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 …

 

  • How the U.S. dollar is under attack and what it means to Main Street investors

  • What are the best and worst investments based on what’s happening now … and where it’s headed

  • 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 >>

 

 

The future of growth …

Put on your thinking cap.  This one’s going to use some brainpower.  But if your investment plans involve money and the future, it’s probably worth the effort.

During our 2017 Investor Summit at Sea™, Chris Martenson warned that a financial system dependent on perpetual growth is unsustainable in a world of finite resources.

We’ll forego discussing “finite resources”, though there’s probably a lot of opportunity there.  The New Orleans Investment Conference is a great place to learn more.

For now, let’s consider “a financial system dependent on perpetual growth” … one of the most important, yet least understood, concepts about the eco-system we all operate in.

It’s simple, yet confusing.  Here it is in two sentences …

When dollars are borrowed into existence, the only way to service the debt is to issue more debt.  If the debt is paid off, the economy ends.

Imagine playing Monopoly and each player starts with $1,500.  With four players, the “economy” of the game is $6,000.  This “start” money comes from the banker.

New money is introduced two ways:

When a player passes Go and collects $200 from the banker … or when a player mortgages a property by borrowing from the banker.

Notice all the money to play comes from the banker.

So let’s MODIFY the game ever-so-slightly …

Let’s have the banker LOAN the start and payday money to each player at 10% interest per turn.

We still have four players starting with $1,500 each for an “economy” of $6,000.  But at the end of the first round, each player now owes the bank $150 of interest.

(We’ll forget about the additional payday loans … it just complicates the math and isn’t necessary to make the point)

But borrowing money into circulation creates three (hopefully) obvious problems …

First, there’s only $6,000 in circulation.  With total debt of $6,000 borrowed plus $600 of interest owed, it’s now IMPOSSIBLE to pay off the debt using only the money in the game so far.

And if the only way players get NEW money is borrowing, this creates a cycle of perpetually expanding debt.

Second, if each player paid ONLY the interest out of their $1,500 start money, after ten turns, they’ll have no money left at all.  But they still owe the original $1,500!

So you MUST GROW your asset base by more than the interest expense or you’re consumed by the debt.

Third, if all players try to free themselves from debt, they would take ALL the money in the game and give it to the banker, the game would end, and each player would still be in debt.

In this system, it’s physically impossible to extinguish the debt without extinguishing the economy and ending the game. 

Naturally, to keep the game going, the banker continually extends credit to the players.

It’s basically the way the global money system works and why people way smarter than us say it’s unsustainable.

It’s also like a Venus fly trap because any attempt to reduce overall systemic debt is deflationary, making existing debt even more burdensome.

Deflation means borrowers pay debt down with dollars worth more than those they originally borrowed.

Worse, any assets borrowed against have dropped in value.

Think of 2008 when the credit bubble deflated.  Property values fell, while the outstanding debt remained fixed.  Property owners were “underwater” (negative equity).

Meanwhile, the dollar was STRONG.  It took a whole lot LESS dollars to buy anything.

Everything was on sale and cash was king.  Lots of people got rich buying things with cash when others couldn’t borrow to buy.

Deflation is awesome when you’re sitting on cash.

You’d think lenders are happy to be paid back with better dollars.  And they are … IF they actually get paid.

But underwater borrowers often decide to default on the loan so they can keep their dollars.

So bankers HATE deflation.  No wonder the system they set up in 1913 demands perpetual expansion of debt and prices.

In fact, the Federal Reserve overtly targets 2% per year INFLATION:

“… inflation at the rate of 2 percent … is most consistent over the longer run with the Federal Reserve’s statutory mandate.”

Here’s the problem with perpetually expanding debt … it weakens an economy.

Sure, it drives inflation, but inflation weakens consumption.  When things cost more, people buy less.

Debt also requires interest.  Even at minimal rates, HUGE balances require big payments.

Interest on public and private debt take money away from production and consumption … causing both to shrink.  Just not at the beginning.

When first injected into an economy, debt gooses activity and provides a temporary high.

And as in our modified Monopoly game, once deployed, more NEW money is required just to keep the interest from consuming the economy. There’s a point where new injections produce diminishing returns.

Whew!  Thanks for staying with us.  Tape an aspirin to your forehead.

