I, like everybody, have an opinion regarding the Government bail out of Wall Street. In the end, however, I am not in a position to influence policy. The next logical step is to study the policy and understand how to position my clients, my business, and ultimately my family and me to best benefit from the policy.
By now there isn't an American that hasn't heard the terms CDO and CMBS. Both are financial instruments that enabled Wall Street to grossly over leverage itself. Its not a new concept, investors have been using leverage to multiply earnings for as long as investors have existed. Leverage, in moderation, is a powerful and effective investment concept. Unchecked, leverage, fueled by greed, leads to a trillion dollar U.S. Taxpayer funded bail out.
I am a Real Estate Investor and I consult for Real Estate Investors, so naturally I want to understand how this bail out affects my clients and me. I firmly believe Government debt is bad, it serves to crowd out private sector investment, reduce savings, drive demand side price increases (inflation) and weaken the dollar.
Over the past 5 years, the U.S. has run annual deficits around $400 billion per year. Last week the President of the United States announced a bail out that will cost the U.S. Taxpayers a trillion dollars. That's two and a half years of budget deficits dumped on the U.S. Economy in less than one year, in addition to the systematic debt our Government creates annually.
Ostensibly the bail out isn't really debt, because the monies spent are backed by assets. The Government will buy these assets at steep discounts; and will be able to sell them back to the market at a profit at some point in the future when the markets have settled. If that occurs as planned, the long term effect is reduce the Government's debt, and the long term implications of reduced debt is good.In the short term, however, the bail out is massively inflationary. The bail out will have the same effect as the Federal Open Market Committee buying a trillion dollars worth of Government Securities in a short period of time. That move weakens the dollar against other currencies, drives up the price of goods in the U.S., increases interest rates, and drives down the value of hard assets, including real estate.
If you are seller or a landlord, in the short term you'll see more demand for your asset, depending on the credit loosening effect of the bail out. That increase in demand, however, may very well be offset by capital leaving the market for dollar denominated real estate.
What that means for my buying clients is that they will continue to have good deals in which to invest, the competition for assets may increase as the bail out should loosen up the credit markets, allowing more players to enter the market. More players in the market is good thing, as it serves to offset downward pressure on asset values created by inflation. What it also means to my clients is that they will have to buy long. They need to buy strong returns, maximize depreciation, and - yes - leverage to maximize returns. Buyers are better served by looking for value and strong returns rather than waiting for blood in the water. The great deals will come, but focus on buying good deals.
Time will tell if the bail out was a good decision. In the short term it avoids a melt down of the credit markets in the U.S. which would destroy demand and in turn our economy. It's short term effects are inflationary and will force down asset values for an undetermined period. In the long term, if the Government, and by extension the U.S. Taxpayers, can profit from buying these assets and the profits aren't spent by congress the overall impact of the bail out is positive for the U.S.
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