Predicting the financial future of the world is impossible but paying attention to certain historical trends which are repeating themselves right now can indicate where the future is heading. And then throw in the likes of digital currencies such as Bitcoin, that have no allegiance to any sovereign nation, and you get the feeling that all currency hell is about to break loose. Paying attention to the following indicators can help you start to make moves to protect your portfolio.
Keep your friends close and trading partners closer
The US trade deficit measures the net balance of imports vs. exports with a particular country. The following chart shows the extreme imbalance the US currently trades with China, which makes us vulnerable to trade wars and supply chain disruptions. On top of this, we are exporting our US dollar for goods that are imported. Should China decide to no longer to accept the US dollar as payment for goods, we could find ourselves in an unwinnable trade war.
As US fiscal and monetary policy of massive dollar printing continues with the Biden administration, the inequities between the rich and the poor have accelerated. This social instability is seen as a weakness by our global adversaries. In fact, according to CurrencyTrading.net, there are seven nations planning a dollar coup against the United States which should raise alarm bells for our citizens: China, Saudi Arabia, South Korea, Venezuela, Sudan, Iran and Russia. Should China alone call in its approximately $1 trillion in US debt, the demand for the dollar could plummet, disrupting markets worse than the 2008 financial crisis.
The Black Swan – Cryptocurrency
According to author and hedge fund manager Ray Dalio, in his book, The Changing World Order, the last three major powers who held global reserve currency status were the Dutch Empire in the 1600’s, the British Empire in the 1800’s and now the United States Empire which has held reserve currency status since the 1930’s. Many are predicting that the Chinese Yuan is the next currency to be held as a global medium of exchange. However, it may not be a sovereign nations’ currency which holds that next top spot. It may be cryptocurrencies because of their decentralized nature, transportability across national borders, and the fact that they are impervious to government corruption.
There are some strong warning signs that the 200-year run as the preferred global medium of exchange for the US dollar may be coming to an end. I would strongly encourage you to watch this video, from Ray Dalio to understand historical trends and how it relates to the rise and fall of global powers. History has a way of repeating and recognizing the patterns in modern day life could be the best way to predict your financial future. However, this historical shift may have a crypto twist!
Have you ever watched a peacock strut around on full display? From a human’s perspective, we believe a peacock is a beautiful, proud and slightly arrogant animal.In reality, they are just trying to court another peacock.
Certain global capital markets have an amazing way of emulating a glorious peacock, but the reality of those markets might just be a feather duster.
Back in 2001, during my internet wine auction house days at Winebid.com, there were many peacocks running around on full display, with dot.com business models that were pumped up with hype and meteoric pro-forma projections such as Pets.com, Drugstore.com and online grocer Webvan. All these businesses are now feather dusters.
To protect your portfolio, and provide you with insight, here are a few feather dusters you should avoid:
Bitcoin as store of value
Bitcoin has often been touted as a store of value, similar to gold and the US Dollar. However, the value of Bitcoin dropped 54% in one month on May, 19th 2021 from its all time high in April 2021. Furthermore, Bitcoin has no underlying intrinsic value, which is a large reason for the extreme volatility. Bitcoin is not used to facilitate daily transactions, nor is it adopted as a reserve currency by any country in the world. At this moment, Bitcoin is purely speculative, and is at risk of being viewed as an outcast by major economic world powers.
Unless you are lucky enough to invest in the top 10% of Initial Public Offerings, you run the risk of negative returns. In a recent Nasdaq study looking at companies three years after their IPO, the study calculated that almost two-thirds of all IPO’s are now underperforming the market with 10% lagging behind overall market returns. Holding onto those investments which seemed exciting at the time, cost investors money. Lately, we have been investing in late stage, pre-IPO companies through several secondary investment funds with strong track records, a.k.a., buying from the inside. Once a company executes an initial public offering, you are buying stock from the outside and much of the value has already been squeezed out. The key to assuring solid returns is to buy the stock from the inside.
Investments that are too good to be true
If it’s too good to be true, it likely is. There is a reason that Bernie Madoff was the most successful Ponzi scam artist ever, stealing over $18 billion from investors. He promised higher than average returns without fail while seducing and abusing his personal network.
However, it takes two to tango. Investors were naïve enough to not perform their own due diligence. “The financial mechanisms behind the con man’s moneymaking scheme are always secret or hard to verify,” Tamar Frankel, a Boston University professor said. “There is always a smell of illegality, persistent but subtle enough that people are willing to overlook it in order to get at the financial returns.”
Investing can be a risky business.
We all make mistakes along the way; however, you can learn from others to prevent the same mistakes. Peacock investments sometimes show up in beautiful and alluring packaging, but without doing your due diligence, you may end up with a feather duster. As always, consult your financial advisor and trusted sources before you invest in any opportunities.
