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Well, that’s a lie.
This is a story about a dude named Lane he moved to the mainland and bought one place to stay. And then one day he went try to rent them out, and then he became one. That’s still me.
A simple passive casual listeners This episode is going to have David mcaveeney I met him at a family office mastermind recently gonna be talking about a lot of good macro economics. We’re gonna split this up in a couple parts. First part we’re going to talk about China, India, other international trends and the second part will probably be talking about more domestic trends. You know who’s going to win the election. What I’m personally doing and what is if Trump wins again where does that go? So enjoy and just be aware that you know David works with high net worth investors right and so if you’re a young kid don’t buy gold man, you got to grow your wealth. I mean, I think gold is a great hedge against inflation and it also it also retains value in case of zombie apocalypse but it doesn’t cash flow doesn’t put food on the table, but enjoy and make sure you guys connect with me join the club, simple passive cash flow calm slash club. This is a story about a dude named Lane he moved to the mainland and bought one place to stay. And then one day he went try to rent them out. And then he became one really but still me. Folks, I got David McElhaney here you guys can check out his website mcilvain e ica.com. We met like a month ago at a family office mastermind and it’s just interesting getting around different types of investors that do bigger deals then some of the stuff I’m normally used to, you know, which is more mom and pop investors and sophisticated mom and pop investors, I’ve been trying to move more into the world of family office type of opportunities and better bring David on the line and kind of just talk about some of the stuff that’s been happening in the macro economy. But David wants you to explain your business. So people have a little context and some of the clientele that you work with, you know, what is their typical profile?
Yeah, one of the reasons why the macro economic perspective is important to us is because our first business started in 1972 is a precious metals brokerage business. And gold as it plays a role in a portfolio is that of insurance. So whenever you’re talking to the insurance guy, you probably talking about what can go wrong. And that has focused on many different aspects of the global economy, domestic economy, the financial markets, public policy, geopolitics, all of these things factor in at a macro level into what can go wrong with an investment thesis where maybe you’re a little overexposed on a particular asset. don’t have enough liquidity or what have you. So being quote, unquote, in the insurance business, although it’s not, as I say directly, so it’s just the way that gold is treated in the portfolio, it means that we’re constantly looking at the macro picture. We also have an asset management company. And that asset management company is interested in real things just in a more diversified way than gold. So interested in specialty real estate interested in infrastructure, global infrastructure projects, global natural resources and global precious metals. So still looking at real things. But with physical metals, you have no cash flow with those other things on the asset management side, it’s real things with cash flow, that would be the difference between our two businesses. So yeah, we’re very interested and very curious, do a weekly podcast done that for 12 years and speak with some of the leaders in both Wall Street firms and in academia and even into the central bank community, talk to them exactly about the policies that they’re setting in motion that end up impacting pricing of assets, whether that’s stocks, bonds, or real estate So that’s kind of in a nutshell, who we are what we do family business, and we’re in our 48 years. So coming up on five decades or
so we’ll circle back to the gold stuff at the end here. But you know, I just want to get in your head and what you’re thinking of what are the big movers in the economy and what’s happening in the news, because some of this macro stuff is important. I mean, I’ve always said that when you’re investing in deals or buying a rental property, it should be really some market or even which side of the block you’re on. Are you next to a couple, buy your home, but as I’ve kind of moved through the investor club, and I start to realize that’s the goal, but most passive investors are busy working a day job and they just don’t have the ability to go fly out there and check this out. So they’re really shooting from the hip 1000 miles away. So a lot of the concepts that there’s when they’re making an investment decision, whether it’s right or wrong, is directly correlated with what’s happening in the macro economy. Macro news. For example, you got a deal in Dallas. Everybody’s been hearing that Dallas has been an amazing market for the past three years, but also people investors have been known this for last decade. And you tell me if you can find deals in there, everybody knows it and their mother and every other sophisticated investor out there. So that’s an example whether it’s the right way of doing it or the wrong way, it is what it is. So David, what are some of the macro events in the news that you’re kind of following today that actually really matters? And by the time this goes out, and will time stamp, this is March 2020. In case you guys are catching this up later,
