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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
Speaker 1 (00:00.046)
The way we get to asymmetric returns is just by being patient. I don't remember the last time we bought something that didn't have a value add component to it. Anybody who wants to get alpha or asymmetric returns or try to beat the S &P has to do it with some type of value add component.
There's a huge dislocation and expansion in cap rate if it doesn't check every box. What you're finding is that if it doesn't work for an institution, you're getting significant yield in the multifamily space. Heart of Beverly Hills.
Office building bought it at three and a half. We saw value add strategy to it. Wells Fargo gave us back 20,000 square feet, kept eight. We took that 20,000 square feet and took it from 30 cents and now we're leasing it at about seven dollars.
In the 10 years I've been in the industry, everything was negative. It doesn't matter what the property is today, what can the property become? That's completely switched. I saw you wrote a book. I did. When did you write that book and what is it called?
Money and Morons. Money and Morons is basically about the national debt. We're on an unsustainable path. We're not going to solve this problem. It's going to lead to crisis. And that's my conclusion in the book and my suggestion to everyone is, you know, just prepare.
Speaker 2 (01:20.6)
there
Speaker 2 (01:41.1)
All right, welcome to another episode of Deal Flow Friday. I'm your host, David Moqavam, and today we got Paul Danishrod, founder and CEO of StarPoint. Paul, thanks for joining. How you doing? It's nice to be back in LA and get to leverage my network, AKA my dad's friends, to get people on the pod. And at first I reached out to Bahman and...
I'm great. Thanks for having me.
Speaker 2 (02:08.354)
He's like, no, you need to talk to Paul. So I'm glad I got to talk to you. The brains behind the amazing company you built. I've seen you guys from afar and up close. You know, actually when I started in the industry, I looked at the wave on third deal that you guys were doing and then seeing what you guys have pivoted and different strategies and targeting different type of opportunities in all different.
type of sectors, right? Multifamily, retail, industrial, ground up, existing. And so I'd love to dive in into what you're seeing today. How are you, and I've heard you from before, targeting asymmetric returns. How are you targeting that in today's environment?
Well, welcome back to LA. Thank you. I'm sure you don't miss the humidity of Miami. know we were just talking about that.
Thank
Speaker 2 (03:02.894)
It is hot in Miami right now, so I think any excuse to kind of get out of that humidity is nice, but come November, you know, I think you could find me back in Miami. yeah.
Yeah, yeah, absolutely. Miami and November is the best.
It's really the best. I hope you could come visit. I think it would be good to show you around a little.
My wife and I, Shadi, we like Miami. We come once or twice a year, so next time we're there, we'll come sail.
I mean, honestly, the energy in Miami right now, sorry, we're going a little off topic, but the energy in Miami is incredible. You walk around the streets, from an investment side, you understand the money's flowing there, but when you actually are living there and you see the restaurants are just super busy, like you go on a Monday or a Tuesday and everything is packed still, the energy, it's justified. And so we love it there.
Speaker 1 (03:50.04)
Yeah.
It's a great town. So back to your question, what are we doing to deliver asymmetric returns? I mean, I love this Buffett quote. a big, Buffett's a mentor of mine and I quote him a lot everywhere. Actually, if you walk into our office, we got this big, I think it's like six feet by three feet poster with one of his quotes on there.
One of his quotes about discipline. But yeah, the way we get to asymmetric returns is just by being patient. And you know, the Buffett quote that I was about to refer to was, you know, it's easy to get rich as long as you do it slowly. And, you know, his quote goes on to say like, no one wants to get rich slowly. Everyone wants to get rich quickly.
Especially like the Gen Z generation, right? It's amplified now. Absolutely.
Absolutely. yeah. There's no patience, right? Especially in the age of social media where you just constant stimulation and you want, you know, everything fast. Right. You want your food fast. You want your media fast. You want to get money fast. yeah, we get to asymmetric returns or alpha mainly through patience. Making sure that we're disciplined, you know, we're recognizing where we are in the marketplace.
Speaker 2 (05:00.419)
Instant gratification.
Speaker 2 (05:05.301)
Returns
Speaker 1 (05:19.342)
going back to a Buffett philosophy, are we getting value? Are we getting real value? Are we getting deep value? Or are we overpaying? And real estate investors historically have lacked patience. We're not a patient group as a whole, even though real estate is slow. it's, most real estate strategies require time, right?
