In March 2009, I warned investors of the inevitability of another stagflationary economic cycle. I repeated it in April 2010. It is now coming to pass.

Just like Lyndon Johnson’s “war on poverty” in the 1960s and the tidal wave of government spending it unleashed, President Obama’s “war on income inequality” is again drowning the economy in government debt. And just like that “American Hustle” of the 1970s, this too has resulted in a stagnant economy and stubbornly high unemployment. Can inflation the Fed is so purposefully ignoring be far behind? In a word, no.

This is because the Fed has a 100 percent track record of being wrong about the consequences of its actions. Let me repeat that: The Fed’s track record of being wrong is 100 percent. In fact, it’s so bad that there is a move afoot in Congress by Rep. Kevin Brady, R-Texas, Chairman of the Joint Economic Committee, to create a Centennial Monetary Commission to evaluate the effectiveness (or better yet, ineffectiveness) of the Federal Reserve’s first 100 years. That fills us with confidence when Congress, which is held in universally low regard, is contemptuous of our central bank.

What investors should expect is for the Fed to continue to inject dollars into the economy to forestall deflation of the stock market bubble, which must come as longer-term interest rates rise. After all, 2014 is an election year, and this is why Janet “Light Year” Yellen is now Chairwoman; she can be relied upon to keep the monetary pedal to the metal.

If this turns out to be the case (and why shouldn’t it: Obama and his minions have a 100 percent track record of always doing the politically expedient thing), then general inflation could occur along with a rise in unemployment. As James Dorn, vice president for monetary studies and a senior fellow at the Cato Institute in Washington, D.C., says, “Printing money cannot spur real economic growth, but it can cause inflation and higher unemployment, as in the stagflation of the 1970s.”

Just ask Argentina President Cristina Fernandez de Kirchner – if you can reach her, that is. She has been MIA as blackouts and looting have spread across the country. Like Obama, she and her late husband and predecessor, Nestor Kirchner, were great social levelers – income equality, nationalization of the private sector and similar sorts of stuff. Sound familiar?

Anyway, the Kirchners used higher government spending, financed by money printing, to grow their economy too. However, with inflation at 28 percent and another default like 2001 looming, it’s coming unraveled.

Can’t happen here, you say. We’re the largest economy in the world and the dollar is still king. Besides, we elect our government officials. We don’t have dictators who rule by executive fiat.

Think again. Economic life has become more highly politicized under Obama than at any time in our history. The Fed’s manipulation of the money supply and interest rates has depleted average Americans’ savings, increased risk-taking and reinflated asset prices. This is not a recipe for a healthier economy and economic growth.

For investors, there is no perfect hedge for what is to come. However, a weighting in favor of alternative assets should place you in front of this curve. Hard assets are harder to debase than currencies, and less subject to manipulation than stocks and bonds. Furthermore, they are potable, meaning they can be picked up and moved if necessary. That isn’t a bad thing in Obama’s America.

As for the rest, we’ll just have to wait and see. After all, according to Stanley Fischer, who is likely to become the Fed’s vice chairman: “You can’t expect the Fed to spell out what it’s going to do, because it doesn’t know.”

Robert Smith is president of Peregrine Private Capital Corp., based in Lake Oswego. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.

The post OP-ED: Economy suffering from another ‘American Hustle’ appeared first on Daily Journal of Commerce.

Now that the Federal Reserve is disconnecting the heart-lung machine, it will be interesting to see if the economy can survive on its own. For five years now the Fed money machine (QE 1-2-3) has literally been the lifeblood of the economy.

Ironically, it is this very same policy of quantitative easing that is largely responsible for the upward redistribution of income in our society bemoaned by the current administration. Our easy money/tight credit environment has resulted in a scarcity of borrowers and a plethora of asset bubbles. With the S&P currently trading at a cyclically adjusted price earnings ratio of 24, it’s not cheap.

In my opinion, the equity market at this moment does not reflect the “real” economy, but instead is the product of central bank machinations. This is true both here and abroad. Central bankers the world over are printing money like mad to support/revive moribund economies. They are flogging a group of donkeys as if they were racehorses.

