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.
Energy Dependence
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.
Given all the uncertainty surrounding the 2020 election and the recent flurry of election lawsuits alleging massive and systemic voter fraud, the official outcome of the Presidency will not truly be known for months. The Senate race is also in limbo due to the Georgia run off that may not be known until January 2021. Clearly, the United States requires major election process overhaul in order to protect our single most important freedom. Our vote!!
However, one very real certainty is that taxes are going to increase no matter who eventually wins the White House. The United States national debt has recently exceeded our gross domestic product. Our Federal government continues to spend beyond its means under the guise of “modern monetary theory.”
The fiscal reality is the federal government does not have the money to pay for its entitlement programs, bailouts and addiction to stimulus spending. By artificially keeping interest rates at all-time lows, the Federal reserve is creating massive bubbles in the stock market and residential real estate.
What can you do to take safe harbor from the coming storm?
1. Preservation of Capital:
Recently, we have been watching a fiscal chart called the Buffet Indicator. Essentially, this indicator tracks the total US stock market valuation relative to the total GDP of the US.
According to Current Market Valuation, this indicator is currently 65% higher than the historical average, suggesting that the market is Strongly Overvalued. If this indicator is correct, a major market correction might be coming soon and shifting into a stable asset class such as health care real estate would be recommended.
2. Tax Efficiency
Without breaking any laws, lowering your marginal tax rate without lowering your income is not an easy task.
Health care real estate provides some major tax efficiencies by way of a tax tool called a cost segregation study. This legal accounting method allows the owner of a building to accelerate depreciation on different parts of the building per the IRS tax code.
We recently highlighted a medical office building acquisition in which we were able to generate a $1 million dollar paper loss and pass through to our investors.
Preservation of capital and tax efficiency should be front of mind for all investors, especially now.
The warning signs are out there, you just have to know where to look.
Recentric continues to look for development and acquisition opportunities to meet the growing demand for larger, out-patient medical facilities. This strategy allows us to take advantage of the growing need for these facilities and offer new and exciting opportunities to our current and future investors.
We are living in unique times. Our government is entering uncharted territory as it relates to deficit spending in an effort to allow the United States to continue to live beyond its means. Zombie companies are being allowed to exist when they should have other wise been allowed to fold. Stock market and real estate bubbles are fueling a complacent sense of security when the fundamentals of the economy are showing clears signs of major distress.
Is this the new norm? Is this the result of modern monetary theory currently being practiced throughout the world?
Listen to a panel of financial experts which include professors from Denver University and real estate experts with decades of market cycle experience to help explain what steps you can take to prepare for the future.
Thank you to all who joined us for our webinar on “What To Do If the US Dollar Loses Its Reserve Status.” If you missed it, you can click this link to watch the replay here.
About Our Panelists
Glenn R. Mueller, Ph.D.
Dr. Mueller has 44 years of real estate industry experience, including 37 years of research. Mueller is internationally known for his market cycle research on income producing real estate, his real estate securities analysis (REITs) research and his public and private market investment strategies and capital markets analysis.
He is a Professor at University of Denver’s, F.L Burns School of Real Estate & Construction Management, teaching and doing research in real estate market cycles, development, feasibility, investments and real estate capital markets (Institutions, REITs & CMBS). DU’s program started in 1938 and offers undergraduate (BS) and graduate (MS & MBA) degrees in business RE&CM, as well as executive programs. He has published 100+ research articles and 110+ quarterly issues of his Real Estate Market Cycle Reports. He is also the Real Estate Investment Strategist at Black Creek Group where heprovides Real Estate Market Cycle Research and Investment Strategy for Black Creek’s Institutional Real Estate Investment Groups, Non-Traded and Public REIT groups.
He holds a B.S.B.A. from the University of Denver, MBA from Babson College, and Ph.D. in Real Estate from Georgia State University. Former research positions at Legg Mason Inc., PriceWaterhouseCoopers, ABKB/ Jones Lange LaSalle Real Estate Investors, and Prudential Real Estate Investors.
Visiting Professor – Harvard University – 2002 to present & summer executive education semesters.
Advisory Board Member – Arden Real Estate Group – Institutional Opportunistic Real Estate Fund, 2014 to present
Chairman – Board of Directors – European Investors Inc. – Global, International & US REIT Funds, 2014 to 2017
Steven Laposa, PhD
Steven Laposa, PhD is a Principal with Laposa Realty Advisors, LLC in Denver, Colorado, a Senior Advisor to Ankura Real Estate Advisory, and a Fund Advisor to ST&T Capital Management. Dr. Laposa has extensive real estate and project management experience on a global scale including national and international institutional investment acquisition and disposition strategies, market analytics and forecasting, litigation expert, real estate fund advisor, construction manager, real estate economics, equity and debt portfolio risk analysis, site location analysis, and industry recognized thought leader.
Andrew Mueller, PhD
Dr. Andrew Mueller is a professor at the Franklin L. Burns School of Real Estate and Construction Management. Prior to joining the University of Denver, Dr. Mueller was a consultant for several large international consulting firms, a private consultant to real estate developers in Colorado and the Northeast, and an instructor at Colorado State University and Regis University. Dr. Mueller holds a Ph.D. and M.A. in Economics from Colorado State University, a M.S. in Real Estate and Construction Management from University of Denver, and a B.B.A. in Finance and Environmental Studies from Emory University. Dr. Mueller has taught as an instructor and teaching assistant in the Economics department at Colorado State University, and as an adjunct faculty at Regis and University of Denver. Dr. Mueller has taught Real Estate Capital Markets at Daniels as an adjunct, and is currently teaching Business of the Built Environment. Most recently, Dr. Mueller won the 2016 Manuscript Prize from the American Real Estate Society for Best Office Buildings/Office Parks paper. In his free time, Dr. Mueller enjoys skiing, mountain biking, home brewing, and picking bluegrass with his friends.
Dr. Mueller has 44 years of real estate industry experience, including 37 years of research. Mueller is internationally known for his market cycle research on income producing real estate, his real estate securities analysis (REITs) research and his public and private market investment strategies and capital markets analysis.
Steven Laposa, PhD is a Principal with Laposa Realty Advisors, LLC in Denver, Colorado, a Senior Advisor to Ankura Real Estate Advisory, and a Fund Advisor to ST&T Capital Management. 
Dr. Andrew Mueller is a professor at the Franklin L. Burns School of Real Estate and Construction Management. Prior to joining the University of Denver, Dr. Mueller was a consultant for several large international consulting firms, a private consultant to real estate developers in Colorado and the Northeast, and an instructor at Colorado State University and Regis University. Dr. Mueller holds a Ph.D. and M.A. in Economics from Colorado State University, a M.S. in Real Estate and Construction Management from University of Denver, and a B.B.A. in Finance and Environmental Studies from Emory University. Dr. Mueller has taught as an instructor and teaching assistant in the Economics department at Colorado State University, and as an adjunct faculty at Regis and University of Denver. Dr. Mueller has taught Real Estate Capital Markets at Daniels as an adjunct, and is currently teaching Business of the Built Environment. Most recently, Dr. Mueller won the 2016 Manuscript Prize from the American Real Estate Society for Best Office Buildings/Office Parks paper. In his free time, Dr. Mueller enjoys skiing, mountain biking, home brewing, and picking bluegrass with his friends.