Especially when you're in development, right? You're talking now.
yeah, you don't see a dollar till you get CFO. Yeah.
Exactly, Three to seven year strategies. But even on your side, the multifamily value add, right? Those are three to five year strategies at best.
quicker ones right? think there's longer hold periods.
Speaker 1 (06:10.216)
For sure. So patients, you know, I would say that's just sort of a macro philosophy. Going beyond that, if we're talking like specific strategies, we're big believers in the opportunity zone legislation. We've done about five OZ projects, both in multifamily and industrial. And where we're really getting asymmetric returns there is the tax efficiency.
yeah. And that's now permanent, right? With the BBB.
I love that name. Who else could come up with the name of a big, beautiful bill except for Trump?
great marketing. been strong on that point.
Even as the president of the United States, still marketing. You think you get to that level of success or stature and you can just sort of stop marketing? I mean, you get enough exposure.
Speaker 2 (07:05.492)
That's his aura. That's his key to success, Selling the dream.
Yeah, yeah, yeah, yeah, his message. Yeah. Yeah, that's a good point. Selling the dream. I like that. I'm have to remember that. So what was I saying? yeah, back to the BBB. Yeah.
So opportunity zones have been huge for you guys.
It's permanent legislation now.
And it's actually interesting because if you talk to most developers, everyone that the common theme is you can buy below replacement cost. it doesn't really make sense to build right now. but with opportunity zones, look long-term patients as you were talking about and how, yeah, maybe construction costs may be higher than what you can build today, but the tax efficiencies, the long-term value is there. And so I think it's almost.
Speaker 2 (07:57.432)
I wouldn't say contrarian, but you are building at a time where there is now a lack of supply being built. There was a lot of supply delivered during, you know, pre-rate hike. And so you're actually putting shovels to the ground maybe at a better time.
Yeah, I mean that supply demand and balance depending on the product type the sub market That you know that always eventually comes back into balance right even looking like retail right retail was so out of favor for so long But the lack of supply over the last 10 15 years You know brought it back into balance and now retail is one of the darlings of real estate again all of a sudden
mainly because of the lack of supply, not necessarily that demand has been increasing. The shift to online has continued that trajectory. yeah, coming back to that, even if there is an imbalance, there's a little bit too much supply or you can buy below replacement costs or construction costs. We always look at that, as long as you've got a long enough hold, it's gonna come back into balance.
Yeah, so one of the things you were talking about with patience, you have patience, but you also play in many different asset classes and strategies. You were just mentioning retail and construction. And I know you guys do a little bit of value add multifamily as well. I guess what's the what's the constant in your strategy as you're kind of shifting different asset classes and and pivot to different strategies? What's like your constant that kind of is your North Star in?
finding these asymmetric returns.
Speaker 1 (09:40.63)
Yeah, so we do shift our strategies to where we feel like we're going to get better returns or asymmetric. And when we say asymmetric, what we really mean is, right, reducing risk and, you know.
Return to excess of market, alpha, like your edge, right? Yeah. That's where I interpret it.
Yeah, but also it's really how do we reduce risk further? Even if returns stay the same, if we can reduce risk, yeah, protect downside. You know, another Buffett rule, you know, there's three rules in investing. Number one is don't lose money. Number two and three, go back to number one.
Check downside.
Speaker 2 (10:30.766)
Exactly.
That's what you were really trying to do is limit our downside make sure we don't lose money Yeah, and so that's what we really mean by asymmetry right less risk higher returns and so do we really have a North Star there especially as we go from strategy to strategy and That's probably I guess our North Star is that You know, we're not always a hammer and we don't always see a nail
Survive the down cycles
Speaker 1 (11:00.142)
When you're a hammer, all you see is a nail, right? So all we used to do was multifamily value add. And so since that's all we did, multifamily value add had to be the right product all the time. It had to be the right strategy all the time. And I saw that flaw in that, because it just wasn't. There are times where multifamily value adds a great investment.
