6 Year Real Estate (Economic) Cycle with Akhil Patel and AdaPia d'Errico

Welcome to Ladies Kicking Assets where we are empowering women and all of our audiences with education. We are really aspiring for women to take action on the information that they're receiving and just be educated. And gosh, what we've seen is that this is not just women that are listening to Ladies Kicking Assets. We have people of all people groups around the world, ages, male, female, listening to the information and to our guests. So we're so grateful for that. One of the things that I would stress is that you take whatever information you hear that you go connect with your CPAs and your attorneys and those folks who have all of the little letters after their names. That is who we are. We are all folks who are aspiring for more education and becoming, you know, better in those spaces. So today I just want to thank Courtney, who's my business partner, for being here with me on this great interview. And today we have Adapia d' Errico and Akhil Patel. And so I just want to welcome you both to our Ladies Kicking Assets Vodcast. And just a jump into some conversation that we're going to have today on our economy and just where things are.

Going, which that's a hot topic folks.

Are wanting to know. So having said that, open up the vacuum for some tidbits for us.

Well, it's great to, it's great to see you again. It's great to, it's great to be back. And as you know, I'm a big fan of and friends with Akil, who I'm really excited to bring to the Vodcast because ever since I met Akhil and started studying his material about the 18.6 year real estate cycle, it's completely changed the way that I approach investing, the way that I approach wealth and the way that I think about economics. And it's been a couple years and the material that they have is so vast and it's so important that I'm still, I still feel he thinks I'm a good student, but I still feel I'm not quite there with the magnitude.

There's so much.

It is, it's so much.

There's so much. It's so hard. And every time I think that I've gotten to this point where I've got a good grasp, there's like a curveball thrown and I'm like, dang, like reverse, oh my gosh, the reverse repo markets. I am still trying to figure out that. And I've tried reverse repo markets for dummies and I'm still, apparently, we, we need the super special edition for Courtney.

Well, you represent me too over here, all of us, so that is, that is a complicated space. I think so anyway. Well, ail you want to walk us through that? And you, you know what, what Atapia is referring to with this, with this process.

I think when you asked me that question, I was wondering if you wanted me to explain the reverse repo market.

Well, you can, you can if there's.

The reality is though, you don't really need to understand unless you're an investor in it. You don't really need to understand it in any great detail other than to know that it's a source of liquidity for banks. And when it dries up, banks can't extend loans anymore and then the whole system starts to collapse. So I think that's really the only salient fact you need to know about it. Other than that it's all, yeah, I.

Knew that's where they parked their money overnight and so I just wasn't really sure. Like how does that affect other markets?

Well, so, so okay, so I mean we're jumping right into the middle.

I know we did.

Banking system creates. I mean the money supply in an economy is created by the banking system when they literally just write a loan and that is the money that's created which is then deposited in an account and spent into the economy. Now banks need to pass reserves and other sort of assets to each other in order to make sure that they settle between themselves because you've got money moving around the system. And one of the ways they do that, I mean one way is via the central banks. So they have reserve accounts with central banks and they're settling that way. The other way is to loan and borrow assets from each other through the repo markets or the interbank markets or other markets which historically have had similar names. Now when there is some crisis of confidence, banks stop doing that to each other and the central bank has to step in and inject liquidity into the system. And sometimes it takes a bit of time to wake up to the fact that actually there's some serious problems. And typically it dries up towards the end of the economic cycle when everyone is over leveraged. Property prices are far too high and there's been too much extension of money, AKA money creation by banks for relatively marginal property schemes and that creates a crisis of confidence. Credit dries up, businesses can't access credit. Credit is a lifeblood of the economic system and then you get a full scale economic collapse. And that is basically the essential point of the repo markets. But if you were to go back to, for example, AD33 and read the account by the Roman historian Tacitus, he describes actually very similar process. Banks lost confidence, they stopped lending to each other and it resulted.

