Here we are at our grand finale!  Glad you made it.  Please put on your seatbelt and keep your arms and legs inside the bus at all times.

The Debt Ceiling: What if They Do and What if They Don’t?

For starters, let’s just get clear on what the debt ceiling is.  Since we have people all over the world listening to our podcasts and reading our blogs, we don’t want to assume that everyone understands what the debt ceiling is or even how the U.S. government is organized.  And since there may be a few U.S. citizens who slept through Civics class, it’s probably good to lay a quick foundation.

The debt ceiling is the amount of borrowing the Congress will permit.  Congress (not the President) is in charge of setting the budget.  The President may (and does) submit a proposal, but Congress has the final say.  Then the President’s job is to do what Congress tells him to do.  He’s the Executive, and his job is to execute the will of the people as delivered to him by the people’s representatives, Congress.  Sometimes a President acts like Congress works for him (a dictatorship), or that he works directly for the people (a democracy).  In reality, the U.S. system is really a representative republic.  That’s a whole other discussion, but something you should think about if you’re a U.S. citizen.

Now the Treasury is part of the Executive Branch, so it works for the President.  That is, the Treasury reports to the President, who reports to the Congress, who report to the people.  The Treasury can’t borrow money past the limit Congress says unless the people’s representatives (the Congress) say it’s okay.  What Congress is finding out is that they can’t just say it’s okay if the people (those are the folks who actually have to pay for it all) say it’s not okay.  Right now, there’s a large and loud group of people who are not okay with more borrowing, hence the big debt ceiling debate.

Right now, the Congress has set a ceiling on how much Treasury can borrow, and Uncle Sam has hit it.  If Treasury borrows past that, then the Executive Branch has exceeded its Constitutional authority (like THAT never happens…oops, sorry, did a little sarcasm sneak out?), which, if it happens, would spark a completely different and heated debate.

As stated in our first installment in this series, we’re not here to say what SHOULD happen.  And no one can say with authority what WILL happen.  What we want to do is be prepared for a variety of possibilities. So let’s talk about what some of those various possibilities might be.

What if they DO raise the debt ceiling?

If Congress agrees to raise the debt ceiling, it will rile Tea Party conservatives, but it will calm the markets.  The U.S. will retain its pristine record of having never defaulted.  This may be the closest Uncle Sam has come to defaulting, but it isn’t the first time there’s been a debate about the debt ceiling and warnings from credit rating agencies. Some have said that Uncle Sam’s credit rating is going to take a hit anyway.  It’s something to watch, because a lower credit rating will mean higher borrowing costs for Uncle Sam (higher interest rates paid on Treasury bonds), which means higher interest rates will ripple through ALL types of debt.

One thing new is that with recent financial reform, ratings agencies have less discretion about not downgrading a debt issuer’s rating when problems are apparent.   A problem with the mortgage mess is that the rating agencies overlooked obvious problems and investors got snookered into buying debt that was far riskier than they bargained for.  When the underlying loans started going bad, bond investors got spooked and quit buying.  That meant the flow of money into mortgages stopped, and liquidity drained out of the real estate bathtub causing all real estate “boats” that were floating in that sea of money to drop.

The point is that, like any other borrower, if Uncle Sam’s credit rating drops, then the interest rates he pays will rise.

Let’s stop here and re-visit a previous thought, because it will be part of a recurring theme.

We think Big Ben wants low interest rates because low interest rates will encourage more borrowing and spending, which he thinks is the path to prosperity.  You may or may not agree, but it doesn’t matter what you (or we) think.  Big Ben has the Magic Checkbook (the one whose checks never bounce), so it only matters what he thinks.

So, if anything happens to cause interest rates to rise, the Fed is likely to step in with its Magic Checkbook as “the buyer of last resort” to create demand and bring down interest rates.  And, as we’ve discussed in previous installments, when the Magic Checkbook comes out, inflation happens.  Keep this in mind at all times.

Now, an increase in the debt ceiling means more borrowing, more interest, and more currency expansion.  Why?  Because the open market (think Bill Gross and PIMCO, plus all the warnings from the Chinese) doesn’t appear to have enough appetite for all the bonds Uncle Sam wants to issue at an interest rate that works for Ben and Sam.  So, either interest rates will have to rise to attract more Treasury buyers or the Fed’s Magic Checkbook comes out.  You may have already heard the hints about a possible QE3 coming to a theater near you.

