This week began with strong bearish sentiment across the economy and markets. But with positive economic updates and a stock market rebound, could the bulls be back? Join Andrew Brill as he dives into these developments and more in this week’s Wealthion Weekly Market Recap, featuring insights from our latest interview guests!
Andrew Brill 0:00 Hello and welcome to wealthions weekly market recap. I'm your host Andrew brill, the week started off with a steep downturn, but rebounded nicely. While we all held our breath, let's hear what our experts had to say this week. Friend of wealthion, Raoul Pal joined speak up with Anthony Scaramucci and explain how to deal with the volatility of crypto. He also touched on how far behind the curve the Fed is and exchanging a debt crisis with a slow debt crisis. Raul touched on the possibility of a Solana surpassing Ethereum. Raoul Pal 0:39 This one in Bitcoin has been 27% it's kind of within the range of normality. And what you need to ask yourself is, the main drivers of crypto are the business cycle. I Where are we the economy? Well, we're starting to pick up slowly. Inflation's coming down, rates are going to come down, liquidity is going to come in. And so therefore that's usually a very good time for crypto. So the the tailwind is behind you. And the other thing, are people adopting the technology? Are things being built on it? And that's ongoing too. So when you see a news event like the last few days, you know, driven by macro factors, you tend to think they're likely to be short term. Now, if the business cycle was getting old and the economy was starting to feel a bit more fragile, then yes, you might be worried about it, but this is early in the cycle, and generally you have to expect the volatility and how I've always dealt with it is a Jedi mind trick, which is you look forward to it. When it happens, you can buy more, and you get to compound your returns much better than anybody else who just does nothing or tries to trade around it. So you should be thinking of these sell offs as a gift is, oh, wow, if I can find a bit more cash, I can put it into the market. And you tend to do really well over the cycle by doing that strategy. And that's really what, what the last four days were all about was the Risk Manager tapping somebody on the shoulder, saying, Listen, you're losing money on this side. You need to start reducing risk. And that's why everything gets hit, from crypto to NASDAQ to mining stocks to oil to anything, any risk at all. But these tend to be very short lived, because, you know, once the market resettles, they get used to the change. People have been washed out of positions. It then kind of settles back to normalcy. And these, I call them, macro spasms, they don't usually last very long. Could it last a week? Could it last two or three? That's possible. 2016 so very similar. The the dollar had been very high. The world economy was super slow. World Trade had slowed down because the dollar was so strong. And the Japanese came in and intervened in their currency. All the markets blew up exactly the same mechanism. But what happened after that was the central bank started stimulating, particularly the Chinese, because they'd been waiting for this moment to do so the Europeans last time around and the UK last time around. This time, I think it's going to be the Chinese who are going to stimulate. I think really, it's probably a net positive. Just give it a few weeks, and it's probably very positive. Anthony Scaramucci 3:22 Okay, so I'm going to test this out on you, 15 corrections in the last five years of at least 10% 15 corrections, okay, the 1000 year flood that being defined by the global financial crisis or the stock market crash. 87 did David askin blow up? You and I are old enough to remember that in 94 the 1998 Russian ruble crisis that blew up long term capital management in 98 it feels like the 1000 year flood happens on Wall Street every five or six years. And we chop. We chop our way higher Raoul Pal 4:01 When they print more currency, it makes the value of that, the purchasing cap, power of that currency, go down versus scarce assets. So it makes assets go up. So now, every time, every four years, in fact, that we've come close to something that could be nastier, they've started printing money. And it's not just the US, it's everybody, all the main central banks, and that has kept a bottom under markets. Even in 2022 was a bit trickier, because we had inflation, so it was hard to print money. But eventually, when it got to it, when the S&P was down about 30% they kind of went Enough, enough, and they started printing money again. So I don't think there is a lot to fear. In fact, I would be so outrageous to claim the probability of A down 50% market is now miles smaller than it was when you and I grew up, when it was a common occurrence that we would see it. We won't see this again because of the money printer. Okay, doesn't mean it's a. Risk Free World, obviously, because when they print money, they're debasing your savings by 8% a year to start with. But if you think of that 8% cost of that debasement, that's like the central bank's buying a put option on the whole system, and it's costing you 8% premium a year. Put