May 1988
Vol 11 No 7
If you've been following the political campaigns this year, perhaps you've noticed that none of the candidates plan to do anything about our economic problems. In fact, the leading Democratic road runners all seem to be running on the tried and true 'tax-spend-tax' platform with a dash of anti-trade protectionism thrown in. None of them has any apparent concept of how American interests are linked to the international economy. Not to be outdone, George Bush seems to be the kind of fellow who can walk through snow without leaving any footprints. After a lifetime of public service, he's left no impact. Regardless who finally emerges as the next President, our nation will continue to be run by unelected bureaucrats who will continue to gain power and influence over our lives by issuing even more regulations to hamper the activities of productive citizens – tax payers.
Nero fiddled while Rome burned and our leaders in the Administration and the Congress have been fiddling while our economic state of affairs approaches the point of no return. I think it's fair to say that entrepreneurs and investors are going to have to find ways to ride out the approaching political and financial storms one can see on the horizon. Our leaders just won't deal with our problems. If 'none of the above' were on the ballot, he'd win by a landslide. As an exercise, see how the following scenarios would affect you.
1 WAR continues in Central America, Iran/Iraq, Afghanistan. Chemical and Biological warfare replaces nuclear attack as a new threat. Political unrest and violence grows in Korea, Israel, South Africa, Panama Canal threatening critical materials as well as supply lines and world trade. Remember, a single assassination started WWI!
2. GOVERNMENT CONTROL at all levels increases dramatically. We're already seeing special rules affecting investor HUD loans which call for a 'modified cost approach' appraisal which will limit profits. VA loans and FHA loans are becoming non-assumable for the most part. Computers are beginning to track our every move. An international system is coming on line which will make privacy a thing of the past. 5 year olds are being assigned numbers. In Australia a national identity card act was seriously proposed. Rent Controls remain a potent threat. Tax incentives are being used to encourage use of full recourse loans, purchase of low income housing units, public /vs/ private education and single parenthood/partnering outside of marriage /vs/ family units. Now, if you want a passport, the IRS has to process the application first. You must give your social security number to buy/sell gold, real estate – indeed to do business.
3. TAXATION and the ECONOMY pose new threats. No matter who wins the election, we'll all lose it. Everyone who's running will raise taxes and manufacture money. The dollar will continue to collapse until we cure our deficit spending. Foreign investors will pull out of T-Bonds/Bills/Notes into Stocks and Real Estate. They're buying American companies at record rates as we go to press. The infusion of $Billions into our markets will accelerate inflation, raise interest rates, depress stocks and bonds, wipe out savings, bankrupt insurance companies and pension funds, create desperate times. Only if our 'rolling recession' continues to spread from industry to industry as it has been doing will we be able to avoid a major depression. We're approaching that point on the 54 year long wave cycle. We may be overdue in this longest of all recoveries. Any new taxes will just make things worse without making a dent in exploding social costs.
4. FINANCIAL SECURITY based upon government and/or institutional programs will be a joke. Congress can't wait to get its hands on the surpluses on Social Security Trust Fund books. Planned increases in Medicare/Medicaid premiums will wipe out increases in any
Copyright Sunjon Trust All Rights Reserved
Quotation not permitted. Material may not be reproduced in whole or in part in any form whatsoever.
1-888-282-1882 www.CashFlowDepot.com
disbursements to retirees. And they're going to tax those Social Security checks as well as establish a 'means test' so that those who've saved against the future will receive less. Under ERISA regulations, companies can terminate their pension plans if they want to unless there's some contractual obligation to continue them. Read YOUR company pension plan and see if it says that it has been established and can be terminated at the will of the employer. The new tax act. makes it much more expensive to offer a plan. In a rash of business failures and/or bankruptcies such as might be seen in a depression, how safe will your pension be? Teachers and public employees at state and county level are particularly vulnerable. Without a tax revenue base, where will the money come from?
5. SOCIAL/CIVIL UPHEAVAL will become the norm when government dependents are finally faced with the bill for their own financial welfare. Think of all the government 'crutches' we lean on. Section – 8 subsidized housing. Welfare and public assistance. Pensions. Jobs. Subsidies. Education. FHA/VA loans. FICA/FSLIC. Public Health. EPA. Hospitals. Crime control and prevention. Day-care. Geriatric care. We have only to look at Panama to see what happens when government withdraws support. Or we can look back 20 years to Newark and the era of 'burn baby burn'. More than ever, we're going to find that our family groups and close financial/personal associates represent the best defense in troubled times.
