In these interesting economic times we have to ask ourselves: ‘What are real assets? And how do we get real returns on our investments?”
Recently I came across a rather provocatively titled book that addressed some of my own questions about where our real estate and investment markets might be headed. Entitled “Survival Investing: How to Prosper Amid Thieving Banks and Corrupt Governments,” the volume is described by Publishers Weekly as “a shrewd discussion of money and politics–and the deleterious effect the latter has on the former.” The author is a former investment banker who turned his back on Wall Street and committed himself, after the 2008 economic crisis, to helping struggling families get back on their feet. Referred to by Bloomberg News as “an oracle with a track record,” John Talbott currently runs a website called “StopTheLying.com” and has also written articles for various news publications.
Like many of our customers, we at Biostruct are concerned about possible future economic developments and trends. So, while it’s not our intention to offer advice on money matters (we’ll leave that up to financial gurus like Talbott!), we’re always interested in the perspective of a genuine “insider.” –Especially one who happens to have correctly predicted both the housing market crash in the U.S. and the ensuing global slowdown!
You’ll have to read the book for yourself if you want “the full meal deal.” However, I would like to share a few of the author’s insights, particularly those relating to real estate.
It’s clear, in the wake of the 2008 financial upheaval, that governments of the world have been left “holding the bag.” As Talbott points out, they’re faced with enormous annual operating deficits at a time when the banking system continues to require additional “state” guarantees and bailouts, due to its ongoing struggle with bad debts. When you add in the fact that growth is constrained because the first wave of the baby boom is hitting 65 (and citizens are still loaded with unsustainable levels of debt), the stage is set for another economic catastrophe.
Among the global dynamics covered in Survival Investing are:
*the low-wage threat of China and India;
*the legitimacy of investing in gold;
*the false security of diversification; (and)
*the risks of sovereign debt.
Individuals and institutions usually hold the majority of their financial assets in common stocks, corporate bonds, mutual funds, index funds, municipal bonds, money markets, bank CDs, and Treasury securities. But these conventional investments will not do well, Talbott advises, in a world dominated by corrupt, debt-laden governments and thieving investment bankers, brokers and middlemen. “Traditional investments are no longer secure in today’s indebted and double dealing world,” he insists. And that’s precisely where many economists are missing the boat!
In a recent blog on the Huffington Post, the author discussed the difference between “nominal” and “real” returns:
“In speaking with my financial advisory clients, I find the most misunderstood concept is the difference between nominal returns and real returns. And Wall Street brokers and bankers are very quick to take advantage of this situation. Simply stated, a nominal return is the annual percentage return a security or asset earns each year in total. It is the annual return you see stated in the newspapers or online for any particular asset. The real return from holding that asset or security is this nominal return less the current inflation rate. People speak of what an asset’s “real” return is after adjusting for inflation.”
While real estate is a “real” asset, Talbott doesn’t believe it’s going to appreciate much, in “real” terms, anytime soon. But even when their real value is not appreciating, houses have historically done a good job, he notes, of appreciating–with inflation–in nominal terms. So even if interest rates were to suddenly rise (putting a damper on the housing industry, the auto industry, and–in fact–the whole economy), homeowners would still retain their purchasing power, due to the increasing nominal value of their residences. Most stocks, on the other hand, will lose value in an inflationary situation. Thus, according to Talbott, real estate can be seen as a reliable hedge against rising interest rates. Moreover, a “real estate portfolio” is far easier to manage, during a period of upheaval, than a stock portfolio!
So, for the person who is considering buying or investing in the built environment, what sort of investment makes the most sense? As we consider this question, it’s important to realize that the economic crisis is just one aspect of a greater systemic failure: a demonstration, in fact, that our mechanized way of looking at the world is running out of gas. Many believe that in order to rise above this failure, we need to begin by changing our overarching framing metaphor from “the universe as a machine” to “the universe as an organism”. Through the updated lens, the economy can be viewed as a biocentric, holistic system in which machines, while still used, are operated within the limits of natural systems. This new perspective is necessary, advocates say, because our past mechanized systems developed as an abstraction–apart from a broader understanding of ecology, evolutionary biology, and (quantum) physics.
“To emulate nature, our first challenge is to describe her in her terms. The day the metaphors start flowing the right way, I think the machine-based models will begin to lose their grip” – Janine Beynus, Biomimicry: Innovation Inspired by Nature
While the science underlying them has evolved, many of our institutions and behaviors have not. In a landmark work entitled “Ecological Design”, authors Sim Van der Ryn and Stuart Cowan observed: “Our present forms of agriculture, architecture, engineering, and industry are derived from design epistemologies incompatible with nature’s own.” Moreover (as also noted by Van der Ryn and Cowan), “design manifests culture, and culture rests firmly on the foundations of what we believe to be true about the world.” Clearly, the creation of a restorative built environment–one that is not only compatible with natural systems, but sustainable, as well, for future generations–will require a major shift in both architectural and mainstream real estate practices.
“The Economics of Change: Catalyzing the Investment Shift Toward a Restorative Built Environment” is one recent report that provides effective alternatives to the current financial model and policy framework that drive investment decisions in real estate. These alternatives will hopefully help move limited investment capital towards a restorative built environment by integrating social and environmental benefits into investment models, appraiser methodologies, and supporting policies.
According to the report “When considering how to build a more sustainable,
prosperous and fair economy, investments in green buildings and infrastructure that generate ecosystem services within the urban core promises us greater prosperity and resiliency in the decades ahead. This work provides monetized environmental and social benefits not currently considered in a conventional real estate investment model. By enhancing the underlying real estate investment model, which includes appraisal, risk assessment, finance, and lending, the full transition to a high performing built environment appropriate for the 21st century can be achieved.”