Ask The Guys – Infinite Returns, Gold, Cap Rates, and Cash Flow
It’s your questions and our answers.
That’s right. It’s time for another segment of Ask The Guys … when we hear about the real-world challenges investors like YOU face every day.
We have another great collection of questions from our loyal listeners … covering everything from infinite returns to gold, proper reserves, compressed cap rates, and cash flow.
Remember … we aren’t tax advisors or legal professionals.
We give ideas and information … NOT advice.
In this episode of The Real Estate Guys™ show, hear from:
- Your in-the-know host, Robert Helms
- His go-with-the-flow co-host, Russell Gray
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The ins and outs of infinite returns
Our first question comes from Sean in Durango, Colorado, who wants to know more about the ins and outs of infinite returns.
This is a topic we are pretty passionate about … it was even the theme of this year’s Investors Summit at Sea.
The idea of an infinite return is pretty simple. It means that you’re investing on the house’s money.
In other words, you put up some money for a deal … to buy a property or be in syndication or grow crops … and at some point the deal has paid you back … and you’re still making money.
Maybe that takes a year or five years … but once you get all of your initial capital off the table, everything else that comes in is an infinite return.
Infinite returns are easy to do in real estate … but it DOES take time.
There are lots of different ways to chase an infinite return, like getting creative with financing and syndication … but the core concept remains the same.
You’re earning a return on no money at risk.
Purchasing real estate with other people’s money
Teresa in Claremont, California, wants to know more about using other people’s money to leverage the purchase of real estate.
Does it only work with people who have lots of money for a downpayment? Are there any lenders willing to finance 100 percent of a deal for a buy and hold?
Using someone else’s money doesn’t mean breaking into their house in the middle of the night or stealing from their bank account.
It means showing them the opportunity.
One of the primary sources of other people’s money are lenders. They’re in the business of putting capital to work for their depositors, for their shareholders, and sometimes for themselves.
Lenders put up some of the money for a deal in exchange for some portion of the return or a predictable income stream, like an interest payment.
You can also leverage other people’s money through syndication. If you need $1 million to do a deal, you can raise $100,000 from 10 different people.
There are lots of legal and ethical implications to a syndicated route like this … but it can be a great way to get started passively or if you’re interested in being a full-time real estate practitioner.
A lot of people think they have to have some sort of money to start with to do a deal. It helps … but you don’t have to.
What you do have to have is a deal that makes sense … because it’s going to end up being the collateral or the investment that your equity partners come to.
No matter what, you’re going to have debt … and you’re going to have equity.
The key is to look at how much profit is in the deal and figure out how much of that you can give away to different people for their participation.
And when all of that is done … is there enough leftover for you?
Finding a lender who will cover 100 percent of deal through a loan is tough … and the ones that do will usually be for a primary residence.
Protect your cash flow with reserves
Gary in Scottsdale, Arizona, owns four single-family rental properties.
The question on Gary’s mind is how to deal with the reality of net cash flow … one major expense can wipe out your entire annual cash flow.
It’s real and it happens. It has even happened to us.
We always … always … put contingencies and reserves in our pro formas.
A pro forma is your plan for the property … what you think the income and expenses are going to be.
There are two major places where you will need reserves.
When you buy the property, you can’t put 100 percent of your cash into the down payment and the property. You need to have some in reserve.
Most lenders require this. When you close escrow, they’ll want to make sure that you still have money in your bank account.
We also recommend that you take some reserve capital out of every month’s payment as the rent comes in.
Perform your vital functions … and then put a little bit aside. That amount depends on your projected plan for your property and what needs you anticipate.
The cause and effect of cap rates and interest rates
With cap rates compressing across the country, it has been said that investors should be careful to still maintain a good spread between the cap rate and the interest rate.
Drew in Chicago, Illinois, wants to know if there is a direct correlation between these two factors or if it’s just a general rule of thumb to indicate when a market might be overpriced.
We think this is a great question.
Capitalization rate … or cap rate … is determined using net operating income.
Cap rate doesn’t include anything to do with leverage or your loan … so there is zero correlation between cap rate and the interest rate.
But there CAN be cause and effect.
If interest rates are low and you can borrow money for cheap … you want to borrow more.
And if you want to go out and find a property, you’re going to find a lot of competition because rates are low.
So, you’ll bid up the price for the same amount of income … making the cap rate go down.
Leveraging from gold and real estate
Debra in Alpharetta, Georgia, wants some further insight into leveraging from gold and real estate combined.
Assets like gold and oil are basically proxies for the dollar.
We borrow in dollars. We lend in dollars. We invest in dollars.
When you start looking at the dollar, you see a long-term trend in loss of purchasing power … it’s called inflation.
Real estate investors use inflation to get rich by borrowing money from the future and bringing it into the present when it’s worth more.
So when you borrow … you have effectively shorted the dollar.
You can accelerate that process with gold.
If you look at the history of gold relative to the dollar, it basically stays the same as the purchasing power of the dollar declines.
Gold gives you the opportunity to hold some liquid wealth outside of the banking system and hedge against the falling currency.
More Ask The Guys
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Bitcoin, gold, oil, stocks, real estate, and popcorn …
It’s hard to watch the financial news these days and not get the feeling the fragility in the financial system we’ve been concerned about … is starting to show.
We grew up in California and learned as kids how to react to an earthquake …
Get away from glass and hide under the shelter of a desk or doorway … because stuff was probably going to start falling.
Fragile things shatter in an earthquake. They can’t handle the pressure. The key to safety is to get to the sturdiest parts of the structure until the shaking subsides.
Of course, when it’s clear and bright … the windows are the most fun. You can bask in the sunshine of hope and opportunity.
But when the foundation is shaking, it’s time to find shelter … FAST.
You’ve probably noticed stock prices slipping. Even the fabled FAANGs (Facebook, Amazon, Apple, Netflix, Google) are ALL now in bear markets.
So what? After all, we’re real estate investors. What do we care about stocks?
We don’t. At least not directly. But all these markets are like gauges on our financial dashboard … and when they start flashing red, it’s wise to investigate.
This is a newsletter, not a seminar, but let’s see what we can reason together in the next few minutes about what’s shaking in the financial world … and where it might be headed.
The first place to look is the most important financial market there is … bonds.
Of course, real estate investors should watch the bond market for clues about the direction of interest rates.
But while interest rates are interesting … credit markets are what REALLY matter.
That’s because credit markets both create and price the currency which fuels everything else.
Credit markets are like the big reactor core in the Star Wars Debt Death Star. They’re both the fuel source and the weak spot at the same time.
To take the metaphor a conspiratorial step further … credit markets are also the source of the Emperor’s power.
And as Peter Schiff persistently points out … when the original Debt Star blew up in 2008, the Emperor wasted no time in building a bigger, deadlier version.
The obvious implication is the next explosion could be a LOT bigger.
Now in a plain vanilla stock market dip, some (usually innocuous) event spooks highly-leveraged paper traders. They sprint to the exits … and stock prices fall.