And it's what we grew up on and one of our core competencies. But there were markets and shifts and macroeconomic forces where multifamily IAD wasn't the right product all the time. And so we did shift. And so we do look for strategies and dislocations in real estate broadly to find higher returns and lower risk. So our North Star is that we'll be opportunistic.
And it's interesting, you you're saying that someone like like me who's been in multifamily existing value on multifamily my whole career and the way I see it and this isn't at all disagreeing. It's it's the idea that you know, especially as at this age you want to specialize in something right. You want to be an expert and multifamily is something where now at this point I'm extremely sharp, extremely focused in that. And but I've also seen
the drawbacks, right? Where you're at a down cycle where there's other opportunities and other asset classes that are thriving and multifamily is not the darling, is not what the LPs or the institutional capital is placing equity in. Right now they're in data centers and industrial and multifamily isn't that sexy asset class that it was maybe four years ago, right? So that said, I think
the way that we've been able to at least capitalize or diversify is geographically, right? Like what are the geographic markets where maybe multifamily has a better supply demand balance or has a better supply side story that there's not a flood of supply hitting it. These are the areas where I'm kind of identifying that there's benefit that may be valued multifamily today as a whole.
Speaker 2 (13:25.214)
isn't as advantageous as maybe some other investment vehicles, but there is capital still out there for multifamily. It's super resilient and maybe we can diversify geographically, which we've done. how, guess have you guys also, you guys are also geographically everywhere. And so how do you kind of balance the asset diversification with the geographic diversification?
in finding the right opportunities. Are you guys kind of doing more of like an ad hoc or is there more of like a general thesis?
Yeah, so something you mentioned, and I think it's really, important, and we've struggled with this over the decades, which is specialization. Specialization brings an advantage, and I don't think you can discount that. You really focus on one product type, do that really, really well, and across the organization, everybody's got a focus, and whether it's on the,
Operating side, you know whether it's on the property management side or the rehab side Or the acquisition side that specialization, you know build skill sets that become probably a little bit more competitive than a generalist and so I Would advise anybody who's new to the industry specialize right? It's hard to be in every single asset class and do it. Well
Right, you need decades of experience. And even then, right, it's hard because the asset classes change.
Speaker 1 (15:06.894)
So your specialization is probably smart.
And I think from what I've seen on some of your guys's investments, you guys have been really good at identifying parts of an investment that's super nuanced specifics. Like for instance, my wife and I, last night we're walking past Camden and we saw the Wells Fargo building and you guys put the Gravita space over there. And I remember actually my dad was looking at that investment and I guess.
and you could explain it better than I can, correct me if I'm wrong, but Wells Fargo had a footprint on there that was under market and you guys had to negotiate with them and something that may be on paper is like, can't do this, but you guys found an edge in kind of getting some luxury retail on there to increase the value of the property. And so I think you guys have done a good job at kind of finding those little nuggets in deals where you can find
something that maybe someone else who's just plugging and chugging would say, okay, like this return wouldn't work.
Yeah, I mean, the property you're mentioning on Camden Drive, it's, know, it was a super core asset. We bought it at three and a half cap. Office. Office building, bought it at three and a half. Yeah, right. And the golden triangle, they call it. But yeah, we saw value add strategy to it. So Wells Fargo had
Speaker 2 (16:33.048)
Heart of Beverly Hills.
Speaker 1 (16:43.79)
about 25,000 square feet of space, both bank branch and offices. And they had, believe it or not, a 65-year lease at basically 30 cents a foot, annual 30 cents a foot. So they had free rent.
They just negotiated that when? at inception? A long time ago.
They owned the building at one point. And they sold it to the buyer. And one of the things when they sold it to the buyer is they negotiated this lease for themselves at a really. Yeah, basically, right? Yeah, it was a sale lease back and free rent for 60 years. So we took a chance because there was no guarantee we were going to be able to renegotiate that lease. But we were able to do so.
sale lease back for free.
Speaker 1 (17:38.286)
Wells Fargo gave us back 20,000 square feet, kept eight. We took that 20,000 square feet and took it from 30 cents and now we're leasing it at about $7. Yeah.
