In the real estate industry, staying on the pulse of the economy is crucial; it’s the only path to thriving and achieving success. With the year just beginning, it is only right that we not only watch out for what’s potentially to come but also to look back and learn. Who better to give important macro economy insights and 2024 commercial real estate predictions than Dr. Peter Linneman, who, in nearly 45 years, his unique blend of scholarly rigor and practical business insight won him accolades from around the world? He is the Founding Principal of Linneman Associates, LLC, a leading real estate advisory firm, and its affiliates. In this episode, he imparts his expertise on the year ahead for real estate, pulling crucial lessons from past recessions to help us navigate and survive a potential crisis and more. Find out the reasons behind some of the world’s crises. Learn about recession, inflation, and the economy. Plus, get a glimpse into the impact of China’s growth on the global economy. Tune in to this conversation with Dr. Linneman to not miss out!
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About Peter Linneman
For nearly 45 years, Dr. Peter Linneman’s unique blend of scholarly rigor and practical business insight has won him accolades from around the world, including PREA’s prestigious Graaskamp Award for Real Estate Research, Wharton’s Zell-Lurie Real Estate Center’s Lifetime Achievement Award, Realty Stock Magazine’s Special Achievement Award, being named “One of the 25 Most Influential People in Real Estate” by Realtor Magazine and inclusion in The New York Observer’s “100 Most Powerful People in New York Real Estate”.
After receiving both his Masters and Doctorate in Economics under the tutelage of Nobel Prize winners Milton Friedman, Gary Becker, George Stigler, Ted Schultz and Jim Heckman, Peter had a distinguished academic career at both The University of Chicago and the Wharton School of Business at the University of Pennsylvania. For 35 years, he was a leading member of Wharton’s faculty, serving as the Albert Sussman Professor of Real Estate, Finance and Public Policy as well as the Founding Chairman of the Real Estate Department and Director of the prestigious Zell-Lurie Real Estate Center. During this time, he was co-editor of The Wharton Real Estate Review. He has published over 100 scholarly articles, eight editions of the acclaimed book Real Estate Finance and Investments: Risks and Opportunities, and the widely read Linneman Letter quarterly report. He is also the co-creator of the popular, and highly regarded, Real Estate Finance and Investment Certification course, REFAI. Most recently, he co-authored (with Dr. Michael Roizen and Albert Ratner) the best-selling book “The Great Age Reboot: Cracking the Longevity Code for a Younger Tomorrow.”
Macro Economy Insights And 2024 Commercial Real Estate Predictions – Dr Peter Linneman
We’re super excited about this episode.
Our guests keep getting better and better. We have an economist on the show now.
It’s not just any economist but somebody who understands the real estate space very well. We follow a lot of the content that he’s on and a lot of his literature. We’re excited to have Peter Linneman on our show.
Let’s get into a little bit about Peter. He is the founding principal of Lineman Associates, a leading real estate advisory firm for more than 40 years. He has advised leading corporations and served on over twenty public and private boards, including serving as chairman of the Rockefeller Center Properties. He has published over 100 scholarly articles, and eight editions of the acclaimed book, Real Estate Finance & Investments: Risks and Opportunities.
He’s also the co-creator of the popular and highly regarded real estate finance and investment certification course. Peter is the author of The Linneman Letter, a quarterly report to which every investment firm should be subscribed. Welcome to the show, Peter. Thanks so much for being here with us.
It’s my pleasure. Thank you for having me.
Lessons From Past Recessions
Let’s start the show-off, Peter, with us as human beings, we seem to have short memories. For real estate investors, that’s even amplified but the old adage where history doesn’t repeat but it rhymes is true. We are excited about your predictions when it comes to 2024 and beyond in real estate. However, we want to take a trip back in the memory lane and get your perspective on past economic cycles that we’ve been through, maybe not us, but yourself and other investors who’ve been through over the last time.
Ava and I were doing some research before the show and we realized the number of recessions that have come through just over the last 45 years that we researched. This has gone on for well over 100 years, but over the last 45 years, starting in 1969, the 1970s with the Guns-and-Butter recession, in ’73 and ’75 with the Oil Embargo Recession, 1980 with the Iran Revolution Recession, 1990 and 1991 with the Gulf War, 2001 Dot-Com, 2008 with the GFC, Great Financial Crisis, and in 2020 with COVID. Please tell us any memorable stories that you can share from these recessions that have come and gone. Any survivor and distress stories you could share?
I go back to the ’69, but even more so the ’73 to ’75 was in my adult memory. Let me do it differently. I would describe the US economy as the following. It is a font of entrepreneurship. It’s a font of creativity. It has a relatively stable political and legal infrastructure. It has a great financial infrastructure that keeps getting better and therefore, it grows except when it doesn’t. Simply stated, and this is overly simple, it grows about eight out of every nine years.
