The Current Economic Climate - Episode 7
Brant Greathouse:
Hey guys, welcome to Meaningful Capitalism, where I'm your host Brant Greathouse.
Carl Moore:
I'm Carl Moore.
Brant Greathouse:
Carl Moore. We're here today, we're going to be talking about the current economic climate. Everybody is looking at what's going on in today's world, and it makes a big impact on the decisions that you make as you're investing. So Carl, why don't you tell us a little bit about what you're seeing as some of the major shifts and trends that are happening in today's economic climate?
Carl Moore:
Yeah, so this is actually something I've spent over the past few weeks learning from some other people as well as doing my own research and engaging in some of this stuff. So one of the things that I don't... honestly nobody knows what's going to happen. In the last few years because of COVID they've pumped over five trillion additional dollars into our economy. And so we can see that through increased gas prices, you can see it through, go to the grocery store. If you buy the exact same thing from 18 months ago, it's about 20 to 25% more expensive for the identical items while nothing's really changed. What used to cost about-
Brant Greathouse:
Except for the quantity.
Carl Moore:
That's how they keep the price down, give you less but charge you the same amount. And so what used to take, if you were coming and having a container shipped from China to America, that used to be about $3,000 for an entire shipping container. As of yesterday, that's about $22,000. That's a massive increase, which is where we're seeing lots of this inflation.
Brant Greathouse:
Nice.
Carl Moore:
And part of the inflation is this. If I know that you only have $10, I might only try to charge you 8. But if I know that you have $100, I'm going to try to charge you 20. So people are charging more while there's not really a lot of change actually going on, and it's because people have a lot more cash in their pockets. Because we've pumped $5 trillion in to stimulate our economy is what's actually happened is credit card delinquencies are at an all time low.
Brant Greathouse:
Good job everybody, you're paying down your credit cards instead of buying more junk.
Carl Moore:
Household debt is at an all time low, but I think that government debt is just replacing it, because it's at an all time high. And then it really just, there's actually even in the banking world an increased amount of money sitting in savings. So people are getting these stimulus checks, they're not going out and blowing them, and I think that's because news is creating fear around this thing, so people aren't taking vacations. They're not traveling around the world. Things like, people are doing vacations more like, I'm going to go stay at an Airbnb for a month and work from there because now I work remotely, and be in a different climate.
Brant Greathouse:
Wow, yeah.
Carl Moore:
And so there's a lot of things that are shifting and changing. And so what the ultimate outcome of pumping $5 million into an economy is going to be, I think we're going to have to wait over the next few years, because this is unprecedented territory. It's a place that we have never charted before, nor has any country ever charted before, and we can see these declines in what's going on in our economy here locally, but you can actually see this in other countries. Even China is suffering. And so-
Brant Greathouse:
So people trying to do the same thing that they used to be able to do in investing is probably not going to work for the long-term. We've got to be able to adapt and shift and look for opportunities that, when you see these massive shifts, opportunities are arising. So your goal as an investor is to identify where is the opportunity, and how can we capitalize on it?
Carl Moore:
Oh absolutely, 100%. And so that kind of brings me to the next thing, is making decisions. So depending on your age, depending on your desired retirement, and you're looking at your investment portfolio, as you see the Fed rolling out these interest rates that are supposed to increase four times over the next 12 months, which just because I say that doesn't mean they'll actually do that. But with this increased inflation, landing the plane is probably going to be pretty rough. We're not going to get through this in a way that's going to be really smooth and easy, especially for people in the middle class and below. It's going to be, I think the gap of separation between the wealthy and the middle class is already growing, and I think it's just about to become exponentially big. And some of that, and so back to you as an investor, if you're holding properties yourself instead of investing in somebody else's firm some of these kind of might begin to take and roll out differently.
But each time the interest rate goes up, especially when you're buying these commercial properties that's on a cap rate, what it's actually doing is forcing whoever owns the property to lower the numeric value of that property, because it still only creates so much cashflow, and the cashflow has to be able to cover the mortgage or the loan or whatever it would be. So each time these interest rates go up, the value of the property is not necessarily going down, but the owner's equity is going down. And those are completely in proportion to one another, which is why during the economic crisis when all these people were losing their houses, interest rates were going down to give equity to the people owning the properties to stabilize the economy, and it worked.
But the interest rates are almost too low, and they recognize that. And they're saying, hey, we're going to not be buying as many notes. The Fed is winding down how many loans that they're going to be purchasing. But then they're still going to have trillions of dollars of loans on their books, and when are they going to reverse that and start getting rid of those so that they can have their capital back? And those are things I haven't found anything about.
Brant Greathouse:
Yeah, after 2008 housing collapse, the Fed started buying trillions of dollars over these years of mortgage backed securities, and that's what you're talking about.
Carl Moore:
Right. Yes, exactly.
Brant Greathouse:
They're backing down on buying as many, and they're phasing it out over the next 12 months.
Carl Moore:
Yeah, they should be completely done by this summer is what they're saying.
Brant Greathouse:
By this summer is what they're projecting. Now the last time they did that, they started doing it and the market freaked out, so they backtracked and went back to buying normal. But this time, we're going to have to see what they're going to do. And as interest rates rise, it's going to change a lot of things. Like you said, it's going to change the value of commercial property and what you can sell it for. It's not necessarily going to change the intrinsic value, it's going to change what you could sell it for if you're wanting to cash out of it today, and so there's going to be a lot of people who you and I have talked to in the past and said, "Hey, interest rates are low, this is a great time for you to sell. We can offer you top dollar, why don't we buy your property?" And they said no. Well those people are now three, four, five years older, and as the interest rate rises, our ability to offer those same old prices is actually going down, because we can't, the property can't support the type of mortgage that that would demand.
