An old Equation Revisited

We have all experienced that our daily living and business expenses have steadily demanded more dollars to sustain ourselves, although wages and income have been stagnant or have declined. The artificial dilution of the money supply results in nominal price increases for the consumer. Our administration, the unelected, unionized public serpents and their co-conspirators, the mouthpieces of the media, have no clue of what they propagandize. They readily blame ‘speculators’ and greedy foreign suppliers for the devaluation of our money. Who creates the devaluation? A speculator makes an educated bet using his money. For a trade to exist there has to be a buyer and a seller. Every one of us is a speculator, a trader. Nevertheless, who will profit in this environment? If my perception proves to be correct, then we in our M.H. business will be one of the blessed benefactors of this grand immoral scheme, at least those of us who reasonably manage our debt. It is not the number of toys we control, but the number of debt we can easily serve. The value of debt is eroded by monetization. The inflation of the fiat money supply we have to endure is in reality, logically, just a gigantic transfer of wealth from the creditors to the debtors, a once in a life time event. Our debt is denominated in and contractually remains in devaluing money, and can be satisfied with the same. The new valuation of our currency will be a nominal multiple of the old, once the real inflation cannot be camouflaged any longer. And that is why I refuse to be a creditor at this time. It might behoove us to review our present private and business financial situation and balance the equation.

Bernd, this post is meant not only to reply to what you’ve posted above, but rather a general response to your last several posts.

I concur with a lot of what you say, particularly with regards to the way the media spins things and the general public blindly, with no critical thinking skills whatsoever, seem to take it as gospel. I also feel like we’re headed for a period of inflation, and I’ve been predicting another recession for quite some time now, yet the economy (on a national level) appears to be improving month by month. I say this from first hand observation, moreso than just agreeing with news reports and statistics.

My model for the past 18 months or so has been to accumulate cash, and use it to purchase free and clear SFH rental homes. I am also doing MH wholesaling to accelerate the cash build. What is becoming obvious to me though is that in order to reach my goal of 12-15 free and clear rentals, I can do it much faster by using some small amount of debt. I’m thinking pay cash for one, and then put 80% financing on the next one, which gives me an overall LTV of 40% (assuming I pay full retail, worst case) and still the flexibility of having half of my properties un-encumbered. I agree that I don’t want to lend any more money in this environment, which is one (of many) reasons I no longer do lonnie deals.

I have a couple friends who have gone off the deep end (my opinion) with these civilized-society-will-end-due-to-xyz type prophecies. My question for them is always “What if you’re wrong?”. Sure, you can make a logical argument that it could happen, but if you put all your eggs in that basket, and the economy booms, you may have missed a tremendous opportunity.

Back in 2006 at Tony and Scott’s boot camp I remember many of us sitting there predicting the housing meltdown. It sure seemed obvious to many of us that the current path was unsustainable. We all figured that if our predictions were right (and they were) that people would be forced back into more affordable housing (MH’s) and demand for the same would skyrocket. It would be the best time ever to be a Lonnie dealer. Boy were we wrong. Household consolidation, falling market rents, and government interference have all contributed to make LD’s much less profitable (and in demand) than they were back during the boom years.

My point: Even if you correctly predict a massive economic shift or other similar game-changer, it’s the small things that you didn’t predict that can have a big impact, possibly rendering your prediction, and planning, worthless. I choose to adopt a moderate, relatively low-risk plan that is not extreme in any direction, along with balancing my risk across several types of assets and businesses. I trust my instincts immensely, but not enough to put all my eggs in one basket, based on some prediction, and let it ride. In the end, this is what helps me sleep at night, and may not be right for everybody. My 2cents.

The use of debt to acquire income producing assets makes perfect sense and in theory is a can’t miss proposition provided that you buy right and operate well. So why is it that oftentimes businesses built on debt fail or flounder? There are a multitude of possible pitfalls, but I think the crux of the matter has to do with the effect that getting comfortable using debt has on us.

I believe that its effects are subtle at first, but lead us from a path to independence from a job to dependence on lenders. The symptoms also include a narrowing of ones field of vision, and an increasing resistance to break the routine. Too soon, the everyday issues, rather than the direction to the goal dictate every adjustment.

An analogy that comes to mind is driving a tractor in a straight line across a wide field; in order to accomplish the task one must keep their eyes fixed on a distant point of reference; and whenever an obstacle presents itself, traverse said obstacle and re align with that same distant point of reference. I think that debt and its use causes many (most) to completely lose sight of the direction to their goal.

We also seem to have the “it won’t happen to me” syndrome; no matter how many times we see others lose their way. Be Careful.