Amazing. mean, that value is incredible that you're doing also prime retail now that you've unlocked untapped out of that deal. And yeah, I've seen that on some other deals. I know you have that recently read. You guys have that deal on Roxbury, the garage that you're converting. So I guess my question on just looking from afar, do you guys go in assuming that you can?
get this, unlock this potential or are these things that on the fly you're figuring out or is it a mix of both? Are you protecting your downside and saying, all right, this deal works if we don't do that, but this is gravy. How's your approach with some of these value add components that you're doing on your deals?
Yeah, normally we identify the value add components before we buy it
I'm trying to think.
Speaker 1 (18:48.258)
I don't remember the last time we bought something that didn't have a value add component to it. It's really hard to get to those asymmetrical returns without buying. There's too much money in real estate today. The capital flows have made it really, really competitive and has depressed cap rates. Institutional allocation to real estate went from half of a percent
you at. Of course.
Speaker 1 (19:17.62)
And it's probably today around 5%, 5.5 % on average across all the institutional cohorts. So that 5x increase in capital flow into real estate, you're talking billions of dollars. real estate's a different business today than it was 30 years ago because of those capital flows. So anybody who wants to get
alpha or asymmetric returns or try to beat the S &P has to do it with some type of value add component. Unless you're going into rural Alabama and buying class C multifamily.
which has its own risk spectrum to it, right? Again, we're talking risk return, not just return, risk return.
yeah, absolutely. So yeah, everything we do has a value add component. We identify that before we acquire it. We're actually usually executing on our value add strategies even before we close on the property. And all our business plans, whether it doesn't matter of the asset class or asset type, we're looking at how to increase revenue, how to increase NOY.
Speaking of institutional capital, I think I've said this multiple times on the pod, capital raising is definitely harder today than it was pre-rate hike. Anyone that says otherwise is probably lying to you. It's okay to admit it, right? How has capital raising been for you guys? Have you seen opportunities now that some of these institutions are maybe out on asset classes such as like multifamily?
Speaker 1 (20:46.901)
Absolutely.
Speaker 2 (21:04.236)
Are you seeing that as an opportunity? Are you seeing that as a challenge? Talk to me a little bit about capital raising for you guys.
Yeah, we're seeing the same thing. The capital's shifting. Multi-family is no longer the darling that it was. Really, over the last almost 20 years, the institutional capital loved multi-family. Today, not so much, for all the reasons you mentioned earlier. so our multi-family value add
strategy right now is dormant. One, because of that, it's really hard to raise capital for. But also, the returns are... I don't know what you're seeing, but what we've seen, and because we always go out and test the market probably every quarter on our dormant strategies, we're seeing real multifamily value add returns in primary markets.
be product 80s or newer, the returns are really a 14, 15 IRR. People want to try to get to an 18, but they're financially engineering really to get there.
And also credits kind of also returning those returns right now, right? Like if you're investing in like a credit fund for multifamily, because rates are so high right now, like you're hearing some of these returns also hitting like 14, 15%. So it's like, you do need to get to the 18, 19%. The question is, is it out there? Right.
Speaker 1 (22:46.134)
We haven't seen it. I know if you have.
I think it's one-offs, right? You can't get that return at scale. I think the way we're solving is not necessarily IRR, and anyone can financially engineer an IRR, but we're looking at in-place cap rate relative to borrowing costs, deals that are positive leverage, that have strong cash-on-cash going in. It's like back to basics. It's like old school.
buying multi, you know, like, oh, this is cash on cash, cash is king. So I think that's like the way we're valuing deals and the institutions can't get comfortable with that. But what you're seeing is the private capital, the family offices, foreign capital, even they love that. They understand it. They see that there is the dislocation in capital in multifamily right now is actually creating opportunity.
Yeah, I mean, you mentioned positive leverage. We've struggled with that when we've looked at multifamily value add recently, especially in primary markets, newer product. It's still sort of trading in the five cap.
Agreed because the new product in primary markets is still, they're still institutional capital chasing that, right? They're still, that institutional capital they're looking at as buying below replacement costs, buying below peak, they're justifying it in their mind. That's definitely not hitting high teens returns. That's definitely at best a 15 like what you're talking about. IRR. But...
Speaker 2 (24:33.026)
I think we like to play a little on like the sub-institutional space where maybe it doesn't check every box. And what you're finding is there's a huge dislocation and expansion in cap rate if it doesn't check every box. It doesn't have to be a 70s deal tertiary. Like we're not touching that, but if it has two of the three box checked, but maybe it's eight foot ceilings instead of nine, what you're finding is that.
