Welcome to our latest episode! Today, we’re honored to host Alastair J. Macdonald, a renowned advisor to entrepreneurs, investors, and business owners. Alastair is a TEDx speaker and the owner of Parallax Strategic Advisors, where he provides economic, social, market, and financial forecasts to private equity, hedge funds, and endowments globally. He’s also the editor of The Parallax Report and Chairman of the Board at Chengeta Wildlife International, an organization dedicated to elephant conservation and anti-poaching efforts.
In this engaging discussion, Alastair shares his unique perspective on the evolving global economy and investment landscape. Drawing from his experience in Africa and his work advising top investors, he offers insights on navigating uncertainty, the implications of rising interest rates, and the future of U.S. housing and commercial real estate markets. Alastair also explores the potential opportunities in Section 8 housing, rare earth commodities, and global equity markets, while reflecting on the critical role of adaptability and contrarian thinking in times of economic change.
If you’re looking to gain actionable wisdom on investment strategies, economic trends, and market dynamics, this episode is a must-listen, Tune in now!
HIGHLIGHTS OF THE EPISODE
00:00 – Welcome to the Big Mike Fund Podcast
00:19 – Guest intro: Alastair J. Macdonald
03:28 – The U.S. political system and its global implications
08:55 – Search for certainty and self-trust in uncertain markets
13:40 – Rising interest rates and their economic impact
17:24 – The role of gold, silver, and the BRICS nations
22:00 – Challenges in the U.S. housing market
27:48 – Opportunities in Section 8 housing and government support
33:10 – Repurposing commercial spaces
40:25 – The overvaluation of U.S. equities
47:21 – Emerging opportunities in rare earths and global markets
53:05 – Closing thoughts on contrarian investing and value-driven decisions
If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.
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Full Transcript:
Intro: Welcome to the BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.
Mike Zlotnik: Welcome to the BigMikeFund Podcast. I’m the Big Mike, I’m Mike Zlotnik, and today it is my pleasure and a privilege to welcome back my good friend Alistair MacDonald. Hey, Alistair.
Alastair MacDonald: Good to be with you again, Mike.
Mike Zlotnik: Thank you so much for coming on a podcast. We just saw each other in Dallas at the Freedom Founders event. Thank you for finding time. I know you’re busy. You are. You’re always busy.
Alastair MacDonald: It’s easy to make time for you, Mike. No issue at all. It’s good to be here.
Mike Zlotnik: So what’s new? What’s kind of like, Oh, what’s different? We’re recording this before the election. It’ll come out after the election. So it’ll be an interesting, um, conversation on the outcome of the election.
Sounds good. So let’s start with what’s do in, in your personal world and then, um, we will, uh, discuss election and, and everything else, uh, afterwards
Alastair MacDonald: in, in the order of things most meaningful to me, my, uh, kids are well and healthy. Son is studying chemical engineering. My daughter’s currently volunteering in the jungle of, uh, Uganda in Central Africa.
I’ll be going to see her in, uh, about 10 days, two weeks time to spend a couple of weeks with her, then a trip to Qatar, uh, she also is fluent in Arabic, so we’ve got some adventures planned to see the gorillas, ride some camels in the desert and, uh, and connect with interesting people. So, uh, other than that, family is all healthy and well, uh, can’t complain on my side.
Um, looking back. Looking out at the widened aperture view, I, I think it’s probably because I’m, as you know, born and raised in Africa, a multi-generational African, and I, I tend to view politics with a certain level of, uh, maybe a different perspective than most of the voters in the United States. Uh, one of the most striking things for me, coming to the US as Zimbabwean as an African immigrant.
Is noticing over time. It took me quite a while noticing the level of corruption and backhandedness and dirty politics that for some reason I naively thought was uniquely African. And I realized that really, it’s just a degree of sophistication. It’s just that the developed world is a little more sophisticated.
And it’s a self serving ineptitude and corruption at the highest levels, whereas in Africa, we wear it on our sleeve. It’s not surprising at all that they’re all profiting from the work of the masses. So as a result of that, I tend to view. I tend to view politicians very differently. I see them as social followers as opposed to social leaders.
You know, Overton, uh, the, the, really the wise mind he passed away in 2003 and the man for whom the Overton window is named, uh, captures it perfectly. I think just the sense that there’s no, there’s no leadership at all in standard politics, because by definition, they ascend to the position according to popularity.
Popularity dictates that the more that they give the masses that they want, the more they will hold, quote, power. And so, I think this is an important distinction because it allows me to look at all candidates with an equal level of disdain and, uh, not necessarily holding them in high repute. These are professional panderers that are here to sell us on a future that apparently only they are qualified to lead us to.
Historically, that’s not the case. So, regardless of who we’re cheering for to get into office, I take comfort knowing. That, uh, the U. S. President is, thanks to the design of the American system, one of the least powerful leaders in the developed world, according to the infrastructure of the checks and balances around the system.
So I think even if it goes badly, regardless of who you’re cheering for or against, know that they are somewhat disempowered by the structure put in place by the founders. And I take comfort that,
Mike Zlotnik: uh, that’s a great wisdom. That’s, that’s, that’s really. I think you talked about information. Noise and other things.
And I was just reading a book it talked about data, information, knowledge, and wisdom. And, uh, the wisdom is exactly what you just brought. It’s not the information, it’s not knowledge, it’s really the collection. It’s the experiences. It’s the Knowledge combined with experience to come to the wise decision that it doesn’t matter who wins.
We just need the election to be over, to have some predictability and stability. And thanks to the founding fathers, our constitution at least provides some reasonable checks and balances in the system. So from that perspective, I just wanted to add, everything you said is exactly true. I grew up in the Soviet Union.