With that backdrop, consider this headline from Investor’s Business Daily

Here’s Why China’s Latest Growth Scare Should Worry You – May 30, 2017

Credit has been growing twice as fast as nominal GDP for years. The diminishing returns suggest that many loans are going to unprofitable ventures. They also signal that sustainable economic growth is far less than current growth rates. Such a rapid deceleration from the world’s No. 2 economy would sap demand and prices for raw materials such as copper, exacerbate overcapacity issues and act as a drag on an already-sluggish worldwide economy.”

Uh oh.  “Diminishing returns” and “deceleration” in the face of rapid credit growth.

When a junkie can’t get high, they either increase the dosage to the point of toxicity … or they wean themselves from the drug.

China is getting serious about weaning its economy off torrid credit growth, and data and financial markets already are showing early withdrawal symptoms.

Hmmm… sounds like they’re leaning towards weaning.  We like the addiction metaphor.

China and the United States are the two biggest economies.  What either does affects the world.

Right now, headlines say China is slowing its use of debt, which in turns slows its economic growth, with a ripple effect on other economies.

Meanwhile, the Trump Administration is talking bigly about reducing the deficit and debt. Will he do it? Can he do it?

Who knows? But if the global economic system sustains itself on ever-increasing debt. and the two biggest borrowers are going on debt diets … who’s willing and able to take on a bigger share of global debt?

And if no one does, then what happens to asset values?  Is deflation on the horizon?

Last question … then you can take a nap …

Would the Fed and other central banks allow deflation … or do they roll out QE4ever (quantitative easing) in an attempt to stop it?

Meanwhile, now seems like a good time to consider repositioning equity from properties and stocks with high asset values into properties with sober valuations and strong cash-flows.

After all, stocks and even real estate values might be a roller-coaster ride, but rents are more of a merry-go-round. Boring, but a nice place to hide when feeling queasy.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

Trump’s budget and your real estate investing …

In case you missed it, President Trump just announced his proposed budget. 

Two items caught our attention.

First, there are big cuts to social programs.  With 43 million people on food stamps and many of those being renters, there’s an obvious ramification for landlords.

As we said back in 2015, “…if the government subsidy goes away or is reduced…or if interest rates on your tenants’ consumer credit goes up…then it becomes even harder for them to pay you rent.

Hopefully, it’s both an obvious conclusion and one you’ve seen coming.  It hasn’t happened yet, but it’s inevitable because of the math behind the problems. 

So be cautious about a portfolio overly dependent on government subsidies.

But something else popped up which is perhaps less obvious … and more exciting.

President Trump proposes selling off half of the U.S. strategic oil reserve to raise cash to pay down the national debt.

We’re not here to say whether that’s a good or bad idea.  We’re not that smart. 

Besides, our orange Trump phone isn’t ringing, so the White House hasn’t asked our opinion anyway.

But when things are happening which have direct economic ramifications, we’re interested in how they might affect real estate investors.

It’s a bit of a rabbit trail.  But because oil is an impactful component of economic activity, we think it’s worth the effort. 

To start, the immediate benefit of selling the reserves is reducing interest expense.  This is especially beneficial when interest rates are rising … or threaten to.

Of course, money saved on interest can be redirected into paying down more debt … OR,  it could be used for investing into income producing activities and infrastructure.

Now we’re not inside Donald Trump’s head, but we are real estate guys. 

So we wouldn’t be surprised to see the president direct more money into income producing activities and infrastructure. After all, that’s how real estate guys think … we don’t spend, we invest.

Of course, this begs the question … what kind of activities and infrastructure are most likely to get attention, and what kind of jobs will they produce … and where?

Real estate investors want to get to popular places and product types BEFORE they become popular.

So putting on our orange comb-over thinking cap, we think the-real-estate-guy-in-chief wants to create domestic manufacturing jobs.  It’s just a wild guess … based on what he overtly says he wants to do.

But the challenge for a domestic manufacturing agenda … as our good friend Peter Schiff points out … is the factories and supply chains needed to support it have long gone to China to take advantage of cheap labor and lax environmental laws.

So while a viable long-range strategy might be to create a more factory-friendly environment in the United States … the U.S. needs good, solid middle-class jobs NOW … or as close to now as possible.

So what kind of industry would be ideal for creating U.S. based jobs fast?

It would need to be something that could ONLY be done in the U.S., so there’s no temptation to take the jobs off-shore. 

