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Alrighty folks, wild times in the economy. We're going to talk with Miss Anna Kelly and try to
give you some advice on what we're doing, what we think you might want to do in this environment,
because what's going on? Well, we have private credit imploding, maybe being the next Black Swan
event, draining liquidity. We obviously have the Iran War. We have Jeffrey Gunlock talking
about a lost decade. All by the way, just another Tuesday morning, Anna, how you doing?
I'm doing great. It's interesting, and it's just getting more and more interesting as we go,
for sure, to say the least. Yeah, I've shared this with my channel. I'm curious what you think of
this is this is the most fear I've seen in a long time, right? Because I talk to people
on this journey, and I don't usually sense fear. I get nervous. I get excited. But fear is
really, it does seem to be rearing its ugly headed. To me, the closest comparison I have
was the couple of days after 9-11, right? Where fear was like, oh my God, is another one coming,
right? What's going on? That's the only compare I have in my adult life to what's going on right
now, because it's just, you throw on top of that AI taking white collar jobs. There's so
many reasons to be afraid. What do you think? Yeah, in fact, the fear gauge is all the way down,
and read as of yesterday. We are seeing some evidence of extreme fear, and Warren Buffett has
the old adage be greedy when others are fearful and fearful when others are greedy. Like you,
I said, we're not at the fear part yet. There's enough money still transacting that although
some of the smaller investors are getting fearful and getting out, big money has not shown fear
yet. I think some of that started to unwind last week, and we started to see a little bit more fear,
and again, a much higher fear gauge. I still don't think we've seen a bottom. Most people think of
the stock market when they're looking at fear or not. They're not really looking at a wide array
of asset classes. We've seen some fear and commercial real estate. In the last couple years,
we've seen some fear in the stock market. But I think what's making people more afraid
this time, Michael, is we've already been through multiple shocks over the last six years now,
since COVID hit us. We've seen many things happen that nobody expected, and each time that those
things happened, something in the economy started to break or rattle. We had COVID, and then we had
inflation, and then we saw a couple of banks, three banks, I think about to fail, and treasury had
to come out and issue a new bank rescue fund for lack of a better word, even though they wouldn't
call it that. Then we had the tariff war start out, and the retaliatory tariffs, and then war
with Russia and Ukraine, and then Israel under attack, and now Iran war. At a time when inflation
is showing to be more persistent than what many thought and growth and lack of jobs and
ticking up unemployment, have shown pain to the downside. I think people are starting to realize
this hope for a Goldilocks, and the next big expansion, at least it's kicked down a little farther,
and when you have a very stagnating economy, like we've been talking about on the show,
it can go either way. I think people are rightly concerned when you start seeing things like
private credit defaults, and big banks riding off bad debt. It starts making people wonder,
is this the next GFC? That's what I'm hearing. Is private credit about to drop, and then
that was already right at the cusp of canary in the coal mine saying things were kind of dangerous,
and then we go to war. I think people are rightly concerned. I think we're not at the bottom of
fear yet. I think that there's probably further to go, and any additional shock, Michael,
that happens between now and then could cause a financial crisis. I think people are wise,
not to be a doomer and sell everything at the bottom. That's the worst thing you can possibly do,
but to be conservative and think about where you have exposure and risk, whether it's risk that
you can really stomach if you see a lot of volatility, because I think, regardless of if you've
actually have a deep recession or a financial crisis or hyperinflation, even if we don't have any
of those extremes, I think you're going to have extreme volatility over the next year or two,
and the longer this war goes on, the more fearful the markets will become, because oil shocks usually
generate recession as well as inflation pressure. This oil shock is, I think it really does lead to
demand destruction, because again, mom and dad go fill up the car once a week, and it's just a
constant reminder that things are more expensive, right? That's going to start changing behavior.
