Norris Bruce
Jan 27, 2017

Bruce and Aaron Norris Discuss Their Newsletter and Upcoming Event on the Real Estate Radio Show #523

Aaron Norris

Bruce and Aaron Norris held a live webinar this week discussing their latest newsletter and upcoming event 2% Interest, $40 Trillion in Debt, and Other Surprise Endings. In the show they also discuss how the Norris Group is celebrating its 20th anniversary this year. Bruce started the company when he was 44, and when you think about this he hasn’t owned it as long as it seems. In between then he had to grow a lot, and it was a really fun journey. When you buy properties you can do it alone. A lot of their clients actually do this. You basically work at home or in a small office. You have a company with all these facets to it, and for Bruce this was really outside of the scope for him for the first 15 years.

Episode Highlights

  • What will Bruce’s upcoming timing report cover?
  • Which reports was he the proudest of?
  • What is the big mistake investors make, and how would this same mistake affect reports?
  • What does China’s economy and national debt look like now?
  • What is their healthcare system like?
  • What does the Eurozone deflation refer to?
  • What tax law changes could we see in the coming years?

Episode Notes

The Norris Group also had their tenth anniversary for the radio show with over 500 shows. This was a good idea of Aaron’s because it really forced Bruce to study. When he interviews a lot of the people they are a lot smarter than he is on their subject. Their history goes all the way back to the Crash, so the opinions of people before the Crash were very different. It has been a very interesting journey and a wide variety of people and opinions.

Bruce will be sharing his tenth timing report at his upcoming event. The first one was 8 years in length, so the idea of doing one spanning ten years was not something he considered prior. The first one was an 8-year journey, and when it turned out to be pretty accurate he started doing them a little more often because there were smaller chunks to consider. When he did The California Countdown, he knew it would be a short-term report until they got to the Crash. When this happened and it grew in intensity, they had Category 5. This was when it looked like things got really bad.

The reports Bruce is the proudest of are the cycle changes. These include The California Comeback, The California Crash, and All In or Fold. Those were really good directional, “get in or get out reports” that made people a lot of money. More importantly, it helped people avoid the damage of losing everything. Aaron said he loves nothing more than to run into people he has not seen in years, and they come up to him and tell him how much of a difference Bruce made in theirs and their family’s life.

Aaron actually had a similar story himself. He moved back to California from New York City in 2004. At this time he was a struggling actor, his mom was dealing with sickness, and he knew it was time to come home. His body fell apart, so the career he was doing in New York was over and he did not even know it. He worked for an architectural lighting designer in downtown L.A. and absolutely fell in love with the construction industry, urban design, and urban development. He was thinking of going back to school for urban development, and he had the opportunity to go back to a Wall Street interview. He was in his third and final interview, but it was a surprise interview that took a very strange turn. It was done by somebody who was not his boss, they just wanted to call him in to let him know she was really the boss and not to cross her. This happened right before Bruce began working on The California Crash, and Bruce told Aaron to come work with him. Aaron agreed, and he has now been with the Norris Group for 12 years.

Bruce said the best moment for him in creating the reports was when the audience was coming in for The California Crash and they had created a very rudimentary document for it. It was a little better document than The California Countdown, and Aaron had gotten a hold of The California Crash. When people opened that document, it was fun to hear everyone’s audible gasps. This has been true ever since, and Bruce thanked Aaron for helping him create a cool legacy of a journey saying, “This is what is next.”

In this first segment Bruce and Aaron review the newsletter, and in the second segment they will look at the table of contents for the new report. Bruce said he knows he has done his job when he is trying to do a report and the ending surprises him. This is a fun ending for him and really happened this time. When you are doing a study of what is next, the process starts with you doing all your research. This even means eliminating many chapters you have written on before, so it is like an NSAA tournament. Bruce lays out his 60-70 folders on chapters he has done in different reports, and he goes through a contest to see which 20 survive the cut. This is about all he can do in a day, and this will be discussed in the next segment.

You do all this research, and you draw the conclusions at the end. The process is very similar to doing an appraisal on a property. One of the big mistakes investors make is they want a number to be true. They buy a property, look for the highest comp, and it does not matter if it is 1,000 square foot smaller or 50 years older and in a bad area. It really comes down to the number they want to reach. If you do reports that way, you will find the information that will prove something. However, it will not be the right thing. You can know that every time he has done the reports he cleans the slate and challenges.