You already knew the results of the election before, beforehand. So, you know, why even get upset about it, where the politicians were sort of a part of the system, and the system just, just, you either were growing with the system, or you were removed by the system. So if you were growing with the system, then you follow the system.
And, and then you, you were a servant of the system, you were a beneficiary of the system. So same thing, true is here, I mean, as you said, back to the corruption, the greater the power, the more, uh, control, absolute power corrupts absolutely. So at least here, we don’t have an absolute power, but the corruption does exist.
And it exists on many levels and you almost can’t eliminate corruption entirely. It’s an impossible, it’s a utopia type of a society. So, from that perspective, I’ll just say, thank God election is going to be over very, very soon. At least we’ll know that we’re done with that, uh, uncertainty. We’ll be in the world of more certainty and kind of, um, we’ll all adapt to whoever wins.
Alastair MacDonald: Yeah, I think there’s, there’s a lot there in what you said, not the least of which is we’re acting as if, excuse me, we have no idea how each candidate is going to govern yet. Both candidates have governed at different levels for the same amount of time. Uh, the idea that this is going to be so radically different is part of the promise that we have to be sold on that this time I’m going to do it differently, which, which both candidates are saying, uh, and I realized that that’s, you know, um, It’s slaughtering some sacred cows because people really do fall in love with the story.
We so desperately want to believe that we will be led to the promised land. Uh, it’s which I think this is connected most importantly to this issue right now that are arising. I think of us as kind of in a bull market of uncertainty. Uh, I think that it’s well underway and I believe that that’s just beginning regardless of who moves into office or who stays in office.
Uh, The whole premise of entrepreneurs, investors, uh, business owners, et cetera, this desire for certainty is at its root in my assessment, evidence of a lack of self trust. And I say that because if we are, if we trust ourselves, uh, you know, a great sea captain doesn’t necessarily set out from the harbor rooted in fear, simply an openness to any possible variants that could come their way and knowing that it’s going to require a dynamism to navigate.
Whatever storms or smooth waters lie ahead. So I know for myself, if I ever feel a sense of fear or concern, you know, certainty is just a feeling. There’s nothing permanent about it. It’s a, and we, I know whether it’s in business or in parenting or relationships or anything, if you’re looking for certainty, it’s typically behind action, even if the environment changes radically, but we trust ourselves to take, you know, what many have referred to as right action, at least in Buddhist terms and.
Uh, Zen terms, right action tends to obviate a lot of the brain damage that we get seeking certainty. It’s just a matter of taking action. And so I think at its core, if we truly believe in ourself, then the more disruptive an environment, the more opportunities will present themselves. You know, at its root, the very premise of the term entrepreneur, of course, was the first Shared by Jean Baptiste Say, who described an entrepreneur as somebody who moves resources from areas of low return to high return, or the original translation would have been of low impact to high impact.
So in social, in periods of social dislocation, which I’ve had the privilege of living through several times. Uh, rampant civil war, civil strife, the collapse of a government, the collapse of a currency, uh, the biggest hyperinflation in history, the biggest asset deflation in history. I’ve had the privilege of living through all of these things.
And I know that the more disruptive it is for others, the more cracks and opportunities there are to, to Jean Baptiste Say’s point, move resources from areas of low impact to high impact. And so if nothing else, we should get more opportunities for that. They’re just so unlikely to be in the same place they were
Mike Zlotnik: on that topic. Where are the new opportunities coming? Uh, again, we’re not seeing hopefully that kind of disruption the way you saw in Zimbabwe, which was a civil war and a lot of death, a lot of death on the streets. People are dying and the businesses were destroyed. And it was a. Uh, revolution of sorts, right? It was basically, uh, society was breaking down to be rebuilt.
Hopefully, we’re not going to see this in the U. S. But what opportunities do you see ahead? There’s a few things that are fundamentally shifting. And I want to move the conversation into sort of interest rates and then, um, U. S. bonds. Because I, a few interesting things happened recently, and I’d love to hear your thoughts and comments.
So, first observation was that the precious metals I’ve had a great bull run, uh, let’s call it from the beginning of, well it’s been, it’s been a long bull run, but definitely a very serious bull run from the beginning of 24. Until now, right? We’re recording this in, in late October. The, uh, and the interesting theory is that the BRICs, BRIC countries, have been buying a lot of precious metals to create a competing currency or, or cryptocurrency to the U.
S. dollar backed by gold or something like that. And this is, this is the theory that’s circulating. And on the other side, something really interesting happening too, uh, foreign central banks are not really buying U. S., uh, treasuries. Uh, they’re not keeping their reserves in, in the U. S. dollar. So, uh, I’m just curious if we are seeing really fundamental shift, uh, uh, in, in, in what’s really happening with the U.
S. economy. And this will lead to the next question, long term direction and interest rates, whether we, we ever going to get inflation back down to the target two to 3 percent and the interest rates come down. I don’t know. We’re going to be dealing with the continuous. Accelerated or not accelerated, but elevated inflation for many years to come because the deficits continue to grow and our debt to GDP ratio and all these ratios continue to get out of whack.
So, uh, US is beginning to look like a third world country from a balance sheet perspective. I’m just a little, little bit concerned. That how fundamental these changes and is this a big deal? I mean, you live through Zimbabwe and you, you saw ultra accelerate inflation. You got to pay for lunch before the lunch.
Otherwise it’s going to be 20 percent more. So I’m just curious, uh, how you’re seeing things here in the United States from all the things that I mentioned.
Alastair MacDonald: Definitely large secular changes are at play, and it’s still early days, uh, it’s still early days in the secular rise in interest rates, for example.