You're going to start to see, I read an article over the weekend that said, the next two weeks are
important, because if the war is resolved in pieces, a piece agreement is done, you probably have
enough slack in the supply chain where things will work themselves out. Okay, but if it goes on much
past two more weeks, then you start talking about crops and you start talking about all these
other things that you just can't undo, and that will be kind of the second order effect, and
that's when inflation goes wacko, right? We're about to get a nasty inflation reading, because
gas is up a dollar, in like 12 days, that's going to be a horrible reading for CPI.
Absolutely, and diesel gas is up over five bucks, and most transportation of goods and services
goods across the country, I shouldn't say services, is run by diesel trucks, right? So the fuel
cost will be passed on for sure. Absolutely, and again, that's just the cure to higher prices is
higher prices, and this could be the straw that breaks the back and sends us into that long
call for a recession. It's that important, so again, we've got to be hoping for peace, but I've
got to tell you there's nothing going on right now that makes me think this is going to be short.
We even had President Trump talk about negotiations, and then Israel launched this, and Iran launched
that. Doesn't sound like peace to me. That's a hell of a, that's a hell of a peacetime when you
have these waves of missiles going. Yeah, you know, I wish and hope that it will be over quickly.
I just don't have a lot of realistic optimism that it's going to be short, and the reality is
the length of the war, and what it does to the supply shock and to oil prices, and not just oil,
but gas into your point about crops, fertilizer, aluminum, a significant portion. Helium, just helium.
Yeah, I didn't even know about helium, but there's a lot going on. 40% of the helium is offline
right now because of somebody bombed something. And helium, you know, people think, you know,
party balloons, but you guys don't realize this. Helium is a part of the manufacturing process for
semi-conductors. And yes, it's only 1%, but it's a pretty critical 1%, because helium can't be
replaced for whatever it does. I'm reading all of this. I'm like, oh my god, this is, this is going
to get, this is going to get wild. And it's even similar, you know, I don't remember the exact
stat, although I looked them up a couple of weeks ago, but you know, even though not, it might be
somewhere just under 10% of the world's oil goes through the straight of her moves, but it's like
20 to 40% of certain nations all around it. There's the ply of oil and gas and then the chemicals
for fertilizers quite a bit. So it will have a direct impact on food costs for sure, as well as,
you know, consumer discretionary goods. And so the longer it goes on, the worse those supply chains
are and the worse the high oil prices end up feeding through to inflation. And so I think when
you start to see inflation and you start to see the fed hiking rates, Michael, I didn't think the
probability was very high for a rate hike until we went to war with Iran. And now it's a real
probability. And so 50, 50, you know, in the real estate world where so much debt still has to be
refinanced, this is where the real fear is coming that, oh my goodness, not only are we going to
have more inflation, but the Fed may have to raise rates. And so I think that's spooking the
market. And the other thing that I think really is creating a lot of fear is that you're starting to
see assets that are generally not highly coordinated, correlated all take a beating. So again,
we've been talking about, and I'm still bullish on, you know, golden silver over the long term,
as an inflation hedge, but you did see. And I've kind of warned about this a little bit, but I was
surprised at just how quickly and how deep golden silver sold off when energy started to spike,
and when the stock market started to correct. And it is kind of common sense that when you start
to see a stock market correction, like the Russell 2000 is in correction territory now, the S&P
is down, I think 7% something like that. So not correction territory, but heading that way,
when you have that happen so much of the markets are leveraged with margin calls. And so when you
start to see people like, I want to sell and fear breeds, I want to sell and take, you know,
take my gains off the table, they sell not necessarily what they want to, but they sell
their winners. And so if they've made a lot of money in golden silver, they're selling, I would argue
largely to cover those margin calls and to take what gains they can. But when the average investor
sees that that everything's selling off, it's like, oh my goodness, where do I hide? Or do I go?
And I think that uncertainty and not knowing what's next is what creates so much fear. And the
question is just how long will it last? What happens to different asset classes? And are the
do people panic sell and do companies go under or do they weather the storm and things end up okay?
So yeah, I mean, you add on top of that, the fear of AI and white collar jobs, right? You had
block layoff 40% rumored meadows going to layoff 20%. This is just another fear that people have.
