China is Ready to Make a Deal + How we Create Wealth in Real Estate

Welcome to the Skeptical Investor weekly article, right here on BP! A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

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This week, we’re talkin’ potential Fed rate cut this week, we actually got some inflation numbers, and a China trade deal could be imminent! Oh, and I go a few inches deep on how wealth is actually created. You won’t want to miss the ending :).

Let’s get into it.

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Today’s Interest Rate: 6.19%

(👇 .03% from this time last week, 30-yr mortgage)

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The Weekly 3 in News:

1. 1-Labor market showing some green shoots as we enter Fall season. New weekly job data from ADP shows the economy added 14,250 jobs in the first full week of October. A marked improvement from Summer (ADP).

2. 2-No, cancellations of home purchases are not concerning. At the height of the housing crash, PulteGroup had a cancellation rate of 44% in Q3 2007 PulteGroup’s cancellation rate this quarter was 12% (ResiClub).

3. 3-Nashville News - Shout out to Nashville! One of my favorite financial and economic podcasts, The Compound & Friends, starts with a 2 min chat on how everyone loves Nashville, saying, “We have employees there, it’s pretty sick.” And at Min 3:33, host Josh Brown lays down the Nashville history surrounding the Ryman Auditorium. Thanks for setting them straight Josh. Oh, and the episode on the frothy stock market is a good one. Highly recommend (Compound).

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This week is absolutely chock-full of both economic and geopolitical action.

We have:

• --Fed Interest Rate Decision
• --~20% of public companies report earnings, including: Microsoft, Alphabet, Apple and ---Amazon and Meta, giving insight into the health of the consumer.
• --US and Malaysia sign new reciprocal trade deal.
• --President Trump Meets President Xi in person in Korea.

Let’s dive in.

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China Trade Deal Could be Imminent

Investors are waking up to some big news from China: US and China have reached a consensus on key trade issues.

We may have a trade deal!

But is this a head fake?

Speaking on NBC after 2 days of negotiations on the ground, Treasury Secretary Bessent said, the 2 leaders would meet face to face to hash out the deal this Thursday in Korea. The 2 leaders haven’t actually met in person since 2019, during Trump 1.0.

Wow. Count me a little shocked on this one.

I thought it would take much longer to get to a deal after a few volatile months of tit-for-tat threats. But it appears all of that could just have been posturing to gain an advantage ahead of these final talks.

The Details.

China’s Vice Minister of Commerce announced agreements on:

• Pausing tariffs on $300 billion in Chinese imports,
• export controls on things like microchips,
• tariff suspensions,
• agricultural (aka soybean) purchases,
• anti-fentanyl measures,
• anti-drug cooperation,
• TikTok operations,
• rare earth minerals, (as an aside, these minerals are not rare. It's that we don't have as much refinement and mining of them in the United States, but they exist here in large quantities, an important distinction. “Rare earth minerals” is a total misnomer).
• trade expansion, and
• US Section 301 tariffs (aka unfair/gov intervention in trade).

Additionally, while Secretary Bessent is in Asia, I bet he takes advantage of his geography and meets with other Asian country leaders. We could see a ramp-up in other trade deals.

Why This Matters.

This is the largest outstanding geopolitical risk for the United States. This development boosts investor confidence by de-escalating a trade war that has disrupted global supply chains since 2018.

And, in general, any large economic tailwind is bullish for US companies and people’s pocketbooks = buy more housing and housing-related goods and services.

Good for real estate investing.

However, the deal’s success hinges on final leader approvals. Incomplete terms on the enforcement of intellectual property or fentanyl chemical exports could lead to future volatility.

And expect much scrutiny from US-China hawks on national security concessions, Congress is likely going to be pretty noisy this week. Especially since they're just twiddling their thumbs at home during this government shutdown (cue Lindsey Graham screaming his pretty little head off).

Follow-On Effect: Russia

One aspect of this deal that many folks may be sleeping on: the US is requesting China's assistance in negotiating a peace deal between Russia and Ukraine. I think the US will move to help facilitate progress on those peace talks by leveraging China’s significant economic influence over Moscow during these talks. Doing so would take the last large remaining geopolitical risk to the US off the table and boost European and US relations, and would likely lead to more favorable trade agreements.

If you didn’t know, China buys about 60% of Russia’s energy exports, providing crucial revenue for its war effort, while supplying dual-use goods like drone components and electronics that have appeared in Russian weapons used in Ukraine. China is basically Russia’s sugar daddy.

But then again, this won’t be easy. China’s “no-limits” partnership with Russia since 2022 makes it reluctant to alienate Putin, and Beijing benefits from a distracted West amid its Taiwan ambitions.

But, IF this happens, send it!

Switching gears….Inflation.

Inflation Up, but Lower than Expected

Wait, we got an inflation report from the BLS during a government shutdown?

Yes.

Why?

Well, they called the bean counters back in the office because it was time to calculate the cost-of-living adjustment for 2026 Social Security benefits.

Thus, we get an updated BLS Consumer Price Index number! And as a result, the Social Security Administration said it will be increasing checks for seniors by 2.8% for 2026, more than this year’s 2.5% increase. No presidential Administration would want to skip this; that would be political seppuku.

CPI Inflation Up, But Less Than Expected

Of note, CPI is not the preferred measure of inflation for the Federal Reserve, and frankly, it's a lagging number, so inflation is likely lower. One major example of this is shelter and gas inflation, which both industries show is way down, but the CPI has up for September.

