Thriving on Planet Bernanke

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Had dinner with a long time successful investor the other night. Over our grilled salmon I asked him where he was putting a good chunk of his money these days. He just laughed and said that wherever he can find reasonable yield and as long as he could understand the investment.

He said that the old rationality of the stock market has been replaced by a newer one based upon too much momentum-driven trading. He also noted with a laugh that the investing landscape today resembled some “unknown planet.”

I’ve known this chap for some time and know that he is not given to exaggeration, and I thought, if you’re like this investor, you too might feel like you’ve crash-landed your investment vehicle on some strange and distant planet…

Because we are living on a strange planet…one that is not on any of my star charts…it’s a newly discovered world that we decided to call… “Planet Bernanke.”

Absurdities of Planet Bernanke

Planet Bernanke is an absurd planet where the search for yield and safety can be as frustrating as it is surreal. It’s a world where banks choke on cash that never enters the economy. It’s an alternate universe where down is up and black is white, where money is created but never used, where the frugal are punished and the profligate are rewarded.

And really, is there any doubt that the Fed Chief’s distortion of the economy is as warped as any altered state of being that ever entered Spanish surrealist Salvador Dali’s byzantine imagination? Soft, melting watches draped over a desert landscape suddenly seems eminently rational in comparison…

And speaking of desert landscapes, the search for relatively safe and simple high-yield investments on Planet Bernanke feels likes a fool’s errand, or worse, an exercise in self-flagellation as investor chase after “sure things” that end up being only shimmering mirages, that quickly fade as burned investors end up Facebook down in the dirt.

It’s as if our whole financial world has been turned on its head the past few years, with no real escape from the inverted Planet Bernanke financial absurdities in sight…

Fed destroying investing

And it’s no exaggeration to say that the Federal Reserve is virtually destroying investors’ conservative savings and earnings paths by declaring historically low interest rates will be carried forward until at least 2014. The ripple effect of this insane and ineffective policy has rendered Treasury Bills and government agency bonds just as useless as CDs and savings accounts for earning any kind of worthwhile yield on your money.

We concluded over a bottle of enjoyable California cabernet that there has not been a time like this in America in living memory, and that the difficulties in finding reasonable yield are hitting investors across almost every spectrum. But the ones taking the some of the biggest hits right now are those safety-minded investors who can’t seem to be able to buy a decent and safe return from the usual places.

And yet, my friend offered, there was hope; reminding me of the old truism that money is never lost, it just changes hands. “The trick,” he said, “is to know where money is going, and then simply, follow the money.” In other words, go where the economy is good. And there are such places; you just have to know where to look.

One exceptionally high yielding option for investors that is serving my old pal well these days is investing with a private lender. The key is to know who the private investment firm is, and look at their record. My friend has invested with a private lender that specializes in local real estate lending in a market that is not depressed but rather, is booming. That market is here, in Austin Texas, but it’s not the only place that is doing well; there are others. If you do a little research, you can find very solid private capital firms that are doing very well for their investors in specific markets across the country.

How can this be in this economy? It’s simple, really; even in depressed times, there are always places that are doing relatively better than most other places. And, even in very depressed places, there is usually islands or pockets where money is being made.

Why would this be?

The answer may surprise you, but it’s simple. Money will always find the most promising and highest returns in every economic situation, no matter where or what it is. And think about it; whether you’re an ultra-high-net-worth individual, a corporation, or just a middle class person, everyone and every investor wants to obtain a profitable ROI—return on investment—or yield. Your job as an investor, like the old saying goes, really is to “follow the money.”

Filling the void of zombie banks

Today, with such tight credit, private lenders are filling the void of the banks. That means opportunity.

In the private lending world, as you might expect, funding will vary per project, property type, amount, equity position of the borrower(s), and a variety of other factors that will drive the yield on the investment.

But, you must be thinking, what kind of returns can you expect in a real estate secured private lending investment? You will be surprised—and envious—of what smart investors are getting for yield on their income portfolios positioned with private lenders…

But there is one key point to keep in mind. That is that in private lending and hard moneylending, credit scores do not drive lending decisions. Rather, funding decisions are based upon equity in the property itself and the real prospects for potential for success in the project, based upon the due diligence performed by the company itself. That being said, successful private lending firms will have a deep bench of local market analysts to perform the rigorous analysis necessary to drill down to the very best opportunities that cross their desks.

Given that information, the returns can and will fluctuate, but typical hard money rates are in the double digits; anywhere from 10% on the low end to upwards of 18% or more on the high end. There are also fees of several points involved as well as potential equity in the project(s) in question, so the returns in private lending can be quite attractive.

Is putting your money in a private lender’s hands to invest for you the only way to get yield on Planet Bernanke? Not at all; but it is one way to get some very high yield on your money with a level of security for your principle. If we’ve got to live on Planet Bernanke, we might as well thrive, don’t you agree?

And those are…The Gorrie Details.

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