Why the Fed is Not Raising Interest Rates

A Post from April 29th, 2016 via SavantReport.com

Amid a slumping economy and reduced levels of consumer spending, the Fed on Wednesday again opted not to raise interest rates. “Economic activity appears to have slowed,” the Federal Open Market Committee said in a statement released after its two-day meeting this week. “Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”

The bottom line is that we saw 0.5% growth in the first quarter of 2016, lower than the expected 0.7% growth. Personal consumption rose 1.9% and personal savings rate grew by 5.2% versus the 5% 4th quarter of 2015. Our economy is growing at the slowest pace in 2 years. The Atlanta Fed’s forecast has proven to be right on…

The velocity of broad money touched a new record low. All the new money created in the economy (mostly by banks lending) isn’t translating into growth. Although Obama is touting his greatest achievement as bringing the economy out of recession, it doesn’t appear he did a very good job at it. The velocity of money is one of the biggest factors in true economic growth. This is worrisome, and previously I had believed we bottomed in the velocity of money, and I was looking forward to growth. This news is disappointing to say the least. This undoubtedly means that things are not as rosy as the government would have us believe, perfectly tying into the .5% GDP growth in Q1.

What this all means is that despite people feeling “good” about the economy, real substance is lacking. Carl Icahn sold his prized possession, AAPL (Apple) just in time to have the stock take a 10% dive on the news plus news of slowing iPhone sales. Carl said that he expects the markets will have a “day of reckoning” and that he has a “huge short position” in addition to long positions.

Adding to Carl Icahn’s view, U.S. corporate defaults are rising, and in fact the highest since the financial crisis. With major retailers having challenges (Apple, Sport Chalet, Sports Authority, etc.), there are reasons to be concerned about the market in the context of rising corporate debt defaults and the cross contamination that might come from it:

The markets are at a critical juncture now. Candidly, I’m surprised by the rally that we’ve had, but I don’t feel comfortable with the market’s volatility, which tells me that this rally is not as strong as some would like to believe. Here is a 60-minute bar chart of the S&P emini futures… Big ups, and big downs.

My analysis of the market remains biased towards volatility and downside at this point, not additional upside, but stranger things have happened.

REAL ESTATE SLOWING:
Last week we talked about the big box retail risk in the real estate market, and the week before about the Miami Meltdown. But this week, the housing data continues to point towards slowing. The pace of U.S. homebuilding fell in March to its lowest level since October. Housing starts fell 8.8% from a month earlier, to an annual rate of 1.089 million. We are basically flat year over year, pointing to the slowdown I have been predicting for the last 6 months or so. Single family home starts fell 9.2% in March, which makes up about two-thirds of the housing market.

Homebuilders have done exceptionally well in the economic recovery. A big part of that, however, was how cheap they were able to buy land from 2009-2012. Now the good land deals are gone, and they are starting to pay much higher prices for development land amid slowing sales paces. Home ownership has continued to fall in recent years, not grow:

A big part of this trend is certainly millennials. It was once a coveted accomplishment to own your own home…Today people are more worried about the stylish car they drive and name brand clothing. I believe this trend is short lived pending a Republican presidential win, which will help establish a new trend of less subsidies and more reliance of self-created financial futures.

The next chart shows U.S. housing inventory adjusted for the population. This is why home prices are rising faster than salaries:

Rental vacancies are still relatively tight, and tightening even more…Which is very interesting considering the massive multi-family apartment building spree that much of the country is in the midst of right now. Are we over building apartments? Not according to demand and vacancy rates, which seem to have stabilized at a reasonable mean-line. However, if the building continues and the trend shifts back to home ownership versus renting, then we could of course find ourselves in the opposite set of circumstances when considering multi-family as an asset class.

Keep in mind that hedge funds bought hundreds of billions of dollars of single family homes during the downturn. Many of those properties have not made it to the market yet. There is a real possibility that one of two scenarios are or will be in play for the rest of this year and next year in residential real estate:

Hedge funds might start selling and flood the market, pressing prices down; or
Hedge funds might be keeping inventory off the market and holding them as rentals, keeping the home ownership rates low.

The silver lining of the housing data is that first time home buying is up, but really only because of the massive incentives that state and federal government are giving out to homebuyers. For example, here in Nevada, the state has a fund which is GIVING AWAY as much as 3-5% of the purchase price of a home in “down payment assistance.” This is literally FREE MONEY for homebuyers. Since home buying incentives began, first time home buying is up…My only problem with that is that it is somewhat fake…Its like the Fed buying bonds…Its artificially created or stimulated demand, which isn’t sustainable for the long haul.

Real estate brokers and agents (not always the brightest bunch when it comes to investing) are starting to talk of a rent growth “bubble” and pricing bubble. They are wrong on both accounts. While I’m not particularly bullish on housing for the next couple of years, I’m also not incredibly bearish. I think we’ll see some ups and downs, but long term I am still a believer in both residential and commercial real estate as a fantastic appreciating asset class…Until the next cycle top.

Jordan Wirsz | Oil Bloodbath Continues

Everything I Got Right or Wrong in 2015

First, HAPPY NEW YEAR to all of you — words cannot describe how truly grateful we are to have you as our readers, and how much we cherish the opportunity to share our winning strategies, research and investment philosophies with you. Wishing you and yours a wonderfully profitable 2016 from my Hideaway in the Utah Mountains (picture attached).

2015 was an interesting year no doubt. We shared dozens of market warnings and buy signals for various markets. We got most right, and a few wrong. So here are the “rights” and “wrongs” of 2015:

What was a total miss:

1. Australian Real Estate-WRONG We have been calling for the bottom to fall out of the Australian real estate market for about 3 years. And for 3 years, that market has held on by it’s fingernails in a stubborn defiance against the inevitable bear market, or as I tend to call it, “collapse.” Three years ago, I called for a BOTTOM in or around 2015 for Australian real estate, and it has yet to even enter “correction” territory. Renowned economist Harry Dent is in agreement with my analysis, and we both agree that it is just a matter of time before it happens. Australia’s currency has “collapsed” compared to the 1.00++ from a few years ago to recent lows below the .70 mark. The currency is facing headwinds for many reasons, including the loss of the commodity bull market that has propped up their economy during the woes of other world economies in recent years past. Now that the natural resourced based economy is losing capital flows from China speculation in addition to the woes of their natural resource based economy, I expect Australian real estate prices to fall substantially in an “imminent” move to the downside, however the timing and haste of the fall has eluded me. Nonetheless, if you have assets in Australian currency or assets, now is certainly a time to be divested. The risk to reward ratio for Australian assets right now is 10x in the opposite direction that Savant looks for….In other words, there is 10 times more risk than the potential upside.

