regulators will approve the industry consolidation while there is an anti-trust suit against these companies.

OK. So what is clubhouse. Think of a social media app that is somewhat like Facebook, except the only way to communicate is by talking. The only way to talk is by being in a room. There are three types of rooms. Rooms can be created by any member at any time. You can invite people who follow you to join you in a room. You can also schedule the opening time for a room and notify the community that at 8PM, there is going to be a room dedicated to talking about fishing. So all those members who have indicated an interest in fishing will be made aware of the upcoming meeting on fishing. They won’t see notifications about rooms dedicated to travel to Paris unless they’ve listed travel to Paris as one of their interests.

Some members who have been consistent room hosts will have the right to apply to create a club. A club is a little like a Facebook group. There might be a club dedicated to, say, commercial real estate, or fundraising. If the room isn’t a club, you’ll only see it as an open room to join if you are connected with people who are in the room.

Once you’re in the room, there are two parts to the room. There is a stage and an audience. Only the people on stage can speak. When you’re in the audience, you can be invited on stage by the moderators of the room. Once you’re on stage, you can join the conversation.

In many of the clubs, the moderators are there to have a panel discussion and answer audience questions. In many of the rooms I’ve attended the moderators ask audience members to put up their hand and come onto the stage to ask a question or make a comment relevant to the chosen topic of the room.

In my experience, some of these rooms are open for hours. Some of the people I spoke with on the weekend said that they came onto Clubhouse intending to stay for an hour, and instead stayed four hours.

I’ve engaged in several conversations that have been incredibly powerful in just a few days. Several people I’ve spoken with have managed to already translate the connections they made in Clubhouse into real live offline relationships that have monetary value.

The software is in Beta release so far. They just announced a $100 million capital raise at a $1B valuation. Leading the fundraise is Andreessen Horowitz. Let’s put this in perspective. This is for a company that has zero revenue. They reportedly have about 2 million active users on a weekly basis.

AMA - Alignment with your life partner Jan 26, 2021

Show notes

Today’s another AMA episode, ask me anything. Nicolas from Washington asks:

“If I may ask, how do you move things forward and get things accomplished without causing pain or hardships to those around you (in my case my wife) when they are in a slower lane?”

Nicolas, this is a great question. I understand that you’re currently trying to balance a full time job, self-care, family, friends and investing.

What you’re describing is a common problem. I can’t say that I do this perfectly. Some days I’ll be recording a show after my wife has gone to sleep. It’s a matter of choosing what to put in your calendar and aligning it with your goals.

The first word that comes to mind from your question is the word stress. It feels like you’re experiencing stress. My definition of stress is the gap that exists between expectation and reality. Stress lives in that gap. If there’s no gap, there can be no stress. Since there are only two variables, you’re choices are to focus on aligning expectations, or alter the reality. There’s not much else.

In the case of your wife, this is an exercise in determining how to involve your wife in the decision-making process around investing. The points of stress can be many:

1) It might be around the time required to manage an investment

2) It could be whether investing in this particular asset class is a safe investment.

3) Some people simply have no entrepreneurial genes within them. They don’t understand it. They think that business owners are pushy people and they would just rather go to their 9-5 government job and trust that the system will take care of them.

4) Maybe your wife has a belief system that investing is risky and the only safe thing is to keep your money in the bank.

I don’t know in your specific case where the disconnect is. But I will say that you need to invest time in gaining alignment with your wife. That is a process.

Sometimes a spouse says. I don’t understand all this real estate stuff. You can go ahead and do what you want as long as it doesn’t take time away from the family. Again, I don’t know your specific circumstance.

If there’s something that’s important to you, then you may simply want to ask her to make an investment in time to understand it enough so that you can both be aligned. You’re not asking for her to become immersed in it, not to make it her hobby or her passion. Maybe there something she’s into that is not your passion. Maybe she’s interested in lilac trees or quilting. You may want to reciprocate by showing genuine interest in something that’s important to her. Again, it’s not going to become your passion. You commit to understand it enough that you get a deeper understanding of her.

There’s no absolute right or wrong way to do this business. Some people are happy owning three vacation rentals that earn as much net income as a 10 unit apartment building. Others want to be active part owners in a portfolio of 100 apartments, and still others want to be passive investors in a portfolio of 1,000 apartments.

A Short Trip Through history Jan 25, 2021

Show notes

On today’s show we’re going to take a short trip through the history books. We’re not going back to Roman times, or ancient Greece. Although there are numerous powerful lessons in history that we could easily apply to today’s environment.

No. On today’s show we’re going back to the fall of 2019, and then we’re going to go back to the fall of the year 1999.

