Can you handle the truth?
“You can’t handle the truth!”
– Jack Nicholson in A Few Good Men
Neither optimists or pessimists can handle the truth.Optimists refuse to acknowledge the part of reality that’s negative …
… while pessimists can’t see the ever-present opportunities hidden behind the problems.
While we’d rather be optimistic than pessimistic, maybe it’s better to be BOTH.“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
– F. Scott Fitzgerald
Here are some thoughts about risk and opportunity from legendary real estate investor Sam Zell …
“People love focusing on the upside. That’s where the fun is. What amazes me is how superficially they consider the downside.”
“For me, the calculation in making a deal starts with the downside. If I can identify that, then I understand the risk I’m taking. Can I bear the cost? Can I survive it?”
You can only take calculated risks if you look carefully at both the upside AND the downside.
Today, the entire global financial system is largely based on “full faith and credit” … primarily in the United States dollar.
And there’s a gigantic investment industry that’s built on perpetual optimism …and a belief non-stop debt-fueled growth FOREVER is actually possible.
Even worse, the entire financial system’s fundamental structure literally REQUIRES perpetual growth to avoid implosion.
That’s why central banks and governments are COMMITTED to debt and inflation … at almost ANY cost.
But as Simon Black points out in Future of Money and Wealth …
History is CLEAR. Empires and world reserve currencies don’t last forever.
And irredeemable paper currencies and out-of-control debt ALWAYS end badly … at least for the unaware and unprepared.
Optimists can’t see this. So they take HUGE risks they don’t even know exist.
Pessimists can’t act. So they miss out on the HUGE opportunities that are the flip-side of the very problems they obsess over.
Robert Kiyosaki stresses the importance of being REALISTS …
… standing on the edge of the coin, seeing BOTH sides … and then being decisive and confident to ACT in pursuit of opportunities while being keenly aware of the risks.
We created the Future of Money and Wealth to gather a diverse collection of speakers and panelists together … to examine the good, the bad, and the ugly …
… so YOU can have more context and information to make better investing decisions.
Chris Martenson opens our eyes to the physical limitations of long-term perpetual exponential growth which depends on unlimited supplies of clearly LIMITED resources.
Of course, as these critical resources dwindle, they’ll become very expensive as too much demand competes for too little supply.
When you see nation’s fighting over scarce resources, it’s a sign of the times.
But of course, there’s OPPORTUNITY hidden inside of crisis.
And to seize the opportunity, you must understand it … or it just sits there like a hidden treasure under your feet.
But it’s not just recognizing trends. It’s also TIMING. And being a lot early is much better than being even just a little late.
To beat the crowd, you can’t wait for the crowd to affirm you.
To get timing right, it’s important YOU know what the signs are.
What does it mean when Russia dumps Treasuries and buys gold? What caused Bitcoin to sky-rocket in 2017? Why are there bail-in provisions in U.S. banking laws?
Peter Schiff saw fundamental problems in the financial system back in 2006 … and screamed from the rooftops that the financial system couldn’t support the then red-hot economy.
Few listened … then WHAM! In 2008, the weakness of the financial SYSTEM was exposed … and MANY people were CRUSHED.
Peter insists the REAL crash is still yet to occur … and everything that made the financial SYSTEM weak in 2006 is MUCH WORSE today.
Yet small business and consumer OPTIMISM is at all-time highs. The ECONOMY appears to be BOOMING … again. And Peter’s still screaming out his warnings.
The Fed is RAISING interest rates to cool things down. But history says EVERY SINGLE TIME the Fed embarks on a rate raising campaign it ends in RECESSION.
In Future of Money and Wealth, Fannie Mae chief economist Doug Duncan reveals when he thinks the next recession is coming … and WHY. We listen to Doug because he’s got a really good track record.
The 2008 crisis exposed real estate investors to the REALITY that what happens on Wall Street, at the Fed, and in the global economy … can all rain down HARD on Main Street.
Ignoring it doesn’t make it go away. And you’ll die of old age waiting for the storm clouds to blow away.
There will ALWAYS be risk. There will always be OPPORTUNITY.
It’s not the external circumstances which dictate what YOU get.
It’s really up to YOU … and your ability, like Sam Zell, to see both opportunity and risk, so you can aggressively reach for opportunity while carefully navigating risks.
Education, perspective, information, and thoughtful consideration are all part of the formula.
That’s why we created the Future of Money and Wealth video series.
Future of Money and Wealth features TWENTY videos … over fourteen hours of expert presentations and panels …
… covering the dollar, oil, gold, real estate, crypto-currencies, economics, geo-politics, the new tax law …
… PLUS specific strategies to protect and GROW wealth in the face of potentially foundation-shaking changes to the financial system.
Just ONE great idea can make or save you a fortune.
Future of Money and Wealth might just be one of the best investments you’ll ever make.
To order immediate access to Future of Money and Wealth …
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
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- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
The Future of Money and Wealth
The world economic order is under-going massive change right now. We’re literally watching it unfold in the daily news.
Yet few investors really understand what’s happening and why … or what they can do to both grow and protect wealth during these historic times.
“Those who can’t remember the past are doomed to repeat it.” – George Santanya
In two power-packed days our all-star line-up of notable experts will explain …
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How the U.S. dollar is under attack and what it means to Main Street investors
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What are the best and worst investments based on what’s happening now … and where it’s headed
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How savvy investors are preparing to be on the right side of an historic wealth transfer most people don’t see coming
Remember, the flip side of crisis is opportunity. But pretending everything is fine … and not being prepared in case it’s not … can be dangerous and expensive.
“Maintain unwavering faith you can and will prevail in the end, regardless of the difficulties, and at the same time, have the discipline to confront the most brutal facts of your current reality.” – Jim Collins, Good to Great
Click here now to learn more about The Future of Money and Wealth >>
Take What the Market Gives You
Stock Market Volatility Creates Opportunity for Real Estate Investment Syndication
We all want life on our terms. The perfect opportunity at just the right time … where we don’t have to think, work, or go out of our way to hit it big.
Be honest. If you didn’t get in (and out) of Bitcoin at the right time, aren’t you just a LITTLE jealous of those who did? We are.
But even many of those Bitcoin millionaires have taken it on their crypto-chin since the easy money train went off the rails.
The market giveth and the market taketh away.
