The future of retail & changes in the 1031 space with Joshua Ungerecht Managing Partner ExchangeRight

Joshua Ungerecht gives insights on the decisions, past, present and future, that he and his team have made to maintain stability in these uncertain times.
Joshua Ungerecht who is a managing partner at ExchangeRight gives insights on the decisions, past, present and future, that he and his team have made to maintain stability in these uncertain times. Prior to the pandemic, Ungerecht was anticipating a recession, due to his firm belief in the cyclical nature of our economy; as a result of this anticipation, his firm deployed their capital in “recession proof” investments such as grocery stores, pharmacies, and health care facilities.

His firm’s strategic and future-focused way of operating has allowed them the freedom to close a $119 million deal during this recession. He is aware that his company is an outlier amongst the vast majority of our nation which have been negatively impacted and he aims to educate viewers in the practices of forward thinking and bankruptcy prevention.

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Ryan Morfin:                    Welcome to Non-Beta Alpha. I’m Ryan Morfin. On today’s episode we have Joshua Ungerecht from ExchangeRight calling to talk to us about the future of retail, and how the 1031 space may or may be changed going through this recovery. This is Non-Beta Alpha.

Ryan Morfin:                    Joshua, thank you for doing the show. We appreciate you coming on today.

Joshua Ungerech…:        Thank you for having. Appreciate it.

Ryan Morfin:                    So ExchangeRight just successfully placed a $119 million net-leased portfolio DST. That’s a big transaction in any market, but to do it though the coronavirus is a huge win for the industry and for ExchangeRight so, congratulations.

Joshua Ungerech…:        Thank you very much. Really grateful, especially given what’s going on in the overall market.

Ryan Morfin:                    Well, I think it’s a testament to you guys’ leadership in the DST space and IBD channel. We’d love to just hear your thoughts about what was happening, prior to the exogenous shock of coronavirus in the DST market, and then how this disrupted your business plan and what’s the outlook going forward?

Joshua Ungerech…:        Yeah, so I think in the lead up to the COVID-19 crisis we had been growing concerned, just because of the length of time since the last recession, that we were overdue for a recession, and we were overdue unfortunately a financial crisis. And so from our standpoint, we’ve been really conservative and we’ve been really seeking to find those recession resilient pockets in the marketplace. And candidly, just expecting that though we couldn’t tie markets and though we don’t pretend to have a crystal ball, we do believe in the cyclicality of markets.

Joshua Ungerech…:        And so that has really driven us to focus on necessity based retail and healthcare tenants, and in particular we focus on investment great credit tenants. And the idea behind that was you know, we wanted to make sure that we had multi billion dollar balance sheets standing between us and the next economic downturn, and so the reality is when COVID hit, what we found is our necessity based retail and health care tenants are synonymous with essential businesses. And so the vast majority of our tenants were open and operating their grocery stores, pharmacies, healthcare providers. And so from our standpoint our tenants really haven’t been impacted negatively in some cases.

Joshua Ungerech…:        In many cases they’ve actually been strengthened as a result of what’s been going on.

Joshua Ungerech…:        So on that side of the business, from an asset management perspective, we’ve been really fortunate and really grateful for the strength of the tenants, and the fact that we have been more conservative. From just a market standpoint, we are seeing a clear slowdown in terms of transactions. I mean there’s just … physically its just very difficult to get transactions done, then when you layer on uncertainty and fear, there is a lot fewer investors out there who are able to transact because they don’t have buyers on the other side of their transaction that feel confident about consummating those transactions.

Joshua Ungerech…:        So long story short I think everybody is experiencing a slowdown in overall volume of equity placement, but from an asset management perspective, we’ve been really fortunate to just not have any disruptions. Through April and May we got a 100% of our rent from all of our tenants across 685 properties, so that’s saying something.