it that way, it's not the worst thing of the world, but it's never great. Anthony Scaramucci 5:21 The Fed behind the curve? Raoul Pal 5:23 yeah, yeah, they are. Anthony Scaramucci 5:24 How far behind. So somebody, you know, are they 150 basis points behind or they? Raoul Pal 5:33 yeah, I think you know where they should be. Now, if we look at trueflation, which is an on chain, so on a blockchain recorded about a million or so prices. Anthony Scaramucci 5:45 Let me interrupt you. That's t, r, u, flation.com and I recommend that all the time to people, because it's a almost like a blockchain aggregator, decentralized aggregator of pricing data. Andrew Brill 5:57 Ed yardeny of yardeny research joined wealthion and gave us his perspective on the unemployment rate and the job market landscape. He also explained how big government spending is keeping the US economy running. James Connor 6:12 So let's talk about the unemployment rate. Okay, you said it came in at 4.3% you're not concerned about that, but the trend is definitely up. It was 4.1 the previous month. Why aren't you concerned with these numbers? Ed Yardeni 6:26 Well, look in the past, when monetary policy has tightened, you have seen some increase in the unemployment rate, and then, according to this widely discussed, some rule when the unemployment rate goes up slowly, at some point, it goes up really quickly. And so there's some rule that kind of we seem to have triggered the SOM rule. So I think one of the reasons the stock market took a dive recently is because of that employment report coming out, and the unemployment rate going to 4.3% now, when you actually slice and dice the unemployment rate, you find that it wasn't people losing jobs. As a matter of fact, in July, layoffs actually went down quite sharply, according to challenger data. And what's really put some upward pressure on the unemployment rate is that people have been entering the labor force. They heard that the job market is pretty good, and so they're coming in pretty quick. By the way. There's also a lot of illegal and legal immigrants that are flooding into the labor market, and they may having be having some impact, and that's certainly something that we haven't had in the past in terms of its impact on the unemployment rate. So I think that when you look at the makeup of the unemployment rate, it's not that companies are failing on their employees and saying the consumer is too weak, we have to cut back employment. It's just that the supply of labor has been surging. Participation Rate of prime age men and women has increased pretty significantly here. So that's all a sign that people are are hearing and proceeding, that there are jobs out there. It may just take a little longer to find a job, by the way. Another possibility here is that there remains a shortage of skilled labor. There's a lot of immigrants, but a lot of the immigrants aren't skilled and there's a real shortage of skilled labor, particularly technical labor. As the as we become more technologically proficient in the labor market, it's harder to find those kind of people. And I think what we may be seeing is that productivity is making up for that. We're augmenting the labor force that we have so that to offset the shortage of skilled workers with more productivity. And as a result of that, we're seeing that the economy can grow with maybe a slower pace of employment gains, which is all productivity. Productivity is a fairy dust. I mean, it makes everything better. It makes real wages. Real wages can increase. Wages rise faster than prices. It means that companies profit margins can improve. You get better real economic growth with lower inflation. So I think that's the environment that we started seeing in the data last year. I think it's continuing this year and continue on through the decade, which is one of the reasons that my base case for the decade that we're in is what I call the roaring 2020s it kind of rhymes with the 1920s and people remind me that the 1920s ended badly, but that's You still got a few more years before 2029 and the 1920s ended badly because the government came up with the Smoot Hawley tariff would shut off world trade. It's conceivable that if Trump wins, that we might have. Some tariff issues for the economy. It's conceivable that if Harris wins, there could be some economic issues as well from from that policy side. But all in all, the economies, through thick and thin, through Democrats and Republicans in the White House, has done pretty well, and so has the stock market. James Connor 10:20 a lot of the strength that you're talking about in the US economy, it's coming it's coming from government spending, and that's coming at a big cost. The US has $35 trillion now, and in federal debt, it's growing at a trillion dollars every 100 days. I believe the debt to GDP ratio now is at 125% one of the highest ever. You're not concerned about that. Ed Yardeni 10:43 Well, my attitude is, it is what it is. I mean, you know, I'm not a big fan of big government. I'm not big fan of big government spending, but it, you know, the facts are exactly as you just stated them, and you can't ignore it, and it's clearly had an impact on the economy, not all bad. I mean, the