And very few individuals are running the simulations of the heightened probability, and every day this probability is rising, that the larger turn in rates was up in July, August of 2020 through 2021, depending on. Where on the yield curve you were looking at it. Uh, I think that that move is meaningful.
And so long as we continue to remain above those lows, we have to consider that we’re inside of a new bear market in bonds and a bull market in rates. If that makes sense, uh, rising. period of interest rates. If that’s the case, then entire, uh, financial advisory models and, uh, uh, Monte Carlo simulations, portfolios, asset managers, and so forth would do well to adjust their expectations accordingly.
Uh, and I feel like that still hasn’t percolated through the collective awareness. Evidence of that is the fact that the Fed is finally, uh, as of a month and a half ago. Started chasing rates back down, which is what they do, as you and I’ve discussed before.
Mike Zlotnik: But the market is doing the opposite. The market is in the opposite.
Alastair MacDonald: Yeah. So to be fair to the history of the data, it’s not an, it’s not unusual for the long end of the curve to rise after the Fed has begun lowering rates before we see a secondary turn down. The issue is the, it’s speed of change. It’s rate of change. Rate of change and speed of change is the critical piece for interest rates.
As you know, from your experience in the industry for so many years, it’s not a three to four, three to 4 percent increase. It’s not a 1 percent increase. It’s a 33 percent increase. And so that’s meaningful at the margin, which is where most of these more speculative, more leveraged, uh, investments will feel it.
There’s some concern there that no one’s really prepared, uh, personally for a rising interest rate environment. Uh, besides that, we certainly are getting indications from gold, which I’ve been a fan of now for some time, and I’m still bullish on, uh, I think that the gold and silver miners are grossly lagging behind, and they’ve got a huge gap to close on the upside, or gold has to come back down, but the miners are still relatively very, very underpriced, and I’m still a fan, uh, so we’re getting signals from the precious metals market, from the interest rate, Uh, you know, bond market that the larger trend in inflation and a protracted maybe depreciation of the dollar over time is at play.
Having said that, the probabilities of the BRIC nations somehow forming an alliance, a durable competitive alliance that would replace the U. S. dollar, I mean, we have to have really bruised our brains in some way to believe that any one of these nations are truly sovereign or powerful enough. To carry the weight of the world’s reserve currency, this is just absolutely preposterous.
You know, the idea that they will get together and they’re going to bankrupt the U. S. They need the U. S. even more than it needs them. The United States domestic chart of accounts is, is, you know, we love consuming our own stuff too. I think one of the reasons that we’re seeing a pullback in global treasury purchases It’s because this secular rising interest rates is a global phenomenon.
Everybody is experiencing squeezed, uh, increased in cost of payments and so forth and cost of capital. This means that there is just less capital swilling around, even amongst global central banks to divert capital toward foreign debt, particularly if. Those interest rates are rising and the bonds are getting, you know, knocked down in price.
So it follows, at least in my thinking, a fairly logical progression that we would see a continued pullback. Now, the danger here is, of course, George Soros old principle of reflexivity. So long as this continues, Individuals will expect it to continue. So long as they expect it to continue, it will continue to happen at speed.
Uh, and so there’s, there’s some, some awareness there. I think that we could probably be a little more pragmatic. The U. S. reserve currency is not just a position of privilege. It’s a position of profound responsibility that very few will ultimately pay the price for more than the U. S. saver or the U. S.
consumer. So I, I, uh, I don’t know that there’s any. Candidate qualified to rise up and, and hold the mantle the way the U S uh, the U S economy does historically speaking, the most powerful nations financially are those with the biggest weapons. And that remains the United States and those nations that are powerful, such as, you know, Singapore and Israel and so forth on a relative basis, had their own weapons or they have people looking out for them.
So I think that the global order of power there is, is incredible. Is in a good spot. What worries me is the rampant dislocations of alliances over the course of the last eight years as a function of America’s renewed push toward nationalism. Because what this is doing is creating power vacuums around the world.
Ukraine is an example of it. Taiwan sits and faces the risk as you and I speak, uh, Iran and Israel are biting each other’s necks. All of this, all of this is exactly. A function of the power vacuum being filled by local opportunists around the world, coupled with that, we bring in multi national capabilities for say nuclear weapons in suitcases.
And we’ve now got a multipolar world. All of which is armed, heightening the risks for us from a game theoretician, uh, perspective of increased conflict at a very large scale. And that is real. Uh, and I’m afraid neither candidate that is running for office right now is speaking to those risks.
Wow. That was, uh, we started with, uh, Uh, with one point, and you cover so much, so I do concur, just a couple of quick comments, I do concur that BRICS, uh, are not there, it’s not, you don’t have a united nation, you have a collection of, uh, multiple countries that, that, that, that want to put up resistance to the U.
S. leadership, and obviously China has great ambitions for the next world leader, if you follow Ray Dalio’s, um, uh, the principles of navigating changing world order, they would like to be the next. Uh, great empire. So from that perspective, all that makes sense. And these conflicts and the wars, it’s kind of interesting, uh, big following, um, uh, Ray Dalio, the power gets challenged.
The power gets challenged on multiple fronts as part of this evolving, uh, changing world order. So I hear you, but let’s go back to the, um, the United States and, um, sort of short duration, short. interest rate direction versus the long. The long, I think we’re all pretty clear, it’s the rates are going up because of the so many factors.
The chances are the rates need to be higher with a high inflation devaluation of the dollar, etc. Maybe the whole world on a long term basis is going to high interest rates. But in the short term, do you see rates sort of retreating? Again, the Fed is cutting because they’re cutting The bond market may disagree, but at some point, uh, as long as the Fed is doing what they’re doing, then you have a difference between the, uh, mid to long duration bonds versus what the, what Fed funds rate is doing, and then the short, short end of the curve.