Unfortunately, it’s not that regular. Why does it occasionally not grow? One of two things happens. Either we were so happy at how it was growing that we got out ahead of ourselves. You can go back in time and we bought all the automobiles we needed for 1979, but we also bought all the automobiles we needed for 1980 that year.
1980 came and we didn’t need automobiles. We’d already bought them. You go, “That slows it down.” I’m being overly simplistic, but the so-called housing bubble, we got so enamored that in four years, we built 2.2 million more homes than we had people to fill them. Then came the next year. We already had the homes a year after that. That shut down a big part of the economy until it got back to something normal.
One of the sources is over-exuberance, we get too exuberant and we’re enjoying not just the normal times, but the good times. We then convince ourselves that the unsustainable is sustainable. You find out it’s not and things taper down but when they taper down, they would revert. That’s one of the reasons. The other tends to be with major regulatory governmental interventions.
Macro Economy Insights: We just get too exuberant and we’re enjoying not just the normal times but the good times and convince ourselves that the unsustainable is sustainable and then we find out it’s not.
The only reason I say government is who else can have a big enough impact? You can’t. I can’t. I can do dumb things, but not big enough to stop the economy. You can do dumb things but not big enough to stop the economy. The government can do things that can stop the economy and the most recent example was dramatic, which is we’re going to shut the economy down or about a third of the economy down. A few years ago, the government decided you can’t shop in malls. You go, “What?” That’s going to have an effect. You only can go to work if you’re “an essential worker.” That’s going to shut an economy down.
I’m taking that as an extreme example. A less extreme example is the Fed raising the interest rate “too high.” Most of the economy doesn’t care. A lot of people never borrow. A lot of businesses never borrow. They don’t care but some do and that slows them down. They raise it too high and you get it. I only say this again because only the government can affect that big a footprint. We lived it with the shutdown.
You could argue whether the shutdown was smart or dumb. That’s not the point but it created a recession because you shut a third or more of the economy down. Those were the two reasons. We either get over-exuberant and then we have to sit on the sidelines a little bit with part of the economy or it’s government overreach. Exuberance is overbuilt in human beings and government overreaction is built into human beings. It’s going to happen.
Peter, what causes recessions? Is it the behavior of the economy which we can’t control or is there a remedy for these swings? Do we have to learn to live with them?
Different government initiatives are what you explained but is there a way to be able to control these things?
Not really. In my view, lots of millions of books have been written about that. I don’t think you’re going to change a fundamental exuberance in people. I don’t think you’re going to change government, not making mistakes. They’re just human beings in those jobs.
How about if we get an AI involved and then AI can see historically what has caused it and they can advise?
Also, maybe help with some of the economic cycle predictions. Advise central banks on the interest rate increasing or decreasing.
How much to increase, how much to decrease, how much to keep it up, and how much to keep it down.
In a fantasy world perhaps but in a real world, I don’t think so. There are 300 million human beings in this system. There are, God knows, how many businesses and government offices. I don’t even quite know what AI would do. If you think about AI and the way you are describing them, it would be central planning but we saw how well central planning worked with human intelligence. I’m not sure it’s going to work. We saw in country after country central planning.
I’m not sure AI is the answer to that. What can you do about it? I think you can learn to live with it. Don’t panic, first of all. The world isn’t coming to an end. Every time it goes down, somebody says, “The world’s coming to an end,” including the recent one. Remember people were saying no one is ever going to shop at a store again. They’re all going to do it online. That was stupid. No one’s ever going to work at a hotel again but people were saying this.
Understand that things tend to revert. Not 100% but they tend to revert. Don’t panic. Yes, it’s going to be a rough next year. When a recession starts, focus on what’s going to be a good eight years after it. How do I make it through the rough period? I live in the Northeast. If a storm comes, it’s not the end of the world unless I do something stupid like go out in the blizzard with inappropriate clothing or drive in dangerous conditions. You adjust. That’s the same way with recession. Tighten your belt a little bit. Don’t take that vacation that year. Cut back and be prepared before it happens. I think it’s more about being prepared for what human existence is in a way.
Just learn to live with it.
The Notorious 2008 Great Financial Crisis
Peter, from all the recessions, that happened since the late 1800s, why did the 2008 recession get the notorious title, the Great Financial Crisis?
It’s interesting because it was the deepest since the Great Depression, but it was nowhere as near as deep as the Great Depression in the ’30s. It depends on the data. The data wasn’t as good. Twenty-five percent of the people are unemployed with no safety net, no social security, no unemployment insurance, no Medicare, and no Medicaid. By the way, the country’s standard of living was probably about one-eight of what it is now.
There’s a reason all those people are thin in those pictures from that era but imagine what would’ve happened during the shutdown or during the great financial where we had about 10.8% unemployed. They had 25. We had unemployment insurance. We had Medicare and Medicaid. We were richer going in so people had some savings. It was totally different.
Factor in farming. The price of food was cheaper relatively back then.