onshoring has been very successful, the infrastructure spending, I live in Long Island, and right now it's a pain in the butt when you go to to JFK. But there's JFK spending $19 billion on two terminals, and right now it's a big miss. LaGuardia now is a much better airport, and it's easier to get, get, get to parking is still a pain. But all in all, you know, you go around the country and you do see infrastructure spending, and some of that is directly financed by the government, some of it is indirectly financed through, if not subsidies, then tax credits, and that's what it is. Now, you might have noticed from our conversation that I tend to be an optimist, and we've had previous conversations where I've basically leaned towards the optimistic, bullish side in the market, and by the way, that hasn't been a bad place to be over the past few years, but I can't put lipstick on this pig of the federal deficit, and one day down the road, we may have a debt crisis. Won't be the end of the world. It could last three, 612, months, and it could cause a backup in bond yields and a recession. I'm not going to tell you that. You know everything is going to be hunky dory forever, but I am telling you that if we have a debt crisis, we'll probably have a solution to the to the deficit problem. Right now, there's no will whatsoever in Washington to do anything about the deficit. It's a man and woman made problem. So when and when and if it becomes a critical debt crisis, I think you'll see the politicians scramble to come up with a Lee, credible 10 year program to put put a lid on the growth of outlays and to do something to stimulate revenues that's not an optimistic scenario. It's just a scenario that's kind of consistent with what's happened in the past. Sometimes you need a crisis to make make Washington do what it needs to do. We came pretty close to that last year, in August, September, October, we had a couple of really lousy Treasury auctions, and the bond yield went from four and a quarter percent to five and 5% very quickly. And I think that got the attention of people in Washington. But interestingly, the Janet Yellen, the Treasury Secretary, came up with a short term fix, which is to tell the bond market, you know, I coined the phrase bond vigilante back in the 1980s but she basically told the bond vigilantes, Hey, you don't like my bonds, then I issue fewer of them. I'll issue it in bills. And, you know, it's a temporary fix. It's a gimmick. We obviously don't want to be running deficits of one to $2 trillion all financed with bills. But in the short term, it calmed the bond market down, as did the fact that inflation continued to decline. And then there's always the safety the you know, the safe haven idea of the bonds, and we just had this pretty nasty sell off related to kind of a global credit, a global carry trade reversal, or unwind, if you want to call it that, and everybody ran into treasuries. Suddenly they're below 4% and then suddenly they're back above 4% as people get a little bit less scared. Andrew Brill 14:42 This show is sponsored by better help in these crazy times we live in. It's probably the last thing on your mind. You and your self care. We all deal with it, work, kids, obligations, bills, you name it. Everything takes priority except you. If you. Ever worked out or been an athlete? You've heard the saying never skip leg day, but how about never skipping therapy day? That's right, I'm talking about taking care of you, talking to someone who will help ease some of your burden so you can get back to what it is that makes you happy. I talk to a therapist, and it really helps to take the edge off everyday life. Maybe you're going through something and can't really pinpoint what is, what it is that's bothering you. If you need to talk to a professional or thinking about giving therapy a try, give better help a try. It's easy, entirely online, convenient and flexible to fit your schedule, just fill out the questionnaire and get matched to a licensed therapist anytime. Never skip therapy. Day with better help. Visit better help.com/wealthion. Today to get 10% off your first month. That's better H, E, l, p.com/wealthion. after Monday's sell off, Adam Johnson explained what caused the market to shake out and how algorithms are running the market, not actual people. So what happened the Nikkei obviously started this off down 12% we've all read the news worst day since Black Monday of 1987 what happened there? Adam Johnson 16:19 So I think it's a combination of things. And the Nikkei was almost like, you know, the Japan index was almost like the straw that broke the camel's back. In other words, if you go back to last week, we were all talking about the rotation from Ai stocks that have run a lot to small caps that have still been stuck way under their old all time highs that actually go back to like 2022 right? So where's AI socks have been running small caps. Haven't been then we find out we're gonna get rate cuts in September. Well, that's good for small caps. So that rotation was sort of the first thing, I think that happened. The second thing was that Fed Chair Jerome Powell basically said, Yeah, we are looking at September as a point to start rate cuts. And then point