Questions require answers and lots of questions require lots of answers.

real estate photo
Photo by MichaelGaida, pixbay

You’d be wrong in thinking that you’ll get either since the missing ingredient to both is lots of time. Someone invent me a time machine and I’ll answer more questions. Until then I have a select few to share.

I do read all emails and questions sent but obviously can’t answer them all. Sorry about that…

It’s been a while since I did a Q&A on the blog so here goes the first one:

Quick note to let you know I really enjoy the podcast. I discovered it through a republication on the Zerohedge blog.

I greatly appreciate the focused, intelligent, macro-economic discussions without the spin and sensationalism. I work for a hedge fund, and have (like many others) been struggling to make sense of these QE fueled, Central Bank driven markets. Retail investors (friends & family, not clients) ask me all the time where to put their money, which is a tough one because where do you go if both stocks & bonds are at historic highs?

There is also not a ton of value for real estate buyers & investors, and nothing to be had for money in the bank (except for fees). Not a good sign when guys I play pickup basketball with are talking about buying vacation properties as an investment since rates are cheap. I suppose I should tell them to lever up to the hilt, and wait for the next bailout?

Keep up the good work!

Thanks for the kind words! I don’t know where you’re based as we’ve readers from all over the world but I’ll assume you’re US based. The US is almost certainly heading into a recession so even if you’re prepared to play the momentum game you’re not really being paid to take the risk.

Buying real estate at the tail end of the long term debt super cycle takes cojones I don’t have. What’s your compensation?

What does make sense – if you can find it – is cashflow real estate, based on a 30-year fixed rate mortgage. Even at breakeven on cashflow this can make sense (location dependent) since you’re synthetically short the bond market with other people’s money. I’d be OK doing that.

To more specifically answer your question: standard portfolio theory works in a world where every single asset price on the planet is not manipulated. That’s not a world we enjoy to any degree at all.

And yet, these asset allocation models persist because they’re taught at most business schools by men with moustaches and pointy shoes who don’t have to deal with the real world.

Going to cash, cash equivalents, and liquidity with the majority of your capital, while placing bets on convexity, makes a lot of sense to us. Look for where convexity lies because your cost of entry is so stupidly low and your return potential so high that even when you get it wrong you’re not penalised much for it. This makes even more sense in a world where you’re now penalised for holding cash in a bank.

Thanks for an excellent site. I’ve been a reader since 2012 but this is the first time I’ve reached out. I can’t tell you how many times your sound reasoning has saved my butt. Thank you.

With all the advances in technology I’m curious as to why you are not investing in Venture deals which you were doing previously? Also I read your article on Tesla and wondered if you had any thoughts on Amazon as a tech play since I’ve been buying them over the last year, as I see so much going online and they are the 100lb gorilla in this market. Any thoughts on them?

Sincerely appreciative F.E

As you may already know, I ran an early stage VC business from 2012 through early 2016 so I know a thing or two about it.

To answer your question, I’ll tell you about a previous life. In the early 2000’s I built a real estate investment holding business. Super simple business model which a trained monkey could execute. Buy middle to lower middle class homes at double digit yields (they were available then), leverage them up, and buy more.

It was simple interest rate arbitrage with leverage, where you could constantly examine and understand risk by managing your spread.

Fast forward 2006, and I was struggling to find anything worth adding to the portfolio. Credit was still available but yields had collapsed to 4% or less. Great for asset values (I’d made 60x on my capital) but nothing to buy without going further down the risk curve. I sold up and got out.

Increasingly, I found the same set of problems in VC. It’s hard to compete with excited 30-year olds, flush with cash who will blindly throw money at deals. It’s eerily similar to the situation I found myself in when I liquidated real estate in late 2006. Also equally importantly, the risk to being illiquid ahead of what I am looking at now is just too great for me to ignore.

My friend Raoul Pal mentions private equity is in a “terrifying situation”. I’m no expert on the subject and Raoul certainly knows more about it than I do but early stage VC has increasingly become a lottery ticket investing market right at the point where global liquidity is drying up. It’s a function of easy money distorting asset prices globally.

There are a couple of really interesting private deals that I’m working on with partners but as a whole I’m not spending time on the sector.

Regarding Amazon: remember that Elon Musk, Jeff Bezos, etc. are using available capital to build their dreams. But if you look at the cap tables they are certainly not “all in” backing these companies with their own personal balance sheets. Not even close. But hey – you and I’d do the same thing if we could get away with it…

In an environment of zero interest rates and cheap capital, companies with great stories, accompanied by media buzz, benefit from herding and crowd behaviour. This is where both Tesla and Amazon shine.

Now, I’m not suggesting Amazon is a fraud which I think Tesla probably is. As far as I can tell it’s just another overvalued company which has grown on the back of very accommodative monetary policy and bullish equity markets. Part of the reason is that it’s valued like a tech company, but if you look at their operations, aside from cloud, it’s a retailer.

They have a market capitalization of $360 billion dollars and their listed P/E (TTM) is 191. EPS is a paltry buck and change and operating margins are 2.7%. For this to somehow work out, Amazon has to take over virtually all online commerce and run IT for most corporations in the US and maybe even the rest of the world. That’s just for it to live up to its current market cap.

All I’d say is to make sure you make the distinction between fascinating exciting ideas and what you’re prepared to pay for them. Full disclosure: I’m not interested in Amazon, either long or short.

The ‘dollar’ is the single most interesting and important issue for the global financial system right now — at least, that is my instinct (and Raoul has banged this drum for

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