6. BANKING AND CREDIT are the Achilles heal of our personal and financial lives. Just for a moment, hark back to the great depression following Roosevelt's 'bank holiday'. Nobody trusted banks! Credit was extended on a personal basis for necessities – and then, rarely. Suppose you had to function in such an environment. What would your 'net worth' produce in the way of spendable cash with which to buy food, shelter and transportation to work? How would you sell your assets in a creditless/cashless society? How much money would you lose if government were to once again close the banks? How vulnerable are you to drastic increases in interest rates and payments during inflation with variable rate loans? How will YOUR bank fare as Latin American debt is defaulted on and written off? Your deposits? Banks are closing now. Faster than in the depths of the depression. Federal Home Loan Bank Chairman Wall proposes closing 100 Texas lending institutions in 1988. Saver beware!
7. CHANGES IN SOCIETY cause deterioration in values. Almost half of our kids are born out of wedlock. Half a million American have no homes. We tolerate them living on public streets, eating out of garbage cans. We're becoming accustomed to violent crimes, loaded weapons in our homes – and in city schools. Criminals are released from prisons early to make way for more criminals. Serious discussion is being given to mandating an age beyond which the elderly will be cut off from public health and medical treatment. Bankruptcies are on the rise. So are numbers of broken marriages. In our fractured families, it takes two incomes to maintain middle class living standards. Kids become 'latch-key' children who hardly know their parents. The elderly are thrown away – placed into institutions. We are confronting the AIDS plague by consuming $Billions as well as medical staff support which has created severe shortages of emergency room nurses and care for terminally ill.
8. DEMOGRAPHICS are creating fortunes and despair at the same time. Southern New Hampshire is booming as Dukakis' Massachusetts Miracle drives thousands across the state line into safe territory. Relaxed tax environments in Texas, Florida and Nevada are attracting millions of new citizens away from the states with the most restrictions on enterprise and the highest taxes. Thus, some states are prospering with high levels of self-supporting entrepreneurs and profitable companies while other states must support those who can't make it. Their only response to a shrinking tax base is to increase taxes to support social programs, thereby driving out more productive citizens and attracting more social dependents. Money walks, but real estate sits and sulks. What are the long term prospects in YOUR state? Will surging population/income growth increase your property values? Will there be surplus housing which will depress values and rents? Should YOU be liquidating and moving?
9. CRUMBLING INFRASTRUCTURE threatens many of our older cities. New York depends upon sewer and water lines which date back 150 years in some instances. Everywhere bridges, school buildings, courthouses, hospitals, railway stations need to be replaced. Ground water pollution, chemical pollution of rivers and lakes, acid rain, air pollution, hazardous waste dumps need remedial attention. Rail beds and highways require maintenance and repair. But there's no money with which to do these things. And we're borrowing all we can just to run the day to day government operations. Massive property tax increases are coming – soon.
10. NATURAL DISASTERS continue to plague us. El Nino – exceptionally warm water off the coast of Peru changes weather patterns and crop yields in America. Hurricanes are now beginning to appear in the Southwest. The Ozone layer is disappearing at a much faster rate than was predicted because of the presence of chloroflourocarbons that we generate. That means dramatic changes in climate could be coming. Melting of the Antarctic ice cap. Higher levels in the oceans. Inundation of thousands of miles of beaches and coastline. California's 'big one' will hit sometime before the end of this century – 12 years – in the opinion of many experts. Nothing can prevent it. It's a certainty. Aside from the death and destruction which will be awesome, there will be the loss of almost a $Trillion in real estate and disruption of financial communications between international clearing houses in California and other major world financial centers. Nothing anyone can do will change the date that this happens. Each person has to make his/her own choice on moving.
11. COMPUTERS are becoming essential to our daily lives. Without them we couldn't start our cars, watch TV, invest in stocks, use checks or credit cards, fly, shop for food, rent a car, operate a retail store, ship or transport anything, or pay taxes. Government without computers would be powerless. With them they're gaining control over virtually every aspect of citizen's lives, income, retirement, military service and education. Modern defensive electronics systems, missile launches, the space program and aircraft need computers in order to function. Try to get your money out of a bank when their computer's down. That means that you're vulnerable to any sort of power failure, computer failure, software defect or absenteeism of the 'regular' computer programmer or operator. A new threat is becoming evident: the WORM or the VIRUS. These destroy data and programs. They can be timed to act or to infect other computers through their programming. Thus, computer crime and disruption of essential accounting and computational functions can jeopardize your career and savings.
IT WASN'T RAINING WHEN NOAH BUILT HIS ARK . . .
I've been accused of being an alarmist before. I bought a propane conversion kit for my car for a gasoline shortage that never came. I've had a year's supply of food for 10 years. I've had a generator for power outages. I own houses with their own wells in case of a break down in the water plant. I live in an area where oranges grow on trees and fish jump out of the water to avoid overcrowding – and where the sun shines most of the time and the weather is moderate. I've given up highly leveraged profits in order to avoid debt. I've liquidated at no little expense and paid taxes on profits so that I could prepare for the worst. And I've kept funds out of the banking system to avoid loss in the event of any widespread failure that might exceed the capacity of FDIC/FSLIC insurance. I've started up cash flow businesses to provide an income should my investments fail to perform. I've also diversified my interests so that no single failure or state law would affect them all at the same time. And it's still not raining yet. But once the rain starts, I'll be ready.