If it doesn't work for an institution, you're getting significant yield in the multifamily space. Does that translate to a high teens return? Tough on paper, right? Depending on how you underwrite, but you're getting significant cash on cash and positive leverage.
Yeah, there's there's cash flow there. So that's the I mean, that's a good thing Yeah, I remember when there was a time there was a two or three year period of time where people buy multifamily with no cash flow Yeah, I mean like zero cash. I mean, I was looking at him. I'm like, my god, you morons. What are you doing?
In the 10 years I've been in the industry, everything was negative leverage because everyone was solving to a return on costs. Everyone was, you know, especially in the value outside. How can I like, it doesn't matter what the property is today. What can the property become? That's completely switched.
Yeah, yeah, a little more grounded and underwriting has become a little bit more realistic today than it has.
Speaker 2 (25:59.584)
It's way it should be. I think it's the way it should be.
Yeah, it'll change again. People have short memories and even though we're going through some pain right now, people are going to forget that market shifts and trends don't always go up.
People are already fri-
People are already forgetting, know, bridge debt is really the root cause of like why there's so much capital stack distress right now. Because operationally these multifamily properties are fine. They're 95 % and sub 1 % delinquency, but they're like 92 % and 3 % delinquency. It's not distress, it's just a little sluggish. But the cap stack is completely upside down and that's because of the bridge debt.
Now you're starting to hear groups to get to that mid-teens or high-teens return, they financially engineer it by just juicing it up with Bridge. I mean, personally, I'm afraid to do that after what happened last cycle.
Speaker 1 (27:06.491)
Well, last cycle being the one we're in right
Or this cycle, sorry. meant like, yeah. Pre-rate hike, doing that and what we're experiencing today.
The curse creep
Speaker 1 (27:17.902)
Exactly. Yeah. Yeah. I mean, if you look at the groups that bought multifamily, you know, in the thousands of units and we're buying at three and four caps using bridge capital, adjustable debt, and then underwriting to, you know, 4%, 5 % annual compounded rental growth. Um, and are now have lost their entire portfolios, right? You know, they built up
you know, really quickly 7,000 units and lost all 7,000 because of just exactly that, right? Bridge debt that was, you know, 4 % is now 8%. And, you know, they were buying at three caps. So even if they got some rental growth, they're only at a four cap. So they got, you know, they got the property at a four cap. got debt, they're dead at an eight. They're done.
can't refi that because you're pretty levered up. You're done. Agencies are, you know, eight, nine debt yields, so forget about it.
You know, so yeah, that goes back to the Buffett rule, know, patience, right? Trying to financially engineer to a return. It works sometimes, but most of the time.
So at what point, you you were mentioning how multifamily strategy for start points a bit dormant at the time for value on multifamily. But if you talk to other groups, at least in multifamily, they say, this is a great buying time, this is a great buying time because of the dislocation in capital. What would make you excited for a multifamily deal today? What kind of yield, and obviously it's geographically specific and
Speaker 2 (29:09.314)
vintage specific, but in general, what is, guess, again, your metric of choice to see identifying that this is a good deal in the multifamily space in this environment?
So our active strategies today are our Opportunity Zones and what we call our Tenant Centric Retail. In both of those programs, we're getting to about, call it about a 25 IRR. The Opportunity Zone's actually a little bit less. Opportunity Zones, we're getting to about a 22.
but it has tax advantages. Is the return net of the tax advantages or is that like on paper deal level? That's all. Wow, that's great. What kind of yield on cost is like a opportunity zone deal getting to?
deal of. Right.
Speaker 1 (30:05.176)
Buh.
like stabilized cap rate on total cost or.
So our Opportunity Zone projects, again, we got industrial and multifamily and so
Yeah, okay, so it's a little bit different.
vary a little bit, so I'm just giving you sort of blended numbers. But on a return on cost, we're getting to roughly a seven and a half.
Speaker 2 (30:31.022)
That's great.
And again, those are on 10-year holds, too. So the IRR sort of shrinks a little bit because of the whole period. So to answer your question, our active strategies today, we're getting north of a 20. And then on the opportunity zones, the tax adjusted is just incredible. One thing people forget about the opportunity zones, too, is there's no depreciation recapture.
