America has an enormous amount of uncertainty right now – but we’ll all know how it turns out a year from today! Recession vs. Soft Landing, Trump vs. Biden, the Direction of Interest Rates and Inflation, the wars in Ukraine and Israel will all be resolved in the next twelve months. And how you bet on these endings will have a huge impact on your investment success.
In this Lecture Series we examine not only the likely outcome of each item, but also the impact on the mobile home park sector. And after the lecture we answer more than an hour of live questions.
We thought you’d be interested in reviewing these materials.
Time to Place Your Bets - Transcript
Welcome to our lecture series event. This is Frank Rolfe. Glad you could be here, we know you have lots of options with your time, so we're very thankful that you were here with us. We'll try to keep the material fast-paced and information packed, then we'll move on to Q&A, and hopefully we'll get a lot of good thoughts, a lot of good commentary done in a short span of time, so you get on with your normal life. So we've titled this lecture series it's Time to Place Your Bets, and that's because right now there is so much uncertainty in America in so many categories. I've never seen it like this ever, and I'll be 63 shortly, and I've been through many of America's worst moments. I was there in the '70s, I was there for the savings and loan crash of the '80s. I was there for the dot com bust in 2000. I was here for the great recession, 2007, 2008, been around for COVID, obviously. But never in all of those events have I ever seen this much screwed up at one time.
And you can just curl up in a ball and be filled with fear and loathing and say, "Okay, well, I'll just give up on the world. That it's so screwed up, I don't know what to do." Or you can try and make intelligent bets based on the uncertainty, which if it goes your way, you'll do very well, indeed. William J. Kaiser, the famous industrialist, once said that "Problems are only opportunities in work clothes." And so in all problems, there's a silver lining for those who can choose where things will ultimately head and buy at reduced prices accordingly.
So let's move on with the Time to Place Your Bets. Now, as I just mentioned, this is our basic theory of why we're holding this lecture series event because we've never seen so much uncertainty yet so much which is resolved in one year.
So we've had a lot of uncertainty for a long time now, since 2020, when we got hit with COVID and we weren't sure where that was all gonna head, were we gonna die, were we gonna have to wear mask forever? What would happen with that? And then just everything fell apart, so now we've got highest inflation in 40 years, highest interest rates in 40 years, more urban crime than anyone's ever seen, our borders are screwed up, we've got a war going on in Ukraine, we've got a war going on in Israel. Just everything that happened, and that would be one thing if there was never any finality to it, it would just be miserable forever. But the good news is that by the end of this year, almost all of the uncertainty goes away.
So if you place your bets right now, based on your best estimates of what you think will happen, you will know whether you're a winner or loser coming up here on December 31st. So let's go over what these basic bets are and what we think the odds are of each one just to come up as rational adults with some rationale here.
Well, the first thing is that you have the issue of recession versus soft landing, you see that a lot in the press right now. And you have two schools of thought, you have the people who think we are going to mystically land from a 1000 foot drop on our feet with no issues whatsoever. We're going to simply be unscratched, dust off our clothes and say, "Wow, that was an exciting ride," and then you have those who say, "No, we are in for a recession. Maybe the worst is the Great Depression. Who knows?"
And it seems, if you've noticed that the people who are big proponents of the soft landing all seemed to have a vested interest in that narrative, government officials. Janet Yellen the other day, smiling, I think, giving thumbs up that she had manufactured the soft landing. And then a lot of stock people, because the stock market of course will go down the toilet in a recession, so they're out there saying, "No, not worry about recession, things will be fantastic, this will be a soft landing, go buy stocks." But if you look at the people who don't really care, the older people, people older than myself, who don't give a darn, what do they say?
Well, let's see, Warren Buffett said that the glorious period of America was over, that's a pretty dour commentary and he has skin in the game, he's a publicly held company, but he's, as you know, approaching 90. And Charlie Munger, his partner just recently died of old age, and then look at this guy, Gary Shilling. And Gary Shilling was the first chief economist of Merrill Lynch a half a century ago. So here's a guy who's been through every recession of all time.
And what does he say? He says, "A soft landing is bucking history. I think we're probably in a recession now, wait until they get all the data in, the revisions and everything else." So it seems to me like the older people who tell the truth, they don't have any skin in the game, who have no money to make out of whatever they forecast, they are pretty much preaching a narrative of disaster. And the only ones I can see and correct me if I'm wrong, who tell you how great things are going to be and how we've engineered the most miraculous landing in history are trying to sell you something.
So they want you to believe that there is no recession on the horizon, but that's one of the biggest overlying issues right now in the US. And you have to remember that nobody has achieved a soft landing since 1994, so think about that for a minute. So in 30 years, not through any other economic period in American history has a country ever, ever landed on its feet with a soft landing.
