Sam Zell on real estate investment and inflation now

The 9/11/13 Wall Street Journal has an article tilted “Once Voracious Zell Puts Less on Plate.” Google that title to find a copy on-line to read.

During my senior year in college I chose real estate investment as my career. Not writing about it; doing it. And I did for 23 years. I still write about it. www.johntreed.com/realestate.html

Sam Zell of Chicago is a prominent real estate investor who specialized in buying troubled real estate then turning it around. According to Forbes magazine, he is worth $4 billion as a result of his success doing that.

Here are some pertinent quotes from the article along with my comments in red.

[Zell views] prices as remaining too high…

I have been telling my readers for years that prices falling from their 2006 peak does not necessarily mean they have fallen enough that they are now bargains. I urged readers to focus on the cash flow the property produces and to look at markets on a deal-by-deal basis to find bargains, not to assume the subprime crisis turned almost all deals into great bargains.

Zell says he has a low of 30% of his personal investment portfolio in real-estate investments, down from…half…in 1990.

That is only a half useful piece of information. What is the other 70% in now? Later in the article it says natural gas, emerging market real estate, and a distressed debt fund. I would dismiss each and every one of those as very bad ideas. Gas is a single commodity—indeed a highly political one. The only way to invest in commodities would be to buy in advance for your personal use or to own a diversified portfolio of commodities as a hedge against inflation. Unfortunately, there appear to be few proven ways to invest in physical commodities long-term. Most such investments appear to be new derivatives called ETFs which I think also have high political risk as well as little history of how they perform in financial crises. Emerging markets are typically a gaggle of polluted, corrupt, undemocratic, disasters. The word “emerging” is aspirational, not descriptive. It is false advertising. Brazil, for example, has been emerging since the beginning of time but never quite seems to emerge. Distressed debt, like all debt, is a USD-denominated asset. Investing in USD-denominated assets in 2013 is borderline suicidal. They are the worst things to own during high inflation.

We’re dealing with a world that is dramatically more volatile and that requires more caution and care than before.

That would be the point of my two most recent financial books: Best Practices for the Intelligent Real Estate Investor and How to Protect your Life Savings from Hyperinflation & Depression, 2nd edition.

Zells says that the “government’s so-called quantitative easing program will come back to haunt the country.”

I have been yelling that from the rooftops since 2010 when the first edition of my hyperinflation book came out. Only I would say that “haunt” is too weak a word. The federal government and the US dollar (USD) are going to melt down with financially devastating results.

Zell’s main point is that property values will stop rising when “Quantitative Easing” ends.

I have said that as well, but the situation is worse than that. Any interest rate increases, such as those we have had in the last several months, lower property values of all capital assets including real estate. Furthermore, the great danger of “Quantitative Easing” is not merely its cessation but its weakening of trust in the dollar to the point that we are now in jeopardy of some shock to the financial world tipping us over into hyperinflation.

Zell gives some unexpected advice to a student questioner at the end of the article. “Go to medical school.”

Uh, that would be about as dumb a decision as you could make. Doctors now come out of medical school with mind-boggling debt. And they are about to be sold into slavery by Obama care. In the event of hyperinflation, the real amount of that debt would disappear, which is good, but you would still be trying to buy hyperinflated groceries and such with the price-controlled money Obama let you collect from federal skinflints.

Mr. Zell seems unaware of the hyperinflation danger and the steps required to manage that risk.

John T. Reed