But then they calm down and the next day they’re back out there snapping up bargains. This “buy-the-dip” strategy has been the name of the game for several years.
But the longer-term downtrend suggests something is different this time. Perhaps worries the Debt Star is running out of power?
The Bitcoin crowd has been chanting “buy the dip” also … but here too, it seems the Farce is strong … and the downtrend has more gravitational pull than past dips.
Clearly, nervous stock investors aren’t piling into Bitcoin for safety.
Of course, the usual safe space for snowflake stock investors to hide is bonds.
But if gobs of money were pouring into bonds … interest rates would be falling.
While rates have certainly moderated the last few weeks from their upward trend, it’s hardly a serious decline.
So … nothing happening now has us disagreeing with our recent conversation with David Stockman on the direction of rates.
And we certainly would NOT be using short-term debt on tight-cap properties hoping to re-fi to lower rates in a year or two! If that’s your plan … be careful.
Then there’s oil. You’ve probably heard the price has fallen. We’re guessing your tenants like it at the pump. Businesses too.
Obviously, energy costs … just like interest and taxes … RAISE the costs of operating a business, a household, and an economy.
President Trump’s a business guy. So to no surprise he prefers ALL three lower … so more profit gets to the bottom line.
But oil … like gold … is MUCH more than just a commodity.
Both have significant connections to the future of the U.S. dollar … and all three are powerful tools in geo-politics.
Just last year, we pointed out China’s noteworthy moves with both oil and gold.
And just because things are moving slowly, doesn’t mean they aren’t moving.
All that to say … we’ve been paying close attention to this for several years … and it seems to us things are picking up speed.
We keep them on our radar … and yours … for TWO reasons …
First … major financial events often seem to show up suddenly and shock the world … but they usually had a long and obvious (in hindsight) build up.
We’ve learned to look further out so we have more time to re-position. After all, the blessing and curse of real estate is it moves slowly.
So real estate investors are wise to pay attention to early warning indicators … and then rearrange portfolios to both mitigate risk and capture opportunities.
Second … when economic and financial earthquakes first tremble … it’s smart to seek shelter under sturdy structures.
For that reason, we think it’s likely to see MORE money moving into real estate in search of stability (and tax breaks).
But just because real estate is stable doesn’t mean YOUR portfolio is.
As we learned in 2008, bad portfolio structure crumbles when hit with tremors from a Debt Star explosion.
However, when those market forces clean out weak portfolios, there are bargains galore … for those who are ready, willing, and able to take advantage.
Ironically, consumers are tapping home equity like it’s 2007. We’re guessing holiday shopping will be solid. But it won’t make those borrowers wealthier.
Savvy investors are grabbing equity too … and using it both to purchase strong cash flows … and to hold in reserve.
It’s always good to have some cash if market tides turn.
YOUR mission is to be among the aware and prepared … and NOT among the unaware and unprepared. It could be a good time to increase liquidity.
Are we saying another crash is coming? No. But we can’t say it’s not.
Right now, there are tremors.
So while you’re thinking about your goals for next year … including how to invest your educational time and money …
… we encourage you to make getting better educated, better connected, and better structured a top priority … so IF things turn quickly …
… YOU can sit safely inside your reinforced portfolio chomping on popcorn and watching the fireworks.
And if the fireworks turn out to be a dud … you’re really no worse off for being prepared.
Until next time … good investing!
More From The Real Estate Guys™…
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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.
Love the show? Tell the world! When you promote the show, you help us attract more great guests for your listening pleasure!
Lessons from Facebook’s face-plant …
No doubt you’ve heard Facebook’s stock face-planted recently. But just in case, here’s the whole gory story in just three headlines over five days …
Facebook stock hits record high ahead of earnings – MarketWatch 7/25/18
“Investors … continue to shrug off … gaffes … with privacy and security … Chief Executive Mark Zuckerberg … said … the company has not seen an impact on the company’s top line.”
Facebook’s stock market decline is the largest one-day drop in US history
– The Verge 7/26/18
“Facebook’s market capitalization lost $120 billion in 24 hours.”
Facebook’s stock set to enter bear-market territory after third straight decline – MarketWatch 7/30/18
“The stock has now fallen 22% from its record close … on July 25.”
Of course, if you’re a real estate investor this may seem like only a moderately interesting side story buried in all the news flying across your screen.
And maybe that’s all it is.
Then again, maybe there are some things to be gleaned from this epic implosion … even for real estate investors.
Lesson 1: Just because everyone else is … doesn’t mean YOU should
Your mom probably taught you that. But it’s good investing advice too. It’s never smart to be late to an equity party … or late leaving.
The so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) are the “must have” stocks for … just about EVERYONE.
The problem is popular assets often get bid up well past their fundamental value … as speculators jump in hoping to ride the upward trend for awhile …
… and hoping to be fast enough to get out before the trend turns.
Of course, hope isn’t a very good investing strategy.
Lesson 2: Don’t ignore problems just to keep hope alive
Notice the quote about investors continuing to shrug off bad news … ignoring the obviously developing problems at Facebook.
So when Zuckerberg comes out right before the bad news … even as Facebook’s stock was heading to a record HIGH … and says the problems aren’t affecting the top line …
… investors apparently chose to believe him, … and not heed the clues in the news that clearly showed Facebook was headed for stormy seas.
Now, investors are suing Facebook and Zuckerberg for misleading them.
But investors should also look at the big picture, and consider the motives of these who claim as is well.
Remember this classic assurance from the world’s foremost banker?
“Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market.”
– Federal Reserve Chairman Ben Bernanke on May 17, 2007
Just a year later the financial system all but imploded. But the danger signs were there …
Peter Schiff and Robert Kiyosaki were warning people. Most didn’t listen.
We didn’t. But you can be SURE we listen today.
Lesson 3: Momentum is a condiment … not a meal
With real estate, sustainable profit is all about the income.
Sure, it’s great when things get hot and people want to pay MORE for the SAME income. But at some point, the numbers don’t make sense.
You can bad fundamentals and invest primarily because “it’s going up.” But when momentum fades, prices snap back to fundamentals.
If you’re on the wrong end of it, it’s painful.
Of course, if you see it coming, you can cash out via refinance or sale, and store up some dry powder for the soon-to-be-coming sale.
Lesson 4: Trends and indexes are interesting, but the deal’s what’s real
We have a big, diverse audience … so we talk about big picture stuff. It’s important to see the big picture.
After all, every asset you own is floating in a big sloshing economic sea.
If you’re not aware of weather patterns and watching the horizon, you might not see storm clouds and rough waters forming.
But investors make money in EVERY kind of economic environment, so it’s not the conditions which dictate YOUR success or failure.
It’s your attention to being sure each individual deal YOU do makes sense.
That means the right market, product type, neighborhood, financing structure, and management team.
Keep the deal real … and have plans for what you’d do in a variety of economic situations …
… so when conditions change you’re not caught unaware and unprepared.
“The time to repair the roof is when the sun is shining.”
– John F. Kennedy
Lesson 5: Train wrecks in stocks can be tee-up for real estate
This is our favorite.