So it feels like in the short run, we have room to go down, but in the long run, these long forces, long term forces will, Bring the interest rates back up higher with a high inflation. So what do you think? Is that an accurate theory? Um, and then, uh, as far as sort of your feeling on the real estate, and I know you’re more of a macro and you look at the world, but your thoughts on, let’s call it residential real estate in the United States versus the commercial, commercial real estate that’s been severely impacted by higher for longer interest rates.
So now as the rate’s coming down, there’s a bullish feeling in the commercial real estate. Um, we, we, you know, I’ll add one more comment and then we’d love to hear your commentary. A lot of the commercial mortgages just cannot afford to refi. With the maturity cliff type of hanging over them. So from that perspective, we need the rate somewhat lower to enable these, uh, loans to, to refi.
It’s a rate of change. We went from zero to five and a half so fast as paper is maturing. If you can’t refi it, you’ve got a crisis on their books. Uh, and a couple of banks already, I was reading an article on Friday in your community bank, even Wells Fargo, they started to increase. Allocation of loss, uh, uh, reserves to cover some of these losses because of higher interest rates are causing grief on these, uh, performance of these commercial assets.
So
it’s very real and a difficult environment. So long as everybody’s convinced that rates will come down, you know, hang in there, nobody’s doing anything in case they don’t. So there appears to be very poor risk mitigation at a lot of the larger banks who’s still sitting on massive unrealized losses. I think something that is useful.
For all of us to bear in mind, and I think will be useful for your, uh, your audience is this, the just speaking to the principle of the Federal Reserve cutting rates. Well, the, the reserve, the Federal Reserve is cutting rates because they have to. And here’s an important distinction that nobody is making.
Mike Zlotnik: Why do they have to cut rates?
Alastair MacDonald: They have to cut rates for this exact reason. Remember that the rates that we are, that they are quoting or that they’re quoted for Is the overnight rate lent between them as a function of a line of credit with a select core group of financial institutions, approximately 12.
And then it goes out from there. This is the font of all capital, or at least credit flows in the U S system, the bulk of them, at least access to cheap capital. This is the irony of America’s free market capitalist system is that we rely on a central bank to give us a line of credit. Uh, I mean, you know, it would be funny if it wasn’t so serious.
Uh, but that aside. The Fed has to cut rates and here’s a simple example. If they are lending to say Bank of New York or Chase or something like that at five and a half percent as they were just recently, but the six month T bill falls to four percent or the three month T bill falls to 4. 5, What this suggests is that capital is available to chase at 4%, 4.
5, but they’re overpaying by going to the Fed, the Fed has to stay competitive, or that line of credit window that they offer is completely broken. They have to chase those rates down to, to make themselves competitive. As I say, Or the line of credit is just, it’s pointless. And so they will continue to cut until they overshoot on the downside, as they have always done.
Just as they will in the previous cycle of rising rates, continue to raise until they overshoot on the upside. They’re constantly following the market. That’s that’s what’s going on. And so they will continue to do that so long as capital is available to those institutions amongst themselves at a better rate.
Or amongst anyone else, sovereign wealth funds, et cetera, et cetera. This is a big issue. Uh, skipping over to real estate, the rate limiting step for, uh, at least residential real estate in the United States is the affordability crisis. And it is a crisis. We are paying, at least home owners are paying significantly more than the equivalent, the rental equivalent than they did at any point in history.
Except for perhaps December of, excuse me, December of 22, I believe, modestly higher. But the point is, besides home purchases as speculation, which is, you know, which is a huge virus in the United States right now, starting in the 70s and just exploding in the last five, six, seven years with the arrival of iBuyers and so forth, is institutions that have Completely distorted the function of shelter and turned it into an item of pure speculation.
This is a problem. It’s creating multi generational dislocation. Gone is the homestead, raw farmland being turned into condos. You know, it has a long term, uh, we’ll pay a long term price for that. But nobody’s going to necessarily be speaking about that for many years. What I’m focusing my attention on is this affordability issue as a function of mortgage rates being so Uh, there is of course a narrative that we have a housing shortage that it’s really not intellectually honest in my assessment of the data.
This gap is higher than it was even at the last peak in 06. So when I look at that, that has to be mean reverting data. The beauty of mean reverting data is no opinion is required. It doesn’t matter what we think. We’re not assigning anything to it. We know just like the unemployment rate. That it will mean revert over time.
This matters because the narrative is the broader narrative in the, in the, the rooms that I’m in and the audiences that I have and that I’m, I’m joining are saying the inevitability is that rental rates have to be, have to raise dramatically. Or they don’t say dramatically, you say rates have to rise on rentals to make up the gap between purchasing and rental.
That’s not the case. This can also happen with property prices coming down to renters, uh, equivalent. So we said to ourself, is this the context in which rental rates can be raised? You can only do that in a, in a booming labor market, which is to say an era of falling unemployment numbers. Yet ever since July of last year, we have been inside of a, I think secular rise from 3.
49, 3. 5 percent up as high as 4. 2. And it’s like pulled back recently. So the larger trend in unemployment appears to have turned up. You cannot push higher rentals. And we’re speaking on the macro, you’re right, this is national data, there will be islands of specificity of different outcomes. But to the extent that we think we can, anyone thinks they can push higher rental rates onto a rising unemployment environment, they’re going to find themselves without tenants. I don’t think that’s the way to bid.
