10/23/11: The Creature from Jekyll Island – A Conversation with G. Edward Griffin

As Halloween approaches, we wanted to pick a spooky topic to kick off the week.  We’ll follow it up next with our annual edition of Halloween Horror Stories, so stay tuned!

For this episode, our topic is The Creature from Jekyll Island.  For the uninitiated, this is the title of the epic and iconic expose on the Federal Reserve by award winning documentary filmmaker G. Edward Griffin.  And while it isn’t quite as entertaining as Rocky Horror Picture Show, it certainly has its own cult of rabid fans.  However, like Rocky, Creature probably has more than it’s fair share of closet followers.

So when our good friend Robert Kiyosaki (who is no stranger himself to controversy) not only promoted, but endorsed The Creature from Jekyll Island, we thought we’d use the power of our press passes to get a face to face interview with the author.

Lurking around the microphones for a frightening discussion about the Federal Reserve:

  • The mad scientist of radio magic, host Robert Helms
  • His humpbacked henchman, co-host Russell Gray
  • Documentary filmmaker, prolific author and outspoken critic of The Fed, G. Edward Griffin

Anthony J. D’Angelo says, “Your mind is like a parachute.  It only works when it’s open.”  How true!  But this doesn’t mean that you should blindly accept everything you hear.  However, it certainly encourages exposure to various points of view for further contemplation.  In fact, that’s just how Griffin expanded some simple research for a speech on inflation into a seven year research project and one of the best known critiques of the Federal Reserve ever penned.

The Federal Reserve Bank is arguably the most powerful, non-governmental institution on the planet.

What’s that?  You thought that “Federal” meant it was part of the government like the Treasury department?  Not so.  And that fact in and of itself isn’t even considered to be all that controversial!  It’s widely acknowledged, even by Fed supporters like David Wessel, author of the New York Times bestseller In Fed We Trust, that the Fed is NOT an official part of the U.S. government.

So what’s the big deal about the Fed and why should a real estate investor pay attention?

First. the Fed controls the money supply of the (for now) world’s largest economy.  It has a profound impact on interest rates and inflation – two topics which all real estate investors hold near and dear.  Plus, the Fed has tremendous authority over ALL banks in the USA, even the little commercial ones in the flat middle states.  And if all that power wasn’t enough, because the U.S. dollar serves as the reserve currency of the world, the Fed and its policies also profoundly affect global trade and currency exchange rates.

Yeah, the Fed’s a pretty big deal.

It’s no wonder then, that as the 2012 elections approach and so much emphasis is on the economy, that the topic of the Federal Reserve has made its way into the mainstream of presidential debates.

Ron Paul wants to End the Fed (the title of his book).  Rick Perry has publicly denounced the Fed’s activities as “treasonous” and the last time we looked, “treason” was a pretty egregious crime.  Although politicians are often guilty of putting their feet in their mouths, we’re guessing that wasn’t a comment Perry made lightly.

Meanwhile, Herman Cain actually has a stint as a Chairman of the Kansas City Fed on his resume!  What’s an investor to think?

To top all of this off, love him or hate him, all the major polls show that President Obama’s odds for re-election are not good.  So it’s quite possible one of the aforementioned GOP candidates will end up in the White House.

Now we aren’t here to say who should or shouldn’t be in the White House, or even if the Fed is good or bad.  As you might guess, we have our own opinions.  But since you’re investing YOUR money and not ours, then the opinion you should be most interested in is your OWN.  Hopefully, you are forming it carefully!

To help you formulate an informed opinion on the Fed (and anything else we can think of that may affect job creation, the value of real estate, interest rates on mortgages, taxes paid on profits, etc), we will continue to scour the universe for news, information, perspectives and ideas to share with you.

After reading The Creature from Jekyll Island, we found it to be both well-researched and documented, as well as thorough and extremely thought provoking.  And after sitting down with the author for several hours both on and off mic, we found him to be a whole lot less scary than some of his critics portray him.  In fact, in many ways, it was refreshing to talk to someone who was willing to go where the evidence led him – even if it was to a highly controversial conclusion.

So listen in to our discussion with Mr. G. Edward Griffin, then form your own opinion.  And we encourage you to continue your education on the Fed by devouring some of the other books in our Recommended Reading list on the topics of Banking & Politics.  Happy Trick or Treating!

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Treasuring Fine China

In case you’ve been living under a rock the last several years, here’s a news flash:  China’s booming economy is having a big impact on the world, and the U.S. in particular.

And whether you like it or not, or agree or disagree with U.S. policy toward China, it doesn’t really matter.  China matters.  So, we’re learning to pay attention to China.

In case you aren’t convinced, consider that Chinese demand for raw materials (cement, steel, lumber, oil, etc.) create more demand which drives up prices.  So if and when U.S. builders start building again, their costs will be higher.  This means the properties they build will cost more.  Which means that existing properties’ values will be pulled up by rising replacement costs.

What???  How, you ask, can we talk about rising prices when everything’s in the dumper?

It’s easy.  As long as people do what they do, populations grow.  The need for buildings continues in spite of the economy.  And the last time we looked, people will do without a lot of things before they skip having a roof over their head.  So it’s only a matter of time before building begins.  Meanwhile, we sit in a rare window of time where there are low interest rates and lots of properties selling at or below replacement costs.  Just something to think about…

And speaking of interest rates…

Did you hear what Morgan Stanley Asia’s honcho Stephen Roach told CNBC?  He thinks China may decide to stop lending money to Uncle Sam.