Why that should concern investors is simple. Historically, the average return for investors holding equities is 6 percent per annum. Now the great thing about having any usable measure of value is that it is “mean reverting.” This means it has to spend some time below its mean as well as above it. Thanks to Bernanke Inc., our market simply hasn’t done that. This suggests that from this level, someone who bought and held a broad basket of stocks for the next 15 years could expect roughly a 2-2½ percent real return.

So, thanks to the Fed’s machinations, investors may be looking at very poor future returns. Even then, this is not likely to be a smooth ride. There could be some very tough years mixed in with that 2 percent return. If I am right, and the stock market is another bubble in the making, it will end badly.

This will likely be exacerbated by downward pressure in the housing market. This is not something much noticed or commented on by the media or investment community, but it’s there nonetheless. The 10-year Treasury note’s yield almost doubled in 2013 (from 1.7 percent to nearly 3 percent). And over the last 18 months, the 30-year Treasury bond’s yield jumped more than 50 percent. So much for the Fed’s illusion of control.

These rates are already hurting new mortgage applications, which fell 15 percent last summer. After a brief respite, they’re sliding again. This “interest rate problem” for housing isn’t going away.

Furthermore, where are the rising incomes necessary to support this “recovery” in housing prices? Incomes were flat for the first decade of the new century, taking a real nosedive after the financial meltdown. When housing prices rise without a corresponding increase in incomes, it is the clearest sign possible of a new bubble.

This artifice was made possible earlier by the easy credit policies mandated by our “oh so wise” government. In deference to political correctness, someone who could fog a mirror could buy a house. This allowed consumers to pay ever higher prices for homes without corresponding wage increases.

However, those days are dead and gone. Banks across the board have tightened credit standards. It now takes an average FICO credit score of 732 for a bank to approve a loan. Compare this to the “go-go” days of housing when applicants with scores under 600 were approved regularly.

As sound as these reasons are, tighter credit standards are certainly not good for housing prices.

Finally, there’s the institutional component, or more specifically its looming exit. According to Goldman Sachs, almost 60 percent of home sales in the first quarter of 2013 were cash (read institutional) transactions vs. 19 percent in 2005. This means first-time homebuyers (the most important brick in the wall) are still locked out of the market.

The problem is that many of these same institutional investors find it a lot easier to buy homes with all of “Helicopter” Ben Bernanke’s funny money than lease or flip them to someone else. It was recently reported that American Homes 4 Rent (AMH), after going public and buying homes all over the U.S., had nearly half its homes sitting vacant as of June 2013. Oops!

The Carlyle Group, a private equity firm with $2.3 billion in real estate holding (and home to several past presidents) is actively reducing its multifamily holding. Just like with the stock market, rising interest rates, languishing incomes and tight credit means an indefinite rise in prices just isn’t in the cards. Cash is looking better all the time. With the largest sovereign wealth fund in the world, the Norwegian krone is probably a safe bet. As the best-run city state on planet Earth in addition to being the most business friendly, Singapore and its dollar also beckon. Bon voyage.

Robert Smith is president of Peregrine Private Capital Corp., based in Lake Oswego. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.

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Janet “Lightyear” Yellen gives the market just what it wants: more stimulus! As she recently sailed through her Senate hearing, Yellen delivered dovish comments that strongly suggest that the U.S. economy can count on more stimulus support (quantitative easing) for a longer period of time than anyone anticipated.

A detailed reading of her comments reveals that the Fed has “more work to do” to help the economy. Nowhere in any of her comments was there even a hint of “tapering.” Sure enough, U.S. stock futures hit a record high following these comments.

For the record, Yellen said “you (do) not see stock prices in territory that suggests bubble-like conditions.” I believe it was her predecessor and mentor Ben Bernanke who said exactly the same thing in front of the housing market bubble.

Because the Fed has an almost perfect record of being 100 percent wrong in terms of prognostications, this should give all investors pause. However, in all likelihood it won’t. Asset bubbles are driven by emotions – greed, to be specific. And greed does not abate gradually. It is shattered by trauma and replaced by fear.

I fear that in the long run the current measures of asset purchases and artificially low interest rates are not a temporary expedient, but the new direction of long-term Fed management of the economy. Fast forward to 2020 and you have a Fed with a balance sheet of $10 trillion in assets vs. a mere $3 trillion today. Unwinding this in anything other than a catastrophic manner is next to impossible – even without the participation of other central banks around the world.

