BiggerPockets Real Estate Podcast Summary

Episode Title: Scott Trench: How I'm Protecting My Money From “Irrational Exuberance”
Host: BiggerPockets (Scott Trench filling in for Dave Meyer)
Release Date: March 14, 2025

Introduction

In this episode of the BiggerPockets Real Estate Podcast, Scott Trench steps in as the host to present his comprehensive macroeconomic thesis for 2025. Recognized for his insights on real estate investing, Scott shares his bearish outlook on multiple asset classes amidst what he terms “Irrational Exuberance 3.0,” a concept derived from economist Robert Shiller’s work on asset overvaluation.

Macro Thesis Overview

Scott begins by outlining his two-part approach to analyzing the current economic landscape:

1. Assessment of Major Asset Classes: Cash, treasuries/bonds, residential real estate, commercial real estate, stocks, Bitcoin, and gold.
2. Risk and Opportunity Identification: Evaluating the most significant risks and potential opportunities within these asset classes.
3. Personal Portfolio Strategy: Detailing his own portfolio adjustments and the associated tax considerations.

Interest Rates Analysis

Current State and Predictions

Scott delves into the complexities of interest rates, emphasizing the importance of the 10-year Treasury yield as a key indicator for mortgage rates and commercial real estate financing.

• Yield Curve Dynamics:

  • "What we see today is a slightly inverted or flat yield curve... the federal funds rate is four and a quarter today and we see that the ten-year rate is also four and a quarter." [02:30]
  • Historically, a normal yield curve would feature a significant spread between short-term and long-term rates, indicating economic growth expectations. However, the current flat/inverted curve suggests market anticipation of future rate cuts by the Federal Reserve.

• Potential Federal Reserve Actions:

  • "For the yield curve to normalize... the Fed will have to lower rates six times in 25 basis point increments." [03:10]
  • Scott argues that such aggressive rate cuts are unlikely without triggering a deep recession, leading him to project that the 10-year yield may rise to around 5% in 2025.

• Inflation and External Factors:

  • Persistent inflationary pressures, demographic shifts like the retirement of the baby boomer generation, and potential tariff implementations could sustain high interest rates.
  • "If inflation is high, the Fed will tend to increase interest rates to put downward pressure on prices." [04:45]

Money Supply (M2) Examination

Scott challenges the notion that the recent asset price surges are solely due to money supply expansion.

• Historical Growth vs. Current Trends:

  • "M2 grew about 39% from January 2019 to January 2022... from 2022 to the present, there hasn't been a material increase in the money supply." [05:20]
  • Despite a significant increase in M2 during 2019-2022, the post-2022 growth has been minimal (1.6% from January 2023 to January 2025), while inflation has continued to rise.

• Implications:

  • The disproportionate rise in asset prices compared to money supply growth suggests speculative bubbles rather than fundamental value increases.
  • "The growth in asset values in the last two to three years is due to an extraordinary amount of speculation and not growth in the money supply." [06:10]

S&P 500 Analysis

Scott provides a critical evaluation of the S&P 500, highlighting concerns about valuation and sustainability.

• Market Capitalization Growth:

  • "The S&P 500 has grown 51% from January 2023 to January 2025... this is a major problem here." [12:50]
  • The index has surged 2.35 times since January 2019, outpacing the money supply growth by nearly sixfold.

• Shiller P/E Ratio Concerns:

  • "As of February 2025, the S&P500 is trading at a 38 times price to earnings ratio per the Shiller PE Index." [13:15]
  • Historically, such high P/E ratios precede market corrections or crashes, reminiscent of the pre-dot-com bubble era.

• Risk Factors:

  • Slowing GDP growth, expected to contract by 3% in Q1 2025.
  • Persistent inflation beyond money supply metrics.
  • Rising unemployment and corporate earnings misses.
  • Extreme fear indicated by CNN’s Fear and Greed Index.
  • "I fear a potential sharp pullback or even a possible crash in U.S. stocks in 2025." [14:00]

• Counterpoints and Real-Time Adjustments:

  • Scott acknowledges the unexpected dip in February inflation but maintains his overall bearish stance.
  • "I will watch it carefully and watch me be wrong on that one too." [15:20]

Residential Real Estate Insights

Single-Family Homes vs. Multifamily Properties

Scott differentiates between the performance of single-family homes and multifamily residential properties.

• Single-Family Homes:

  • "Home prices have gone up about 50% since 2019, which is less dramatic compared to the S&P 500." [16:10]
  • In Barcelona, residential real estate has outpaced money supply growth but not to the excessive extent seen in equities.

• Multifamily Residential Properties:

  • Demonstrates significant price corrections, exemplified by Scott’s purchase of a quadplex in Denver:
    • "Originally listed at $1.2 million... I bought it for $1 million." [18:00]
    • Represents a 20-25% price drop, indicating a buyer’s market in multifamily sectors.

• Regional Variations:

  • Markets like Denver, Austin, Phoenix, Atlanta, and Raleigh are experiencing varying degrees of price corrections and rental adjustments.
  • "I hypothesize that the same reality may be true in places like Austin, Texas, Phoenix, Arizona..." [19:30]

Commercial Real Estate Challenges

Scott paints a bleak picture for the commercial real estate sector, highlighting severe valuation declines and future risks.

• Valuation Drop:

  • "Commercial real estate has declined 18-20% from its peak valuation." [20:10]
  • Cap rates have increased by 30-40% across various commercial sectors, signaling a significant devaluation.

