Avoid getting caught in this trap …

A long, long time ago in a world without video games, we played a boardgame called Mousetrap. Since a picture’s worth a thousand words …

image

To see it in action, click here.

As you can see, Mousetrap is a pretty elaborate set up where an initial action sets off a chain reaction of subsequent actions …

… until finally the unsuspecting mouse is caught in a descending trap.

Credit markets are a lot like Mousetrap …

… and the further back you can see through the chain of events, the more likely you are to see what’s coming … and avoid getting trapped out of position.

The Great Financial Crisis of 2008 taught us how dangerous it is to keep our noses myopically to the real estate investing grindstone … falsely aloof and insulated from the turmoil of credit and currency markets.

When the trap fell, we were caught … illiquid and upside down … with not enough time to react.

So we’ve learned to pay careful attention to the machinations of the markets. And right now, there are a lot of moving parts.

Depending on how long you’ve been watching, some of the action may seem disconnected and even irrelevant to your daily real estate investing.

Be careful.

Gold, oil, trade, tariffs, currency, and bonds are far more intertwined than most folks realize … and they all conspire together to impact credit markets and interest rates.

And last time we looked, credit markets and interest rates are very important to serious real estate investors.

By now, you’re probably aware the Fed dropped interest rates for the first time in 11 years.

Granted, it wasn’t much … only 25 basis points (.25%).

But the stock market didn’t like it. And neither did President Trump, who was unabashed in his displeasure with the Jerome Powell led Fed.

So that’s one piece of the puzzle.

You’ve also probably heard that the U.S. and China have been engaged in an economic pissing contest for quite some time.

Here again, President Trump is displeased with China’s trade policy with the U.S. and he’s been using tariffs to goad them to the negotiating table.

But the last round of talks didn’t end well, so Trump slapped more tariffs on the Chinese exports to the United States.

Once again, the stock market didn’t like it much.

Let’s take a time out here to remind ourselves that when money flees the stock market, it usually ends up in bonds. As demand for bonds goes UP, interest rates go DOWN.

Then, as interest rates do down, investors go back to stocks in pursuit of yield, and everything reverses. It’s an ebb and flow of funds which creates a degree of equilibrium.

Or at least that’s how it usually works …

Sometimes, when investors don’t like either stocks or bonds, they buy other things for safety … including gold and real estate.

This is a far more interesting development and something we discussed at length in a recent commentary.

But that was before China allegedly punched back at Uncle Sam’s latest tariffs by allowing their currency to fall below the politically significant 7:1 ratio to the dollar.

Now before your eyes glaze over, it’s not as complicated as it seems. And as we’re about to point out, it has more of an impact on your real estate investing than you may realize.

When China allows its yuan to weaken relative to the dollar, it takes more yuan to buy a dollar. More significantly, it means dollars will buy more Chinese goods.

In other words, it makes Chinese goods cheaper for Americans … effectively negating the punitive impact of U.S. tariffs. It’s like blocking the punch.

The Trump Administration wasn’t happy about China’s “block” and, for first time since the Clinton Administration, decided to brand the Chinese as “currency manipulators”.

Without getting into the weeds, it means the conflict is escalating … and the two heavyweight economies are turning a gentleman’s disagreement into a street fight.

With the two economies highly intertwined with each other … and very influential around the globe … this altercation has the potential to impact virtually everyone world-wide … including Main Street real estate investors.

Of course, we’ve been talking about this since 2013 when the clues in the news made it clear the dollar is under attack by China (and Russia).

We’re not telling you this to brag. We’re simply saying these are events which many people have seen coming … and have been preparing for.

And it’s not over by a long shot.

So if want a broader context for what you see reported in the daily news, you might want to check out our Real Asset Investing report and our Future of Money and Wealth video series.

And if you’re not sure why all this matters to a lowly Main Street real estate investor, consider this headline …

China could unleash this weapon on the financial markets to wallop the USYahoo Finance, August 6, 2019

“They [China] could start selling Treasuries which is what they use to benchmark the yuan to the dollar and that would be the doomsday scenario.

(By the way, Russia’s already done it, but they’re small fry compared to China.)

“While China has reduced its holdings of Treasuries in recent years,
any amount of pronounced dumping could send U.S. interest rates skyrocketing.

Remember, this is Mouse Trap …

Think about what “skyrocketing” interest rates would mean to an economy bloated with record levels of consumer, corporate, municipal, and federal debt.

As we discussed exactly one year ago, America’s debt could be an Achilles heel China could attack by dropping the interest rate bomb.

Back then, this was considered an extreme view … highly unlikely because dumping that many Treasuries at once could cost China billions.

But China’s been stocking up on gold … perhaps as a hedge against collapsing the dollar?