So if you were in the room with 100 folks, you know, that, you know, at different age ranges,
but they're all W2 employees are all employed. What would what would be your kind of advice if
you're on stage? You know, there's going to be a thousand or more people watch this video. So
what would you tell? What would be a couple of messages you would tell them? So I think just off
the cuff, the first thing would be the most important thing is to know your own financial situation.
And what your number one financial goal is over the next year and then five to 10 years. And
and the reason I say that is because all of us are in a different position as to what level of
risk we really can take when we have a very volatile economy where things could kind of go
in not so great directions where it's not clear that we're at a bottom that we're about to come
out of, you know, with some some levels of growth. And so if you are someone that doesn't have a
lot in savings, you certainly don't want to take risks of trying to catch the bot, you know, catch
the bottom and catch a falling knife. Like you don't want to just say, oh, Mark, it's corrected.
Let me throw everything I have and make bets that it's it's going to, you know, bounce back up.
If you have a lot of money and your income needs are met and you've appreciated and you want to
preserve some, then you can afford to take more risks. So you have to understand before you
listen to an advisor or a talking head economist or a hedge fund manager or, you know, even you and
I, you have to ask yourself, what's number one for you right now? Is it that you need more income?
Is it that you want growth and appreciation? Or is it that you need to preserve what you have?
And so that is the most important question. And so if you don't have at least six months of your
income and expenses, ideally you're your income, but at a minimum, at least six months of expenses
that you could afford a job loss. Let's say a company that you work for, like I did, the GFC
worked for AIG starts to stumble and they have layoffs. Can you afford a layoff? And what are your
prospects with your within your industry for finding another job? You know, if you're in your young
20s and you're a new college grad and you lose your job, it may take six months or a year to find
another job in your field. And so if you're a high income earner, if you're a manager level and
you get laid off, can you afford to be without work for six months? So I would say protect your
protect your liquidity at least for six months expenses set aside before you invest in anything.
If you have those expenses set aside and you have a risk tolerance and a time horizon that's
very, very long, then sure dollar cost average into the market, the stock market within, you know,
appropriate time horizons and risk tolerance. And there is two different school of thoughts, Michael,
and the advisors with these two different schools of thought will argue with you and they will argue
with each other as to who's right and who's wrong. But you have advisors that just say go into
the ETFs, DCA, this is what, you know, we were taught, this is what I was taught when I went into private
banking. Dollar cost average always, it doesn't matter if the market's up or down, just keep going into
the S&P 500 in an ETF. And over the long time, history shows, the markets are going to get up,
so don't worry, don't look at all these ups and downs, just set it and forget it. In the other
school of thought, in fact, it's a lot of older investors who've been around many financial
hiccups, let's say, maybe minor to major crises, you know, since the 70s and beyond, they're kind
of saying, you know what, it's not so easy anymore. And the markets are very disconnected from
fundamentals. And you can't just park your money passively in an ETF and hold on. You have to
be better or work with money managers who understand what sectors do well in these kind of environments
and what don't. And so I am at the school of don't just passively set aside your money and wait
for 10 years, although some advisors would argue with me, you know, I have a wealth manager as well,
and we're looking at things like what asset classes do well in periods of stackflation, recession,
and inflation. And I'm hedging some of my investments with number one, my number one goals asset
preservation, right? So I'm not getting greedy just because everyone's fearful, because I don't think
they're fearful enough yet for me to get real greedy. But on days where we've had some down markets,
I've added back to gold and silver. I bought some gold and silver miners. I bought some energy stocks.