number three from last week was when the jobs report came out weaker than expected, and everyone thought, oh my gosh, has the Fed wait? Waited too long. I mean, we've been worried about inflation. Should we be worried about recession? The answer is no. GDP is still growing 2.9% and even the Fed, the Atlanta Fed GDP now forecast, which is forward looking, still says we're growing 2.7 so how can you have a recession, which means the economy shrinking if right now, you're growing 2.7% right? So I don't think that some of these connecting of the dots, actions that have happened over the past week or so are necessarily accurate, but I do think it explains why people were on edge here, why they sold on Friday. And then add to that, the fact that in Japan, which is always the place to go, to sort of hide, because the Japanese Yen is so stable, since there's no inflation in Japan, for Japan to suddenly be off 12% I think people here just said, You know what? Forget it. We're out. And that's an emotional decision. Emotional decisions are never correct. But I think that is why, why we're down so much on the open and by the way, starting early this morning, I was getting calls from Dubai, San Francisco, Florida, from clients saying, Adam, should I sell one client even said, you know, if it's down another 5% we're going to sell everything. And I said, No, that's when we buy. So, you know, you have to keep those motions in check. Andrew Brill 18:43 I was going to say, Adam, that this seems, it seems to me, knowing you a little bit, that this is a buying opportunity. So what you say to your clients to calm them down and say, Look, you know what, we're this is going to be okay, and let's, let's put a little more money to work here, just to calm people's nerves even further. Adam, how much as if is this the algorithms, where, when a stock starts going down, there's an automatic computer that says, and it's not a person, it's not someone like like you, who speaks to their clients. It's someone whose computer saying, Oh, this is down X percent sell, and then the next computer says sell, and all of a sudden that two or 3% is 15, 22% like you said, it's they're all algorithms that are running a lot of this money, not a person. Adam Johnson 19:26 yeah, well, pretty telling that the New York Stock Exchange, which for decades, actually a couple centuries, was the home of open outcry, right? Where guys are shouting across, you know, buy me this, sell me that, right? The home of open outcry, and their own study has concluded that as much as 70 to 75% of daily volume is electronic, and that's the algorithms. And you and I have talked about this before, but for the benefit of those who are, say, watching for the first time or need to hear it again, what happens, especially during earnings season? Is that algorithms, computers are programmed to instantly read a press release on a on a big company name, you know, take an Intel or a Microsoft or something liquid, right? And look at 678, metrics. Earnings are expected to be 34 cents. Revenues are expected to be 28 billion. Gross margins expected to be 58.6 whatever. And the computer compares what's in the press release, because it can read it instantaneously, to what the expectation is. And if any one of those metrics does it measure up, the computer instantly shorts the stock and you no longer need a plus tick. So it's not as though the stock has to tick up before you can short it. The stock can fall, fall, fall, fall, and keep shorting, shorting, shorting, shorting, and pushing it down. And so selling begets selling, and that's why, on some of these earnings reports, like Intel last week, you know, the stock was down 29% on earnings. It wasn't a great earnings report, but 29% Wow. You know, snowflake, the quarter before that, Delta Airlines, UPS Ford, they've all struggled with earnings because, you know, one or two metrics didn't measure up, and that's the algorithms, so people need to recognize that and and not get caught up in it. Andrew Brill 21:16 Adam Johnson also joined us for a longer interview this week and touched on how small cap stocks are outperforming the S&p 500, and how rate cuts will impact small cap stocks with the sale of bonds to finance government debt. Adam also spoke about how companies can raise capital by issuing bonds. He also touched on investment opportunities beyond tech and how a presidency by either candidate will impact the market and global economy. There's talk of, obviously, interest rate cut, a lot of money, they say, poured out of AI and semiconductors and into small caps. Would you consider that a decent play right now is look at some of those stocks, or is it still look maybe some of those little stocks are have an AI background, also, like Celestica that you talked about. Are there stocks like that that you know you would take a look at? Adam Johnson 22:12 a couple of comments. And being stock picker, I think it's most important that you focus on individual stocks, not the market, not sectors, you know, you know, I appreciate themes like AI or computing power, but you know, you got to know the company or the four or five companies that are part of that theme, that is part of your portfolio. And so you have to really do the