And when you consider the cost of “war” … even a trillion dollar loss is less than what the U.S. has spent in the Middle East.

So it’s not too far-fetched to think China might consider the loss just the cost of winning the trade war.

Let’s bring it back down to Main Street …

We’re not saying interest rates will skyrocket. But they could. There’s a lot more room to rise than decline.

And if China is playing a different game than Uncle Sam thinks, they may make a move few expect.

Is your portfolio fortified to withstand a sudden spike in interest rates?

“The time to repair the roof is while the sun is shining.” – John F. Kennedy

Think about it. Pay attention. Inspect the roof … and make repairs.

Until next time … good investing!


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Tariffs, Taxes and Trade Wars – Insights for Real Estate Investors

There’s a lot of talk in the media about tariffs, taxes, and trade … what does all of that really mean for real estate investors?

As a real estate investor, you need to understand what is going on economically. What’s happening at an international level can trickle down to your local playing field.

To help you navigate the news, we brought in our good friend Peter Schiff. Peter is an author, stock broker, and financial commentator … and he has some strong ideas to share.

Learn to more successfully sail the economic sea and weather financial storms.

In this episode of The Real Estate Guys™ show, hear from:

  • Your financial seafaring host, Robert Helms
  • His economically seasick co-host, Russell Gray
  • Author, stock broker, and financial commentator, Peter Schiff

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Tariffs and the big picture

If you’re the type of investor who reads the headlines … and you should be … then you’ve probably seen lots of talk about tariffs, taxes, and trade.

But most investors don’t understand what these headlines mean for their money.

What’s the deal with these three big “Ts” … What are they? How do they work? And why do they impact your business?

As a real estate investor, you’ve got to understand the economic and financial sea that you swim in.

You need a basic understanding of all things economic.

Tariffs … in particular … are a great place to start.

Before 1913, the United States didn’t have an income tax. Instead, we funded our federal government through tariffs.

A tariff is a tax on people that want to sell in our markets … and today, President Trump is using tariffs as leverage in negotiations to level the international playing field.

You may agree or disagree with these politics … but whatever your personal opinions, you still need to know what such action really means for you.

Any kind of tax or tariff affects how much things cost in our economy … and it can also affect where jobs are created … which affects where people live.

By instituting tariffs, the federal government hopes to bring more manufacturing jobs back to the United States … potentially resurrecting manufacturing ghost towns.

Real estate investors need to look out at the horizon and see the bigger picture. You want to be riding the wave … not chasing the trend.

That’s why we asked our good friend Peter Schiff to share his knowledge and experience with us.

The US-China trade relationship

Peter says a great place to start increasing your understanding of the current economy is to look at the US relationship with China.

According to Peter, China does TWO big things for the US … they supply us with real goods, and they lend us money.

We get everything from China. It’s all manufactured products that make our lives better.

People go to Walmart and buy cheap stuff … and where is it coming from? China, of course.

China is also the biggest buyer of US bonds … which means they are our lender. They are lending us money that we would otherwise not have.

While the federal government talks about losing $500 billion a year to China, Peter thinks the US is still getting the better end of the deal.

China supplies us with real goods … and in exchange the US gives them a stack of paper that is arguably worth less every day that they hang on to it.

So, if the US places tariffs on China and enters a trade war, who is worse off in the end?

Peter says the Chinese will still have all their stuff … and we’ll just have a stack of paper.

The US government hopes that by instituting tariffs, companies will make their products in the US instead. Peter says that is easier said than done.

Pulling together the infrastructure, raw goods, and man power to manufacture these products in the US could take years … and it will cost businesses more money … not to mention a major shortage of goods in the meantime.

Peter explains that switching the US back over to a more manufacturing-based economy would require tremendous changes … and most likely result in a huge depression until the new economic flow was established.

“When we were a big manufacturer in the past, we had limited government, lower taxes, fewer regulations, a lot of savings, and a skilled workforce. We don’t have that stuff now,” Peter says.

Peter does mention that the US is probably going to have to make some of these changes eventually … but proposed tariffs and trade wars would accelerate the timeline in a painful way.

And the United States doesn’t realize how painful it will be.

If tariffs make it harder for the Chinese to sell stuff to America … they’ll sell it domestically instead.

As the Americans get poorer … the Chinese would be getting richer.

Right now, the Chinese labor, and we get the fruits. Suddenly, they would get both.

And what about our intellectual property?

“They’re going to keep ripping off our intellectual property because we can’t stop it, but now they’re not going to be giving us this big subsidy by loaning us money and supplying us with goods,” Peter says.

Preparing for a drop in the dollar with gold

Another notable headline today … the Chinese and Russian governments are buying gold and putting it away.

Peter says that the Chinese and Russian governments recognize that the dollar’s day as the reserve currency are numbered.

