We’re just two weeks removed from an epic educational and networking experience at the New Orleans Investment Conference.
While we were there, we threw a little private party and Robert Kiyosaki, Peter Schiff, Chris Martenson, and Brien Lundin all showed up to hob-nob with our listeners. Very fun.
(Side note: Chris Martenson, Brien Lundin and Peter Schiff are all confirmed for the 2018 Summit at Sea™ … and we’re still recruiting several other VERY notable speakers.)
It’s clear the future of money and wealth is on the threshold of MAJOR change.
For most people “the dollar” is synonymous with money because their income and wealth are denominated primarily in dollars. So the future of the dollar is an important topic.
Right now, the U.S. dollar is the world’s reserve currency … and Treasuries are considered the safest, most liquid place to save excess dollars.
Treasuries are Uncle Sam’s IOUs. They’re technically called bills, bonds, and notes … but they’re all debt.
Treasuries also play a major role in how market interest rates are determined … so if you’re a user of debt, the future of Treasuries affects you also.
Yields (rates) and prices of Treasuries are a function of supply and demand.
Like apartment buildings, when investors bid prices UP, yields (like cap rates) fall.
You may already know it, but just in case, the math is simple: Income / Price = Rate
For example, $60,000 net operating income on an $800,000 property is a 7.5% cap rate.
If investors bid the property up to $1 million, it’s $60,000 / $1,000.000 = 6% cap rate.
So high demand creates upward pressure on prices, and downward pressure on yields (cap rates). Make sense?
The same with Treasuries. As long as demand is robust relative to supply, interest rates are low. Strong demand for Treasuries means low interest rates.
If anything substantially alters the supply / demand equilibrium in Treasuries, YOUR asset values and interest rates will feel it.
Lots of government debt means lots of Treasuries for sale. We’re pretty sure that’s not changing soon.
But TOO MUCH supply means lower prices. Just like when lots of houses in a neighborhood are for sale at the same time.
DEMAND for Treasuries comes from private investors (small and large), and political investors (governments and central banks).
Private investors buy Treasuries to park large amounts of cash, use as gambling chips in the Wall Street casinos, or serve as collateral in complex financial transactions.
Governments also buy Treasuries as a place to park their reserves. China and Japan are at the top of the list with over $1 trillion each.
Treasuries are denominated in dollars. So countries buy dollars with their own currency, or sell things to the United States and get paid in dollars … then use those dollars to buy Treasuries.
To keep the worldwide economy going, Uncle Sam issues lots of Treasuries and the Fed prints lots of dollars.
As long as everyone trusts the dollar, it’s all hunky-dory. And this is why so many of our big-brained friends are concerned.
As we chronicle in our Real Asset Investing special report, China’s been making substantial moves to undermine the dollar as the world’s reserve currency.
We recently commented on this … and the story continues to unfold.
Here’s the quick backstory …
When the dollar became the most trusted currency on earth in 1944 it was backed by gold. In 1971 Uncle Sam defaulted on the gold backing.
Not surprisingly, the world dumped dollars which triggered excessive inflation (rising prices, loss of purchasing power). The U.S. quickly came up with a plan to save the dollar.
Uncle Sam made a deal with Saudi Arabia … for oil to ONLY be sold for dollars and the Saudi’s would invest their profits in Treasuries. Clever.
Then the Fed raised rates to nearly 20% to “break the back of inflation.” If you wonder why inflation is scary, look at life in Venezuela right now.
Inflation is caused by too many dollars in circulation relative to goods and services available.
High interest rates slow borrowing. It’s a long story, but new dollars are born when you borrow. Reducing borrowing slows the birth of new dollars.
High interest rates also suck excess dollars into banks and Treasuries, as people and nations save for yield (interest).
These moves shifted demand for the dollar from Uncle Sam’s savings (gold) to the oil and bond markets.
Back then, the U.S. had the biggest manufacturing economy, most productive workforce, the strongest military, and very little debt.
Of course, MANY things have changed … and more change is likely coming to an economy near you.
Today, no one cares about gold … except China and Russia, who are accumulating hundreds of tons a year. Hmmm… that’s interesting.
Coincidentally, Russia and China are the #2 and #3 military powers in the world behind the United States.
Russia and China recently made a deal to trade oil in Chinese currency (the yuan) … instead of dollars.
And now there’s talk China will “compel” the Saudi’s to deal in yuan too. When you’re the big customer, you have negotiating leverage.
China also recently announced plans to create a yuan-denominated oil contract, which some say is a big step towards creating a robust yuan-backed bond market.
And to top it all off, it’s been reported China is flirting with the idea of backing those petro-yuan contracts with gold.
The Chinese are infamous for seeing a good idea and copying it.
Right now, it seems China has reverse-engineered the dollar’s rise to dominance and is simply copying it … and it looks like they’re making steady progress towards their goal.
The BIG questions are …
What does it mean to YOU and what can YOU do to grow and protect YOUR wealth?
Of course, that’s a HUGE discussion and we’re working on something BIG to address it.
For now, when you think about the future of money and wealth, here are some things to consider …
Investors, many probably born after 1971, are piling into Bitcoin … driving it up at an insane rate.
Motives we’ve heard for Bitcoin-mania include moving wealth into an “asset” which can’t be simply printed out of thin air.
Interestingly, Bloomberg reports that online searches for “buy Bitcoin” have exceeded “buy gold.”
Some use the border-less nature of Bitcoin to escape capital controls and discreetly move wealth out of totalitarian jurisdictions.
Of course, some are buying Bitcoin simply because “it’s going up” and they want to strike it rich in dollar terms.
Meanwhile, plans have been announced to launch a Bitcoin futures market … just like already exists for gold.
Ironically, futures markets are the very mechanism many pundits claim gold prices are suppressed with … to discourage those concerned about the dollar from seeking safety in gold.
We’ll see what happens to Bitcoin. Meanwhile, Russia, China and several other nations continue to accumulate gold.
As for the U.S., it’s all about the red-hot stock market.
Of course, as our friend Simon Black points out, the top performing stock market is Venezuela. So a booming market isn’t necessarily the bellwether of a healthy economy.
Where does real estate fit into all this?
History says real estate fares pretty well when shift happens.
Even in chaotic financial times, people still need a roof over the head, crops still need to grow, commerce goes on … and real estate is at the center of human activity.
Of course, that doesn’t mean all real estate investors everywhere make it.
We took it hard in 2008 because we weren’t prepared for a sudden shift. We’re working hard to be better prepared today.
One thing’s for sure … there’s never been a more important time to get SERIOUS about your financial education and strategic network.
Until next time … good investing!
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