Bottom line:  If Congress raises the debt ceiling, then slow, steady inflation is the best case scenario.  If productivity doesn’t increase (adding more products to the economy) to absorb some of the excess money, prices will rise at a rate that upsets the people and alerts the lenders (the bond buyers) that they’re going to get paid back with devalued dollars.  So slow and steady inflation is the “mandate” that Big Ben talks about all the time.  It’s what he wants to happen.

Of course, if you’re a non-Fed bond buyer (such as China) and you realize the currency of the bond you’re holding (dollars) is dropping by say 5% a year, then you’ll want 5% plus a little bit more to make sure that you really make a profit.  And if you want a higher yield and Uncle Sam needs your money, then either Sam pays or another buyer needs to come in and give Sam a better deal.  Again, that’s when Big Ben steps in with his Magic Checkbook to try and bring yields back down to keep Sam happy, keep bond values worldwide stable (a collapse in the bond market would be a worldwide economic wipe out), and keep interest rates low so consumers can borrow and spend.  Remember, Big Ben subscribes to the notion that borrowing and spending is the path to prosperity.

Yes.  It’s a vicious cycle of persistent inflation.  Go look at a chart of inflation since the U.S. came off the gold standard unofficially in 1933 and then officially in 1971.  What you’ll see is a clear picture of rising debt and rising prices.

What if they DON’T raise the debt ceiling?

There has been a real war going on in the U.S. government about raising the debt ceiling.  What’s all the fuss about?  It isn’t like Congress hasn’t raised the debt ceiling a jillion times before.

It seems that a big and loud faction of the American people is tired of the spending more than you make and borrowing to cover the difference.  There is real pressure on their representatives to stop it.  For them, it starts with refusing to authorize further borrowing.  At least not until an agreement is hammered out as to how to cut spending.

Whatever the details, if the debt ceiling isn’t raised, there are two primary possible outcomes, neither of which is pretty.  And as we’ve already seen, raising the debt ceiling isn’t all that pretty either.  In other words, the U.S. economic picture isn’t pretty, no matter how you look at it.  But remember, inside of all the problems are opportunities, so don’t be discouraged.  Be excited…and keep expanding your education.

So, if the debt ceiling is not raised, then the Fed will need to decide if they want to make the Treasury’s bank account magic also.  That is, the Fed can allow the Treasury to write checks that clear even though there isn’t any money.  This means no default on U.S. obligations.  How can they do that you say?  Well, since the Fed clears the Treasury’s checks, and no one knows what goes on inside the Fed, how would anyone really know when Uncle Sam ran out of money as long as the checks keep clearing?

But overtly giving the Treasury they’re own magic checkbook lets the world know the whole system is a sham, depending on how much visibility anyone has into Uncle Sam’s revenues and expenditures.  Since it’s Treasury’s job to report all of that, we’d guess they’d work to cover it all up.  Some have speculated that it’s already happening.  Who knows?

However, at whatever point the world realizes that the Treasury has a magic check book, investors all over the world will begin to dump dollars and buy stronger currencies and commodities.  Why?  Because they know that spending will continue far in excess of production, and the Treasury can simply expand the money supply at will to cover the deficit.  More dollars out of thin air outpacing production means falling purchasing power (more dollars chasing less goods).  Combine that with worldwide investors dumping dollars, and you have a recipe for hyper-inflation.

Hyper-inflation means that anything denominated in dollars will go up in price fast.  Think Zimbabwe: a trillion dollars for a roll of toilet paper.  Foreigners will be snapping up U.S. real estate (they already are).  And Americans will lose purchasing power all around the world.  Very ugly for Americans and anyone holding dollars.  Look at what gold has done in the weeks leading up to the debt ceiling deadline.  It seems the markets are prepping for long term inflation.

And of course there is the eventual outrage as the American people realize the Executive Branch has now completely circumvented Congress and is at liberty to spend without restriction.  How will the American people respond to that in this age of social media?

Default:  The Doomsday Scenario

The other possibility is outright default.  That is, Treasury will tell the world, “Sorry, I can’t pay you.”

This scenario is being described as financial Armageddon.  Since Uncle Sam has never defaulted, no one can say with certainty what would happen, but common sense says that interest rates would sky rocket.  Why?  Because U.S. debt would no longer be considered risk free and investors would demand a big premium to buy it.

We could speculate on which debt offering would take over as the foundation (“safest in the world”) of all debt risk pricing (interest rates).  But no one knows.  What matters is how the Fed would respond to rising interest rates on Treasuries.

If the Fed is true to form, they will whip out the Magic Checkbook and step into the bond market to create demand in an effort drive interest rates down. Or at least slow down their ascent.