Tom Brady said it best after the Super Bowl …
“Losing sucks. But if you want to win, you have to play the game.”
… and risk losing. Of course, we’re pretty sure Tom didn’t lose too much. And if you’re playing the right game, even losers can come out okay.
That’s what we love about real estate.
Sure, it’s not as exciting as the roller-coaster rides of speculative exchange traded assets like cryptos, stocks, bonds, and ETFs. But you can still make BIG money with real estate playing a very conservative game.
Right now, the market is reminding lots of paper- and digital-asset speculators that big ups often come with big downs. So people with lots of money in those markets are realizing safer havens are pretty attractive when the tide turns.
And that’s a GIFT TO YOU …
Because when you know how to make (or find) boring, reliable, stable, dependable returns … of 8-20% … with a time-tested asset like real estate … YOU are a HOT commodity.
We’ve been saying for years this is a GREAT time to become a real estate syndicator. And it just keeps getting better. There are TRILLIONS of dollars invested in paper assets through brokerage and retirement accounts … and folks who’ve been in those markets a while are sitting on some fat gains … BUT they’re nervous … and rightfully so.
Some have already moved to cash to play it “safe” … and because they don’t know what else to do. But the dollar’s been weak, and although interest rates are rising, inflation is rising faster … so the net gain on parked cash is negative. That’s a losing deal.
Enter YOUR big opportunity … syndication.
When stocks tanked in the dot-com bust, billions went into real estate for safety with yield and a hedge against inflation.
Sure, real estate got a black eye in 2008 … even though it was a credit market problem and not a real estate problem. But smart people realized the fundamental need for real estate didn’t end with the financial crisis … and many smart investors scooped up bargain properties, just as rental demand increased because of the financial crisis.
Real estate investors have made a lot of money over the last ten years … just like stock investors. But right now, stock investors are being reminded of the volatility of the stock market and the relative stability of real estate.
Give Nervous Stock Investor the Gift of Real Estate Syndication
Stock investors are RIPE for offers to invest in real estate.
And when you learn the secrets of successful syndication, YOU can attract many millions of dollars from frightened stock investors into the safer haven of real estate. Best of all, syndication allows you to become wealthier helping wealthy people grow and protect their wealth. It’s an epic win-win.
Often in business and investing the best play is simply to take what the market’s giving you. Right now, it seems to us the opportunity to raise money for real estate deals just got even better.
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
Keeping it real in a surreal world …
If you’re a newshawk like us, you’ve probably noticed the world is a little crazy. Even something as mundane as money and wealth has become weird.
The most obvious case in point is the dramatic rise and retreat of Bitcoin.
In 2017, something triggered a rush of money into Bitcoin … driving it from $1000 in early January to a peak of nearly $20,000 less than a year later.
Pundits are still trying to divine what happened and why. Of course, what’s just as interesting is how the world reacted.
The People’s Bank of China (PBOC), which is China’s version of the U.S. Federal Reserve, has moved aggressively to crush cryptos.
Okay. But does that matter if you’re not Chinese or a Bitcoin buyer? How does any of this relate to Main Street real estate investing?
Patience, grasshopper …
China’s not the only government attacking private cryptos. Six others have already banned it, though they admittedly aren’t big players.
But India is reportedly about to join the anti-crypto club. They’re pretty big.
South Korea (home of Samsung, LG and Hyundai) is another biggie that’s floating the idea of banning cryptos.
Of course, legislation isn’t the only way to attack an alternative to government issued currency …
We’ve been listening to precious metals pundits allege that central banks … surreptitiously through their agents … use futures contracts to manipulate the price of gold and silver.
Interesting. Let’s put on our tinfoil hats and think about it …
According to this CNBC report, Bitcoin started trading on the futures exchanges on December 18th.
This chart shows Bitcoin’s price peaked at $19,180 on Sunday, December 17th.
But since then, Bitcoin’s been declined sharply … all the way down to under $7000 this week. That’s a HUGE decline. And it started December 18th …
Weird. Probably just a coincidence.
Of course, the story of cryptos and their impact on the future of money and wealth is a MUCH bigger discussion.
But we think it’s safe to say that cryptos are here to stay in some shape or form.
What’s also interesting is how governments are now connecting cryptos to both gold and oil … linkages which are the heritage of U.S. dollar dominance.
Meanwhile, Russia (the world’s largest producer of oil) and China (the world’s largest consumer of oil) have both been accumulating TONS (literally) of gold.
Why?
According to this article in the India Times, “The Chinese central bank is trying to diversify from the US dollar on which it has become overly reliant”
(Side note: you might want to think about how reliant YOU are on the dollar … maybe China knows something …)
This article in Russia affirms the role of gold in diversifying away from the U.S. dollar.
Apparently, gold does actually have a role in global economics … even though most Americans think of it as a barbarous relic or merely a trading tool to accumulate dollars.
But major sovereign nations are using gold as a hedge against the U.S. dollar.
Smart. Turns out 2017 was the dollar’s worst performance in 14 years.
So if Bitcoin and gold each expose the dollar’s weakness … it’s not totally shocking the issuer of dollars, the Federal Reserve, might want to see both Bitcoin and gold prices held down.
We’re not saying the Fed is behind any alleged suppression. But we’re not saying they aren’t. We don’t know.
But in this surreal world where we’re not quite sure of the real motivations of those in power, nothing would surprise us.
The bigger questions are … what does it all mean to Main Street investors and how can we position ourselves to both grow and protect wealth in this crazy world?
Here’s some thoughts …
If the dollar is doomed to continue its 100+ year decline … then debt and real assets are your best friend.
Debt lets you pull future dollars into the present, where you can use them at today’s purchasing power (stronger than the future’s) to acquire things of real value.
By “real value” we mean utility … things that provide permanent and essential service to people. Food, housing, farmland, energy, and commodities all come to mind.
Of course, when you use debt, you have those pesky payments.
So it’s REALLY nice when you can acquire real assets that produce enough cash flow to service the debt you used to buy them. They literally pay for themselves.
Naturally, debt-financed income-producing real estate is arguably one of the best investment vehicles in a falling dollar environment.
You can buy it with relatively cheap debt and use the income to service the debt.
Over time, as the dollar falls, the dollar price of the property rises while the debt stays fixed.