2019 seems like a distant memory. The economy seemed to be humming along nicely. Unemployment was at a historic low. Stock market valuations were considered irrationally high in 2019. We were in the 4thquarter of one of the longest albeit slowest economic expansions on record. Extrapolating continued expansion seemed foolhardy at best.

But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was in 2019 when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is among the highest in history and the economy is fragile to say the least.

Let’s go back to 1999. My company Tundra Semiconductor went public on February 8, 1999 on the Toronto Stock Exchange. The Shares priced at $9.25 but were in such demand that they opened at $13.10 and closed their first day of trading at $13.24.

We were part of that .com euphoria. We didn’t know it. We were too wrapped up in counting our rising daily net worth. At one point, my stock options were worth millions. By March of 2000, the stock hit a high of $78. We were all on top of the world. We were extrapolating to when our stock might be worth $300 to $400 a share. We were absolutely delusional. It was a very powerful and humbling lesson in greed and the dangers of the echo chamber of groupthink. Everyone in the tech industry was rationalizing the valuations. The idea that people would skip the pet food aisle at the grocery store and order their pet food from a separate specialty retailer online was clearly nuts. But those companies still managed to attract stock valuations in the billions.

When the bubble burst, most of that paper wealth, that monopoly money wealth evaporated.

I know of some people who exercised their options, triggering a tax obligation, and then didn’t sell the stock. So they were left with stock that was worth far less that when they exercised. The remaining value wasn’t even enough to pay the tax obligation. Some people had to mortgage their house to pay the tax bill on money they never got to put in their bank account. That’s how confident people were in the valuation of these companies.

I think about an interview with Scott McNealy, former CEO of Sun Microsystems. He said “What were you thinking?”. He was asking this of investors paying a “ridiculous” ten times revenues for his stock at the height of the .com mania.

If you bought Sun Microsystems stock in 1994, you would have seen a 100x increase in value by the time it hit the peak price of $253.

So here we are. Tesla stock is trading at 1600 times trailing 12 month earnings. It has an enterprise value of 802 billion dollars. The stock is trading at 28 times revenue.

Sun Microsystems was a relative bargain at only 10 x revenue. When the world finally woke up and said this is nuts. The stock came back to earth. By 2008, the stock had lost 98% of its value compared with 2000.

$1.3T worth of paper value was wiped out in the .com bubble burst. The resulting economic recession was partly caused by the difficulty that many companies faced in raising capital needed to expand their businesses. It forced contraction in thousands of businesses which resulting in economic contraction.

So here we are. We are in a major bubble. That is as plain as day.

Live on Peak Prosperity Jan 24, 2021

Show notes

On today’s show we’re going to be replaying a conversation that I had with Adam Taggart on the Peak Prosperity Youtube Channel. Peak Prosperity is an organization run by my good friends Dr. Chris Martenson and Adam Taggart. The Peak Prosperity movement has over 1 million followers and they’re dedicated to helping people build resilience into their lives.

I love speaking with Adam. He’s been a guest a few times on the podcast as has his partner Chris. Dr. Chris Martenson holds a phd in pathology from Duke University and he was one of the first people to sound in the alarm about the Covid-19 outbreak back in January of last year. He’s been consistently weeks or months ahead in his reporting compared with the information coming out of government agencies. Adam, similarly has been active in seeking out analysts in the financial markets to understand what is happening beneath the surface that we see reported in the mainstream financial press.

Adam and Chris both continue to make fundamentally life changing contributions to the world of business resilience and human resilience. When we talk about capital, people often just focus on what is in your bank account. Adam and Chris believe that there are 8 forms of capital that make up your life and that if you only focus and cultivate one or two of those forms of capital, you’re not going to make it. Definitely you’re going to want to check them out at peakprosperity.com.

George Ross on Current Affairs Jan 23, 2021

Show notes

George Ross is well known as former executive vice president in the Trump Organization. He was a judge on the TV show The Apprentice. He taught at the law school at NYU for more than 20 years and is the author of two best selling books on real estate and negotiation. He has represented some of New York's most famous and wealthiest clients. It's almost impossible to drive a couple of blocks in NY without George having a first hand story about a building or landmark. On today's show we're talking about recent events and what it might mean for real estate investors and developers.