Ryan Morfin:                    Well, that is good pickings on the credit side. Going back to your portfolio you’ve got some really important retail that in a pandemic play very well like a lot of Walgreens and CVS. But also Dollar General and maybe you can talk a little bit about your views on some of the bigger tenants in your portfolio and what their prospects are, but a 100% collection is fantastic because not a lot of landlords can say that.

Joshua Ungerech…:        Yeah no, we’ve talked on that last point. We have talked to a number of the largest asset managers across the country and some of the largest lenders, and we heard reports of malls that have had 95% forbearance requests. There have been apartment buildings that are 95% occupied, but only collecting 70% 75% of rent. So in contrast we’ve just been really sheltered from that reality because of the strength of the tenants.

Joshua Ungerech…:        As you mentioned there’s grocery stores and pharmacies, those are the obvious winners in a COVID crisis when there is a run on necessities. What a lot of people don’t realize is that the Dollar stores, like Dollar General, Family Dollar, Dollar Tree, about 20 to 25% of their floor space is devoted to groceries. And they’ve really over the years turned into the local, lower income group grocery providers for their neighborhoods. And so they were a huge beneficiary.

Joshua Ungerech…:        All of the uncertainty and the fear that was driving record breaking demand for toilet paper and food and those kinds of things. And then of course on the healthcare provider side of the equation, we have a lot of tenants that are providing healthcare. They are providing dialysis, urgent care needs, basic health care needs. So a lot of those tenants have also become hubs for testing in the COVID crisis. So, that’s something that we have seen benefit a lot of our tenants on the healthcare side. And then we have a number of tenants that are in discount retail, and discount retail also does really well, particularly in a recessionary period of time because a larger portion of the demographic of the country needs more affordable options for their necessities.

Joshua Ungerech…:        So all that being said each of those tenants have a different way in which they have been able to respond. And it doesn’t hurt that in a lot of the shelter in place cities and states, if you shut down almost all the other businesses, which ever businesses remain open are going to be the beneficiary of whatever that ongoing demand is.

Ryan Morfin:                    Yeah, I know, date night is definitely at the grocery store these days. So a lot of these tenants are also hiring, it seems that also is a good data point for the resilience of these businesses.

Joshua Ungerech…:        Yeah, I think it’s somewhere in the neighborhood of 160,000 to 200,000 people across Kroger, Dollar General, CVS. We are seeing tenants now Dollar Tree, Dollar General, I believe CVS and Walgreens have all announced essential employee appreciation bonuses, where they are not just hiring, but they are able to pay those essential workers who have continued to show up to work in the midst of this crisis. Pretty significant hazard pay bonuses given all that is going on.

Joshua Ungerech…:        And so, now unfortunately on the other side of the equation when you have $36 million people unemployed in a two-month period, that’s a drop in the bucket but it still just go to show the contrast between those tenants who are able to actually survive and thrive in the midst of this.

Ryan Morfin:                    Its interesting, Walgreens and CVS prior to this crisis were going through somewhat of a transformation. I think CVS was purchased by an insurance company. What was the strategy, and I think it’s going to play out beneficially here, but what was the strategy for like the Walgreens and the CVS? They were trying to become more than just a retailer, they’re trying to become a healthcare destination as well?

Joshua Ungerech…:        That’s exactly right. So CVS actually purchased an insurance company. Both CVS and Walgreens what they’re doing, and you’ll hear it called the MinuteClinic or Doc-in-a-box, but what they’re doing is they’re actually becoming a healthcare provider. They are going to have doctors that are in their location. So a portion of their floor space is now going to be devoted to providing discount healthcare.

Joshua Ungerech…:        So the idea is, if I have a non-urgent healthcare need, lets say I’ve got the flu, or I’ve got a fever, and I need to go and get seen by a doctor to get a prescription, well, I can choose to go into an emergency room, I could choose to go to an urgent care, or I could go to my local CVS or Walgreens. I can get seen a lot quicker at a local CVS or Walgreens.