What was “in the ball park”:

1. Oil-RIGHT That’s right, we called the commodity collapse, including the oil market. However, we did not know the extent of the bottom pricing that currently exists. One thing I have learned about the energy markets, is that they simply get overdone both to the upside and to the downside… Oil really is a “boom and bust” commodity, and it certainly did BUST this time around. 2015 was a great year for us to showcase the oil collapse as a call we made years ago. In fact I remember not many years ago, doing business with energy equipment rental companies who were hounding to follow the oil patch…It was the “BOOM” time, and I knew that following every oil BOOM cycle, there is a BUST. We have done extensive work with clients in the oil patch of North Dakota is recent years, and now we are seeing the toll that $35 oil is taking on the region up there. Oil was a nice call to the downside, but, goodness, this has been a bit overdone, and things may get worse (lower) before they get higher.
2. Gold-RIGHT Okay, by now you know I’m NOT a gold bug. In fact, I make fun of gold bugs all too often. Don’t get me wrong, there is a right time to own gold, and the wrong time to own gold. The last few years have been the WRONG time. Gold shot up to huge levels not seen before based on a fear and anxiety play from the money printing that world governments have done. The bottom line is, gold sits in a safe, it doesn’t pay a dividend, and it costs huge amounts of premiums to buy and massive commissions to sell. At the end of the day, gold would be good in the case a nuclear war against the U.S. or during social unrest to extreme degrees. Beyond that, the bullish case for metals has all but disappeared…Just as I predicted. Gold topped at about $1924 in the futures contracts several years ago, and now it’s trading at $1,060 and recently hit $1,045. I have been calling for gold to trade under $1,000 in 2015. It got close, but no cigar. Has it hit the bottom? See below under 2016 predictions.

What went according to plan:

1. U.S. Real Estate-RIGHT Right again. We had many clients follow us into residential real estate in 2010 and 2011 and they have made huge fortunes doing so. In 2012 we called the “discount” off the table for homes in the U.S. and called the time to buy commercial real estate. We were right. Softening home prices (but not declining necessarily) is due to the big rise we had up to 2012. Long term housing will continue to do well, but the better buys are in commercial real estate right now. We were right, and we have made millions of dollars in the last couple/few years for ourselves and our clients at Savant Investment Partners. HOWEVER*** Time is running out! We feel that there is a year or two ahead of us that will be viable for acquisition…Then its time to sit back and ride the cycle and wait for the top. This, like anything, is subject to change pending events and circumstances that may change, but the bottom line is that if you don’t buy real estate soon, it may very well be too late in the cycle to get in on it.
2. Agriculture-RIGHT Another correct call — Agriculture is in the toilet. I recall arguing with a well know agriculture publisher a few years ago about the future of ag. He was bullish, and I was bearish. Proudly, guess who won. I don’t owe this call all to my own credit — but with great thanks to a large client of ours who educated me on the agriculture markets. As soon as I understood it, it became clear as day to a cycle-based investor like myself, that farmland and agriculture commodity prices were simply in the “Euphoria” stage of the cycle. And so it has begun, the major, major, major bear market in agriculture markets. Based on time charts for the ag-cycle, we expect things to be tough in agriculture for at least another 3 to 4 years, and possibly as many as 5 or 6 years.
3. U.S. STOCK MARKET- RIGHT In the beginning of 2015, I gave two thoughts about the stock market. The first one was that the stock market was likely to go higher, especially long term. The second was that things had gotten too heated up, and we “need” a correction to pull the froth off the market so that we could continue up at a more organized pace. Instead, we are finishing the year almost flat. We DID go higher, and when the opportunity arose for a correction, the market didn’t take it… The U.S. stock market has effectively passed up every opportunity to continue a correction into reasonable territory, making it’s current position somewhat susceptible to massive volatility as the big investors try to keep this bull market raging on. That is a dangerous position to be in. We called for excessive volatility, and we got it. We called for somewhat higher prices, but also for a much needed correction. (see below in 2016 forecast). As of right now, I am completely out of the equities markets. And I’m okay with that. If the markets rise without me, I’ll be fine with it. If they dive without me, I’ll be just as satisfied. For now, there are very few good opportunities to be a trader or investor in the stock market. We haven’t hit the peak of the long term cycle, but the shorter cycle certainly suggests the need for some sustained down-time.
4. Interest Rates — RIGHT I said that in 2015, we would see the Fed raise rates. They did. I said that real estate rates would remain low…And they did. I also said that the long term interest rate cycle is going to be soft and subdued, and so far, I’m right. The “end-timers” who say interest rates are going to skyrocket have, at least in the interim, been proven wrong. With that said, Bond holders have been on the right side of the bet until this year. Next year, will be a different story.
5. Canadian Economy- RIGHT Back in 2014, I talked in earnest about the coming debacle of the Canadian economy, and specifically their incredibly high priced housing. In 2015, Canada officially entered recession, and now housing is in the early stages of softening, which will prove to turn out to an all-out freefall of housing prices if the economic metrics remain as staggering as they are right now. Household debt to income ratios are incredibly high, housing cost per foot is incredibly high, and housing cost per household income is staggering. We have many Canadian friends and clients, so this is not a “fun” thing to be right about…But we were.
6. China Stocks & Real Estate- RIGHT In 2014, we issues a stark warning for China in 2015. We knew prices were too high, financial accountability was extremely low, and artificial stimulus into the economy AND especially their real estate markets was, categorically “absurd”. The China story is only starting to unravel. Their stock market has collapsed, and has been artificially pumped up again. China’s real estate market is getting weak, people are losing fortunes, and developers are defaulting on their billions of dollars of loans from the Chinese government run banks, which lent the money to keep the economy rolling at full steam. Some people argued “soft landing” for China, but we have all along been touting that China has many systemic issues in their real estate and stock markets that will take a long time to work out. The Chinese government even went as far as to manipulate their currency against the U.S. Dollar because of their weakening role in manufacturing and outsourcing with a stronger U.S. Dollar.
7. U.S. Dollar Rally — RIGHT The U.S. Dollar has risen substantially, as predicted. We touched the 1.00 mark on the USD Index and I fully expect we will go even higher. Only a few short years ago, people were calling for the complete dismemberment of the US Dollar. That’s when I got bullish the USD, and bearish the Euro…And that is exactly when their trends began reversing. In 2014, I called the US Dollar rising in 2015 and beyond. This one was a dead hit.

