The big story is getting BIGGER …

As Ernest Hemingway famously wrote in The Sun Also Rises …

“How did you go bankrupt?”

“Two ways: Gradually, then suddenly.”

Of course, this isn’t the only great excerpt from this classic book …

“Everyone behaves badly … given the chance.”

These two excerpts sum up the world’s financial condition … and the policymakers who’ve been driving the ship … into the ground.

More of Hemingway’s writings seem fitting for this day and age …

“You can’t get away from yourself by moving from one place to another.”

“Do you ever get the feeling that all your life is going by and you’re not taking advantage of it?”

Ahhh … where to begin?

Last time, we said silver is signaling weakness in the dollar, which at the time was the only currency not already at all-time lows against gold.

Of course, the ink was barely dry on our computer screen when the dollar dropped hard against gold … as gold blew through its record high in dollars to flirt with $2000 an ounce.

If you agree with J.P. Morgan when he told Congress, “gold is money” … which relegates the dollar to merely a currency useful for trading (at best) …

… then you probably understand gold didn’t moveThe dollar fell.

Of course, ever since Nixon broke the global gold standard in 1971, currencies “float” … which means currencies change value in relation to each other.

If that’s confusing, that’s because it is. And when you lose your bearings, it’s hard to tell up from down.

Imagine jumping out of an airplane with a team of skydivers. You’re all in free fall. But as you look at each other, you appear to be floating together.

But if someone opens their chute and slows their descent while you don’t … from your vantage point, they went UP. But did they?

Of course not. They’re just falling more slowly than you.

The reference point of the solid ground rising up below is how you know. The ground appears to be rising, but it’s not moving up. You’re falling. And so is the person who pulled their chute and appears to you to be rising.

So if you’ve ever wondered how gold could be rising in one currency and falling in another, now you know.

Gold is the solid reference point which exposes what’s really happening with currencies. It’s accountability.

That’s why we watch it … and think you should too.

Right now, gold is shining a bright light on something all investors … real estate and otherwise … should be paying attention to.

But don’t take our word for it. Check out these recent headlines …

Goldman Sachs boosts gold price target, says the dollar’s reserve status is at risk
– Yahoo Finance, 7/28/20

Goldman warns the dollar’s grip on global markets might be over
– Bloomberg, 7/28/20

US dollar at risk of sudden collapse? Ex-IMF official warns “blow-up event” could sink currency as debt mounts
– South China Morning Post, 7/24/20

How might the dollar lose its reserve status? How might America go bankrupt?

Gradually. Then suddenly.

Meanwhile, professional money watchers are baffled …

Gold prices hit all-time high, and it’s a bit of a mystery why
– MoneyWatch via CBS News – 7/28/20

Yes. Things make no sense when you have the wrong reference point.

When you can’t think outside the dollar … when you think the dollar is eternal, immovable, invincible, the center of the monetary solar system … it’s confusing.

A similar confusion plagued astronomers who believed the sun and planets revolved around the Earth …

Retrograde motion [planets moving backwards in orbit] … had early astronomers … thoroughly confused … it was impossible for them to come up with a solution that also fit with the popular idea that Earth was the center of the solar system. Not until … Copernicus placed the sun at the center of the solar system did all that retrograde motion suddenly make sense. – Livescience

We’ve previously discussed ways real estate investors can be directly affected by a falling dollar. So we won’t repeat that here.

But it’s not just real estate investors affected. It’s everyone everywhere …

King dollar’s decline ripples across the globe
Reuters, 7/28/20

“ … adding fuel to a global momentum rally that has boosted prices for everything from technology stocks to gold.”

No wonder Americans are enamored of the stock market … even in the midst of what is likely an economic depression, everything is UP … in dollar terms.

It makes no sense.

This is “asset price inflation” in NOMINAL terms … it takes more dollars to buy the same assets. “Nominal” means in numbers … unadjusted for inflation.

So the nominal value of a 3-bedroom house might go from $50,000 to $250,000. But the actual utility value … how many people it will sleep … is exactly the same. The house isn’t worth more in the real world.

Obviously, when you measure your entire everything in a currency whose value fluctuates, it’s easy to suffer from “nominal” confusion.

In fact, bankers and politicians make their living on creating and capitalizing on nominal confusion.

Nominal confusion tricks people and societies whose wealth is falling and economies are shrinking into thinking their wealth and economies are growing.