So you've got 10 years of depreciation shelter too with no recapture. So all the cash flow is sheltered as well and it's really tax efficient. So that boosts your yields by almost 50%.
depreciation, no recapture, and also your cap gains from your prior investment gets written off, like you don't pay cap gains. Is that how it works? Or does it get deferred? Do they still pay cap gains?
So basically, on your original capital gains, you pay 90 % of it. It gets deferred for a couple of years, but you have to pay it in, let's call it, two years out. OK.
Speaker 2 (31:49.624)
Got it. So it gets deferred by a couple of years.
And then you pay 90 % of it. you get a 10 % adjustment in the basis. But then that was on the original. On the new appreciation or the appreciation over the 10-year hold period of the new asset, there is no capital gain. So all that appreciation is now tax-free and no depreciation or recapture on top of it too. So the tax efficiency of it just boosts the return.
It's
Speaker 1 (32:22.158)
really a 22 IRR in an opportunity zone is really closer to like a 35. Yeah. Right. On tax adjusted basis. So another investment would have to deliver 35 to get you back down to that 22. Right. Yeah. That's the way we sort of look at it. So multifamily for us, we'd have to get back to that area of north of a 20. Right.
Instead of taxing.
Speaker 2 (32:55.062)
I so. It's just, it's such a, it's a resilient asset class and there's so much capital chasing it. And especially on the credit side, you have agencies, have Fannie and Freddie. So when shit hits the fan, you still have leverage that you can get. Maybe it's not the best as it's been, but you can still, there's still a way to borrow. Look at office, for instance, as a case study, when there's no capital, there's no
debt, the values plummet and operations were tougher there too. And so it's resilient and there's a lot of capital chasing it. So I just don't see that getting to the twenties unless as you said, it's, you know, the boons like tertiary markets.
You have a rich uncle?
sure. Who doesn't?
I don't have any rich uncles. But the reason I bring it up, I call Fanny and Freddie, you know, the rich uncle of the multifamily industry, meaning they're always there, right? They're always there. They always have money and absolutely they lend in every single part of the cycle.
Speaker 2 (34:00.973)
Right.
Speaker 2 (34:07.118)
That's a great analogy. Yeah, it's true. You're always there. They're always there. They're always reliable. And that's why multifamilies price the way it is.
Yeah, and that is a huge benefit for multifamily. I agree with you. It's really a strong factor. There is no.
You talk about risk adjusted return that that's protecting your downsides.
Yeah, that definitely protects your downside, 100%. And there is no rich uncle in office. There is no rich uncle in retail. There is no rich uncle in industrial or data centers. It's just in multifamily, thanks to Fannie and Freddie. yeah, I do appreciate that part of the sector. Yeah. Yeah, for sure.
I guess, switching gears a little, I wanted to ask you this. I saw you wrote a book. I did. When did you write that book? And what is it called? Money and Morons. What is it about? And when did you write it?
Speaker 1 (34:58.839)
Money and morons.
Speaker 1 (35:03.534)
It came out about a over a year ago. took me about three years to write it, so I wrote it in the middle of COVID. wow.
Yeah. While everyone was baking sourdough and banana bread, were... Yeah, yeah, yeah. Nice.
I did some of that too. You did some of that? Yeah, it sucks. It wasn't edible. It wasn't edible. But you're just I got the look out. Money and Morons is basically about the national debt and trying to bring more attention to it, the deficit.
But your book came out.
Speaker 2 (35:40.334)
The deficit. You talking about that a little earlier, writing about it a little earlier, then now it's talked about a lot more than it's ever been. Not enough.
Not enough. We've got some really smart people, some of the smartest people in the country. And I'm talking about Jamie Dimon, head of JP Morgan, Ray Dalio, the head of Bridgewater.
I'm in the middle of his how country goes how countries go broke
Even the head of the Fed has made his comments and on and on on on that we're on an unsustainable path. Our debt to GDP today is at about 130 % and a lot of the studies and the data shows once you pass 100 % debt to GDP, you're getting into really scary territory and we're past that.