What was a total surprise:

1. I didn’t have a specific forecast for European debt. However, I admit that I completely missed the possibility that by the end of 2015, 40 percent of the European sovereign debt market would be trading at a negative yield. I didn’t consider that investors would have to pay Germany for the privilege of loaning it money for five years. Who would have thought? However, this also presented a great opportunity that investors like Bill Gross (formerly CEO of PIMCO, currently at Janus Capital) took advantage of to short the European debt. And it worked quite well to date. I will say that I forecasted low rates, but the international markets certainly took me by surprise.

All in all, it was a great year. This year, we made well into the 7 figures for investors and ourselves. Although we don’t have a financial arm for trading the various markets for clients (yet), our bets and insights have proven to be more right than wrong, for which we are eternally blessed and grateful for. Now the time comes to predict what 2016 has in store for us…And that you will see below:

What’s in store for 2016:

1. The political front will have a big impact on the 2016 economy in the U.S. The democratic institution cannot continue to afford to have low employment participation and low wages. People still “feel” like they are out of work. Technology has played a key role in this, seeing as how technology helps us work more efficiently and fewer hours. This has been a long-term trend. However, for the democratic institution to convince voters that their party is what is best for the U.S. economy, they have to find ways to turn things around. Hence, the “pop” in recent years of hours worked:Although some of this “pop” is due to economic recovery, it is still not that far away from pre-recession levels which remained relatively low in the hay-days of 2003–2006. I see more workers being employed in 2016, and some strain in financial condition on most businesses as a result. This could precipitate the market correction that stock market correction I have been thinking is coming…An earnings recession could very well make its way into the spotlight in 2016. Thus, be prepared for people to “feel like” they are doing better economically, but expect business net profits to slow down a bit.
2. The stock market is decidedly tired of this non-stop rally for the last 5 years. If you look at recent charts, you can see that 2015 struggled to hold onto its gains throughout the year. We punched through to new all-time highs, and quickly retraced back and forth between net positive and negative for the year. The U.S. stock market is needing to find some balance…Right now, gravity weighs heavy on the market, and we need a correction to flush out the bull and “reset” things to prime up for another run to the upside, which I think is imminent. While some disagree, I think 2016 will be a volatile year. Here is the S&P chart for 2015:As you can see, we had a correction, but still remain over the 2,000 mark. It was only a few years ago that we were at 1,100…We’ve essentially doubled the major indexes in very short periods of time. I believe before we go higher, we’re going to have to go lower. My bet for a correction is 18% + percent to the downside which would be in the 1,750 neighborhood on the S&P. While there are perpetual bulls who see nothing but upside to the market (it’s their job, who can blame them?), the reality is that the risk versus reward in the stock market is skewed at the moment. For the market to jump to 2,200 would be much more difficult than for it to fall to 1,800. There are headwinds in the equities markets. Thus, I see 2016 as a flat to negative year for equities…December 31, 2016 may prove to be flat to positive, but there is a good likelihood of significant downside rides in the interim. I give an 18% or better correction approximately a 60% chance. That would present a much better buying opportunity for the bull market cycle which I expect will top 2017–2020 in the stock market.
3. The gold market will continue to face headwinds. Lack of dividend, lack of demand from India and China, lack of enthusiasm and optimism among investors is one reason why I see gold trading below $1,000 in 2016. We have gotten awfully close to the $1,000 mark in 2015. Although I think we could see a dead-cat bounce to the $1200’s range, I think before 2016 is out, we’ll see gold lower. My bottom minimum target for gold is $964, although I think it could trade as low as $850. The interest thing is that the silver market has literally fallen out of bed. Silver topped at $50, and has devalued by 70%+ trading into the high $13’s. At this point, I think silver is in the range of long-term investment “buy” signals. Silver still may have a dollar or two more to the downside, but long term I see it easily double where it is today. What is “long term” in my book? Probably 5–10 years. I’m always an advocate of buying precious metals as a safe haven, but you have to buy them at the right time. I don’t expect gold or silver to be entering any new bull markets anytime soon…But owning a little bit of it is never a bad idea. 2016 should be a lower year for gold.
4. The oil markets are likely to remain depressed for a while. Not to say that they won’t bounce back a little, but energy in general will struggle as the overall commodity cycle is in the bearish mode. $80 oil in 2016? I doubt it. $60-$70? Certainly a possibility. I am planning to invest in energy equities such as Chesapeake, Exxon, and others this year when earnings continue to get slammed due to low margins. I want to enter the market right about the point that these company’s cost-savings measures are being realized in earnings, and that should be the turn-around for them. Long term, oil will boom again. And 2016 should provide a bottom to enter the long term energy play.
5. All international real estate such as China, Canada and Australia should begin to take hold of the bear market. While I have made this call before (and been wrong on timing), I am incredibly confident that the call will be right, just maybe not perfect in timing. The commodity cycle and international money flows to these countries are slowing, the economies are on the rocks, and that should prove to at least begin the cracks in the real estate markets. Like anything, real estate does not move particularly fast. Various factors such as interest rates, jobs, affordability, capital flows, etc. etc. etc. all come into play. I see 2016 as a definitive down year for those international real estate markets.
6. The U.S. real estate market may hold flat for 2016. There are numerous signs that indicate the U.S. could slow down in 2016 or 2017, and if that is the case, I believe real estate will hold about steady. I believe 2016–2017 are opportunity years to take advantage of the last “deals” in U.S. real estate before we just buy and hold for the long-term cycle to take hold and propel us higher into the 2020’s. The opportunity to buy U.S. real estate at discount prices is decreasing, and the markets, especially the capital markets, are coming back quickly. Thus, the time is sooner than later to be invested, or you may miss the boat. Again, risk versus reward ratios should be stacked incredibly in our favor…Right now they are, but not indefinitely. 2016 should be a flat to slightly higher year for U.S. real estate with the possibility of “softness” creating opportunities. Take this opportunity to buy for the mid-term real estate cycle that we expect to top in 5–6 years +/-.
7. U.S. interest rates are going to remain relatively low. Although we may see a 2nd, or even 3rd rate hike by the Fed in 2016, they are all likely to be 25 bps (1/4 point) raises. This may add slightly to real interest rates that borrowing at, but I see real rates still staying in the 5% range for quite some time. Inflation is low, the economy is still sluggish, and the government can’t afford refinancing their maturing debt at much higher rates. Thus, I see 50–75 bps maximum being added in 2016 to the Fed’s rate, and about that much may translate into real interest rates. Take advantage of it by locking up your interest rates and borrowing as much debt as you can on high quality income producing assets like quality commercial and residential real estate. Don’t be afraid of 6.5% real interest rates this year…Its not going to happen. Right now, we are borrowing at about 4.5% on commercial loans with medium maturities. Expect 5% +/- in 2016. However, be ready for 150 bps higher in consumer lending rates. As the number of hours increases that typical workers are working, and wage inflation inches up, consumer lending rates are likely to increase. I see this consumer (unsecured of lightly secured such as credit cards and auto-loans) rate increase definitely starting in 2016.
8. Currencies, including the U.S. Dollar and the Euro will continue in their recent trend. I see the US Dollar index easily hitting 1.06- 1.07 mark in 2016, possibly even as high as 1.10–1.12. This means commodities are going to continue to struggle, and other currencies are likely to decline, especially the Euro which I see at the 1.00 mark in 2016. The Canadian dollar will continue to have problems, as will the Australian dollar. Bottom line, I want to hold as much of my assets in U.S. dollar terms as possible, and if you trade currencies, look for opportunities to buy the U.S. Dollar and short the Euro when opportunities to do so present themselves.
9. Commodities are going to continue to struggle. Agriculture will be in the dog-house for several more years to come. The best that can be expected in 2016 will be some “relief” with slightly higher crop prices. However, don’t expect a big rally in 2016. Oil, Gold, Agriculture, all should be relatively subdued in 2016. With the exception of oil-stocks and silver for the long term, there will be few opportunities to take advantage of for the long-term picture in 2016 in the commodity arena.