It’s not that we take joy when the stock market reveals its true character … but we know it’s a wake-up-and-smell-the-coffee moment for many Main Street investors.
As our friends Chris Martenson and Adam Taggart recently pointed out …
… if you take the FAANG stocks out of the stock indexes, the highly-touted stock index returns would have been NEGATIVE.
It’s hard to diversify when you you’re exposed to the hot stocks everyone’s piled into … directly or indirectly.
So as Main Street investors come to suspect the disproportionate influence just a few arguably overbought stocks have on their TOTAL net worth and retirement dreams …
… history says people’s hearts turn home to an investment type they instinctively understand and trust. Real estate.
So for those raising money from private investors to go do more and bigger real estate deals, a stock market scare can make it easier for your prospects to appreciate what you’re offering them.
Lesson 6: Do the math and the math will tell you what to do
Very few paper asset investors we’ve ever met actually do the math.
They either buy index funds based on trends and history, and don’t realize most are exposed to the same small group of hot stock everyone owns …
… or they buy stocks based on a hot tip, a gut feeling, or a recommendation from someone they think is smarter than they are.
But real estate math is SO simple to understand and explain.
And when you can quickly show a Main Street paper investor how a 15-20% annualized long-term return on investment real estate is quite realistic … with very moderate risk …
… real estate is the CLEAR winner.
Even a modest 3% per year price appreciation on 20% down payment (5:1 leverage) is 15% average annual growth rate.
Add to that another 2% or so a year in amortization … paying down the loan using the rental income … you’re up to about 17% annualized equity growth.
Toss in another modest 3-5% cash-on-cash and some tax benefits and you’re pushing 20% annualized total return pretty fast.
And that’s just bread-and-butter buy-and-hold rental property.
There are all kinds of specialty niches and value-add plays which allow active investors to goose returns …
… or for a syndicator to put a lot of meat on the bone for their passive investors … and still take a piece for doing the work.
Lesson 7: Monitor your portfolio for weak links and over-exposure
Lots of paper investors who didn’t even know they were exposed to Facebook are finding out the hard way …
… just like when we didn’t realize our whole investing and business model depended on healthy credit markets.
So be aware …
When you’re overly exposed to a critical factor like interest rates, credit markets, a tax law, a specific industry or employer, or even a currency or financial system …
… you run the risk that a single unexpected event can take a BIG bite out of your assets.
And while you might not be able to fix everything right away, the sooner you’re aware of the risks, the sooner you can start preparing to mitigate them.
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 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.
Is this the end of easy money …
We’re just back from another incredible Investor Summit at Sea™ … and it was EPIC!
With 234 people, 2018 was our biggest ever … and many have already reserved their place for next year. Click here to get YOUR name on the Advance Notice List.
We kicked off the 2018 Summit with a two-day land conference based on our theme, The Future of Money and Wealth. Our speakers hit it out of the park!
Fortunately, we videotaped the whole thing. Watch for more details … or if you already know you want it, click here to pre-order the entire two-day series.
Meanwhile, it seems the world continued to spin while we were gone. So as much fun as it might be to keep cogitating on currency, bonds, gold, oil and interest rates …
… we decided to dig into our real estate news feed and see what’s happening with our favorite investment sector.
But a funny thing happened …
A couple of related headlines jumped out as particularly interesting after a week of contemplating the future of money and wealth.
First …
CRE Valuations Are Trending Down – NREI Online, April 6, 2018
For the uninitiated, CRE is short for Commercial Real Estate. And when the industry talks CRE, it includes large multi-family.
But even if you’re a Mom & Pop single-family home investor, you can still learn a lot from following CRE trends.
So this first article opens with …
“… real estate investors can expect that property prices will trend downward in the near future …”
“‘Value appreciation has practically stopped …”’
“However, there are variations among sectors. Industrial … has seen rising values … malls have seen big losses …”
“Cap rates have been inching up … for all sectors except industrial …”
After two days at Future of Money and Wealth, then another seven days at the Investor Summit at Sea™, these comments make a whole lot more sense to us.
First, interest rates are rising. But the impact on real estate is much deeper than just mortgages getting more expensive. If only it were that simple.
So without getting lost in the weeds, consider the impact of rising rates on the overall economy …
With record levels of consumer, corporate, and government debt … rising rates put a pinch on budgets at every level.
This means it’s harder for consumers to spend more, for businesses to sell more, and for landlords to raise rents on those consumers and businesses.
And when you realize income property values are driven by income, it’s easy to understand why stagnant rent growth means stagnant equity growth.
But this article also reminds us why we LOVE real estate … “there are variations among sectors” … so while retail (malls) are losing value, industrial is gaining.
We discussed this trend in our February 14 newsletter, so we won’t revisit it here. The point is …. when things shift, pain and profit are NOT equally distributed throughout the economy.
So if you’re alert and proactive, you can get in front of an opportunity … or out of the way of a problem … faster than investors on cruise control.
Meanwhile, while rising cap rates can come from income rising faster than prices, most of the time it’s from prices falling.
(Again … no investor left behind … cap rate is income divided by price. Just grab a calculator and play with numbers until you understand. It’s an essential investor skill.)
So why might cap rates be “inching up” … that is, why would buyers be offering less for the income?
Conversely, why would sellers be offering more income for less price?
(That’s two different ways of saying the same thing … go back and play with the numbers until you get it.)
One likely reason is investors aren’t willing to overpay today (bid up) expecting income to grow in the future. The numbers need to make sense TODAY.
So cap rates are like a barometer of sentiment. Rising cap rates are an indicator of a less bullish, more bearish outlook.
If rents rise (creating more income) and/or interest rates decline (reducing expenses), then cash flows improve.
If the rents don’t rise (stagnant income) and/or interest rates climb (expenses increase), then cash flows stagnate or decrease.
So investors are saying the think either rents won’t rise, or interest rates won’t decrease (or even increase), or both. That is, they don’t expect market forces to improve cash flows going forward.
Make sense?
Which leads to the next headline …
Competition Intensifies for Value-Add Assets, NREI Online, April 17, 2018
“… competition is becoming increasingly stiff as the industry faces the likely end of the cycle and rent growth has moderated for core assets.”
“As yields get lower and lower … two strategies have emerged … speculative building and value-add …”
Quoting a research director at a commercial research firm …
“‘Value-add has become quite attractive … people are less afraid to take on vacancy risk and reposition buildings.’”
So let’s break this down real quick, then you can go get a snack …
When you hear “the likely end of the cycle”, it’s code for “the party’s nearly over.”
Real estate, like the rest of the economy, has been partying on easy money since 2009.
At Future of Money and Wealth, Fannie Mae chief economist Doug Duncan reminded us we’ve been in one of the longest (and weakest) recoveries in modern history.
In other words, we’re nearing “the likely end of the cycle.” Duncan thinks the U.S. will be in full-fledged recession in 18-24 months.
So now instead of just buying a property and riding a wave, you actually have to buy smart and do some real work to improve the income … like “take on vacancy risk and reposition buildings.”