Not only that, but a debt-ridden government is highly motivated to perpetuate a weakening dollar (inflation), which benefits all debtors … including YOU.
In other words, using debt aligns your investing with the government’s motivations and likely actions.
Nice. But it gets better …
Because real estate provides housing for people … who vote, work, and have pitchforks … or in the case of the USA, AR-15s …
… governments are much more motivated to SUPPORT real estate than attack it.
They might go after cryptos (until they can issue their own). They might go after gold again.
They might print free money for their friends in Wall Street to blow up paper asset bubbles and drive down interest rates (nice, if you’re a real estate investor).
But if they attack real estate … that hits home (literally) … and it’s a revolution.
That’s why, as we saw in 2008, even when they screw up and real estate is collateral damage to their financial shenanigans …
… governments, central banks, Wall Street, and even corporate America all rally to prop up real estate.
From that stand point, people still hold the power. And people live, work, and depend on real estate.
So to keep things real in a surreal world, you could do a lot worse than making real estate the anchor of your investment portfolio.
Until next time … good investing!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
Intoxicating investments can be toxic …
It’s the time of year to get together and have a good time celebrating the holidays. Sometimes this involves indulging in some intoxicating activities.
Those who want to enjoy themselves know their limits … and prudently rely upon a sober person to get them safely home.
Naturally, we’re talking about investing.
Just take a look at just a few of the many recent intoxicating headlines …
- Homebuilder confidence hits highest level in 18 years
- Berkshire Hathaway shares reach $300,000 for the first time
- Costco’s stock rallies toward another record
- Bitcoin futures trade near $20,000
It’s important to remember … investing vehicles are supposed to get us to our financial destination SAFELY.
Crashes are DANGEROUS … which is why sobriety is advised.
Of course, in a room full of intoxicated partiers, a sober person can come off as a party-pooper … and NO ONE likes a party-pooper.
So let’s see if we can serve up some investing eggnog and with a dash of optimism … and no nasty hangover or risking a life-threatening crash.
First, let’s take a quick dive into the aforementioned headlines …
Housing
Home-builders are REALLY confident … presumably because they believe conditions are ripe for them to buy land, materials, and labor … turn them all into homes which they can sell at a profit.
That’s because home prices are UP … unlike those dark days in the wake of the recession when existing homes were selling below replacement cost … making it nearly impossible for home builders to build profitably.
Stocks
The U.S. stock market … and most global stock markets … have been rocketing higher.
In fact, the U.S. stock market has taken out all-time highs … over SEVENTY times in 2017 … an all-time record.
All this amid rabid share buybacks by corporations flush with cheap cash from low interest rates… and now from tax breaks which appear inevitable in the new tax bill.
Of course, when corporations take stock OFF the market (reduce supply), while demand surges as bullish investors are piling in … prices rise. Go stocks!
And speaking of rising prices …
Bitcoin
Of course, the meteoric rise of Bitcoin is THE asset price boom story of the year … perhaps of our lifetime. It’s gotten to where accidental Bitcoin multi-millionaires are even starting hedge-funds.
Are we jealous? Maybe just a lot. But we’re not sure missing the Bitcoin boom makes us stupid … any more than Bitcoin billionaires are suddenly investing geniuses.
“Stupid is as stupid does.” – Forrest Gump
Pre-2008, we knew a lot of people who thought they were real estate investing geniuses because real estate was going up fast everywhere.
They’d put $20,000 down and buy a little house, and a year later it was worth $100,000 more. There’s NOTHING wrong with that.
BUT … it’s a mistake to think you’re an investing genius because you bought a bubble asset at the right time.
Of course, if you’re not smart enough to get out before the bubble deflates, it can take all gains … and your investing “genius” … with it. We know.
“I may be drunk, Miss … but in the morning, I will be sober … and you will still be ugly.” – Winston Churchill
Rising asset prices are FUN. Easy equity is intoxicating. Who doesn’t like to see the spread between assets and liabilities grow?
But asset price parties can turn ugly fast if you’re not careful, which brings us to the point of today’s musing …
In good times and bad, always remember what REAL investing and wealth are …
… and no matter how intoxicated with bubble wealth you are, be sure you get home safely.
How?
To our way of thinking, the purpose of investing is to accumulate units of real value and the productivity of others.
Wealth is measured by how many useful items you own … like buildings, trees, crops, barrels of oil, ounces of strategic or precious metals, etc.
These are things people MUST have in order to live, work, or make things of value.
When you have more units of real value, and more people sending you a portion of their productivity, you are WEALTHY.
And when you pick items of real value which also reduce exposure to counter-party risk, your wealth is even safer.
Intoxicated investors look at their balance sheet and celebrate their net worth … perhaps even borrowing heavily to spend on consumption.
In fact, this is EXACTLY what the government and banks WANT you to do.
Sober investors look at their balance sheet as merely a tool for building their CASH FLOW statement. Spending comes out of the productivity of the asset … not it’s equity.
This is no small differentiation … because what you do with equity defines you as an investor.
The investor who buys low, sells high, skims some spending money, then pushes the stack back in and rolls the dice again, needs to keep playing the game … or the cash flow stops.
You can be a full-time investor, but you’re still on the treadmill.
The investor who buys low, then uses equity gains to acquire streams of positive cash flow will eventually become free from the need to personally produce to eat.
Robert Kiyosaki calls this “out of the rat race” … and it’s an enviable place to be.
The world is awash in paper (balance sheet) equity right now … in stocks, real estate, and now cryptos. None of them are bad. Equity is awesome!
But the market giveth equity … and the market taketh equity away.
We think it’s smart to take equity off the table before Mean Mr. Market takes it first … and then use your new equity to acquire productivity … cash flow.
It’s even better when you can pair equity with cheap long-term debt, so you can own MORE units of real value (properties) and income (tenants).
Of course, the right real estate is an ideal vehicle to acquire an income producing asset with cheap long term debt.
If prices decline, the income provides a basis of value and control. And if prices take off, your bigger collection of assets will create even more equity faster.
If you haven’t already, now’s a good time for a portfolio sobriety check. It doesn’t mean the party’s over … but it just might make it a bit safer.
Happy holiday and until next time … good investing!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
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- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
The MOST interesting story of the year …
What a wild ride 2017 has been … and 2018 is looking even MORE intriguing!