Of course, the amount of Treasury bonds the Fed would need to buy will depend on how the rest of market responds.  But it’s safe to say that it will take LARGE purchases (QE4, 5, 6 & 7?) in order to keep interest rates down.  Remember what that means:  Lots of new money coming into the economy.  It wouldn’t surprise us if they set up straw buyers to hide the fact that the Fed is flooding the system with new money.  But as we said earlier, the excess funds will eventually trickle through the economy and land at the doorstep of the American public in the form of higher prices.

Further, it isn’t likely U.S. productivity could increase enough to offset the volume of new money entering the system, so once again inflation is the likely outcome.  Commodities will spike and prices will rise as the cost of raw materials works their way through the supply chain.

Now you know why Peter Schiff thinks gold will hit $5,000.  It also helps explain why Robert Kiyosaki says “savers are losers”.  Holding dollars in any of the aforementioned scenarios is a sure path to lose purchasing power.  Savvy people will be dumping dollars and purchasing anything real.  Go do a quick study of the Weimar Republic in pre-World War II Germany and you’ll get the idea.  Never in America?  That’s what they said about a default by Uncle Sam.

What’s a Real Estate Investor to Do?

Are you freaked out yet?  You should be concerned and aware, but don’t hit the panic button.  Just keep getting educated, watch the developments, and think through the possibilities.  Then take action as you deem appropriate.  We think you’ll find it helpful to be a part of a “master mind” group of similarly concerned and informed people, so you can discuss issues and bounce ideas off each other.  It’s a big reason why we continue to run our Mentoring Clubs and annual Investor Summit at Sea™.  Look to join or start a group in your area.

As real estate guys, we can no longer just think about real estate outside the context of currency, commodities and Fed policy. Those days are gone – at least in the U.S.

But if we pay attention, then we can use commodities and foreign currencies to protect the value of our cash reserves, go aggressively into debt to acquire properties that will likely increase in dollar denominated value against fix dollar debt (equity happens!), and purchase properties that are most likely to appeal to Americans who are growing poorer, and foreigners who are growing richer.

Take some time and think about that last statement, because that’s there the rubber really meets the road.  We’ll talk more about all this as the weeks and months roll by.  And it will be a major topic of conversation on our 2012 Investor Summit at Sea™, where we will have Robert Kiyosaki with us for an entire week – plus an all-star faculty of experts in a wide variety of relevant subjects.

In closing, let us say that while these are certainly uncertain times, those who are best educated and well-connected will prosper, while those who aren’t are more likely to sell assets, avoid debt and hoard dollars as they’re being squeezed by inflation.  Think through where that will lead. Selling things that are real in order to collect paper dollars which have no intrinsic value and are losing purchasing power.  Does that sound like a formula for success?

Now just one final illustration to make a point, then class is dismissed. Thanks for sticking with us this far!

Imagine if you purchased a $125,000 rental property in a market that produced something the world rally needed- something like oil and gas.  Even if Americans can’t afford much, the hot economies like China will need it and be willing to pay for it.  So it’s likely there will be jobs in any U.S. region that produces energy.  Jobs mean people, and people mean housing.  So an area like that will have a demand for rental housing.  Best, those jobs can’t move away from the region because the product is locked into the land itself.

Now, imagine that you put down $25,000 of cash, which, if left in the bank would go down in value as the dollar falls through inflation.  You get a $100,000 loan at a today’s low interest rates and lock it in for the long haul.  Then you rent the property out for a positive $200 a month.

Big whoop, right?  But at least the property is feeding you and not vice versa.

Then let’s say that you use the extra money to buy a little gold and silver every month.  Of course, you run the risk that the dollar could get strong against gold, so you have to decide what you think is the most likely outcome.  You could also use foreign currencies to hedge against a falling dollar.

Now, doomsday comes.  Zimbabwe-like inflation hits and it now takes $100,000 to buy a loaf bread.  Those $200 a month investments in gold and silver will have held their purchasing power, so you take a small fraction of your gold and COMPLETELY pay off your rental property (not that you would, but you could).

Meanwhile, gas and oil are selling to China so your tenant is earning good money.  Now there’s probably lots of competition for tenants, so your rents aren’t through the roof (though they probably would be thanks to inflation), but you have cash flow.  Or, you have a house that’s paid for that you could live in if you had to.

The point is that the right real estate in the right market, when structured properly, is a great way to benefit from inflation, whether it’s slow and steady (like the Fed prefers), uncomfortable (if Uncle Sam doesn’t slow down the pace of the growth of its debt), or out of control (if Uncle Sam defaults and the magic checkbooks start working overtime).