And we're adding to the deficit every year now. We got about $2 trillion in annual deficits. That's another, call it 4 to 6 % of GDP every single year that's growing.
Speaker 2 (36:54.754)
And we're trying to get that down to three, right? That's the goal.
That's the goal so that it doesn't keep growing, But that's assuming GDP goes at 3%. GDP is not growing at 3%. GDP will not grow annually at 3%. And so it's a real issue. And we're not focused on it.
and it'll lead to crisis. The leading thinkers on this issue are two economists, Reinhart and Rogoff. And they wrote a book called This Time is Different. This time is different? Yeah, this time is different. And basically, it's heavily researched, very data driven, and they just show that
you know, what happens to countries that just keep layering on debt and deficits. And they show in their research that eventually those countries either default or they go into crisis. that's the trajectory we're on.
It's also, just reading Ray's book, also separates from those who own the reserve currency, right, like the dollar where you can print or the people who don't own their own currency, right?
Speaker 1 (38:15.81)
Yeah, right, so exactly. A lot of people who default don't really have a strong currency. can't Right, they can't print. And even if they could, no one's buying their bonds. So they just default, right? The Argentinas of the world, Greece's of the world, Venezuela, and so on. The ones who end up going into crisis are the ones who can print.
and print.
Speaker 1 (38:45.154)
and they print to an infinity and then crisis happens, right? There's a loss of confidence or there's a bond crisis and that's probably where we're headed. And I don't worry about myself, but I worry about the country and I worry about your generation and your future. We are leveraging your future and your generation, you're letting us do it.
Yeah.
Speaker 1 (39:15.062)
and you don't really understand.
Most of the world doesn't understand what a fiscal or monetary crisis is. You're talking about depression level crisis. And so I wrote the book to try to get more attention here and to see whether we can change our course.
Do you think we'll change our course? No.
No, when we were at 40 % debt to GDP,
we could have solved this problem easily. It would have been an easy fix.
Speaker 2 (39:59.636)
When will we have 40? That's the GDP.
20 years ago, 15 years ago. It could have been easy fix, right? Raise taxes a little bit, lower expenses a little bit, and you solve the problem. When you had 130 % debt to GDP, there are no easy fixes anymore.
think it's higher than 130 at this point. All right, maybe I'm looking at the wrong metric. I think it was like closer to 300. Maybe I'm reading the wrong metric. I just remember reading Ray's book. We'll check it, we'll check it.
No, so your 300 is accurate if you include off balance sheet debts. Yes, which by the way, those off balance sheet debts are real and they're coming. That's Medicare, Social Security, those two institutions, the trustees that run them have told us that those two institutions or those two trusts are going to need funding in about
That's what it is, okay.
Speaker 1 (41:01.718)
Eight to nine years. Without funding, they're not going to be able to pay what they've promised. And they have to. That's going to shoot the debt up to 300%. Really fast.
So my friends and I debate about deficit among many other things, but one of the things some of my friends say is, it's not as bad as people make it seem. Look at Japan. Look at how much in debt they are, and they're not collapsing. It's not a great depression. Do you ever hear that comment? And I guess what's your response to that?
So, And I guess, you know, not picking on Japan, but there's a lot of other countries that are maybe a little bit worse off than America and where, you know, one of the leaders in AI, I feel like I do believe we can at least grow. If we're going to get out of it, it's to grow our way out, right? So I guess what's your response to that?
Yeah, this is the bigger fool theory. So we can be an idiot because there's just a bigger idiot out in the world. Is that the theory?
That's the theory. That's basically the theory, yeah. You said it right.
Speaker 1 (42:18.222)
Yeah, that's why the title of the book is Money and Morons. Yeah, Japan has hired debt to GDP than we do, right? They've had a stagnant economy for 20 years. They've wiped out. Japan had the highest savings rate almost in the world per capita. The highest savings rate. They wiped it out. It's gone. Right? Look at Japan's savings rate 30 years ago to now.
and it's result of the debt. So they've got some of the lowest savings right now.
So yeah, I mean, if we want to be one of the idiots in the world stage, then yeah, we can just look at who's more of an idiot and say, okay, we're fine. We're an idiot, but we're not as big of an idiot as they are. I don't see that.
