Beware of Recency Bias
The Downfall of Most Business Owners and Investors Going Forward
Business owners, investors, and operators/sponsors in real estate and passive real estate are all having the same problem right now.
I call it Recency Bias – People looking to the last 1-3 years when money was flushed into the system by the Federal Reserve and Congress, boosting the growth of just about every asset class and thinking it will continue.
People are still running on the basis that everything will continue as it has for the past 15 years. “Recession? I think we're just about done with that. The Fed's going to pivot, reduce interest rates, go back to quantitative easing by July, and we'll be back to the same old run we've had after the great financial crisis.”
That is not going to happen. I might go a different direction than the herd (what I call the group-think or the mob mentality) But I find more often than not, going the opposite direction of what most people think, is THE better path.
We Are Facing Strong Economic Headwinds
The economic direction of growth cannot continue with the unprecedented amount of debt and deficit spending in this country with no end in sight.
We currently have a debt ceiling issue coming up soon in the next couple of weeks, and we have a stalemate between Congressional Republicans and Biden who still wants to keep spending like there's no tomorrow.
The fact is, we can't continue spending the way we have. Even though the U.S. has been the reserve global currency for almost 80 years, that can change very quickly.
There are aspects of de-dollarization that have been occurring. De-globalization caused by COVID. The geopolitical climate shifting. The country is spending more than what it can produce and the U.S. credit card is maxing out at an all-time high. National security issues. The on-surge of household debt from mortgages, student loan debt, credit card debt, auto debt, etc.
And the student loan payments are coming due again after being paused for the last three years. Students will need to start making payments beginning in August and many of them took on more debt and started living with an increased lifestyle.
They just don't know what they don't know.
This country has led them to believe this is the way to do it. The problem is that the consumers who drive our economy, pay the rent, go to stores/shops, buy cars, and everything else that drives the economy – will no longer have the capital to do so.
A Recession is Coming in the Investment World
Whether you think we're in a recession or not, you better prepare for one in the investment realm.
Alternative investments are how I built my freedom plan, based on real estate. I love real estate, but you have to be very cognizant of the cycles that we're in. The current cycle is different from the one we’ve experienced in the past several decades. It's a change in the Secular and Cyclical cycles.
Cyclical is a shorter-term business cycle that we typically have every six to eight years. This one has gone on for 14 years due to the cheap money pumped into the economy by our government.
We began our previous secular cycle, the downswing, back in 1980. It was the 40-year period of decreasing interest rates. Now we're on the upswing. (If you haven’t read Roy Williams and Michael Drew’s book, Pendulum, I’d recommend getting it to elucidate the significance of these secular cycles.)
So, how does this affect investing?
The pattern people depend on today is that of dramatic growth in all asset classes. It's the pattern of money running uphill. If you've done anything, a hustler in business or investing in general, you've made money. That is changing.
Now the environment is such that only those who can operate businesses or real estate efficiently and profitably will be successful. The days of buying it, adding a little lipstick to it, then refinancing out to a greater fool who will pay more for it due to the low cost of capital are over.
The cost of capital has increased faster in the last 14 months than it has in our history (nearly 500% from 0.25% in March 2022 to 5-5.25% today). That is a significant game changer and it is affecting pricing going forward. That's why I'm watching and waiting. I’m putting a pause on equity investments because that will not give me the results I want.
I see deflation occurring, where values come down. It won’t significantly harm those who have operational efficiency in place. They can manage through it. But if they have debt coming due in the next two or three years, if they don't have any profit during the holding period (only on the back end), they will not make it.
The Opportunities a Recession Brings to Passive Real Estate
A recession also brings opportunity for those prepared for it. Those with liquidity – money in treasury T-Bills, or debt lending for example – are better positioned to seize those opportunities.
Debt lending is currently my favorite position because I can call the shots and decide the asset value. I can lend up to a certain point to keep my money safe. It's fungible. It’s contractual by nature. I don't have to play the equity route (owning it) and hope it grows to make a profit. I know exactly what I'm getting whenever I make a deal.
And when I see the opportunities on the other side of the recession, I’ll jump back in. The earliest time when equity will come back into play will be the end of this year, maybe by 2025. Just like after the great financial crisis of 2008, the opportunities started coming late in 2009 and 2010. Then we just took it on from 2011-2015.
There were great opportunities for those who were positioned for them. This is what I call the Great Wealth Transfer. It will happen again, but you have to be very astute about how you run your business and where you make your investments.
If you play with recency bias, you're likely going to get tripped up, lose money, or lose business. That is something you don't want to do.
To your freedom!
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