Yeah, this is not the first time we've seen this happen. This is precedented in other, other countries and other, you know, we've watched currencies fail and other things like that, and I think they're all tied in together. You said that really well. When that, that happens and the bank stop lending and that sort of thing, it causes everything else to kind of crash and burn. And so I, I'm definitely interested in your 18 point real estate cycle. So that's, I think there are so many people right now that are really just not sure of what to expect of 20. Are we in a recession? You know, what's going on with inflation? What's the Fed going to do? There's so many questions out there and I think the, the economy and what to expect from 2023 is such a huge weight that's kind of sitting on everybody right now. So I'd really love to kind of dig into that.

Okay, should we start with the big picture or.

Yeah, that's, that's great.

Okay, so the 18.6 year real estate cycle is really the 18.6 year economic cycle. So essentially what you have at the end of each cycle is a major banking stroke, financial stroke, currency crisis, and a major collapse. And then you have several years of trying to sort that out. The system resets and then you have another expansion which typically lasts about 14 years and then until you get to another peak and then another crisis which again takes four or so years to sort out. And this has been going on in the US since at least 1800 and even longer in the UK. And we talk about those two countries deliberately because they've retained their same form for the longest period of most Western or developed, quote, unquote developed countries. Typically it is, I mean, we refer to it also as a real estate cycle because ultimately the asset that gets most speculated in is real estate. And it's the asset that everyone anywhere on the planet needs, needs access to either through ownership or renting, to live, to work, to play, to do all the things that we need to do to live. It's also the scarcest asset in the sense that while there's no shortage of property, there is a shortage of property or real estate in the best locations or in locations where other businesses and other people are located. And so there is A sort of a monopoly pricing power for well located real estate, which supports speculation, which supports prices going up, which supports banks creating more and more money against that rising value, which exposes the banking system to an overheated real estate market which ultimately cannot keep going because real estate becomes too expensive for the economy to sustain. And when that starts coming down, the banking system then dries up and that's what causes a financial crisis. So it's a real estate cycle, but it's also an economic cycle. So then the question I suppose is where are we within it now? So I sort of outlined a 14 year expansion and a four year kind of crisis and kind of recovery phase. And the expansion itself is, you could argue, is divided into two roughly seven year halves and a mid cycle recession in between. And the mid cycle recession tends to be quite short and relatively easy to get out of. I don't mean it doesn't cause problems. I mean it's. Central banks and governments can engineer a recovery relatively quickly and then you get a second expansion. And typically the second expansion in that 14 year phase is the bigger expansion. There's more speculations, higher prices, things going further over the top, behavior being more extravagant. And that is where we are now. So a lot of the, I mean while there is no doubt somewhat of a slowdown in economic growth as we come out of the rather strange two to three years that we've all gone through, it is not a recession that will cause a crisis. In fact, in fact, if you were to stop reading the news and just look out the window and see all the enormous building that's going on and speculation and other things that is beginning is really sort of starting to get into gear. And you're looking also globally, so not just the United States or Europe, but you're looking to see what's going on in the Middle east and in parts of Africa and in Asia and so on. I mean you can really see that there is a global boom underway and that will continue for another three or so years to a likely peak around the middle of the decade.

I can, I can see that. What are your thoughts? I was at a conference a couple of weeks ago and they felt like one of the biggest opportunities that we were going to see in 2023 is distressed commercial real estate. Do you think that's coming?

I mean, real estate is a very locational asset and so it depends upon where you're talking about and what sort of commercial property you're talking about. I'm not an expert in either of those things. I have to say, I mean, I'm sure there are opportunities because the commercial part of the property sector is probably even more sensitive to economic growth. Things have slowed down, interest rates have been high. And of course it does put some entities out of business which then will release real estate. And also, you know, the cost of borrowing is quite high for a lot of, fundamentally for a lot of real estate owners. And so yes, I'm sure there are distressed assets out there. I don't know if it's. Things are widespread enough to call the entire sector distressed. I just don't know enough about it.

That's actually a really good point.

