The Real MF Guys Show Episode #13 with Chris, Eli & Nathan owners of Atlas Multi Group, focusing on inflation, treasuries and riding the market. The Real MF Guys Show
Inflation impacts everything that we buy on the equity side, everything we buy hard asset wise and even what we shop for at the market. A factor that impacts inflation is the trade deficit. We import more than we export and have more dollars going out than coming in. All of our factories have been outsourced due to cheaper labor overseas. Other countries get trillions of our dollars.
“What is a country? I mean it's more than just the sum of its people, it's really the sum of its production and economic terms. So if you don't really produce anything, if you're not really manufacturing something that is sold here or abroad,
So why would they outsource all that labor? You can claim that it was outsourced to keep labor costs and the cost of goods down. In reality what that does over time is these countries, they get a ton of our dollars and then they bring it back over here and invest in equities, treasuries and real estate. What we’ve seen since the crash in 2008/2009, is those dollars go out, then come back in the above-mentioned forms of investments and drive up prices. Maybe not prices at the store, but it does drive up asset prices.
I always thought “that the primary cause of inflation was the Fed printing money and the secondary cause was money creations through bank loans” - Eli.
So let’s say you deposit a hundred dollars and nine of your friends also deposit a hundred dollars, now the bank has one thousand dollars. They can now lend out ten times that and then take interest on it and that’s how the banks make money. Unfortunately this is completely false and just isn’t how the system works.
Basically, what they're doing is they're creating money out of thin air, and that's so powerful because of how many banks are out there and how many millions and millions of people come in and get loans for various things? Once you start down that rabbit hole, where does it end? It’s so important to know that banks are making these loans, because where does the money come from? The answer is nowhere, they literally create the currency on a balance sheet somewhere.
So if the Feds print money and just give it to the bank, does it really get into the country? It doesn’t, it never actually gets outside into the real world. So in essence the Feds can print almost an unlimited amount of money. If they then increase the reserve requirement and tell banks that they now have to have fifty percent reserved, it would never actually cause inflation because that’s just dollars on a ledger.
How does the whole Treasury scheme work? Our treasury will have a budget that they overspend, the Fed can’t just print money, so how does that money get paid back? They create treasuries. Those treasuries are then bought by big banks and they hold on to them for a time until the Fed prints more money and buys those treasuries back. They're buying those of their own market, so to speak, and spin affecting the supply and demand ratio.
So when a bank needs to hold a risk free asset to balance out their ledger because they have a million dollars in loans out there and need to have a million dollars in assets, what do they go into? They go into treasuries as it is by far the best risk free asset out there in terms of ratings. Treasuries equal cash.
So with all these things going on in the market today, why Multifamily? Suppose our residents are having a problem making their payment. Well, we’ve underwritten in a way that we have a break even occupancy and a break even rent. Say we’re charging a thousand dollars for market rent, but it’s underwritten that we can go down to six hundred a month and still make our payments and cover our expenses.
If the economy then crashes and people can’t make their payments, we can lower our payments to where we can still operate. Your money is protected for two, three, four years or however long it takes to recover and then we can go back to normal operations. So it’s a hedge against economic issues.
When you really think through it, if money becomes scarce, meaning inflation is happening, what are you going to pay first? For most people it’s food and rent. So with multifamily, it’s one less asset you have to worry about surviving an inflationary environment. However just like anything else, there are people not operating this way so you still need to know who you’re placing your money with.