Mike Zlotnik: So this is really fascinating, uh, and that discrepancy between, uh, uh, ownership and Um, cost of to own versus cost to, to rent is, is almost at the historically highest point. Uh, although the rates just started to climb down, but the prices haven’t, haven’t been going down.
So you have incredibly expensive market, cost of financing haven’t risen. And, um, what you just Uh, outline is either the rental rates have to come up or the prices have to come down to bridge that gap. Is it can this gap stay at the elevated level or it’s all it has to revert to the mean those forces Have to the pressure is going to be applied until there’s a some kind of equivalent or or a balancing act between Uh cost to own versus uh cost to rent.
Is there any consideration for the 10 plus or 15 million migrants that were brought into the country. There’s a large aggregate demand for housing units. And, uh, the supply we’ve been under building that this is at least the theory that I’ve heard, whether it’s accurate or not, we’ve been under building for many years and the supply of housing units is relatively.
Uh, short versus the demand growth, even though you have population growth is not. It’s not driven by the U. S. birth rate, but it’s driven by migration. Uh, and you can open up even the whole conversation, why the border got opened so much, to bring in a lot of new population. Well, immigration policies were not working in a legalized manner.
Now it was kind of opened up, let’s just let the flood in. So, what I’m thinking is, uh, back to the, uh, Aggregate demand for housing units rental rates. Of course, we need we need people working. Otherwise, they can’t pay rent, right? Otherwise, you have, um, you have a situation where you US US is going to have to provide massive subsidies, right?
To support the population being able to afford the housing. So just curious, uh, any more comments on that and forward direction of, um, um, a lot of construction is being done. Thanks for listening. Transcription by CastingWords Uh, limited by the higher for longer interest rates. It’s another reason to cut because as you higher rates Uh cut the consumption, but they also cut the production.
They make production of new units difficult So that’s that’s the reason I believe the rates have to come down because you want to you want to produce more in order To produce more you need to have affordable cost of construction. So what are your thoughts?
Alastair MacDonald: Yeah, I think that, uh, the concern there is the qualification of the lender, excuse me, of the borrower, the qualification of the borrower.
So I’ve seen, you know, we’ve heard bandied about of this election cycle, the immigrants, the, the way that illegal immigrants, uh, between seven to 20 million, that’s a big spread. Those are just the numbers that I hear. I don’t have an opinion. I don’t have a qualified opinion.
Mike Zlotnik: I heard 10 to 15, but it could be seven to 20.
Alastair MacDonald: Whatever it, yeah, and I have no qualified opinion about whether that’s true or incorrect. But if we look at this, we say, well, okay, these individuals are going to require government subsidies to legitimize and stipends to legitimize their applications, or they’re going to be fraudulent applications, you know, so until and unless these individuals are legitimized by some version of a, of a political process.
And then beyond that, are given seed capital to actually go out and buy a home. They will continue to remain trapped in this kind of wrinkle in political time. Uh, that is certainly not a position anybody would want to aspire to. As an immigrant myself, this is a very important matter to me. Uh, you know, The event that we were at together last week, I shared my personal story, uh, my younger sister, college educated, you know, six figure earning, tax paying, family raising person with a job offer here in the States has been waiting 19 years, uh, just for her interview. So, it’s very near and dear to my heart.
Mike Zlotnik: She can run over the border, she can get here.
Alastair MacDonald: Yep.
Mike Zlotnik: That’s a crazy story.
Alastair MacDonald: The news makes it look a lot easier than it really is, I think, to do it legitimately. So I say that because this matters to me. And at its core, the issue here is that of qualification.
Historically, citizenship was earned outside of those that weren’t born in the United States. And so we’re, as I shared at the event, I feel like we’ve broken, you know, The citizenship peg, meaning that we were in, we’re actively participating in the devaluation of American citizenship. And as somebody that actually earned it, this is meaningful to me and it doesn’t sit right.
Having said that, I understand that the United States, given the decline in birth rates and so forth, has a legitimate need for foreign born individuals like myself to arise, to arrive in the United States and contribute. It’s that last word that’s critical. Contribute. So everybody, what I’m seeing, the concern here is that these individuals, I believe that they are here.
Let’s just assume the best. They want to contribute. They want to advance their station in life. They need to be legitimized. And so anyway, long story short, I can see whoever it is that comes into office next as a function of the populist demand. They’re going to need to figure out some way. And both parties missed this opportunity to pander either for or against a very large interest and rise of interest in the types of things that Section 8 housing was built for.
So I believe that Section 8 is actually moving into its own new bull market and I’m actually personally making some adjustments to anticipate profiting from that. I think that that is going to provide a sensible inflation hedge. For the asset, while at the same time, completely obviating any concerns of a continued rise in unemployment with government sponsored, uh, rents being, you know, being taken care of.
So I think section 8 has been vilified and ignored and laughed at and ignored for the last half cycle of the last 14 years of the bull market in real estate. And I think that section 8’s star is about to rise.
Mike Zlotnik: So on that topic, are you effectively projecting or predicting that Uh, a lot of these families, um, will need to get that section 8 government support, uh, to go out there beyond, uh, some of these currently provided housing.
Uh, units, which is, uh, you know, it’s, it’s almost difficult to believe these folks are living either in the hotel rooms or they’re living here in Brooklyn, New York. I, I, I see them every day and my daughter goes figure skating at the, uh, uh, aviator. It’s, it’s the figure, it’s the, it’s an old aviator field where the hangers turn into the figure skating rinks.
But you have a gigantic, uh, federal land and they build these massive, um, housing units, which is basically temporary. It’s like a, it’s like a, uh, They build these huge tents where they are living and it’s not a place, I don’t know how it’s going to be in the winter, but it’s no fun to be, uh, enjoying cold weather.