And if you’re like our pal, the apartment king Brad Sumrok, and you’ve already been doing value-add and achieving spectacular results … be prepared to settle for “only” solid results.
Here’s the bottom line …
Rising interest rates are moderating the economy, so it’s important to focus your growth plans on things you have more control over.
This is probably not the environment to bet big on rising rents, falling rates, and lots of passive equity growth. You’ll need to buy smart, have a good plan, and work hard. We call it “force the equity.”
Pick your sectors, markets, properties, and financing structures for the long haul.
And remember … real estate is a highly inefficient investment vehicle with lots of nooks and crannies for good deals to hide.
So when you’re well-connected, diligently searching, and properly prepared with a solid team and resources so you can act quickly and carefully, you improve your odds of landing profitable opportunities.
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 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.
Dollar death watch emergency conference call …
We just recorded an emergency conference call …
… featuring Peak Prosperity’s Chris Martenson (The Crash Course) and Brien Lundin (Gold Newsletter).
Chris is a big brain PhD who studies economics, eco-politics, and how energy (i.e., oil) affects economics.
Brien is a well-recognized expert in precious metals and mining investing … and spends much of his time studying the gold market.
Both guys are hyper-connected to the smartest economists, investors, and niche experts in the world. So they’re not just smart, they’re also well-informed.
The conference call centers around China’s recent announcement of plans to back their currency with gold for the purpose of settling oil trade.
This single move could substantially affect oil, gold, the dollar, interest rates, real estate … Uncle Sam’s credit line, budget and influence around the world … and YOUR financial future.
It’s a BIG deal.
China has been advancing … quietly at first, and lately much more overtly … a strategy to UNDERMINE the U.S. dollar as the world’s reserve currency.
This is HUGE for anyone measuring wealth and income in U.S. dollars.
It’s even more significant for Americans, whose government has been able to use its privileged status to go DEEPLY into debt … seemingly without consequence.
But that could be changing …
Uncle Sam’s unlimited checkbook … as well as his substantial influence around the world … has been largely built on the power of issuing the world’s reserve currency.
That’s because international trade is primarily settled in U.S. dollars, so getting locked out of dollars though U.S. sanctions can choke a nation’s economy …
… just ask Russia, Iran and Venezuela … to name a few who’ve been on the receiving end of this power.
Oil is the biggest component of international trade.
It’s no wonder Russia, who happens to be the world’s largest oil producer, was early to sign on to circumvent the dollar.
Iran (#5 producer) is on the team. Venezuela (#11 producer), whose economy is 95% oil, also just got on board.
Now the U.S. is talking about kicking CHINA out of the dollar system.
But China’s been preparing to be independent of the dollar …
… and has a LONG list of bilateral trade agreements signed with MANY trading partners (as chronicled in this free report on Real Asset Investing).
As the largest oil importer in the world, China has a lot of purchasing power to put pressure on the “petro-dollar” (U.S. dollars used in international trading of oil), as Chris explains in the call.
The petro-dollar has been a major component of the dollar’s power in international trade. China’s move could be setting the table for a collapse of the petro-dollar.
This isn’t the end of the world …
But it could be a BIG change for dollar denominated investors …
Those who are aware and prepared can protect themselves and get in a position to win. Those who aren’t will likely be blind-sided and face potentially horrific losses.
We’ve been watching this develop for years … and now it seems things are picking up speed.
If YOU haven’t been paying attention, it’s time to accelerate YOUR learning and preparation.
Maybe this isn’t as big a deal as we think. But better to prepared and not have a dollar crisis … than to have one and not be prepared.
The GREAT news is there are lots of smart investors watching this situation very carefully … and there are strategies to hedge … and even profit … from these developments.
So click here now to listen in on the conversation with Chris Martenson and Brien Lundin … as we discuss China, oil, gold, the future of the dollar … and how concerned investors can prepare.
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 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.
Yet another BRUTAL storm forming …
And the hits just keep on coming …
We know you’d like investing to be simple and drama free. We do too.
But while real estate investing itself is a simple activity … the economics of real estate investing has become more complex.
There’s a LOT going on in the world. Some things interconnect by cause, and others by effect … meaning they don’t appear to be related, but then converge.
As Jim Rickards points out repeatedly … economies and ecologies are complex systems. They are difficult to understand and even more difficult to predict.
But even though no one can say with certainty what will happen, it’s still important to take precautions when it’s clear SOMETHING BIG is coming …
… just as Floridians watched Irma and prepared, not knowing fully what to expect. Better to be prepared and not have a disaster than vice versa.
So let’s take a look at what’s forming on the horizon …
Hurricanes Harvey and Irma
While the total financial and human impact of these back-to-back disasters is yet to be calculated, one thing’s for sure … it’s going to be expensive.
Short term disruptions to gas prices and orange futures aside, disasters like these redirect HUGE amounts of capital … which has a ripple effect.
For example, money insurance companies might otherwise put into financing NEW multi-family apartments in other markets …
… will now pour into re-building properties damaged and destroyed in Houston and Florida.
Federal money which might have been focused on infrastructure spending or tax cuts will also be redirected to damage recovery.
And it’s likely the demand for construction labor and supplies will rise, driving up total construction costs in many markets … not just those affected by the storms.
That’s because just as demand for concrete in China creates price increases in the U.S. … the demand for reconstruction resources will probably be felt throughout the United States.
Distressed inventory
Just like the financial disaster of 2008, there may be many problem properties coming out of all this … because many weren’t insured for flood damage.
Federal aid may help some of those homeowners. It’s less likely such relief is offered to investors who were under-insured.
While it’s no fun to profit from someone else’s loss, there’s a role for profit-seeking capital to play in repairing damaged communities.
We wouldn’t be surprised to see tax breaks, loan subsidies or other incentives offered to entice investment capital to flow into affected markets … like when New Orleans was hit by Hurricane Katrina.
The Debt Ceiling
In other news, President Trump and Congress managed to get the debt ceiling temporarily increased … while raising the prospect of simply eliminating it all together.
Talk about calling a spade a spade. The ceiling hasn’t capped spending … ever.
Now billions of dollars are ear-marked for hurricane relief, and everyone can take a short break from “worrying” Uncle Sam might default on his debt.
So it looks like it’s back to over-spending as usual. Not surprisingly, the dollar’s year-long fall has resumed velocity.
Then again … maybe the dollar’s fall (and gold’s rise) is part of a bigger story which has nothing to do with U.S. business-as-usual deficit spending …
Gold-backed yuan already finding friends
As we recently noted, China announced plans to settle its oil trade in yuan.
And to entice sellers to accept yuan, the Chinese are backing it with that “barbarous relic” … gold.
Days later, oil-rich Venezuela announced they’d start using yuan … and other currencies … to “free us from the dollar.”
It’s no surprise Venezuela would jump at this. After all, just two weeks earlier President Trump signed an executive order sanctioning Venezuela … whose economy is 95% oil.
But as we note in our Real Asset Investing report, China began its plan to supplant the dollar way back in 2010. So none of this is new.