Bruce has been doing research for 6 months, and he did not write the final chapter until ten days ago. The final chapter is the largest final chapter they have ever had. It comprises nearly a quarter of the book. The reason for this is there is a process he takes you through to show the reasoning and rationale of why the conclusion this time is different than any conclusion they have had in the last 40 years. Bruce said this was important for him. It projects out ten years from now, which means he will probably not do another report in the next ten years in California. However, it does not mean he will take a look at another area to see if he can figure it out. He will not assume the other areas are at all similar to California. He still may have his fun looking at another state.

In this quarter’s newsletter, he snuck in a chapter he did not think he would have enough time to cover at the seminar. Some of the five topics that Bruce and Aaron will cover really deserve a chapter of their own. Unfortunately, he said he is not knowledgeable enough to do that chapter, and he realizes this now. When he realized this, he thought it would be fair just to put a title on it. The Wild Card chapter just has ten subject titles, half of which will be covered in this newsletter.

These are subjects that could affect real estate but are not connected to the real estate world. Sometimes they are not even in the country, but sometimes we have to look outside this and see how California prices could be affected by what goes wrong or a certain area has a problem. The first wild card is China. Bruce said he was going to write an entire chapter on this subject, but he realized he could not do it justice since he was not familiar with it. China is the second largest economy in the world. If they have a major problem, it will be felt worldwide and affect the economy of a lot of areas and not just their own.

Since the financial crisis, China’s national debt has exploded from 158% of GDP to 282%. A lot of that debt is due to very aggressive expansion of real estate. About 40-45% of China’s debt is connected to real estate, and the personal debt owned by real estate owners has gone from half a trillion to $1.8 trillion in 7 years. This means it has gone up by over 3 times. The day he realized he would not be capable of writing a chapter on China, he watched a documentary on ghost cities of China. When he watched this, he realized he had no idea how to comprehend what the following paragraph means.

What China has done is it has built cities in their entirety that will be occupied within the next twenty years hopefully. This is not in cities like what Riverside would look like, but more like Manhattan. They have a lot of these cities have been pre-built as well as high-rise condos going for $500,000. Meanwhile, median income in the area is $4,000 a year. Bruce said when he heard this statement he realized he had no idea what the thinking was behind this and what the value is in this high rise condo. How do you have a $500,000 condo when you have $4,000 median income? This is something he would like to give to Rick Solis since he works with appraisals. If Rick could appraise the condo he could tell Bruce what it is worth since it cannot produce a cash flow past $1,000 a year.

China has built these cities in advance; and if you think about what they have done, a lot of their GDP growth has been attached to this type of project. Approximately 30% of their GDP is connected to real estate. What if you do not need any future cities 20 years in the future? Bruce does not know what will happen to their economy, but it feels uncomfortable to him. Most of those buildings are owned by people who are speculative and own with the intent of making a profit. Bruce does not really know how he would calculate the debt attached to it. If he was a hard money lender in China and somebody came to him saying they paid $500,000 for a condo and Bruce took a look at the likely income from rental, he would not know how to make a loan for them. He would not know how to value what they have.

The other thing is that there is a lot of money leaving China. Bruce did a talk in L.A. with a Chinese citizen, and he was very helpful and knowledgeable. Bruce realized people with wealth are very uncomfortable keeping it there and are afraid the rules of engagement will change and they won’t be able to sell their asset. They may not be able to get money out of the country; and you are seeing money come out of China because the people with the money are concerned.

Bruce said the other thing that really bothers him came about when he was watching a healthcare documentary and he saw the problems their system has. China is definitely an area that has grown and has tremendous wealth. You have a lot of people living in very rural settings with no income. Their healthcare system is basically a “pay as you go system.” You go in, receive a number you paid for, and you wait for your turn. The doctor sees approximately 100 people a day, so however many minutes that gives you is how many minutes you have. If you need a procedure, you have to pay for it up front. If the insurance kicks in and rebates you something, this is what happens.

Bruce said there was one particular man who had gone in with tremendous pain in his leg. It turned out he had a blood clot and 10 days to live. They said the surgery would cost $50,000, and he was a farmer who made $4,000 a year. Somehow he had managed to save $30 grand, and this was over his entire life. This meant he could not have the surgery, so he went home and took painkillers. He decided to take matters into his own hands and cut his leg off with a hacksaw. The local people heard about this, and it became a problem. The government came in and actually offered to take his other leg off for free when it was also infected. Bruce actually got to see this guy talk in a wheelchair at one of his meetings.

Bruce does not know how to appraise China’s issues going forward, but he thinks there will be some uncomfortable times for them. They have a great story regarding gross income; but for many who still live in the $4,000 a year income world, their life has been very different. China could have a lot of challenges; and if they do because of their size, it will affect the world economy.