AMA - Inflation and Debt Crisis, part 2 Jan 22, 2021

Show notes

This is part 2, a continuation from yesterday's show. Braxton from New Orleans asks:

It feels like we are certainly departing from the status quo of the past 10-20 years. I have taken cash out of some of my small rental properties but struggle to re-deploy in more investment properties because prices continue to be pushed upward. There is a mountain of liquidity and increasing competition for investment at low yield. My personal view is we may see near term inflation, but I am concerned we could also be at the doorstep of another debt crisis like in 2008. It appears as though speculative mania has taken over in many markets. How do you view the inflation vs deflation risk and balance you near term investment decisions? If there is inflation it would make sense to buy assets as the housing rents should keep pace with prices, however if there is deflation retaining cash may make more sense. I would like to know how you are thinking through this scenario as each path will likely have very different outcomes.

I think we are going to experience a period of stagflation, a combination of economic stagnation combined with inflation. Stagflation is caused when something artificial causes economic contraction. Efforts to stimulate the economy are held back because the artificial cause is still present. The result is an economy that is flooded with cash, but nowhere to go. The result is inflationary despite the economic contraction. That means prices will fall in some sectors of the economy, but not all. The artificial event of course is the pandemic this time around. Governments the world over are ordering businesses to close and to not conduct business in order to protect human life and the healthcare system.

Keynsian economists believe that stimulus will be inflationary and that retrenchment is deflationary. But that’s not necessarily true as we saw in the late 1970’s after the OPEC oil embargo.

Any talk of deflation is of short term deflation. Nobody’s talking of a protracted depression like we saw in the 1930’s. I have no doubt that we are in a long term inflationary trend. This has been true since the early 1970’s. So the question is really whether a deflationary interlude would be devastating for you as an investor or not.

The key to positioning your portfolio to handle a deflationary period is to make sure you have sufficient covering equity, and that you have sufficient monthly cash flow, or ample cash reserves.

Your third question is whether we’re going to experience another debt crisis. A 2008 style residential real estate crash is possible, but not very likely in my view. The banks are much better capitalized and the Fed has basically told their member banks that they will buy up the toxic debt if it appears. It would take a big rise in interest rates in order for loan rates to become unaffordable, which would trigger a drop in real estate prices. For now, the Federal Reserve has issued guidance for the next couple of years that rates would remain low. When you do the math on the excess reserves that the banks have on deposit at the Fed, there’s more than enough cash there to handle a massive default on real estate.

As of earlier this week, the new Treasury Secretary Janet Yellen who was previously Chair of the Federal Reserve has been the cheerleader for even more aggressive printing of money. We may be facing a sovereign debt crisis at some point in the future, but not a real estate debt crisis.

I believe the US government is going to print money until the population or the rest of the world loses confidence in the dollar. At that point, we will experience rising interest rates in order for the US to sell its bonds.

If the US doesn’t succeed in restoring confidence in the dollar, then the US will lose its position as the global reserve currency and will get reset into some other monetary system.

AMA - Three questions - Making Sense of the market Jan 21, 2021

Show notes

Braxton here from the Greater New Orleans area. I am a long time listener to your show and I find great value in the breadth of content. I really enjoy the show format and this is the one podcast I can commit to on a daily basis. Thank you for all that you do for the Real Estate community. I know it must take an immense amount of effort to produce this on a consistent basis.

My question today is on the topic you hear often these days on the great debate between inflation and deflation.

Braxton,

This is a great question. In my view, there are three major elements to be considered here separately.

The first question is a little like asking, are there any bargains to be found in today’s hyper competitive environment.

The second question is related to inflation versus deflation.

Your third question relates to whether we’re going to experience another debt crisis in the near future.

These are such good questions, that I’m going to answer them over a couple of episodes so that we can do each one justice.

Let’s start with #1. There’s no question that we are seeing an auction environment in many segments. The winning bidder in an auction almost always pays more that if there is only one buyer at the table.

The key is to focus on a specific stream of investment types. When you are well positioned in the marketplace, you will find lots of special situations that appear without showing up on the market. I’ll give you an example. We have millions of small businesses that are hurting in the current environment. The business owner may be looking to exit the business, but wants to keep any marketing of the business a secret. As soon as the owner markets the business, they damage the business, their employees go looking for another job out of fear for their job security. Often those businesses have real estate associated with them. We’re evaluating one right now as we speak where it might be possible to separate the real estate from the business and lower the cost of acquisition to a fraction of the asking price.

Off market deals happen as a result of special situations. It might be a death in the family, or a divorce. Sometimes it’s a medical emergency that precipitates a financial problem. Coming in to save a situation for a family in financial distress can be an opportunity to do well and do good at the same time. You might pick up a property at a fair discount to the market, while preserving a good chunk of the seller’s equity.

Finally, we look for opportunities to add value, to transform a property from something that’s not in very high demand into its highest and best use. This way we're not competing based on the existing market.