And then let's look back at what happened in '94, so how did we do the soft landing in '94? Well, the Fed going into '94 had raised the Federal Funds rate from 3% to 6%. And what have we done? We went from 0.25 to 5.75. So in 1994, the rate had doubled, and our current moment here going into 2024, Jerome Powell at the Fed has taken the rates up almost infinity. We've gone from nearly zero to nearly the 6% that they had in '94. Clearly, the impact, the negative impact of what Powell has done is 100% higher than that in '94.
And so you can't really compare those two animals, and you then say, "Well, what's the likelihood if we've been unable to have a soft landing in half a century, other than one time in '94. Do you really seriously believe that our team right now is the team to engineer that soft landing?" Look in 1994, 1994 the government seemed to be a whole lot better run, Alan Greenspan was a terrific head of the Fed, much superior Jerome Powell in all levels of play. So it seems odd to me that you would think that our current goofy squad would somehow be the greatest of all time. Because if you could engineer the soft landing when things are twice as screwed up as they were in '94, then yes, you should... They should build a giant statute, they should go ahead and build a giant marble statue of Jerome Powell, and they should place it right in front of the Lincoln Memorial there in DC, if you really believe that. But personally, I wouldn't be saving up for that marble sculpture anytime soon. I think that things are not looking good for that.
You saw just today, Jamie Dimon, I believe, who's ahead of JP Morgan Chase say, "Yeah. We're basically screwed. We're gonna go into recession." He doesn't know where the soft landing folk are getting their data. And if you read up, as I do, and you probably see a lot of it on MSN, and I like to look it up everywhere as to what economists are saying from all your major banks and investment banks and even your countries, you'll see that right now most predictors are 50-50 shot of a recession in '24, and that is the highest percentage of guesstimate they have ever had.
So it's not just me saying, "Yeah, we're probably gonna have a recession," it's pretty much anybody who does not have a vested interest in telling you that we're not, that they all say that we probably will.
And then you have the direction of interest rates. So interest rates, as we just mentioned, under Jerome Powell went from 0.25 to five point, I don't know where they probably landed 5.5, 5.75 or something like that, and that's the most rates have been raised in 40 years. The last time we saw rates go up like that, we saw it under Ronald Reagan and I was there for that, and the rates went all the way to about 18%. So what's important here is, what's the future movement? So we know the rates have gone up a whole lot, but where are they going from here? And a lot of that probably has to be tied to the recession or soft landing.
So if you say there's a recession, well, then it's easy math to do, all you have to do is you can get online a chart of interest rates, and that you can map out where in each of the recessions were. And if you take every recession since 1950, and you add together the interest rates when the recession began and where it ended, what do you come up with? You'll come up with a typical two and a half point reduction in interest rates from the start to the end. And even Jerome Powell himself said in his recent discussions that he does that he thought that this cycle of interest rates going up is over. So it's a pretty good bet that you will not see any higher rates.
The only question now is, how low will they go and how fast? And if you do it based just on economic statistics, you'll see the answer is... If you take the average about two and a half points is what it will be. So if that were to be true, and the Fed funds rate is right now at 5.5 you would end up about three. And if you look at a lot of what the economist predict as far as where it is heading, you'll see this right in line with what they say. Why? Because they've done the same math that I did of just taking the interest rates and dividing through. So I'm pretty confident that is where we're heading from an interest rate environment.
Also, you have to remember that this is an election year. And I know that we can all pretend that the American government is devoid of any corruption or issues, but we all know that's untrue. And so clearly a president going into re-election season cannot afford to have the economy in a recession. It's not good for business. You're not going to win the presidential election when the economy is down the drain. Jimmy Carter proved that once and for all. So you know that in the Biden camp right now, they will do anything humanly possible to manipulate things as best as possible to drive those rates down, it's just human nature. That's what you would do. That's what I would do. Any sensible person would do if they wanted to keep their job, they're going to do what they have to to keep the optics looking like they're doing a good job.
So behind the scenes, and I don't know what pull Biden has with Jerome Powell, but you know they got some. I seriously doubt that they're a totally stand-offish, that they don't talk. That Powell is himself incorruptible. So more than likely, not only are you going to have a recession which drive rates down, but in fact, the government itself will be pushing and pushing to try and get the rates down.