The second surprise, or wild card, is the Euro Zone deflation or break up. You have Brexit coming along, and there is a chart that shows what that means to the economy. There is a five-year projection where the EU loses GDP for from 2018-2023. There is an even bigger loss for the United Kingdom, and this is a recession in the EU for five years with just this event. The EU’s economy is a little bigger than the United States if you take a look at the whole. They have not been growing at a tremendous rate up until now. They came off a recession, and now they are probably headed back there.

The other big wild card for the Euro Zone is their upcoming elections. You have major elections in Italy, France, and Germany. Depending on how those elections go, you could have a very different looking Euro Zone after those elections in 2017. Part of the newsletter had a Reuters article from November 16, 2016. It stated how elections in France, Germany, and the Netherlands next year and next month’s Italian constitutional referendum are flashpoints that could ignite brewing political discontent across the continent. These are among the biggest risks for 2017 and an important part of what is next for that large group of countries that are joined together.

Another article from John Mauldin’s newsletter was from Financial Times columnist Wolfgang Munchau stated that “Italy would one day be led by a party in favor of withdrawal from the Euro. When this happens, Euro exit would turn into a self-fulfilling prophecy and there would be run on Italy’s banks and its government bonds.” At the very end it said “the latter would imply the biggest default in history. The German banking system would be in danger of collapsing, and Europe’s biggest economy would lose all its competitive gain it so painstakingly accumulated over the past 15 years.” We have to keep an eye on what is going on over there for 2017 because it could spill over into the world economy and become a big problem for the U.S. and its growth.

The next topic is oil disruption. This is an interesting topic. We have a president who had decided to get aggressive with United States capacity to be oil dependent. He signed legislation for the Keystone and Dakota Access pipelines. There is a chart in the newsletter that shows the percentage of GDP for which oil is responsible. It is so lopsided that it’s scary. Bruce made an investment in Grand Junction, Colorado because oil shale went bad there. You had a city that was 50% vacant for 5-6 years. You have countries with oil that is a very large percentage of their GDP. If they are unable to continue producing oil at a profit or their supply is not needed by the United States, this will be a big problem for their economy. They are very unstable as it is, and it does not need any help to become more unstable.

The other thing that could really affect this is a chapter that Aaron will cover in the report that has to do with the progression of the electric car, solar power, and how this could disrupt an industry they think is irreplaceable at the moment and could become less and less necessary. This is a big deal when you take a look at the oil and this area that could be very volatile as it is if it has a real problem with oil. If you look at the tan in the chart, this is the part of the economy that is oil-connected. It varies from 25% to 67%. If you have a problem in that area, you have a real problem with unemployment and your society. The area does not need any help with this; so this is a wildcard Bruce will look at and see if it will be violent and visit us somehow.

Another wildcard is the tax law changes. We have a president who will definitely change the tax laws; and what will likely emerge is a much larger standard deduction. You will have about a $30,000 standard deduction, which is approaching triple what it is right now. This will mean that 60% of the people who file long form will no longer need to file this. This will be one of the reasons why it will be so easy to say they will not allow for interest payments to be deductible off your income tax. This will hurt so few people, and this will probably be virtually harmless for the next cycle if interest rates stay low. It will hurt if interest rates go back up.

Another law change that could happen is you have a change in the $500,000 IRS 121 law that says you could make $500,000 on a sale of your residence every two years. This is one that always cracked him up, and he is excited about it being there. He took advantage of it once, but it would not surprise him if this occurred.

Lastly, the healthcare laws are about to change, but we have to be really careful that we don’t say everybody with a pre-existing condition or people too poor to pay for coverage are left out. This will be a challenge and not an easy turnaround. However, one chart about Obamacare shows there have been a lot of increases in rates. They system is not working, so we have to figure out what is going to work. The truth is, 10% of our population accounts for 66% of healthcare expenditures. 50% of the people account for 3%, so it is definitely lopsided. One of the reasons for this is you have an aging population. You have charts that show how different the cost is per capita and annual expense. If you go over 85, you are spending a ton on healthcare and it is halved between every 20 years. If you go the other way, it doubles as you get older and older.

We have an aging population; and we will progressively get to live longer, so this healthcare issue is a big deal. Bruce was actually surprised this does not affect your ability to receive a home loan. All of us have experienced how expensive it is to receive insurance. Deductibles are growing, and it is not an equation that comes into play when you receive a home loan. However, it may one day and could impact real estate as well. If you look at it county by county, there are no significant changes that happen quarterly for California. You have areas that are in the same boat they were the quarter before and others pushing their limits.

Tune in next week as Bruce and Aaron continue their discussion and find out what will be covered in next week’s event 2% Interest, $40 Trillion in Debt, and Other Surprise Endings.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

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