Almost every day – or at least every month or so – another country’s leadership announces restrictions on money getting out of that country. There can be various reasons for this. Sometimes it is just that they don’t want capital flight – and other times it can be that the leadership needs the money of wealthy people in order to fund other initiatives, i.e. Venezuela, Russia, and, most recently, Saudi Arabia.
Certainly, if you are in a country that has announced initiatives to control outflows of capital or is under autocratic rule, it is likely that you would be trying to figure out how to get your money out of the country to a safe location.
What about other countries with autocratic leadership that have not – yet – announced capital controls or wealth confiscation? Wealthy people are more likely to be attuned to world events and world risks. So one would think that people in those countries would be starting to think that it might not be the worst idea to move money out, ‘just in case…..’
And what about countries that don’t currently have autocratic leadership but might have such leadership in the future if political events turn out a certain way. Maybe citizens with wealth in those countries might be wondering too.
And oh yes – let’s not forget wealthy people in countries with leadership that is just fine, but with stagnant economies. There are fewer places they can send their money as, by definition, they will be excluding all of the autocratic countries I just mentioned. If they send their money into these places, they might not be able to get it out. Once again, I see the money flowing right here.
And finally, what about great countries where wealthy people just want to diversify. The result is the same as the preceding paragraph. There aren’t a lot of choices. And, yes, again, more money flowing to the U.S.
In some of these situations, money will flow here quite legally and properly. However, in other situations – the first few mentioned above — the odds are that those with wealth to protect would be thinking about how to move their wealth legally, but if not legally, then likely illegally if they have no really good alternative.
Money leaving autocratic – and non-autocratic — nations and flowing towards the U.S. is obviously nothing new, i.e. it has been going on for years; however, my belief is that rather than a wave cresting, it is, if anything, gaining in strength. Yes – my view is that the wave of money coming towards the U.S. is growing and not slowing!
What does this mean for U.S. real estate?
I see two things:
First – it would point to continuously rising prices, especially in gateway U.S. cities.
Second – it would point to a lot of shady transactions and attempted shady transactions.
What should real estate players do? Two things:
First – don’t let this wall of money pushing up prices push you away from your good underwriting. The fact that other players are making a rational choice to overpay – based on their political circumstances, should not push U.S. real estate players to overpay when we don’t necessarily have those political circumstances. Said another way, don’t fall prey to the greater fool theory that because prices are rising for the foregoing reasons it means that the underlying value of the item in question justifies its price. And said still another way, the wall of money flowing into the U.S. pushing up prices will come to an end at some point, at which time the pricing could fall precipitously.
Second – in view of my prediction of increased efforts of frantic wealthy persons in other nations trying to get their money out, and the obvious benefits to third parties in assisting them in doing so, I suggest increased scrutiny of who you are dealing with. In this regard, I suggest that U.S. real estate players be “over-careful.” So called “know-your-client” and other protections should be increased. It is never worth it to take a risk of breaking U.S. laws to capitalize on this otherwise potentially beneficial situation. And, to belabor the point, turning a blind eye by pretending not to see something that has a funny smell to it, and hoping it will be ‘okay’ to claim ignorance if the matter is later challenged, doesn’t work either, as when it all comes to light everyone’s reputation is burned and sometimes irreparably.
Third – ‘if you can’t beat ‘em, join ‘em.” What I mean by this is that in a gold rush the people selling picks and shovels always do well. This means that U.S. real estate players with the reputation and ability should consider working with the foreign money in an advisory, co-investment or other similar capacity. To be clear, I am not advocating taking advantage – I am advocating the opposite; namely, being an honest U.S. teammate to help the foreign money be invested safely in U.S. real estate in a win/win manner.
That is my philosophizing for today.
A last thought – if you feel the need/desire to speculate, maybe buy Bitcoin. Jamie Dimon is no fool and he said the following about Bitcoin:
“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,” he said. “So there may be a market for that, but it’d be a limited market.”
So if my theory that there is a wall of illegal money exiting autocratic regimes, it may result in pushing up the price of Bitcoin.
To be clear I am NOT advocating buying Bitcoin – and I don’t intend to buy it myself – but it might be a fun ride for the pure thrill of gambling and not having to fly out to Las Vegas.