The 18-Year Cycle

I’m writing this blog post from Wall Street (NYC) and it’s a good time to talk about market cycles.

Around 2002 six years prior to the Great Crash Of 2008, I read an article by Prof. Fred Foldvary who wrote in 1997: “the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.”

Foldvary’s prediction was based on a book that he wrote analyzing real estate crashes since 1800. The economics professor concluded that real estate crashes about every 18-years (give or take 3-4 year variations) with the exception of world wars (no real estate crash in the 40s) and currency collapses (there were two crashes in the 70s due to Bretton Woods).

The insight that the real estate market would crash in 2008 was invaluable… although I was not fully prepared for how the crash would effect my loan and realtor commissions as well as the negative effects on my construction company.

DISCLOSURE: Nothing on this blog is meant as investing advice… just mere educational pontification on my part. Oh ya… and all the photos on this blog are taken by my iPhone.

Unfortunately (or maybe fortunately for those that pay attention), the Fed does not seem to pay attention to the Austrian Economic School Of Thought. They should adjust for Credit Expansion and Credit Contraction Cycles and not just the consumer price index.

The Fed should pay attention to the rate of growth in nominal final sales to U.S. purchasers and look for deviations. The last three deviations from normal trends on nominal final sales measure of aggregate demand were the October 1987 stock market crash, the Asian Financial / Russian Rubble crisis (and collapse of Long-Term Capital Management) in 1998, and Fed’s liquidity injection to fight a fictitious deflationary collapse in 2002.

What the Fed did in those three deviations can be described as being irrationally exuberant over false indicators. The Fed over reacts to an economic crisis and over inflates liquidity into the markets that cause irrational exuberance in the real estate markets.

That the Fed uncannily does this in a consistent 18-year pattern is remarkable.

But I use these trends to my advantage. I look at investing like a NFL Football game. The first 4-5 years are Quarter 1 and would include the period 2009 to 2013. During this time, banks have collapsed and mortgages are not available. So goes my rule of thumb, “Buy real estate when no one can get a loan, and sell when everyone can get a loan.” I only acquire real estate in Quarter 1 and always sell in Quarter 4. For me, real estate is not a long term investment.

Other indicators are when purchase prices fall below replacement cost (the value that an insurance claim will repay) and when cash-on-cash returns over 24%.

SIDE NOTE— despite common belief to the contrary (and as a former top realtor this is almost sacrilege to say), your personal home is not an investment. You may have heard Robert Kiyosaki say this and it’s true. However, I still recommend you buy your dream home in a luxury area because of the prosperity identity that it provides. Read my last blog post for a discussion about the reptilian brain and limbic system.

In Quarter 2 (2014 to 2018) and Quarter 3 (2019 to 2023), it’s possible to make good money but also very risky to flip and land develop. From my experience, the risk comes from paying high interest rates IF utilizing hard money lending combined with delays from government interference, environmental issues, and permits. If you have the cash to avoid leverage with high interest rates, this could be a decent strategy. In Quarter 2 and Quarter 3, I prefer to be the hard money lender and invest in tech via my venture capital fund. Historically, keep in mind that we experience 1-2 stock market crashes in Quarter 2 or Quarter 3.

Finally, I’d be careful to invest in Quarter 4 (2023 to 2027). Indicators of Quarter 4 are zero-down subprime lending, mortgage fraud, and overbuilding by developers. Quarter 4 is the time to sit on the sidelines and wait. If you have long positions in companies, hedge your bets by simultaneously shorting these industries. You’ll need the help of a seasoned securities attorney to make sure that you’re 100% compliant with our laws.

Today… according to my perspective, we are in Quarter 3.

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