More to come…

As we get into the new year, I’ll be talking about my 3 best investing ideas for 2016. We will schedule our next webinar on the subject for next month, so stay tuned.

Please forgive any spelling errors as I am writing this on a short-staff week — we’ll be back to our regular format next week.

God bless you all, and Happy New Year to you and your families. May 2016 be a blessed year and a profitable one for you.

Sincerely,

Jordan Wirsz

China's Bubble

Written July 2014 via http://savantreport.com

For years, I have been warning of a bubble so large, so significant, so catastrophic, that it will make the U.S. real estate and stock market bubbles of 2008–2010 look like a walk in the park. Perhaps the biggest economic, real estate, and stock market bubble has yet to burst, and when it does, millionaires will be made, and millionaires will be shattered…It just depends which side of the bet you want to take.

Bubbles are not that difficult to detect. Double digit gains in any asset class for years on end are certainly a warning sign. But the real nail in the coffin is when inherent value has been dismissed totally, and the investment

becomes a “must” for no other reason than “it just keeps going up!”

Warren Buffet is a pretty smart guy. I don’t agree with his political or taxation stances necessarily, but I have to give him credit for being able to detect inherent value in a company or asset, or the lack thereof. That skill (note that I didn’t use the word “gift” — because anyone can build a skill) has made him and his shareholders billions upon billions of dollars. In short, he knows what to stay away from, and he knows where value exists where the market may not see it yet. Detecting a bubble uses those same skillsets in the opposite way.

There is a bubble so large, that it will likely take years, even a decade or more, to fully unravel. The bubble is so pronounced, that even a novice level skillset of determining intrinsic value in an asset, economy, or company will be able to see this one right off the bat without looking too hard. If you’re on the right side of this bet, you’ll make incredible returns. If you’re on the wrong side, you’re going to get slaughtered.

Keep in mind, economic and asset bubbles don’t “pop” overnight. Bubbles take time to expose themselves to those who aren’t paying attention. Then denial sets in.

And then? Then pure panic.

What is this massive bubble? Perhaps the greatest bubble of all is…

That’s right, China is perhaps the greatest bubble that this generation will ever see. The speculation of real estate, equities, and lending are beyond anything that could be comprehended without seeing the visual charts of what is happening.

When you add financial sector or government debt to the above chart, some estimates of China’s total debt is around 277% of GDP!

China has been overbuilt twice as much and for twice as long as any other government driven emerging market in the history of mankind. There is virtually no other way for this to end than very, very, very badly.

The real estate speculation in China has led to literal “ghost cities” being built…But not like the old wild west…No, these are far more prolific! We’re talking about dozens and dozens of high rises condos being built, complete shopping malls, restaurants, office towers, all of which are completely empty…Built purely on speculation, and bought by individuals suckered into thinking that it was a good investment. These “cities” remain absolutely, utterly, empty.

So what do these “ghost cities” with not a single resident look like?

The renowned TV program “60 Minutes” recently did a special on these Chinese ghost cities. I’ve included a link to view this segment. And trust me, it’s 13 minutes
that you can’t afford not to watch.

https://www.youtube.com/watch?v=uxjwhk1ktNw

Folks, I kid you not…This crisis is brewing…

Chinese government officials rushed to deal with the collapse of a property developer they say is unable to repay almost $600 million of loans, marking a large default for a real-estate fi rm and the latest sign of stress in a slowing Chinese economy. Officials in the eastern city of Fenghua have been meeting to determine how to deal with Zhejiang Xingrun Real Estate Co.’s outstanding debt and dispose of its remaining land assets. The company owes banks 2.4 billion yuan ($390 million) and a further 1.1 billion yuan to other creditors, according to a statement posted on the local government’s website.