Everything like clothing and shoes. Things like that today are in real terms a fraction of what they were then. Why do you see all those guys, all those men mostly in the pictures with what we would call sports jackets or suit jackets? Do you know why? That’s the only coat they had.
That’s their daily driver. You still see that in the third world a lot of times. They take a suit. They come to work. They take that off, wear their scrubs, do what they have to do, and then put the suit back on. It is very common.
We were in a different place. Was it bad? 10.8% I think was official. However, during the shutdown, in April, May, and June of 2020, we had about 22% to 23% of the workforce collecting unemployment. That was bad. That was even worse than the great financial crisis but it reverted faster. That was because once you said, “Maybe you can go to work and maybe you aren’t going to die.”
People got back to it, but it was much more than the normal recession. The normal recession, 10.8% was the unemployment rate. It would’ve been a normal recession going to 7.5% or something like that. Why did it go higher? The excesses were bigger. That was the housing excess I was describing. We built all the houses we needed and that’s a big sector and so forth.
Talking quickly about the COVID recession, why was it so short? It was 2 to 3 months relative to other recessions that happened?
Why did it happen in the first place? We would’ve had a downturn if we hadn’t shut anything down by mandate because you were frightened. I was frightened. I don’t know if I’d have gone to the Sixers game etc. I don’t know if they would’ve played. We weren’t even given that choice. They shut it down. When you shut down not only things that would’ve shut themselves down but a lot of things that wouldn’t have shut themselves down, that came back pretty quickly, in particular medical, which is 18% of the economy.
You couldn’t go to your doctor except for an emergency. You couldn’t go to the hospital except for an emergency for months. Not everything’s an emergency. Some of the people started coming. That’s 18% of the economy and that was one of the big reasons and then slowly travel. Slowly this and slowly that. It went on. I think the role of medical healthcare is understated in the comeback because we went from full bore 18% to only going if you’re delivering a baby or have an emergency. That’s a stunning drop that happened and then it began opening up.
Just the last question on the recession topic. Are we currently in a recession as the Yield Curve is still inverted?
No. The Yield Curve has been a terrible predictor of recessions. In fact, almost everything is a terrible predictor of recessions. Go back to what I described are the sources that are over-exuberance, which is a hard thing to predict. Hence, your AI kind of thought is if we could come up with something and big government mistakes. Again, remember, people don’t think they’re over-exuberant at the time. People don’t think they’re making dumb decisions. It’s not like the government is sitting there going, “Let’s make a dumb decision.”
We are not in a recession. The Yield Curve is not a good predictor at all. It predicts recessions that never occur and it misses some that do. It missed this one. I didn’t think we would have a recession. We haven’t had a recession. Why? We have a lot of pent-up demand. GDP is still 2% below trend. We have a lot of making up ground and vacations we didn’t take. Also, a lot of hips that weren’t replaced. A lot of cataracts that weren’t removed.
You guys may not have had hips and cataracts, but there was a whole bunch of people terrified to go out until the last eight months. Still tremendous autos, huge pent-up demand for autos. Think about it. First, we were afraid to go out to buy autos then just as we were willing to, you couldn’t get them because they didn’t have components. As you were able to get them, the interest rate went up to the point where if you were borrowing, you couldn’t afford it. There’s a lot of pent-up demand there that will power things through.
I feel good. We’re not in a recession. I don’t think we get a recession this year. Why? Because we have months of pent-up demand and just normal economic activity. It’s not across the whole economy. We have ten months plus normal growth. We’re not exuberant. The Fed is a bit dumb and they’re slowing the economy, but most of the economy isn’t interest rate-sensitive. The pent-up and normal is swamping the part that the Fed can slow with interest rates. If you don’t borrow, the Fed is not slowing you. If you’re in California, the fact that it’s slowing in the Northeast is irrelevant and that’s like a lot of the economy is not affected by short-term interest.
We're definitely not getting a recession this year because we have 10 months of pent-up demand, just normal economic activity. Click To TweetSurviving A Recession
A quick thing here. As far as the past recessions, you’ve been around for a while. You joke about it at times. The old adage of, “Success leaves clues.” What type of real investors survive the best over the recessions that you’re familiar with? What was it about them? What did they do? Did they zig when everybody else was zagging? The Sam Zell selling the office before the 2008 crash or buying when everybody else was selling? Who has survived the best over these recessions?
You could try to be Sam. He was a dear friend of mine. The reason Sam was a legend was it was real unusual. Trying to duplicate real unusual is not a terribly good strategy because you can’t be real, real unusual. It’s impossible. What have I seen over the years? Lower debt survives. If you go in with lower debt if you go in with better properties. It doesn’t have to be the greatest property in the history of the world, but a well-located leased property where people want to be, you’ll survive better long-term debt rather than short-term debt or fixed rate long-term debt rather than floating.