With everyone else on board, a global unraveling similar to 1929 may be unavoidable. This is because each nation ultimately will act in its own rational self-interest, and depart from this course even if it is detrimental to the general interest. When this happens, barriers go up and the downward spiral begins.

In the interim, retirees, pensioners and savers continue to be crushed. Current interest rates for many passive investments are below the inflation rate. This squeeze will only be exacerbated if policy makers follow Yellen’s urgings to accept higher core inflation as the necessary prerequisite for promoting full employment. How do these innocents preserve their wealth or maintain their lifestyle in the face of this onslaught? The simple answer is they don’t.

If this is really the case, why go down this path at all? In its simplest form, the Fed is little more than an economic central planning agency staffed by unelected, unresponsive career government bureaucrats. I know history isn’t taught (not relevant) in schools anymore, but communism failed precisely because centralized economic planning doesn’t work. Yet we see central banks around the world assuming an ever greater role in our affairs.

Strangely enough, even though these institutions and their staffers have a greater impact on financial markets than anything else, they are seldom held responsible for their misguided actions. They simply segue from the global stage into genteel retirement where hagiographic biographies are written about them (think Alan Greenspan and “Maestro”). In the meantime, taxpayers, retirees, pensioners and savers can go fish.

Robert Smith is president of Peregrine Private Capital Corp., based in Lake Oswego. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.

The post To QE infinity and beyond! appeared first on Daily Journal of Commerce.

I thought it apropos to use the line from Bob Dylan’s famous song “Like a Rolling Stone” to sum up the Fed’s current predicament.

After nearly five years of unprecedented monetary stimulus (QE1, QE2, QE3 and now QE infinity) the never robust economic “recovery” appears to be slowing. Housing fervor is cooling, job creation remains anemic and consumer confidence is eroding.

It should be apparent to all that the economy can’t stand on its own. As I mentioned last month, it still needs monetary crutches. Truly, the Fed has “no direction home.”

This becomes patently obvious with the nomination of Janet Yellen as Ben Bernanke’s successor. Acolyte is not too strong a word to use when describing Yellen’s relationship with the current Fed chairman. So, folks who weren’t big fans of Bernanke’s Fed the past seven and a half years probably will like a Yellen-led central bank even less.

Like her current boss and mentor, Yellen is a Keynesian. Keynesian economics holds that private-sector decisions often lead to inefficient macroeconomic outcomes. Hence, it is the responsibility of that supremely efficient entity known as government (Obamacare, anyone?) to intervene in the economy to stimulate aggregate demand (total spending in the economy). This is particularly true during recessions. Hence, the controversial policy of “quantitative easing” (or QE), which the Fed has pursued since 2008.

However, by vastly increasing the money supply over the past five years, the Fed could very possibly be setting the stage for future inflation. In so doing, Bernanke and Yellen appear to be replaying the 1970s stagflationary cycle.

The last time around, it took Lyndon Johnson five years of spending on “The Great Society” and his “war on poverty” to stoke the inflationary fires. So far, we are right on script. Five years of quantitative easing have gotten us exactly the same results: a stagnant economy and high unemployment.

So far, these policies have not driven inflation higher, given the counterbalancing effects of weak loan demand and high unemployment. However, the day will come when loan demand returns, interest rates move higher and the specter of inflation returns.

This outcome may not be of immediate concern to you, but it begs the question of how asset classes perform in this type of environment. In the short run, stocks generally could do well based on more monetary easing. Because there is no proven connection between QE and economic growth, Yellen could just keep printing money indefinitely without getting the results she seeks. However, investors need to be alert to the real possibility that higher stock prices in a flat-line economy may simply be the new Fed-inspired bubble.

Inflation may be slow to arrive; however, when it does, it will increase quickly (as in the late ’70s and early ’80s) and be impossible to reverse without collapsing the economy. As before, this will result in a widespread movement to hard assets. Therefore, investors would be well advised to consider precious metals, energy, land, fine art and natural resources before the next big wave pushes their prices substantially higher.

Robert Smith is president of Peregrine Private Capital Corp., based in Lake Oswego. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.

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“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness … we had everything before us, we had nothing before us.”