I have bought some commodities and some things like dividend aristocrats, you know, who pay
hot dividends, consumer staples that tend to have pricing power and they can weather, you know,
some inflation and some downturn. And so I am dipping my toes back into the market. In fact,
I bought about 10 stocks or ETFs today while the markets were down a little bit. But again,
everybody's different. And so talk to an advisor, but make sure your advisor's been around the block
20, 30 years, ideally, and that they're not just put your money in the S&P and just ride it out
for the next 20 years because you can lose a lot. And if you lose a lot now because you're not
at least preserving some of what you have before you get real aggressive with what you can afford to
lose, it may take 10, 20 years to regain the losses that you could take when you're coming off of an
asset bubble. Yeah, well, let's switch gears to private credit because we're seeing seemingly
every day multiple, you know, folks hold redemptions back. We had two again this morning
that we talked about. Do you think private credit really could be the spark that makes this the
next GFC or what are your thoughts on private credit? How bad is this going to get? Absolutely.
I don't know if you remember, but we probably started talking about this about two years ago with
private credit and derivatives. And really the risk being that we don't know quite how big it is
because it is private. There are not daily publications that's public data. And it's highly
unregulated. So private credit and the derivatives market, they are not under a strong
purview of the US government, you know, auditing financials and knowing what exactly is happening.
And so my concern then, and it's actually panning out to be true now, is that when you have private
credit and those more, let's say it's private financing. Okay, so you've got a mortgage. We'll just
employ for real estate that was done on a private loan. We don't know how many times that debt has
been sold into whom. And we don't know if the, you know, my liability is a credit company's asset.
How many times did they pledge that asset as collateral to get loans for themselves to,
you know, and spread the risk? So you have one asset, one loan, kind of as collateral for the lender,
and then collateral for that lender loans to a big bank. And what we've been seeing is some evidence
of that. So we've seen some really big public banks write down losses of lending companies who
lent to borrowers with bad assets. And so it's hitting two or three lenders up instead of just the
one bad loan that's going bad. And so that is, I think, the real risk where this could become systemic
is how big is it? You know, they're saying something like 1.2 trillion, but I've seen, I've seen
numbers like four trillion dollars. And so, you know, how big is it really? And the reality is nobody
knows, including Jerome Powell and Scott Bessent, you know, and so if it's unregulated and it's
unknown how big it is, you really cannot determine how big of a risk it really is. But what we do know
is in typical credit cycles and liquidity cycles is once you start seeing a number of large
institutions start to fail, it generally is an indication that there's a lot more, you know,
Jamie Dimon said there's probably more cockroaches in the kitchen, you know, and so I think that
private credit is a real risk and it's a real systemic risk at a time when we're seeing the liquidity
cycle downturn when you have so much debt that has to be refinanced. And so I think it's probably
the biggest risk we have in the financial system right now is the downturn and liquidity and then
central banks who usually provide that liquidity as a backstop, they're out spending money on war,
you know, we're spending a billion dollars a day on the iron war. So the only real answer is you
either let everything fail, which governments don't like to do or you bail it all out, which
governments don't like to do either. But neither is good for the economy. And so I think it's
something we really have to take seriously and not be too rosy optimistic like all the advisors
want to tell you to be, but also not be paralyzed with fear on the other side and do nothing. You
just might want to steer clear of if it's a risk, I'm investing in things like financials,
you know, if they're going to be inequities, a lot of the big money's rolling out of financials
and into commodities and into, you know, consumer staples. Yeah, when I look at private credit,
and I try to play the Domino's game, you know, let's just say it's a trillion dollars so the math
is easier. And I try to ask myself how bad could it be? And because again, there are assets behind
these loans. To your point, some of them might be pledged multiple times, which is obviously fraud
in its own problem. But, you know, the biggest number that I can get to is 40% off, right?
Just fire sale, bad pricing, you know, raise capital. So on a trillion dollars, that means there's
400 billion of losses coming somewhere, probably lots of places. And lots of that money will roll
up to the big banks to your point earlier. And the other thing that I think sparking this is
our comment earlier about interest rates. I think there were a lot of people operating, especially
in the commercial real estate area about rates for coming down. And they were, they were hoping for
that, you know, one or two more cuts. And it was going to somehow save them or stop the bleeding.
