The Behavioral Real Estate TRAP

BAWB - The Bay Area Wealth Builders Association
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TIMES: Networking & FREE PIZZA until it runs out Starts at 6:30 Pm
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The Behavioral Real Estate TRAP
What if some of what we thought was investment skill was actually a period of unusual economic tailwinds?

For roughly a decade, from about 2012 through 2022, business owners and investors
were rewarded for a particular set of behaviors:
- Borrow
- Leverage
- Expand
- Scale
- Buy assets
- Keep your money working
- Take more risk to generate more return
And for a while, it worked.
Many services businesses and practices grew and sellers received
increasingly high multiples when they chose to exit.
Real estate appreciated.
Stocks appreciated.
Private equity flourished.
Credit was plentiful.
Capital was cheap.
And the lessons from that decade?
Bigger is better. More is the goal. Conservatism loses.

But many are not becoming increasingly convinced that these are the wrong lessons.
Because 2012–2022 wasn't normal. It was atypical.
It was an extraordinary period aided substantially by government monetary and fiscal policy, aka, massive stimulus (debt).

After the 2008 financial crisis, the Federal Reserve drove interest rates DOWN toward zero and began massive quantitative easing.
The Fed's securities holdings grew from roughly .5 half a trillion dollars before the crisis to approximately $4.25 trillion by the end of QE3 in 2014.
Then came COVID.
The Fed's balance sheet ultimately approached $9 trillion while Congress
simultaneously injected trillions more into the economy through fiscal stimulus.

There were legitimate reasons for emergency intervention in both crises.
But there were also consequences.
Cheap money didn't just stimulate economic activity.
It changed behavior.
It pushed investors farther and farther out on the risk curve.
It made leverage look safer.
It supported higher asset valuations.
It rewarded expansion.
And it conditioned an entire generation of business owners and investors to believe
that double-digit returns, rapidly appreciating assets and cheap capital were somehow normal.
They weren't.

That's what some are now calling I call The Behavioral Trap.
It's bias on a massive scale.

Many naturally assume that what worked over the last decade will continue to work over the next one.
But what happens when the environment changes?
Interest rates are higher.
Inflation has found strong footing.
Debt and the cost of debt is much greater.
Demographics are changing in a negative trend.
Globalization has declined dramatically.
Geopolitical instability is increasing.
And government debt service is becoming a much larger share of the federal budget.

This isn't any partisan observation.
Republicans and Democrats have both participated in building this house of cards.
And the numbers are becoming difficult to ignore.
The Congressional Budget Office currently projects federal debt held by the public
to rise from roughly 101% of GDP today to 120% by 2036 and 175% by 2056.
Even more striking is that net federal interest expense is projected to rise
from approximately $1 trillion today to $2.1 trillion in 2036.
At that point, interest expense alone would nearly equal all federal discretionary spending.

Eventually, arithmetic wins.
We have Social Security.
Medicare.
Defense.
Interest on the debt.
And everything else we've promised ourselves that somehow the government will pull
another rabbit out of the hat and provide.

Something eventually has to give.
Taxes?
Reduced benefits?
Means testing?
Higher retirement ages?
Persistent inflation?
Financial repression?
More money creation?
Probably some combination of all of the above.

But here's something many have yet to learn:
Don't assume government intervention is going away.
Quite the opposite.
When the next major recession, banking crisis, credit event or market disruption arrives,
the political pressure will force Washington and the Federal Reserve to intervene again.
We've conditioned ourselves to expect it. There are always bailouts.
Privatize the gains — socialize the losses.
The next intervention could create another period of significant asset inflation.

But here's the catch:
The starting point is very different this time.
More debt.
Higher interest expense.
Larger entitlement obligations.
Less favorable demographics.
Greater geopolitical instability.
And considerably LESS fiscal room for error.

That's why Investors need to be very careful about asking:
"Where can I still get the returns I used to get?"
That's the wrong question.
Because chasing yesterdays return in today's environment
may require taking substantially more risk.

The better question is:
"What return is today's environment willing to give me at a level of risk I can afford?"

And there is one more question, particularly for those of us who have already accumulated enough:
Why am I still trying to maximize the return in the first place?
At 40, sure, you're an estate builder. To pursue Growth is the norm.
At 50, you're in the compounding period of life.
At 60 or 70, the objective is more likely shifting toward preservation, greater options and stewardship.
Creating wealth and stewarding wealth are not the same job.
That's where "How much is enough?" becomes much more than a philosophical question.
It becomes an investment question.
The biggest danger may not be that the world has changed.
It may be that our thinking hasn't changed with it.

That's The Behavioral Trap. It's for real.
The question is, will it trap you?

Join us at BAWB to discover ways to avoid this Trap and Safely move forward.

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