No, that isn’t from Barack Obama’s second inaugural or even his speech in Cairo. It’s from Charles Dickens’ novel “A Tale of Two Cities.” However, it does sound enough like the present to give one pause for thought. This is particularly true with regard to the economy.

Ironically, in the age of Obama (“The Great Equalizer”), two very different economies have emerged – and they share very little in common. First, there is the Wall Street economy. This is populated largely by rapacious financial types who spend most of their time gulling unsuspecting folks into predatory mortgages and the like. You know the type – greedy and reckless. Then there’s Main Street, beer and pizza, or barbecue as the case may be, the busted knuckle garage and old Harley parts. The former has benefited enormously from the Fed’s easy money amid tight credit while the latter continues to suffer.

Wall Street houses and equity fund operators are the insiders, while you are the essential grist for their money mill. They move back and forth between the highest levels of business and government with consummate ease, profiting enormously thereby. All the while, hours worked and wages earned by the middle class shrink and return on savings disappears.

Most ordinary Americans have benefited very little from the run-up in equity prices driven by the Fed’s relentless growth of the money supply. Only recently have they seen any recovery in the value of their primary asset: housing. Finally, they have less to spend from their savings because the Fed’s near-zero interest rate policies have slashed these anticipated income streams to near zero.

This schism is exacerbated by the siren call of the stock market. With returns on traditional safe-haven investments next to nothing, more and more money is being lured into a stock market that is essentially played out. How much higher can stock prices go with an economy that is essentially flat and likely to remain so for many more years?

In this environment, the stock market essentially becomes a zero-sum game: someone must lose for others to win. In this case, it’s Wall Street and aforementioned fund operators who are the winners, having driven asset prices up the past four years with the Fed’s funny money.

It should be obvious to all by now that monetary illusion (more, cheaper money) is no substitute for real growth. All it does is grossly distort the allocation of capital and further enrich a fraction of the population that has access to it.

My advice is to begin raising some cash by selling off some better capital gains positions in equities. A larger cash position will allow one to take advantage of the fluctuation in asset pricing that is sure to come.

The game is about played out. How can an economy that is so weak as to forestall the Fed’s much ballyhooed tapering possibly provide more support for further short-term capital gains?

Robert Smith is president of Peregrine Private Capital Corp., based in Lake Oswego. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.

The post A tale of two economies appeared first on Daily Journal of Commerce.

Fed Chairman Ben Bernanke and his minions, after watching global stock and bond markets crater following his remarks about the mere possibility of monetary tightening, are backpedaling as fast as they can. This of and by itself should be disconcerting to investors. It shows more clearly than anything else how insulated from reality our policy makers really are.

It reminds me of Hitler in his bunker, moving phantom armies about on a map while Soviet shells rain down. Anyone who spends anytime on the street knows the economy can’t get along without stimulus from the Fed. Cheap money and a ZIRP (zero interest-rate policy) are the necessary props for the stock market. And the market is Washington’s facade of prosperity.

The obvious fact is that quantitative easing is simply not filtering down to the mainstream economy. Obamanomics has done nothing to increase our anemic growth rate, which remains mired in the 1-2 percent range.

Instead of creating more, high-paying, full-time jobs, the flow of newly minted money from the Fed immediately trickles up to the top echelons of the financial establishment, the banks and the brokerage houses. This allows them to bid stock prices even higher as the public looks on in amazement.

With Bernanke’s foot on the gas and Obama’s on the economy’s throat, how long can this artifice last? As long as investors remain hypnotized, I guess. Like a cobra slowly rising from a fakir’s basket, the higher it gets, the more mesmerizing it becomes. However, sooner or later investors will be bitten and the spell will be broken.

When this occurs, investors’ focus will shift to the reality of our near zero economic growth rate and miniscule job creation. They will then realize that the Fed’s ability and desire to raise interest rates is zero. They are caught in a liquidity trap. In order to revive the economy, they opened the monetary floodgates. To keep it from tanking again, they must now keep them open.

So, for income investors, the search for yield is not even close to over. What you see is what you get. The Fed’s near ZIRP remains anchored firmly in place. Short-term interest rates, money market rates and savings rates will remain close to zero. Bond investors will continue to stretch for yield. A good strategy here may be blending shorter term investment grade bonds with higher yielding corporate issues. In this way, investors gain yield while still managing interest rate volatility.