Now we're looking at rate hikes. And I think what's happening is financial institutions are going,
okay, time to clean the books, time to dump this stuff that, you know, we're not going to be,
the Fed's not going to save us this time. We got to start writing this stuff off. And thus,
private credit starts to implode. And the problem with a credit cycle like this is the first
people to sell are actually the winners. Yeah. Because they take the smallest loss. It's the people
that come second, third and fourth that really causes this thing to really crater. So long story short,
I think we might have some really good commercial real estate deals in the next 12 to 18 months. What do you
think? I do, but what I also know is you have to be very, as we say, well healed, you know, if you've
got a billion dollar fund, you know, that can go take down several, you know, deals that are a
couple hundred million dollars a piece, great. You're going to find some huge opportunities. So,
but for, you know, small fish in the pond, you might do well to invest in some reeds of funds
that are going after these very large commercial real estate deals. So the smaller commercial real estate
deals, the 10 units, 20 units, that 30 unit properties, the small ones, they can typically be traded
with a small group of investors, even still using a local bank. But I think most of the distress
is actually in the large wealth I family market where, you know, I've played for quite some time.
And it's because, you know, people don't realize most investors are not holding these big apartment
complexes as long term holds. They're buying them to flip them. And so they bought them at low prices.
And, you know, I full disclosure have bought, you know, many properties in at low prices as well.
And, you know, the intention was when you bought them in, you know, 2022, 2021, we're going to flip
these in, you know, two years. We'll renovate all the units. We'll sell it to a new buyer. We will
have created a lot of upside on the income and then interest rates changed. And so even if you've
got a loan that's really good, you know, most loans on properties that are being flipped are done
with, you know, two to five year financing. Short term paper. Short term because you're flipping,
right? You're not only missing for 30 years. So you're not going to put on a mortgage that's a
30 year mortgage. You can't actually get them in commercial. But even if you had a a Freddie Fanny,
you know, 30 year amortization and a 10 year loan, even if you got them at really low interest
rates, Michael, when you try to go sell that property today on paper, the new buyer is having to,
you know, borrow it seven. And so it, they can't pay as much and your taxes and your insurance
have gone, you know, way up. So you're in a eyes down. So what this means is that even really good
operators and really good properties on paper are down about 30 percent or up to 40 percent. So to
your 30 percent haircut. So these banks, you know, they're not extending anymore. So the mantra was
survived to 25 and extend and pretend and the banks would just let you go another year and wait for
the Fed to cut rates. And I don't know if you remember, but in 25, I said, I think it's going to be more
like pray to heaven. You make it to 27. And now I'm like, here, here we are. I've got a couple
properties. Again, full disclosure, where, you know, we've got rates that will reset and not
able to pay investors dividends right now because we've got mortgages that are going to go up
and our debt service payments going to go up. And if rates continue to go up because inflation,
we won't be able to find a buyer at the price that we need to not only get out of the loan,
but pay back all of our investors. So it's a really, it's a really difficult situation for commercial
real estate asset holders. And, you know, you just have to hope that you can manage it so well
and keep, you know, pushing up rents to cover the additional expenses. But at some point,
when you have a slowing economy, you know, the renters are tapped out and they can't afford the
rental increases. So there will be huge opportunity because it's significant distress and commercial
real estate. But, but you have to be very, very careful. Don't just buy into a syndication because
someone says, I'm getting it at a 20% discount to the last donor. Well, should you be getting it at
a 40% discount? And what is your interest rate? And, and are you getting it in a way that that
de-risk's it for your investors? So there, you have to know what you're doing to make money
on commercial real estate, you know, falling. Yeah, this just, it feels to me that this is the
perfect storm to finally flush the system because there are a lot of bad deals done. Not only
commercial real estate, but private, you know, company financing. Yeah. Because again, when rates
you know, doubled essentially almost overnight, there were just deals done that made sense at 3% that
don't make sense at seven. And, you know, that refinancing is coming due. And what I thought is banks
were going to just extend and pretend. And now with, you know, the threat of a rate hike,
they're just like, okay, we're done. And I've seen banks do this before. I saw banks do this in
2010 and 11. I bought several apartment buildings for 50% off or more because banks just gave up.
