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Band-Aids All the Way Down

April 2023 Insight

It is believed that the phrase “Turtles all the way down” originated in the early 20th century when British philosopher (and mathematician and astronomist) Bertrand Russell welcomed audience questions after giving a presentation on astronomy. A woman in the audience stood and refuted a portion of Russell’s presentation by claiming the earth was not suspended in space, but rather was a large flat object sitting on the back of a turtle. When Russell asked what the turtle was sitting on the woman replied, “Well, its turtles all the way down.”

It has been a relatively slow month in the world of economics and real estate. This perceived slowdown may be due more to our team’s focus on closing out the first quarter (while also trying to wrap up tax season preparation), but I have still taken time to scan the headlines from my normal reading sources. There is growing consensus that the US will have a recession (most think it will be mild). Most pundits believe the bank failures of March are outliers, that we are not in danger of a banking crisis, and softening inflation readings have most believing the Fed will increase rates only 25 basis points in May and then stop for the foreseeable future. All this information is mildly interesting, but nothing of enough consequence to change investment decision making processes or business strategies.

It was a surprisingly strong quarter for our portfolio operations. The portfolio produced the highest revenue in our history (on a normalized basis) other than Q3 of 2022 which included some large one-time revenue items tied to CAM reconciliations, and our delinquency was by far the lowest on record (which of course supports the higher revenue). Net operating income was not record setting, as expenses continue to grow (especially insurance), but still very solid.

Additionally, our annual (and relatively informal) portfolio valuation as of December 31, 2022 was completed during the quarter, and despite the general market malaise, we saw a decent increase in market value.

And yet, and yet…I find myself a little pessimistic. It obviously isn’t the portfolio performance. And really, it isn’t even the economic situation. Make no mistake about it, there is a large part of the economy already in a recession and my sense is we will enter a full-blown recession by the end of the year (though it won’t be identified as such until months or quarters later). At the base level recessions are personal things, and even a full-blown identified recession doesn’t mean that I (or Altus) will have negative economic outcomes. In fact, based on everything we see, and with our portfolio being largely unimpacted by the increase in interest rates, there is huge opportunity for us on the horizon.

No, my pessimism isn’t the short term, even with the recession on the horizon. My pessimism lies squarely with the sociopolitical situation in our country.

Our political parties have completely failed us. One party claims to be all about tolerance, but then treats anyone that has different opinions with complete intolerance, even to the point of trying to get people fired or publicly disgraced. The other party claims to fight for freedom, but then tries to restrict freedoms that aren’t in line with their political footballs de jure, even on stupid things like restricting the use particular words. Both parties have election deniers in positions of national power. Both parties have leaders that are either actively ignoring the law (governor of Arizona), or, as legislators that are encouraging executors to ignore the law (House of Representatives from both parties). National leaders (and presidential candidates) from both parties are dealing with legal issues tied to hiding (or trying to hide) nefarious actions from the public. We have elected officials discussing the physical dividing of the country. The parties are censuring their own members who dare to think on their own and vote differently than their party would like. Elected leaders don’t hardly speak to each other, and when they do it isn’t to find a solution, it is to score political wins. The majority of Americans, though an ever-shrinking amount, sit between the political extremes and have no one representing them as each party moves more and more to the fringes to try and pick up the marginal voter. One look at the three leading 2024 presidential candidates tells the story. If this is the best the world’s superpower can come up with…

I don’t read a lot of news stories, and I certainly don’t watch any – the networks aren’t reporting the news, they are openly pandering to their viewers. I do scan headlines across a broad range of publications however, and that is often enough to understand more than I wish I did. Once in a while a particular headline will catch my eye and I will click through. This was the case last week when the current president released his 2022 earnings. One thought I had was in reference to the presidential salary. It is ridiculously low. Granted, the base salary doesn’t tell the entire story as a four-year assignment provides basically a 50% annual pension for the remainder of the president’s life. But still, even taking that into account, it is a pittance compared to the private sector. The CEO of Alphabet made ~500 times what the president made last year, though that is certainly an extreme. Maybe if we provided better compensation, we would have more qualified people applying for the job.

But even as it stands right now, the president’s salary, and in this case adding in the salary of a well-paid spouse, puts the president into the second highest tax bracket (and an effective tax rate of 23.8%). This puts the Bidens in the top 5% of earners in the United States. I have no problem with that, as I also want to be a high-income earner each year. But the president is currently and actively trying to raise taxes on the high-income earners (the so called rich) to fund social programs. Just as I think it is hypocritical for the lawmakers that are in favor of high taxes to be trying to repeal the SALT taxes, I can respect a high-income earner who wants to raise taxes on high income earners. Until I saw how much was given to charity – which easily could have been the same social causes that he wants taxes to pay for. At 3.5% of income, it is far below the percentage of income most readers of this Insight give away each year (at least the ones I am familiar with). I’ve heard the argument about rich people being able to give away more of their income. In this case the president is rich, but miserly. And from his position of miserliness, he wants to tax others for his causes that he is unwilling to back up with this own plentiful means. [To be fair, I also know many people give away substantial amounts of time and money without deducting it because they are doing it for the cause, and not for the deduction. If the President is doing the same, the extra generosity wouldn’t show in his taxes and my criticism in unwarranted.]