And the first country to sign a bilateral trade agreement to “renounce the U.S. dollar” was … wait for it … Russia … followed by Brazil, Australia, and a LONG list of others.
We think this is a HUGE story that few in mainstream financial media are covering. But we are.
In fact, we’re putting together an emergency conference call with Brien Lundin and Chris Martenson to discuss the ramifications … so stay tuned for that!
Is the U.S. dollar doomed?
This is the big WHY IT MATTERS … especially for Americans and everyone denominating wealth in American dollars.
Like Hurricane Irma, no one can say exactly if, when, or how disaster will strike. And it’s possible the winds will change and the storm will miss your portfolio.
But what if it doesn’t? Right now, the winds appear to be headed your way.
Are YOU ready? Are you getting ready? Many people don’t even know what ready looks like. That was us 10 years ago.
It’s a complex problem so there’s no simple solution. If there was, it probably wouldn’t be a problem.
Peter Schiff has been warning about this for years. As has Robert Kiyosaki, Richard Duncan, Simon Black, Chris Martenson, Jim Rickards, David Stockman … and the list goes on and on.
Each has their own ideas about when … and how to prepare.
There’s no one-size-fits all answer because everyone’s situation, portfolio, investing IQ, advisory network, access to deals, and investment objectives are different.
MISSION: POSSIBLE
Your mission, should you choose to accept it, is to get informed, educated, connected and activated … as quickly as possible.
And if you think getting educated is time consuming and expensive … it’s nothing compared to being ignorant and apathetic.
When storm clouds form on the horizon, some decide to pay attention and take pre-emptive steps. There’s no guarantee of safety, but their odds are better.
Others only hope for the best, but don’t prepare for the worst. Yet the higher the stakes, the more important it is to be preemptively cautious.
The storm warnings are loud and clear … for everyone paying attention.
But storms often approach slowly … and because most blow over … it’s easy (yet dangerous) to assume every storm will.
Slowly at first … then all at once
Longtime listeners know we’ve been watching this whole story unfold for years.
We talked about the very real possibility of China making a run at reserve currency status almost two years ago. We said then we’d keep you informed and so we are.
Now things are picking up speed. So if you’re new or haven’t been all that interested … NOW is the time to accelerate your understanding.
If you’ve read this far, we trust you’re interested and concerned … as you should be.
So we STRONGLY encourage you to SERIOUSLY consider attending BOTH Brien Lundin’s New Orleans Investment Conference (coming up FAST!) and The Real Estate Guys™ 2018 Investor Summit at Sea™.
These events each feature lots of big brains … with critical perspectives every serious investor needs to have to help understand and navigate these stormy times.
Sure, these events are capitalist ventures … we each make some money producing them.
But we’re not after your money … we simply use to it for event costs and to pay some bills along the way. Your support makes these events possible.
We organize events so we can get brilliant minds in one place at one time. And the only way to make it affordable for us … and you … is to share the cost with hundreds of others.
So yes, we need your help. And in exchange YOU get access too!
With that said, these events are happening with or without you. Your absence or presence, while nice for us, could be LIFE-CHANGING for YOU … and that’s true of most important ideas, opportunities and relationships.
So with the winds of sea change blowing fiercely on the horizon, it’s a good time to consider carefully whether or not investing in preparation is a good idea.
We think it is.
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 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.
China, gold, oil, the dollar and YOU …
There’s a BIG story developing … something we’ve been tracking for years …
… which might be about to create a SEA CHANGE for investors all over the world … including YOU.
Here’s a headline you SHOULD be aware of but might have missed …
China sees new world order with oil benchmark backed by gold – Nikkei Asian Review, September 1, 2017
There’s SO much to say here, it’s hard to know where to start.
We’ll hit some highlights … and refer you back to some of our previous coverage of this VERY important topic.
First, let’s quickly consider …
WHY this matters to real estate investors …
If you denominate your net worth, assets, debt, or income in U.S. dollars, then you should care VERY MUCH about the future and health of the dollar.
Ditto if you utilize debt or care about the impact of interest rates (and you should) … on your mortgages, the stock and bond markets, as well as the overall economy.
And if you’re an American or invest solely in the U.S., the health of the U.S. dollar and economy should be of even GREATER interest to you.
So yes, what China is doing with gold and oil matters a LOT to real estate investors … especially in the United States.
What’s the big deal?
First, this recent move by China is the latest in a long series of moves they’ve been making to undermine the role of the U.S. dollar as the world’s reserve currency.
This is something we’ve been tracking since 2009, when we first read about China’s concerns about U.S. debt and interest rate policy.
We continued to track China’s actions and made this the focus of our remarks in our 2013 presentation at the New Orleans Investment Conference.
Shortly thereafter, we expanded on the situation in our special report on Real Asset Investing.
We’ve also talked about it on our radio show and in our blog.
So if you’re new to this whole subject, we recommend you go back and review those reports, broadcasts and blogs.
For now, just understand China has been overtly, aggressively and systematically working to undermine the U.S. dollar’s uniquely powerful role in global finance.
This latest move is a HUGE next step in unseating the dollar’s dominance.
The rise and (potential) fall of the U.S. dollar …
If you’re unfamiliar with U.S. dollar history, schedule some time to study it. It’s too big a topic to unpack here.
For now, we’ll simply point out that the U.S. dollar was originally backed by gold from its inception and when it ascended into its role as the world’s reserve currency at Bretton Woods in 1944.
The gold backing was broken in August 1971 when then-U.S. president Richard Nixon defaulted on Bretton Woods. Gold soared and the dollar crashed.
The U.S. quickly cut a deal with Saudi Arabia … where the Saudis would use their influence to force oil shipments to be settled in U.S. dollars.
This “petro-dollar” deal created a huge and persistent demand for dollars …
… and protecting the petro-dollar has been a focus of U.S. foreign and trade policy ever since.
To further bolster the dollar, then-Fed chair Paul Volcker jacked-up interest rates to over 20%, which had a profound impact on the U.S. economy … and real estate.
All this to say … gold, oil, the dollar, and interest rates all impact each other … and have been VERY important to maintaining U.S. dominance around the world.
So it’s no surprise other countries looking to increase their influence in the world are interested in all those things … and you probably should be as well.
Chinese currency to be backed by gold …
So let’s take a look at some of the notable statements in the news article …
“Yuan-denominated contact will let exporters circumvent US dollar”
“Yuan-denominated gold futures have been traded on the Shanghai Gold exchange as part of the country’s effort to reduce the pricing power of the U.S. dollar”
“China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold … could be a game-changer for the industry.”
“… will allow exporters such as Russia and Iran to circumvent U.S. sanctions …”
“… China says the yuan will be fully convertible into gold in exchanges in Shanghai and Honk Kong.”
Think about this …
When oil exporters … like Iran, Russia and Venezuela… can circumvent the U.S. dollar in oil trade … and get GOLD instead of U.S. paper which can be printed out of thin air …
…which do YOU think they’ll choose?