• Multifamily Sector Struggles:

  • Loan maturities from five to six years are causing distress as lenders begin to enforce terms on struggling owners.
  • Declining rents, exacerbated by oversupply in high-growth cities, are undermining asset values.
  • "In Austin, Texas, rents are reportedly down 22% year over year." [22:05]

• Opportunities Amidst Decline:

  • Despite the downturn, Scott identifies this as a prime opportunity for sophisticated investors to acquire distressed assets at lower valuations.
  • "I think that this is a big opportunity... because of this dynamic." [24:00]

Bitcoin and Gold: Speculative Growth

Scott scrutinizes the rapid appreciation of Bitcoin and gold, questioning their roles as traditional inflation hedges.

• Bitcoin’s Surge:

  • "Bitcoin has grown 900% in the last five years while the money supply has grown 40%." [32:53]

• Gold’s Performance:

  • "Gold has paced the S&P 500 in terms of price growth, up about 40-50% in the last two years." [33:10]

• Speculative Concerns:

  • Both assets are outpacing money supply growth, suggesting speculative investment rather than genuine value as inflation hedges.
  • "They are not stores of value or hedges of inflation; there is clearly something else going on. I call it speculation." [34:25]

• Personal Stance:

  • Scott admits to holding no gold or Bitcoin, underscoring his skepticism.
  • "I own no gold. I own no Bitcoin." [35:00]

Personal Portfolio Strategy

In response to his macroeconomic outlook, Scott details substantial shifts in his personal investment portfolio.

• Reallocation Strategy:

  • "My financial portfolio is 30% in residential real estate... 30% in index funds... 30% in cash... 10% in bonds." [36:10]
  • Reduced exposure to equities from nearly 75% to 30%, increased cash holdings to 30%, and allocated 10% to bonds as a defensive hedge.

• Reasoning:

  • Emphasizes optimizing for post-tax net worth available for immediate use rather than long-term portfolio growth.
  • "I believe that I'll be getting a better risk-adjusted return with the reallocation which will offset some of that tax impact over the next couple of years." [38:15]

Tax Considerations

Scott underscores the importance of understanding tax implications when rebalancing or reallocating investment portfolios.

• Tax Impact Example:

  • "If one has a hundred thousand dollar gain... you have a real inefficiency to make moves in your portfolio willy-nilly here." [37:30]
  • Discusses the trade-off between realizing gains now versus potential higher tax rates in the future.

• Strategic Decisions:

  • Opted to pay taxes now with the anticipation of higher future tax rates.
  • "I believe that in the future taxes will go up and that will also include adjusting for inflation here." [38:00]

• Advisory:

  • Recommends consulting with tax planners before making significant portfolio changes.
  • Points listeners to BiggerPockets resources for finding tax professionals.

Conclusion and Call for Feedback

Scott concludes by inviting listeners to engage in dialogue, challenging his views, and providing data to support or contest his thesis.

• Acknowledgment of Uncertainty:

  • "I know that a couple of the moves that I'm making could be missed opportunities if the market continues to compound for the S&P 500." [39:00]
  • Recognizes the possibility of being proven wrong and seeks constructive feedback.

• Invitation for Interaction:

  • Encourages listeners to share counterpoints, especially regarding his money supply analysis.
  • "Please link to that in the comments section here on YouTube or send me an email@scottickgerpockets.com." [39:10]

• Final Remarks:

  • Expresses honor in hosting the episode and gratitude to the audience.
  • "Thank you so much for listening to me today." [39:25]

Key Takeaways

• Irrational Exuberance 3.0: Scott warns of overvalued asset classes driven by speculation rather than fundamental economic factors.
• Interest Rates and Inflation: Persistent high interest rates coupled with stubborn inflation could lead to economic instability and asset price declines.
• Stock Market Vulnerability: High P/E ratios and slowing GDP growth suggest a looming stock market correction.
• Real Estate Opportunities: Significant price corrections in multifamily and commercial real estate present buying opportunities for informed investors.
• Skepticism Towards Bitcoin and Gold: Rapid appreciation indicates speculative investment rather than their traditional roles as inflation hedges.
• Personal Defensive Strategy: Scott has shifted his portfolio towards real estate, cash, and bonds to mitigate risks, acknowledging the tax implications of such moves.
• Engagement Encouraged: Scott seeks data-driven discussions to refine his economic outlook and investment strategies.

Notable Quotes

• "I think we're in a period that I'm calling irrational exuberance 3.0." – Scott Trench [00:02:00]
• "The S&P500 is trading at a 38 times price to earnings ratio per the Shiller PE Index." – Scott Trench [00:12:50]
• "Bitcoin has grown 900% in the last five years while the money supply has grown 40%." – Scott Trench [00:32:53]
• "I own no gold. I own no Bitcoin." – Scott Trench [00:35:00]
• "If you rebalance or reallocate your portfolio, you need to understand that there will be tax consequences for that and those are real." – Scott Trench [00:38:30]

Final Thoughts

Scott Trench’s insightful analysis provides a sobering perspective on the current economic environment, urging real estate investors to exercise caution and proactively adjust their portfolios. By highlighting the risks of overvalued markets and the potential for significant corrections across various asset classes, Scott equips listeners with the knowledge to navigate uncertain financial landscapes effectively.

Disclaimer: The views and opinions expressed in this summary are based on Scott Trench’s presentation in the podcast episode and do not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making investment decisions.