Then you have the direction of inflation. This is one of the toughest ones to guess if you're gonna place your bets on what will occur. Because inflation has come down and we're now at about 3%, and the Fed has a target of 2%. And to go from three to two is a lot, that's a 33% reduction. But the big problem you have is if you study inflation and how Reagan beat inflation, as it came out of the Carter era. Reagan learned an important point, and you can read up right on Wikipedia, Reagan learned that to beat inflation, he had to attack energy, that you could manipulate rates. You could raise them to the moon and you can crash the economy, but you ended up simply with stagflation, which is the dreaded time when you have a recession/depression and yet super high inflation, so people just get killed financially. That's what happened during Carter. We were in a horrible period of stagflation, I was there, it was very, very depressing.
But Reagan learned the energy is a key part of the cost of everything. So the cost of manufacturing ties to energy, the cost of heating and cooling the factories is energy, the cost are transporting your goods to market is energy. So as a result, you can't win inflation unless you fix energy and energy was fixed by Reagan through de-regulation.
So when Reagan went into office and they looked around and said, "Okay, how do we tame this horrible beast that Carter created?" One of the tests was, "Okay, well, let's de-regulate energy, let's get oil flowing as hard and as vibrantly as we can." And that's what worked. So the problem you have right now is we've got this green energy mindset in the government. So we basically declared war on the oil and gas industry, and the problem is that that just creates inflation and that's what's part of what has caused our problems. So while we're not allowing people to drill for oil, while we're shutting down the Keystone Pipeline, we're putting in all of our energy and focus on things which aren't working. You saw today that Ford announced that all their car sales of about two and half million units, they sold only 3%, of that was an electric car.
So clearly, being good business people, at some point, they're going to scale back that energy dream, and I drive down the highway all the time and I see these hideous windmill farms out along the interstate. But if you read up on them, the amount of energy that's used to create the wind mills is about as much as they produce in their useful life. So we've gotta change up this agenda, and yet I don't have any faith that the government will.
I am convinced just from what I have seen and heard and read, that many people in Congress have a vested interest through stocks they own in these green energy companies, that they're never going to do that willfully. So you're gonna have to have a complete change of mindset, change in command. And if they can't do it, if people do not get back into embracing and promoting oil and gas, then more than likely inflation will not be able to be tamed, they will continue on and tell some administration that does what Reagan did, which is basically de-regulate it.
Then you have the uncertainty of Trump versus Biden. This is a presidential election year, so we will know in November of this year, 10 months from now roughly who becomes president? And right now, polls are kind of neck and neck, the poll from a week or so ago showed Trump winning by a nose, and now they're saying it's a dead heat, but you have to remember that polls are one thing, but polls this far out a year away are not that accurate. There have been many cases in American history where people poll very poorly, and then as the election neared suddenly they started rising in the polls and they pulled off the victory.
So we don't really know on this one, what would happen. This was one of the toughest ones to predict. At the same time, you've gotten Biden's health clearly deteriorating. If you watch him on TV, you watch him walking, it's more than a little alarming, and who knows where that will be by November. You have all kinds of wild cards, anything could happen, nobody knows where that one is going to go. It is hard.
The other thing that you have trouble discerning as an investor in the concept of Trump versus Biden, and they'll clearly be. Those will be the two nominees, I know that we're in this Iowa caucus right now, but it's a jock. Trump is so far ahead statistically, there's no way anyone's going to win the nomination besides Trump, but you have these third party candidates who are jumping or will probably jump in. One is Robert F. Kennedy Junior, the Democrat yet he was an anti-vax and masker. And then you have the No Labels party, which has been quietly doing a huge amount of fundraising, and as a result, they've been clearly getting ready to do a campaign, they just don't... We don't know who the candidate will be, it appears it will be more than likely Joe Manchin that's who most people believe it will be.
And so that is gonna be a great disruption to the political process regardless of whether it's Manchin, Kennedy or both. You have to remember back in '92, and I was there, isn't it all, back in good old 1992, that Ross Perot entered the race as a third party independent, and he took 19% of the vote, and that was a lot. And in fact, if you look at the statistics, what happened there, the reason that Clinton won in '92 was Perot. That 90% of the vote was almost all Republican votes that would have gone to Bush, and yet Bush didn't get them, so that's another wild card that none of us really know. We don't know, but people say, "Ah, well, if Kennedy enters or Manchin enters, that will clobber the Democrats," and then others say, "No. It won't, it will clobber the Republicans." I have no idea. I'm not really big political person, I don't follow it anywhere near as much details you may.
But I just know that we didn't have a third party candidate of any fire power in election ever since '92. So this will be the first election in 32 years, in which you've got a third party that may well disrupt the polling and disrupt what happens. And then finally, did we ever really fix the election issues from 2020? I don't think we did.
I know there was lots of litigation file, but it was mysteriously all settled without ever going to trial. We'd never had any trials on voting machines or ballot box stuffing or really anything. So I'm not even sure even if you knew the answer of who would win, that actually... Whoever should win actually would win because I have no confidence we've ever even fixed those problems. So the Trump versus Biden one, that is a really hard one to decide on.