Joshua Ungerech…:        And guess what, when they give me a prescription I can pick that prescription up right there. And then because 15 to 20% of their floor space is devoted to groceries, I can pick up my chicken soup and anything else I need, and have it be a very convenient one stop shop, saves a lot of money as well. So its not nearly as expensive as if you have to go to urgent care or the ER for something that is non urgent.

Ryan Morfin:                    Well, its fascinating to me too. Dollar General’s stock price has been going up through this crisis, while the S&P has gone down. So, when you guys are talking about recession resilient businesses this is definitely a defensive investment. The credit on Dollar General, its curious to me, so do they also take like food stamps and EB5 programs and unemployment programs?

Joshua Ungerech…:        Yeah, I believe they do. That’s I mean pretty consistent across all the Dollar stores. Again if you think about the demographic that they are ultimately serving, they really are focused on lower income demographic. So they are generally doing what they can to ensure that they are able to facilitate those needs.

Ryan Morfin:                    Yeah and I think the average household income of their customer is about $40,000 and so in an environment where there’s going to be downward pressure on wages, I think that household income level is probably going to swell in terms of numbers. But I do say its an interesting area. One question is, a lot of the grocers have realized that brick and mortar actually matter. There’s the Amazon effect, but for critical and necessity retail you need to have it. How have some of the stores started to maybe change their business models through this? Have they started to take temperatures of customers coming in? What are some of the changes to the business model that we should expect for retail as we go through the second phase coming into fall?

Joshua Ungerech…:        Well, one quick thing that you just triggered when you talked about the Amazon effect is a lot of people, if you think about the online effect and the Amazon effect, Amazon had to buy a brick and mortar grocer. They couldn’t compete in that space purely online. So they had to buy Whole Foods to really be able to compete. Grocers across the space are having to do much more thorough cleanings, and much more consistent cleanings to make sure that they are able to sanitize common areas. And then you are seeing a lot more of the hand sanitizer locations throughout the store trying to encourage that people are consistently cleaning their hands and disinfecting at different stations.

Joshua Ungerech…:        You’re seeing some stores require masks, and some of that is driven by county, city or state regulations. Some of that is driven by the store themselves wanting to protect their workers and protect other consumers. I think that’s going to be increasingly broadening policy response where, increasing the number of people who are having to wear a mask.

Joshua Ungerech…:        For a number of grocers they were limiting the number of people who could be in the store at any given time. They were marking sidewalks to show what the distancing needed to be for each person standing in line. Now I think a lot of the worst of the crisis has passed and so you don’t have this as much anymore, but you were having grocery stores open for seniors and give them a safe hour to … before it would open up to the rest of the public so that they would be a chance for them to get what they needed with a whole lot less of the rush and the crowd. Because those people who are older, really much more vulnerable demographic. So those are some of the things we’ve seen so far.

Ryan Morfin:                    Yeah, and have there been any requests from the grocery tenants to talk about ventilation of air flow or anything like that? There’s been, that video or that graphic where somebody sneezes and then you can see the mist. Is that becoming an issue for not only the workers of retail, but also the patrons?

Joshua Ungerech…:        Not yet. We haven’t received any sort of special request from any of our grocery tenants. I think that particular issue is going to get scooped by the requirements for masks. I think that you are just going to see that become more ubiquitous, that people are going to have to wear masks, particularly in places like the grocery store where you are dealing with common areas and things that people are going to consume later. There is a much higher propensity for that to potentially cause an infection for someone else.

Ryan Morfin:                    You’re closer to the food supply chain than we are in this industry. What is the risk if you will, if at all to the food supply? What conditions … how bad would it have to get? We’re starting to see some of these meat processing plants slow down and impact delivery meats in parts of the country. What is your view from that standpoint?