And how influential will U.S. sanctions be (i.e., getting locked out of the U.S. dollar and banking system) when countries can do business without the dollar?
How important will GOLD become as more and more international trade settles in gold-backed yuan instead of nothing-backed dollars?
How unimportant will dollars become? Where will the bid move?
Is THIS why gold has been moving up lately? Is this why the dollar has been falling?
Why did U.S. Treasury Secretary Mnuchin pay “a rare official visit” to Fort Knox and subsequently tweet, “Glad gold is safe!”? All of the sudden gold is interesting to the Treasury?
Meanwhile, Germany recently completed a repatriation of a big chunk of their gold … ahead of schedule. Maybe the rush is to pacify voters in the upcoming election … or maybe there’s another reason?
Of course, way back when China began publicly expressing concerns about the U.S. dollar … and taking steps to mitigate its own exposure to dollar denominated assets …
… several countries joined Germany in taking steps to repatriate their gold from foreign hands. That feels a lot like a “run” on the bank … and it began long before any of the current elections.
Besides, if gold is really just a barbarous relic with no role in modern finance as some claim … then why all the fuss?
As you can see, this all raises a LOT of questions.
What’s an investor to do?
First, simply understand the fate of the dollar has a PROFOUND impact on anyone who earns, saves, invests or borrows in dollars.
If that’s you, then this is an IMPORTANT topic for YOU to pay attention to.
Next, be encouraged there are investment strategies which you can use to mitigate risk and generate profits … even in the face of a falling dollar.
We discuss some of these in our special report on Real Asset Investing.
Get and stay connected and informed. That’s why we attend the New Orleans Investment Conference and produce the Investor Summit at Sea.
Right now, it’s more important than EVER to attend events like these.
It’s where you hear from thought leaders, focus deeply on important topics, get into great conversations with like-minded people and subject matter experts …
… and form valuable relationships with people who can help you implement useful strategies.
The WORST thing you can do is ignore it all and hope nothing’s going to change. The world is changing whether you know it, like it, or understand it.
How you choose to respond will determine how it changes for you.
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 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.
Real estate still makes sense in uncertain times …
The world is full of alarming headlines which should concern any alert investor:
Pension Crisis Too Big for Markets to Ignore
The Federal Reserve Could Reduce Its Monstrous Balance Sheet Soon – That Should Terrify Everyone
The retail apocalypse has officially descended on America
We could have pulled up more, but you get the idea. Scary stuff.
Of course, we’re still on a high after our recent Summit at Sea™ with Robert Kiyosaki, Peter Schiff, G. Edward Griffin, Simon Black, Chris Martenson, and many other really smart people.
If you’re familiar with any of these guys, you may wonder why we’re still excited. After all, these guys are notorious for decrying the many problems facing the global economy.
But their concerns are only half the story.
There’s also lots of opportunities available … many of which are unique to real estate
So while it may be bad timing to buy an over-priced property hoping to flip it to the greater fool for fast cash, high-priced properties create opportunities too.
If you’re the proud owner of a highly-appreciated property, you have the gift of equity.
Your equity can be repositioned from an over-priced market to a growth market through a cash-out refinance or 1031 tax-deferred exchange.
Consider this headline from the LA Times …
Leaving coastal California is a ‘no-brainer’ for some as housing costs rise
The article highlights a couple who are leaving Huntington Beach for Phoenix.
There’s a lot of that going on right now. People and businesses move around in order to survive and thrive.
The key is to get on the right side of the flow.
Of course, not everyone leaving high-priced areas will want or be able to buy. And until they do, we’d love them to rent … from us!
So record-low home ownership rates might reflect weakness in the overall economy, but they actually create demand and opportunity for landlords in affordable markets.
There’s ALWAYS an opportunity.
Now this isn’t to say that all real estate anywhere is a good deal. Or that maximum leverage on every property is the ideal portfolio structure.
But don’t let the doom and gloom of mainstream news dissuade you from developing your real estate investing opportunities.
Real estate is not a fad. As long as individuals are permitted to own properties, those who do will be wealthier than those who don’t.
Real estate is real. It’s considered by the world’s wealthy to be a safe haven asset.
So when bombs are dropping, financial markets are volatile, geopolitical tensions are high … capital seeks shelter in the dollar, Treasuries, gold and real estate.
But consider that the dollar is under attack by two very formidable forces … China and Russia. If they succeed, it could cause problems for the dollar.
Besides, the dollar is only a temporary hiding place for frightened capital.
What about U.S. Treasuries?
Debt denominated in the world’s reserve currency, and backed by the world’s biggest economy and military, tends to attract flight capital. It’s safer than other debt.
But the U.S. is also the world’s largest debtor … with no apparent plan to stem the hemorrhaging of red ink.
And if anyone eventually creates a strong alternative to the dollar for global trade, especially in oil, then Treasuries could be in real trouble.
A weaker dollar means debt holders will want higher interest rates to compensate for the lost purchasing power.
Hopefully, that makes sense. If not, think of it this way …
There was a time when you could buy 100 pieces of bubble gum for one dollar. A penny a piece.
If you loaned someone a dollar, it’s worth 100 pieces of gum. But if the dollar loses purchasing power, it might only buy 50 pieces of gum … now two cents each.
If you thought that might happen, you’d need the borrower to pay you back two dollars just to be EVEN. And you’d probably want a little more for your risk.
That extra dollar is “interest.” And when the currency is losing purchasing power, you need MORE interest to compensate.
Make sense?
The problem is if interest rates rise, bond values drop. In the interest of time, we won’t explain this now, but grab a calculator and play with numbers until you get it.
So rising interest rates mean a loss of principal for capital placed in bonds.
This makes bonds a scary place to park long-term capital for wealth preservation.
And with next to no yield, safety of principal is really the primary purpose of parking cash in bonds. No wonder foreigners have been dumping Treasuries.
How about gold?
We like gold. It’s shiny. There’s no counter-party risk. It’s easily convertible into any currency. It’s been used as money for thousands of years. It’s survived the rise and fall of empires, currencies and cultures.
BUT … gold pays no yield. It just sits there like a stack of cash. And tax law can make it difficult to move in and out of.
Which brings us (finally) to real estate …
We’re admittedly homers for real estate. After all, we’re The Real EstateGuys™.
Still, we think there’s a LOT to like about real estate in uncertain times … like right now.
First, real estate is a tangible, physical asset. Stock in a company that goes out of business isn’t worth the paper the shares are printed on.
Real estate doesn’t have counter-party risk. If you park cash in real estate, no one else needs to do anything for the property to have value. Your asset isn’t someone else’s liability … like an insurance contract, a bank deposit, or a bond.
Of course, if the tenant pays rent, the property becomes MORE valuable.
But what if the tenant doesn’t pay?
With real estate, you can evict a non-paying tenant and replace them with one who does. Try to do that with a bond.
If a bond issuer owes you money and fails to pay, you can’t just replace them with someone who will.
The debt just goes bad … and you lose.
We could go on. But you get the idea.
Real estate was valuable a thousand years ago, and it’s probably going to be even more valuable a thousand years from now … especially as more people compete over less land.