Because they are growing … in nominal terms … denominated in dollars. But there aren’t more jobs, more production, more real world value.

Nominal distortions can show “growth” in dollars, while employment, production, and purchasing power all fall.

In real world metrics, wealth is shrinking. The only thing growing is the number of dollars. Trillions of them in fact. Conjured out of thin air.

The cure to nominal confusion is to think outside the dollar …

When you ask Ken McElroy (Robert Kiyosaki’s Rich Dad Advisor for Real Estate) how much real estate he owns … he doesn’t tell you a dollar amount … or even how many properties.

Instead, Kenny tells you how many “doors” he owns. He measures his wealth by doors.

Doors represent the REAL asset … a tenant who goes to work every day and earns a paycheck and sends a third of it to Ken and his investors as rent.

THAT is real wealth.

If you own a 32-door apartment, you have 32 tenants. If you paid $1 million and it goes “up” to $2 million, it’s nice. Equity happens.

But you still have only 32 tenants. You didn’t add anything of real value.

And if everything else is going “up” too, your extra million may not make you relatively richer.

It’s only when you use debt to magnify equity growth faster than inflation that you can become relatively richer.

When you denominate your wealth in units of REAL value … ounces of gold and silver, acres of land, barrels of oil production, tons of agricultural production, number of tenants …

… it doesn’t matter whether you trade in dollars, yuan, SDRs, bitcoin, buckskins, banana peels, or seashells.

REAL assets always have REAL value relative to each other. And when you add units of REAL value to your portfolio, your relative wealth grows.

It’s not about collecting dollars. It’s about collecting real assets.

“Assets minus liabilities equals net worth” works in accounting class and bank loan applications, but not in the real world.

Otherwise, the Federal Reserve could just print trillions of dollars inflate asset prices, and make the United States and Americans rich … nominally.

But it’s the only tool in the Fed’s kit, so they’re printing away. But precious metals say the world isn’t buying it.

Or more accurately, they’re not buying the dollar.

On Main Street, there are folks who look at their Wall Street produced financial statements and THINK they’re rich.

They’re nominally confused. If you own 100 shares of stock in a company whose sales and profits are declining … but the share price doubles in dollars …

… you still own 100 shares of a failing company. How are you richer?

Meanwhile, there are thousands of millionaire-next-door real estate investors with 20-30% of their tenants’ income flowing to them each month … often tax-free … who are richer in a more real, resilient way.

Of course, a depressed economy creates challenges for real estate investors too. There’s no easy street in a crisis.

But we don’t think you need to be afraid of a falling dollar. Just prepared. In fact, if you play it right, you’ll probably end up doing quite well.

Income property, mortgages and precious metals in the right combination are arguably the ideal tools to short a falling dollar and build real relative wealth.

We’ll have more to say on this very soon … stay tuned.

Meanwhile, keep your head in the game. The world is changing from gradually to suddenly.

This isn’t the time to “Wait and See”. It’s time to “Think and Do”.

Equity happens …

We’re taking a break from our relentless preparation for the upcoming Future of Money and Wealth conference to focus on one our favorite subjects …

Equity.

According to a recent report by CoreLogic, last year’s increase in America’s home equity wealth was the largest in four years.

In 2017, the national CoreLogic Home Price Index rose by more than six percent, the largest annual increase since 2013.

We call this “passive equity” because the market just handed it to homeowners simply for buying and holding their property over that time.

Good job.

Of course, national averages are interesting, but not useful for practical investing.  Real estate is local right down to the neighborhood and property … and no two are exactly the same.

Think of it this way …

If you have one foot in a bucket of snow at 20 degrees and another in a bucket of 170 degree steaming hot water, on average you’re enjoying a nice soak in a warm bath …

… but in the real world, you’re scalding one foot while you get frostbite on the other.  National averages have limited utility.

Fortunately, CoreLogic provides a nifty color-coded map which compares equity growth at the state level:

 

 

Unsurprisingly, coastal states with strong technology business … California and Washington … lead the pack for equity growth.

But we’re guessing closer analysis would show equity rich markets are expensive relative to rents, so income investors can’t just go to dark green and buy.

So how’s an investor to use this kind of data?

Here are some ideas for your consideration …

First, you can do a deeper dive into the states with strong equity growth, and look for common factors.  Right away, we saw coastal and tech.

