Austin, Texas – “Democracy never lasts long. It soon wastes, exhausts, and murders itself. There was never a democracy yet, that did not commit suicide.” – John Adams, 1814

In 2022, the federal government shelled out $476 billion in interest payments on our national debt, and is projected by the Congressional Budget Office to pay $640 billion by the end of this year. What’s more, the CBO projects this outlay to reach $739 billion by 2024 and nearly double to $1.4 trillion by 2033.
 

Today’s dollar would be worth 14 cents in 1972. Remember, inflation cannot be reversed. There are five times as many dollars in circulation now than there was in January 2020. Think about that – a five-fold increase in the money supply. This results in you having to pay 18% more for the things you buy today. So, where can I put my money to counter inflation? Most experts would suggest real estate or precious metals. These are the assets that historically hold value during inflationary periods.
 

Today, the average 30-year fixed mortgage is 7.23%, compared to 3% a year ago. Heavily indebted companies are paying higher interest rates alongside increasing wage inflation. Moody’s trailing 12-month default rate for lower-rated debt rose from 1.4% to 3.8%, with next year being forecast at 5.8%. If economic conditions continue to deteriorate, Moody’s expects this default rate on low-rated debt to rise to 15.6%. As interest rates increase, so will the default rate. I would expect to see problems with leveraged loans first, followed by junk bonds, which are still priced for perfection at a 2.5% spread versus US Treasury bonds. Over the past 20 years, this spread has averaged 4%.

 
After spending $10 trillion on Covid relief, we came to find out that 90% of PPP loans (over $800M) were never paid back. Plus, at least $600 million of Covid relief was lost to fraud or embezzlement. But hey, at least 493 new billionaires were created during Covid. In reality, most got poorer, and the hangover has yet to begin. We cannot counter the effects of spending with more spending.
 
Let me paint a picture of what I see – Here in the US, Newmark reported that $1.2 trillion in CRE debt is “potentially troubled.” So far, 2023 has seen the lowest demand for mortgages since 1996, with the average mortgage payment having doubled since pre-pandemic. Credit Suisse and JPM have decided not to open new real estate funds, while Blackstone REIT paid out only 34% of redemption requests in July. Abroad, China reports that foreign investment is down over 50%. Since the Global Financial Crisis of 2008, the CCP has allowed city and provincial governments to take $9 trillion worth of off-balance-sheet debt to build roads, bridges, water plants, and high-speed rail that drove eye-popping growth. Evergrande, China’s largest homebuilder, reported a combined loss of $81 billion for 2021 and 2022. Are you seeing this global trend?
 
Each day, we at Next Frontier review a report on domestic bank loans that hit the “watchlist”. For the past year or so, the daily number of loans moving into the danger zone has fluctuated between 10 and 35. Last week, that number crossed 100 for the first time this year. Yesterday (8/31), a whopping 958 more loans hit the watchlist with an additional 66 headed to special servicing. Do you see the picture?
 
While earning 4% on a CD or savings account may seem like a great investment right now, keep in mind that as long as the interest rate is below the rate of inflation, your return is negative. As a reminder, we have liquidated all prior property holdings and are patiently awaiting our next opportunities. If you are interested in capitalizing on opportunistic and distressed real estate investments, please click the button below to register for our deal room. As we identify potential acquisitions, we will inform you concurrently to gauge your individual interest in each.
 
We wish you a great Labor Day weekend, and we look forward to welcoming you on our journey into the Next Frontier of Real Estate Investing.