yeah. So we look at maybe degrees of macro, what you described as a specific micro type deal, but in the context of a larger environment, Dallas, we would even blow that out even further to a macro perspective, either national or international. The things that are on our minds right now. Certainly, you look at a Chinese growth, and it’s been in decline for a number of years now. We’re now at the slowest growth in the Chinese market. We’ve seen in 29 years. There’s direct impact into the real estate market, particularly on the west coast and to a degree you know, in places like Seattle and Vancouver, BC. where a lot of Chinese money has been coming out of the mainland and finding place to be. And so a lot of buying in recent years that buying has slowed for a couple reasons. One, you look at Asian pings moves here recently to consolidate power. He doesn’t want money leaving, he wants it in the economy. He wants to fortify growth and sort of drive a particular theme, whether that’s the one Belt, One Road project or a number of other big picture growth. thematics for China slowest growth in 29 years is kind of a big deal. They have been the largest contributor to global economic activity, global GDP in recent years. And it looks like that’s not going to happen this year. They’ll still contribute something. But why does this matter to us? Why should this matter to you as an investor because mood has a lot to do with what’s happening in the world of finance, if there’s a mood of greed, then you have kind of the days of Gordon Gekko. You remember him saying in Wall Street, perhaps that greed is good? Well, greed certainly drives deals. Greed certainly gets people enthusiastic about spending money and it’s on a spectrum. An emotional spectrum, this mood spectrum where you have that and that’s a part of the business cycle. But you also have fear as another expression of our humanity and a part of the business cycle. And when that mood is in place, then all of a sudden, people are much more restrictive in the dollars, they’re willing to spend the dollars, they’re willing to invest, etc, etc. So as professional investors, we want to know what the mood is. We want to know why it’s being influenced in such a way. So the IMF had numbers recently that came out on global economic growth and they put 2019 numbers at 2.9%. That’s fine. 2.9% is positive, not negative. So should we worry the issue is below 2.5 2.5% or lower? You’re categorically in a global recession? Again, we come back to mood is there a difference in mood a difference in the way that investors spend money capital flows, interest rates get directed in light of the prevailing mood in the market, or 40 basis points away from what I would consider a significant mood shift now comes in the headlines of coronavirus over the last several months. So we have this virus that is really not well understood continues to grow. We’ve seen daily growth rates as much as 20%. And as small as between five and 10%. So some days, we say, Oh, it’s gonna be solved. Look, the growth rate of diseases or the viruses is diminishing, they must have it under control. And then the next day, we have different news. And again, it affects the mood of the market. The real impact here is because we’re already close to a recessionary level on a global basis, you’re talking about a significant change in terms of the way people feel, and ultimately how they allocate assets. So as an investor, do you want to be aware of the mood? Absolutely. Do you want to be aware of the things that impact the mood of the market? Absolutely. And so something like the corona virus, maybe and only time will tell, but maybe just what is necessary to push us back into global recession? What does that mean? We have got a whole host of policy responses that we may see from the People’s Bank of China, the Federal Reserve the European Central Bank, to try to keep the business side Michael going again, this is all very interesting to me. Because if you look at growth in the US stock market, we’re at the end of basically 11 years of growth, the longest stretch of growth we’ve ever had in US financial market history without a significant or major correction. Right. So we’ve done very well in the financial markets. Will that continue? Now this backdrop issue of mood and perhaps a shift towards global recession? Maybe that’s the defining factor for late 2020.
I think the corona virus I mean, who knows by the time I get this podcast out and aired, but it might have just gone away In your opinion, is that just a story that’s sort of just being a headline right now? What is the real weakness in the Chinese economy that’s been more prevailing for the last two, three years? That’s that’s kind of made this downward trend?