And ideally, it would be for a product with both domestic and global demand.  

After all, a nation can’t get rich selling to itself.  It needs to export.

Of course, demand would need to be big enough to make a real contribution to economic activity. 

And it would also need to be a product with supply and distribution chains which either already exist or could be ramped up quickly.

Hmmm … we think it all points to energy.

After all, the U.S. has huge oil and natural gas deposits.  So the jobs to harvest, process and distribute them would all have to be created right in the United States.

And even though global demand for energy ebbs and flows, the long-term need for energy grows steadily along with global population and economic activity.

Remember, it was the energy sector which dominated the post-2008 U.S. job growth.  Many real estate investors rode that wave … especially in Texas.

Price wars with Saudi Arabia curtailed that growth, but with the Saudi’s still hurting over the last oil price war, maybe they won’t want to get into another.

And if the U.S. oil strategic reserve “savings account” is low, Uncle Sam’s in a better position to step in and provide some extra demand if prices need a boost.

So if a Trump Administration is pushing a pro-energy agenda, it checks a lot of boxes, even though it may miff staunch environmentalists.

Again, we’re not advocating one way or the other. 

We’re just observing and speculating about what might be happening, how it might play out, and how real estate investors might find opportunity.

So we went digging in our news feed for any interesting developments in the world of energy. 

Here’s something we found a little off the beaten path … 

First Ever U.S. LNG Cargo Set Sail For Northwest Europe

LNG is Liquified Natural Gas.  And it’s headed to Europe … one of Russia’s biggest customers.  Interesting.

But more interesting is this quote from the OilPrice.com article, referring to a report by the U.S. Energy Information Administration (EIA) …

“According to the EIA, the U.S. is set to become a net exporter of natural gas on an average annual basis by 2018, due to declining pipeline imports, growing pipeline exports, and increasing LNG exports.

By 2021, four LNG export facilities that are currently under construction are set to be completed.”

Okay.  So this is probably a bazillion dollar business emanating from somewhere … where lots of people will need to do lots of work to make it all happen.  Jobs!

This took us on a hunt to find additional information about WHERE this LNG was coming from … because maybe those real estate markets are about to experience growth.

We found the EIA’s Annual Energy Outlook for 2017Actually, it was easy to find … because the OilPrice.com article linked to it.  Yeah, we’re sleuths.

The EIA report is 64 pages long with charts, graphs and maps.  On page 46, one map shows which U.S. regions they project to “lead growth in tight oil production.”

On page 60, there’s similar information about natural gas.

Now, we’re not saying these are treasure maps telling you where to invest in real estate. 

But it is a starting point for an investigation into where future job growth might occur … through natural economic forces, geo-politics, and a new U.S. administration eager to stimulate domestic production job creation.

But don’t just stop there.  Consider also the supply chain.

It takes big, heavy, expensive equipment and infrastructure to harvest, process, store and ship energy. 

These suppliers and sub-contractors might not necessarily be tightly geographically linked to the natural resources.  So look for them not by geography, but by working your way through the supply and distribution chains.

Because while energy production might create a surge of “primary” industry jobs, primary industry growth often gives rise to “secondary” (supply and distribution chain) jobs … sometimes in other areas.

Could this be the beginning of a resurgence of job growth in rust belt states? 

We don’t know.  But that’s another box President Trump would like to check, so it’s a development worth watching.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

12/29/13: Thinking Outside the Buck – How Savers Can Avoid Being Losers

Robert Kiyosaki says, “Savers are losers”.   Does this mean you should consume more than you produce, or that saving is bad?  Of course not.

There are multiple meanings to the Savers are Losers concept.  In addition to drawing a distinction between working for money (saving) versus having money work for you (investing), there’s the problem of money versus currency.

As real estate investors, we put a lot of time and effort into “making money”.  And while it’s fun to consume, most of us create profits with the idea of accumulating and storing wealth…at least temporarily until the next great investment comes along.

The challenge comes when the vehicle we use to store the value of our profits (paper currency) is being consistently devalued by its issuer.

With central banks (like The Federal Reserve) around the world “printing currency” at unprecedented rates, everyone doing business in currency (like the dollar) is affected.  And the dollar has the greatest effect of all because it’s used globally as the world’s reserve currency.