Joshua Ungerech…:        So I think it really depends on the workers. If you start to see an uprising and we started to see a little bit of this, so for example, we don’t have any Trader Joe’s in our portfolio, but you did hear some reports that a lot of the workers across the country starting to come together and demand hazard pay, desire to shut down locations. You’re seeing and hearing about not just the meat processing plants but, other … even Amazon, you heard this come up as well, where they wanted to shut down distribution warehouses and areas where there was infections.

Joshua Ungerech…:        And so candidly, that is probably the biggest risk and its not really specific to grocers, it’s really more about those who are working in the distribution facilities, to get the food where it needs to go from the logistics standpoint.

Joshua Ungerech…:        If you saw an uprising there, and I think we are past the worst of it, so I think there has been more of a mentality to get back to work, now that’s starting to crop up, so that’s comforting. There was a period about a month ago, where I was starting to grow concerned that if you had the workers who are at the factory level, at the distribution facility level, at the logistics level, if they started to strike, then you could have a massive issue. Because major cities have no more than about a week of food in supply at the various grocery stores, at any given time. It’s usually less than seven days of food, which is constantly being replenished by that logistics infrastructure and distribution infrastructure.

Joshua Ungerech…:        So, as long as the logistics infrastructure and the distribution infrastructure stay intact, we should be good. I do think there is going to be food inflation because you’ve got a lot of demand destruction, all the restaurants, they’re forcibly closed that’s disrupting supply chains from different farms and suppliers of food. They’ll stop planting and they’ll stop creating as much supply if you don’t have demand for a long enough period of time. And then eventually demand comes back, and then you don’t have supply. It takes a lot longer to replenish that supply, than it does for demand to snap back.

Ryan Morfin:                    Well, that’s interesting and the grocery anchored and pharmacy tenants have all done well, but a lot of these restaurants aren’t going to come back. I heard a statistic from the government last week that about 11 million jobs are expected not to be able to come back from the food services industry which is a permanent scar. If you extrapolate that to your point then there’s going to be an impact on demand for food, and it’s going to be a lower growing season I guess you were saying in the fall and the spring?

Joshua Ungerech…:        Well, what’s happening is a lot of the farmers and food suppliers are reacting rationally to a massive drop in demand, and that massive drop in demand is ultimately causing a lot of food suppliers and farmers to reduce their crops, to effectively reduce the supply, because it doesn’t make sense to grow something that you can’t sell down the road.

Joshua Ungerech…:        So what we’re concerned about is the demand destruction is going to lead to reduced supply and then demand will eventually rebound, and you are not going to have as much supply there. So we would expect food inflation down the road because of that.

Ryan Morfin:                    That makes a lot of sense. That makes a lot of sense. So you guys were defensive prior to going in, how do you think the DST market is going to play out for the rest of 2020 into ’21?

Joshua Ungerech…:        From an asset management perspective, it is going to really depend. What we’re seeing is, right now we’re seeing, depending on what location you’re in. If you’re in a city or state that is starting to open things again, you have a lot higher probability of being in a good position by the end of this year. If you’re in a city or state that is continuing to close things down like, for example, out here in California they have decided that we’ve gone from flattening the curve to waiting for the cure. And so they’ve talked about waiting for three more months of shelter in place. That’s going to have a huge negative impact on the economy out here.

Joshua Ungerech…:        You have other states like Texas that are opening up, states like Georgia that are opening up. They may have increased risk of infection and spike in COVID cases, but on the other hand they are probably going to reduce the likelihood that they are going to have a depression. And so you’ve got a lot of politicians that are stuck between a rock and a hard place. They feel like on the one hand they are choosing death, on the other hand they are choosing a depression.

Joshua Ungerech…:        And so what we are seeing play out is depending on what region you’re in, if your state is opening back up, and if your city is opening back up, then you’re seeing some of those jobs starting to come back. You’re seeing businesses that start to have more certainty and can start to make decisions. They are not frozen and paralyzed.