Where Will You Travel First? Jan 20, 2021

Show notes

On today’s show we’re talking about the need for travel. It sounds strange to say “Need” when we’re talking about travel.

According to a report just issued last week by hotel analytics firm STR global for the first week of January. Across the nation occupancy was 37.0% (-28.3%) Average daily rate (ADR)was US$87.97 (-27.1%). Revenue per available room (RevPAR): US$32.59 (-47.7%). These are crushingly bad numbers. They represent an uplift from the low points in Q2 of last year. But these are far below profitable levels for the industry.

According to Airbnb CEO Brian Chesky the changes the Covid pandemic has brought to the travel and lodging industries are permanent shifts, not temporary adjustments.

According to AirBnB, travel is never going back to what it was before the pandemic, He feels that there are several trends that are worth noting.

1. Bye-bye to business travel...as we know it:

Chesky said the shift to remote work and meetings that Covid-19 accelerated is resulting in "a significant permanent decline in business travel, as we know it."

Now I have a dissenting view on this particular point. People used to travel for all kinds of reasons in business. There’s no doubt that there are many meetings that can be held as effectively online as in person. I’m a huge believer in using technology for these types of meetings. When I’ve traveled on business, it’s been for a primary purpose, and that is to build relationships. I believe relationship building is better done in person. Those in the future who are clear as to why they are traveling will have a competitive advantage. Relationship Building Business Travel is going to be a new superpower for those few who embrace it.

2. Not a "rural" exodus, but an "everywhere" one

Rather than traditional tourism, people sought out getaways with family or friends or temporary work-from-anywhere relocations, he said. And rather than a dichotomy of urban living to rural destinations, he feels that travel demand has been "redistributed" among smaller and mid-sized communities.

3. From "mass travel" to "meaningful travel":

"Mass travel, mass tourism, which he defines as people going to crowded tourist districts, standing in line, getting their selfie in front of a landmark, in lines with other tourists, will be replaced with more meaningful travel.”

I actually don’t agree with AirBnB on this point. There are still places I want to visit by air. I can’t wait for air travel to be restored. I can’t wait to get back to Europe. I want to go sailing in Sydney Harbour, and visit the Great Barrier Reef. These destinations are not driving distance. That’s why I believe we will see a rapid resurgence of air travel in the second half of 2021.

There is no question that after a year of being isolated from family, people want to travel home and visit relatives. I see this in my own family. For the next year, travel is going to be more about connecting with friends and family than visiting the Louvre or the Eiffel Tower. I agree with him on that point.

Mr. Chesky believes this is a semi-permanent shift.

This is where we disagree. I believe that the first trip will be to visit friends and family. But what about the second trip and the third?

People in Northern climates are addicted to their winter getaway to that beach destination where they can layer on the sun screen and get sand in their toes.

Travel is not just about connecting with people. It’s about regeneration. That means getting out of your home environment for a change of scenery. It’s very hard to have an effective vacation at home when there are dozens of unfinished chores calling for your attention. When you board a flight, take a cruise, you can truly disconnect from your day to day life, if you choose to and get a real recharging of your batteries.

Energy Is Money Jan 19, 2021

Show notes

On today’s show we’re talking about what is money, and what is economic output? On today’s show I’m going to put forward a monetary theory that might be worth considering in today’s environment of rampant printing of money.

In order for something to be considered money, it has to satisfy three criteria.

It must be a store of value
It must be a means of exchange
It must be easily divisible into small units

I think we would agree that the dollar and the Euro, and not even the British Pound are a very good store of value. They’re all depreciating assets.

It seems like we’re trying to make sense of our monetary system with increasing frequency these days. The global dialog on crypto-currency has certainly brought the discussion front and center.

But when we talk about money and go back to the early economists over the past couple of centuries, you will come across the labor theory of value.

Two pre-eminent economists at opposite ends of the spectrum both subscribed to the labour theory of value. Adam Smith was a free market capitalist and Karl Marx was decidedly at the socialist end of the spectrum.

Since most items in the 1800’s were manufactured using human labor in some way, the idea was that the value of a commodity was determined by and could be measured objectively by the average number of labor hours necessary to produce it. In the labor theory of value, the amount of labor that goes into producing an economic good is the source of that good's value.

But today we can easily separate the notion of cost and value. Tying value strictly to labor input clearly misses the notion of value to the end customer. Should a glass of water be free? Or is a bottle of water fairly priced at $1.00? The labor theory of value would suggest that its value should be linked to the amount of time it takes a person to fill the vessel that carries the water.