Most of the time, you win having short-term interest rate floating debt than you do having long-term. It’s when you lose that it’s very painful. Pay the price and have the long-term debt. You do lose. There’s no doubt. You’d have been better off floating right until you get killed. Long-term debt, less debt, and “better properties.” Yes, cut back on your capital outlays and on your appetite to do things but remember these are like winter storms.
Is diversification a part of that recipe to win? Diversified across multiple assets. Can a multi-family investor being astute survive through all these as long as they don’t have short-term variable debt? As long as they have good properties, good debt or they have to be diversified to survive like the S&P 500 index type of investing.
If you’re a passive investor, then be diversified because you don’t know. Keep your personal debt low. You don’t know if you lose a job. Try to save. Always save. Price average your portfolio. If you’re an active investor, it’s very difficult to say, “I’m an expert in apartments in Tulsa and now I’m going to go do a hotel in Tuscaloosa.” I suppose I could diversify that way but it’s a trade-off. You’re giving up your expertise for diversification.
I would say if you’re a professional, exploit your expertise but realize storms come. Be prepared for the storms. If I have a building in the Northeast, I have salt on supply. I have a snow contractor lined up, etc. It’s the same way. If you’re in an economy that does have downturns, keep your debt relatively low, lower than need be for the good years. Get yourself fixed-rate debt even though it’ll hurt in the good years and have pretty good properties so they can weather it in the sense that people want to be there.
Inflation And The Economy
Peter, let’s switch the conversation and discuss inflation. Let’s discuss moderate inflation at 2% to 3%, which is recommended by economists. Why is inflation at any rate good for the economy? Why should there even be inflation?
There’s no good reason, but let me give you the reason given and it is not a bad reason as opposed to it’s a good reason. The reason given is if we had sustained deflation, people would wait until tomorrow to buy because they believe tomorrow the prices will be lower. If they believe in the prices of everything, not one thing, not like your tech thing, but imagine they believe everything in the economy. Everything’s going to be cheaper tomorrow than now. They’ll wait.
When they wait, there’s no production because nobody’s buying. I’m overstating it but that’s the rationale. Therefore, the rationale goes better that they believe prices are going to be a little higher tomorrow than now so there’s a bias to do something a little bit now. However, what that says is we’re probably doing too much now by a little bit versus ideal. That’s the rationale. Is it brilliant? I don’t think so.
Two percent is just a number because you could fill in 0.25%, 1%, or 3%. I don’t think you’d want to fill in 50% but it’s just a number. When people hear the Feds say this, they think it’s from some sophisticated study. It’s not. It’s like when you tell your kids to be in at midnight. What’s so magical about midnight versus 11”45 or 12”15? Absolutely nothing. Is there a general concept? Yeah. Don’t be out when there’s a lot of trouble. That’s all you’re saying but you have to say something specific. If they say 2%, it’s stupid but it’s no more stupid than telling your kid midnight. That’s all it is. Did you do an empirical study? Did you get a lot of data about what happens at 11:45 versus 12:00? Of course not.
This imaginary 2%, what should the Feds funds rate be at? The rate that starts all the rates.
The relationship between inflation and interest rates is not nearly what you’re taught in a macroeconomics class. You know that because for 8.5 years in 2010, the interest rate on the short-end was zero. Did we have huge inflation in the 2010s? No. That should make you skeptical about how tight the relationship is. In fact, we had inflation recently. It’s gone. Inflation’s long gone right now.
Where are we now? How is inflation measured and why do we believe?
They collect the prices of about 138,000 items each month and compare them to what the price was last month versus the month before. They don’t take into account coupons if you’re buying your things with coupons or Super Saver Tuesday but they do a legitimate job.
When you say they, are you talking about the Federal Reserve?
No, the Bureau of Labor Statistics. Also, they’ve been doing this for a long time. Do they do a perfect job? No. Trust me. They do a lot better than the three of us could do if we started from scratch because they’ve done it a long time. Let’s take the CPI report that just came out. It got a lot of headlines, 3%, 3.5%, and so on. I went and calculated. I went to the data. I got my calculator and calculated. The inflation rate from August 2020 through January 2024, the data that just came out was annualized.
If you take the inflation that occurs and make it annual rather than over those months, it was 1.1%. It’s not my data. That’s the data that was released. Since August, it has been annualized. We have 1.1% inflation. Now, the main driver of that inflation was housing and shelter. They had shelter which is 40% of that index at 6%. It was 5.9% to be precise.
By the way, 40% of the index at 6% is 2.4 percentage points of inflation. You don’t even care what the other 138,000 prices are doing. Even with that 40% of the index, being 5.9%, it was only 1.1% annualized since August. One thing people don’t know is they do the price of your tie. That’s one of the 138,000. They did that what it was last month versus a month before. For housing, they go back eight months and ask what it was nine months earlier.
It had its boom because of COVID.