The lending bubble in China is massive. A number of Chinese developers have gone bankrupt. And for the first time, a major Chinese developer is discounting their condos by as much as 40% to get them sold.

The “smart money” investors such as Billionaire Li Kashing (worth a reported $31.9 billion) is selling off several billion dollars’ worth of commercial real estate. “Just because?” Probably not…He likely knows the storm that is brewing on the real estate and economic fronts.

A recent survey of wealthy Chinese households shows that 60% of the rich are considering moving overseas. This is not surprising, considering the huge amount of Chinese money that has been invested abroad, much of which in the U.S..

What about the Hang Seng (stock market)?

This chart would not look so bad unless you consider the wide speculation that Chinese companies that are listed on the Hang Seng may be “cooking the books” to a pretty significant degree, given the lax oversight and regulation of financial standards in China.

But what about the Chinese government? Wouldn’t they intervene to help stop the economic bubble? Wouldn’t they prevent the ghost cities being built? Wouldn’t they tighten credit to prevent the over speculation? Well, they have certainly intervened…But only to feed the lie and control the media. The fact that China openly manipulates its economic data, especially around key political phase shifts, such as one communist regime taking over for another, is no secret. China is a massive economic banking superpower (creating trillions in new loans and deposits each year). But China lives in a stagflating world, and as such must be represented by the media as growing at key inflection points by mysteriously reporting growth even without open monetary stimulus.

This “cooking the books” tactic is crucial for preserving hope and faith in the future of the stock market, real estate market, and lending markets.

Even Goldman Sachs says that China is cooking the books…

From Bloomberg:
“China’s unexpected surge in exports last month renewed concern from analysts at Goldman Sachs Group Inc., UBS AG and Australia & New Zealand Banking Group Ltd. (ANZ) that statistics from the nation can be unreliable.

The 14.1 percent jump from a year earlier was the biggest positive surprise since March 2011, according to data compiled by Bloomberg. The increase didn’t match goods movements through ports and imports by trading partners according to UBS, while Goldman Sachs and Mizuho Securities Asia Ltd. cited a divergence from overseas orders in a manufacturing index.

Smaller trade gains could signal a less robust recovery from a seven-quarter slowdown just as Australian Treasurer Wayne Swan says the economic rebound is a sign of improving global demand. Accurate statistics from the world’s second-biggest economy are increasingly important for domestic and foreign investors and for China’s government, ANZ’s Liu Li-Gang says.”

The Chinese government rules with an iron fist. They control the media, the internet, and their economic data.

So as far as they are concerned, the bubble will dodge the needle at all costs…Even outright manipulation of financial and economic data.

Make no mistake about it…China is a bubble worth recognizing. Investors who are invested there will get slaughtered. Those who find ways to “short sell” the bubble will make millions.

The safest bet? Being on the sidelines, watching it from afar, and finding real value investments in your own back yard where there is tremendous economic growth on the horizon, coming right out of the backside of an economic and real estate cycle, with plenty of upside for years to come.

Learn more about Savant Investment Partners –
www.SavantInvestments.com

Learn more about Jordan Wirsz
www.jordanwirsz.com

Market Literacy 101 – Agent’s Guide to Market Knowledge

Information is power. The world is an incredibly loud place. Today’s society is full of technology, noise, commentary, and self-proclaimed experts. Everybody is tweeting, posting, writing, and recording talking-head videos. If you watch CNBC or CNN, or read the Wall Street Journal, you’ll quickly become confused and lost in the sea of information and opinions. Moreover, you’ll be wondering whom to believe because every so-called “expert” has a different opinion on the market. One guy is bullish while another is bearish. One says, “Sell everything and head for the hills” while another says “stay steady and use this opportunity to buy more”.

Economists, Ph.Ds., Harvard graduates and many other “well-educated” individuals are favorite guests of the local and national business news channels. You’d think smart, well-educated people would all agree on the correct conclusions regarding the real estate market, right? Wrong.
So how does a quality real estate professional stay up-to-date with all the things going on in the world and properly understand how it affects real estate, and more importantly, his/her clients? Simple – become market literate. Rely less on other people’s opinions, and learn how to formulate your own educated opinions on the market dynamics.

Market literacy is less about becoming a Ph.D. economist, and more about understanding the dynamics behind the real estate markets. Even today’s most astute news-junkie can become overwhelmed wading through the noise of our convoluted informational environment. Sifting through the commentary and opinions is where you need to start your journey to becoming incredibly sophisticated and market literate.

First and foremost, choose who/what you want to listen to or read for all the right reasons. The right reasons would be a depth of market knowledge, and lack of their special interest motives. For example, if you listen to the CEO of Markus & Millichap or Colliers International, they will always have a silver lining to the market. Why? It’s their business, and they can’t belittle their business even in rough times. Some people call this diplomacy, but I call it politicking. Other people, who produce market reports, like I do with the Savant Report, love to sell “doom and gloom” because fear sells subscriptions. Choosing your information sources wisely is a critically important place to start with market literacy. Becoming literate with all of the wrong information won’t help you. Even on international news networks like CNBC, I often find that headlines are deceiving, and the tone of an article written by someone who knows nothing about the subject matter is incredibly misplaced. Furthermore, the true devil (or angel) is in the details, so it is vital to pick apart the headlines, sift through the data an begin to develop an all-encompassing mental picture of the markets.
What I find most disturbing about agents who have the tools to become market literate is the misuse of the data for their own self-interests, spouting twisted facts into skewed sales pitches. This is what gives our fantastic industry a bad name. So, while I’m giving you some tips here to become market literate, use them responsibly.