Uh, and at some point they’re going to need housing units, but I don’t know, even Section 8. There’s not enough product. There’s not enough supply. Affordable housing is a massive shortage. So even if, how do you see the Section 8 of, I guess, government subsidized housing manifesting? Because basically, new product is way expensive.
Nobody builds for Section 8. That, that product is just not, it’s too expensive to build. Even if they build affordable, they build B2R, B2R type of communities. Uh, but they’re much more, you know, they’re not designed for these type of government subsidies. Uh, so you need older product, older supply that, that gets renovated, somehow brought back into the operation. I’m just kind of thinking out loud.
Alastair MacDonald: Yeah, and I’m not sure. So I believe that this has to be addressed, uh, but it has to be addressed and it can only be addressed politically, where to house these individuals. But there’s many things that should be addressed that politicians are just not courageous enough to do.
They’re not incentivized to do, especially once they come into office. Uh, so there’s many things that should happen that don’t because of their own self interest. Uh, it, it’s, it’s a function of the system that we have. Uh, having said that. Regardless, my position here, my bullishness about Section 8, uh, is, is hedged in as much as even the increased rise in unemployment, which I believe, and I went public in real time in July, August of last year of 23, saying, I believe this is the bottom in the unemployment cycle.
I believe that the larger trend is rising. And with that, there will be more individuals in need of Section 8 type stipends and support from the government. Uh, and I, so I think there’s, I’ve got kind of, I’ve got my, my horse’s handicap there. I think that either way, the larger trend is up. You’re absolutely right, the issue of affordability and, and new builds.
Nobody’s building, no one’s doing new builds for Section 8. Right now, and what I’m describing is a multi year trend that I believe is going to establish itself here in the next 18 to 24 months born of necessity, the political stumbling will continue, but there are no shortage of warehouses of commercial spaces of so forth that I can see.
Particularly in some of the older cities in the United States being repurposed by incentives from politicians saying, Hey, listen, we’ve got a budget to help make this happen. And, and incentivizing developers and builders and so forth to pivot toward these types. And, and I’m just using section eight as a, as a collective term to capture the need for government support to response and housing. I’m not a fan of this, but I see it as somewhat of an inevitability over the next half cycle.
Mike Zlotnik: That’s interesting. Um, Yeah, it’s, uh, it’s not a matter of a choice. It’s a matter of reality, and the reality is happening, and the affordable housing is a critical component. I know we’ve kind of, we’ve gone for a little longer than, than expected.
We probably can do this for another hour. Uh, but a set of final thoughts, uh, any other kind of big trends for, let’s call it, 25 and beyond. In other words, we’ll have The new elected government here, uh, section eight demand, and maybe strength for the program will continue to, to enhance, um, any other big trends, obviously interest rates in the short run fed cuts, by the way, any more comments on this, so you believe in the short run, they’re going to execute the, uh, these cuts, uh, they, they, they laid out base case scenario, and I just wanted to hear your confidence.
Is this base case real? Uh, some folks. I’m thinking that this is, this is too optimistic. Will they get down from five and a half down to five now? Will they get down to sub 3%, 2. 9 over the next, call it a year and a half, two years? Is this a pretty clear path ahead? They, they have to, they don’t have a choice or they can keep going, going and then stop and reverse the direction because of some other data.
Alastair MacDonald: I think the real risk is what happens on the long end of the curve. Uh, you know, the Fed can do what they’ll do. Uh, what concerns me right now is this un inversion of the yield curve, and that, that is typically what catalyzes or signals the onset of the next recession. Uh, that’s been, you know, everyone talks about it, the yield curve inversion, but it’s really the un inversion is where the, the, the recession actually begins.
Mike Zlotnik: The long rates are rising while the Fed is cutting, and they Exactly. Yeah. And we’re starting Short duration up to, I don’t know, three, six months while the two year all the way through 30 year bonds, uh, the yields are climbing.
Alastair MacDonald: Exactly. And that’s what is needed historically, just data based. Uh, well, it’s that that’s what happens prior to the next recession. I say that I anticipated that the US would be in recession by now, and I’ve been wrong. So I take complete responsibility for that. It’s defied all the red flags. And the, the, the orange and red lights on my dashboard, a dashboard that helped me anticipate almost to the month, the peak in, uh, in us housing back in 05, 06, depending on whether you were commercial or residential, the peak in us equities in 07, the bottom in 09, these things that have been transformative for me in terms of forecasts, my dashboard appears to be signaling things that are not happening.
Uh, and this concerns me more. So having said that the uninversion in the yield curve is, is the most interesting. thing to observe in regards to rates. There is also, uh, there’s also a very convenient thing that we forget, which is always the case. We don’t like the lessons that were hard to learn, and we tend to forget them when we need them most.
And this is the most, in this case, the most Evident example of this is the sense that prices will rally if rates fall or at least hold steady. I heard the same narrative back in spring of fall of 05 and spring of 06 when I was cautioning my clients about a national systemic housing bubble. And I was alone at the time.
And the only response, the only people that could con, could concede that this could even occur said, well, that would only happen if rates rose. And I said, no, rates can fall and property prices will fall with them. And that’s exactly what happened. We saw mortgage rates and property prices fall all the way into the 09 and 11 lows.
I say that because Because the model that I was using for confidence was Japan, where rates had actually gone negative, and they still experienced one of the largest property price deflation and deflations in developed Western economies. So even if we do see rates on the long end of the curve come down in the past, and again, you know, if a forecast works 50 percent of the time, it doesn’t work at all.