Also, everything. Suppose they’d go back and take the price of all 138,000 items 8 months ago versus 9 months ago. Do you think inflation would be a lot higher? Of course, because what happened was we shut the economy down, demand came back across the economy, and shortages of everything. Prices of everything went up, profits of everything went up. Supply came online for everything including housing and apartments. Guess what happened? Prices came down.
Now, I’m in the business. By the way, all you have to do is call Greystar, which has 700,000 apartments, or Portland, which has 100,000. Look at equity residential in 2000, etc. and do you know what real inflation for apartments was over that time period? It was zero. If you go back to January, March, April, or May of 2023, it was 5%, 6%, or 7% a year but that supply pipeline came on just like it did for every other item in the economy.
As supply came on, even though demand was good, prices moderated. Supply and demand met and in some cases supply overshot. It had prices falling and some didn’t quite catch up. Now, if you take out housing and set it at zero, which is basically what it was, and if you don’t believe me, call any of the apartment operators and ask them what they got.
If you put it at zero, the inflation rate since August was minus 1%, annualized. This is not fancy math. This is that data. The only change I made was I called people who have apartments and put in their answers rather than eight months ago data for housing. The week before that Personal Consumption Expenditure Data came out. It was a different index. It only has a 20% weight for housing. Other items have bigger weights. That’s basically all it amounts to and it was in the fourth quarter. I did the fourth quarter. It was 0.4% inflation annualized. That includes housing going up at 5.8% because they’re going back eight months earlier.
If you put housing at zero, the personal consumption expenditure inflation is minus 0.7%. Call it 1%. We are living right now, forget a year ago, forget eight months ago. You don’t ask somebody what speed were you going eight months ago to know what speed they’re going now. You don’t ask them how much slower are you going now than a year ago. You ask a really simple question. What speed are you going right now? Right now, inflation is going at basically zero across the economy, maybe slightly negative.
If that’s a lever that the Fed pulls, which is interest rates and they’ve pulled it too far, isn’t that then the logic says we’re not going to have a soft landing? If it’s sitting at 5.25% or 5.5% and inflation is at zero or even negative, isn’t that too much to pull? Doesn’t that cause a recession?
It’s a crazy high-interest rate that affects about 20% of the economy and has no effect on 80%. If you were to have a heart attack right now, you are not going to say, “Nope. Don’t send me to the hospital. Wait until Powell cuts the interest rate to 4% or somebody who’s reading who’s about to have a baby isn’t going, “No. I’m not going to deliver until Powell lowers the interest rates.”
Medical is immune to interest rates and government is immune to interest rates. By the way, we’re not saying we’re not going to stop building a bridge because of the interest. About 80% when you go through it is immune. Twenty percent is being punished and is being slowed down and 80% is going, “I don’t know what they’re talking about.” They are not slowing the economy. They’re slowing a small part of the economy. It’s like trying to stop a car by putting on one break or something. It’s not going to do it.
Medical is basically immune to interest rates. Click To TweetThe inflation did not occur because of the Fed. It did not disappear because of the Fed. It occurred because of supply shortages. That’s why it happened so fast. Normally, if it was driven by the Fed, it would slowly roll up like we had in the ‘70s. This didn’t roll up slowly. You woke up on Tuesday and it was happening and that’s because you started spending. Once you started spending and there was nothing there, prices went up.
Also, it came down fast because, over the last fourteen months, supply came online for everything. The Fed has got the interest rates way too high. They’re punishing 20% of the economy that doesn’t need to be punished. Remember, when you talk about crash landing, that verbiage is we’re overheated and can we come down to sustainable. We’re under heated. We’re 2% below normal. We need to get the economy even going further. The Fed has the rate too high. Most people are immune, but not everybody.
US Government Debt To GDP Ratio
Talking about immune, the Fed itself has a debt and it’s not immune to those interest rates. We were looking at this government debt in the next conversation we want to have with you and most governments around the world have it. Interestingly enough, some governments were able to reduce their debt-to-GDP ratio over time but talk to us about the US government debt and the $32 trillion. Give us your thesis on that.
I think this is unbelievably simple. We have a GDP, first of all, just for people to know of about $28 trillion. Our income, if you will, is loosely defined as $28 trillion. Let’s take your $32 trillion number, which is about right, the headline number. Could you pay off your home mortgage with nine months of work? We could pay off the Federal debt by giving all of our income for the next nine months to pay off the debt.
I’m not saying we do that. You’re not going to pay off your mortgage by taking 100% of what you owe but typically people have mortgages about five times their income. We have debt that’s about 120% of our income or 1.2 times. If our homes are affordable, our debts certainly are affordable, just to start there, in normal debt metrics. The second part is of the $32 trillion, about $15 trillion, and $16 trillion is owed by one branch of the government to another branch of the government.