work on individual companies. But as far as small caps go, they had the biggest move that they've had. First of all, just, you know, just in terms of raw, you know, price percentage move. They had the biggest move in several decades. But they've all they also, about two weeks ago, had the largest outperformance versus the S&p 500. In other words, they didn't just move up a lot, but they moved up more than the S&p500 by a magnitude that goes back like, I think, 55 years. So small caps have suddenly sprung to life on the promise of rate cuts because small companies generally are less mature companies, so they need constantly to borrow money. So lower rates help them, obviously. And then the other thing is, because they don't yet have earnings, those future earnings are worth a lot more today as rates come down, which means we can afford to pay more for the stocks. So that's really why it's small caps rally. Yes, that is a very viable trade. Small caps are still well below their all time high. That goes back to, I think, 2021, and so there's more room for them to run, because, you know, the S&P and the Nasdaq have just recently made new highs. NASDAQ, or the small caps, are still catching up. But I would, I would also caution viewers and listeners against simply buying small caps, because they're small and it's a hot space. Now, you got to find high quality companies. And by high quality, I mean good management teams, a good product. Maybe they have pricing power, the barriers to entry, they don't have too much debt. They're growing cash flow, ideally, they have earnings, right? I mean, there, there are a lot of different ways to to sort of define quality. Those are a few of them, and I think all of those are important in making a decision about a company. Andrew Brill 24:37 Can you explain how the rate cuts help companies that are the smaller companies. Obviously, the big companies have their own cash, and they use that cash, and then I'll have another question about what Netflix just did. But how do the rate cuts help these, these smaller companies? Adam Johnson 24:53 So if you're a small company, you're small because, you know you you're still growing your sales and trying. To get them above a certain threshold. And chances are, that means that you every few quarters, or maybe every year or every other year, or whatever it is, need to go out and borrow some more money. You might do that through a secondary stock offering. You might do that through a bond offering. You might do that actually from just, you know, taking out a loan or a line of credit, or what they call a revolver. It's a revolving credit facility where just kind of sits on the shelf, and as you need it, you pull money down, and then you pay it back, and then as you need more, they rotate it, and you bring them fresh capital, right? That's a revolver. So if rates are coming down the by definition, the cost of all of that borrowing is also coming down, so it's easier on the company, right? It's cheaper, you know, it's cheaper money. You know, in the same way that when mortgage rates come down, you can afford to buy a bigger home, or you just buy the same home, and it costs you less so you can, you know, use the money that you saved and, you know, go take the family for vacation, whatever. So lower rates in terms of cost of borrowing, that's pretty simple to understand, right? It's just cheaper to run your finance, your business, fine, but I do think, and this is maybe what you're you're getting at, and I touched on it, but I'll say it again in a sort of slower way. And it's really, it's a subtle thing, but it's kind of in the weeds. But our our folks, need to understand the notion of a discount rate. So analysts like you and me, right? You know, we look at, we look at a company, we say, Okay, what do? What do I think earnings will be next year, and then the year after that, the year after that, and the year after that. And what I do is I put together this stream of what I think will be future income, but I have to discount, to put it in terms I can understand today, I have to discount those future cash flows back to the present. So $10 next year at, you know, a 10% interest rate is, is like, you know, $9 today. So if you pay me $9 today or $10 next year, you know, at a 10% interest rate, it's kind of the same thing, but all of a sudden, if interest rates, you know, drop to 5% Oh, wow, now I'm better off, because, actually it should be, you know, nine and a half dollars. That's this, right? So as as as that discount rate gets smaller, you can afford to pay more for stocks future earnings are worth more today. That's that's what a discount rate ultimately determines. It's bringing tomorrow's money into today's dollars. And again, as interest rates come down, that discount rate goes down, which means the value of those future dollars goes up. Andrew Brill 27:46 Netflix and not in the AI, although they do use AI, because they're always recommending some sort of every time you log us. Oh, you watch this. Watch this. So, but Netflix just did something very interesting. They issued investment grade bonds to raise capital. How does that work? And is that should more companies be doing something like this when they need to raise