And so, yeah, so I'll, I'll jump in real quick here. The thing, the thing with the cycle and where we are in the cycle and on their website and in their materials they have this whole, it's called a clock and then basically like a chart or, or a map. And then, and then Akil, you're also really tracking a lot on like stocks and commodities. And part of this, one of the things that really stands out for me in the second half of the cycle, so the, the 2020 Covid crisis, that was the mid cycle recession, so to speak. So we're kind of like coming up and like coming out of it is we're, we're having that infrastructure bill that was passed for energy efficiency and like green building and all of that. That in my mind is how I'm relating the second half of the cycle to continued investment. Because that infrastructure bill and the energy bill, that is all creating jobs and that is going to create opportunities for housing and, and then it just builds and builds and builds and builds because there's still a ton of credit in the market. I mean banks are lending, except for Wells Fargo who decided to like take itself out of the market and maybe Akil, I'm curious what your thoughts are on that. Like they've shifted around their mortgage stuff, but I still see a ton of credit creation. And right now mortgage brokers are pretty excited about mortgage rates coming down. And there was an article in the Wall Street Journal just today saying that they're already seeing an uptick in mortgage applications. And it's just, it's just like we're coming out of this recession, this weird squiggle of COVID and then it feels like we're about to really ramp up, especially if interest rates, you know, normalize, if we stop the volatility, then people can start price discovery again, they can start investing again, they can start making moves. So I really Feel like we're in this like calm before a takeoff, personally.

Well, yeah, I think there's been a shift in what, you know, people were expecting this gigantic huge crash and burn of all of the markets. And I think everybody's kind of changing their outlook on what we're going to see over the course of this next year.

I mean they've, I mean, let's, let's be honest. I mean people have been typically, I mean, talking about experts have been typically looking the wrong way for the last of 10 years. So, so why would, why would 2023 be any different to any other year? I mean, but I mean, I sort of maybe slightly flippant comment, but you know, 2009, the cycle started around 2011, 2012, it's not every one day that it starts, but it's around that time when you have the low in US land values. And so I should say, by the way, it's a land cycle. So when property prices rise, it's not the building that's increasing in value typically it's, you know, maybe inflation means the build cost is higher, but it's really fundamentally it's land which is going up in value. Bottom of US land prices was around 2012, sometime 2011, maybe. No, we don't really measure land values, land prices, which is part of the problem, which is why no one sees the cycle. But anyway, you know, we, they, they, I still distinctly remember in 2012 they were talking about triple dip recession and so on. We had the Libor scandal, we had Euro, Eurozone crisis, we had, you know, all sorts of political shenanigans in Washington, other things around that time. Absolutely the best time to be investing. But you know, no one was really looking at that. You know, 2013, 2014, it was an era of low interest rates. It was, you know, the idea that actually we're going to get hyperinflation. John Paulson lost billions thinking that gold would go to whatever it was. And it crashed. You know, then oil prices were going to go up. They crashed in 2014. You know, the eurozone was going to collapse in 2015. It didn't, et cetera, et cetera, right? It was the era of low. It was just about quantitative easing and so on. But actually we've now seen that when quantity easing has been removed and we've had some of the biggest economic shocks that you could possibly imagine, things have kept going on. And this is basically how the cycle works. Because fundamentally what is driving it is land and people need land. People have money to acquire land. People have the ability to borrow to acquire land and they're doing so. Higher land prices induces greater construction. That is a major employer in any economy. Governments realize that the economy is shifting and it needs new infrastructure, it needs green technology, it needs faster broadband and all the other things that create a modern society. That investment goes in, it's very lucrative, it raises land values. That induces further construction. Prices get higher in central areas, so people look for other areas to live in. Maybe there might be some shifts in work patterns and so on and that new centers of population become favorable. And this is a very old story that happens maybe on the surface for different reasons, but happens.

Right. Very important piece that you just said, you know, with the shift in work patterns. I mean we have, we have all experienced that and seen that certainly from the last couple of years with COVID and you know, I know I'm in the Houston area, Texas and so you know, a lot of folks didn't have to go into the office, were no longer desiring to live downtown. They were able to move out where they had access to different styles of parks and whatnot and could office from home and, and even, you know, the housing market, people were converting bedrooms into offices or buying homes that already had, you know, multi purpose work styled environments built into homes. Because the whole workshop work life has completely changed across the globe. You know, that's just not in Texas, but I can just speak to that since, since I live here, you know, and I know in Dallas and, and in la, you know, in California, where Otapia's at. I mean, you know that, that is certainly true and you know, you're in, you know, London and so, you know, I'm sure you're seeing that same same thing. You know, folks are no longer having to directly go into an office. Many people still are. It depends on the, you know.