There’ve been SO many fascinating stories. Trying to pick the MOST interesting is a real challenge …
… a historic and unorthodox Trump presidency
… the record-breaking ascent of the stock market
… the record-breaking U.S. and global debt
… the meteoric, hyperbolic rise of Bitcoin, and crypto-currency’s move from libertarian fringe to mainstream …
And of course, there’s the ongoing saga of China’s drive to dethrone King Dollar; the drama in the House of Saud; and the (allegedly) strong U.S. jobs market.
All these things affect the financial eco-system our real estate investments live in … so we pay attention to them.
After all, we don’t want our backs to the beach if a tsunami is coming. We did that once and it was NOT fun.
So what’s the biggest story as we end 2017 and press into the new year?
We think it could be oil. But perhaps not for the most obvious reasons. Here’s why …
Currency is like the blood of an economy. It circulates … transporting energy to individual cells … many of which are organized into vital functions.
We teach our syndication students the importance of designing an effective business model … a circulatory system … to be sure cash flows to all vital functions.
Failure to nourish all cells (individuals) and vital organs (critical activities conducted by groups of individuals) can result in sickness, permanent disability, or death.
This is true for individuals, for businesses, and for nations.
After World War II, the U.S. dollar was crowned the world’s reserve currency.
Backed by gold, the dollar circulated the globe … transporting economic energy to individuals, businesses, and nations.
In 1971, the gold-backing was removed, and the dollar became severely ill … with a disease called “distrustitis” … commonly known as rejection. Nations didn’t want it.
So, they began aggressively trading in their dollars for gold …. bidding the price of gold up from $35 an ounce in late 1971 to nearly $700 in early 1980 …
Ironically, U.S. citizens were locked out of gold ownership until December 31, 1974 when President Gerald Ford revoked the ban imposed by President Franklin Roosevelt way back in 1933.So what does all this have to do with oil in 2017 … and why do we think it’s important heading into 2018? And how does any of this tie into real estate investing? We’re getting there!
First, a little more history …
Uncle Sam discovered an un-backed dollar wasn’t very popular. And when nations dumped dollars, it created The Great Inflation of the 1970s.
Back then, the cure for the dollar’s “distrustitis” was to force dollar demand through oil (the petro-dollar) and high interest rates (they reached 20% in 1980).
Cheap labor from China sucked up some inflation … while a recession slowed economic velocity to suck up even more. But those are topics for another day.
The point is there’s a long linkage between the dollar, gold, and oil … and all three have substantial influence on geo-politics … even today.
Of course, now there’s a new kid in town … crypto (a.k.a. Bitcoin) … which started a ridiculous run in 2017 …
Hmmmm … that chart pattern for 2017 looks a lot like when gold took off the last two times there were outbreaks of dollar distrustitis …
Probably just a coincidence.
But it makes you wonder if crypto and oil might get together as a way for Uncle Sam’s adversaries to escape the dollar … oh, wait …
Headline: Russia may turn to cryptocurrencies in oil trade to challenge sanctions & the petrodollar
Headline: Venezuela to Launch Oil-Backed Cryptocurrency
… which brings us to why we’re closely watching oil going into 2018.
In many ways, oil is the asset of choice to back currency. It’s been the backbone of the dollar since the 1970s and the world knows it.
That’s because the world runs on oil.
And unlike gold, every productive nation MUST have oil. It isn’t a philosophical commodity … it’s pragmatic.
As Investor Summit at Sea™ faculty member Chris Martenson reminds us, EVERY economy needs energy to operate.
Because oil is the world’s most in-demand commodity, whatever currency it trades in is sure to be in high demand.
China, the world’s #1 buyer of oil, knows this. And they’re using their economic muscle to position their currency, the yuan, for a greater role in global trade …
Headline: China will ‘compel’ Saudi Arabia to trade oil in yuan — and that’s going to affect the US dollar
Of course, with $20 trillion in debt and a debt-to-GDP ratio over 100% … more than THREE times what it was when high interest rates were used to crush inflation …
… the U.S. economy probably couldn’t handle 10% interest rates, much less 20%.
So if all the forces aligned against the petro-dollar succeed, might the U.S. experience some painful inflation?
Quite possibly.
Of course, when you own real assets … especially those which produce (like farmland or oil fields) … or channel productivity (like rental real estate) … you’re hedged … you preserve wealth.
But the key to PROFITING from inflation is to short the dollar. And that’s done with debt.
When you can fix the debt and own the asset, as the asset’s dollar price goes up against the fixed debt, the debt becomes smaller.
Of course, as we’ve discussed before, income-producing real estate is the safest way to play this game.
Now if we’re Uncle Sam and worried oil might end up backing a rival currency, we need to prepare for role reversal.
When the world wants dollars, all Uncle Sam had to do is print and import. The world gets dollars, and the U.S. gets stuff. Nice.
But if something replaces the dollar, then Uncle Sam needs to export stuff the world wants, in exchange for whatever currency is now in demand.
Are we saying the world will stop taking U.S. dollars? No.
But they might want a lot MORE dollars to buy the same stuff (inflation), which would weaken the U.S. economy.
Not surprisingly, the U.S. is taking steps to stimulate domestic oil production.
Headline: The GOP Tax Bill Is A Big Win For U.S. Oil And Gas
And agree with it or not, the Trump Administration is very friendly towards the oil industry.
Bringing this all back to Main Street and our daily real estate investing …
First, the relationship between oil and the U.S. dollar has the potential to impact the purchasing power of our dollars, interest rates on our mortgages, and the cost of living for our tenants.
We’re very interested in ALL those things.
Next, if Uncle Sam stimulates domestic energy production with investment incentives and regulatory easing, it might lead to economic booms in energy-rich geographies.
Remember, energy was a top driver of job creation post-2008 … with Texas being the biggest winner.
That’s what took us into Dallas after the recession … and keeps us interested today.
Oil, gold, the dollar, China, new faces on the Fed, tax reform, Bitcoin …
… are all converging in 2018 for potentially massive changes to the future of money and wealth.
And they’ll all be very important topics of discussion on our 2018 Investor Summit at Sea™ … which just might be the MOST important Summit in our history.
Until next time … good investing!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
Avoiding bubble trouble …
Between Bitcoin, Nasdaq, and yes … even some real estate markets … there’s a growing concern about bubbles blowing up on giddy investors who’ve been partying like it’s 1999.