capital? Adam Johnson 28:09 Well, you know, you could argue that raising debt is cheaper than raising equity, because if you raise equity, you dilute your earnings per share. You know, if you have X number of shares and you do a secondary stock offering and increase the float by 10% well, by definition, you just lowered your earnings per share by 10% because you're now dividing the earnings by more shares, right? And so some will view that as value destructive. The other thing is, or the other advantage to bonds is, you know, you can deduct the interest on bonds against your taxes. So not only do you get the financing, you don't dilute your shareholders, and you get the interest rate deduction, so your after tax cost of borrowing is lower than the nominal interest rate cost of borrowing. So for some companies, actually, that does make sense. The other thing is for invest, investment grade companies, as opposed to companies that aren't investment grade, which are, you know, they have to issue junk bonds. But investment grade companies, they invest, you issue investment grade, which carries a lower interest rate. So it's much cheaper than issuing junk bonds. And so you know that can be very attractive because it's a low rate. And I should point out right now that even though rates are still high, corporate bond spreads are at record lows. In other words, bonds trade at a differential versus the risk free rate or treasuries. So if treasuries, just to make the math easy, are at 5% and the spread for corporate bonds is is 1% well then the total cost of borrowing is 6% five plus one. And 6% that 1% is the spread. Well, that 1% and that's about where it is right now, is the lowest it's ever been. So even though rates are high, bond spreads are low. And so there for all those reasons, that's why a company like Netflix is issuing debt. Andrew Brill 30:20 aside from tech Adam, is there something else that you're keeping your eye on? Obviously, AI and there's the tentacles are starting to really, really reach deep. Is there something else you're keeping your eye on? Adam Johnson 30:33 Well, I think there are all sorts of opportunities out there. I mean, I love logistics companies that are focused on helping other companies deliver stuff more effectively and more cheaply. Robotics and Automation play a huge part of that. I think there's still a lot of companies, great American companies, that are normalizing After the craziness of covid that still haven't quite gotten back to where they ought to be. Whether that's Blackstone, world's largest private equity company, or Chubb, the largest and highest quality insurance company here in the US, though it recently did make a new high, but it's very cheap at like 11 times earnings. You know, Delta got clobbered on those earnings. It's a one quarter thing because they have 3% too much capacity. Fine. We have the most number of people ever transiting through US airports, July 4 weekend. So consumers have money they're spending. Ditto on Expedia. Draft Kings comes under what I would call my new mouse trap category, where they're taking something that we've done for a long time, been on sports and packaging it in a different way and making it more accessible. I think that's got a lot of upside. You know, Uber is, is kind of half logistics, half consumer, and they're going to build out their their advertising platform. Because, you know, think about it, when you order an Uber and you're just staring at your screen, where is it? Where is it? Oh, there's the car. Okay, two blocks. It's coming. You're staring at your screen for 345, minutes. You're you're captured eyeballs. So put ads on there, and if you just run the numbers of how much they can generate for those ads and how many minutes people spend looking at the screen, and how many people are looking on the screen any given day, you can easily get to $2 of additional earnings within two years. Well, all of a sudden, you know, Uber's earnings just went up by 50% stock just got cheaper, right? So there's some really exciting opportunities like that. It's not all just tech. Andrew Brill 32:39 How do you see the presidential election affecting everything? I know that there's two sides of the coin, but it seems like, you know, Kamala Harris is now a little bit more aligned with some of the things that President Trump would war would want to do, but it's still Democrats versus Republicans. You know, we still have three months before we get there. How do you see the markets playing out to that point? Adam Johnson 33:04 It'll be messy and it'll be volatile. And if, if what we're seeing right now proves to be just a sort of honeymoon bounce for Team Harris and Trump starts to take the lead again, I think markets will take off If, however, it's a dead heat, or if she starts to take a lead. I don't think markets will like that, because she historically, if you just look at a record historically, she is much more of a Bernie Sanders, Elizabeth Warren, high regulation, high tax, type of politician. And, you know, markets don't like that. Markets like independents. They like low regulation. They want government out of the way. That's Trump. So the market will sort of tell us who's leading. We can look at the polls, but