6/3/12: Schiff Happens – Is The Real Crash Yet To Come?

When the mortgage-backed securities (MBS) market collapsed in 2008, real estate owners – both homeowners and investors (and radio talk show hosts) – got hit hard. Banks failed, loans became scarce, buyers disappeared, and people everywhere (including tenants) lost their jobs.  Very ugly.

Lesson: pay attention to macro (big picture) economics.  So now we do.

In the aftermath, we went looking for people who’d called the disaster ahead of time and for the right reasons.  Then we started stalking them, so we’d be first in line to hear the next prediction.  When we went to the Las Vegas Money Show to interview economist Mark Skousen, we ran into one of these guys.  So grabbed an empty meeting room, set up the microphones and persuaded him to sit down to share his big brain with us – and you.

Coming to you from Caesar’s Palace Hotel in Las Vegas, Nevada:

  • Your talkimus maximus host, Robert Helms
  • Your talenti minimus co-host, Russell Gray
  • Special guest, money manager, author, economic and financial pundit and biggimus brainimus, Peter Schiff

In case you don’t know Peter Schiff, he is the President of Euro Pacific Capital investment brokerage.  He’s a former candidate for the U.S. Senate, a prolific author, and an outspoken financial commentator.  Just for laffers, set aside 10 minutes and watch this montage of pre-meltdown TV appearances by Peter as he argues with a host of “experts” about the problems Schiff saw approaching.

Now some people don’t like Schiff’s politics.  Whatever.  We aren’t a political show.  We want to learn how to be better investors.  And we sure wish we would have been paying more attention to Peter Schiff back then.

In his 2006 book, Crash Proof, Peter detailed why he thought the U.S. mortgage markets would collapse.  In his 2011, “I told you so” update, Crash Proof 2.0, Peter revisits the original text with the benefit of hindsight.  It’s one of our favorite books and is on The Real Estate Guys Recommended Reading list in our bookstore.

In this interview, Peter talks about his new book, The Real Crash – America’s Coming Bankruptcy.  Scary title! And we thought the whole Mayan calendar thing was spooky.

Peter explains to us that while the mortgage meltdown was horrific, it was really only the tremor before the big earthquake.  What’s yet to come is the real crash (hence the catchy book name) which will be caused by the collapse of the mother of all bubbles: U.S. Treasuries and the U.S. dollar.

Of course, the implications for real estate investors should be obvious.  Mortgage interest rates pivot off of Treasury yields.  When the value of Treasuries go down, interest rates go up.  The bigger the collapse, the higher rates go.

Now if the Fed decides to prop up Treasuries by purchasing bonds using their “magic checkbook” (for more on this, check out our multi-part blog on The Great Debt Ceiling Debate), called “Quantitative Easing”, which is essentially printing money.  The outcome?  Inflation.  Maybe even hyper-inflation.

Of course, in all of this doom and gloom, there are tremendous opportunities.  And Schiff doesn’t leave us feeling completely freaked out and helpless. In fact, he actually has many ideas about what you and the country can do to mitigate the inevitable pain created by an unsound monetary system.

During the week we spent with Robert Kiyosaki on our last Investor Summit at Sea™, he told us he thinks there’s an 80% chance of hyper-inflation.  The solution?  Use mortgages on income producing real estate to short the dollar.  That is, borrow dollars today that are worth more than dollars 10 years from now.  Then pay the loan back with tomorrow’s cheaper dollars.

Now, if interest rates rise, and inflation hits, then real estate prices and rents will go up, more people will need to rent, new housing will be too expensive to build, and your mortgage will be easier to pay off with devalued dollars.  However, it’s important to remember that even though people will be being paid more dollars (in an inflationary environment, wages go up too), prices will also be going up – and probably faster than wages.  So people who are savings and don’t own real assets will actually get poorer in terms of purchasing power.  That’s why we like low cost, positive cash flow real estate markets.  Positive cash flow means we can control the property long term no matter where values go in the short term.  Low cost markets are more likely to see an increase in demand as people lose purchasing power.

Now Peter Schiff is a stock guy, but some of the things he says can apply directly to real estate.  First, he likes dividend paying stocks.  The real estate equivalent is rental real estate.  He likes bargain stocks.  The real estate equivalent is affordable markets.  He likes shorting the dollar.  As we just discussed, mortgages are a great way to short the dollar – as long as the tenants are paying them!  Lastly, he likes diversifying in non-U.S. assets.  Of course, we’ve been fans of investing in real estate outside the U.S. for the last several years.  One of our favorite markets is nearby, English speaking and really beautiful (that’s a bonus) Belize.

So even though Peter’s a stock guy and we’re real estate guys, we actually have a lot in common.  So much so, we decided to invite him to join us as a guest faculty member for our 2013 Investor Summit at Sea™.  At this point, it’s supposed to be a surprise, but since you’ve read this far, we thought we’d reward you with a sneak peek.  Thanks for being a fan!

For now, we encourage you to listen to this episode and make some Schiff happen to you!

Listen now:

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