Your left pocket owes your right pocket. If you took the money that your left pocket owes to your right pocket and you took it out and gave it to them, one branch of the government would have less money, and the other branch would have an exactly offsetting amount of money. There is no change. We pay it off and have no different burden. Another way is to think about a payment. One branch of the government is paying interest, the other branch is receiving it. It’s a net wash. When you net that out, we have about $17 trillion. That’s still a big number, but remember $28 trillion units of GDP. I made it a lot more manageable simply by pointing out the money that we owe to ourselves. When we pay for it, we also get it.
Let me break this down though because you are on our side. The Fed is there. They are somewhat involved with the government. Jerome Powell has much more of a dog in the race to minimize this debt number. Whereas, I’ll read you his quote and basically what he says, “In the long run, the US federal government is on an unsustainable fiscal path. The debt is growing faster than the economy. We’re borrowing from the future generations.” I would’ve imagined you saying this term and him minimizing it, but it’s the reverse.
One of us is smarter than the other. I’m joking. People can decide. Is debt growing a bit faster than the economy? Yeah. Is that mathematically sustainable? It doesn’t take a math genius to say eventually that doesn’t work. Imagine you have a dollar of debt. Whatever your income is, your income and you have a dollar of debt and then the next day you have $2 of debt. Is it still manageable even though it’s double? You now take it to $3. Even though you increased it, is it still manageable given your income of $3 a debt? Yeah. How about $4? It’s still manageable. Could you do that for eternity? Probably not. You’re not trying to do it for eternity. Things adjust. It’s mathematically accurate but intellectually vacant.
Why do some people say we’ve gone beyond the point of return when it comes to the US debt? Some people are even talking about not paying the Chinese back.
It’s because they get quoted. You don’t get quoted by saying, “We could pay off our debt in nine months if we wanted to.” What the government owes themselves isn’t real debt. You don’t get quoted for that. We’ll put it differently. Negativity bias. You guys are I’m sure aware of negativity bias and apparently, people believe it’s hardwired into us because if a lion’s coming, I better be highly alert to it. It has been innately evolutionary in us.
We’re very aware of the negative. You get headlines, you get quoted by saying, “We’ve hit a point of no return,” but when you look at it, people have been saying that my entire adult life. They’ve been saying that my entire adult life and here we are. By the way, the economy is bigger and stronger. We have higher standards of living. Did we waste some money on what we spent the government money on? I’m sure, but by the way, we wasted money on some of the private things we spent on.
The economy is bigger. The economy is stronger. Click To TweetCould we have had a bigger economy now had we not wasted money buying heroin? I’m sure. Could we have had a bigger and stronger economy if we hadn’t done some dumb government spending? I’m sure. The point is whether it is a debt or not, whether you borrowed or not, spending on heroin is not productive. Whether you borrowed or not, building a bridge from nowhere to nowhere is not productive. Those are the real questions. We are rich. As a country, if we were Botswana or Zimbabwe, it would be a very different issue. Poor people don’t have the luxury of doing stupid things.
It’s more than that though. It has 5,000 nuclear weapons with intercontinental ballistic missiles. It has hundreds of bases around the world. It is having your money as the main money trading around the world. Let me ask you because we are a bit short on time here. A lot of gurus out there like Dave Ramsey talk about debt, particularly for people that are for their primary residence. His thesis is to pay off your debt in the fastest way you can. This is for their main home.
Over the years, in my experience for the last few years of being in business, I’ve seen people build most wealth by owning their main home and that’s how people have either or other generations. What is your thesis on paying off your debt on your primary residence? Is debt a good thing for people? Should they borrow if they can financially afford it and buy rental properties? What’s your concept or should they even get into buying a home with debt or should it be bought cash like some of these crazy things that I hear?
I haven’t had a mortgage for years on my home. Why? I think I have more productive things to do with my money and I don’t want to invest. I don’t view my home as an asset. I view it as a place I live. If it turns out to be an asset, God bless. I’m not religious, but God bless. That’s a bonus but what I got was to live in it. I’ve lived in my current residence for years. Until I sell it, I don’t care if it’s up or down. I’m living in it and enjoying it. That’s how I think people should approach their homes.
Macro Economy Insights: I don’t view my home as an asset. I view it as a place I live and if it turns out to be an asset, God bless.
Now, not everybody has the luxury of being able to buy their home debt-free so they borrow. I’m not telling people not to borrow. I think that you are pretty exposed. People have made money on it over time but if they’d have taken their money and done stocks, they would’ve made money on it too. Over the years I’ve owned this residence, I owned another before it, and the stock market did pretty well over those years too.
That’s 7% compounded approximately, I would say.
I did okay. I got to live in my home. I got to live where I wanted to live. I don’t have children that way, but I got to raise a family. To me, I get it. It’s a financial asset and so forth. The minute you start thinking about it as a financial asset, you’re going to get in trouble. Think about it as where I want to raise my family and whether can I afford it, including borrowing. I’m not against borrowing. That’s not the point. I have the luxury. I can live where I want to live without borrowing.