Of course, if you sit out to play it “safe” … you might miss out on all kinds of exciting gains. Buy into the hype … you might be left without a seat when the music stops.
So what’s an investor to do?
Fortunately, these are much easier problems for a real estate investor to resolve than for those investors playing purely with paper assets.
That’s because real estate is unique among investment vehicles.
First, real estate is almost impossible to commoditize.
Every property is a one-of-a-kind collection of condition, location, potential, financing structure, and seller motivation.
And unlike nearly all other investments … you can influence many of the factors which contribute to the financial performance of real estate.
On the other hand, every Bitcoin, ounce of gold, share of Apple stock, or 10-year Treasury are essentially identical anywhere in the world …
… and there’s virtually nothing you can do to influence the supply, demand, or financial performance of any of them.
Of course, this doesn’t necessarily make those “investments” bad. But they are very different than real estate.
Our point is that when pundits toss real estate into the commoditized investments bubble warning basket, it’s not a completely valid argument.
Real estate provides a level of safety and control not available in commoditized investments … and the key is basic analysis and underwriting.
Now don’t be intimidated. It’s not that complicated.
However, income property analysis and underwriting is a different process than analyzing a stock, bond, or commodity.
As for crypto? We’re the first to admit we haven’t the slightest idea how to analyze or underwrite a crypto-currency.
But back to the business of analysis and underwriting …
In simple terms, “analysis” is simply looking at the numbers and drawing some conclusions about what they mean.
“Underwriting” is fact-checking the inputs which create the numbers you’re analyzing to be sure the numbers are rooted in reality.
“Technical” analysis is looking at the supply, demand, and price trends. It’s about patterns, and using the past to help predict future price action.
“Fundamental” analysis is looking at the operating income, the market, the management, and other competitive factors, to estimate prospects for future success.
Fundamental analysis is what Warren Buffet is famous for. And because he’s really good at it, he often finds companies whose stocks are cheap relative to their potential.
So a “good deal” is something selling for less than it’s potential … so long as you have the funds, expertise, and control to develop the potential.
When it comes to stocks, Warren Buffet is big enough to have some direct influence on how a company develops its potential.
Unfortunately, Main Street investors can’t play the stock game at Buffet’s level.
The great news is real estate lets you get your Buffett on much better than just some speculating amateur playing pin-the-tail on the hot stock donkey.
So here’s a simple way to approach real estate deal analysis and underwriting so you can recognize a bargain … even in a hot market.
The goal is to buy a property that isn’t already at the top of its value range (a bubble).
For this discussion, we’ll assume you’ve selected a market and neighborhood that’s in good shape and stable, or trending in the right direction.
When it comes to the actual property, you’re analyzing it for acquisition, improvement, and long-term production of income.
Already, the distinction between real estate and a commoditized investment should be apparent.
When you acquire a commoditized investment like Bitcoin, Apple stock, gold, or a bond, you’re bidding into a very competitive environment.
Sure, there may be a little wiggle room in the price, but it’s based on timing … not negotiation.
But with real estate, there’s often the possibility of negotiating price, concessions, carry-back, equity participation, etc.
Often, you’re only competing with a handful of other bidders, so your negotiating skills can make a big difference.
Real estate is personal and individual. It’s NOT a commodity.
So one way to mitigate the risk of buying at the top of the value range is to simply negotiate a better deal at the start. Skill matters.
But that’s just the beginning.
Most properties aren’t perfect when you buy them.
Depending on the condition and potential of the property, there’s often a variety of improvements a new owner can make to create additional value.
If you’re smart, creative, and cost-effective, you can make micro-investments into the property and improve its macro performance.
For example, our friend Ken McElroy likes to add washers and dryers to his apartment units. When he does, he can get a $600 investment per unit to yield an increase in rents of about $300 a year.
You can’t do that with Apple stock. Even if you buy 100,000 shares.
This is where your “cap ex” (capital expenditure, or “fix-up” budget) ties in directly to your income analysis.
So you have the acquisition costs and the cap ex as your “cost basis” going in. It’s the amount of capital you need to get a return on.
That “return” is called Net Operating Income. It’s simply revenue less expenses before debt service.
Once again, this is where real estate sets itself apart from commoditized investments.
With real estate, the line items of your revenue and expenses often contain things which you can improve with good management and creativity.
So as you analyze and underwrite the deal, make a note of each item over which you have some degree of influence or control.
When you do this, you’ll see the potential and probabilities for improving the financial performance, and thereby the value … and you’ll develop a solid foundation for a viable business plan for the property.
This is “duh obvious” to seasoned real estate investors. But for newbies, it’s a VERY important distinction.
Real estate isn’t a good deal simply because it’s real estate. And real estate isn’t dangerous simply because values have risen in the aggregate.
Real estate can’t be measured in the aggregate. Each property is unique.
That’s what makes real estate fun and challenging.
But to our way of thinking, what’s dangerous is buying a commoditized investment you don’t understand, can’t control, with no plan … hoping it will do something awesome all by itself.
It might. But it might not.
In ANY investment, there are ALWAYS stories about people who get stupid rich by dumb luck.
But for every lucky winner, there are a hundred gamblers who get crushed trying to get lucky … with no plan.
Be smart. Do your homework. Make executable plans. And when you see a deal that makes sense … just do it. And don’t let bubble talk scare you.
There might be bubbles forming all around you, but you don’t have to buy one.
Until next time … good investing!
More From The Real Estate Guys™…
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Bitcoin vs Real Estate
Unless you just arrived on earth, you’ve probably heard about Bitcoin mania.
In case you haven’t, here’s a 7-year chart which clearly illustrates what all the excitement is about …
Source: CoinDesk.com
In case that pattern looks familiar … here’s what the NASDAQ looked in the late 90’s during the dotcom mania (the big spike in the middle) …
Source: BigCharts.com
And to be fair, here’s housing … note the run up from ’99 to ’07 ….
Source: Calculated Risk Blog
The only difference between Bitcoin and the Nasdaq or housing charts is we know the rest of the story for tech stocks and housing.
Is Bitcoin going to crash like tech stocks and housing did?
Not necessarily … though we wouldn’t be surprised.