Then you have the health of the US banking industry. Now, you know as well as I do, that the interest increases from 0.25 to five point whatever is killing the banking industry, because if you've got a loan on your books as a bank and you took it out years back, back when the interest rates were at 0.25 with the Fed, then you have some pretty low rate loans out there. But suddenly you're having to pay depositors instead of zero percent roughly on a CD, you're having pay five.
So your cost of money has gone up exponentially, and that's gotta be killing bank profitability. Again, it's not a sector that I study in any form or fashion, but I do know the sector of common sense, and you can't do what Jerome Powell has done and not assume banking problems.
Now, you saw it earlier in the year, you saw three banks that failed and people went in to tizzy and were running around screaming. But things have been far worse in the past, 3000 banks failed during the savings and loan crisis. Now, there's some other items though out there that are also causing problems that don't get a lot of media, number one is you have two, roughly two trillion, it's a little less than $2 trillion of office and retail mortgages coming due over the next 24 months. That is a lot, that's about a third of all of your office and retail debt coming due. And here's the problem, it's not just that it's a lot of debt. The problem is that office buildings and shopping centers are probably universally upside down. If you look at the average vacancy rate on office in the United States right now, the average is about 20%, but if you're in St. Louis the average is 50%.
So it's basically a market by market, but even if you just assume 20%, there's no way those banks can ever appraise it where they were at 20%. Between the increase in interest rates and the fact that the office buildings are having much greater vacancy and lower rents, it is definitely going to be a suicide mission to try and get that debt redone. So you're gonna have an enormous amount of defaults, you haven't really seen it yet, you've seen a few, but it's gonna get far, far worse.
Let me give you an example of just from the St. Louis area, up the highway from me here. The largest building in all of downtown St. Louis recently sold this giant skyscraper building, I believe at one time called the AT&T Center, sold for $4 million at auction. This is a building that I'm going to bet, although I don't know the final number, it must have cost somewhere between 60 and $100 million to build. And it sold for $4 million dollar and it's not old, it was built in the '80s. So it's basically a brand new office building. You might say, "What happened to it? How could this be?" Well, because no one needs office anymore, technology has changed how we work, we work remotely now, or many businesses do, they don't need the office space, they don't need fancy space.
So the problem is the building got totally empty, and then when it hit the market between the cap rates and the horrible vacancy, in fact, it had no income really, it wasn't worth much. Why? Because they're gonna have to re-purpose the building, there's no demand for office in downtown St. Louis anymore.
So instead, they're going to make it into apartments. It's costing them $100 million is the estimate to make it into a department building. So therefore they can only play the $4 million 'cause they have to pour 100 million more into it. The same thing as shopping centers nationwide, every market I go to, I like to do a lot of walking to try and walk 10,000 steps a day in the winter, in the summer. What better place it's heated and cooled than the mall?
So I am a mall walker, like many older Americans, when I go out to mall walk in any market across America, I see nothing but vacancy. I also see a lot of the blue chip anchors gone and replaced with goofy stuff. Even at the mall in St. Louis, there's a mall called West County mall, they have a place in there selling garage sale items, this is in space that was designed for something like the caliber of a Nordstrom. And now it's just like a couple of people selling junk that didn't sell a garage sales around St. Louis. So you're in for a huge banking issue. The question's who is carrying the debt? We don't know who's carrying the debt. They're being very secretive about it, probably because they know it'll be a run on the bank if anyone knew who's carrying all that office and retail debt. That's gonna be a disaster.
And then you have the federal government, who just cannot regulate things enough. They've never made a regulation they did not like. Trying to pass new regulations in the banking industry on capitalization and items that are gonna cause banks to again have further problems 'cause they can't lend as much money as they did before. So that's not gonna help.
So the bottom line is, you've got just a real mess on your hand. And if you look at the three bank failures from earlier this year and last year, what happened there was back in the olden days, back in the Great Depression and all the way to modern times, if you had a run on the back, here's what people would do, they would go down in-person and stand in a big old line and withdraw all their money, and they had to get whatever they're gonna withdraw done during office hours. So you had to start up at whenever the bank opened 9:00 or 10:00 in the morning, and then the bank shuts at 4:00.
So the bank would only lose deposits of as many people as they could in-person process during that time, and you know they would give them every delay known to man to minimize how many proceeded through the doors during that period.