you know, polls are kind of quirky, because they're polls, whereas, you know, if you if you look at where the wisdom of the market, where people are putting their money and placing their bets, that ultimately, I think, carries more weight than just, you know, someone being asked to to respond to a poll on a telephone call. So the markets, I think, will start to tell us, but right now, we're still in the honeymoon phase. The DNC hasn't even had its convention, so, you know, you got to get to September. The amazing thing is how quickly they pivoted from Biden to Harris, how she's been anointed without having to do a single press conference. We don't really know what she stands for. So that's why I say it's kind of a honeymoon period. You just sort of assume, Oh, well, this is, you know, this is what's going to happen, without really knowing the substance behind what's going to happen. Andrew Brill 34:51 You kind of think it's Biden 2.0 but we don't know. You're right. Adam Johnson 34:55 I think she could be far more radical than Joe Biden. You. Uh, you know, again, based on her track record. Andrew Brill 35:02 right? We will have to wait and see. Adam Johnson 35:04 she was the one who said we need to reinvent policing in America. that's not just defund the police. That's that's reinvention. She's the one who said we need to rethink the entire border. She's the one who initially said, I completely oppose all fracking. Now she realizes she needs Pennsylvania, and she's saying, no, no, fracking is not all bad, because Pennsylvania has a Marcella shale, and there are hundreds, 123,000 people involved in that industry. And that's a lot of votes, and it's a swing state. So you know, election year promises. So, yeah, just watch what they do, not what they say. Andrew Brill 35:40 Dave Meyer of bigger pockets, explained passive investing in real estate, along with some risks and strategies to qualify for multiple mortgages, is what do you say to the person who says, You know what? I don't want to be a landlord, but I do want to invest in real estate. Dave Meyer 36:01 there are many, many good passive options for being a real estate investor, and they sort of run the spectrum. There's sort of this spectrum in real estate between super active, which would be like self managing a flip. You're there every day. You're doing all of it. On the other end of the spectrum are probably REITs. You know, you can invest in publicly traded real estate companies get some of the benefit of real estate, but that's probably not the most, the highest return that you're going to get. There are two or three strategies for more passive folks that I recommend the two, two or three of them I do so. One is just investing using a property manager. This does require that you do some work. So I still, personally, I invest, I live in Europe. I still invest in the United States. So I work with a real estate agent to find properties. I do the deal analysis myself. That's something I'm good at, and so I do that myself. I create budgets and performance, and then once I buy something, I turn it over to a property manager that I know we can connect you with property managers at bigger pockets, but you should screen a couple of them and find one that's good for your business. And it does still take managing your property manager. You should know that it's not just like, hey, I bought this thing. You're in charge. You know they're technically, in a way, your employee, and you sort of need to meet with them. I talked to mine maybe an hour a month, so it's not a lot, but you need to pay attention, you know, you they'll send you reports. They'll send you, you know, financials, and you need to look at them and ask questions and be a diligent business owner. So that's one option that probably, of all the passive options is the least risky and I think, a really stable way to build investment. Next one is something called turnkey investing. There's some companies that will find rehab and then manage properties for you, so they'll basically do the whole thing. That's a great way to invest. You just need to be diligent about vetting the company, because you're putting a lot of faith, obviously, into the operator. There are many good, reputable ones, but I assume there are also some ones that might not do the best job with the renovation. So you want to be very careful there. And then the third one is one that I love. It's called syndications. And so this is basically when investors pool their money together and buy large assets. It's kind of similar, it's very similar to the private equity model, where high net worth individuals and you do normally have to be accredited for this option. So that just call that out. If you're accredited, you can usually join together as a limited partner, and select a GP, a general partner, who will buy, usually, a large commercial asset. So this might be a big multi family. It could be retail, it could be office, and all of the work is up front there. You know, you do some vetting of the operator, you look for the deal. Then once you fund that investment, it truly is passive. You don't do anything. You can review the financials, but it's, it's entirely passive. I do this. I like it. Of course, the trade off is