Easy money is both a symptom and a sickness …
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359 reasons why this is NOT the end …
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From Disney World to Bizarro World …
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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.
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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.
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!
11/23/14: Liquid Real Estate – Has the Oil Boom Run Out of Gas?
The dollar price of oil has fallen substantially as of late…just like real estate did a few years back.
Does that mean it’s all over for oil? Or is now a good time to buy?
To explore this slippery topic, we take a trip to Texas to talk oil, gas and cash flow with our favorite oil man.
In the station pumping out broadcast brilliance:
- Your energetic host, Robert Helms
- His slimy co-host, Russell Gray
- Special guest and bona fide Texas oil man, Paul Mauceli
While it may seen obvious to some, in case you’re wondering, oil and gas can definitely fall under the heading of real estate investing.
We’re not talking about commodity trading, where investors are flipping in and out of futures contracts or options trying to skim a little profit from price spreads and market volatility.
We’re talking about buying or leasing a piece of land, digging a well, putting up a pump and sucking money out of the ground.
Most of the horror stories you hear about in oil and gas are rookies getting crushed by the pros in the paper markets…or by naive investors going into a high risk (and potentially high reward) exploration project.
Exploration is like venture capital investing. You’re buying into an unproven business plan. Of course, if you strike oil, you’re rich. Just ask Jed Clampett, But the odds are against you.
Our friend Paul Mauceli has a different approach that we like a lot better. It feels more like investing in an existing apartment building.
The concept is simple…
Instead of buying into one single point failure make it or break project hoping to hit a home run, buy into a pool of already drilled and producing wells…just like buying an apartment building that’s already leased up…and the oil (and cash) is flowing.
Your cash flow is based on the “rent” (the price of oil) times the number of units (barrels) less operating expenses. These are things every real estate investor understands.
Your profitability is based on the ratio between what you pay and what you collect. Obviously, the less you pay, the better your return.
The challenge comes when you buy and then later the “rents” drop.
Of course, this is a risk every investor takes, so it’s wise to build in a little wiggle room, so you can afford to stay in the game even if the revenue declines.
Obviously, buying when rents are low can be good if the price you pay is also low…which it should be based on the lower rents.
Then later, when the rents go up, you’ve already locked in your costs, so your profitability is actually better. So even though we hate to buy when prices are low (it’s scary), it’s actually the best time.
If you wait until the market is high, then you risk paying too much and not having enough cushion in case of a pull back in prices.
One HUGE difference between apartment investing and oil well investing is there’s typically no loan on the oil well. So you don’t have to worry about foreclosure or negative cash flow.
Something else to consider is the 100 year history of the U.S. dollar. In spite of its recent “strength” (really, a reflection of a weaker Euro and an even weaker Yen), the dollar has lost 97% of its purchasing power since 1931 (the year the Federal Reserve was created). The dollar has a 100 year history of LOSING value.
That means anything REAL purchased in 1913 (real estate, precious metals, gems, etc.) retained its value, while the dollar did not.
Right now oil is soft because of a weak domestic consumer economy, softness in China, increased U.S.production. and (allegedly) geo-political games intended to punish Russia for its aggression in Crimea.
But like real estate, you have to ask yourself: will the long term worldwide demand for oil is likely to increase or decrease? And is the long term strength of the dollar likely to increase or decrease?
If you think the world will use more, not less oil…and the dollar will eventually resume its 100 year trajectory down (remember, the Fed, the European Central Bank and the Bank of Japan are ALL TRYING to INFLATE…i.e., devalue their currency), then when would be a good time to buy oil wells?
Paul thinks NOW is a great time because they’re on sale. And that’s hard to argue with.
Listen Now:
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Alan Greenspan’s Shocking Confession
The Real Estate Guys™ just returned from the New Orleans Investment Conference where we (and some of our listeners) had a chance to hear from the Maestro himself, Dr. Alan Greenspan.
If you’re a long time follower of The Real Estate Guys™ radio show and blog, you know we pay close attention to the Federal Reserve because of it’s strong influence on interest rates, the value of the dollar, and asset prices (like real estate).
In fact, many economists and market pundits believe Alan Greenspan’s policies when he headed up the Fed (1987 to 2006) led to the real estate boom and ultimate bust in 2008.
Coming into the conference, we’d heard rumors that Greenspan was singing a strikingly different tune…about a great many things…than when he was at the helm of the most powerful financial institution on the planet.
Now it should be plainly obvious that Fed policy is hugely important to everyone who owns an asset, runs a business, earns a paycheck, has a savings account or pays on a loan.
So now that he’s on the outside, knowing exactly how it works on the inside, what is Alan Greenspan saying today about the Fed, the dollar, the future of interest rates, and what investors can and should do?
First, he says the bond-buying program known as QE didn’t help the “real economy” (i.e., jobs for the middle-class, real wage growth, or increasing purchasing power and consumer demand).
However, he admits QE did boost asset prices. So stocks, bonds and real estate are all artificially higher because of easy money.
In other words, the Fed helped the rich get richer, while doing nothing for the middle-class and poor.
