The last time Michael Burry was this pessimistic about the markets, the Great Recession happened.
 
For those unfamiliar with the name, Michael Burry, of “The Big Short” fame, bet against subprime mortgages before the housing collapse in 2008 and made a fortune. Christian Bale played him in the movie adaptation of the book. Lately, Burry has been in the news for sounding the alarms about the current economic environment.
 
On November 15th, Burry tweeted, “You have no idea how short I am.” The hedge fund boss did not exactly reveal what stocks or assets he holds short positions in, but his tweet indicates pessimism about the markets. This latest tweet is the heel of another headline he made back in September.
 
On September 29th, Burry tweeted (now deleted), “Today I wondered aloud if this could be worse than 2008,” Burry said in a now-deleted tweet. “What interest rates are doing, exchange rates globally, central banks seem reactionary and in a [cover your a–] mode.”
 
Burry’s not the only prominent figure voicing concerns about the current state of the economy. At about the same time as Burry’s September tweet, ex-Treasury Secretary Larry Summers, a frequent critic of the Fed’s delayed response to inflation, warned that global economic risk levels are similar to those seen in 2007 ahead of the Great Recession.
 
Burry’s latest post about his sizable “short” position came during the same week that cryptocurrency trading platform FTX collapsed, sparking fears of a widespread crypto collapse. It’s probably safe to say that Burry was not high on crypto either when he tweeted, “Long thought that the time for gold would be when crypto scandals merge into contagion.”
 
Burry may be onto something. Sophisticated investors have long turned to tangible assets to counter the effects of market volatility. However, it’s not gold that smart investors turn to; it’s real estate.
 
Smart investors like ultra-high-net-worth individuals and institutions rely on real assets to buffer the effects of the recession and inflation.
 
The following chart demonstrates how rents typically keep pace or even exceed inflation:
 

 
Real assets are ideal for countering the effects of inflation.
 
Here’s why:
 
Dynamic Rental Rates…
 
Because of the relatively short-term nature of commercial real estate leases (e.g., multifamily and single-family rents), real estate can offer dynamic cash flow that can adapt to rising inflation because when leases are renewed, rates can be adjusted accordingly – typically without any effect on occupancy as the past two years have demonstrated.
 
Unlike other income assets like traditional bonds that generate fixed cash flows, the income streams from real estate can rise over time because of the short-term leases. Allocating to segments with shorter lease durations with strong long-term demand can provide the opportunity to regularly reset rents to prevailing market rates in an inflationary environment.
 
The Real Benefits Of Real Assets…
 
Besides the ability to adapt to inflation, smart investors have long relied on commercial real estate (CRE) for many additional advantages and benefits.
 
CRE drowns out the noise. Because CRE is illiquid and trades on the private markets, it is insulated from short-term volatility typical of the public markets and susceptible to knee-jerk investor reactions.
 
CRE offers reliable, sustainable long-term returns. CRE has long been a reliable source of recession-proof and inflation-insulated cash flow. Although it may not always offer an immediate payoff, once stabilized, there is no more reliable and consistent income source than CRE.
 
CRE has shown reliable historical performance. Investors can count on CRE for long-term appreciation. There may be short-term dips, as seen during COVID, but CRE typically rebounds quicker than other sectors to continue its upward trajectory.
 
CRE accelerates wealth. Smart investors leverage the expertise of others to free up their own time and accelerate wealth. Through passive investments, investors can generate multiple streams of income that can be reinvested to supercharge current streams or create additional ones.
This makes the type of wealth building impossible with investors independently.
 
Tax Breaks. Whether from an additional dollar of revenue or a dollar of savings in expenses, does it matter how you boost your bottom line? It doesn’t matter to the ultra-wealthy, and that’s why tax benefits matter and smart investors gravitate to CRE through private investments. Private investments structured as partnerships offer various tax benefits, including deductions, depreciation, avoidance of self-employment taxes, tax deferral, and long-term capital gains treatment not available with other asset classes.
 
Leverage. Financial leverage enables the acquisition of multiple assets instead of a single asset acquired without leverage.
 
Through leverage, CRE investments can supersize returns through secured loans that require only a fractional capital commitment (20%-25%). Instead of putting 100% of investable capital into one asset, that capital can be spread out over 4-5 assets, generating multiple income streams instead of just one.
 
Even accounting for the cost of borrowing, returns from using leverage far outweigh the returns without it.
 
Forced Appreciation. As investors, you cannot force the appreciation of a single stock. With CRE, however, it’s a different story. In the right hands, investors can partner with experts to force the growth of CRE assets through the management and property improvements, marketing strategies, better tenant screening, and retention, etc., to improve NOI from improved occupancies and rents.
 
I’m Short On The Markets…
 
All the economic uncertainty swirling the markets is why I’m short on stocks and crypto and long on real assets.
 
Real assets give me the best chance of surviving the current financial storm through sustained cash flow that keeps pace with inflation.