But we do think there are some lessons and opportunities in taking a closer look at what’s going on with Bitcoin.
Price Action
The price of anything is almost always the direct result of supply and demand with capacity-to-pay (you can want something, but if you can’t pay, you can’t bid).
When demand exceeds supply, prices are likely to get bid UP. And if you add capacity-to-pay to a demand that’s over-whelming supply, prices can go hyperbolic.
Bubbles
Bubbles form when enthusiasm for a particular “asset” causes bidders to cross over from buying “fundamentals” to buying “momentum.”
When we say “fundamentals” we mean income and not supply vs demand.
With stocks, “fundamentals” are earnings per share. The ratio between price and earnings is cleverly called the price-to-earnings ratio (P/E).
When a stock gets “hot”, investors are willing to pay a lot more for the same earnings. Here are examples where the relationship between price and earnings are all over the place …
Apple recently announced their earnings at $2.07 per share. Apple’s stock price is about $175 per share.
Exxon reported earnings of 93 cents per share at a price of about $84.
Amazon reported earnings of 52 cents a share at $1045 per share.
Google had earnings of $9.57 per share at $1022 per share.
If you’re buying fundamentals, it seems Apple and Exxon are better deals than Amazon or Google. You pay less for the income.
But the price action says the market is more excited about the future of Amazon and Google. Clearly, bidders are buying something more than income.
Of course, we’re not stock investors or analysts, so we’re not recommending anything.
The point is when investors see future growth, they’ll often bid the price UP in an attempt to “buy low” … presumably hoping to “sell high” later.
But sometimes investors get TOO excited and they buy something simply because “it’s going up” … and they want to get in on the action.
Forget fundamentals. The only things that matters is everyone else is piling in and pushing the price up.
That’s what happened with tech stocks in the late 90s.
Investors bought the idea of a “new” economy … one where “old-fashioned” concepts like revenue and profit fell by the wayside.
Back then companies were going public … with little or no profit … and eager investors would bid the prices up to double and triple digit increases in just a matter of hours.
It made no sense. But it happened. Many people became multi-millionaires by getting in early. Some stayed multi-millionaires by getting out early too.
Bubbles occur when more people are coming in than getting out. Bubbles deflate when that reverses.
When there are no fundamentals, it’s all about getting the timing right.
Real Estate
The real estate bubble was similar … but different.
In the dotcom mania, most people were investing cash, though some used debt (margin).
With real estate in the early 2000’s, the price boom was fueled almost exclusively by debt … specifically, mortgage-backed-securities (MBS).
Debt allows people to pull future earnings into the present to bid up price today. Cheap mortgages let people lever their paychecks into big loans.
In the beginning, people who had legitimate income and reasonable down payments were the buyers. Lenders underwrote for income (fundamentals).
But after the dotcom bust, the Fed pumped lots of money into the financial system and Wall Street needed someplace to put it.
Stocks had a big black eye, so the money ended up in bonds, which drove down interest rates (when bonds go UP, yields … rates … go DOWN).
As bond yields fell, bond investors went looking for yield. So Wall Street served up mortgages as a “safe” place to invest for better yield.
As more money poured into real estate, real estate prices rose further. Real estate got “hot.”
Wall Street investors fed mortgages backed by real estate “going up” … without regard to the income of the borrower.
Soon, fueled by cheap money from Wall Street, Main Street was buying real estate without regard to their own income or the rental income. All that mattered was prices were going up.
It was all good … until it wasn’t.
When the fundamentals (income and rents) couldn’t support the debt load and loans inevitably began to default (starting with sub-prime), no one wanted to buy mortgage-backed securities anymore.
So all the money going into MBS and fueling real estate stopped.
When it did, buyers lost the capacity-to-pay, and the supply and demand imbalance flipped in favor of supply. Prices crashed.
Bitcoin
We’re the first to admit we’ve missed out on the Bitcoin “boom” so far.
When we first heard of Bitcoin, it didn’t make sense to us because it was being presented as a currency … a medium of exchange. A way to buy and sell things.
Of course, today almost no one is using Bitcoin as a currency … any more than people still use gold as a currency. And Bitcoin, like gold, has no earnings.
Just as we don’t consider gold an investment, but rather a place to store wealth outside the dollar, we don’t think of Bitcoin as an investment either.
What we didn’t see was the potential for a huge supply and demand imbalance to cause Bitcoin prices to go hyperbolic.
It’s well known the supply of Bitcoin is allegedly limited to only 21 million Bitcoins. We have no idea how anyone could verify this … but we’re admittedly ignorant.
However, there seems to be no limit to the number of other crypto-currencies which can be created. Time will tell whether the supply of cryptos will catch up to or exceed demand.
But looking at the Bitcoin chart above, it seems apparent something happened in the last few months to create a HUGE demand. To our knowledge, nothing happened to supply.
Based on the news and all the geo-political unrest, one potential demand driver could be wealthy people trying to get big money out of totalitarian regimes.
China, Venezuela and Saudi Arabia come to mind.
Such a surge of demand with capacity-to-pay could cause a big spike in prices.
Then, when everyone else sees Bitcoin going up … for WHATEVER reason … they all get in to ride (chase) the wave.
Because there’s no way (that we know of) besides the price action to really know what the Bitcoin supply and demand numbers are, it seems dangerous to go all in with real money.
Remember, just because it’s going up doesn’t make it safe.
If the momentum turns, now you’re in a race with everyone else to get out. And that almost always ends badly.
However, if you have some throw away money and you want to take chance on a moonshot … we’ve certainly blown money on less interesting things.
We first heard about Bitcoin in 2010 and could have easily put $100 in just for the fun of it. It would be worth over $200 million at today’s price. Instead, we bought sushi. Oops.
Real Estate vs Bitcoin
You’ve probably already figured out … there’s no comparison.
Bitcoin and real estate are two very different financial vehicles and they play different roles in your portfolio.
Bitcoin is about betting on price action … getting in while demand is growing in the face of limited supply. Then being fast enough to get out before it turns.
Real estate is about buying streams of income by using debt to acquire a tangible asset with thousands of years of history of being in demand. Humans will always need places to live, work, farm, and play.
Of course, if we use some “throw-away” money to buy Bitcoin and it goes up 10,000%, we wouldn’t complain. We’d probably just cash out and buy some gold and real estate.