Your mission, should you choose to accept it, is to understand the economic mechanics of the flow of money and where and how it’s likely to flow. Then position yourself to benefit from as many of the most likely scenarios as possible. As illustrated, we like real estate for this reason.  And if we had time, we could show that even if deflation occurred, you can still win with real estate.  But that’s a topic for another day.

Our Prediction

You thought we forgot, didn’t you?

We think after all the yelling and screaming, that a compromise will be reached and the debt ceiling will be raised.  And whether it comes through a higher debt ceiling or a secret Magic Checkbook in the hands of the Treasury, the U.S. will not default.  Of course, that’s just our opinion and we could be wrong.  We’ll see.

Now take a shower. That was a long workout.  We’re going to buy a bag of popcorn and watch to see how the movie ends.  See you on the radio!

Have a comment?  Use our Feedback page.

Robert Kiyosaki and his Rich Dad Advisors® will be talking about how investors can capitalize on all the turmoil in today’s economic environment.  Gold is at all time highs.  Interest rates are at historic lows.  The US is teetering on the brink of default as the debt ceiling debate rages on.  Wouldn’t you like to know what several successful real world investors are thinking?  We do!

Robert Kiyosaki is one of our favorite financial gurus. We know he’s sometimes controversial, but we don’t get the criticisms.  He preaches the importance of education, surrounding yourself with qualified professionals, and understanding that most of the world’s financial marketing and “education” programs are designed to steer uninformed consumers into the waiting arms of brokerage houses, bankers and tax collectors.  Kiyosaki says financial education is essential to your economic well being. What’s controversial about that?

Besides, whether you agree with him or not, the fact remains that he’s the best selling financial author in the history of the planet.  That alone makes him worth listening to, since millions of people around the world are influenced by him.

As for us, we like Robert and his advisors a lot.  We’re very fortunate to get backstage with the Kiyosakis and many of their advisors.  If you’re a regular listener to The Real Estate Guys™ radio show or podcast, then you know we’ve had Rich Dad Advisors Ken McElroy and Wayne Palmer as faculty on our last two Summits.  And not only are Ken and Wayne coming back for 2012, but Robert and Kim Kiyosaki will also be on board the Summit for the entire week!

We’ve gotten great personal and professional advice from Robert and the Rich Dad Advisors that has made a positive difference in our lives. We’re big fans. We think the world will be much better off as every day working people make it a priority to expand their financial education.  It’s why we do the radio show, run our mentoring clubs, promote Rich Dad and others who believe in education, and run around collecting interviews and expert opinions from as many people as we can.  Ideas, information, strategies and perspectives from lots of sources are a great way to form your own well-crafted opinions.

We encourage you to join us and listen in to Robert, Kim and the Rich Advisors on August 11th as they talk about the pressing economic issues of today and where the opportunities are.  The event isn’t free, but it sure isn’t expensive!  It’s a very small investment in your education which has the potential to pay huge dividends.  Afterwards, drop us a note on our Feedback page and let us know what you thought.

What does it all mean?  And where is all this “liquidity” going?

Slogging through the headlines in our galoshes:

• Your host and rainmaker, Robert Helms
• Your co-host and chief drip, Russell Gray

Have you ever wondered where the Fed gets the money it uses to purchase government debt or toxic assets?  We’ve heard it said they have a magic checkbook – one whose checks NEVER bounce.  Hey! We want one of those!

So when the Fed buys stuff in the “open market”, where does the money go?  And once it enters the economy, how does it spread around?  Will any of it puddle up in real estate?

If you’ve been baffled by all of this, but can see gold, oil, gas, groceries, clothing and your Big Mac and Starbucks all going up, then you already have part of the answer.  Maybe those pundits who proclaim no inflation are really all wet?

Tune in to this episode as we explain how the added liquidity created by expansionary monetary policy dams up and then overflows through a series of levee breaks, eventually bringing a wave you can ride.  But you need to be on your board and paddling well before the dam flood comes.

Remember:  when asset values go up (denominated in dollars), equity happens. If you want it to happen to you, you have to get in while the tide is low, then be lifted by the rising waters.  So grab your rubber ducky and let’s get our feet wet.

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A closer examination reveals that a flood of new money (to pre-empt the Y2K “threat”) helped fuel stock speculation.  Then, the money got shut off and everything crashed.

To solve the stock market problem, though they’ll never admit it, our money scientists lowered interest rates, effectively throwing currency at the problem.  The result?  The stock market stayed flat for 10 years and real estate took off.  Oops again.