The problem with individuals that are data selecting to say, well, that’ll only happen if, you know, It’s just not true. My point is, I think that the gap of affordability, uh, between renting and owning is so large, it’s historically been closed fastest by property prices coming down. And I, you know, I, I eat my own cooking.
I’m actively renting right now and have been, uh, for a gosh, two years, a year and a half. Uh, so I, I have some, I have some conviction about this.
Mike Zlotnik: That’s very interesting. So you, just a couple of things you said. One, your dashboard is saying recession is coming. It needs to come. It should come, but it hasn’t come. It’s been delayed, delayed, delayed. So you, it sounds like you’re still of the belief that, uh, as unemployment rate will continue to climb at some point, a real recession will happen. Right. I mean, if we, if we, if the trend is of the increased unemployment, uh, is real, then the recession should be real.
Because at the end of the day, people have avoided the recession because of the high employment, low unemployment. They all had jobs. They can, they can pay the bills. The moment you, you, you, you cut the source of income, you have substantial Spending cuts, you, you can’t spend, so from that perspective, that’s a risk, uh, yield curve is obviously un inverted, uh, and continues to un invert, uh, it’s going to be interesting over time, if, um, you always said, the Fed follows, not leads, but they’re following cutting rates, and the market is, is being, well, at least Last three months or two months since they’ve cut rates.
It’s been doing the reverse. So it’s going to be interesting. I’m just trying to foresee where the opportunities are, is the opportunity that the valuations and the pricing of residential may come down because of that massive gap between Cost to rent versus cost to own. And then on the commercial side, is this the reverse, where everything has already come down quite a bit, and as rates fall, the reverse might happen.
It’s a relative opportunity. Is, is the commercial a better opportunity today, commercial real estate versus residential? Um, how do you feel? At least, this is what I feel. I feel, I feel very similar, by the way. Residential on a relative basis is very expensive, and a commercial real estate that has Corrective valuations is relatively cheap, but it’s, it’s all, it’s all a matter of opinion.
If you talk to residential folks, they say, well, it’s still short supplied for many years to come, and residential will continue to climb, and commercial, you’ve got no transaction volume, you have no, the market is not established, you can keep falling. Right.
Alastair MacDonald: Yeah. Well, a couple of things that for clarification, uh, the talking about the fed cutting rates, that’s, that’s, they’re chasing the lot, the short end of the yield curve. They’re not, they, they, they’ve got zero control of the long end of the curve.
Mike Zlotnik: What if they start QE? What if they start buying bonds if they want to move the long end of the curve down?
Alastair MacDonald: Entirely possible. I think that’s probably a fair ways out. We’re going to need a heavy equity market drawdown before they, they have the temerity to do that again. Um, having said that, so that, so that where they’re cutting is on the short end of the curve and I, at the long end is, you know, answers to nobody. It answers to the collective, uh, expectation and assessment of risk. Um, outside of that. Yeah, I think that’s residential. I just, I guess I have an issue with, with data selection and there’s a lot of it, especially in the residential real estate space.
Again, I, you know, back in 05, 06, when I was coursing about a gargantuan housing bubble, people would say, oh, it doesn’t matter in my market. When credit contracts, it doesn’t matter where you are. It does matter in as much as you get different declines, different rising, uh, rates and so forth. But the, so there are elements of, uh, well, so that the affordability issue is the headwind to be addressed.
Individuals that are saying, oh, we’ve got a massive housing shortage, I believe are being affected Intellectually dishonest and not paying attention at the housing per capita index, which is really the trump card to use the pun. That’s really, that’s really the number to watch. And that number is back actually marginally above where it was at the previous bubble in 05 and 06.
So per capita housing is not signaling any sort of shortage of supply. Uh, so I, I remain, I remain concerned about, uh, residential real estate prices coming down. Uh, and it’s, it’s literally the way that I’m, I’m positioning myself. Having said that, the commercial space, I agree with you, with this one exception, which is, I believe that there are, or will be, that’s probably a better term, will be, probably in the next 18 months, opportunities in the commercial space in areas that are open to repurposing and rezoning those buildings, as opposed to just the straight assumption that it used to be an office tower and it’ll always be an office tower.
Jurisdictions, political jurisdictions. That have the flexibility and dynamism to induce developers to come in and, and, uh, make it easy for them to convert these, uh, to multifamily, family units. And so I think that there’s a lot of promise there. Unfortunately though, uh, you know, this, it’s, this, that’s likely to take some time and where it does happen, it’ll be in select rogue areas around the country where we have something that is very hard to find, which is a forward looking politician.
Mike Zlotnik: Very interesting. And by the way, the. Opportunity you’re describing is actually a very interesting opportunity. There’s a lot of office need to be repositioned into housing, but it’s expensive. Uh, these buildings were not built for plumbing, electric, and other, uh, parts. It basically needs a lot of government incentives.
And those politicians or especially small local markets where they can come up with big incentives, maybe even larger markets, it can make a big difference from that point of view that the government incentives could could drive the actual investment in the space. So,
Alastair MacDonald: and just to be fair, that this is speculative on my behalf, I’m not positioning myself that way, but I can see there will be a select group of individuals that will probably, should they find jurisdictions that are open to investing.
Kind of flexible perspectives. I imagine there’ll be individuals that will be able to make some particular projects work out really well. Uh, outside of that, my longer term trend, I’m still very bullish about Chinese equities. Everybody’s terrified. I’ve started accumulating them over the last few months.
Hong Kong, extremely cheap. I realize that’s not the purview of our conversation, but Um, back in the domestic side, hot assets, and, uh, I’m not a hot assets at any price person. Uh, I’m an owner of gold and the, and the miners and so forth, but I’m not buying them right now. What I am is protracted slow buyer of our rear earths, uh, lithium and so forth.