One thing’s for sure … the future of money and wealth are changing … and there will be unprecedented risks and opportunities as everything unfolds.
Until next time … good investing!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
A big story keeps getting bigger …
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.
During the conference, Robert Helms emceed a fascinating panel called The Future of Money, with panelists Doug Casey, Danielle DiMartino Booth and Chris Martenson.
(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.
China is now the largest manufacturing economy and top importer of oil. Russia is the #2 seller of oil … behind (wait for it …) Saudi Arabia.
Russia and China recently made a deal to trade oil in Chinese currency (the yuan) … instead of dollars.
China already has major oil producers Iran and Venezuela on board the petro-yuan train.
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!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
7/13/14: The Future of Money – Currency, Metals and Crypto-Currency
Money is such an interesting topic. It really is the lifeblood of human society. It’s the repository of human production and the means by which value is exchanged. Money does in fact make the world go ’round.
For real estate investors, and really any other investor, business owner or laborer, productivity, cash flows and net worth are all denominated in some form of money.
Of course, over history and around the world, money takes different forms. And depending on when and where you’re from, you look at money through a specific paradigm.
For 70 years, the U.S. dollar has been the world’s reserve currency. As such, the dollar has become the universally accepted unit of value through which virtually everyone around the world engages in commerce.
You may be able to do business at the street level with local currency, but when big corporations or governments do business, it almost always goes through U.S. banks and U.S. dollars. And it’s been a powerful source of U.S. hegemony (influence over other countries) for decades.
But many people believe the dollar’s reign as the dominate currency may be coming to an end. Even if it doesn’t, technology, global power shifts, and modern monetary theory are all affecting the dollar’s value and utility.
And because the production and accumulation of money is the main purpose behind most real estate investors daily activities, we thought it would be a good idea to talk about the future of money.
Enriching the conversation about currency, coins and crypto-currency:
- Your on-the-money host, Robert Helms
- His-cryptic co-host, Russell Gray
- Billionaire businessman, political pundit and best selling author, Steve Forbes
- Currency fund manager, Axel Merk
- Precious metals expert and entrepreneur, Anthem Blanchard
When you have billions of dollars, we’re guessing you pay close attention to their value. So when billionaire Steve Forbes puts out a book called Money – How the Destruction of the Dollar Threatens the Global Economy and What We Can Do About It, we’re interested in hearing what he has to say.
Fortunately, Steve was kind enough to sit down with us to talk about it, so we turned on the microphones so you could listen in.
The short of it is that an unstable dollar means an unstable economy. The analogy Steve uses is time.
Consider what your calendar planning would look like if each day you woke up, the number of seconds in each minute was being changed. Some days there are 60 seconds in a minute. Other days, there are 75 seconds. Sometimes there are only 45 seconds.
When you start calculating the value of hours, days, weeks and months using these floating value minutes, you can imagine how confusing and chaotic your schedule would be.
You’d probably miss more than a few appointments because you’d invariably end up in the wrong place at the wrong time.
It’s not hard to see that when the dollar’s value is constantly shifting, investors and businesspeople invariably end up with money in the wrong place at the wrong time.
Austrian school economists call this a misallocation of capital or a malinvestment. Later, when adjustments are being made to realign monetary values with real values, this misplaced capital is revealed. And it’s usually a painful “correction”. Can you say 1929, 1987 or 2008?
Sadly, lots of people are wiped out when these events occur. Then politicians get angry and slap more regulations on business and investing. And central banks print more money to paper over the losses and reduce the pain. Everyone feels good for a moment because they feel like something is being done.
But history tells us it doesn’t work. In fact, history says it makes it worse.
Why?
Because the REAL problem was never addressed. The real problem is unsound money. Unsound money is inherently unstable, and leaves investors and businesspeople guessing about values and risk. A case in point is the 2008 real estate crash.
The post mortem on the 2008 crash reveals that the gobs of cheap money created to paper over the dual whammy of the tech bust and 9/11 attacks ended up fueling a bond bubble that blew up.
It’s a big topic, but worthy of short review. After all, what’s the point of riding this next wave of rising real estate prices only to get slapped down hard in a few year because you weren’t paying attention?
So all the cheap money pumped into the system in 2001 needed a home and Wall Street began creating investments. They started by packaging up loans (mortgage backed securities) and selling them as assets to investors. It satisfied some demand, but it wasn’t enough.
So Wall Street needed to make more loans and started lending to people who really couldn’t afford to pay back.
But because it was a pump and dump operation, Wall Street buried the sub-prime loans inside big pools, then sliced the pools up and sold them off in pieces so no one could really see what was inside.
It was like pulling the pin on a hand grenade. You know it’s going to be ugly, but you know you can toss it to the next guy before it blows up.
These mortgage backed securities (MBS) sold like hot cakes. Remember, there was all kinds of cheap money in the market and it needed a home. But when there weren’t enough real borrowers, qualified or not, Wall Street needed to create more investments to sell anyway…so they came up with derivatives.
Think of derivatives like clones of the original.
Derivatives look real, but there’s no actual borrower or property. The “investment” is just a contract that says this piece of paper will be worth the same as the original piece of paper (the one with the real borrower and property attached). This concept of creating “assets” out of nothing is a common theme in modern day finance…right down to the greenback in your wallet…
And as long as everyone believes the clone is just as good the original, AND the original borrower pays so the original paper performs, no one knows that it’s all just a big fraud. Really, it’s no different than a common Ponzi scheme. It all seems okay until you run out of suckers.
Of course, we all know what happened. Joe Sub-Prime couldn’t handle the interest rate increase two years into the loan. By then the originator of the bad loans had long since sold them and moved on. And when Joe Sub-Prime defaulted, the original paper and ALL the derivatives indexed to it went bad. In other words, the whole house of cards collapsed. It was a financial train wreck of epic proportions.
It all happened because of unsound money.
You see, unsound money can be conjured out of this air. It’s like having a credit card with no limit. There isn’t anything to stop a constant expansion of money…at any pace.
And just like 2002-2007, it’s all great…right until it isn’t.
Sound money on the other hand, CANNOT be conjured out of thin air. It must be backed by something real, which is limited in supply. Which means that the price of it (interest rates) reacts to supply and demand.
And when too much money is being used, it gets more expensive. This regulates how quickly money can be metered into the economy.