Yeah, the big transition for them is an inability to transition from being mercantile stick where they’re basically building products and shipping them overseas and selling them major export led growth. They’d like to change their whole economic model from being export driven to Being based on internal consumption. So consumption as a share of GDP, they’ve tried to get that towards 50%. And they can’t move the needle. They can’t get that to happen. So it’s basically been a failed project getting consumption is the driver of growth in Chinese economy that has been problematic. We’ve had a major property boom there. And some booms turned to busts, particularly if the financing of the deals is done on a very shoddy basis. And I think that’s only fair to say you’ve had credit expansion in mainland China on such a massive scale, that it’s allowed for really bad deals to have been done. And now it’s time to sort of find the skeletons in the closet, see where the bodies are buried. Because in a world of very loose finance, sometimes sane minds and good business decisions are not well calculated. So I think that’s the the backdrop issue is massive credit expansion and major fragility within the Chinese financial system and an inability to convert from the old business model which is export driven to internal No consumption, which they’ve used is much more stable long term. They just haven’t been able to make that switch yet something I read recently because they did that one child policy is going to come and haunt them in the next decade or two, the One China policy is a disaster, it is already haunting them and to be a single male in mainland China, prospects of marriage and family are not that great. So yeah, I think that’s an issue. It’s a demographic issue. Also, from the standpoint of when you provide public services, a safety net of sorts, it requires dollars in for the dollars out. And so when they begin to make promises to the public, but don’t have enough dollars coming in, because they have a demographic cliff, again, just not enough people in the workforce, this becomes a real issue and that I would describe the demographic issue is more of a long fuse issue. It’s not going to hurt them this year next year, but over a 10 and 20 and 30 year timeframe to complete disaster in China the demographic disaster and it really does stem back to that issue of the one child policy where you’ve not created a replacement. So huge obligation And cash outflow and not enough coming into government coffers to pay for it.
So moving over to India, you hear that they’re kind of the next up and comer in terms of economy. Is that true? Are they kind of a drop in the bucket compared to
China, India is a fascinating case. In some respects, their economy is transforming and becoming a very compelling place to be the growth rates in the demographics are very different. Their demographics are completely different in India than they are in China. And there’s a story certainly that could develop there. Modi is experiencing or experimenting on the national level with something that he did in the state where he was kind of local politician before hit the national scene with something called Hindu nationalism. And it’s very, I don’t know if extremist is the right word. It’s not quite the right word. But it’s something that ultimately I think is going to if this continues, it’ll hinder growth in India. If you are not a practicing Hindu. Now all of a sudden you are actually at threat, if not in terms of civil liberties, maybe even in terms of your life. You can Look at this in certain regions and see that it’s affecting both Muslim populations as well as Christian populations. And if you’re not a dyed in the wool Hindu, I don’t know if that’s quite the right word phraseology. But it’s not a place that’s catering to openness and an expansion of the capital markets, because they’re prioritizing sort of, again, this mix of religion and nationalism in a way that is very, it’s biased, bigoted and exclusive, which means it excludes anyone who’s not just like them, if you want to grow your markets, you open up, you free up, you create opportunities, you don’t restrict, and they’re in the process of restricting and defining the winners and losers. And I think ultimately, that’s the big issue is they gonna have to come to terms with their own religious identity before they can really come into the 21st century.
Any other international trends that we should be following or maybe not what are some that really get too much press that really don’t matter that much?
Yeah, I think the other ones that matter a lot. You look at Europe, and just as we talked about China earlier and sort of growth economically in China, you’re lacking the main engines of growth in Europe as well. So industrial production, the numbers coming out of Germany and France and Italy have all been pretty horrific in recent quarters and even years. And so declining growth in Europe is a significant issue. If you’ve got declining growth in Asia, the US is kind of standing out as the beacon on a hill, we’re not doing that bad. But that’s on a relative basis where you actually have a steep decline in growth in Europe and declining trends in China. I guess if you’re looking at risk and reward the US markets are not a bad place to be. I mean, from most of
the listeners are real estate investors. And I don’t know why you would look anywhere else in America, I mean, in terms of rent to value ratios for what you get, you can’t be
a part of that is even more basic, the rule of law where you’ve got contracts and established understanding of property rights. And this is not true all over the world. There’s conditions for ownership, there’s issues with squatting, all kinds of other issues which we just don’t have to worry about because we exist in a in a place that has been very stable the rule of law Something that we can almost take for granted.
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