Joshua Ungerech…:        And in other states where that’s not happening yet, things are still completely uncertain and you’re starting to get, if people are out of a job long enough it does start to go from a temporary shock to a permanent reality. And those people aren’t going to be able to pay their rent, they’re going to have to move back home, or move in with other families, they’re going to find ways to save money. Well, that’s going to have a big impact on all those real estate asset classes that ultimately depend on a healthy consumer or a healthy renter, that’s going to start to have a pretty big knock on effect.

Joshua Ungerech…:        So at the end of the day, from an asset management perspective, where your assets are going to make a huge difference, and what kind of asset you’re in is going to make a huge difference. Out here in California they are not going to have students coming back in the fall. They have already proclaimed that they are going to a distance learning approach for their entire university system. But what kind of impact is that going to have on student housing? For example. I’m not leasing, if I’m not coming back in the fall, why would I strike a new lease? Multi family, same thing, if you’re in a place that’s not really seeing job rebounding over the summer, well that’s going to start to have an impact as temporary stimulus measures can only cover the rent for so long. So I think you’re going to see, A Tale of Two Cities in some respects. You’re going to see those cities that rebound are going to do relatively a lot better than those that are still going to be in a lockdown mode.

Ryan Morfin:                    So you would reopen? If you were elected Governor overnight, you would reopen California you think?

Joshua Ungerech…:        I’m a libertarian. I’m a let individuals make their own decisions. And so I do believe that if you’re more vulnerable that you should have the right to shelter in place, and be much more careful and cautious because you may have other issues that make your risk significantly higher. But if you’re in the demographic that’s largely not impacted as severely, you should have the right to go back to work if you so desire. If your employer would like to have you go back to work, and they are willing to have you and you are willing to be there, you should be able to do that. For example, if I’m running a restaurant, if I’m willing to employ people and those people are willing to be employed, and I’m willing to open and I have consumers who are willing to come in and eat, that should all be allowed in my view. That should be an individual freedom that people can express in what is still a free country.

Joshua Ungerech…:        And if you are worried, if you’re on the side of the coin that says, look I think its much worse than people realize, or I’m at higher risk, then stay sheltered in place. You have that freedom. And other people’s freedom in that respect do not dramatically impact you if you want to shelter in place. I was in favor of a shelter in place order when it was all about flattening the curve, because once you overwhelm the medical system, that’s a whole other issue. Now you are actually impacting other people’s lives. But once we recognized that we had flattened the curve, once we got to a place where we had recognized that we were not going to overwhelm our medical system, once we had temporary hospitals that weren’t being used, we flattened the curve, we accomplished the original goal. And at that point I think you monitor it, but you let people go back to a reasonably cautious way of life that is free.

Ryan Morfin:                    Couldn’t agree with you more. Couldn’t agree with you more It’s going to be an interesting dichotomy of different approaches, and I guess that’s the genius of our constitutional republic. We got 50 different experiments and people get to choose where they want to live. It’s going to be interesting to see demographic shifts like this going forward.

Joshua Ungerech…:        That’s a good point, real quick, I do think you’re going to see states that decide to open. I believe that they’re going to be the beneficiary of a lot of people fleeing. If you’re stuck in a state where you can’t go back to work, and you can’t provide for your family, you eventually have to provide for your family. That might mean you need to leave and go somewhere that’s opening back up. And so I think what we’re going to see is the acceleration of the political divide. I think we’re going to see the acceleration result in an exodus from those states that are taking an approach that is not really geared towards personal freedom.

Ryan Morfin:                    Yeah, no. I think the thing about this pandemic and this crisis is that it’s accelerating comorbidity issues on sectors or companies or macro trends which is accelerating everything. And yeah, I think it’s a fast forward button for trends that were happening prior.

Ryan Morfin:                    Well, so you guys seem to have called it right, right? Balance sheets, invest in great tenants, grocery, necessity retail, and now as we’re going through this and maybe fast forward into the recovery, what would ExchangeRight’s view … what is your view, looking out in the next 24 months? What are the opportunities going to be? Is it going to be in other types of consumer retail that are distressed and getting in at very attractive basis through either distressed debt purchases? Or how do you guys play the next three years if you will?