China And The Global Economy
It’s because prior to coming to the US, we lived in Canada. In Canada, the maximum mortgage term you can get is five years. The US is 30 years old. I think people who lock in their mortgages, that’s sub-5% for 30 years. In some cases, it’s sub-2%. It is literally a lottery ticket. That’s why that conversation came up. Moving on here, I want to talk about how since World War II, the US has been the world’s number one superpower. It has the strongest military by leaps and bounds. The US dollar is the dominant world. The economic dollar that’s being used around the world.
Science and advancements have been brewed here in the US more than anywhere else but it also has its caveats. The retiring Baby Boomer generation, reduction in population growth, not including immigration, illegal immigration, the never-ending wars around the world, and so on and so forth. It’s the positives and the negatives the US has but with the emergence of growth of China in the global economy, is the US still the best place to invest? Are you still long-term bullish?
The reason I ask that is really what China has done from the ’80 to now, 750 million people living below the property line in the ’80s. We have a family friend who traveled to China in the ’80s and they said at the airport, they were holding onto a candlelight instead of an actual light telling the planes which way to go. That’s how archaic they were. However, now they have less than ten million people living the below poverty line. Some scholars say this is one of the greatest achievements of humankind that China was able to do. Does that keep you up at night? Are there any concerns about us possibly not being the best place to invest long-term?
The answer is no. However, I’m not a military expert. The military part of it, I don’t have an opinion on if there were a military thing. Put aside the military.
They’re not. The Chinese supposedly, as far as inherently, they’re not fighting adventurous type. They’re very risk-averse. They rather do business than go to war but go ahead. Keep going. That takes the military aspect out of it.
I was going to say, “Tell that to the Tibetans.” Economically, I was in China for the first time in 1986. It remains and I’ve been in 86 countries in all seven continents. It remains the poorest place I’ve ever seen in my life, and that was in ’86. I can only imagine the closer you get to the Cultural Revolution and all that before it was even poorer. I’ve been to a lot of poor places. Second, the striking thing about China in the last many years, since Deng Xiaoping, the striking thing is not how far they came. The striking thing is how far they have not come since 1900, Deng Xiaoping. Basically, life was the same or worse when Deng Xiaoping took power in 1900. That was hard to find anywhere else in the development there.
They were addicted to opium. It was Mao that came in. He said a bullet in the head other than smoking opium. It was a totally different world.
By the way, it’s very impressive. Everybody talks about all the roads they built and all the buildings they built. We built some of those roads in 1910. We built some of those roads in 1920. We built some of those roads in 1930, 1950, 1970, 1980, and 1990. The reason they had to build all those roads is they had built no roads. They had no train system that worked. They had no airports. You just gave it.
They had no airports. I remember the Beijing Airport. It was like a bad American legion lodge. It was awful. The reason they built it all is they had built nothing all those years. You have to give them credit for what they’ve done. I’m not taking it away. Now, put the reality on it. Do you realize that every year, the absolute level of income of the median household in the United States rose by more dollars than it did in China?
China grew faster. Why? They were poor, but in absolute dollars and you can’t spend percentages. You can only spend dollars. We got richer every year than they got, even though their growth rate was much faster. As I say to people, “Would you rather have my income growing at a pretty good rate or Elon Musk not growing at a very good rate?” That’s obvious. That’s the US versus China. It’s great that they’re growing, but they’re growing twice as fast as us right now and they have four times the population.
You do the math half as fast, four times the population. The median income is $16,000 a household. Ours is $68,000. Do 2.5% times $68,000 versus 5% of $16,000 and you’ll realize in absolute dollars, we’re growing faster. It’s not good or bad. Just do the math. Am I afraid of them? No. I hope they keep growing.
That’s the question. Is China a friend or a foe? Is it a partner? We have a few other questions we hope to get them as well.
The answer is yes. It’s a friend and it’s a foe so as Germany. Germany is a friend and a foe.
We have a military base in Germany. They’re restricted from doing certain things. In China, we don’t.
Yeah but do you think if your General Motors, is Germany, a friend or a foe? They have Volkswagen. If you want to go on holiday, they’re a friend. All these countries have dimensions of friends and foes. Some political and some economic. Of course, they’re friends and foes depending on. China is still trying to figure out its political system in their continuing to morph.
They’re a dictatorship capitalist mixture, which is very unique to the world in the way the governments run.
It’s not even capitalists. They still have or 60% of the economy are state-owned enterprises and so forth. It’s an odd combination, I agree, and economically, we’re massively larger. People don’t understand. We’re a quarter roughly of the world’s GDP but if you said the world’s discretionary GDP is discretionary, not just survival, we’re probably 40% of the GDP of the world. It’s stunning. People say, “Will somebody replace the dollar?” You have to have something to replace it with. I’m reminded in many ways and trust me, I’m not what I was when I was 25 or 22 or whatever. However, compared to 72-year-olds or 73-year-olds, I’m much better off than I was at that age.
It’s all relative.
