We know a guy who bought a property with NO foundation. He didn’t know it because he paid cash … and with no lender forcing an inspection, he skipped it.
He figured since the property had been in use for decades, everything was fine. But just because a building is standing, it doesn’t make it safe or sound.
Similarly, the financial system is the foundation of the economy. Last time, we noted the U.S. economy is reportedly doing well. Great!
But … there’s a BIG difference between a strong economy and a strong financial system.
Now before you crawl up in a ball and go full fetal, remember … bad times are good times for the informed, connected, and prepared. That’s why we do what we do.
So let’s dig a little deeper …
An economy is about ACTIVITY … making, selling, buying things … and saving to create pools of capital for lending to do more of all those activities.
A financial system is the INFRASTRUCTURE which supports the activity … banks, credit, stock and bond markets … even the currency itself.
People can see and feel economic activity. It’s visible all around. The news reports on it day and night.
But it’s a LOT harder to see the strength or weakness of the financial system.
Most people simply go about doing their economic activity and trust (consciously or unconsciously) that smart, responsible people are maintaining the system.
Others don’t really trust the folks in charge … but aren’t sure how to know whether the financial system operators are doing a good job or not.
So sadly, most people are completely blind-sided when the system fails in some way. Just think about the millions of people wiped out in 1929, 1971, 1987, 2000, and 2008.
And if you’re not sure why those dates are significant, it’s probably time to allocate some of your financial focus to more than just your economic activity.
We know. It’s boring. It’s hard to understand and relate to. Just like a building’s foundation … most people would rather walk the property than climb under the house.
We get it. But stick with us … because if you’re riding any part of the boom, it’s wise to consider when, where, and how fast the party ends. Because parties ALWAYS end.
This is why some of the pundits we follow … guys like Peter Schiff, Robert Kiyosaki, Chris Martenson, Simon Black … sometimes seem a little gloomy.
While mainstream media is telling you how pretty the economy is … these guys are inspecting the foundation and seeing cracks … which are perhaps not obvious to the untrained eye.
One of the biggest cracks is the obscene amounts of individual, corporate, municipal, national, and global debt. The world’s NEVER been in debt like it is right now.
The problem is debt needs to be serviced. And when debt is growing faster than productivity (income), defaults occur. This leads to the next huge concern …
When Party A borrows from Party B, Party A has a liability … and Party B has an asset. Party A’s liability is Party B’s asset.
When Party B pledges their “asset” (Party A’s debt) as collateral for a new loan from Party C … now TWO loans depend on the performance of Party A. Make sense?
Of course, Party B’s loan now becomes Party C’s asset … and Party C can pledge it as collateral for another loan … and on and on. Party on.
These debt parties link balance sheets of financial institutions together like a group of mountain climbers all tethered together.
The obvious problem is because of the linkage … when debts go bad, the entire system is subject to …
They call this “contagion” and it was the heart of the 2008 financial crisis … even as the Federal Reserve assured everyone things were “contained.”
But asset prices are fragile … based on most players holding their positions and not dumping them.
However, when debt implodes, players sell whatever they have as fast as they can to raise cash to cover the bad debt.
That’s what happened to stocks in 2008. And even though people weren’t dumping real estate to raise cash, real estate values fell when money stopped flowing into mortgages.
So yes … all of this matters a LOT to real estate investors.
When credit markets collapse, it chokes lending, crashes asset prices, and stalls economic activity.
That’s bad for everyone who depends on asset prices and credit markets.
(Of course, for the prepared, it’s a shopping spree!)
Last time the credit markets failed, central banks stepped in and printed TRILLIONS to buy up bad debt, backstop failing banks, and reflate asset prices.
Can they do it again?
Maybe. But some say interest rates aren’t yet high enough to drop far enough fast enough in a crisis to jump start the economy.
Also, central banks balance sheets are still bloated with bad assets they printed money to buy up in the last crisis.
Will the world stand by as trillions more are printed to do it again on an even grander scale? Or would the world lose faith in …
As we describe in detail in Future of Money and Wealth, China and Russia have been openly leading a rebellion against dollar dominance.
And while the Chinese currency is arguably some distance from supplanting the dollar globally, it’s picking up steam.
The yuan is now a MUCH more viable dollar alternative than anything else was in 2008. This is a developing story we’re following closely. Meanwhile …
Let the Good Times Roll
Don’t get us wrong. The economy appears to be strong. There’s a lot of opportunity in the market RIGHT NOW.
If you’re in the right markets and product niches, this is a fun and profitable time to be an investor.
BUT … the financial system these good times are based on hasn’t really changed. In fact, in some ways the cracks are getting larger.
So while the good times roll, remember things usually roll downhill … and sometimes right off the edge. Best to stay aware and prepared.
Until next time … good investing!
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