And it gets more fun. The administration has used their authority to add a “fee” to the cost of borrowing money to buy a home. But not for all borrowers, just borrowers that have a credit score over 680. This isn’t a fee; it is a tax. A tax paid by people that were responsible and paid their bills on time. To subsidize people that didn’t. This isn’t even a tax against the “rich”. This is a tax against anyone with good decent ok credit that is trying to borrow, including first time borrowers. A full seventy two percent of the population has credit scores better than 680.

Band-Aid, after Band-Aid, after Band-Aid are being applied to the serious wounds that inflict our country. Seventy six percent of voters say that America is falling apart and 62% of voters feel that the Unites States is in a crisis. Twenty five percent of young Americans (millennials and younger) describe democracy as a “bad” or “very bad” way to run the country. We have a shortage of housing, rising crime, social security teetering on insolvency, sky-rocketing mental health issues, elected officials who don’t believe in the sanctity of law, and so much more. And while the wound festers, rather than deal with source of the wound, we add more band-aids.

Every-day citizens who show up, work hard, and try to be a solid part of society are bearing the brunt of political insanity. It is easy to pick on the President because the President is the most visible of political figures. But the other party is trying just as hard to divide rather than unite. One Band-Aid (most often specific to their voter base) after another. Band-Aids all the way down.

There are many historians, geopoliticists, sociologists, economists, etc., that have long forecasted the current societal strife and governmental decay due to reoccurring historical patterns that have occurred over hundreds of years. So far, I haven’t seen any of them that feel we are now closer to the end of the process than the beginning. Things will break and eventually will be rebuilt, but we have no idea what that might look like. And we have no idea how bad it will get before it gets there. Anyone who lived through the Civil War would say things were really, really bad. Most who lived through the Great Depression spoke of the difficulties of obtaining even the bare necessities of life. We are still able to reach into society’s collective memories to learn about the struggles of the 1970s, though it seems younger generations rarely ask, and the older generations have largely tried to block it from conscious reflection. Each of those periods of turbulence came with new economic and societal paradigms that would have been hard to predict in the years immediately preceding the change. But in each of those changes the country was able to survive, and hopefully we can do so again.

Despite my overall enthusiasm of the short-term investing prospects, there is a part of me that wonders if we (being Altus and also separately being my wife and me) should be more focused on preserving wealth and investment value rather than trying to build it. While wealth preservation certainly may be appropriate for some investors based on their individual life situations, those decisions are specific in nature and not societal. There are a couple issues with us a having a broader wealth preservation mindset (when taken at the expense of pursuing investment returns).

The first is that Altus is heavily invested in the success of our investor community. While there are certainly some of our investors that may want to focus on preservation, most of our investors are not there yet. For those that are not yet there, if we were to change our focus away from producing returns and towards protecting equity, we would be abandoning those that are earlier in their journey, including many of our employees.

Second, we have no idea how the new paradigm that comes out of the social turbulence will look. Gold bugs would say buy gold and put it in a safe. Well…the government confiscated all private holdings of gold during the Great Depression (1933). Cryptocurrencies? Their volatility makes them a poor store of value. Additionally, governments (China) have already outlawed them and there is no assurance the same won’t happen in the United States. Debt? Probably not a bad place to try and tread water but there are dozens of examples throughout history of forced debt jubilees, and some respected analyst and economists have raised the same as a possibility for the US in our current environment. Stocks? Business holdings? Land? Who knows how extreme the new paradigm will be. But at least with investments into active assets (stocks, businesses, debt, real estate) we should be making returns while we wait to discover how the new paradigm will directly impact us.

Plus, wealth taxes, asset seizures, etc. are going to be less painful in absolute on more assets rather than less assets. Just like I would prefer to pay millions in taxes each year because it means I am making a lot of income, if something as crazy as a wealth tax is to go into place, I would rather be paying that tax on a high amount of wealth than a small amount of wealth. And if capital gains or investment income tax rates go up substantially, I would rather pay those rates on lots of gains and income rather than a little bit. At the end of the day, in nearly all conceivable outcomes, I end up with “more” if I start with “more”. And with that “more” I am better able to control how and who I can help.

Crazy times, and who knows how it ends. First is the upcoming “opportunity of a lifetime” period of distress. After that…we will have to wait and see; and make the necessary adjustments when it is appropriate to do so. But where or how our capital is invested doesn’t change my philosophical conviction that it needs to be invested. I am invested. Altus is invested. And it is our job to make sure our investing community can be wisely invested.

Happy Investing.

About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at fjinks@altusequity.com.