Joshua Ungerech…:        Yeah. So we have been patiently waiting for a recession. Not because we desire a recession but because we believe in the cyclicality of markets. We believe that recessions are inevitable. The longer you kick that can with cheap money policies and low interest rate policies and financial repression, the longer you kick that can and you try to avoid the recession, the worse the recession is going to be. And history has proven that out over and over and over in the past. So we have for many years now, people have looked at us as being way too conservative. Picking long term net leased properties backed by investment grade credit in recession resilient industries, that looked like, why are we being a party pooper? Why aren’t we piling on and buying things that have more growth potential? And I think this crisis helps to illustrate why it is we’ve been positioned this way.

Joshua Ungerech…:        And again, we did not foresee a pandemic. We just recognized that there is going to be recessions. The reality is, a lot of the things that are going to happen as a result of COVID-19, a lot of things were still going to happen anyway. COVID-19, that crisis just like you said, that accelerated the realization of all of those risks, but those risks were already there. We were already moving from a greed to a fear regime before COVID-19 hit. The world economy was already slowing down before COVID-19 hit. This just accelerated that.

Joshua Ungerech…:        So in our view what we’ve been waiting to do, and the way we’ve been positioned is we wanted really strong balance sheets, strong recession resilient tenants and industries so that investors could weather that economic cycle. They could keep getting stable income through the downturn. But we have a sister company called Telos Capital. And Telos Capital actually buys deeply discounted value added opportunistic commercial real estate all across the country. We’ve already had 20 different programs that we brought out over the years, and Telos Capital was really born out of what we did after the great recession.

Joshua Ungerech…:        When the great recession hit, we started buying up deeply discounted retail properties, typically strip retail, or grocery anchored retail properties that were 20 to 40 cents on the dollar. From the height in 2006, 2007 to when we were buying it, we were getting significant discounts because of the great recession. And because we were getting those significant discounts, we could afford to put capital into those projects, improve them, attract new tenants at much lower rent, because our basis was lower. And then we could turn around and refinance or sell those properties after we had stabilized them.

Joshua Ungerech…:        Same thing we did with apartment buildings, self storage, student housing and so on and so forth. So we have been patiently waiting now. We have internal a philosophy that if we can’t find opportunities that are attractive enough on the value outside for Telos Capital, then we’re just going to build up cash, and we’re going to wait. And the fewer opportunities we can find, the more likely it is that we are close to a market top.

Joshua Ungerech…:        And that’s exactly what’s played out in the last few years. Is we had fewer and fewer opportunities and that this crisis has hit, what we expect over the next couple of years is that there are going to be some phenomenal discounts that are going to come out of the distress that this crisis has caused. So we don’t take any pleasure in that distress, but we do want to be ready for those opportunities through Telos Capital. And we think they’re going to happen across the country, across all asset classes, other than the really stable ones like what we’re doing through ExchangeRight.

Ryan Morfin:                    Well, I’d love to bring up then, and I know it doesn’t really tie up to the ExchangeRight portfolio, but JCPenney just went bankrupt. A lot of these anchor tenants in these big malls, are we going to have these zombie structures or are you seeing anything creative being done across the country to repurpose some of these dead malls?

Joshua Ungerech…:        Yeah, and what we’re seeing is a lot of … I shouldn’t say a lot, we’re seeing some groups going into these larger regional malls and they’ll convert a quarter of the square footage to multi family [inaudible 00:33:45] another quarter to office or medical office. And so what they’re really doing is they are reducing the footprint that’s devoted to traditional big box retail. A lot of that big box retail is really discretionary retail that is being ultimately competed against with Amazon and online retail and just eviscerating that type of retail.

