Well, a lot of times, over the last 30 years, we've been asked the question by various investors, is this time different? I cringe every time I hear that question. It's probably the four worst words in investing. Is anyone saying this time is different. And, you know, people get suckered into a lot of stuff and I'm not talking about politics. I'm talking about investing. Whether it's stocks or real estate. You know, economists, central bankers, so called experts start saying that this time is different. That somehow the markets or the economy, some structural change has happened, that's fundamental, that's permanent. The pattern is pretty predictable. It leads to bad things. Most importantly, it distorts the capital flows that go in and out of different asset classes. If capital flows in, it tends to create unsustainable price increases, asset bubbles, exactly what we saw leading up to the global financial crisis. A lot of capital fueled by easy, cheap, poorly underwritten debt, leading to a housing bubble. And then that inevitably leads to a market crash because it's unsustainable. There's a couple of really good books on this. One by Reinhart and Rogoff that was written right in the middle of the global financial crisis and really pointed to a couple of different things. A lot of reliance on central bankers expertise. A lot of assumption that Wall Street's innovations were a good thing, whether it's securitization or CDOs, credit default swaps and the like that globalization and technology, we're going to usher in this era of permanently low inflation and interest rates.

We saw the same sort of thing happen with the dot-com boom and bust of ninety's. It happened back in the 1920s when we came out of World War I, well before my time. But you know, these cycles have this psychology of, "this time is different". People buy into it. Why do they do that? I get asked that question a lot and I think there's a lot of different factors. I think first and foremost, we're human. With all the psychological strengths and weaknesses that come with that. I think that most of us are actually wired to be optimists, our psychology is. It's just - the survival instinct that's in all of us. So there's this natural yearning for good news, a better life, more wealth. It's a pretty strong cultural trait for Americans. The American dream is wrapped around that. Everybody's fascination with the Kardashians. Reality TV is a reflection of that. I think that leads into actually my next point is that, partly greed, I think has something to do with this. There is a greedy nature to human nature that causes some of us to be willing to swing for the fences and ignore downside risks. And I think this gets amplified, especially today, with the presence of social media and Internet sites and so forth. There is an echo chamber effect that causes psychology to just feed on itself. The herd mentality is a pretty powerful mentality.

And so depending upon your source of news, you know, you tend to focus on the good news or whatever appears to be different and supporting what you're hearing about this time being different and you lose any historical context, any memory that markets go through cycles. Investor psychology has a huge impact on that. And you only hear and see the evidence that supports your particular views. This is called by sociologists and psychologists - confirmation bias. It's really pronounced today in the echo chambers that exist, whether it's news outlets or social media, that you you might be drawing your information from. So, what does all that mean for Paladin? Because, the times have clearly shifted in 2020. And to think that we were in a perpetually low interest rate and a perpetually low inflationary environment and that easy money was available. That's off the table right now, clearly. And there's a big question whether or not we'll go back after all of the disruptions that have influenced where interest rates are going this year. Will we go back to where we were for the last 20 years, which is close to zero interest rates? Or, is there going to be a new normal? Our views are pretty simple. Economies are cyclical and market's asset prices are cyclical and asset pricing is hugely dependent on investor psychology. And what that does is it influences capital flows. And so you really have to be mindful of monitoring the capital flows, both on the equity side and the debt side into certain markets, into certain product.

So in general, avoiding markets with high competition is generally a good thing. That's one of the reasons that we have focused on workforce housing in Latin America and rental housing here in Southern California, both of which have limited institutional competition. There's a lot of competition in these markets among small time players, but Paladin always is positioned as a more credible, institutional sized, stronger player in these markets. So we have a competitive advantage. But avoiding institutional competition has been, I think, a big factor in the success of our strategies over the last 30 years in these two markets. And, we just never believe that this time is different. I think the days of zero interest rates, over the last two decades. We look back on it as just sort of this golden era of easy money. I don't see it coming back. I do think that things will normalize. There still is a lot of capital. Over $1,000,000,000,000, I heard the other day, sitting on the sidelines right now in real estate private equity, waiting for distress to hit and will bounce back. So there's that capital flow, will quickly normalize sset pricing, which is adjusting right now. And, just at the larger macro level, there's a similar amount of capital that I think will eventually bring interest rates back down, but not back down to the levels that we've seen in the last decade.

We've talked about how Phoenix is one of the most beautifully cyclical markets historically, for real estate investment. And part of the reason for that is that it is relatively easy to develop new supply in that market, and there's plenty of land available to develop in Phoenix. And so, you really have to time your entry and exit in that market. I'd say 80%-90% of the success of the real estate investment, in that particular market, is based on market timing. Contrast that with what we're doing here in Southern California, B and C workforce housing rental apartments. There are so many reasons why those assets are well insulated during times of economic downturn or any kind of uncertainty. And the main reason is the cost differential between those assets, both on just a cost per unit relative to new supply and class A space and rents. The tenant base in our properties don't have any other affordable housing choices. They've been boxed out of the market of home ownership because of high housing prices here. That's only gotten worse in a rising interest rate environment, like we're in now. They tend to be very sticky renters during market cycles. And if you're targetting assets like we do, where current rents are 20% to 30% below market rents, market rents can still go down 10% and if a tenant moves out, they lose their job and they just can't afford to pay rent anymore. We can still bump rents up to market. The 20% loss to lease, market rents come down 10%, we can still bump rents by 10% if units turn over during the recession.

We tend to see very little unit turnover, in our buildings, during recessions because again, our tenant base is a renter by necessity and we see more demand for our assets because folks move out of the more expensive Class A space seeking a more affordable living option, which is the Class B and C properties that we own. So occupancy, in our particular corner of the universe, remains very, very stable. So then it all comes down to how you've capitalized an investment because if you're conservative on the debt side of things, which we are generally. We don't do floating rate debt. We always lock in our interest rate. We always make sure that our loan durations match our business plan with a little extra cushion so we don't have any debt coming due in the middle of an uncertain market cycle like we're in now.  You do that and you combine the resiliency of occupancy and the fact that if units turn, you can even have your cash flow go up, not down in a market cycle downturn. It's a pretty good strategy. So it depends. That's just been a resilient characteristic of what we're doing - one of the reasons we were drawn to Southern California for our value-added apartment investing was just those unique attributes relative to other markets.