Right. And that's what I'm starting to sense right now. So again, I'm, you know, I'm fortunate
enough that a month ago I went out and raised almost a million bucks to, you know, increase the
kitty. So I'm getting excited for the opportunities that are coming. Yeah. And that's a really good
point. It's important to that you have liquidity. Again, you know, I talked about in the beginning,
at least six months of your expense, but if you're an investor, this is when real money is made,
is when you're, yes, you need a hedge and yes, you need to protect, you know, from the downside
or protect against inflation with some of your portfolio. But if you're an active investor like we
are, you know, you want dry powder, as they say, you want liquidity so that when things are on sale,
and when that fear is high enough that prices are down enough that it makes sense for you, you need
the cash to go take them down, especially in an environment where lenders are going to be nervous
and tight, they're not going to give you as much LTV. So you're going to have to put more money down
in order to capture those deals. And so liquidity is extremely important right now. So don't go spend
it all on things you don't know, you know, in the market, like save some dry powder so that you can
take down deals when they, when they materialize. Yeah. And then the last thing I saw a headline in
the Wall Street journals this morning, basically saying great news real estate investors. If you have
the stomach for political risk, you too can get 30% discount on real estate today. Now in fairness to
the headline, they were talking about folks like stocks like invitation homes. But what I want my
audience to realize is I agree with that statement, right? There are so many people afraid buyers and
sellers that the only people left standing are my people, right? The people that will write
disrespectful offers. They know what an average deal is. This is, this is the time. If there was
ever a time on a to write, like truly disrespectful offers, it's right now. Yeah, absolutely.
We're actually in real estate because there are not a lot of buyers who can buy at, you know,
six plus percent interest at prices where they are today. And so there's more properties being
delisted and taken off the market now than I think ever in history. If I remember correctly,
I don't remember, you know, early 70s, late 70s, but I think we've hit records where there is,
you know, a significant amount of inventory and no buyers. And so your competition is limited.
And therefore, those that really need to sell, you have the best opportunity to get those things
at a really good basis today. You know, where it was harder to do that before. Yeah, this is the time
again. If you again, you got to make sure you have a reserve security six months is on a said,
yeah, you got to make sure you can do what you can to protect your job. But if you are in the
market to shop and invest, go to the Uncle Warren, right? Buy when others are afraid, right?
Get greedy when others are afraid. And it's it's coming. I definitely think it's here in residential.
It's coming to commercial. Yeah. And you know, some of us will take advantage of it. So I hope
that's you. Absolutely. Yeah, this is the time. And that's the thing you have to remember investor
psychology is you're going to be afraid when everybody else is afraid when the news is afraid.
The best thing that I ever did in 2009 when AIG was shutting its doors and I had lost a lot
of money in my 401k and was losing my job. As I said, you know what, I'm going to I'm going to start
buying real estate. I already had real estate, but I'm like, I'm going to buy more and I'm going
to cash flow and I'm going to, you know, and I got properties at great prices and made some cash flow
and then built that up slowly because it was an environment, you know, different today and to
some extent, but I see a lot of similarities. And so being able to run into the fire when
everybody else says, what are you doing? You're crazy. Is really where the wealth is made is
buying cheap. And you can only do that when when there's fear and don't feel like you have to
pick the bottom because if you can get a good deal and you can get it at a basis that makes sense
at an interest rate that makes sense and maybe some creative financing. If it works today,
it's going to be a good deal long term. And if things get cheaper, then hold on to the property
that you bought today and buy more when it gets cheaper. But don't wait to time the bottom,
just like in, you know, in stocks, you want to kind of dollar cost average and keep doing really
good deals. But don't do mediocre deals just to do a mediocre deal. Couldn't agree more.
Anna, where can people find you? Great. You can find me here. You can find me on social media at
on a Kelly REI mom. And for real estate and wealth coaching and consulting, you can find me at
on a Kelly investing.com. Thank you so much. Have a good week. You too.
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