Obviously, it’s a big topic.
Steve Forbes is calling for a gold-backed dollar. At least partially. His point is that the dollar needs to be stabilized or the world is not going to continue to use it as the reserve currency.
THAT would be a BIG PROBLEM for U.S. dollar holders. And it’s something we’re paying VERY close attention to.
Which bring us to Axel Merk…
Axel is an expert on currencies. He manages funds which trade in currencies. This means he pays attention to the relative strength of things like dollars, yen, euro, yuan, etc.
He also pays attention to gold…something that we’ve been following closely for quite some time.
If and until Steve Forbes gets his way or someone creates a gold-backed currency, all currencies worldwide are essentially fiat.
Fiat currencies have value because the issuing government say they do. These are called legal tender laws.
This means that a piece of paper (or digits on your bank statement) can be used to pay taxes and any public or private debts. As long as you can settle these items with otherwise worthless pieces of paper, the paper has value in society.
Side bar (as though this blog isn’t already along enough)…
Think about this for a moment: When a currency is stable (or has the widely accepted illusion of stability) then all sellers and workers in a given economy will probably accept it. At the very least it can be used to pay their debt and taxes.
When a currency’s value begins to fall, initially seller’s and workers will continue to take it, but they quickly seek to spend it on something real like food, clothing, furniture, equipment…anything tangible that has inherent utility. They only keep enough currency on hand to pay taxes and debt. Go look at the historical record of any of the many currency collapses from the Weimar Republic to Zimbabwe and Argentina. It’s a movie with a very predictable script.
But if legal tender laws require that this now abundant, albeit practically worthless, currency must be accepted for payment of taxes and debt, wouldn’t it be wise in the face of a falling currency to defer taxes as long as possible and borrow as much as possible to buy tangible items today?
Then later, when the currency is abundant, you can offer the taxman and creditor your piles of paper and they are compelled by law to accept them…even though they aren’t worth much at all in terms of purchasing power.
In effect, debt today (like long term fixed rate mortgages on real estate) is a very powerful way to effectively short a falling dollar. It’s certainly something to think about if the dollar continues its steady decline.
So as you can see, and as we previously discussed and Steve Forbes contends, that unsound money, no matter who issues it, it problematic for investors and businesspeople. It makes every financial transaction, especially those of long duration (like real estate or starting a business) a much more complicated process.
Axel and his firm spend time watching the rate at which each currency is declining as compared to another, and then they trade currencies in an attempt to be in the right side of move.
In his best-selling book, Currency Wars, James Rickards talks about a race to the bottom. This is where all currency issues are expanding currency supplies (causing their values to drop) in an attempt to make other currencies stronger by comparison.
This means the stronger currency can buy more exports from the lower currency. And since everyone wants to increase their exports, they cheapen their money. Yes, it’s twisted, but that’s the way of the world right now.
Think of it this way. If two currencies are falling, but one is falling fasten than the other, then the one that is falling slower, is “stronger”.
For example, if a dollar falls 10% and the Euro falls 20%, the dollar actually increased relative to the Euro.
$1.00 less 10% is 90 cents.
€1.00 less 20% is 80 cents.
90 cents is worth 10 cents more than 80 cents. And 10 cents is 12.5 percent of 80 cents. So the 90 cent “dollar” (which started out as 100 cents) is worth 12.5% more than the Euro. That is, the dollar rose against the Euro.
But is the dollar really stronger?
Confused? That’s Steve Forbes’ point and why guys like Axel Merk manage currency portfolios for their clients.
So what does ANY of this have to do with real estate?
Well, it’s no secret that the Fed has been trashing the dollar for quite a while and especially the last 5 years.
This has made other currencies relatively stronger, so foreigners have been buying up dollar denominated assets…like real estate. In fact, in some markets foreign buyers are coming in for cash and buying up to 30% or more of all available properties.
If you’re in one of those markets, then these people are bidding up prices, gobbling up inventory and, in the case of single family homes, pricing out U.S. home buyers. That’s one of the reason why home prices rise even though the U.S. job market and wages remain weak.
So yes, all this matters to you.
Of course, even though he believes in capitalism and free markets, Steve Forbes is advocating for a political solution. He wants the policy to be that the dollar is backed by gold…at least partially. His argument is that a sound dollar will unleash business and investment by bringing stability to the entire process.
Sounds good. But what do we do until then?
Enter Anthem Blanchard. Like Steve Forbes, Anthem is a returning guest to The Real Estate Guys™ radio show. He runs Anthem Vault which is a technology driven physical gold (and other precious metals) dealer and storage facility. And Anthem just came out with something which we find VERY interesting.
Perhaps you’ve heard of Bitcoin, which is arguably the biggest and best known of the crypto-currencies…
Bitcoin is interesting on a couple of levels.
First, the very fact that the market has embraced Bitcoin is a sign of falling confidence in the dollar.
After all, with today’s technology, electronic payments have been ubiquitous for years. So Bitcoin didn’t catch on because it was easier than writing a check or handing over pieces of paper.
The market is apparently eager to find some alternative to the dollar.
Second, Bitcoin, like every other crypto-currency up until now, isn’t backed by anything. The coins are “mined” when computers produce this long strands of code on the back-end of an arduous computing process.
The idea is that even though they aren’t backed by anything tangible, Bitcoins can’t simply be fabricated with a few computer entries like dollars can (as former Fed Chair Ben Bernanke so famously boasted on national television).
So Bitcoins are allegedly limited in supply. Therefore as demand grows, the price rices.
We’re not here to slam Bitcoins, though we certainly aren’t fans of any kind of currency that isn’t backed by something real.
Our point is that the market place clearly wants an alternative to the dollar that is convenient to use and removed from the political pressures to crash its value.
Steve Forbes says a gold-backed dollar is the answer.
Others say crypto-currency like Bitcoin is the answer.
But what if you could combine the two? How about a gold backed crypto-currency?
Now THAT is an interesting concept.
And that’s exactly what Anthem Vault has created. Maybe it’s just us, but we think it’s going to be a big deal.
All this to say (and thanks for reading this far), that the future of money is changing and it’s something every real estate investor should be paying attention to.
So listen in as Steve Forbes, Axel Merk and Anthem Blanchard share their perspectives on the future of money, metals and crypto-currency.
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