Darrin Gross:
I'd like to ask you, Mike Zlotnick, what is the BIGGEST RISK?
Mike Zlotnik
So great there. And thanks for that. Three, three ways to manage to kind of risk avoided. mitigate it and obviously transferred. I when I grew up being a mathematician, so we've looked at risk too. And I've learned there's two elements to risk. Number one, it's likelihood. Number two is impact. So what what I do is I look at risks and try to figure that figure that out. So likelihood, and impact are the two key variables that drive all the decisions. And I would say the number one risk on a grand scale of things, and for the entire real estate market. And I think about it, it's not necessarily my biggest fear, because I feel that the the impact is huge, and likelihood is low, very low. But the interest rates going up a lot. So take a look at what has happened to the 30 year bond, where we are recording this February 10. I don't know when it's gonna come out, maybe it's live. But I looked at the data since the beginning of the year, and the 10 year Treasury and in a 30 year Treasury moved quite a bit. The yields have gone on on a 10. year from from point 94, up to 118. If I if I'm committed fluctuating obviously on on a 30 year from 1.66 to 1.9697 in that range. And these are very substantial moves. If you're a bond investor, you lost 20, maybe even more percent of your investment in 30 days. This is how sensitive this stuff is. And the whole real estate industry is heavily dependent on low interest rates. It's like a fuel when the rates drop, it's a fuel for real estate fire. When the rates climb, cost of capital goes up cap rates go up now. This is directional moves. But what the United States is doing, they're printing huge amount of debt basically borrowing and spending the money for the stimulus and everything else. So our debt to GDP ratio is getting out of control. Nothing new here, right? We've known about this, but it's getting progressively worse, it's that the risk is accelerating. So there's only one solution, unfortunately, that we've seen it in the world out there to Japan model there is going to go negative. Now, as crazy as it sounds, it's the opposite of the risk that I'm talking about. So the rates go negative probably will be pretty good for a lot of real estate investors, as the cost of capital will drop. But there's also a possibility of effectively runaway inflation, as the government continues to spend without the brakes, unless fat comes in, that's basically manipulation of rates, that the Fed has unlimited checkbook, and they can buy all the bonds that are issued by the Treasury and push other rates down. But at that point, what do we have, we have a central bank that buys everything, just to get the rates to the point where they can service the debt on, you know, one, the liabilities of the United States government, unfunded liabilities plus the real debt. So the problem is, this could turn into a runaway hyperinflation. And the rates will actually jump substantially. And it happens, it will be essentially devaluation, massive devaluation of the dollar. And it can happen, I've seen other countries do this. So your strategy of artificially keep the rates lower and lower and lower. It works until it doesn't. And if it doesn't, that becomes a cliff. And that cliff triggers hyper inflation. And it could cause substantial grief on the on the older all the lines, everything rolling the debt service, it'll be massive squeeze, because of the debt to GDP ratio is so out of control, that if rates climb, we have a massive collapse of the of the of the over oversized debt portfolio, the whole the whole national debt plus all the private debt. So it's a possibility to risk, what can you do about it? It's hard, it's hard to come up with a great strategy, obviously. likelihood is, is pretty low, I do think that the Fed will not let that happen. In the long run, it's just they can't, I mean, we're gonna have a bigger crisis, a different type of crisis than we're dealing with now.
You could, you could sort of play some, some derivatives to protect yourself, you can build in if you're, if you're if you're an expert trader, you could hedge against that. But in the short run, I would essentially caution people who don't think the rates can go up, they actually can, and they are showing some movement today.