Well, we're seeing, it's interesting, we're seeing, we saw the shift out of London during 2020 and 21 and now we're actually seeing people start to come back.

Go back to the office.

I have friends that are being.

You want to maybe living in a. And I can't speak for small towns in America, but living in a small town in, in, in rural England is maybe not quite as interesting as being, you know, close to the center of town.

I speculate, I don't know, yours might be more interesting.

I have a friend that works for Fidelity and they are actually giving them like bonus like lunch money and stuff like that if they actually come into the office. To work. So they're being incentivized to be in person.

I mean, the thing, I mean, part of that, part of that shift actually is, is we, I mean, there is a global shortage of workers. And actually what's quite interesting, I remember, I remember seeing an article in 2020 about the economic consequences of pandemics. And they said one of the consequences of all pandemics in history is a shortage of workers. Now when we're talking about the aftermath of the Black Death in Europe in the 14th century, it was because, you know, know, most of the workers have been killed. And I, I was struggling to relate that to the experience of 2020, while serious, didn't have nearly the same fatality rate. But it's nonetheless the case that people have retired early, they've decided that they have different priorities, they don't want to be sitting in an office for the remainder of their lives and so on. And also, I mean, the other thing is that, you know, there is, you know, just many new industries opening up are requiring new people and people are reskilling and moving into different things and old industries have a shortage of workers. So you actually have to get incentives, you have to pay them properly. Most of what a company earns can't go off in shareholder remuneration or director remuneration actually has to be shared with office employees. So actually what we're seeing is something relatively similar to most, the aftermath of most pandemics in history. Quite interesting.

It is, it really is. And so, you know, as, as you had mentioned the cycle, you know, and where we were and Adapia, you had kind of spoken to that, you, you had mentioned something that I hope, hope was hoping that you could dive into just a little bit more, which was the behavior, you know, it folks, their behavior being more extravagant, you know, in this second seven year cycle, if you will, what might be just historically some generalities of some of that extravagant behavior. Are you seeing people buying more or you know, what are you seeing or what should we.

Borrowing more?

Borrowing more?

Yeah, no, buying more, borrowing more. Borrowing against asset price rises as opposed to earnings borrowing or borrowing to acquire things which have no earnings. So alternative assets, crypto, etc. Which you know more about than I do and speculating and things that really have no business being speculated in. So a good example from a previous cycle was Japan in the 1980s and there was a roaring trade in golf memberships. Even to the extent that there was something called the Nikkei Golf Exchange or something, I think it was for the Nikkei Golf Exchange and the value of traded golf memberships on that was about 200 billion, which was larger than the size of Switzerland.

Yeah. My gosh. Yeah.

Yeah. So this is the sort of behavior, you know, the record price at auction for a master painting or, you know, some. We've already been through the sort of paying silly money for a dog, an NFT of a dog. But there'll be an NFT or something else, probably even sillier.

An ape. Like a party yacht club.

Actually, I think, I think, you know, maybe, maybe it's a cycle too early, but in future there'll be, you know, bits of the moon that you can buy which potentially has, you know, some kind of mineral that's valuable on Earth. But of course, you know, getting, getting it over to Earth is a bit difficult. Maybe there will be some real estate in Decentraland, you know, selling for ridiculous price, etc. So all this kind of stuff, these are, these are all things that once, you know, once price is showing some upward momentum, people become interested and it goes way over the top.

I believe that. I really think that the next. We've talked about this, that there's going to be especially tokenization of assets and unlocking all this money from fixed assets into a digitized, like, tokenized world. I think there's going to be a huge amount of credit creation and like fiat token, whatever that is, is going to get traded. And I think that's. That's actually coming as well. And I wonder because I, I track, I don't track, but I know about art prices. And right now it's a huge trade. Whiskey is a huge trade. Rolexes are a huge trade like that part of the cycle. I think you guys sent a newsletter about it maybe last fall about how it's starting to show itself the second half of the cycle. Because you're seeing this trade in valuable assets that hold or are thought to hold their value. And my question about all of this is how much and how important is the stabilization of interest rates so that the second half of the cycle can actually take off? Because we're not sitting at historically high interest rates by any stretch of the imagination. I mean, we're coming back to interest rates that were around in like 2015, maybe like my mortgage in 2015 was around 5% and people were borrowing just fine and doing business just fine at 5, 6% interest. So I would imagine, and I don't know, historically, Akil, we haven't really had zero interest rates before other than this past decade. But like, once that stabilizes and, and people are like, okay, this is it. We're kind of good now. Like, I feel like that might be the catalyst for things to start picking up again. And, and we're humans, we're adaptable. We'll figure out how to borrow again. We'll figure out how to game the system. We'll figure out how to do all the things.