The Fed prefers the Personal Consumption Expenditures (PCE) index, which they see as more accurate, broader in scope, more dynamic, and less volatile. In 2000, the Fed formally adopted PCE and 2% annual PCE inflation target as part of its mandate for price stability.

Unfortunately, because of the government shutdown, we do not have an updated PCE number, so this will have to do.

Better late than never.

A Closer look at inflation: The Gas Price Story

Fuel/gas is a part of everything. Literally. Even my garden in my backyard is partially affected, since I mixed in a few bags of fertilizer and soil from Home Depot.

So when these prices go down, it’s like gravity. It affects everything.

Prices at the pump are way down, but the CPI shows prices up 4.1%.

Really?

Well, it’s lagging. Here is a real-time chart from fuel tracker gasbuddy.com showing an aggregate of reported gas prices nationally. You can see a small uptick in September, followed by a dramatic decrease this month.

And a 5 year chart; the average is $3.05/gal, as of yesterday.

And folks in the industry believe we will be below $3/gal in the next few months.

This tremendous lagging is one main reason why CPI Sucks, frankly. It’s even worse with housing cost estimates.

Federal Reserve Rate Cut Decision Wednesday

Remember, the Federal Reserve has a rate cut decision tomorrow.

Real-time data would be pretty helpful right about now…There is an overwhelming assumption in the market that they will cut rates. The bond market is pricing in the odds of a Federal Reserve rate cut (.25%) at 97.8%.

But with inflation levitating - which is expected and which I do believe is temporary - there is still a chance the Fed shocks the market and does not cut. Albeit a small % chance.

Nevertheless, we investors should never assume what interest rates will be in the future. I always underwrite my real estate deals conservatively, at today’s higher rate.

You know what they say about assumptions….

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My Skeptical Take:

Slight tangent, but related, I’ve been thinking a lot about wealth creation lately.

Most real estate investors I talk to haven’t stopped to think through its mechanism, which is what makes real estate so powerful as an investment asset class.

So here we go:

The only way to create wealth, is to borrow

And cash is debt.

Eh, sounds a little gross. I know. But hear me out (and yes yes with exception, hold your comments doomers).

First. Holding cash in a bank account is essentially like holding debt; the inflation of our dollar means that its value slowly decays. Our money becomes worth less and less, every month. Just like if you borrowed money.

Only with this type of debt, you're not making any money with your money; you're merely allowing it to whither away.

Investors (teeny and huge) deploy their savings to an asset. Stocks, bonds, fine art, collectibles, and of course, real estate.

And to do that, we borrow. We pair savings with borrowed funds to purchase something we could not otherwise afford.

Borrowing money is quite powerful.

It costs you a certain percentage to do so, but as long as you think you can make more money with that money, you can reverse the aging process of your savings and create wealth.

In fact, borrowing is the primary way that wealth is created.

And a cornerstone of a modern, developed economy is the ability to borrow.

Famed investor, Ray Dalio, has a great way to phrase this idea: “Credit is the most important part of the economy, and probably the least understood…one man’s liabilities are another man’s assets.”

Let me paraphrase Dalio here to further explain wealth creation.

Just as buyers and sellers transact in a marketplace, so do lenders and borrowers.

Both lenders and borrowers want to take their money and make more money with it. Lenders charge a fee/interest, and borrowers can now buy something they could not otherwise (a car, business, house, any productive asset etc…),

Credit benefits both sides by helping them achieve their goals.

Borrowers pay back the borrowed amount (principal) + the fees (interest etc…).

When rates are high, this leads to less borrowing since it’s costly. Low interest rates boost borrowing because it’s more affordable.

And if both parties do what they agreed, both parties get what they want, and wealth is created.

POOF!

This can be tough to wrap your head around, I know. I’ll continue.

When borrowers promise to repay and lenders believe them, credit (aka wealth) is created.

Only now it has a new name.

As soon as credit is created, we call it: debt.

Spooooooky.

Debt is both an asset to the lender and a liability to the borrower.

When the borrower pays back the loan plus interest, both the asset and liability disappear.

POOF AGAIN!

And what’s leftover, the result for both sides = wealth!

That’s wealth, created right out of thin air!

So, why does credit matter so much? Because when someone gets credit and turns it into debt, they can spend it on their target asset.

And consumer spending (aka consumption) represents most of our economy.

In fact, it’s about 2/3 of GDP!

Thus, debt is how we all grow wealth.

Ray Dalio goes more in-depth into this concept in his free short film on the economy and wealth.

I highly highly highly recommend you take the time this week to watch it.

Here it is:

So we, real estate investors, use debt to create wealth. Yes.

To enrich ourselves. Yes.

To provide for our families. Yes.

But in doing so, we also do something magical. We provide housing for the country.

The government does not build housing (>.1%).

They provide incentives, but it's ultimately the investor who creates that housing. And for doing so, the government incentivizes this action via the tax code.

This is why real estate investors pay little tax.

And as famed investor Charlie Munger (Warren Buffett’s business partner) says, “Show me the incentive and I’ll show you the outcome.”

Housing is the outcome.

This is why real estate is such a powerful, highly tax-advantaged way to create wealth.

So to review:

Use debt to create wealth.

Low taxation is a wealth multiplier.

Why real estate? This is why.

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

-The Skeptical Investor