I don’t like to panic myself, but whether I like it or not, panics do happen, and it has been a while since the last one. So, it is good to remember, for a moment, what a panic feels like, what happens, and how to deal with it.
Panic, in its basic form, is when someone shouts “fire” in a crowded theatre, and everyone runs for the exit, creating a bottleneck, trampled people, and worse.
In a market, it is when greed turns to fear.
What is truly terrifying is the speed at which these events occur. One minute everyone is cleaning up and making a fortune, and almost instantaneously it is the other way around, as everyone runs to grab pieces of the pie before it disintegrates. And then it feeds on itself.
I don’t like to be Chicken Little, but I do have fears that the sky may be falling, enough to be concerned that a panic may happen.
Consider these events:
- Recent Wall Street Journals, on almost the same day, or maybe it is the same day, carried front-page stories pointing out that there is (at least) a 10% chance that AI will wipe out humanity. Yet at the same time, a company called Anthropic, which most people have no idea what it is, what it does, or how it does it, other than that Elon Musk is pissed off at them, is going to raise more money than ever in an IPO, $100B, to create some sort of “AI Stuff” that will wipe out the world. See the beginning of this paragraph.
- Interest rates are rising inexorably, and this time the government doesn’t seem to be able to do anything about it. If interest rates rise merely to 10%, which did happen not that many years in the past, when they peaked at 17%, the math is simple: the $40T deficit times 10% = $4T. The total tax revenue last year was only a bit over $5T. One might worry just a tad about whether the U.S. is bankrupt and, if so, what will happen.
- Meanwhile, everyone is building data centers, which directly or indirectly feed the revenues of most of the major tech companies, which in turn make up almost 40% of the S&P. And all of this is happening when almost the only non-partisan issue in politics is railing against the evil of data centers, not to mention stoking AI fears.
- And this is not to mention the usual concerns, like a bunch of wars, vicious partisan politics, immigration, income inequality, and a whole bunch more.
Finally, it has been a while since the last panic.
So it is not crazy to think a panic of some sort is imminent. As I mentioned in my last article, real estate will not be immune if there is a financial panic.
You may think Bruce is wrong here, and of course that is quite possible. I am either right or wrong, tautologically. If I am wrong, which I fervently hope, then that is just great.
But if I am right, it behooves everyone in the real estate industry to take a hard look at their business and consider what happens if a panic occurs. Will it be an annoyance, a solid bummer, or a major catastrophe? If the latter, it is well to prepare in advance, for as Tolkien said:
“It is over-late to send for aid when you are already besieged”
So what should one do to prepare?
Well, if a disaster happens in a week or so and you have no Plan B, it is really too late, sorry to say.
However, if there is time, I would advocate the following:
- Lock in long-term debt that is fixed rate and assumable, even if you have to pay extra for it.
- If you are a lender, either avoid long-term debt or hedge it with financially impregnable counterparties.
- If you are an owner, look harder at the credit of your tenants.
- If you are a lender, look harder at the credit of your borrowers and the hard assets behind your loans.
- It would be awfully nice to have a cash hoard or easy access to cash, so if you are “all in” regarding whatever business you are in, it might make sense to take some chips off the table.
- If you are in a service business, consider whether you have high overhead and how you will feed it if business is interrupted for a significant period of time. Most law firms, by way of example, cannot survive very long without a level of income to pay the expenses of having lawyers work for them, as all have learned over the years, some the very hard way.
- If you are someone building something, consider what happens if the funding sources run out of money or if access to the goods and products you need to build is interrupted.
- Contra all that I am saying is what I have written in many other articles, namely that you cannot time the market. Let’s say you read the tea leaves that a panic is coming, so you pull in your horns, and it turns out you miss the biggest bull market in world history as AI transforms the planet in a good way. That would be a big bummer too, wouldn’t it?
So what on Earth should we do? To quote Tolkien again:
“All courses may run ill, so how now shall I choose”
This is how I would assess what to do:
- I would assure myself that the one thing I can be sure of is that I don’t have the ability to predict what will actually happen when a panic ensues. Due to this, it doesn’t make much sense for me to predict the future and prepare for it. Instead, my prediction is that, since I cannot predict the future, the optimal course of action is to diversify so much that whatever goes wrong will at least be partially offset by what goes right.
- To this end, I urge reflection on my various articles touting diversification:
How to Outperform in Real Estate on a Long-Term Basis
Leverage and Diversification Conjoined
Anti-Fragility, Nassim Nicholas Taleb
Notably, I advocate diversification of product type, asset class, risk profile, location, geography, and whatever other angles can be thought of.
To conclude, as I continuously worry about panics and what to do about them, I keep coming to the same conclusion, and it is to diversify.
This article says a lot of things I have already said, I admit, but the difference is that I do see the need to do this most urgently, as opposed to waiting.
Bruce Stachenfeld, aka The Real Estate Philosopher™