So the question isn’t really about real estate. It’s about how much YOU will own.
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 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.
Fed or Foe? Two Valid Views on the Federal Reserve
What is the Fed? Friend or foe? Love it or hate it, the Federal Reserve of the United States is arguably the most powerful financial force on earth.
Fed policies affect interest rates, prices and credit…not just in the United States, but around the world. Ben Bernanke and Ron Paul have two very different answers to the question, “what is the Fed?”.
Former Fed chair Ben Bernanke has been touring the country promoting his memoir The Courage to Act. Co-host Russell Gray stopped by a San Francisco Commonwealth Club meeting where Bernanke was speaking…just to hear what Big Ben had to say for himself.
Meanwhile, host Robert Helms sat in on a Simon Black Sovereign Man conference featuring long-time Fed critic, ex-congressman and multi-time Presidential candidate Ron Paul.
Then we sat down with the microphones and chatted about what we heard and how it relates to real estate investors.
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.
In the studio to reflect on the very valid, but polar opposite views of Ben Bernanke and Ron Paul on the Federal Reserve…
- Your very valid host, Robert Helms
- His in-need-of-validation co-host, Russell Gray
Long time listeners know we aren’t raving fans of the Federal Reserve system. So we confess that right up front. We’re a bit biased when it comes to answering the question, “what is the Fed”?
With that said, we’re huge believers in “getting a 360” when it comes to studying any topic…and especially one as important as the Fed. In fact, in our Recommended Reading bookstore, we feature several books on what is the Fed.
Some, like G. Edward Griffin’s iconic Creature from Jekyll Island, view the Fed as a nefarious creation of elite collectivists intent on world domination. Scary stuff, if true.
Others, like David Wessel’s In Fed We Trust, heap kudos on the Fed…and Ben Bernanke in particular…for saving the global financial system with bold action in 2008.
Obviously Mr. Bernanke concurs…as he named his memoirs, The Courage to Act.
What is the Fed?
That’s a loaded question in itself. The standing joke is that the Federal Reserve Bank is not federal (i.e., it’s not a governmental agency, but rather a private company), is not a bank, and it has no reserves.
But for sake of this discussion, suffice it to say that the Federal Reserve Bank is the United States’ central bank.
The Fed issues the currency (those green pieces of paper with pictures of famous dead politicians on them)…called Federal Reserve Notes (FRNs). You probably refer to them as “dollars”, but that’s technically incorrect.
Of course, that opens up a HUGE can of worms about the difference between currency (FRNs) and money (dollars – which used to be specific amount of silver and gold). But we won’t go there….at least not today.
So as you can see, right out of the gate … “what is the Fed?” is complicated topic. But it’s one worth studying when you consider what Henry Ford (the guy who created the Ford Motor Company) said…
“It is perhaps well enough that the people of the nation do not know or understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.” – Henry Ford
Why would he say that?
Well, since Mr. Ford is no longer with us, we can only speculate. But the gist of the comment is plainly understood.
Obviously, he felt the citizens would not be happy if they knew how money and banking worked.
And that’s exactly what Ron Paul thinks.
Ron Paul has been an outspoken critic of the Federal Reserve for the four decades he served in Congress.
He wants the Fed audited. He wants the Fed more transparent. He wants the Fed accountable.
Ron Paul wants the Fed ABOLISHED.
Yet other people are convinced the Fed is an essential part of the U.S. financial system.
The Fed is the Bank to the Banks
If you’ve ever seen the movies It’s a Wonderful Life or Mary Poppins, you’ve seen a run on the bank.
This is when depositors come wanting their money back, but the bank doesn’t have it.
That’s because the banking system business model is fundamentally flawed. A bank borrows short by paying you interest…at least they used to…on your demand deposits. The means you can pull the money out any time you want…as in “short” notice. They, they lend long…like a 5 year car loan or a 30 year mortgage.
So the amount of actual cash on hand is very low compared to potential demands on cash (withdrawals). The number is something less than 5%.
No wonder they run out of money!
The idea of a Central Bank (like the Fed), is to give the banks somewhere to go when they run out of money. It’s like a payday loan for banks.
So when a bank doesn’t have enough money to satisfy customer withdrawals, they can go to the Fed and borrow. Later, when they get some money in from new deposits or loan payments, they can pay it back.
Obviously, we’re WAY over-simplifying this. But that’s the basic model.
The Fed Creates the Currency Out of Thin Air
So where does the Fed get the money to lend?
It prints it.
Bet you wish YOU could do that. But you can’t. So don’t try. It won’t end well.
When Panic Strikes…
When the 2008 Financial Crisis struck, financial markets froze up. It’s a long convoluted story, and if you’re super interested, then you’re a sickie like Russ, and you’ll enjoy plowing through ALL of the books in the Banking and Economics section of the bookstore.
The short of it is that major banks, insurance companies and investment houses all ran out of money…at the same time.
How could that happen?
Leverage.
Wall Street created trillions of dollars of faux financial assets called “derivatives”. Basically it’s debt secured by debt secured by debt secured by debt. Get it?
Even though there were BILLIONS of dollars in the financial system, they were holding up MANY TRILLIONS of dollars of debt.
And when the sub-crime…oops…sub-prime…crisis hit, some of that debt went bad.
Normally, that’s not a big deal. Which is probably why Ben Bernanke assured the world the sub-prime contagion wouldn’t spread.
Famous last words.
In fact, it spread like wild fire.
That’s because when the sub-prime debt went bad, it set off a daisy chain reaction of ALL the derivatives (debt secured by debt secured by debt secured by debt…secured by sub-prime mortgages).
And each layer had a margin call. So when the sub-prime loan went bad, the value dropped relative the derivatives backed by it, so the bank that pledged it as collateral got a margin call.
That means they need to put up cash. Except they didn’t have enough.
So they tried to sell some of the derivatives they had to raise cash. But no one wanted to buy them. Seems the word on the Street was the paper (debt) was bad.
Now, in a “no bid” environment, prices were in free fall. Margin calls were everywhere. More and more derivatives were hitting the market with no bid…leading to more margin calls, defaults and widespread panic.
Ben Bernanke to the Rescue
It’s a big long story…but the short of it is this: Ben Bernanke printed over $4 trillion dollars and started buying up all the bad debt.
The Fed put a “bid” under the market to stop the margin calls.
Then they made huge emergency loans to private businesses. Like the $80 billion loan that saved AIG Insurance.
They allowed Goldman Sachs and other investment banks they liked (then Secretary of the Treasury Henry Paulson was the former CEO of Goldman Sachs) to become deposit banks so the FDIC fund could be raided…oops…used to save them.
Lehman Brothers wasn’t smart enough to get their CEO into Treasury, so Lehman went bust.
So Ben Bernanke had the courage to act. And according to people like David Wessel, Richard Duncan and Bernanke himself…Ben’s bold action saved the financial system.
Good job.
Who Broke the Financial System?
