A long, long time ago in a world without video games, we played a boardgame called Mousetrap. Since a picture’s worth a thousand words …
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As you can see, Mousetrap is a pretty elaborate set up where an initial action sets off a chain reaction of subsequent actions …
… until finally the unsuspecting mouse is caught in a descending trap.
Credit markets are a lot like Mousetrap …
… and the further back you can see through the chain of events, the more likely you are to see what’s coming … and avoid getting trapped out of position.
The Great Financial Crisis of 2008 taught us how dangerous it is to keep our noses myopically to the real estate investing grindstone … falsely aloof and insulated from the turmoil of credit and currency markets.
When the trap fell, we were caught … illiquid and upside down … with not enough time to react.
So we’ve learned to pay careful attention to the machinations of the markets. And right now, there are a lot of moving parts.
Depending on how long you’ve been watching, some of the action may seem disconnected and even irrelevant to your daily real estate investing.
Be careful.
Gold, oil, trade, tariffs, currency, and bonds are far more intertwined than most folks realize … and they all conspire together to impact credit markets and interest rates.
And last time we looked, credit markets and interest rates are very important to serious real estate investors.
By now, you’re probably aware the Fed dropped interest rates for the first time in 11 years.
Granted, it wasn’t much … only 25 basis points (.25%).
But the stock market didn’t like it. And neither did President Trump, who was unabashed in his displeasure with the Jerome Powell led Fed.
So that’s one piece of the puzzle.
You’ve also probably heard that the U.S. and China have been engaged in an economic pissing contest for quite some time.
Here again, President Trump is displeased with China’s trade policy with the U.S. and he’s been using tariffs to goad them to the negotiating table.
But the last round of talks didn’t end well, so Trump slapped more tariffs on the Chinese exports to the United States.
Once again, the stock market didn’t like it much.
Let’s take a time out here to remind ourselves that when money flees the stock market, it usually ends up in bonds. As demand for bonds goes UP, interest rates go DOWN.
Then, as interest rates do down, investors go back to stocks in pursuit of yield, and everything reverses. It’s an ebb and flow of funds which creates a degree of equilibrium.
Or at least that’s how it usually works …
Sometimes, when investors don’t like either stocks or bonds, they buy other things for safety … including gold and real estate.
This is a far more interesting development and something we discussed at length in a recent commentary.
But that was before China allegedly punched back at Uncle Sam’s latest tariffs by allowing their currency to fall below the politically significant 7:1 ratio to the dollar.
Now before your eyes glaze over, it’s not as complicated as it seems. And as we’re about to point out, it has more of an impact on your real estate investing than you may realize.
When China allows its yuan to weaken relative to the dollar, it takes more yuan to buy a dollar. More significantly, it means dollars will buy more Chinese goods.
In other words, it makes Chinese goods cheaper for Americans … effectively negating the punitive impact of U.S. tariffs. It’s like blocking the punch.
The Trump Administration wasn’t happy about China’s “block” and, for first time since the Clinton Administration, decided to brand the Chinese as “currency manipulators”.
Without getting into the weeds, it means the conflict is escalating … and the two heavyweight economies are turning a gentleman’s disagreement into a street fight.
With the two economies highly intertwined with each other … and very influential around the globe … this altercation has the potential to impact virtually everyone world-wide … including Main Street real estate investors.
Of course, we’ve been talking about this since 2013 when the clues in the news made it clear the dollar is under attack by China (and Russia).
We’re not telling you this to brag. We’re simply saying these are events which many people have seen coming … and have been preparing for.
And it’s not over by a long shot.
So if want a broader context for what you see reported in the daily news, you might want to check out our Real Asset Investing report and our Future of Money and Wealth video series.
And if you’re not sure why all this matters to a lowly Main Street real estate investor, consider this headline …
China could unleash this weapon on the financial markets to wallop the US – Yahoo Finance, August 6, 2019
“They [China] could start selling Treasuries which is what they use to benchmark the yuan to the dollar and that would be the doomsday scenario.”
(By the way, Russia’s already done it, but they’re small fry compared to China.)
“While China has reduced its holdings of Treasuries in recent years,
any amount of pronounced dumping could send U.S. interest rates skyrocketing.”
Remember, this is Mouse Trap …
Think about what “skyrocketing” interest rates would mean to an economy bloated with record levels of consumer, corporate, municipal, and federal debt.
As we discussed exactly one year ago, America’s debt could be an Achilles heel China could attack by dropping the interest rate bomb.
Back then, this was considered an extreme view … highly unlikely because dumping that many Treasuries at once could cost China billions.
But China’s been stocking up on gold … perhaps as a hedge against collapsing the dollar?
And when you consider the cost of “war” … even a trillion dollar loss is less than what the U.S. has spent in the Middle East.
So it’s not too far-fetched to think China might consider the loss just the cost of winning the trade war.
Let’s bring it back down to Main Street …
We’re not saying interest rates will skyrocket. But they could. There’s a lot more room to rise than decline.
And if China is playing a different game than Uncle Sam thinks, they may make a move few expect.
Is your portfolio fortified to withstand a sudden spike in interest rates?
“The time to repair the roof is while the sun is shining.” – John F. Kennedy
Think about it. Pay attention. Inspect the roof … and make repairs.
Until next time … good investing!
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