We no longer link the dollar to gold and silver. Starting in 1878, the US dollar was actually a silver certificate redeemable to the bearer on demand for an ounce of silver.

In 1963, the US congress passed a bill repealing the silver purchase act. The US was running low on silver bullion and the US dollar was no longer linked to silver reserves. Along the way, the amount of silver backed by a silver certificate also changed as the currency was debased.

Today of course the US dollar is no longer an asset. It’s a promissory note, it’s a debt instrument.

Almost 1/3 of the US dollars issued since the declaration of Independence, over 200 years were minted in the past year. 2021 appears to be on track to mirror last year in terms of printing of money. We’re not two weeks into the new year and another $1.9T in spending has been proposed.

With a new administration in Washington, there is a lot of talk about the need to reduce greenhouse gas emissions, something I entirely support.

But here’s another inescapable fact. For every unit of economic output, there is a corresponding consumption of energy.

But simply making it difficult or expensive to burn fossil fuels misses the economic value of energy. If you turn off energy output, you’re reducing the economy by that amount. He who controls energy controls the economy.

Energy is money. You can’t accomplish anything in today’s economy without energy.

So why are we not using units of energy as a means of exchange? Why are dollars not a claim on units of energy?

Now I’m not suggesting that we barter with lumps of coal or a cup of gasoline. That’s about as convenient as a bar of silver. We can still have units of currency that are paper money, or even digital money. But what if we tied the dollar to a unit of energy?

Energy is the great equalizer. Energy is required to produce food. It’s required to transport goods to market. Energy is required to listen to this podcast.

The Sliding Dollar Jan 18, 2021

Show notes

On today’s show we’re talking about foreign exchange. The question is what does foreign exchange tell us about our investments and our point of reference?

You might be sitting in your living room as you listen to this podcast. You think you’re standing still, but in truth the earth is spinning at 1,037 miles per hour at the equator, or roughly 70% of that at the 45th parallel. You’re really travelling quite fast. But wait, the earth is spinning around the sun at a speed of 67,000 miles per hour. You’re not standing still at all. You’re in supersonic flight and you don’t even know it. You get the idea.

When talk of money, we tend to use our own currency as the point of reference. Maybe you use the US dollar as the point of reference. Maybe your point of reference is ounces of gold, or perhaps bitcoin. So when the dollar drops in value against the Euro, or the Japanese Yen, you might not notice

This week Mark Haefele, Chief Investment Officer at UBS in Zurich said that they’re advising some of their clients to diversify their holdings into Russian Rubles and Indian Rupees. That’s because they’re expecting the US dollar to lose value over the next year against a basket of foreign currencies.

Currency markets have traditionally been driven by the most attractive currency. But lately, rather than being attracted to the best currency, traders increasingly a being attracted to the least worst currency. None of them are great. Interest rates in India are much higher than in Europe of the US. Money deposited in an Indian bank will get you somewhere between 4-7%. Mortgage rates are between 8.5%-9%. The Russian central bank has kept interest rates at 4.25% in their latest guidance. The Indian Central bank has set its rate at 4%. So investors in search of yield are placing a bet that neither Russia nor India will default on their debt within the term of the bonds maturity.

You know something’s wrong when India and Russia are being put forward as alternatives to the US dollar. So why would UBS be recommending this?

Let’s look at the practice of the US issuing government debt for most of my adult lifetime. The Fed would print some cash. The Treasury would issue Treasury bills and sell them on the open market and investors domestically and around the world would buy these up. The largest buyers for these T-Bills have traditionally been the Japanese central bank and the Chinese central bank. Together, Japan and China own about 10% of the US debt. Foreign governments own approximately 30% of the US debt. But since the start of the pandemic, there has been an unprecedented printing of money.

Just last week, Joe Biden put forward another 1.9T in proposed pandemic relief spending. For now, all of this newly minted debt is going to be held on the balance sheet of the Federal Reserve. The US issued nearly 5T of new money in the past year. It’s hard to wrap your mind around these numbers.

A lower dollar makes the cost of imports go up. The US imports a lot of products from overseas and continues to have a balance of trade deficit with its major trading partners including China.

The price of oil will go up. Since oil and many commodities are denominated in USD, we can expect energy costs to go up in response to the drop in the dollar.

So what does it mean for real estate investors when the dollar falls in value?

It means that the cost of imports go up. It means that we enter a period of higher inflation. It means that the cost of construction goes up, which ultimately affects the affordability of new housing. That in turn affects the cost that new buildings must charge for rent. That too can be inflationary.

As we’ve talked about recently on the show, when inflation is the new game, the rules have changed and you need to align your portfolio and your investment strategy accordingly.

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