Ron Paul, Peter Schiff and other critics of the Federal Reserve System claim that the entire problem was originally caused by Federal Reserve activity in the years and decades leading up to the financial crisis.
You can (and should) read more about that in Peter Schiff’s books, Crash Proof 2.0 and The Real Crash.
Who Cares?
Hopefully, when it comes to understanding, “what is the Fed”, YOU do. After all, the Fed’s decisions impact every aspect of the economy including interest rates, employment, wages, cost of materials, availability of credit and more. All those things directly affect you, your tenants, the value of your savings, and the price of your properties.
But we make distinction between politics and investing.
We have an opinion about how things SHOULD be. Sadly for us, things aren’t that way. You may have your own opinion and you may agree or disagree with us.
That’s okay. It’s what makes the world go around.
But when it comes to investing, whether we like the Fed or not, and whether or not we agree with the Fed, politicians or each other…what matters is making sure we understand what is the Fed and what’s happening so we can try to anticipate likely outcomes and position our portfolios to roll with the flow.
Will there be inflation or deflation? Will interest rates rise or fall? Will employment improve or weaken? And on and on and on…
The Elephant in the Room
So just like being locked in a room with a huge elephant which could EASILY CRUSH YOU…
So, what is the Fed? It doesn’t matter if you think the Fed is evil and is trying to destroy you…or if the Fed is just a big, lumbering oaf…
If you’re on the wrong end of it, you get CRUSHED.
So pay attention to the Fed. Try to see if from all angles. And when it moves, make your adjustments to make sure you’re safely positioned.
Listen Now:
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.
Presidential debates IGNORED this important issue…
Last night seventeen GOP presidential hopefuls showed up for two different debates to discuss “the most important issues” facing the American people.
Among them were Donald Trump, Jeb Bush, Carly Fiorina, Rand Paul, Scott Walker, Ben Carson, Marco Rubio, Ted Cruz and a whole gaggle of candidates who hope to face off against the presumptive Democratic nominee, Hillary Clinton.
But despite all the hooplah, including 6 million Facebook visits and 40,000 questions from John Q. Public…
The MOST important issue was completely IGNORED.
The Fed and money.
Okay, these are really two issues. But together, they affect EVERY person and business on the planet.
Thank about it.
Most of your time and efforts are invested in earning, spending, managing, investing…and worrying about…money. Right?
And the cost of money…interest rates…have a HUGE affect on the price of EVERY financial asset there is…everywhere.
The Fed has been AGGRESSIVELY intervening in financial markets for decades…with “mixed” results (to be kind).
And there was NO MENTION of it.
Keep in mind that since the Fed arrived on the scene in 1913, money has devolved to nothing but debt.
How can you have a conversation about the “debt problem” without talking about the Fed and money?
Of course, unless you’re a geeky student of economics and history, with a dash of conspiracy theorist, you might not understand the problem.
And with only one-minute answers, it would seem impossible for a mainstream debate to address them.
But it’s really quite simple.
Our “money”, which is really only currency, (click here to understand the difference) is BORROWED into existence.
And it comes with an interest expense, albeit very small right now.
When you understand this simple concept, you know why it is IMPOSSIBLE to pay off debt. Because doing so would extinguish all the money.
Think of it this way…
Let’s say we’re at the very beginning of the economy and there is no currency. Just like starting a board game.
To get things started, the issuer of currency (the Bank) prints a bunch of pieces of paper and LOANS them to the players.
And to keep the math simple, let’s say the interest rate is 10 percent per round of play.
Suppose the game begins with a total of $1,000 being handed out to all the players. It doesn’t matter how many players, or who gets what. All we need to know is the Bank loaned out $1,000.
Play begins. Players buy and sell. They even create new products. All kinds of commerce occurs over the course of the game.
Now, at the end of Round 1, it’s time to settle up.
Some players accumulated more currency. Others have less than they started with. But because there was only $1,000 distributed, that’s ALL there is at the end of the round.
Now it’s time to pay the banker back ALL the principal PLUS the 10% interest.
It doesn’t matter how much each individual player owes because we’re simply looking at the aggregate of ALL players.
So there’s $1,000 of principal owed… PLUS $100 of interest… for a total of $1,100 owed.
Everyone tries to pay off their debt, but with only $1,000 in circulation, the society of players is $100 short.
And of course, even if they could pay off the debt, there would be no currency available to play Round 2 with.
So because they can’t pay off the debt with interest, and because they want to keep playing, the players collectively decide to borrow MORE.
So to start Round 2, the society of players borrows $2,100 from the Bank (who simply prints it).
This would be enough to pay back the original $1,000 plus $100 interest owed from Round 1…and still leaves $1,000 available to play Round 2.
Now the players’ collective total debt is $2,100 as they enter Round 2….up from $1,000 at the start of Round 1. And no matter what they do while playing the game, they end each round owing MORE than the total amount of currency held by all the players.
Do you see the problem?
When you borrow your currency into existence and owe interest, the ONLY way to keep playing the game is to ALWAYS increase the debt. To pay it off, ends the game.
This is why, for decades, no matter what party’s in place, no matter what anyone says, the debt NEVER shrinks. It only grows…because it MUST. Or the game ends.
Maybe the candidates don’t get it? Or maybe the Fox news moderators don’t. Maybe it’s the American people who don’t understand or don’t care…and the candidates and mainstream media just follow their lead?
We don’t know. If you think the candidates and media are controlled by sinister behind-the-scenes forces, then go ahead and put your tinfoil hat on. We’re right there with you.
It doesn’t matter.
But until we can change the system, we need to be skilled at playing the game the way it’s run today.
For us, it means using the abundant and affordable debt to accumulate real assets which produce real income that remains top of the priority list even in hard times.
It’s hard to imagine anything more real than real estate. Or any stream of income much higher on the priority ladder than keeping a roof over your head or food on the table.
The good news is that real estate is also one of the easiest and safest investments you can acquire using debt.
Just remember, the value isn’t in buying low and selling high. When you do that, all you end up with is a pile of currency.
Mainstream financial pundits focus on asset prices, which are often bubbles expanding and contracting. Buy low! Sell high! Generate commissions for Wall Street! Generate taxes for Uncle Sam! Rinse. Repeat.
They can’t play that game with real estate, so they don’t like it. And they focus on the price, which is smoke and mirrors…like most asset prices in a funny money economy.
The real value of real estate is in the income.
Income is what drives the equity. And it’s what frees the equity, so you can use debt to protect profits without realizing a taxable gain or relinquishing the property.
And when you pick the right properties and structure your financing properly, you can weather virtually all of the economic and political uncertainty.
So stay tuned to The Real Estate Guys™ radio show. We’ll continue to bring you ideas, information, perspectives and strategies to help you keep it real…in an unreal world.
AND…if you REALLY want to talk about money and the Federal Reserve…
Join us on our 2016 Investor Summit at Sea™! We’ve just confirmed that G. Edward Griffin, the author of The Creature from Jekyll Island – A Second Look at The Federal Reserve will be returning for his second appearance on the Summit. Click here to learn more.
Good investing!
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