I find the best market data from commercial research reports. Pure statistics is a great way to get information. Review numbers, read fewer articles and watch less TV. There is far more market knowledge to be gained by studying numbers than there is listening to someone’s opinion. Because our business is buying an operating commercial real estate, I focus on the big national firms with excellent, reputable research departments. My favorite is JLL. Their team does a wonderful job of creating graphically represented statistic based information tools. CBRE is probably my next favorite resource, and Colliers is a close third. These firms have full-time researchers who put together this information for the company’s brokers and their clients. Obviously the statistics come along with long-winded commentary full of bullish opinions, but the data itself will tell a story.
This chart, from JLL shows what the age mix is of retail properties being renovated:

(JLL (January, 2016) Remaking Retail: a Tricky Proposition. Retrieved from http://us.jll.com)

This chart is a wonderful example of taking data points and forming your opinion and analysis. In my world, this chart means that landlords feel it’s a better investment to renovate older properties than it is to buy or build new properties.

The next chart shows what states have the biggest renovation numbers:

(JLL (January, 2016) Remaking Retail: a Tricky Proposition. Retrieved from http://us.jll.com)

This tells me that it is still cheaper and better to renovate than it is to raze and build new. I didn’t need to spend hours and hours researching that to make that decision for myself or our investors – I can see it in simple terms in just a couple of charts. I didn’t need to read thousands of words to figure it out. The statistics made it clear as day.

Here is another JLL chart showing the disparity between real inflation and wage inflation:

(JLL (January, 2016) U.S. Employment Update February 2016. Retrieved from http://us.jll.com)

With this one chart, I know that people make more money and little to no inflation means a likelihood of consumer spending growth - more money, same cost of goods. That’s a great thing for consumers and average income earners. It also means that new home construction costs are likely flat, while people can afford to spend more for the home, making new home construction more affordable for those wanting to build, (not necessarily reflecting the homebuilder’s pricing model, however!).

To look at a good chart or two will do you a lot of good. Add a couple of free thought moments to absorb the information and think about it, and you’ll become market literate in very short order.
However, there does seem to be a massive amount of misnomers when it comes to market literacy in real estate. Most people think that as interest rates go up, property values go down. This is simply not true – in fact, inflationary times carry higher interest rates and real estate is the most coveted asset to hold during inflationary times. Second, people forget that everything cycles. In my last article for Inman, I described market cycles and why it is so important to pay attention to them. Not only do asset values cycle, as do vacancy rates, rent rates and asset class popularity (i.e. homes, office, retail, industrial, multi-family, etc.). If trends are peaking, it is relatively easy to determine that based on historical data and statistics such as vacancy rates going from 20% to 3%. It doesn’t take a rocket scientist to know that means higher rent rates and higher asset values when the market is doing well.

And vice versa.

Market literacy is more about common sense than it is about complex. It is also more than following every CNBC guest commentator and self-proclaimed “experts.” In short, market literacy is about you developing a feel for the temperature of the marketplace combined with statistics and forming your own opinion of where things are at, and where they are heading.

In 2005 and 2006, the market in just about every asset class was booming. Everyone was “getting rich” and very few people saw the end of it coming. But those who took the temperature of the market knew that things were too hot, much hotter than they had ever been in the recent past. Those who followed statistics of affordability, average loan to values of mortgages, average credit scores of debtors, etc., would have easily seen the end of the boom coming quickly. But few people, and even fewer agents, want to look past next month’s closings to steer both their careers and their clients in the right direction. Those who were prepared with market cycle literacy prepared their business for floods of REOs and short sales, and made literal fortunes by doing so. Those who didn’t were crushed.

As a buyer of commercial properties all over the country, I am “pitched” about 8 times per day by commercial real estate agents trying to sell me over priced properties. At first, they give me the pitch telling me what a great deal it is, how nice the area is, and what great tenants we would have. Once I respond with my market knowledge they often change their tone, concede that I am right and they agree, and proceed to tell me that they’ll keep me in mind on their next deal.

Make no mistake; market literacy is not to be used for the wrong reasons. It is also not to boost your ego, or add to your vocabulary. Market literacy is to be used as a sophisticated tool to steer yourself and your clients in the best way to meet their objectives. Before you know it, you’ll be more confident in the direction of real estate formulated by your own informed opinion, not the conflicting opinions other “experts”.

Risk of Recession & The Dominant Force in Residential Real Estate until 2022

By Jordan Wirsz
CEO, Savant Investment Partners
@SavantReport

The question is coming up more and more often, “is the housing market going to crash again?” Understandably, most homeowners, first time homebuyers, and residential investors are timid given the last episode of home price devaluation in the “Great Recession” of 2008 and beyond. The question is valid, especially for the consumer sector of real estate (residential) since the investment in a home is one of the largest most people will ever make. A 20% market correction could be catastrophic for some families and investors, let alone the disaster we saw in recent years past with the sub-prime debacle. Therefore, it is truly paramount and incredibly important to be able to forecast the future of the market. Of course no one will peg it perfectly but to have a general idea of what is ahead will give buyers the confidence necessary to see through the news headlines of doom and gloom that surround us every day.

As a real estate investment manager with nearly $1 billion of transactions behind me, I’ve had my fair share of market surprises, particularly from 2008-2010. I vowed never again to be “surprised” by a market. And I haven’t. I began studying and learning the markets, locally, nationally and globally, and discovered what I believe is the dominant force which drives real estate values, and helps me predict what the future holds. I have studied this discovery (new to me, not new in concept) ever since. Believe it or not, the macro winds are not forecast by interest rates, commodity prices, wage increases or employment numbers which are purely lagging indicators of what has happened, not what is going to happen. Since the downturn in real estate, I have made literally millions and millions of dollars, all starting with this one quote that I stumbled across during my research in 2009.

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.  The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.” – Sir John Templeton

That’s right – the best time to buy is when no one wants to buy, and the best time to sell is when no one wants to sell. While the “talking heads” on TV and the so-called “experts” love being featured in interviews on national television (including myself), very few of them think outside of their own data-driven boxes, and oftentimes get overloaded with data points and analysis that is more complex than trying to decipher encrypted computer programs. And all that could be avoided by focusing on one simple data point: cycles.

Real estate cycles are among the most predictable cycles of any market I have studied. And believe it or not, one simple chart can be used to determine approximate times to be “in” the market and “out” of the market. Take a look at this:

 
(Dewey, Edward R. (1971) Cycles: The Mysterious Forces That Trigger Events. New York, NY: Hawthorne Books, Inc.)