Pivoting and shifting your mindset, you know, Jason Hartman, he says compared to what? That's like the ultimate best question. So, okay, interest rates are high right now. Okay, compared to what the last couple of period? I mean, gosh, I can remember back when interest rates were 20%. So compared to that, we're sitting beautifully. And it's just a matter of I. I feel like we get kind of spoiled with how, you know, what we had and the things that we had in place. And now it's just a matter of shifting that and, you know, pivoting and making it work.

Yeah, yeah. I mean, you weren't, you weren't paying the same price for property when it was 20%, though. So I think, I mean, there is, There is an element of. There is an element of it. Yeah. People have to spend more of their paycheck on, on this stuff. And it might not necessarily be on the actual servicing cost of a loan on a, on a. On a property. It might be that they have to deposit, you know, devote more of their savings towards a deposit for a house because price is so much higher. And even a 5 or 10 or 20% deposit is three or four years worth of earnings as opposed to something less in previous times. So, yes, the market does adapt, but ultimately what people tend to pay the most for is, is there is a place to rent or a place, a place to own.

And right now it could be that they just want to make breakfast and they're buying eggs.

Yeah, I was just gonna say people are spending more just going to the grocery store or ordering on Instacart or getting gas in their car.

Well, they are paying more, but they're not paying the most. Right. But yeah, I take the point. I mean, we have a. We do have a, you know, cost of living crisis and so on. Just before I come back to other Pierre's point, I just wanted to make one final point. The problem that people don't. I mean, people treat real estate almost as if it's some kind of stock on an exchange. And if it goes up and down, it's. It's one thing, you know, if people can't afford to pay $500,000, for example, for a, you know, a nice house in the center of Houston. They will pay 500,000 for something less good a bit further out because they want to live somewhere which has something and they have to compromise on what they get. So the goalposts are always shifting in.

In respect to real estate, and that has changed significantly. You know, it used to be a long time ago you would spend a certain amount of your income for your property, and, and that has changed and that has really maxed out. And I think that is why we're seeing people really in trouble now, because they, they went and borrowed the maximum amount they could for their property, and now we're seeing all of these other prices go up in the cost of living and the cost of everything else, which is leaving them in a bind with paying for properties and everything else.

So, yeah, true, but inflation won't stay at the level it is. I mean, this is basically, essentially what the Federal Reserve is trying to do is I think ultimately it's more psychological than anything else. It's like scaring off people so they stop demanding pay increases and companies stop pushing up prices and also hope for some resolution in the energy system and the food system and so on, which it looks like is starting to stabilize. So I actually think inflation will then roll off. And yes, to your point, I'd appear it's not so much the level of interest rates, it is the direction or is whether it's moving how quickly it's moving up or down. And once people have some certainty of that, they, they then make the decision. They look, ultimately they borrow more. They, you know, they, it's, it's more speculative. They buy smaller places and they do what it takes and it doesn't. There's no level at which prices have reached too high typically. I mean, you know, you might say in the U.S. you know, average prices of five times average earnings, and that's historically very high. And it, people say, well, that's, that's, that's the moment at which it's going to crash. Well, the reality is in Hong Kong, you pay an average of 8 or 14 or whatever times your average earnings. And so no market, there's no absolute values in any of this. This is back to your point about, compared to what the reality is that everyone has to be loaned up. Inflation does start to tick up towards the peak of the cycle, and not because there have been very significant shocks to the system which have caused that. It's because there has been so much extension of credit into the economy that there's a shortage of basically additional bank financing for further projects which pushes the rate of interest up. And because a lot of it is a lot of the money that has been created by banks has gone into speculating in real estate and not into additional production. That is what increases inflation. And that is at some point there is a trigger and that starts to come down because there's a crisis of confidence, people stop lending. And when you've got into a speculative situation in markets, if you don't have rising prices, you have falling prices, there's no plateau.