Joshua Ungerech…:        We’re seeing a lot of those operators moving towards more of an experience, so they’re going to have a movie theater, they’re going to have a lot more dining in a food court. They’re also going to try to have a gym. We’re seeing a lot of Gold’s Gym and other types of tenants going into those centers along … going back to the multi family and the medical office. So they’re trying to create a hub, almost like a lifestyle center. And then we’re seeing more entertainment driven approaches where they’re trying to find things that are going to attract kids, attract young adults. So they’re trying to really create lifestyle, an experience, living and work, trying to bring it all together. So that’s going to be, I think the trend that you’ll see for a lot of those regional malls.

Joshua Ungerech…:        And in some of those malls are being, in some cases being converted into much more unique usage. We’ve seen huge self storage re-conversions that have been undertaken in a very unique way of repurposing those types of properties.

Ryan Morfin:                    Yeah, we had some clients in Wisconsin who actually turned it into a data center and leased it out to the government which was fascinating. Tale of Two Cities, in terms of outcomes, went from a least desired asset class to the most … Well, I’ll ask this question, I never thought I’d ever ask anyone this question, but given where we are now, the precipice, kind of the lack of central banking impact to the economy. Do you think we are at risk of slipping into a depression? We all, I think agree we are in a recession, but what point do you guys look at this policy driven outcome as pushing us further deeper into a depression?

Joshua Ungerech…:        Yeah. So we unfortunately are on the side that we believe that we’re headed towards a depression. That doesn’t necessarily mean it’s going to look like the great depression, but we do not foresee a V-shaped recovery. We hope we’re wrong, we want to be wrong, but we are not seeing the kind of activity that we would want to believe that we’re going to be in a V shape recovery. If you only have an 80% to 90% balance, which sounds like a great balance but if you have an 80% to 90% balance in activity, coming off of the lows, you’re still looking at a bigger hit to GDP than what we suffered in the great recession.

Joshua Ungerech…:        And a lot of people don’t realize that you have to actually have about a 95% to 100% bounce back, to avoid what we suffered in the great recession. And I don’t see that. I see a lot of, even the states that are opening are telling restaurants that you can only run at 25 or 50 percent capacity. Anybody who understands a business like that, understands that’s a volume business. You can’t operate off of 25% to 50% capacity. And they’re doing the same thing for movie theaters and the likes. So I don’t see how structurally you can get a V shaped recovery.

Joshua Ungerech…:        I’m a big believer in America over the long run we’ll figure it out. Capitalism in the long run overcomes a lot of issues, but in the short run I think we’re headed to a potential depression.

Joshua Ungerech…:        And then I think there’s more deflation ahead. I do think that central banks are doing a lot and the government obviously unleashed some pretty significant fiscal programs. A lot of people are calling that stimulus. It’s actually not stimulus until it is larger than the hole left behind by the crisis. So far what they’re doing in terms of the fiscal stimulus that they’ve attempted, and what the federal reserve has been doing, is really just trying to plug that hole and it’s basically thus far about $5 or $6 trillion against a $12 trillion hole. And so until we get more printing than there is deflation then we are going to be in a deflationary regime.

Joshua Ungerech…:        In the longer run we think that they will eventually succeed, but its not going to be in the shorter run. So eventually the stimulus and the fact that, eventually human being have to adapt, we will eventually have jobs come back. We will eventually have activity come back and then you’re going to have all that stimulus “that was just plugging a hole” that will start to become more inflationary down the road, and then we’ll potentially be in a stagflationary environment.

Joshua Ungerech…:        And so our base case is depression, followed by stagflation, and we think that it’s really important for people to not get sucked up into this bear market rally that has been occurring recently. Again, this is all saying we hope we’re wrong, this is just our base case. We think this is a bear market rally, we think there’s a lot of deflation ahead. We think that there’s a lot of risk in the markets and that people need to be still very cautious. And don’t think that the worst is behind us quite yet.