Carl Moore:
Right. And so kind of coming back to some of those home values, when you start looking at the single family home value, and this kind of does not always proportionally work in looking at commercial. But if you look just at the single family home value nationwide in 2021, it went up 16.1%. So if you bought a $100,000 house at January 1st, 2021 and you sold it December 31st, you would've made over $16,000 just by owning it for one year. And so you start doing the math across the board, well these homes are going up at an astronomical rate, one that sadly the American income cannot keep up with. So the American growth income rate is only up like 4.3%, while the value of properties is up 16.1%. So what ends up happening when these rents continue to skyrocket at this rate is you actually lose the ability to qualify even for renting an apartment. And so that's also going to come into play as values of assets keep going up at this rate with inflation, but people's income is not going up equally. People are going to not be able to buy. Although right now people are still buying, and the time on the market for a house is only two months. And that's nationwide.
Brant Greathouse:
That's nationally.
Carl Moore:
That's nationwide, so if you're in a place like Arizona or Florida, or like we are here in Texas, you're actually seeing that those numbers are quite lower depending on the town that you're in obviously.
Brant Greathouse:
Yeah, we've got a flood of people moving out here.
Carl Moore:
Yeah. So when it comes to the housing and it comes to looking at what these single family homes are selling for, if you look back over time, you know that you're going to list your house let's say at 250,000 and basically what's going to happen is you're going to be offered a percentage of that. Not quite 100%. And if you look, and I can really speak specifically for Texas, there was some research done out of Texas A&M University that I was able to see, and it went from 92 to 95, and it held at about 95% of asking price. And in the last 12 months, has gone up to 97%. So that's across the entire board. That's from your $100,000 houses all the way up to your multimillion dollar houses. People are getting 97% of what they ask.
Brant Greathouse:
Probably an all time high.
Carl Moore:
Never seen before. And if you look in more specific niches like Austin, Houston, Dallas, probably Phoenix and other bigger cities where people are flocking to, I know right now I was talking to a realtor friend of mine in Austin, and he said it's back to where it was eight or 10 months ago, where you list your house for 400,000 and you've got 15 offers at 420, 425, 430. So if you want a house and you want to be able to buy it, you're going to not only have to come out of pocket for a down payment, but you're also going to have to come out pocket for whatever you offer over asking value if that house doesn't qualify for that. Because the value of houses is going up than the banks are seeing those homes are worth.
Brant Greathouse:
In comparable sales, yep.
Carl Moore:
Right, in comparable sales. So there's a lot of things happening in our current economic climate, and those are just things that we need to be aware of as people that are going to steward what we have well. If we're going to be meaningful with our capital, then we have to know what's going on around us so we can prepare our capital to go into places that are going to make long-term changes. Holding onto a bunch of cash and just selling off everything and putting it in the bank right now, probably not a great idea. Across the board, real estate is just a place that if you can get into it, you waiting six months is actually just costing you, if you're buying a $100,000 house at that example I gave earlier, it'd cost you $8,000 because you waited six months to buy it.
So the sooner you can get in on some of those, if you are looking to let go of some of your assets and put it into more stable... if you're getting ready to retire and you just say, hey, I've got a whole bunch of assets, and you want to get the most out of them, before interest rates get too high would be kind of an ideal time to sell and start preparing for those golden years in your investment, and in your life.
Brant Greathouse:
So there's tons of opportunities based on everything that you just covered. It's certainly a volatile time right now. Things are not stable, no matter how much news and medias want you to feel that way. Things are not stable. You can't pump $5 trillion into a market and then things just be going back to normal. And because of that, there's opportunities. So as you guys are looking at different types of investments, just be aware, and really apply yourself to the study of cause and effect here. What happens when interest rates go up? What happens when the Fed stops buying mortgage backed securities? What happens when you have a flood of people moving to Texas? Can we look back in history and see other times where similar things have happened, and where was the opportunity, and how can I get in on the action?
Carl Moore:
Absolutely, absolutely. So one final thing to kind of just wrap up this specific podcast would be, yesterday this company Marcus & Millchap had Henry M. Paulson Jr. on, and he was talking about just some really incredible things. And so if you can get your eyes on that, it would be worth your hour to listen through. But he said one thing at the very end that really stood out to me. He said, "We actually have a flood of these DIY, do it yourself investors." And he said, "I would actually encourage you not to do it yourself. You make tons of mistakes along the way, and you're not able to get..." because of volume, you can actually make more money. So he said, "I would look to find people who are doing things, you can look at their past, look at their history, and I would invest my money with them." He said, "I would give my money to you guys to go and make more money with."
And so if you're a younger investor and you're considering DIY, you might count the cost. Hey, how much is this going to cost me, and how much time and energy and effort is it going to take me to be a DIY investor versus if I invest into some firm, what am I having to sacrifice to do this? Am I giving up time with my family and with my future, and am I going to wish that I had spent more time with my children in those younger years because I decided to be a DIY investor? Versus, how much money can you make when you invest with firms like ours? And so-
Brant Greathouse:
Yeah, you can avoid the dumb tax.
Carl Moore:
We paid that for you already.
Brant Greathouse:
We already paid the dumb tax. Exactly, yeah.
Carl Moore:
So awesome, well I'm Carl Moore, and...
Brant Greathouse:
Signing off, Brant Greathouse. You guys have a great day.
Carl Moore:
Take care. Thanks for joining us on meaningful capitalism.