But that’s just a start.

Look at supply and demand, nominal and real incomes, job growth, population growth, and migration patterns.

Then talk to street level people who live and work in those markets.  Find out what they’re seeing right now.

Once you have your mind around what makes equity happen in one market, you can look for similar conditions in other “emerging” markets.

Then (hopefully) you can make your move and get in early … while the rent ratios still make sense … and ride a wave up.

Of course, if you’re a typical busy person with a small portfolio, that’s a lot of work relative to the size of the investment … especially if you plan to travel to check out markets, build teams, and inspect properties.

Plus, you might not even like doing all that, even if you had the time and a big enough portfolio to justify it.

That’s why we’re HUGE fans of syndication.

Syndication is where a syndicator aggregates funds from a group of investors through a private placement, and then does all the busy work of running the deal … for a fee and a piece of the action.

As long as there’s enough profit in the deals to split equitably, it’s a win-win.

The “passive” investors win because they gain access to opportunities they wouldn’t otherwise have.  They effectively leverage the effort, expertise, and relationships of the syndicator.

The syndicator wins because the passive investors’ capital facilitates economies of scale and access to bigger deals the syndicator might not have on his own.

And for both parties, two major sources of investable capital are paper assets in brokerage and retirement accounts, and equity in existing properties that can be re-positioned.

For example, real estate equity in an “appreciated” state might be accessed through a cash-out mortgage for about 5 percent interest at today’s rates.

The loan proceeds can be used to acquire property in an “emerging growth” state that cash-flows at maybe 10 percent cash-on-cash.

The property-owner gets a positive spread on the equity, picks up some valuable tax-breaks, and has additional “top-line” real estate income streams which can grow over time.  Same equity, but more future opportunity.

As for stock market equity …

If history is any indicator, the recent turmoil in the paper asset markets is likely to create even more interest in real estate.

That’s because speculating on asset prices, whether it’s stocks or crypto-currencies, is a lot of fun when they’re spiking.

But when the tide turns on speculation … and it always does … real estate’s reputation as a reliable wealth builder is once again revealed and appreciated.

In fact, the CoreLogic article affirms the stability of real estate:

“… since 1970 home-equity wealth has been one-third less variable than corporate equity values …” 

And another recently released report from The National Bureau of Economic Research, The Rate of Return of Everything, 1870-2015, says …

“… returns in housing markets tend to be smoother than those in stock markets …”

“… housing has been as a good a long-run investment as equities, and possibly better.”

“… equities do not outperform housing in simple risk-adjusted terms.”

 “Housing provides a higher return per unit of risk …” 

“… housing returns … are more stable … housing portfolios have had comparable real returns to … equity portfolios, but with only half the volatility.”

The report concludes (remember, to them, “equity” means stocks) …

“… the most surprising result of our study is that long term returns on housing and equity look remarkably similar.  Yet while returns are comparable, residential real estate is less volatile …” 

“Returns are comparable”, BUT… they didn’t include leverage …

“… the estimates … constitute only un-levered housing returns …”

When you add in 4:1 leverage (25 percent down), you take a 6 percent real estate equity growth rate to 24 percent!

Of course, we’re probably preaching to the choir.  But think about this …

Maybe YOU already know real estate is a powerful, predictable, and demonstrably more stable wealth-building vehicle than stocks over the long haul.

But paper asset investors have been riding an easy money wave up to record-levels … and now stock markets are starting to get REALLY jittery.

What once was a fun ride is now becoming scary.  And  if you’re a syndicator, this is MUSIC to your ears.

That’s because paper asset investors are probably looking at their brokerage accounts and retirement plans, and are growing much more open to getting involved in real estate when it’s presented properly.

And if you’re a Main Street real estate investor limited by only your own funds, maybe it’s time to consider leveraging your skills to get in on the syndication action.

We think syndication is arguably the best opportunity in real estate today.

We realize there are some people who think real estate might slow down because of rising interest rates. But history disagrees.

Rising rates just makes it hard for home buyers.  And when it’s harder to buy, more people rent for longer, which is good for landlords.

Look what happened when the mortgage markets imploded in 2008 …

… no one could get a mortgage, millions had to rent, and even though there was a financial crisis … rents went up and up and up.

So all this stock market volatility is actually a gift to real estate investors.

Until next time … good investing!


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