Uh, I think that those, I mean, those, some of those. Indices are down 90 percent over the last six or seven years. That’s an astounding bear market and everybody’s forgotten about them. Uh, so there’s still, there is still, uh, that what I’m interested in is finding, uh, raw land or storage, uh, opportunities in your space, you know, warehousing production facilities, et cetera, maintenance management of these types of rare earths and so forth, uh, storage and, uh, and so forth around the country, but it’s early days. But I’m, I’m bullish on that particular opportunity.
Mike Zlotnik: So you said storage of rare earths because they’re so cheap. So you’re looking to just buy the commodity and store it?
Alastair MacDonald: No, facilities that will be processing them, uh, shipping, etc. You know, repurposing, manufacturing, that type of thing. Specifically of the sector, which has been absolutely beaten down.
It’s enough. So has, uh, the, uh, the marijuana industry, the, you know, if you look at the ETF for, I think it’s MSOS just as a proxy, it’s not a recommendation. Just look at it. You know, you’re looking at an asset that has fallen 90%. It’s just, I mean, absolutely bludgeoned and everybody loved it back in the day, just like they did.
Mike Zlotnik: They over, over, over supply the market. I guess these extreme volatility. Uh, create extreme opportunity. So something that’s, that’s relatively cheap becomes a great buy opportunities and vice versa. So,
Alastair MacDonald: and I’m not bullish on the marijuana industry. I just point to it as a grossly beaten down sector that’s been bludgeoned for years that everybody was climbing all over themselves to get into just a few years ago.
Mike Zlotnik: Well, this is back to the wisdom, the contrarian thinking and value driven thinking is, is probably, uh, one of the best ways. Sometimes you’re, you’re, you’re ahead of the times. Sometimes you are behind the times. But this, this, this thinking is the way to look at anything. Um, and the same thing is AI. AI is hugely overpriced, overpriced.
But depending on who you listen to, they think it’s, it’s, it’s going to the moon. Um, until. It’s not so
Alastair MacDonald: exactly. Yeah. And really that represents the broader SMP right now. Uh, admittedly, it’s skewed heavily by the quote unquote magnificent seven that we’re going to call, and we’re going to vilify at some point in the future.
The, the, the oversight there for traditional investors, the index investors is they overlooked the fact that Just their buy and hold philosophy has put them in an extremely precarious situation because they are owning, any owners of large cap equities today, own companies that are trading at, with record earnings.
So they’ve made record earnings and they’re at record valuations. That’s basically, that basically means double leverage to the position. It requires both of these markets that are multiple standard deviations above the historical average getting even more ridiculous than they already are. And if just one of them pulls back to, uh, to the mean, the party’s over.
So nobody’s speaking about this. U. S. equities are absolutely Christ for perfection.
Mike Zlotnik: The Wall Street and all these big firms, uh, it’s the, it’s a payday for them to continue to, uh, uh, stroke that I don’t have to describe it. It’s just, it’s very lucrative and, and, and they want to maintain complacency because what they don’t want to have is capital, uh, It’s almost like this.
I’ve talked about this for a long time. What you just described is the fundamentally, uh, the best way to look at this. Earnings at the historic level, price per earnings at the historic level. There’s a lot of pressure. Anything goes wrong, the price for perfection. While there’s so much More stuff that’s trading cheaply, like you described.
And on a relative basis, this is where the capital should flow, but it’s not. It’s because it’s, it’s sort of, some kind of momentum play, and it’s not even clear. It’s the complacency that, that, that, people don’t want to take any action because it, it’s a recency bias, and complacency, don’t make the change because it’s working.
Alastair MacDonald: Exactly. Meanwhile, meanwhile, individuals like the CEO of Nvidia and many, many other insiders are selling record record volumes of their own stock. So they have to run the businesses that
Mike Zlotnik: they have incredible wealth in this stuff, right? So they need to move the money somewhere else.
Alastair MacDonald: But at the same time, is it possible that those that are working in the business know more about its future than we do? Historically, insider selling is not a bullish sign.
Mike Zlotnik: Well, we’ll wrap up on this. This is a lot of great wisdoms. This is what I love chatting with you. You have so many fundamental, uh, great wisdoms and, uh, observations. And, uh, you’re not paying attention to the masses. You always, very often you are contrarian, contrarian thinking.
You’re saying, that stuff is so overvalued, overpriced. Diversify out of that. Go buy stuff that’s relatively inexpensive. And at least reduce your risk, reduce your exposure. And, and consider, um, prudent diversification at the end of the day. If you’re not even, uh, looking for, for a great bargain. Thank you, Alastair.
Alastair MacDonald: We sell expensive things and buy cheap things. That tends to work out for the best.
We sell expensive things and buy cheap things. Well, if you are a value investor, but if you are a, uh, if you are a, uh, an expensive watch collector, you keep buying more expensive watches until they become even more expensive. Which suggests at some point when we’re buying it, we think it’s cheap.
Mike Zlotnik: I guess on a relative basis. It’s all relative, right?
Alastair MacDonald: Relative, yeah.
Mike Zlotnik: It’s not the price, it’s the value. Good, good old, uh, Warren. That’s, that’s, or was it even, uh, Charlie Munger Warren or, uh, the, uh, Benjamin Graham, right? It’s not the price, it’s always the value.
Thank you, Alistair. Appreciate your wisdom. Thank you for coming on the podcast. I’m sorry, we double the time. I guess it’s two episodes made in one.
Alastair MacDonald: I always enjoy our conversations, mate. It was good to see you last week and a pleasure to be here again today. Thanks for the invitation.
Mike Zlotnik: Thank you. Alistair.
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