Now that real estate took a dump, what are the money scientists doing?  Yep.  Adding liquidity to the system.  Perhaps you’ve heard of “quantitative easing”?  Now commodities are taking off.

But not all liquid is good.  Gasoline is a liquid, but you don’t use it to put out a fire.  Seawater is a liquid, but you don’t use it to quench your thirst.  Do you feel like another “oops” might be coming?

The “new” economy we’re talking about in this episode  isn’t really new.  It’s simply a return to the old school.  So even though the money scientists are devaluing the dollar (which is the unavoidable result of excessive quantitative easing), good old common sense is keeping it from circulating.  People don’t want to spend more than they can afford.  Businesses don’t want to hire more people than they need.  Banks don’t want to lend to people who aren’t qualified to borrow.

Of course, this frustrates the money scientists who are trying to get things “moving” again.  So their answer appears to be more easing.  Hmmmm…. how’s that worked out in the past?

Here’s the point:  when the value of the dollar is dropping, how do you know what anything is really worth?  And if you can’t judge value, then how can you bargain for a good deal?

To mine for the answers to these perplexing questions, we struck a claim to some studio time and sent out a lifeline to a man uniquely qualified to help us.  He is a long time real estate and note investor, he operates one of the largest independent gold mints in the USA, and he’s a member of a small society of deal makers who have mastered the art of doing deals without dollars.

The voices of reason on today’s episode:

• Host and Chief Prospector of Wisdom, Robert Helms
• Co-Host and Nugget Cleaner, Russell Gray
• Special Guest, Robert Kiyosaki’s Rich Dad’s Creative Financing Advisor, Wayne Palmer

Americans tend to denominate value in dollars.  And after substantial quantitative easing by the Fed, the dollar has dropped while commodities like gold and oil have gone way up – at least when denominated in dollars.

But if an ounce of gold will buy the same amount of stuff as it did 20 years ago, then the only thing that changed is what the dollars will buy.  And when the value of the dollar is warped, so then is our sense of real value.

Wayne says the number one skill for successful bargaining, in real estate or anything else, is knowing how to discern true value apart from dollars.

Listen in as Wayne, Robert and Russ talk though this fascinating and timely issue and discover why you may want to do business without dollars.

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We don’t know about you, but any time a billionaire, a CEO of a major company, a best selling author or a legit presidential candidate is willing to sit down and chat, our response is always, “Yes!”.   In this case, our special guest for this episode, Steve Forbes, is ALL of those things wrapped into one.  So we’re super jazzed to bring this exclusive interview to you.

In the broadcast booth at the Freedom Fest conference in Las Vegas:

• Your Host and interviewer extraordinaire, Robert Helms
• The just-happy-to-be-here Co-host, Russell Gray
• Special guest, Forbes Magazine CEO, Steve Forbes

Mr. Forbes was the keynote speaker at the Freedom Fest conference and remained in attendance for the entire event.  In spite of a recent neck surgery, he was very accommodating and so Robert was able to sit down with Mr. Forbes for an impromptu interview.

Steve Forbes with Russ and Robert at Freedom Fest. Russ wrestled Steve into doing the interview, which broke Russ' glasses and injured Steve's neck. But the interview went well and we were all smiles afterwards.

We decided to ask him about his latest book, Why Capitalism Will Save Us – Why Free People and Free Markets are the Best Answer in Today’s Economy. Mr. Forbes’ thesis is that too much government is bad for business because it increases costs, diminishes productivity and takes too many resources away from creating jobs for an ever-growing population.  He calls for “sensible rules of the road” to provide a basic framework in which free people can conduct business.  Of course, the great debate is over what’s “sensible”.  His position is that less is more.

What we’re really interested in is jobs. Jobs are where our tenants get their rent money.  It’s where home buyers get the income stream to make the mortgage payments that prop up the property values that create passive equity.  Jobs are near the top of our due diligence check list when evaluating a market to invest in.  It’s one of the reasons we like Dallas right now.  Among U.S. markets, it’s doing pretty well.  Ironically, another great job market is Washington DC, but if there’s a changing of the guard over the next couple of elections, that could change.  But we digress…

So Mr. Forbes shares his thoughts on the economy, job creation and the role of government in real estate, specifically Fannie Mae and Freddie Mac.  In his position as the CEO and editor-in-chief of Forbes Magazine, he gets to talk with many of people who shape, interpret and respond to public policy.  We really enjoyed our time with him and hope you will too!