Income investors will also see a lot more of alternative assets in the near future. On Sept. 23, 2013, advertising of Reg. D offerings will become legal. On July 10, the SEC commissioners voted 4-1 to remove the ban on advertising private securities offerings to the general public. This ban has been in place since 1933.

Robert Smith is president of Peregrine Private Capital Corp., based in Lake Oswego. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.

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The Fed’s conundrum now is how and when to pull back from its massive and historically unprecedented campaign of monetary easing. The tremendous surge in stock prices the past four and a half years has been supported almost exclusively by Federal Reserve monetary policy. The Fed’s zero interest rate policy inflated market valuations as income-starved investors had nowhere to go but the stock market to find dividend income and capital gains.

Now, if the Fed pulls the plug on this massive pool of liquidity too soon, down the market will go. If the Fed waits too long, a new rate-induced bubble will pop and down she will go again. Ben Bernanke (or his likely successor, Janet Yellen) is darned if he does and darned if he doesn’t.

It’s no wonder that Helicopter Ben (so named for his infamous quip that if things get bad enough, one can always drop money out of a helicopter) doesn’t want to stick around. It’s better to leave a hero than a heel.

Once again, it looks like the noble pursuit of economic stability may very well result in increased instability. Did anyone ever think of just leaving the marketplace alone to sort itself out? Of course not. That would mean the political class needing to find real jobs.

This mendacious meddling does, however, characterize how the Fed has historically “managed” the economy. Long before the age of Greenspan (Alan, that is) we have been staggering like a drunken sailor from one economic bubble to the next.

Lost in the mists of time to a historically illiterate culture lies then-Fed Chairman Arthur Burns and the great 1970s stagflation bubble. In a successful attempt to re-elect Richard Nixon and stimulate the economy, he was the first to open the monetary floodgates. Unfortunately, this action also unleashed runaway inflation.

Enter Paul Volcker, that prince of monetary darkness, to slay the dragon unleashed by his predecessor with double-digit interest rates.

Fast forward to the maestro, Alan Greenspan, and a return to a looser monetary policy. This of course ended in a stock market bubble and crash to rival that of 1929. Irrational exuberance, anyone?

When all that cash went to money heaven, the Fed lowered interest rates yet again. This, along with debasement of underwriting standards – brought to you by Barney Frank, Chris Dodd and Maxine Waters – ignited the now infamous housing market bubble.

When housing fell off the cliff, Greenspan’s successor, current Fed Chief Ben Bernanke, rushed into the breach, lowered interest rates to near zero and started printing money. It’s this runaway monetary policy that has restarted a new rate-induced bubble we are living through.

However, even with all this extra juice, the economy remains questionable. Unemployment remains historically high, at 7.6 percent.

As far as the housing market recovery is concerned, even Robert Shiller of the famous Case-Shiller home price index sees storm clouds gathering on the horizon. He recently told reporters, “All this talk that we’re in this great recovery – we probably are in the short run, but the longer run doesn’t look so terrific to me.” He also notes that “we’re living in a totally artificial real estate economy.”

In case you didn’t know it, regular homebuyers are competing against a new force in the marketplace: hedge funds and private equity firms. According to some reports, these institutional investors may account for up to 70 percent of home sales in markets like Florida, Nevada and Arizona.

I guess the takeaway from all of this should be that easy money can’t solve all problems. Since the end of the Great Recession, central banks have been printing money like mad to revive moribund economies. Unfortunately, it isn’t working. Last year the global economy grew at a little more than half the average annualized rate of the early 2000s.

With the stock and bond markets swooning at the mere mention of tapering, investors should realize there is no easy way out. Whenever the exit does occur, price action will be violent. There is no easy way off of the monetary junk.

Robert Smith is president of Peregrine Private Capital Corp., based in Lake Oswego. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.

The post Darned if you do, darned if you don’t appeared first on Daily Journal of Commerce.

“Fed, China sink Japan stocks.”

“Global manufacturing weak.”

“Sales force guidance weak.”

“Global stock slide points to addiction to easy-money QE.”