The above chart is a simple, quick and dirty view of real estate activity (NOT prices!) The real estate activity cycle is extremely predictable, and as you know peaks in activity are typically associated with higher prices, and troughs in activity are associated with low(er) prices. As you can see, the cycle is not perfect, but it is as close to a market timing took as you can get. The next peak in activity is scheduled to be in the early 2020’s (approximately 2022). So what is to come between now and then?

To understand any market cycle, you must first understand that there is an ebb and flow to every market. There are period of excessive speculation and optimism, trend changes, and growth from external forces like growing employment, low interest rates, over-building, etc. In other words, there is the macro cycle (which we are now in a bullish upward part of the cycle), with minor event or external force driven pullbacks. At the end of December, well before the “talking heads” on TV started talking about a recession, and certainly well before JP Morgan called a 22% chance of recession in 2016 and RBS told their clients to “sell everything”, I issued a stark warning for the stock market and general economic conditions. In December of 2015 I pinned the chance of a “mild” recession in 2016 or 2017 at a 30% probability. But while that sent some people scurrying for safety, I see it as nothing more than an upcoming buying opportunity for homebuyers and investors.

2016 and 2017 may hold a slight pullback in the cards for residential real estate – some slow times and some more active times. But a mild recession and a moderate slowing in housing sales and prices will actually be a very healthy thing for the market overall. When you think about how far we have come since the extreme and extraordinary devaluations from 2008 to 2010, we have had a heck of a 5-year run to the upside. It’s time for a little rest before we start the steepest part of the climb to the top of the market cycle, which is always the most fun. Remember, no market goes up forever, and no market goes down forever…it is an ebb and flow.

I like to think about the real estate market as a steady long term climb in value and rent rates, with a mean line slicing through the middle of the ebbs and flows. There will be periods of time that we are above the mean line, and periods of time below it. Right now, we have pierced the mean line on the way up, and I expect to pull back slightly to the mean line before we continue our bull market run to the top of the cycle over the next 5 to 6 years.

A mild recession or gentle pull back in prices is healthy for any growing market. That means that the market is working the way it should.

I hear the argument on a regular basis, that perhaps it’s “not that easy.” And, maybe its not. But it’s close.

There is quote by famed cycle analyst Edward R. Dewey that rings true: “Cycles are the mysterious forces that trigger events.” When you look back in history, that statement is completely accurate. Whether it is the subprime crisis for real estate, or good weather and low demand from China for agriculture, “events happen” mysteriously in rhythm with the macro cycle forecasts.

Every market *is* in fact unique. Every region, every type of real estate is somewhat different. For example, Texas and North Dakota real estate is struggling now due to oil prices. However, the commodity cycle forecast well in advance that the time for high oil prices was coming to an end. So, while some people remain surprised at the market cycles, they are really truly much more simple and easy to spot than most people think.

JLL is perhaps one of the best commercial research companies I have come across. Since I deal primarily in commercial and multi-family real estate, I follow their research closely. For each real estate asset type, JLL produces a fantastically simple chart showing where the asset type is in the market cycle. Below is an example of a multi-family value “clock” by JLL.

 
(JLL (2016) United States Multifamily Perspective, Suburban Investment - Winter 2016. Retrieved from http://us.jll.com)

Brilliantly done, in my opinion. Because my company manages not only my own personal wealth, but also many tens of millions for other real estate investors, we decided to produce our own macro cycle chart which we update frequently based on where each market is in the cycle. We like to use an emotional sentiment chart, because it often calls tops and bottoms of market cycles better than simple time charts.



(Wirsz, Jordan (2015, December) December 23rd Weekly Recap. Retrieved from http://savantreport.com)


No matter what chart you use, or what market you’re in, be conscious of the macro market cycles and you will be much more confident in the overall trend without getting caught up in the day to day news headlines. Rest assured, investors like myself and others don’t pay much attention to the day-to-day headlines – we pay attention to macro trends while trying to “tune out” the day-to-day “noise” in the headlines.

3 Mistakes that entrepreneurs make by investing in “Sexy” Investments

By Jordan Wirsz

Eternal optimism is a common thread for most entrepreneurs. Naturally, most entrepreneurs are optimists; after all, if they weren’t, why would they constantly take the risks that business throws at them on a daily basis, in exchange for a greater reward? As an optimist myself, I had to learn the art of becoming a realist when it came to managing money and investing. Early on in my career as an entrepreneur, I recall investing my profits both in growth and personal investments in a rather emotional way. I, like most entrepreneurs, was hoping for “the big one.” The one big investment, the great idea, the person who had the deal of a lifetime, the sexy deal that would change my financial life forever. And I was determined to be a part of it…

In the end, I did succeed at a very early age in making millions. But I made them slow and steady, one good deal at a time. Along the way, however, I learned some important lessons through the school of hard knocks, and in the process, also lost millions.

Investing is as much about psychology as it is stock markets, real estate deals, or startups. Even the stock market moves on a day to day basis are more about perception of value and desire to take on risk than it is about daily changes in the value of a company. People get optimistic, they get pessimistic, and somewhere in between, the markets move. We all have our own motivations, goals, and tolerance for risk versus reward. However, aggressive entrepreneurs typically have an above average tolerance for risk in exchange for greater reward. Naturally, that is built into our DNA. And as such, we are also susceptible to making extremely poor decisions based on our appetite for growth and gain. That in of itself is not necessarily a bad thing, but it can lead to very bad things if not kept in check.

Entrepreneurs typically work to become wealthy, but 99% of the time, they end up working for higher incomes and for those of you who don’t know, income is not wealth. Wealth is a net worth which is not relied upon for your lifestyle. Income, on the other hand, is most often used exclusively for creating lifestyle.

Entrepreneurs typically think in multiples. For example, if a business was started with $5,000 and now you are making $100,000/year from the business, that is a multiple of 20 on your original investment!  That’s great…The problem is that now anything less seems “boring”. The idea of that same entrepreneur taking 10% of his/her income and investing in a mutual fund for a 5% return seems silly and meaningless. An aggressive business owner will think, “if I take $10,000 and invest it at 5%, I could make $500 per year. Big deal! But if I take that same $10,000 and invest it into my business, I could make another $100,000/year, and double my business. THAT is a great investment!” That line of thinking is actually not bad. If the math works and the risk versus reward meet your expectations, then for the sake of business growth, that makes all the sense in the world.