But as if THAT admission wasn’t enough, the Wall Street Journal’s article covering Mr. Greenspan’s speech to the Council on Foreign Relations on October 29th said this:
“He also said, ‘I don’t think it’s possible’ for the Fed to end its easy-money policies in a trouble free manner.”
Shortly after Greenspan’s comments, the Fed announced the end of its bond-buying program known as Quantitative Easing (QE).
Does this mean trouble is coming?
(Before you hit the panic button, remember that the flip side of every problem is an opportunity, so “trouble” is usually only bad for the unprepared…)
As real estate investors, not only do we care about jobs, wage growth and purchasing power (after all, it’s hard for unemployed poor people to pay rent), but we also care about interest rates.
So what does Alan Greenspan have to say about the future of interest rates?
Back to the Wall Street Journal article…
“He said the Fed may not even have that much power over the timing of interest-rate increases.”
“‘I think that real pressure is going to occur not by the initiation of the Federal Reserve, but by the markets themselves,‘ Mr. Greenspan said.”
What does THAT mean???
We’ve covered this in detail in previous blogs (just search our site for “Fed”), but the short of it is that without the Fed using QE to create demand by bidding (and buying) U.S. bonds, someone (the market) is going to have to step up and buy them…because if they don’t, the lack of bidding will cause bond prices to drop.
And when bond prices drop, interest rates rise. So if the markets don’t bid strongly enough on bonds, then no matter what the Fed says, the markets will decide when and how much interest rates rise.
In other words, how the market feels about the quality of the debt (the likelihood of being repaid) AND the quality of the currency the debt is denominated in (purchasing power) makes a BIG difference in what yield investors will demand from the borrower.
Right now, investors still consider U.S. Treasuries as “safe”. That is, there’s very little probability of default…in spite of past political posturing over debt ceilings. That’s because the Fed can print as many dollars as it takes to pay off the debt.
But when that happens, it reduces confidence in the dollar itself (the quality of the currency). Because just like when a company issues more shares of stock against the same earnings and assets, the value of each share (in this case, dollar) is diluted.
As we chronicle in our special report, Real Asset Investing – How to Grow and Protect Your Wealth in the Face of a Falling Dollar, there’s already been substantial moves away from the dollar and dollar denominated assets and trade.
China has signed bi-lateral currency swap agreements with virtually every major country, which essentially facilitates their international trade without having to use dollars. And China is the world’s second largest economy to the U.S….and closing fast.
Meanwhile, China and Russia have been stocking up on gold as fast as they can. It seems they’d rather hold their savings in a tangible asset versus a paper asset…like the U.S. dollar or dollar denominated Treasuries.
And what does Alan Greenspan have to say about gold?
Back to the Wall Street Journal article….
“Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”
It seems Alan Greenspan is a fan of real assets. He sounds more like Jim Rickards (author of The Death of Money) than a former chairman of the Federal Reserve.
Yet gold tanked after the Fed quit QE! And other real assets like real estate and oil have also been sliding.
So is Greenspan wrong…or does he know something is coming that will change the value of the dollar?
It seems that Greenspan is warning us that interest rates are likely to rise before the Fed is ready. And if that happens, the Fed is likely to get back in the bond buying business to stop it. Peter Schiff says there will be more QE programs than Rocky movies.
And every time the Fed exits QE, only to come back and do it again…and again (remember, this was QE3 with an Operation Twist thrown in between 2 & 3 for good measure), at some point the world loses faith in the dollar.
When THAT happens, interest rates go up, the dollar falls, and real assets like gold, housing, farmland and energy will be in demand…not just for their utility, but for their ability to retain value as currencies like dollars, euros and yen fail.
Fortunately, real assets are on sale right 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.
Our Most Important Summit Yet
World leaders and banking elite have sometimes secret summits to make their plans for managing the global economy. What they decide affects YOU…whether you like it or not.
Isn’t it time YOU and other investors got together with the best and brightest experts to make YOUR plans to grow and protect your wealth from whatever the central planners decide?
We think so.
That’s why we’re proud to bring you the 12th Annual Investor Summit at Sea™ featuring an amazing line up of speakers like Peter Schiff, Ken McElroy, Tom Hopkins and MANY, MANY more! And NEW!!! Simon Black of Sovereign Man will be with us in 2014!!!
There are experts in real estate investing, economics, precious metals, oil & gas, infinite banking, asset protection, syndication, real estate development, and even sales.
It’s intense. But it’s fun.
Robert Kiyosaki came in 2012 and loved it. But don’t take our word for it. Click here to hear directly from Robert.
The timing couldn’t be more important. The world is changing at an amazing pace. The Summit is your opportunity to discover trends, develop strategies, make connections and get away from the daily grind to focus on your future.
Where else on earth can you go to get a week with this caliber of thought leaders? Nowhere. It doesn’t exist.
And this Summit won’t exist for long either. The ship is filling up and even the Summit isn’t until March, we’re running out of space.
We know it’s a big decision. It’s a lot of time and money. But in the past 11 years we’ve never had anyone say it wasn’t worth it. So we want to strongly encourage you to seize the day and reserve your spot today.