We are so far ahead. By the way, did we have Madoff? Of course. It’s shameful and disgraceful. Do we have scams? Of course. It’s disgraceful. They’re regular in other countries.
Also, they get and they get executed and not just imprisoned.
Think of what he did to Jack Ma. I don’t know Jack Ma. That wouldn’t have happened here. Can the government hurt your business here? Of course. Will you get an absolute fair trial? Probably not.
Peter, in some cases, when you have a dictatorial type of government, they can set certain rules and make things move faster in a weird way like we were talking about the opium pandemic that they had and how they came in and it was a bullet in the head or smoking opium. They changed. Everybody cut their hair short. The Chinese used to have opium dens and long hair. In some ways, having a level of control like that, you can push the economy. You can push the people in a weird way.
It’s interesting. I’m doing a Zoom session with the children we support in Kenya on Joseph Stalin. Probably no one ever had more absolute control of a large economy than he did. He certainly pushed it. He had the power to push it. I’m not sure you’d say it was to the good.
No, you picked the evil as one of them. The 38 million Russians died and only twelve many of them were military men in World War II. Let’s move on because we know we have to run. Our main show was your predictions for 2024 and beyond. We want to get those in.
2024 Predictions
Peter, let’s look into the future as far as rates. What are your predictions for 2024 as far as rates?
In terms of the long rate, I think it will by the end of the year, steady out at something like 3.7% or 3.5%. Why? It’s because it’s going to become clear that inflation’s going to steady out at some number like 1.5% just like it was before the pandemic. It’s going to be the same because we’ll get back to situations like it was before the pandemic. The long rate will steady out somewhat there. When I say steady, bouncing around that from there. I would say the short rate, the Fed’s going to be slow.
The rate should already probably be 3% or 3.5% given the inflation numbers I was describing. It should be massively lower. Unfortunately, they’re going to be very slow. They’re going to punish that 20%. Essentially, there’s this old phrase. The beatings will continue until morale improves. That’s the Fed’s philosophy. They’re having no effect on notable inflation, but they sure are hurting a lot of parts of the economy needlessly.
Macro Economy Insights: The Fed’s philosophy is the beatings are going to continue until morale improves. They’re having no notable effect on inflation, but they sure are hurting a lot of parts of the economy needlessly.
A quick question for you. Over the next few years, what’s the asset class you feel most bullish about? We know that industrial and multifamily are the top runners, but what is your belief on that?
If I had to say you’re going to put all your money in one asset class, which I’d never say to most investors. I’d probably pick multi-family. Why? It’s not going to get disintermediated. It tends to keep supply under relatively good control because not the high-rise stuff, but the suburban stuff is easy to stop when it starts getting overbuilt. No one tenant can blow a hole in your income. By the way, warehouses also can get shut down pretty quickly in supply. I don’t think boxes get dissimulated. Maybe they do, but I don’t think so.
Also, technology affects industrial where you can have drones or other things. Whereas if somebody needs a roof over their head, the technology can create roof overheads.
That’s what I mean by the dissimulation. The other thing about multi-family is no single tenant can blow a hole in your income. You can have a great industrial, and if one company goes bankrupt in an otherwise strong economy. Even in the strongest economy, some companies go bankrupt. Now, you have 50% of your building empty and you have to backfill it and so forth.
There’s no way an apartment building goes from 94% occupied to 50% occupied. It might go to 90%. It might even go to 88%. It just can’t because of the reality of the situation. I like that part about it. I’d say I wouldn’t recommend putting it all in one, but if I had one, I’d live in that. I’m putting most of my marginal money and my direct active money in apartments.
I think we’ve seen some emails coming through. We have an audience question. A question on distress and his opinion on the chances that banks will take back properties or if there will be more loan modifications and workouts.
Lots of modifications. Lots of workouts. The biggest sector that’s got problems is office and the last thing most lenders want is an office building. If you can’t operate the office building, how the heck am I going to operate it? I’m going to take it from you and sell it to somebody just like you but it’s going to take fees in eight months to do it and lawyers to do it. I have no better operator. The only way somebody else is going to buy it is if I lend to them to buy it. If you’ve got a bad borrower, maybe. If it’s hopeless as an office building, you can get lots of modifications.
Especially on development deals where the developer knows what they’re doing, but they’re short on cash. You’re not going to bring another developer to build something mid-construction. We appreciate your time, your wisdom, and knowledge. We appreciate you coming on here. We are a bit over time. Forgive us, but we want to bring you back again next time. Maybe you can verbally say if people want to subscribe to you in some way.
What’s the best way they can reach you?
You can reach us by going to Linneman Associates’ website. You’ll see everything we do. You’ll see the talks I’ve given. We probably would post something like this when it’s available. We post that there. Also, The Linneman letters, speeches I’m giving, and so forth are there. Information about our charity is there. That’s one thing I do.
Thank you so much for your time.
Thank you for having me.