And then you had to wanna go down there and do it. You had to wanna go down and stand in line all day at the bank. So many people might say, "I don't think I'm gonna go do that." What caused those banks to crash last year was that you can now move your money instantly right on your telephone, right online. So people don't have to stand in line, they don't have to queue up, they don't have to wait till the door's closed for the day. The bank can't... Oh yeah, it's nearing 4 o'clock so we save the bank. Because today that bank is open 24 hours a day online, and you can move your money as much as rapidly as you want to. That's why you're seeing people starting to talk about regulations to stop you from being able to move money like that. Because the banking industry is terrified of what could occur.
You have to remember that in 1988, 3,000 banks crashed through the Texas S&L crash, that is 1000 times as many crashed last year, and you remember all the media and all the excitement and terror of those three closing, imagine 3000. Imagine the impact that will have on the economy if that were to occur.
Then you have the US budget deficit. Boy, you talk about a hopeless situation. There is no interest on anyone's part in Congress to really solve it, so we just keep losing and borrowing and losing money and borrowing more. So right now we're reaching around 35 trillion. To put that in perspective, that's $100,000 for every man, woman and child in the United States. We have about 300 million people, and it's about 100 grand a person. Now, when you overlay that onto the fact that most Americans have no money, 70% don't even have $1000, the average net worth, household net worth in the US is about 60,000, and that's including such people as Elon Musk into that average.
How in the world, if you take an average of a family of four, there's 400,000 of federal debt, yet it only has a net worth of nearly nothing, $40,000 maybe, you know that's not even being realistic. So it's a hopeless situation. It would be like somebody who has 50 million of credit card debt, and they work down at Jack in the Box, it's just... It's never going to happen. So that one again is a really tough one. We are on pace right now, if you read the reports, we will be hitting 50 trillion by 2033. That is not that far away. That's just roughly a decade.
So in a decade, we will mushroom from 35 trillion of debt to 50 trillion of debt. So we're well on our way to being $200,000 per person. We were gonna have... Every household in America owing at some point in the not too distant future a million dollars per household. And the problem is no one is ever going to fix this, they... Basically the theory as you kick the can down the road until you retire from Congress and that's how it works. And there's no way to fix it. You'd have to have insanely draconian tax increases and you have to stop basically all spending all together to even have a prayer of fixing it. It would be like the household with the horrible, horrible Visa card saying, "You know what, here's the deal, from now on, all we're gonna eat is one can of pork and beans a day, that's all we can afford, we're gonna pay down debt with everything else. We're not even going to have television anymore, we're not gonna have electricity anymore. We're gonna just basically just sit around in the dark and eat a can of beans every day to pay down the debt." You know, that's not gonna happen. So the budget deficit issue, any sensible person would say, "That cannot be fixed."
Then you have world instability. Now, I don't know where it all, how it all crept up. It happened right now, you can make your own conclusions, but we've got all kinds of problems out there, right? Whether it's Ukraine, whether it's Israel, we have wars, and we don't know where those will all go. And then you had the head of China recently starting to talk like, oh yeah, well, we're gonna take Taiwan. Didn't say when, didn't say how exactly is it gonna be peaceful or a leveraged buyout? I don't know. But the key question is, are we gonna get more involved in these issues than just financially? Right now we were given a ton of money to Ukraine. We've been giving money and arms to Israel, but is it gonna be more than just that? Are we actually to get sucked into World War? Are we going to have to actually send American to these countries to fight? Are we gonna have... Start firing missiles at each other?
That one's terribly scary, scary one for any of us. And of course, that creates a gigantic wild card of the economy, because all it would take is an act of terrorism, all it would take is someone to blow up the US power grid, and you could do it probably just using the internet anymore. And then what do we do? And that danger is always lurking out there, we don't really think about it a whole lot, we haven't really seen or heard much about terrorism since 9/11.
But we know it's omnipresent, that's 13 years without a major attack of some times that impacts the US economy. And so again, that's a big risk factor. All right, so let's talk about what these things will do to the mobile home park industry based on how all those bets turn out. First, let's talk about what the perfect hand would be, of all these cards we just discussed, what would the perfect hand look like? How would that be dealt? What would that look like? Well, the perfect hand for mobile home parks would be a recession, a good old-fashioned recession, because that increases the demand for affordable housing, and then a corollary is it creates lower interest rates. So we want a recession as park owners. If you were around during the 2007, 2008, Great Recession and you went to any industry events, you'll see people back then were talking all the time about, "Oh my gosh, this recession thing is awesome." I don't care what your political standings are, but for whoever you think will continue the recession for as long as you can possibly be milked. So strictly from a mobile home park owners perspective, recession, that would be the good card there.
