Austin, Texas – In our October newsletter titled “Hunting Red October,” we warned of the upcoming tsunami of higher debt, lower profits, higher spending and the threat of geopolitical unrest. In hindsight, our warnings seemed prescient. In August of 2006, I owned one of the largest trading firms in New York by the name of Spectrum Capital Partners. At that time, we had discerned that the mortgage market was about to go into total collapse. After six months of trying to uncover the best trades to make money off of the upcoming GFC, we could not figure out a strategy that would work, and I sold the firm December of that year.

In many ways, the economic build-up that we are witnessing now is similar to that in late 2006. The markets are still holding up well, though under the surface, the frog is starting to boil. In the months following three shocking bank failures, regional banks began a lending pullback of historic proportions – one that promises to persist. Silicon Valley Bank, Signature Bank and Silvergate Bank being shuttered by regulators over a three-day period in mid-March was a harbinger that we have discussed in previous newsletters that still hangs over the market today, although no longer in the headlines.

We are now in the middle of a private sector recession, disguised by insane government spending. The services and personal consumption sectors are being propped up by debt. In July of this year, the personal savings rate was 3.5%, well below the pre-Covid average of 6.9%. In the second quarter of 2023, total credit card debt rose above $1T for the first time ever. This has grown national household debt to a record $17T, according to the New York Fed.

Large liquidity injections are keeping markets afloat by adding stubbornly high deficit spending from the government, which is unwilling to make reductions in expenditures. In the year-to-date July 2023, the US deficit grew by $2.474T. Nominal GDP over the same period grew to about $27T, expanding the deficit to more than 9% of GDP.

According to new data from the Census Bureau, the poverty rate in the United States rose by 4.6% in 2022, its first increase since 2010. The data also shows that the child poverty rate more than doubled from 5.2% in 2021 to 12.4% in 2022, and that rates also increased for ages 18 to 64 and 65+.

On the real estate front, nearly $80B of commercial real estate loans were in distress as of Q3 2023, the highest volume of distress since 2013. MSCI found in its latest quarterly report that over $215B worth of commercial property debt is currently at risk of distress, whether due to upcoming maturities, slow lease-up or missed debt service payments. More than $32B of office-backed debt is currently in distress and $50B remains at risk of distress, reflecting the number of loans scheduled to mature next year without a clear path for refinancing.

This time around, and unlike 2006, I have a plan. After I sold Spectrum, I asked the largest commercial brokerage firm in New York where I should put my money. They told me Austin, Texas, and it was the best investment advice I have ever received. Austin outperformed the rest of the US in median income growth in 2022, rising 12.41% to $89,415. This is compared to the national average growth rate of 8.1%. Austin’s top employers, its family-friendly environment and a strong tourism industry are seen as key factors driving this growth.

After liquidating our portfolio in mid-2022, we remain entirely in cash and are seeing potential opportunities multiply before our eyes. Following our last newsletter, we saw our highest subscription rate to date, and we welcome all of our new investors. The demographics have only gotten better since I arrived in Austin 10 years ago, and the opportunity before us remains, in my opinion, the best we will see in a very long time. If you desire a safe place to put your assets with experienced, diligent, risk-averse and qualified managers, please reach out to us, as we remain ever-excited to welcome you into the Next Frontier of Real Estate Investing.