Ryan Morfin:                    I agree and that’s why we call the show Non-Beta Alpha. We agree and we’re really worried about that but, before you go I have two final questions. One is, so what are some of the bright spots or silver linings in the economy that you look at and say, America will be in good shape in the next three to five years? And the last question is, what books are you reading of interest, to sharpen your macro view or just maybe distract you from all the volatility?

Joshua Ungerech…:        So on the first question, I think the bright spot is recessions aren’t evil. Recessions have the ability for businesses that needed to go out of business, to go out of business. It has the ability to usher in bankruptcies that start to reduce debt burdens that are choking productivity. So I think that if the government and if the federal reserve will get out of the way, there can be a significant cleansing. There can be a significant debt reduction. I think kicking the can down the road by making debt cheaper and cheaper doesn’t fix the problem. If you have an over-indebtedness problem, you’re going to need to go through bankruptcy and get rid of that debt.

Joshua Ungerech…:        And so I think recessions are a way for us to hit the reset button and start from a much healthier foundation. They’re extremely painful, but it is much worse if we kick the can down the road, as we’re seeing today with a lot of zombie companies, that really need to hit the reset button. So I think the bright spot … that sounds really negative, but the prize is we’ll get through this, we’ll get to the other side, we’ll have a lot less debt if we’ll be allowed to go through that bankruptcy process as a country in terms of the various sectors that need to do that.

Joshua Ungerech…:        And then I’m a big believer in the American business, the American entrepreneur. We will find new ways to be productive and creative to add value and we just need to give people the ability to do that without those huge debt burdens. We need to stop encouraging people to be so over-indebted and the same thing with businesses. And I think that’s a bright spot.

Joshua Ungerech…:        I think another bright spot is, I think, there’s going to be a lot of supply chains that are going to be coming back to North America. I think there’s going to be a lot of businesses that are going to in the long run, lot of workers that are going to benefit from bringing more, I think, jobs that are going to be centered around things that we didn’t realize that we had entirely outsourced. We had outsourced a great deal of our production of essential medicines. I think that makes sense to bring back … And I think there’s going to be a lot of industries, a lot of workers who’d benefit from our bringing that back. And so I think that’s a longer term bright spot potential.

Joshua Ungerech…:        From a book that I’m reading, I don’t want to depress people, but I’ve been reading Diaries of the Great Depression. So reading through what people were thinking and experiencing during the great depression. And I’ve also been reading quite a bit of macro economic work regarding just where we are in the cycle, what were the Roaring Twenties like, what was the mentality like after the pandemic in 1918 with the Spanish flu. Trying to really understand this historically, how have human beings reacted to crises similar to what we are facing today, although frankly much worse than what we’re facing today.

Joshua Ungerech…:        And so I’m a big believer that human beings are resilient, and we’re also stubborn, and I don’t think human nature changes overtime. And so if you look at 1918, over 50 million people died as a result of the Spanish flu. And then we had the Roaring Twenties. People rebounded, people continued to go out and live their lives, and I don’t think that those people who think that we’re forever going to be walking around scared of COVID. I don’t think that they understand history and how resilient, how short term our memories are. We forget about recessions pretty quickly and we move on so-

Ryan Morfin:                    Yeah, no, listen I take your page out of the Mr. Smith of Matrix’s playbook, your humanity is the champion virus of all time. And we’ll beat COVID. We really appreciate you joining us and sharing some of your thoughts. It was a great conversation and we’d love to have you back in a few months, just to see how things have been evolving and checking.

Joshua Ungerech…:        Yeah, really looking forward to it. Really appreciate your time.

Ryan Morfin:                    Thank you so much.

Joshua Ungerech…:        Thank you, take care.

Ryan Morfin:                    Thanks for watching Non-Beta Alpha and before we go, please remember to subscribe and leave us a review on Apple Podcast or YouTube channel. This is Non-Beta Alpha. Now, you know.

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