And then lower interest rates obviously are another really, really good card to be dealt if you're a park owner because with lower interest rates, you end up with better and bigger spreads, which is spread is between the cap rate and the interest rate, which makes everything better because your park is still producing the NOI it was producing, but more of it goes in your pocket, and less if it goes to the banks in the form of interest rates. And of course, that also makes cap rates decline, which if you own a park, makes your part more valuable. It also reduces the monthly cost on financed homes. If you've got homes in your park with residents who own their own home and maybe did it through a financing program for a mobile home financier, again, it eases the burden on them. So basically lower interest rates is great if you are a mobile home park owner. In fact, in all sectors of real estate, lower interest rates are what you want.
Then you got the inflation one. Now, I don't think inflation can be solved, I have no hope of Jerome Powell ever getting inflation down below 3%. So that will be saved for whatever administration of the future wants to deregulate energy, but until then we can all pretend like it will mysteriously happen but yet it will not. In fact, Jamie Dimon from JP Morgan Chase Bank also shared that same view point I think today in an interview that we're not gonna get it any lower. In fact, his concern was it will start going up again because it's not tied to anything but energy. So if energy goes up, inflation goes up, the energy goes down, inflation goes down. With the Middle East wars right now, that's gonna put a further push on energy to go up, so I don't think you'll ever beat that. So that card on the perfect hand would simply be survivable. Let's have inflation that's survival, let's not go to 10% or 15%, which leads to the American collapse, but 3% inflation, that would be okay theoretically.
As far as the presidential election, if you're a park owner, you clearly want Trump, because Biden has announced voraciously since election, his dream of eliminating capital gains tax. So just on that one item you would not want Biden around, because since we're in the real estate business and you hold a property for a year and you fall under capital gains, to strip that away and say, "Oh well, we're not gonna have capital gains anymore," that would be a huge hit to real estate, whether you already own a park, you were looking to buying one. Taking that way is really going to crimp investment.
On top of that, Trump probably is the guy that can deliver stability on interest rates and many other items. So on that one, the perfect hand would probably be Trump, regardless of your political stance, I'm talking just from a mobile home park perspective.
Then of course, you wanna have no banking crisis would be the perfect hand, as far as the park business is concerned, because we wanna keep the maximum number of financing options open. If you have a banking crisis with massive bank failures number one, you don't have many banks out there you can borrow from. Number two, people like conduit lenders get frightened off and run away. So you could reach a moment which has happened before, where the only financing you have, it would be Mom and Pop seller caring or possibly Fannie Mae and Freddie Mac if they can stem the crisis. So on that one, no banking crisis would be preferable. On the deficit, that one is hopeless, there's no point in even predicting because you know the answer, you know that the deficit is gonna continue to grow, it's unstoppable. Can never be cured.
So as a result, we just don't want it to get to such a level that America ends. But I'm assuming it's... That one, we can't move on, so that card really... We can't put a lot of store on it one way or the other, 'cause it's very predictable, I'll take anyone's bet right now that the deficit continues to grow, and no one will take that bet because everyone knows it will. But then you have the US being spared from disruption militarily, and that can come in the form of a war, it could come in the form of terrorism. Because you blow up our power grid, we're back to a hunter and gatherer society. Today, everything technologically is really puts you much more at risk than we used to be, because you don't have a computer, you can't do anything, you don't have computers, and we don't have the ability to do banking in the country. You couldn't buy anything at the grocery store because everything they have is electronic based on computers.
So there's many, many ways that America could be drastically whacked. If you look at just COVID and how crazy that was. You probably remember going to grocery store and you couldn't get toilet paper, you couldn't get Kleenex, couldn't get... I remember grocery stores where the entire shelves of the store, even to my small town in Missouri, were almost completely empty. The only thing on the shelves were things that were damaged, like people didn't let them buy the box of Kleenex that was already open. They didn't wanna buy the sack of Oreos where this thing was already opened and half of them fell out. But that wasn't even that big a deal, and look how badly we performed as a nation in dealing with that.
So if you were to raise the ante up into something bigger then it would be quite frightening. So we don't want that to occur as investors, we don't wanna have anything that takes us back to basically having to hunt for food in our yard.
Now, the big reward, if you were dealt that hand as a mobile home park owner is it would give you a shot at the biggest spreads in American history. And for that example, all you have to do is look at the case study of 2007-2008. If you owned a mobile home park in 2007, 2008, and bought one in 2007, 2008, it's pretty assured that you now look like a genius. Because what happened is not only did you buy a park, hopefully, well, that you could raise the rents and increase the occupancy and cut the costs and all that, and always in the goal of trying to get a three-point spread. But then you saw interest rates decline to such a level that you had a built-in five-point spread if you simply got into a three-point spread because the interest rates on the loan fell several points.