Where entrepreneurs get in trouble, however, is when they’ve saved a substantial sum of money relative to their net worth, and decide to invest it in a highly speculative, risky investment in a “win all or lose all” kind of deal. Over the years, I’ve saved relatively substantial amounts of money, and invested them in ideas or businesses with people that I trusted explicitly, and almost every time I’ve lost money. And sometimes, I’ve lost “big” money…Life changing money…Even amounts of money that most people would consider retiring off of. How did a smart, handsome, brilliant guy like myself get talked into investing into a total loser of a deal? Well, there are three common elements that are associated entrepreneurs making silly investments.

1. Entrepreneurs often like investing in things that appear to be “sexy”. We all have a different idea of what “sexy” looks like. Maybe you fantasize about investing in big high rise hotel projects. Or maybe you fantasize about investing in the next Facebook, Twitter, or Instagram. Some people look at the oil business and dream of owning part of a big oil company that drilled a hole into the center of a massive oil reserve. Whatever your idea of “sexy” is, whatever you might fantasize about investing in that you know little about, is something generally worth staying away from. Sexy investments, in sexy industries, with big names behind them are never sure things. We’ve all heard the adage, “invest in people, not products.” Well, yes, but really to be successful in any investment, you need both the people and the product. You need intelligence combined with the right timing, product, and execution.

Recently, I was asked to join the board of a technology company, and further asked to become a co-CEO to help turn the start up around. The other people on the board and the other investors in the deal were big…In fact, big enough to be in a top executive position of a multi-multibillion dollar technology company. They wanted me to invest a modest amount of a few hundred thousand dollars, and to get involved to take the company to the finish line to be acquired. To me, this was a “sexy” investment. It had big names with it, other big investors who were, arguably, smarter than I. So, I took the opportunity seriously, and vetted it out very thoroughly. But ultimately I came to an appropriate conclusion: I knew nothing about the technology, nor did I know too much about exiting through a sale of intellectual property to another company. Moreover, I wasn’t impressed with the other day-to-day leadership of the business, and I didn’t want to battle for control which would have substantially distracted me from my main business. Truly, I had little to offer except my deal making and business skills, and of course the money they wanted me to invest. I chose to gracefully decline the offer to get involved. Although the potential was to quadruple my investment in a matter of months, and it would be a great opportunity to hob-knob with big technology firms and executives, I knew that just because it was sexy, that didn’t mean it was a good investment.

Several short months later, I was proven correct. The company has all but folded. Out of money with an aging set of technology which may not even be relevant in the next generation of hardware, I probably saved myself several hundred thousand dollars and a lot of time, heartache, and anguish over lost money.

2. The second element in making a poor investment decision is the idea that complexity means legitimacy, and the fact that complexity gives a false impression of sophistication. Often times, the simplest investments with the least amount of complexity are the ones that turn out the best.

“Only invest in products and companies that you can explain to a six-year old.” ~ Unknown

Entrepreneurs are often enamored with complex ideas and solutions because we love the challenge of figuring it all out. We also buy into the idea that for something to be seriously profitable, it also must be seriously complex. That couldn’t be further from the truth.

Investing in ideas, people, or products that you don’t fully understand can spell disaster. More often than not, big ideas even with big people behind them, don’t get off the ground. Sticking to your core competency and investing in things you know and understand is key to keeping and building wealth. This is one of the reasons why I am not a fan of complex financial instruments and securities like mutual funds, annuities, or other products that take 300 page prospectuses to explain how they work.

Simpler is better. Period. If you can’t understand it, if you can’t fix something that goes wrong with it, don’t invest in it.

3. The last, and perhaps trickiest of the sexy investment pitfalls, is investing in something because someone else, perhaps richer, wealthier, or smarter than you is doing it too. Back in late 2007, I happened to be friends with a member of one of the wealthiest families in the world. The wealthy family had a big investment deal that they were doing, and they were very excited about it. So, me being the aggressive entrepreneur that I am, I tried to find a way to tag along, and I did. Less than a year later, I was looking at a personal loss of about $800,000. Combine that loss along with the perfect storm in the real estate business of 2008 and beyond, I was really taking a beating.

What went wrong?

Well, first I broke rule #1. I invested in something that was sexy, big, and interesting to me. Second, I broke rule #2 by investing because it was complex, and even though I didn’t understand the business or the value of what I was investing in, I knew that the fact that it was complex of course meant that it was going to be a home run. Last, I broke rule #3, I invested because other people, “far smarter and more successful than I,” were investing in it too. I literally broke all three of my own rules, and lost close to a million dollars because of it.

At the time that I made the investment, I didn’t really think about my investment in the proper context. Of course I was following much bigger and smarter guys in, but they also had much bigger pockets than I did, and could afford to sit and wait out the financial storm a lot longer than I could. Being a “follower investor” is a silly, novice mistake. A mistake that cost me a lot of money.

Sexy investments aren’t always the best investments. Invest in the practical, simple, easy to understand things that you can take control of if needed. Hence, why I almost exclusively stick to real estate and real estate related businesses, because not only to I understand it well, but I can touch it, feel it, and when something goes wrong, I usually know how to fix it.

As an entrepreneur, you take a massive amount of risk on a daily basis already. Business is inherently risky. You don’t need to take your hard earned profits and invest in a sexy investment that gets you excited, but that also has the ability to bankrupt you or set you back years and years from your ultimate goal of being wealthy. Don’t compare yourself to Steve Jobs, Bill Gates, Warren Buffet, or anyone else…Don’t fall into the trap of saying, “but they did it and it worked for them.” The truth is, they were entrepreneurs just like you and I, and they were one in a billion. They grew their entrepreneurship skills in an area of expertise that they knew and understood, and as a result of their core competency, they made it big. Be your own entrepreneur, and be your own investor. Be smart, and don’t fall into the trap of investing in “sexy” deals.