On a side note, Steve Forbes is the nicest billionaire we’ve ever interviewed.  Actually, he’s the only billionaire we’ve ever interviewed.  But he’s still a very nice guy.  So, if you’re a billionaire and want to come on the show and be nice to us, just give us a call.  Our door is always open.

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Peter Schiff is one of the few guys who called it way in advance. Not only that, but he put it in writing in his 2006 book Crash Proof (the updated version Crash Proof 2.0 is now on our recommended reading list).

Even more impressive is that Schiff appeared on a whole host of TV shows sounding the warning.  But people literally LAUGHED at him, as you’ll see in the 10 minute video below.  And there are many other videos of Peter aggressively debating all kinds of people – including next week’s guest on The Real Estate Guys™ Radio Show, Steve Forbes.

Featured on this week’s episode:

• Your host, Robert Helms
• Co-host, Russell Gray
• Fund manager, economist, author and outspoken commentator, Peter Schiff

Politics aside (Schiff is running for the Republican nomination for Senate in Connecticut -  with the endorsement of Steve Forbes!), considering what Peter predicted and what actually happened,  how can you not be at least curious?   It was that curiosity that had us go to Las Vegas for Freedom Fest in July, where we were exposed to many economists who follow the Austrian school of thought.  There isn’t any way in a blog post to explain all we learned, but a recommended homework assignment is to review the major tenets of the Austrian viewpoint versus Keynesian.  We think you’ll find it very interesting, if not highly enlightening!

What we’re really interested in is being able to best anticipate macroeconomic influences that are likely to impact the value of our real estate, the strength of the jobs market, the growth of wages (which fuels growth in rents); and the cost and availability of loans.  We don’t care if you’re Democrat, Republican, Libertarian, fans of rap or a drinker of light beer (okay, we find the last one a little offensive) -if you have something to say that proves true and makes sense, we’re interested.  Peter Schiff is a guy that has proven true and seems to makes sense.

So for this entire show, we ask Peter to tell us to our face how he knew the crisis was coming and what’s going to happen next.  Based on his track record, we think he’s a guy worth listening to.  Check it out and let us know what YOU think!

The Real Estate Guys™ Radio Show provides ideas, perspectives and resources to help real estate investors succeed.

This podcast brought to you in part by Audible.com.  To download a FREE audiobook of your choice, click here.

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The US economy has long been considered unsinkable. When the economic waves of the world get choppy, investors worldwide seek shelter in US bonds.  And the US government has been all too happy to sell those bonds and go deeper and deeper into debt.  Today, almost daily we hear about record setting deficits and new debt ceilings.  It’s easy to be confused and simply tune out.  There were people dancing on the deck of the Titanic even as it was sinking.  They were too busy having fun.

They say that people who fail to learn from history are doomed to repeat it.  If you thought graduation meant no more studying and no more tuition, you might want to think again.  It’s been said that in the history of the world, no economy has survived a 98% devaluation of its currency.  The US is at 95% today.

What does all this mean?  More importantly, what does it mean to you?  MOST importantly, what can you DO about it?

We think the first and most important thing a concerned individual can do is get educated. There are great books, podcasts and seminars available.  One of our favorite teachers is Robert Kiyosaki and the Rich Dad Company.  He’s a guy that takes a lot of criticism, but for our money he tells it like it is better than anyone else that is readily accessible to everyday people.  Anyone who threatens the status quo is going to be the target of critics.

We suggest you read his work, listen to his message and ask yourself if it makes sense to you.  The key to your success will be your ability and willingness to research, think and act. Most people will keep dancing on the deck.  As for us, we’ll be in Scottsdale on April 30th listening to what Robert Kiyosaki, Mike Maloney and Richard Duncan have to say.

Wealth transfers are nothing new. And Robert Kiyosaki thinks a HUGE wealth transfer is imminent if not underway right now.  If you are concerned (and you should be), then we encourage you to attend this event also.

For us, it’s a business decision.  If we invest the time and money and go to the event, the worst thing that happens is that we spend 3 days hearing that these men have to say and thinking about the subject.  Even if we completely disagree, the 3 days of concentrated thought will help us make better decisions.  If we pick up just one of two great ideas that we can act upon, we should easily be able to make enough profit to cover the cost of the event. In either case, we’re likely to meet some interesting people – and who knows what opportunities will open up from that?  Our guess it will be more profitable than if we stay at home dancing in the deck.

Mike Maloney says this wealth transfer presents one of the GREATEST OPPORTUNITIES in history. We don’t want to to miss it!