So we haven't seen that again since 2007-2008, but you're gonna see it now, because if we truly are at the top of interest rates, and Powell has basically said that we are and everything points to that conclusion, and if rates decline two to three points, which is the average since 1950 than any investor right now who buys a park will look like a genius. Even if you could only buy that park marginally where it barely carries its own weight, and you're total failure in instituting your turnaround plan. You'd still look like a genius. If you only had one point spread and the rates drop two points, well, you got the three points spread.
Now, what do you get on a five-point spread? Well, a three point spread is a 20% return, a five points spread, if you are in the numbers, it's mid 30% return. That's an insane level of return, you can't replicate it. It's a once in a generation opportunity. So that's the big reward if you get the winning hand. Now, what's the corollary? What's the bad hand? What would be the worst hand you could get as a mobile home park owner or a mobile home park buyer?
Well, the soft landing would be a start to a bad hand for mobile home park owners. Because if you have a soft landing, then it doesn't do much to spur the demand for affordable housing, but even worse, it doesn't create the environment where people want to drastically lower interest rates. If interest rates decline two and a half or three points during recession since 2050, they don't decline at all when you're not in a recession, they remain pretty much static and then they slowly move. But if you want a big reduction fast, you need a recession, so a soft landing would not be good news for the mobile home park business.
And then of course, you have the corollary of that, which would be no reduction in interest rates. So that means that single-family home mortgages would remain at 40-year highs, so homes won't sell at all. Really nothing sells at all, it would be just terrible, all your other real estate sectors would basically be wiped out. So whether you're an office or retail or self-storage, it doesn't matter, you're doomed. If you buy something back before the rates adjusted, you'd never be able to come out of it. In our industry, at least you can raise the rents enough to still be a success story, but nevertheless, you want lower rates, so not reducing interest rates, which is may well be what Powell would do, 'cause he's never gonna fix inflation, never gonna fix the deficit. So it's very possible he'd say, "Oh well, what the heck? We've got the soft landing, I'll just hang in there at the current rates until we can finally get inflation below three," which you won't get 'cause there wouldn't be any energy deregulation.
Now you also have to remember that when Powell talks tough on interest rates, and that he will hold firm on them, you gotta remember when you've got 35 trillion of debt, which means you are the poorest country in the world, the... No one has that much debt, we are the kings of debt. He has to pay interest on that. And you probably read the articles already that the interest is now getting to be about what we spend on defense, and if he doesn't get it cured, that's only with the first reset of interest, but when you have to apply a full, say, 5% interest to 35 trillion of debt, well, that's gonna basically wipe America out. So it isn't like he has no skin in the game, he's gotta try and find some way to interest rates down, but you have the soft landing, it's gonna make it a lot more difficult.
And then there's always the chance that the inflation will rise, that's one of the big features of stagflation is inflation could go crazy. I'm not talking the inflation of Germany style where it's like 800% per year. But if inflation continues on it, let's say three, then it starts going back up, some say it could happen, go back up 8%, 10%. Back to the days of Carter, 10% inflation was kind of a typical feature. That's gonna increase your operating costs on mobile home parks, and it's gonna make the Fed keep the rates higher forever. It could even take them up again, higher.
The only possible benefit from a real estate perspective, if inflation rises is it also increases everything as far as the rents that you have, and it lowers the real dollar value of your debt. So some believe that Carter through his own stupidity back in the '70s, put in motion a good period for real estate, real estate did well during that because it inflated and inflated values. But we don't wanna have it to such an unsustainable level that the company folds, that's problem.
Another bad hand would be Biden because if you have Biden again, he is going to spend four more years going after his pet project of eradicating capital gains tax. Now, will he have Congressional support to do it? I would hope not. But you have to remember that if you look at the way the American wealth is spread today, it's kind of scary, we're becoming a Marie Antoinette country construction. So today in the US, to be in the top 1%, you have to have about $10 million in net worth. To be in the top 5%, 2 million. To be in the top 1%, 1 million. I'm sorry, I'm sorry. No, that was top of the top. 1%, 10 million. The top 2% it's 5 million, top 5% is a million, but many, many, many, most of America does not fall anywhere in that range. And we're a country today in which you've got... Over 50% of everyone in the US does not pay income tax. They're all basically on some social program.
So when politicians really go to bat to save capital gains tax, who benefits from that? People would say only the wealthy do, only real estate people do. So it's very possible there wouldn't be any support. You know there'll be no support when Trump's wealth tax issues expire, no one's gonna vote to maintain high levels of estate tax exemption. Because most people, 95% of Americans don't qualify anyway, so they don't care. So you would have, with Biden, you would have... I'm almost certain, a continual war on taxes in ways that would have a meaningful impact on you as a real estate investor. And then of course, the banking crisis. If we have the Texas S&L crash, if we have 3000 banks and bear in mind that was just in Texas.