Right, that's a fair point, fair point. I do
You know, Reinhardt and Rogoff, here's another way looking at it. If history matters, and this is why they called their book, This Time is Different, because everyone keeps saying, well, it's different now. Yeah, Japan's got 300, so we can do it. No, no, it's a new age, and AI is going to come in and save us, and we're going to grow our way out of this. And no, we can print our money, and they're always going to want our money and our bonds. That's why they said, This Time is Different. It was more for them.
Speaker 1 (43:45.23)
being sarcastic, it's not different. Reinhart and Rogoff's research has shown that basically any country that surpassed about 120 % debt to GDP eventually either defaulted or had a massive crisis.
Right.
Speaker 2 (44:00.544)
It's a death spiral as Ray puts it. we're at a point where our interest rate, our interest payments are higher than our defense spending. And so this is the beginning of the death spiral as Ray puts it.
no one's been able to get out of.
Speaker 1 (44:16.654)
So Japan's gonna eventually have to face the music in a so are we. We're not gonna solve this problem. It's gonna lead to crisis. And that's my conclusion in the book and my suggestion to everyone is just prepare.
How are you and how is Starpoint preparing? Because I think with all the grim, the grimness of the deficit, I think there could be opportunities on the investment side. Has Starpoint, I guess, identified or are you looking for ways to, I guess, capitalize for this inevitable demise?
Yeah, when the crisis comes, know, so the Kennedys and the Rockefellers of the world, you know, they made enormous amount of wealth by when, when during, during the great depression or during, you know, recessions being having liquidity and buying literally five cents on the dollar. when the crisis comes, yeah, there's going to be great opportunity. It's going to, but there's not going to be a lot of people who have that kind of liquidity to take advantage of it. So.
One thing we're doing, we're deleveraging. So we used to have a target benchmark for leverage at about 60%. We've reduced that down to 30%. Yeah. So our target benchmark for the
wow.
Speaker 2 (45:41.516)
And are you disposing assets and using that equity to deleverage existing assets?
No, we're so, we're, everything's, so there's no I.O. loans for us anymore. So everything has to be amortizing. We'll try to get 25 year, 20 year amortizing loans versus 30, even though we can get 30. And when we refinance, we will no longer cash out. So our target is 30. Today, where are we at? We're at about
So just paying it down.
Speaker 1 (46:16.462)
46%, right? So we still have some time to get to that 30, but we'll get there. The coming debt crisis, it's not next year, right? We have time. Time right now is our friend. We won't solve it because to solve it is gonna take such draconian measures, nobody's gonna vote for that. This is not a political problem. This is a populist problem.
There's nobody who's going to vote for higher taxes, lower entitlements, lower social security, lower Medicare, lower subsidies. No one's going to vote for that. Part of the population will vote for higher taxes. Part of the population will vote for lowering expenses or lowering entitlements. But we need the entire population to vote for.
But not both.
Speaker 2 (47:14.722)
You know, it's a fair point. One thing I would say is you still need to, you're assuming everything is stagnant, where if you get higher taxes and lower expenses, it's not gonna crash the economy, right? And so is that really the solution? You can't tax and lower expense your way out of this, it feels like. feels like we're already past that.
Yeah, that's really smart. What did you study?
What did I study? Finance. I was in engineering at one point, but yes.
You're absolutely right. That's what I'm saying. There's no easy fix anymore. There's no just simple, I'll just do this and we'll be able to get through this with a little bit of pain. This is gonna require real pain. absolutely, higher taxes and lower entitlements or lower expenses is likely gonna put us into a recession and GDP is gonna shrink. Yeah, absolutely.
Okay, well, this was amazing. I'm glad that we got a Go Macro to get there. Yeah, we did. And I'm definitely, your book is on my queue at this point. I think as soon as I finish.
Speaker 1 (48:27.992)
Read Dahlia's. He's a lot smarter than me, a lot more accomplished, and he's got the same thesis.
Yeah, yeah. Well, I'm gonna read both. I'll read both. I do enjoy reading, especially about the deficit. And Paul, it was really great to have you on. Thank you for And great to sit down with you. And please let me know next time you're Miami.
I'm for sure going to. I'm not going to come in August.
You won't find me there either. there. You're gonna like it. Yes, exactly. Thanks again.