And that’s just a day’s worth of headlines from the financial press. Truly, our economy is the walking dead: something not quite alive yet not wholly dead, and animated by forces beyond our control. How long can this zombification last?

Perhaps an even better metaphor is “junkie” – an economy so addicted to monetary stimulus, it can’t function without it. The stock market in particular seems to have an insatiable craving for more, cheaper money. Take it away and down she goes.

However, like any other addict, the longer you’re hooked, the cheaper the thrill. First it feels really good and it’s lots of fun. Then the highs aren’t quite as intense and more frequent, bigger fixes are needed. Finally, money runs out and the junk no longer is affordable. It’s withdrawal time, and withdrawals are long and hard.

So Mr. Bernanke, now that you’ve got the economy hooked, what are ya gonna do? The last time I checked, there are no financial methadone clinics, no place an economy can go to get its fake fix. I’d say the Fed has painted itself into a corner. There is no painless way off the monetary dope.

I will, however, give the devil his due. A year or two of easy money post-recession was probably the right medicine. Prime the pump a bit to get things rolling again. Fast forward five years and there is still no pot of gold at the end of the economic rainbow. That makes one think.

It’s logical to assume that the longer the Fed must maintain the fiction/illusion of prosperity through inflated asset prices (please read stock, bond and residential housing prices), the less likely the reality of prosperity is to occur. I think even an institution as august as the Fed is subject to the law of diminishing returns (the tendency for a continuing application of effort or skill toward a particular project or goal to decline in effectiveness after a certain level of result has been reached).

Andrew Bosomworth, managing director at PIMCO, stated, “Hyperactive monetary policy has caused prices of stocks and bonds to rise about 8 percent per year since 2008, twice the rate of global gross domestic product.” Does anyone really think this can last?

A reasonable person must conclude that stock and bond market rallies are nothing more than a central-bank construct. As such, they are artifice and will not last. Stock gurus say the market is “jittery;” I say it’s fake.

So, how long will this chimera last? Bill Gross at PIMCO, a man worth listening to, seems to think anywhere from 12 to 24 months. By this time, markets will begin to divine that the Fed has no real end game in place and will begin pricing in the inevitability of higher rates.

However, in the interim, asset prices will remain grossly distorted – hence subject rapid and violent correction. As such, there may no longer be such a thing as a safe haven in today’s markets. According to Paul Singer of Elliot Management, “that’s one of the sad elements of (today’s market) distortion.”

In the interim, while we wait for the inevitable correction to occur, the Visionary in Chief (remember, he’s not a detail guy) wants to gut municipal finances by imposing a federal tax on muni-bond income (read Obama administration’s 2013 budget). Now that’s reassuring.

Robert Smith is president of Peregrine Private Capital Corp. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.

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As the housing market slowly climbs out of its deepest abyss since the Great Depression, I think it’s a good idea to revisit some old, pre-recession financial friends. After all, even the best of friends can be fickle at times. Therefore, it’s best that investors know what to expect before re-upping the relationship.

For real estate investors, their best friend has been and continues to be the 1031 exchange. In its simplest form, a 1031 exchange allows real estate investors to defer capital gains tax. And in the age of Obama, deferring any tax is a good thing. Government is a monster: Why give it more food?

Section 1031 of the Internal Revenue Code provides a strategy for deferring capital gains tax that may arise from a business/investment property sale. By exchanging the property for other like-kind real estate, property owners may defer their tax and use all of the proceeds for the purchase of replacement property. So, unlike picking a winner on the stock market, it isn’t two steps forward, one step back.

Like-kind real estate includes business/investment property, but not the property owner’s primary residence. As mentioned previously, Section 1031 does not apply to the exchange of stocks, bonds and indirect investments in real estate like real estate investment trusts. With a REIT, one owns shares of a company that owns real estate and not the real estate directly.

After making a decision to exchange, the real estate investor must decide whether to continue along the path of active management or unload the burden of tenants, toilets and turnover.

More and more investors are choosing the latter because of simple demographics. Our population is aging … fast. Unlike stocks and bonds, real estate is an actively managed asset, and this requires energy. Like it or not, energy is something we have less of as we grow older.

