SPECIAL INVESTOR LETTER FROM GEORGE

Right now we have out for sale a number of "pot deals" - loans on some marijuana dispensaries throughout the State of Washington. Now before I get into the benefits and risks of these particular pot deals, let me remind you that the vast majority of our exotic loans - loans on adult book stores, gentlemen’s clubs, and even once on the World’s Largest Female Mud-Wrestling Palace - historically have a superb record of payment. (Careful: Past results are no guarantee of future performance.)

At Blackburne & Sons, we have no leverage to affect social change. Our rates are 5% higher than those being charged by the bank. We are lucky if we can find anyone willing to take our loans these days. Not only are 90% of the banks back in the commercial lending business, but also Wall Street is killing us with securitized, non-prime commercial loans in the mid-7% range. If we find a good loan that we are are convinced will pay as agreed, we simply must overlook the fact that the loan, the borrower, or the property may be a little bit exotic.

Speaking of exotic, that female mud-wrestling palace deal was certainly a funny (but excellent) loan. That facility made money hand-over-fist. Here’s another funny story. A restaurant securing one of our loans got in a little trouble two years ago because, after hours, our borrowers started to host after-hours, dwarf-tossing contests. Ha-ha! Silly.

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Actual court testimony from a book, Disorder in the Court:

ATTORNEY: Now doctor, isn't it true that when a person dies in his sleep, he doesn't know about it until the next morning?

WITNESS: Did you actually pass the bar exam?

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Some people REALLY love Christmas, but I love Thanksgiving. Last year I had my chance to do the traditional thing of shooting my own turkey for Thanksgiving. Man, you should have seen the people scatter in the meat department!

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Now let’s talk about the nice pot deals. In bold, red type, splashed across the top of the Investment Bulletins, we warn you that marijuana is still illegal under Federal law. It’s true. There is no way to sugarcoat it. As you consider this risk, however, please keep in mind the following:

1. Twenty-nine states, plus the territories of Guam and Puerto Rico, plus the District of Columbia, have some sort of statutes that legalize medicinal marijuana. Helloooo? Folks, there are only 50 states!

2. Eight states have now legalized marijuana for recreational use, including the States of Washington and California.

3. State taxes on marijuana amount to hundreds of millions of dollars. These states possess vast political leverage and will not give up this enormous income without a fight.

4. Tens of millions of Americans across the country enjoy marijuana recreationally, and they represent an enormous voting block. If one political party - say the Republicans - ever tried to override the will of the states and of the people on pot, they would likely suffer badly in the next election. Arguably, Federal enforcement of marijuana prohibitions is politically toxic.

5. Congress has made it clear that it does NOT want the United States Attorney General wasting Federal funds chasing down medicinal pot users. In 2014, Congress passed the Hinchey-Rohrabacher Amendment, prohibiting the U.S. Attorney General from using federal funds to target medicinal marijuana patients. That Amendment was allowed to sunset on September 30th on procedural grounds, but it shows the intent of Congress not to fight this battle. Current Federal pot prosecution guidelines are focused on keeping organized crime out of legal marijuana distribution and on keeping pot out of the hands of minors.

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ATTORNEY: The youngest son, the 20-year-old, how old is he?

WITNESS: He's 20, very close to your IQ...

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“To be honest, George, my problem with the pot deals is NOT the risk of Federal crackdown. My problem is that the interest rates are soooo low. My husband and I greatly prefer those "good loans", the ones with 11% and 12% yields. Eight percent deals seem hardly worth the risk.”

“Quick, Cisca, please take my belt, my shoelaces, and my ballmark repair tool. I want to commit suicide.” Ha-ha! (This is what I ask my golf buddies when I miss my third four-foot putt… on the same hole!)

Folks, let me make something very, very clear. If you invest in five 11% to 12% loans from Blackburne & Sons, statistically you will take a painful haircut in at least one of them, if not more. First mortgages are NOT Certificates of Deposits. Painful losses - especially on loans with double-digit yields - are very, very possible. In real life, the truly good first mortgage investments in today’s market are the 6%, 7% , and 8% deals. These yields are 5%, 6%, and 7% more than Certificates of Deposit. If you want a higher yield than that, you are gambling, not investing.

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ATTORNEY: Are you sexually active?

WITNESS: No, I just lie there.

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About 15 years ago, I read how the people of Albania were marching in the street and demanding that the government, “Do something!” Why?  Millions of uneducated Albanians had gotten caught up in a series of simple pyramid schemes, and they had lost their life’s savings. Huh? The government was supposed to reimburse them for simple stupidity? Not surprisingly, the Albanian economy and government cratered.

I will write to you much more about this subject in the future, but for now please consider the fact that recessions and large economic collapses (Tulip mania in Holland, the South Sea Bubble in England, the Mississippi Bubble in France, leveraged stock purchases in the late 1920’s, the Dot-Com Bubble in the U.S., the Subprime Crisis in the U.S., etc.) occur after a series of malinvestments. A malinvestment is a bad investment, one that does not cover the interest cost of the loan taken out to make the investment. In the case of Albania, the obvious malinvestment was playing in these stupid pyramid schemes.

I am starting to see malinvestments that may prove to be the cause of the next recession - bitcoins and the FAANG stocks. FAANG stands for Facebook, Apple, Amazon, Netflix, and Google. This going to shock you, but right now bitcoins and and FAANG stocks might be pretty good investments. The bubble may only be about 45% of the way to bursting, and as long as you get out in time, you could theoretically make a huge profit. But then, they said the same thing about Pompeii real estate, right before Mount Vesuvius popped its top and drowned everyone in hot volcanic ash.

My gut tells me that these particular bubbles are likely to keep growing for another several years. Bubbles have a tendency to continue much longer than one would predict. When these two bubbles pop in 2019 or 2020(?), I do NOT think that the recession will be terribly bad or long-lasting. My 15-year forecast continues to be that we are in the midst of one of the greatest economic periods in the history of the United States.

What may greatly reassure many of you newbies to my newsletter list is that I wrote a book in 2006 that warned of a severe deflationary depression.  At the time, the thought of massive deflation was considered laughable. My point is that if I ever see a massive black cloud on the horizon, I have no problem with running around, screaming like Chicken Little. The good news is that I see no serious black clouds on the horizon. If you make any mistake in the next decade, it will be not investing and expanding your business fast enough. That being said, stay out of first mortgages with double-digit yields, okay? Geesch.

Warm Regards,

George Blackburne III