As a responsible investor, you've got to consider the downside in order to take calculated risks on the upside. That means you've got to anticipate things that could make your investments lose their value along with their yield. Real estate can crash. So can mortgage 'paper' based upon it. If you'd like to witness this, just go to Texas where you can buy both paper and property at about 50 on the dollar from distressed lenders. When you're a real estate investor, you can't just 'jump in and out' of real estate. Your choices are limited by the availability of credit. That in turn is subject to movements of capital in and out of the bond, stock and commodity markets as well as the overall state of the economy, tax rates, deficits, balance of payments, funding of government deficits. That's why we're looking at such a broad array of possibilities in the coming administration.
You dare not bury your head in your projections like a real estate Ostrich with all your equity exposed. Not understanding the forces that affect your investments doesn't alter the fact that real estate today offers both the promise of fantastic reward and equal measures of hazard if you play your cards wrong. Take another look at those scenarios and list events which will affect what you now own. Next, fantasize with me and pick which of the investments you might choose together with the area in which you'd like to hold them in order to maximize your opportunities and limit your risk. Compare this to present assets.
YOU CAN'T GET THERE FROM HERE . . . Unless you take action now.
Procrastination has killed off more- profits than almost anything I know of. In 1978 I could have bought gold at $135. Junk silver at $3600 a bag. In 1982 I could have bought the Dow at about $775. I could have bought in again in October at $1740 or so. In 1982 I could have bought mortgage paper yielding over 30%. Or US Treasury Bonds at 16% yields. But I didn't. I procrastinated. Fortunately, I did see the demise of assumable loans and sold off properties which presented problems, putting the remainder into Trusts which can still be sold off. I did see the rise in variable loans, so locked in fixed rate financing at low rates. I did see the end of the 60% capital gains exclusion and sold off high profit investments in 1986, replacing them with cash flow properties while I could still obtain 19 year depreciation schedules. In other words, I did the things I could in keeping with my own comfort level, financial resources and skills. You should do this too.
Nobody know exactly where the economy is going and in which time frame, but the foundations are already in place for a recession and high levels of inflation. We could have both at the same time just as we did in the mid-70s. Here are some specific actions for you to consider: (These are primarily DEFENSIVE. Next month we'll talk about the OFFENSE!)
a. Sell high equity property for cash or Exchange it for F&C income generating properties. Single family houses are still your best bet for either scenario over the long haul.
b. Take a hard look at your bank where you've either secured a line of credit with a CD or where you've deposited your savings. If they're overexposed to real estate loans or foreign loans, consider moving into T-Bills or Money Market Funds. In some cases, you can invest in 'switch' funds which enable you to easily move your cash between foreign currency accounts, foreign mutual funds, short term debt instruments, US gold shares or T-Bills. Be sure to check the prospectus before investing your funds.
c. If you're holding 'paper' on property behind variable loans or in areas where property values could drop sharply because of local economic conditions, give some thought to selling it for cash or using it to buy property in a more stable area.
d. If you're a distress buyer, beware of buying into a market situation which could become even more distressed. Lots of people lost money in Houston because they thought they'd seen the bottom when oil hit $20 a barrel. It went to $10 after that.
e. Don't use 'personal recourse' loans to leverage purchases. Try to put together small groups of acquaintances and buy using cash rather than debt. You'll get better prices and a lot more safety. And your free and clear property will produce positive cash flow.
f. Now might be a time to negotiate fixed rate, non-recourse, one-time assumable loans to replace your variable rate loans. Interest rates could move higher in a few months.
g. If you're dependent upon the promises of the government or an institution for retirement high priority should be given to establishing an independent income stream which would survive any serious recession or depression. This might be rentals, paper or a business.
h. Where your local political situation is 'anti-private property rights' and where you're vulnerable to rent controls, harassment or tenant suits/litigation; consider relocating your investments out of the area. Live in one place, invest in another, bank in another.
i. Just starting out? By leasing rentals and sub-leasing them you avoid lots of risk and can test your management skills profitably. Aim for about $100 cash flow on each house that you sub-lease. This is an excellent way to find your true potential in real estate.
j. Maintain a low profile in your community. Don't become an object of envy when you are perceived to have been one of the few who has weathered an economic downturn and survived.
Copyright Sunjon Trust All Rights Reserved
Quotation not permitted. Material may not be reproduced in whole or in part in any form whatsoever.
1-888-282-1882 www.CashFlowDepot.com