In case you’re holding your breath waiting for the super-duper council of 12 deficit reduction committee to balance the U.S. budget, even if Uncle Sam miraculously produced a surplus, he still has lots of short term debt that needs to be refinanced.  So if China doesn’t re-up, then who’s got the horsepower to feed the U.S. debt addiction?  Greece?  Spain?  Italy?

Time out.  Before your mind wanders off, let’s talk about why real estate investors care about all this.

Real estate investors get rich doing leveraged buyouts.  Really!  Just like some corporate raider.  You find an income producing business (a rental property), then go get financing to purchase it.  Then you use the income from the business to pay off the loan.

So, if your goal is to own a lot of these properties, you will have a lot of loans (what we affectionately refer to as “good debt”), and your cash flow will be substantially affected by interest rates.  Right now, in case you’ve been napping, interest rates are REALLY LOW.  And if you lock them in for the long haul, it’s hard to imagine you’ll be regretting it down the road.

But if the Chinese stop buying U.S. debt (Treasurys), then (says Mr. Roach), the U.S. may have to pay (gasp!) higher interest rates to attract buyers.  And if U.S. Treasurys go up, you can bet real estate loans will be right behind them.  See?  Get the connection?

However, as previously posed, this presupposes there is a buyer out there with a big enough checkbook to meet Uncle Sam’s needs.  If not China, then who? And if there isn’t another economy strong enough out there to buy up trillions in U.S. debt, then are there buyers at any interest rate?

So here’s another take:  If China goes away, in part or in whole, our guess is that Big Ben Bernanke will get out his magic checkbook and, either directly or indirectly, will pick up the slack.  In this case, Big Ben isn’t concerned with interest rates (after all, his cost basis for the money is zero), so the issue isn’t rising interest rates, it’s an increasing money supply.  In other words: inflation.

(In case you missed it, we did a series of blogs on this topic when everyone was getting their undies in a bunch over the debt ceiling debate.  If you want to learn more about Big Ben’s magic checkbook, search our site for “The Great Debt Ceiling Debate” or click here for Part 1 of the 5 part series.)

Here’s the bottom line (which is why it’s conveniently located at the bottom):  No one knows what China will do.  But if you understand the mechanics of the money, then you can make a plan A, B, C and D.  And there’s even more letters available if you want to go farther than that.

If China goes away, and Mr. Roach is right and interest rates rise, do you want to be sitting on lots of low interest rate debt locked in for the long haul and being paid for by people who have to rent because home loans are too expensive to buy?  We do.

If China goes away, and Big Ben’s magic checkbook comes into play, and inflation is fueled, do you want to own real assets (like commodities and real estate) that go up in value (over time…be patient) as replacement costs rise?  Check.

If China keeps on buying, but demands higher interest, go to plan A.

If China keeps on buying, and is content with ridiculously low interest rates, even if the Fed doesn’t intervene, won’t low interest rates eventually lead to inflation? (Yes, they do. The whole reason the Fed alleges it keeps interest rates low is to “stimulate” the economy).  Go to plan B.

We’re not saying the current de-leveraging (the U.S. is still suffering from a major sub-prime hangover) won’t suppress prices for the next few years.  But if you’re a buyer, aren’t low prices, low interest rates, and a growing rental population all good things for right now?

 

11/21/10: Real Estate Economics – Interviews with the Federal Reserve and National Association of Realtors

As we’re guiding our real estate sailing ship through the choppy economic seas of the past few years, we’ve learned the wisdom of having a lookout watching the horizon for threats and opportunities.

We also like to compare notes with other sailors – especially those whose lookout platforms are higher up than ours.  They can see more and farther than we can.  That’s very helpful when trying to catch a wave or avoid a storm.

So we dove at the chance to interview some high profile people – to find out what they can sea, sea, sea from their higher vantage point.

In beautiful Miami, sitting on the dock of our radio bay, watching the tide roll away:

  • Show host and captain of the good ship Equity, Robert Helms
  • The cut rate first mate, co-host Russell Gray
  • Chief Economist of the National Association of Realtors®, Dr. Lawrence Yun
  • Vice President and Associate Director of Research for the Federal Reserve Bank of Atlanta, Thomas Cunningham, Ph.D
  • President Elect of the National Association of Realtors®, Moe Veissi

Wow!  What an all star line-up!  After watching each of their presentations to the Congress, we decided to chase them down for a quick conversation that we could share with our listeners.  Though they’re all busy men, each was gracious enough to sit down for some one on one with Robert.

Dr. Yun kicks off the show with some comments on the US housing market.  He’s the first economist on earth to see and analyze the housing data gathered by the National Association of Realtors®.  He’s also able to combine the statistical data with lots of relevant anecdotal data – since he interacts regularly Realtors® around the country.  He points out some of the reasons he believes the worst of the storm is past.

Next, we talk to Thomas Cunningham of the Federal Reserve Bank of Atlanta.  Unless you’ve been in a coma the last two years, you know that the Fed has been very active in trying to stimulate the economy with lower interest rates, expanded credit facilities to banks and that mysterious “quantitative easing”.  What does it all mean?  Our mission is to find out!

While economics and monetary policy is interesting, it’s pretty high in the clouds.  So we wrap the show up with a lively conversation with the energetic President-elect of the National Association of Realtors®, Moe Veissi.  Moe shares his thoughts as he transitions from local real estate practitioner to the helm of the world’s largest trade association.

It’s all good stuff, so listen in – and be sure to tell a friend!

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