liquidity. You don't get to choose when to sell. You don't have control over the asset. But if you can find good operators, this is a really good way to sort of leverage the experience and expertise of of experienced investors and do very little in terms of time commitment. Andrew Brill 39:26 Last question, Dave, what are some of the pitfalls? That's if someone wanted to get into this, and you got into it with some other people and so that, I guess, you manage that risk a little bit. But what are some of the pitfalls someone has to look out for either purchasing their first property or saying, you know, I want to get into this, but I don't know what I'm doing. Dave Meyer 39:47 I think the biggest risk in real estate investing is overly optimistic assumptions. When you analyze a deal, as I was saying, it's pretty easy to analyze a deal. You figure out what the rent is, what the. Expenses are a lot of people get really excited and see, oh, during the pandemic, rents went up 10% a year. That was very anomalous. It's probably never gonna happen again. It may. But who knows? I wouldn't count on it. So what I advise people to do is rely on historical growth rates. So that deal analysis is probably the main pitfall. The second one is people biting off more than they can chew. I think it's really tempting to look at a fixer upper and say, Oh, it's so cheap. Real Estate, like most markets, are pretty efficient, you know? And so if there's a if there is a deal that's cheap, there's a reason for it, and it probably means that there's a complicated and potentially expensive renovation in store. If you're experienced at real estate, fantastic way to make money. But I recommend for people, just try and hit a single right away, like you don't need to make a ton of money. I would recommend, I mean, just getting an average rental property is usually going to get you 10, 12, 14% annualized return. So it's still better than the traditional you know, the average of equities, of course, you're working for that. So you have to decide if that, you know, time commitment is worth it to you, but to me, getting that 12% 13% return on your first deal is a learning experience. You know, you got, you're an entrepreneur, you got to learn your business, then you can take bigger swings in the long run, but at first, just buy something simple, learn the business, and start building your network of other investors, of contractors who you can rely on. Once you have that in place, that's when you can start taking the bigger swings. Andrew Brill 41:35 Do you ever run into a situation where, or I guess you know, someone's getting involved in in real estate investing, they find a great property, good property. Now they want to buy another one, but they have a mortgage out on that first one, and their regular job is doesn't qualify them to get another mortgage. So how do you combat like, okay, you know what the bank says? I'm over leveraged, or I'm leveraged to the point where I can't get another mortgage. Dave Meyer 42:04 There are two great strategies. One is just partner. You know, sometimes you can find another investor who wants to partner on a deal. I might have a better or, you know, a healthier debt to income ratio where they can qualify. The second is that there are more different types of loan products that won't look at your personal credit. So this is similar to how commercial real estate is financed, where instead of looking at your individual credit worthiness, you look at the quality of the deal. That's how you know, if you were to buy a retail property, an office property, the bank would look at you. They're called debt service coverage ratio loans, or DSCR loans, and they'll basically look at your underwriting and say, okay, Dave, this is a good deal, like you've found a property that will cash flow, and we, because of that, feel confident that you're gonna be able to pay your debt service, and if you can't, we're gonna be able to take over a cash flowing asset from you, and these do tend to be a little bit more expensive in terms of interest rates than a conventional loan. But as an investor, you know this is a business, and eventually you're going to have to get away from conventional financing and owner occupied financing. It's just inevitable. So it is a good option. I would just advise people to look at the terms. Sometimes there are balloon payments or prepayment penalties. The loans can get a little more complicated. There's nothing wrong with that, but make sure you fully understand the terms of those loans before you sign anything. Andrew Brill 43:35 Thank you for watching this week's recap. Don't forget to head over to wealthion.com for a free no obligation portfolio review with one of our registered investment advisors, and please follow us on social media for the latest news and information to help you invest wisely. If you haven't done so already, please make sure to like and subscribe to the channel, and don't forget to hit the notification bell so that you never miss a video. Thanks again for watching until next time. Stay informed, be empowered, and may your investments flourish. If you like this content and are looking for more ways to keep and grow your investments, watch this video next.