Please reach out any time if you’d like to discuss why we believe investing in commercial medical real estate is not a peacock or a feather duster.
British statesman, Winston Churchill once wrote, “Those that fail to learn from history are doomed to repeat it.” Hats off, Prime Minister Churchill.If only you were alive today to see how our leaders are setting the stage for another global financial meltdown.
The keys to learning from mistakes made in the past are to study history, uncover the clues and constantly compare to today’s realities.
Here are a few clues that I have unearthed for you to ponder as the history books are written:
Raiding the public treasury
Lord Tytler describes the “Eight Stages of Democracy” as the life cycle of a democracy to be around 200 years in length and exhibits the eight stages of its life cycle as follows: bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance; from abundance to complacency; from complacency to apathy; from apathy to dependence, and finally from dependence back to bondage.
Many would argue that we are retreating from apathy to dependence as the current socialist movement may not be stopped. With the staggering amount of public financial dependence via transfer payments, we are surely heading, if not already there. Government transfer payments now account for 34% of all personal total income!
Lord Tytler said it perfectly: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse (generous gifts) from the public treasury.”
Dollar printing press in overdrive
In 2012, Obama and the Democrats lost control of the House and the Senate at the mid-term elections, which then forced Obama to sequester the annual budget by $109 billion, sparing the likes of Social Security, Medicaid, Medicare and Pell Grants.
This time around for the mid-term elections in 2022, the Democrats are going to try and not make the same mistake and keep the printing presses in overdrive to maintain control of the House and the Senate in 2022. This might explain why even in the face of mounting inflation numbers, the Federal government is pushing even more stimulus than ever before.
Under the Biden administration, we have quickly gone from independence to dependence on foreign sovereign nations for our own energy needs, through executive orders such as the terminating the Keystone Oil Pipeline Permit and banning drilling in ANWR, the Arctic National Wildlife Refuge.
When Jimmy Carter was President, the 1970’s oil crisis proved disastrous for our national security and the middle class with soaring gasoline prices. Are we destined to repeat a similar energy crisis in the United States?
All of these actions add up to a weaker US dollar, higher cost of goods for our country, and more dependence on the Federal government. So how do you take action?
Please read my previous blog titled Uncle Sam’s Deadliest Tax: The Inflation Tax. Since this article was written, the cost of Bloomberg Commodities Index has increased by 15.5%. Reach out today to discuss further.
If you have not been to the White House Priorities website, the major areas of focus for the Biden Administration are Climate, Immigration, Equal Rights, Economy, Global Standing and Health Care.
After having carefully read each paragraph, and ultimately reading between the lines, the only focus that does not have a real sense of urgency is Health Care. In fact, the Biden Administration seems content to keep the current health care system in place, despite calls from the progressive left to move towards a single payer system similar to Canada’s health care system in which the government determines the quantity and quality of health care for all.
Despite the talking points coming from the varied special interest groups and politicians, let’s dive into what the experts are saying is going to happen to our health care system in the next few years.
Bigger fish to fry
Given today’s heated rhetoric, both politically and socially, health care is simply not a priority for the Democrat controlled federal government.
“Given other challenges in the US that need to be dealt with first – such as the COVID-19 response, additional Medicaid funding and economy and tax reform – dramatic changes are unlikely,” said Mark Brewer, life sciences research director for finnCap
Mental health and COVID
The 2020/2021 government ordered shutdowns added additional stress on an already underfunded sector of health care, behavioral health.
Recently, the Biden administration announced $2.5 billion in funding to states and territories to address the crisis. “We know multiple stressors during the pandemic – isolation, sickness, grief, job loss, food instability and loss of routines – have devastated many Americans and presented unprecedented challenges for behavioral health providers across the nation,” said Acting Assistant Secretary for Mental Health and Substance Use, Tom Coderre.
Recentric currently works with behavioral health tenants in our portfolio, understands the need for expanded services, and anticipates further growth in this sector for our existing tenants and future tenants.
Healthcare is only growing.
As a result of the latest stimulus plans, the Biden administration provided nearly 7 million people without insurance access to free insurance through the Affordable Care Act.
And as recently as early April, the American Rescue Plan (ARP) expanded eligibility for the Affordable Care Act’s premium subsidies (federal aid to help people pay for insurance plans bought on the individual marketplace). This will undoubtedly expand the size of the healthcare industry as it keeps pace with the new influx of patients newly covered by insurance.
As a private equity real estate company focused exclusively on health care, Recentric is bullish on our business model, and we believe we will see an increase in demand for medical office space due to increased patient numbers as a result of expanded government coverage.
We are also encouraged that the current quasi-free market health care system, arguably the best in the world despite its flaws, will remain intact throughout the foreseeable future which will provide stability in health care choices for many Americans.
