Lions and Tigers and Bears (or bulls), OH MY! How will a dramatic effect to our monetary system affect our industry, our economy, our society, our contracts, or the world in general. Recent events with the “Occupy Wall Street” movement, the American political scene, the “Arab Spring”, the issues in Greece and Italy, the IMF and G-20, has made me start to contemplate the effects of a global crisis on the multifamily industry. The main concern that I have is that as an industry we make long-term contractual agreements that are predicated on the existence of a currency known as the dollar and the value as we now know it. Now don’t take this post to even insinuate that I believe the dollar will fall or that our economy will fail. What I do believe is that there is an exceptional amount of “chatter” about currencies and a “unified currency”. The success or failure of the Euro has been debated ad nauseam so I don’t intend to continue that here. The one thing that is undisputable, is that it started as a way to equalize exchange rates in the European Union and to stabilize an economy . The fact is that the Euro quickly shot above the dollar in exchange rate and has remained there for almost a decade.
This has prompted me to think about how the exchange of currencies affected contractual obligations. The only way to stay ahead of the curve is to look to history. I think that as prudent business owners and managers we should be looking to protect ourselves from the possibility that there are a whole group of people in New York and Washington, that believe it is time to do a “currency swap” and/or “end the fed” and some of those believe that it should be to a unified world currency that would be immune to exchange rates from the unified countries represented. I am not here to share my opinion on this, but I do believe that it could be in our foreseeable future and it is our obligation and fiduciary responsibility as asset managers to prepare for the possibility of a new currency whether it be in our own country or unified.
Ask yourself this question, what if the reserve announced that the dollar would cease to exist in 6 months and you now can exchange your dollars at the bank for the new currency. We have leases that refer to a monthly rent amount in dollars, late fees in terms of dollars, and any other amenity charges in the terms of dollars. Now if the truths that were perpetrated in the 17 countries using the Euro as currency hold true, there will be “continuity in legal contracts”. This means that a mean or baseline will be established that will rule when it comes to contractual obligations. But what if this does not work in the favor or fairness of the contract holder, i.e. the asset owner? What we know is that we can add language in our leases that afford us a little bit of control over the favor of the fairness. In absence of preparation we will be held to whatever the law of continuity is and it will be legal and binding on all of us. We must protect our interests. I don’t believe that this is imminent, but I do believe that we live in a world that is simply a butterflies breath away from catastrophic meltdown, and there may be no other choice than to do something drastic.
The next thing I am dramatically concerned about is what if inflation starts to run, do we have the ability in our lease to protect ourselves. I think we could be pushed into a situation of hyperinflation by the recent actions of the fed (simply printing 7.7 trillion dollars unknown to our government or any of us), or the actions of our current political climate, or this insane political season that we are in or any combination of the three. The question is, in the case of hyperinflation, where the majority of our expenses and cost of doing business go up dramatically overnight, what can we do to increase our revenue stream. Your resident that is paying $600 per month for his 1 Bedroom apartment, will find it a real bargain if he now is paying the same thing for a meal at Applebees or for a tank of gas. What if he just signed a 12 month lease with you and he gets this “bargain rate” locked in for the next year. Good for him, but not so good for you. If you don’t believe this can happen, look at the history of what has happened to practically every fiat currency in the history of the world. In nearly every case of hyperinflation in recent history (Poland, Germany, Brazil, Zimbabwe, Greece, and dozens more), the “tipping point” that signaled the impending event was when a country borrowed 40 cents of every dollar they spend. Today, the US is borrowing 42 cents of every dollar we spend. Look at food prices, which are up 34% in the last year, according to The Economist.
The one thing that is for sure in my humble opinion, the Federal Reserve cannot “print” our way out of this mess. It is the manipulation of the open market that has led us here and as with everything in the universe, it must “right” itself. We are beginning to see this in the housing market since the bursting of the housing bubble, we have seen it in the tech space since the bursting of the Dot Com bubble, and we now must see it in the currency space. Something must give, I think that we may see the dissolution of the Federal Reserve in the next few years, and we may see the reclamation of a gold standard to our currency. I think that as an investment manager, it is imperative that we protect our investors, and smart multifamily professionals will be watching closely for the “writing on the wall” and will be the early warning system for our owners and investors.
I didn’t write this post with the intention of scaring anyone, as with everything in the history of the human spirit, it has not killed us, but we should be prepared to enter into a very tough time to do business. I think that we should seriously consider our long-term strategies and really consider the “what if” scenarios.
I would love to engage in some thoughtful conversation on these concepts in the comments below. Many of you may disagree with some or all of these scenarios as being really potential, but we have been surprised by much of what we have seen in this short 11 years of the 21st century. Just one man’s fears – food for thought.