We hope to see you in Scottsdale on April 30th.  Click here to join us.

Here’s a replay of our radio interview with Mike Maloney on November 18, 2009:
Download audio file (Is_Gold_All_the_Glitter___Exploring_the_Relationship_between_Dollars_Gold_and_Real_Estate.mp3)

But we’ll stand by that.  Bubbles don’t burst – at least not as long as whatever is underneath them is real.  And there isn’t much that’s more real than real estate.

So we say bubbles are squishy.  In fact, the term “bubble” (in the context of referring to a rapid run up of prices) is really a misnomer.  Better to say “balloon”.

When you squeeze a balloon, it squishes.  It comes out the sides or goes between your fingers; it just finds someplace else to go.

So you’ve heard that real estate prices have dropped.  There’s deflation.  Equity is gone.  Everyone’s underwater.  Life as we know it is over.  It’s real estate Armageddon.

Then you see (like we did) today’s Wall Street Journal article, “Hong Kong Land Sale Raises Worry of a Bubble”.

A bubble?  Didn’t it burst?

Well, no.  Actually, it squished.

According to the Wall Street Journal:

“Government officials here (Hong Kong) grapple with how to cool off overheating property prices”.

When’s the last time you heard “overheating” and “property prices” in the same sentence?  It almost seems like an oxymoron, like “reliable copier”.

Here’s another excerpt:

“The big (land purchase) came after (the real estate developer) sold 900 apartment units in a major new residential complex over the weekend for a total of  US$541 million.”

If you do the math, that’s over $600K per unit!  In ONE weekend.  We haven’t seen THAT in the US for awhile.

More…

“In China…home prices have risen as much as 25% in the past year and land values have doubled.”

That’s this past year, as in 2009.  You know, when US prices were in their third year of decline.

Now, consider where much of the money that fueled the US real estate bubble came from.  Get it?

The bubble squished.  But if your perspective is too narrow, you might think it burst.  Especially because that’s what everyone says.  And if you think bubbles burst, then you will quit the game and hide in your FDIC insured bank account.  Meanwhile, as the dollar crashes, you’re savings become worth less and less.

We have two main points:

First, real estate is an asset class unlike any other.  It’s real (permanent).  Gold and other commodities can also make this claim so, in and of itself, being real doesn’t make real estate utterly unique as an investment.

But, unlike virtually every other investment, real estate’s value is not universal.  Real estate values vary by markets and sub-markets, and those markets are global as we can clearly see.

Compare that to gold, which is also real.  If an ounce of gold is selling for $1200, it’s the same price all over the world.  There’s no squish, except to another asset class.

To really look at it right, you can’t think of real estate as an asset class.  You almost have to think of each property, or at least each market or sub-market, as an asset class.  So when one is down, another is up.  Squish.  Like stocks and bonds, gold and the dollar, etc.

But the big thing (our FAVORITE) that makes real estate unique, is that it can be financed with bank or private funding and debt serviced by tenants.  This makes it VERY conservative when structured properly.  Why?  Because even if the property declines in value, as long as it produces enough net operating income to amortize the loan (meaning the tenants are paying down your loan) some day it will be paid off.  Then it just generates cash flow forever.  That’s a beautiful thing.  Form that perspective, squish doesn’t matter that much.

Our second main point is that right now many people are forming new financial paradigms as a result of what they’re seeing and experiencing.  The people who lived through the Great Depression came out of it with very powerful convictions about how they viewed and handled money.  There were many great attitudes such as frugality, saving; and loyalty and appreciation for the opportunity to work.  We would all be better off by adopting these attitudes.

However, many of those same people missed out on some of the greatest opportunities in modern history because they brought a lot of fear and rigidity out of the trauma of the Depression.  Many people were hyper-conservative.

To be clear, we aren’t suggesting anyone should take risks they aren’t comfortable with.  And we aren’t criticizing anyone’s personal investment philosophy – no matter how conservative it might be.  We’re certainly more cautious about the risks we take these days.

We are merely suggesting to be mindful of the temptation to be hyper-conservative in terms of your willingness to be an investor.  If you won’t invest in your education or take time to investigate opportunity, you’ve probably decided “investing is too risky” and have effectively quit.  You think the bubble burst, the game is over, and there is no opportunity.  Or it’s so far off or you’re so out of position that you’re on investing sabbatical.   This is probably not you, or you wouldn’t be reading a blog like this.  But, there are lots of people who have quit – or are in various stages of quitting.  Make sure you know who you are and that you’re honest about it.

