Since then, the Fed’s upped the ante to $400 billion … and counting.
For those young or asleep during the 2008 financial crisis …
… back then, the Fed provided an infusion of $85 billion per month to keep the wheels on the financial system bus.
Today, they’re pumping in nearly that much PER DAY.
They’re trying to keep interest rates DOWN to their target. Of course, interest rates matter to real estate investors. We typically like them low.
But this isn’t about real estate. It’s more about banks who hold debt (both mortgages and bonds) on their balance sheets.
As we explained last time, when interest rates rise, bond values fall …
… and a leveraged financial system with bonds as collateral is EXTREMELY vulnerable to collapse if values drop and margin calls trigger panic selling.
The Fed seems willing to print as many dollars as necessary to stop it.
And that brings us to an important question …
If the Fed can simply conjure $400 billion out of thin air in just a week … is it really money?
This matters to everyone working and investing to make or save money.
For help, we draw on lessons learned from our good friend and multi-time Investor Summit at Sea™ faculty member, G. Edward Griffin.
Ed’s best known as the author of The Creature from Jekyll Island. If you haven’t read it yet, you probably should. It’s a controversial, but important exposé on the Fed.
In his presentation in Future of Money and Wealth, Ed does a masterful job explaining what money is … and isn’t.
In short, money is a store of energy.
Think about it …
When you work … or hire or rent to people who do … the energy expended produces value in the form of a product or service someone is willing to trade for.
When you trade product for product, it’s called barter. But it’s hard to wander around town with your cow in tow looking to trade for a pair of shoes.
So money acts as both a store of value and a medium of exchange.
The value of the energy expended to create the product is now denominated in money which the worker, business owner, or investor can trade for the fruits of other people’s labor.
This exchange of value is economic activity.
Money in motion is called currency. It’s a medium of transporting energy. Just like electricity.
When each person in the circuit receives money, they expect it has retained its (purchasing) power or value.
When it doesn’t, people stop trusting it, and the circuit breaks. Like any power outage, everything stops.
So … economic activity is based on the expenditure and flow of energy.
This is MUCH more so in the modern age … where machines are essential to the production and distribution of both goods and information.
Energy is a BIG deal.
This is something our very smart friend, Chris Martenson of Peak Prosperity, is continually reminding us of.
Here’s where all this comes together for real estate investing …
New dollars conjured out of thin air can dilute the value of all previously existing dollars.
It’s like having 100% real fruit juice flowing through a drink dispenser.
If someone pours in a bunch of water that didn’t go through the energy consuming biological process of becoming real fruit juice in a plant…
… the water is just a calorie free (i.e., no value) fluid which DILUTES the real fruit juice in the dispenser.
Monetary dilution is called inflation.
Legendary economist John Maynard Keynes describes it this way …
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
Inflation waters down real wealth.
Fortunately, real estate is arguably the BEST vehicle for Main Street investors to both hedge and profit from inflation.
That’s because leverage (the mortgage) let’s you magnify inflation’s effect so your cash-on-cash ROI and equity growth can outpace inflation.
Plus, with the right real estate leverage, there’s no margin call. Meanwhile, the rental income services the debt.
Even better, the income is relatively stable … rooted in the tenant’s wages and lease terms. Those aren’t day-traded, so they don’t fluctuate like paper asset prices.
Effectively, you harness the energy of the tenant’s labor to create resilient wealth for yourself. And you’re doing it in a fair exchange of value.
Of course, the rental income is only as viable as the tenant’s income.
This brings us back to energy …
Robert Kiyosaki and Ken McElroy taught us the value of investing in energy … and markets where energy is a major industry.
First, energy jobs are linked to where the energy is. You might move a factory to China, but not an oil field. This means local employment for your tenants.
Your tenants might not work directly in the energy business, but rather for those secondary and tertiary industries which support it. But the money comes from the production of energy.
Further, energy consumers are all over the world, making the flow of money into the local job market much more stable than less diverse regional businesses.
It’s the same reason we like agriculture.
While machines consume oil, people consume food. Both are sources of essential energy used to create products and provide services.
So when it comes to real estate, energy, and food … the basis of the investment is something real and essential with a permanent demand.
Though less sexy and speculative, we’re guessing the need for energy and food is more enduring than interactive exercise cycling.
Real estate, energy and agricultural products, are all real … no matter what currency you denominate them in.
And the closer you get to real value, the more resilient your wealth is if paper fails.
Right now, paper is showing signs of weakness. But like a dying star, sometimes there’s a bright burst just before implosion.
Those who had real assets prospered. Those who didn’t … didn’t.
Are we saying stocks and the dollar are about to implode? Not at all. But they could. Perhaps slowly at first, and then suddenly.
If they do and you’re not prepared … it’s bad. It you’re prepared and they don’t … not so sad. If they do and you’re prepared … it could be GREAT.
Real assets, such as well-structured and located income property …
… are all likely to fare better in an economic shock than paper derivatives whose primary function is as trading chip in the Wall Street casinos.
So consider what money is and isn’t … the role of energy in economic activity … and how you can build a resilient portfolio based on a foundation of real assets.
“The time to repair the roof is when the sun is shining.”
John F. Kennedy
Until next time … good investing!
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