SPECIAL INVESTOR LETTER FROM GEORGE ON INFLATION

March 28, 2018 Addendum - As you consider investing in a gorgeous little apartment building within walking distance of the capital of the sixth largest economy in the entire world, don’t forget that we are buying this property for all cash. As I look around at cash, gold, stocks, bonds, real estate investment trusts, paintings, and collectibles, I can think of no other investment that can compare to this deal. This is an all cash investment! There is no debt. No one can take this property away from us. Cash? The yields today are pathetic. Trust deeds? We are never secured by the most desirable property in town. If you are bullish on real estate, you could invest in real estate investment trusts, but they all use leverage. At the first sign of trouble, real estate investment trusts quickly lose value because of the huge bank loans that they carry. Gold pays no interest or dividends, and gold performs best in deflationary, troubled times, as opposed to inflationary or hyperinflationary times. There are too many other investments that pay a much higher dividend than gold, while still providing some inflation protection. Stocks? You probably already have plenty of money invested in stocks. Bonds? The long-term trend for interest rates is upwards, and bonds will not perform well in that environment. Paintings and collectibles? People always need a place to live, but they don’t always need a 1963, mint condition, Mickey Mantle baseball card. It is my genuine belief that this investment will be the finest one in your entire portfolio. Sure, you will also own stocks, bonds, trust deeds and physical gold coins, but the crown jewel of your portfolio will be investment in this deal. Free and clear, folks! No debt. Sweet residential units within walking distance of downtown Sacramento will always attract tenants; but the most important feature of all is free and clear.

This letter is arguably the second most important Special Investor Letter that I have ever written in our 38-year history. We have to move-move-move, and do it quickly, if we want to preserve the purchasing power of our money. Inflation is about to go nuts. Yeah, yeah, lots of newsletter writers raise the risk of inflation. This is different. I am not talking about an increasing inflation rate. I am talking about a sudden, huge, and shocking inflationary eruption. Think of Mount Vesuvius and the City of Pompeii. Bam. Sudden.

It is ironic that I should be warning you about inflation. In the early 2000's, I was the Deflation Guy, constantly warning our investors about the very real possibility of deflation. I finally wrote a book, The Reverse Multiplier Effect (an enjoyable read available on Amazon.com) in 2006 in which I predicted a 45% decline in real estate values, the tidal wave of foreclosures, and the tens of millions of unsold homes. At the time, the very idea of deflation was inconceivable to the talking heads on Bloomberg and CNBC. In reality, massive deflation had been a looming risk for 15 years.

The following metaphor may help you to understand inflation and deflation far better than your investor buddies. Think of a microscope. The microscope has two focus dials, which represent the forces acting on inflation. The fine-tuning dial is much smaller than the macro tuning dial. It takes a huge turn of the fine-tuning dial to equal even a single tick of the macro tuning dial.

The Fed can influence inflation by raising or lowering the discount rate and/or through open market operations - the buying and selling of bonds. Think of these Fed actions as adjustments to the fine-tuning dial for inflation. It takes a lot of Fed effort to make a dent in inflation.

But the macro tuning dial for inflation - now that's a knife! What is that macro tuning dial for inflation? Answer: The confidence of commercial bankers to make new loans. Assuming a reserve requirement of 5%, if a bank makes a new loan of only $100, the money supply of the entire country increases by a whopping $2,000! No way. Yes, way. This is called the multiplier effect, and this effect is a normal by-product of fractionalized banking. Therefore, if commercial banks get even a little bit more confidence - just a small tick on that macro inflation dial - the inflation rate increases sharply.

On the flip side, if a bank loses confidence, takes in a $100 loan payment, and then doesn't re-loan it back out, the nation's money supply declines by $2,000. Yup. Twenty-to-one. This is what happened in 2008. Banks became terrified and stopped lending. The banks had trillions and trillions of dollars in loans outstanding, and these loans had billions of dollars in monthly loan payments. When this money was not immediately loaned out again, three trillion dollars disappeared from the U.S. money in less than two years. Admit it. You always wondered where the big monetary bonfire was held. You never smelled any smoke. Now you know. The multiplier effect can work in reverse!

[Please pause a moment.] If the story of how $3 trillion disappeared in just two years resonates, then what I am about to write to you should convey our urgency to spend today's dollars to buy prime commercial real estate.

How do I love thee? Let me count the ways. Why are bankers suddenly more confident? Let me count the ways:

1. Congress just passed a $1.5 trillion tax cut.

2. The Trump Administration - rightly or wrongly - is slashing Federal regulations.

3. The pro-business administration has greatly improved business confidence.

4. The U.S. unemployment rate is just 4.1%.

5. The economy is creating jobs like gangbusters. 6. GDP growth is very good.

7. Congress is now focusing on a huge infrastructure spending program.

8. The yield curve is rising. Banks make their dough between low short-term rates and higher long-term rates.

9. And now, there is talk of rolling back some Dodd-Frank Regulations for small banks.

Are banks gonna lend like crazy in 2018? You betcha. Combined with demands by workers for higher wages (the pool of available workers is dwindling rapidly), inflation is going to go nuts this year.

We will be sending out a terrific offering on a prime apartment building in downtown Sacramento this week. Jump on it! The first investors in my farm deals made a killing. The first investors in our industrial building syndicate are selling this week at a nice profit. The first investors in our all-cash, prime property syndicates - I predict - will do much better than the next syndicate we put together next month, which itself - I predict - will do better than the third prime property syndicate, etc.

So, I really-really mean it. Jump on it!!

Warm Regards,

George Blackburne III, Esq.