Now is a great time to be getting started (or re-started).  Talk to the people you know about real estate investing and see what they say – and watch what they do.  How are their attitudes changing as a result of the last three years?  What’s their game plan going forward?  Ask yourself those same questions.

Remember, squish happens.  As an investor, you want to pay attention to the flow of capital and try to be on the right side of squish.  And since you know squish happens, be sure to structure your deals to survive if you’re on the wrong end of it.   We’ll be talking more about this in the future.

Most of all, make sure you take the right lessons out of this Great Recession.  The right lessons are those that make you a better investor, not those that push you back to being merely a saver or a non-participating observer.  Invest in your education.  Investigate and evaluate opportunities.  Keep your head in the game, even if you’re on the sideline temporarily.

We’d love to hear from you!  Use our feedback page to tell us how this recession has affected your investing philosophy and strategy.  What are the people around you saying and doing?  Where do you see opportunity and why?  What are you doing to broaden your horizon, increase your education and increase your network?

Sitting on the mountain top for this broadcast:

• Your real estate guru, Robert Helms
• Pillow fluffer and co-guru, Russell Gray
• Trump University faculty member, best selling author, seasoned real estate and renowned consultant, Dr. Gary Eldred, PhD.

Digging through technological challenges, The Real Estate Guys mined some golden nuggets of wisdom from special guest, Gary Eldred who called in all the way from Dubai!  As someone who has studied, taught, invested, and consulted on real estate for decades, Dr. Eldred has earned the right to have an opinion.  We talk stocks, bonds, gold and real estate.  Gary tells us which asset class he believes will outperform all others in the new decade – and why.

Gary also reveals his strategy for hedging against economic uncertainty.  He tells us which type of mortgage he prefers right now and why.  As one of the most well traveled investors we know, we also were intrigued by Gary’s comments China, India and Africa – and how what’s happening there affects real estate in the US and other parts of the world.  Of course, since he was calling from Dubai (where he is currently working) and Dubai’s been top of the financial news recently,  we made sure to talk about that too!

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Funny, but when we look at our computer, we see interest rates on 30 year fixed mortgages back under 5%.  Even jumbos are under 6%!  Meanwhile, gold, oil, car prices and CPI (Consumer Price Index) are all up.  (Hint: those are signs of inflation).

When you put all that in the blender, what do you get?  Well, it depends on what color glasses you’re wearing. (Too many metaphors? Sorry.)

Here’s the deal plain and simple: In the US, home and apartment construction is not growing as fast as the population.  Rents are not falling as fast as prices.  Interest rates are ridiculously low.  Toss in gobs of people unemployed, which means they’re missing payments and wrecking their credit.  They won’t be able to buy a home for awhile, so if they can’t keep the one they have, they will be renting.

So what do we have?

• A growing population and influx of people going from homeowner to renter means more demand for residential rentals.

• Less new apartments and homes coming on line mean less supply.

• More competition for fewer rental units means upward pressure on rents, in spite of a weak job market.  Why?  Because people need a place to live.  Next to food, it’s pretty high on most people’s priority list.

• Low interest rates means if you or your investment partners are credit worthy, you can get great (i.e., low) long term interest rates on loans just before what many believe will be an inflationary cycle.  Inflation means anyone in debt will win as the value of the dollar falls.  This is why China is a little miffed at Uncle Sam.   China holds a lot (if you think a trillion is a lot) of US debt and are concerned about a falling dollar.

• Low interest rates also mean lower payments.  Lower payments make it easier to get a property to cash flow without 80% down.  To quote from that fabulous book Equity Happens, “Cash flow controls mortgages. Mortgages control properties. Properties will make you wealthy over time.”  This is true with or without inflation (i.e., appreciation), because you are using the tenant’s money to pay off the loan.   No other investment lets you do that.

Additional opportunities exist for the extra ambitious.  We call it finding and forcing equity.  How?  With less new units coming on line and many banks and overextended owners letting their properties fall into disrepair, there are opportunities to buy someone else’s problem cheap.   Then, fix it up, rent it out and wait.  If things go your way, you may be able to refinance to get your original investment out – and now you’re in for free.  Kiyosaki calls this “infinite return”.  We like it.

Of course, it’s not all rosy.  Unemployment is still a concern.   And financing (especially refinancing) is harder to qualify for.  But, if it were easy, then everyone would do it and there wouldn’t be opportunity.  Hey, wait a minute.  It’s easy to buy mutual funds, isn’t it?  And everyone does it, don’t they?  Hmmmmm…..

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