So if you had a national banking crisis and you take the Texas crisis and you overlaid it across America, then how many banks are you talking fail? If you had 3000 in the Texas, Oklahoma area. Could you have 10,000? Well, theoretically, you could. What would it mean? I mean, you literally could not borrow money, all the banks would be insolvent, so you'd have to be just wanting to buy a mobile home park, go to Mom and Pop, say, "Hey, Mom and Pop, you wanna carry 'cause I can't get a bank." The only wild card in that would be a Fannie and Freddie remain stable, because right now, Fannie Mae, Freddie Mac represent over 50% of all mobile home park loans in dollar value.
And then let's just give up on the deficit, let's not even make that a card, I give it the same level that I do on the good hand, which is we cannot fix it, and that's just the way it is, we're not gonna be able to fix it. So you have to invest today accordingly with the assumption that we are always gonna be an extremely in-debt country.
And whatever ramifications we have will be perpetually felt. So as it takes up more and more to service out of our federal income, we will have to pay that. Does it mean that it's going to cause Social Security and other issues to fail earlier? Yeah, you know it well, does that mean we'll have to scale back on things? Oh absolutely, we will. The money that... You ultimately have a zero sum. At some point you really can't borrow anymore, and so then you have to have the hard choices of where you spend the remaining money you have and will that decision come to America? Oh, it definitely will. Will it be within the next decade? Probably not even at 50 trillion of debt people will still kick the can down the road. But at some point it will spring up and become a gigantic issue that no one can really handle.
And then you have the war escalating. Again, this is the wild card that none of us can predict 'cause we don't know the direction of Ukraine, we do not know the war in the Middle East, is it going to be... Is it going to get larger? Or is it, will become contained and we don't know what our relationship to those wars will be or whatever new wars or if China invades Taiwan, and then we don't know anything about terrorism. So if you suddenly had some giant act of terrorism in the US, similar to a 9/11, but maybe even worse, what happens? Maybe the country could have the soft landing and then the terrible terrorism event, and suddenly we're in a full-on great depression, it's hard to say. That wild card is always going to be with us.
So the key thing is, what do you think is gonna happen? And that's where you should place your bets. So if you feel like we're gonna get the magic hand, if it's gonna be we are gonna have a recession, that we won't have a full-on banking crisis, then it's probably a really good time to buy a mobile home park because you're gonna end up without any effort of your own having a really, really gigantic spread as the interest rates decline which is exactly what happened coming off the 2007, 2008 Great Recession.
But if you think to the contrary, we're gonna have a soft landing, and so we're never gonna have lower rates, then maybe mobile park investing would not be for you. Or if it was, it would have to be a terrific deal that you feel that even if interest rates never decline or even if they went up slightly, that you would still be safe. The key item is you have to make these choices based on what you truly think, you have to be authentic with yourself and say, "Okay, what do I think is really going to occur." 'Cause here's the bad end and you gotta do something. If you look at the Army's handbook on Army management that they give all the army officers, you'll see that in there, they spread the theory of what they call the 80% solution. And what the 80% solution is in the military books is if you're under fire, and you guys are dying and you're not making any progress, you have to do something, 'cause if you stay there, you will certainly die.
The enemy is going to figure out exactly where you are, they're going to pin point it, then they're just gonna blast you with mortars until everyone is killed. So you have to take movement. And the Army has actually modeled this with like war games, and they came to conclusion that 80% of the time the people who moved did better than those that do not.
So remaining static is not really the good choice. So whatever you think these things will turn out and they will all turn out this year, we will know by the end of this year on everything I just mentioned, what happened, so we are the before. Moving right this second to the after movie, which will be in January of '25, we'll know the answer to all these things. It will no longer be uncertainty, it will no longer be in doubt. You'll know who's president, you'll know what happened with interest rates, you'll know where inflation's at. You'll know what happened in Ukraine, you'll know it all. So if you can look in that crystal ball and make your best bets, then you can do well, based on what your thoughts were. But you do gotta do something, you can't just sit back and just put your money in the stock market. Which again, if we have a recession, will get clobbered, most predict a 20% to 30% decline. So staying in the old ways, isn't a successful plan.
So I would urge everyone on everything we just discussed or more issues, if you have them, to think, "Okay, what do I truly think here?" And then invest based on the hand you think you will be dealt. But if you plan accordingly, there'll be so much movement yet so much resolution this year that you can make a really good profit. You can completely change your investment future if you make intelligent choices based on what your bets are.
All right, now we're gonna go to questions. And again, I already have a ton of questions here in the chat box or the question. So I'm going to just plow through these and we're gonna keep going until we run out of them and they're still pouring in. So here we go.