So while most folks are simply simply focused on how to earn and accumulate more money, we thought it would be a good idea to think about what “money” is, and whether the dollar is the best or only vehicle to use as money.

So put on your golden thinking cap, and get ready to think outside the buck…

Sitting behind The Real Estate Guys™ silver microphones for this episode:

  • Your precious silver-tongued host, Robert Helms
  • His generic round co-host, Russell Gray
  • Special guest and golden boy, Anthem Blanchard

As real estate prices rise (denominated in dollars) and equity happens, real estate investors are going to be the proud owners of bulging balance sheets.  Finally!

Of course, we’ve seen this movie before, so while we enjoy booms, we’re very aware of the boom / bust cycle that is inherent in an unsound money system. If you don’t know what that means, don’t worry about it for now.  Just remember that there are booms and busts (ups and downs), and when a market is booming, you ride it up.  Along the way, you’re extracting profits and storing them up for the next bust, so you can go out into the wreckage and snap up bargains.

So as prices rise and lending comes back into the market, investors will have the ability to realize profits (through sales) or extract equity (through refinancing).  Even buy and hold investors (presuming positive cash flow) will be stacking up dollars because the more properties you own, the more cash reserves and operating “float” you hold.

Most people hold this cash in currency, like dollars.  In fact, for most people, dollars are the ONLY measurement of wealth.

But thinking outside the buck, we wonder if it might make sense to store a percentage of those profits and reserves in something other than currency?

After watching the “bail-in” that victimized savers in Cypress last year, the concept of “counter-party risk” changed our perception of risk when dealing with banks.  Especially considering the miniscule reserves held by the FDIC against the huge amount of bank deposits insured.  We already know banks can fail because hundreds did during the Great Recession.  What if the insurer fails?

Soif money in the bank isn’t as safe as…well, money in the bank…then where can you store wealth until you’re ready to use it again?

And even if money in the bank is safe from the bank failing to return it (counter party risk), what happens if when the bank returns it, it isn’t worth as much as when you deposited it?  Think about putting $5 in a bank account in 1965 when gas was 25 cents a gallon.  For five bucks, you could fill up a 20 gallon gas tank!  That’s a lot of driving!

But today, $5 won’t buy you 2 gallons of gas.  So even if the bank gives you your five dollars back, it’s lost its purchasing power.  This is what many baby boomer savers are discovering as the try to sail off into their golden years.  They have more money than they’ve ever had, but it won’t buy as much.

So we sit down to talk with Anthem Blanchard, who literally grew up in the precious metals business.  His father, James Blanchard, was a pioneer in restoring Americans’ right to own gold.  For you young folks out there, you may not know that from 1933 until 1971 is was illegal for U.S. citizens to own gold.

Really.

It’s a long and sad story, but the short of it is that when the U.S. was founded and for most of world history, gold and silver were regarded as “money”.  And dollars were just paper coupons redeemable for real money (gold and silver).  But in 1933, the U.S. decided it was bad for people to own gold, so they made it illegal.

The reason that happened is at the heart of the challenge faced by savers today:  governments wanted to spend more money than they have.  Shocker. And it’s obviously going on today in record fashion.

So alert investors are looking for alternatives.  In fact, it’s gotten so bad that even consumers are looking for alternatives.  There’s a reason Bitcoins are gaining so much popularity.  It’s a currency that isn’t controlled (yet) by government.

The fact that Bitcoins are creating such a stir tells you that people are concerned about the dollar.  And it isn’t convenience.  Because while tech is cool, dollars are effectively virtual too.  Just think about credit cards, debit card, wire transfer, online payments, etc.  All digital.

The issue with Bitcoins are they aren’t real and they don’t have government backing.  We’re not here to put down Bitcoins, but compared to the thousands of years of human history with gold and silver, we’d rather look to precious metals as an alternative to dollars for storing and transporting wealth.

Of course, because metals are tangible, they aren’t easy to use in commerce.  But that’s changing!

Just as innovators came up with Bitcoins as an alternative to the dollar, creative entrepreneurs are coming with technologies to make using precious metals more convenient.  Anthem Blanchard is one of those innovators.

So listen into this edition of The Real Estate Guys™ radio show as we discuss precious metals as an alternative to the dollar for the long term storage of wealth, and how technological innovations can make the use of precious metals in daily commerce less expensive and more convenient.

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