According to the Cambridge Dictionary, the term Hedge (noun) is defined as: a way of protecting, controlling, or limiting something. As a result of Modern Monetary Theory, investors are now worried about the inflation tax, and what they need to do to protect, control and limit their exposure to this devastating wealth killer.
The Federal Reserve has unleashed the printing presses causing a tidal wave of liquidity in the US and global economies. In fact, the Federal Reserve is printing $120 billion every month, according to Richard Duncan, author of Dollar Crisis: Causes, Consequences, Cures. As the US post-COVID-19 economy reopens for business, the cost of goods and services will undoubtedly soar.
You have probably noticed that inflation is already rising so far in 2021, in terms of consumer goods like food, gasoline, lumber and metals. According to Manoj Pradhan, a former Morgan Stanley economist, the real increase will begin next year. “The real challenge will come in 2022, when a lot of spending will have been deployed into goods or into housing, monetary aggregates will still be high with velocity rising.” In simple terms, inflation is a tax on savers, wage earners, and those without hard assets. Any class of US citizen who is not hedging the inflation tax will be crushed under the weight of soaring costs, similar to the 1970’s Carter Administration’s era of loose money policies causing runaway inflation.
Here are a few “hedges” against inflation you should consider:
1. Leveraged multi-tenant real estate: Recentric invests in multi-tenant health care real estate that is conservatively levered with debt. In today’s low interest rate environment, you would be better served to finance the purchase with 10-year fixed rate boosting your internal rate of return and hedging against inflation with the annual increases in rent and ultimate rise in the value of the asset.
2. “Commodities tend to have outsized returns during times of high inflation,” says Adem Selita, CEO of the Debt Relief Company. Commodities are a type of real asset. They are things like crops, raw materials, or natural resources. Their prices go up with those of other goods or services that use those goods. Two easy ways to invest in commodities are:
- Buying shares of exchange-traded funds (ETFs) that specialize in commodities.
- Buying shares of stock in companies that produce commodities.
3. Stable Foreign Currencies/Foreign Stocks: Investing in corporations that buy from suppliers using dollars or are paid by customers in foreign currencies is a great hedge against inflation. Corporations that source resources in the United States will have lower costs from an international perspective. Many multinational companies, such as Coca-Cola and Boeing, have benefited from a weaker dollar. As always, discuss your financial decisions with your accountant of financial planner.
In today’s fiscal runaway train of inflationary “print and spend” policies, and soon to be “tax and spend even more” fiscal policy, hedging against inflation will be the most important financial topic for 2021 and beyond.
Stay tuned for next month’s article on Biden’s Tax Policy and how to legally lower your tax bill in an unfriendly tax climate coming out of the US government.
It’s time to go on the record and make some predictions about the future of 2021. You may not like some of these predictions, and as a matter of full disclosure, this is not investment advice.
It’s merely my experience and knowledge with financial and real estate markets and also my visceral subconscious feeling about the way the year will unfold. Here we go!
The US Dollar will weaken significantly over the course of 2021.
Currently, the Dollar Index which is a measure of the US dollar compared to six other foreign currencies is at 89.73, according to the DXY index. To give you some perspective, the dollar hit an all-time low back in July 2008 at 72.64. The headwinds are growing for the US dollar in the form of a looser monetary policy by the Federal Reserve, a growing US trade deficit which essentially exports our weakened US dollar for imported goods, and an out of control fiscally irresponsible Federal Government. Recently, the US dollar was down 1% against the Chinese yuan. This is the biggest drop on the first trading day of the year in over 30 years, according to Peter Schiff.
The Stock Market will make a major correction.
By keeping interest rates low for years to come, the Federal Reserve has pushed investors who require yield on their investments into the stock market. This is the problem with fiat currencies, as they encourage wild swings in the markets. This is evidenced by the recent IPO of Door Dash, which went public on 12/9/2020 and valued the company at $72 billion which is more than the value of Chipotle Mexican Grill and Domino’s Pizza combined!
Commercial Real Estate as an asset class will be negatively impacted.by the weakness in retail and office as a result of the government shutdowns on businesses.
According to Yelp, from March 1st to August 31st, nearly 100,000 business listed on Yelp closed permanently, which is an average of 500 per day. Additionally, according to PERE, a private equity real estate publication, there are major signs of foreclosure requests from special servicers for CMBS debt in hospitality and retail which is forecast to spread over to office and multi-family. “We’ve seen an explosion in the percentage of loans going into special servicing over the last six to seven months.” concurs Manus Clancy, senior managing director at Trepp.
There are signs of stormy economic weather ahead. So, consult with your financial adviser and educate yourself on what steps to take now, in the event 2021 ends up becoming an uncertain year.
We know 2020 was a really tough year for a lot of people, but only time will tell if 2021 will be any better.