Therefore, many owners will choose to relieve themselves of the burden of active real estate management by exchanging into a Delaware statutory trust property (or properties). This allows accredited investors to “trade up” to ownership of a larger commercial property like Target, Kohl’s or Disney. In so doing, the investor will go from owning 100 percent of a smaller, labor-intensive, self-managed asset to owning part of a much larger, remotely managed property (or properties).

The key here for a successful investment experience is management. Real estate is a tangible asset. Therefore, it must be actively managed by someone, somewhere. If property managers do not put investor capitalism in front of management capitalism, trouble will arise and investment success can become problematic.

When people exchange into a DST, they are investing in management as well as property. The importance of this cannot be overstated. Good management is critical to the profitability of any real estate investment.

Because management is critical to this equation, it should be done as close to home as possible. Investors should look for a property provider of sufficient size and financial strength to serve as manager too.

Outsourcing this function is not a good idea. Too often, this results in management placing its own interests in front of investors/owners. If the manager has no “skin in the game” in terms of investor affection and loyalty, it will not end well.

To avoid this pitfall when exchanging in the next market up cycle, investors should stick with “heritage” players in the industry. These are companies that were in at the industry’s inception and have been through multiple ups and downs in the market cycle.

Avoid new and opportunistic property providers like the plague. They will disappear like autumn leaves with the market’s next downturn. Protect principal and cash flow with the best possible credit tenant and the best possible property management.

Robert Smith is president of Peregrine Private Capital Corp. Contact him by calling 503-241-4949 or visiting www.peregrineprivatecapital.com.

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Irrational exuberance, anyone? I believe it was John Kenneth Galbraith, a committed Keynesian who famously said the financial memory is “notoriously short.”

How ironic then that fellow Keynesian and Alan Greenspan protégé Ben Bernanke, the Fed chairman, is doing everything possible to inflate yet another stock market bubble.

I must agree with Richard Lehmann when he says five years from now we will all look back and say, “What were those people thinking?”

This brings us to the reality gap – that yawning chasm between the real economy and current asset valuations. With the U.S. economy expected to grow at 1.8 percent this year and real incomes slumping 3.6 percent (the biggest monthly drop in 20 years), how else can we describe the difference between what’s happening on Main Street and what’s happening on Wall Street?

The stock market appears to be ignoring Main Street’s pain and concentrating exclusively on the Fed money machine. It correctly assumes that the country is now being run by the Fed and Bernanke. The only problem is that his policy of more, cheaper money has no history of ever working. If it did, Argentina would lead the world in terms of productivity and growth.

Perhaps higher stock and housing prices in the wake of slumping wages and declining consumer confidence make sense on Wall Street and in Washington, D.C.; however, they don’t make much sense to me. I am afraid that the powers that be are just setting Joe Six-Pack up for another fall. There’s nothing like being the last soldier at the Little Big Horn.

According to Jim O’Neill, chairman of Goldman Sachs Asset Management, U.S. economic growth would have to accelerate to “ridiculously strong levels” to justify a substantive advance from here for the S&P. What chance is there of this happening when the recently re-elected visionary-in-chief has tasked the federal regulatory bureaucracy to review each of its decisions in light of renewed concern over climate change.

I would be foolish to think that Al Gore’s sellout to Al-Jazeera put that myth to rest. Such is the strength of true believers who soldier blindly on even after their prophet cuts the ground out from under their feet.

I am sure President Obama and his minions will use this fig leaf to stall or defeat real job creation engines like the Keystone Pipeline, hydraulic fracking and additional refining capacity to aid our energy boom. All this will deprive Main Street, the real economy, with much needed jobs and affordable energy.

Investors not wanting to lose more money on this next Fed-inspired bubble should understand who they’re really working for. According to Richard Lehmann, “while the Fed continues to pay lip service to reducing unemployment (Main Street), its real efforts are going into keeping interest rates artificially low and trying to stimulate inflation.”

First, this helps government by enabling it to borrow and spend more money. Next, it helps Wall Street by driving money into riskier assets. The one group it doesn’t help is Main Street.

The inflation and incumbent economic dislocation that will result are anathema to investors. Therefore, be very careful about joining this dance. When the music stops, there may not be a chair to sit on.

Robert Smith is president of Peregrine Private Capital Corp. Contact him by calling 503-241-4949 or visiting www.peregrineprivatecapital.com.

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