A Moment Of Clarity – On The Economy�...

Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...

From Dennis Fassett, Cash Flow Mercenary...

I got into a discussion on Facebook recently about the economy.

Shocking I know, but we have a pretty robust private group here for local real estate investors – and we’re absolutely savage in forcing out the spammers and clowns.

So we can actually have serious discussions from time to time.

It was in that discussion thread that I think I figured it out.

By “it,” I mean what’s happening with the economy and where it’s going.

Now I’m not nearly smart enough to make a bold proclamation on what’s going to happen. But I did feel like I had a moment of clarity where the pieces seemed to come together.

And I thought I’d share what I came up with and get your thoughts.

So here’s the thing with what we’re seeing now...

The economy continues to defy reason in a number of ways:

Our debt to GDP is staggering and should have led to a flight from the dollar long ago. At the end of 2016, the U.S. had a debt to GDP ratio of 106.1%. Third highest in the developed world.

In contrast, Japan’s was 250%, Italy’s was 132%. Spain was 99%, France 96%, Canada 92%, and the U.K. 89%. China is a currency manipulator so nobody believes its 46%. And Switzerland is too small to make its 33% even relevant.

money So net to net, everyone else is deemed either "worse" or irrelevant, so the dollar continues on pretty much by default. And is there anyone else that’s going to improve?

Not likely.

Second, the stock market is overvalued based on corporate earnings. Consider what Goldman Sachs analysts have reported:

Research highlighted "elevated valuation on almost every metric" in its weekly report on markets.
Analysts say the forward P/E multiple of the S&P 500 has risen by 80% since 2011.
Data indicates the trailing 12-month P/E ratio for the market is 22.1, well above the 10-year average of 16.7.

And is there any sign that this bull market may be nearing a peak?

Nope.

And third, real estate is overvalued, sometimes in the extreme. From CNBC:

Home prices were 6.7% higher in July compared with the same period last year.
Almost half of the top U.S. housing markets are 'overvalued.'

Is there any sign of prices moderating?

Not from where I sit. Everywhere you look there’s still a supply issue. And until the supply of available homes gets more in line with the demand, I don’t see anything changing.

From my perspective…

There aren't any economic models for the situation we're in and there are no easy answers for what may come.

I used to think that the huge national debt would lead to a crashing of the dollar when debt to GDP got to 100%.

But now I don't think so.

If the dollar didn't crash with $20 trillion in debt, why would it at $30 or $40 trillion? Even $10 trillion is impossible to pay back unless we hyperinflate ourselves out of it.

So as silly as it sounds, there’s no material difference between the U.S. having $10 trillion in debt and $100 trillion in debt. None whatsoever. Simply because it can never, ever be paid back.

So the way I see it, until another major global economy cleans up it's act and currency such that they would inspire more confidence as the world's reserve currency, which will never happen, the dollar will live on and on and on.

I think we'll see the business cycle go on the way it has for decades, but with some soft resets in markets rather than crashes like we saw 10 years ago.

Including real estate.