Excellent points. Well, I just want to thank you and Adapia, Akil and Adapia so much for all of these golden nuggets that you've shared with us. You've, you've really piqued my interest a lot in this area. I've probably got more questions going on right now in my mind than we have time to even, even, even cover. Would you share with our guests today, both you and Adapia, on how our viewers can. Can what, what website can we direct our viewers to for you both?

I'll start with me real quick and then I'll let Akil go. And I do, I do. Akil would love you to say when the top of the next cycle is so that we can all prepare because everybody's got a million questions and I do recommend subscribing to what they do. It's game changing but for me, I. You can find me most easily on LinkedIn. Honestly, just my name, pretty easy to find at Apia ad Pia. That is my most active platform and I'm happy to connect with anybody there. So that is where you can find me. And if anyone's interested, I'm the co founder of Women of Wealth and that is a mastermind that empowers women to build wealth, talk about money, talk about finances. And you two are both founding members. I'm so grateful for you, for, for your support and for being part of this phenomenal group of women.

Amazing group. Love it, Love it.

Yeah.

Thank you. Yes. And Akil.

So I'm the director of this company called Property Share Market Economics. Bit of a mouthful, but it does well on Google. I understand. And so it's. The address is www.propertysharemarketeconomics.com. it's all one word. And as Adapia says, we provide commentary and forecasts of the markets, both from a kind of a real estate cycle, but also stock market, commodity market perspective. And we have a free newsletter so you can sort of test us and See if you like what we have to say before becoming a subscriber. I very much encourage your listeners to do so because I think, I think it is relatively. We have a relatively unique way of looking at things which I, you know, I do believe in. You know, we didn't ourselves invent the 18 year real estate cycle, but we know how to apply it and I think it's pretty robust.

Well, and as an investor, and you know, our listeners are investors, it's really important to have that, you know, economic perspective on outlook so that you can make sure that you are investing in the right types of assets. You know, at least making the best educated decisions that we can.

Yes, definitely.

Could I make one further plug?

Yeah, yeah.

So I'm in the process of finalizing a book which will be published. Well, I'm not entirely sure the date, but around the middle of the year. And it will, it's structured as a journey through an 18 year cycle. So I break the cycle down into eight or nine stages. I illustrate that stage with a different historical episode and then I tell investors what. Firstly what to look out for and then secondly, what to do about it.

Oh, amazing. I can't wait to see that.

Yes. What is it going to be called?

It's going to be called the Secret Wealth Advantage. How to Profit from the Economy's Hidden Cycle.

And I've been lucky enough to read a little bit of an advanced copy when I was in draft off stage. And it's, it's so easy to read. Like the book that Phil wrote, Akil's Partner, is a big historical. It's a tome, it's a big weapon. It really goes, it really goes into it. It's like a, you know, it's like a proper, like universal magnum size. It's a big one. Yeah. And Akil's is to me is. That book is phenomenal, don't get me wrong. But like Akil, your book is, is a little easier to digest in terms of bringing it down into what we already know and how we think today. And I think those two together really help because you can reference a lot of the in depth research for every year that everything happened and then, and then the way yours is. So I'm excited for the book to come out.

I love that after you bring it out we'll have to go do like another episode and do a dive into the book. I love that because I need things broken down Courtney style. So I just, so I'm, I'm excited about that.

That's amazing. Thanks for coming. Definitely. Well, thank you all so much. I just want to one more time just ask our viewers to like and subscribe. Our Ladies Kicking Assets Vodcast. Thank you both for carving out time in your day. I know Mondays are tough, but we just thank you so much for making time to record with us. And we'd like to just say, till next time, our Ladies Kicking Assets viewers, with some amazing guests coming up, but please dive into what's been shared with you today, and I look forward to getting on your free newsletter list.

I do, too. I'm gonna go subscribe to that right now.

Yeah, definitely. Thank you so much.

Thank you.

Yes. Y' all have a great day.