Nobody knows when the dollar’s time will be up … but if it loses its role as the primary reserve asset for central banks, what will take its place?

Right now, what gives a currency value are the foreign reserves … we’ve got this huge pile of US dollars that gives currency value.

Before central banks used other currencies as their reserves, everybody used gold. That’s what backed up your paper.

Originally, the transition from the gold standard to the dollar standard happened because the dollar was as good as gold.

US Federal Reserve notes were obligations of the Federal Reserve to pay. So, foreign central banks held Federal Reserve notes, which were redeemable on demand in gold.

Then, in 1971 the US said it would not give other countries gold for these reserves. The value of the dollar went down … and the value of gold went up.

All the central banks kept holding the dollar as a reserve even though it wasn’t backed by gold anymore.

Peter says that the US has borrowed so much money … and printed so much money … that it is heading for a currency crisis.

“In that environment, central banks are going to have to show that their currency is backed by something,” Peter says.

Some banks are buying more of other currencies … like the euro or the yen … but if people lose confidence in the dollar, the same could go for other currencies.

“I think that central banks are thinking they better have actual money in gold, because in the future, gold could be a much more important component of their reserves,” Peter says.

And if the price of gold continues to rise, the appreciation alone is going to increase the percentage of their reserves that are in gold.

Preparing yourself for the future

So what’s an investor to do?

Peter recommends getting out of US stocks in general … and bonds are way over-priced right now.

“If you’ve been fortunate enough to have invested in US stocks and seen a big gain, you need to cash in. Take that gain before the market takes it away from you,” Peter says.

That doesn’t mean you shouldn’t own stocks … Peter says it just means to think about moving out of dollar-dominated US stocks.

Consider taking a look at foreign stocks … emerging markets and developed markets are looking really good right now.

These stocks are international and derive their revenues outside of the US. If the dollar crashes … these stocks will rise in proportion to that decline.

Peter also believes that investors should have some sort of gold in their portfolio. It’s a good way to get diversified.

There’s no sure way to know what will happen in the future. We can only do our due diligence and make an educated guess.

Remember that not every strategy works for every investor. Find what works best for you. Always talk to an expert that understands your financial needs and situation.


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Market Spotlight – Markets on the Move

People, businesses, and their money move around for lots of reasons. New jobs, better opportunities, tax incentives, high returns … the list goes on and on.

Savvy investors monitor these constant migrations. They look for patterns and take action to capitalize on opportunities and avoid risks.

All this movement affects supply and demand … especially for real estate. So today, we’re taking a look at some of the many factors moving markets today.

In this episode of The Real Estate Guys™ show you’ll hear from:

  • Your savvy host, Robert Helms
  • His sassy co-host, Russell Gray

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Read the signs in moving markets

We talk a lot about specific markets that are providing great opportunities for investors right now … but what about a year from now? Five years? Ten?

If you want to stay ahead of the game, you need to know how to read the signs of a market on the move.

It’s important to remember that it isn’t the property that makes you money … it’s the people.

A market is made up of people and businesses that have a relationship with real estate. That’s what makes it valuable.

The more tenants you have in properties that you own, the more positive CASHFLOW comes in … and the richer you become.

When you look at markets, the main thing you are looking at is supply and demand. Are people leaving? Are people coming in?

Then, you need to ask why people are moving in or moving out. There are always underlying factors that affect where and when people move.

As you work to identify these factors, you’ll begin to recognize patterns and principles … information that will enable you to spot emerging trends in other markets and get ahead of the pack.

The power of politics and trade

An article in Bloomberg Business Week points out the upside of a global downturn … juicy real estate deals.

Worldwide, many high-end home prices are being slashed by as much as 30 percent. This market information gives us some interesting clues.

These price cuts could indicate future opportunities … these markets could move!

If you’re looking to flip properties, you could purchase real estate now and have a good chance of selling it in the future for more … and not just because of the equity you put into it to add value.

Take a market like London, for example.

London has a reputation for being super expensive. But sellers of high-end homes are slashing their price tags.

When you do your research, you can discover some of the underlying factors contributing to this lower asking price. Recent changes to tax codes, Brexit, and a surge in populist thinking are just a few.

So, people with the means and ability to move to a more friendly jurisdiction will do it.

But London has a historically great real estate market … when things settle down, there’s a predictable chance prices and demand will shoot right back up.

Sydney, Australia, finds itself in a similar situation. The median home price is down 6 percent year over year since last year.

Australia has an economy that is largely driven by supplying commodities to China. But China is experiencing a slowdown, and Australian markets are feeling the impact.

When you’re looking at markets, you’re looking for clues … and international politics and trade can be powerful factors.

Hong Kong has been a strong real estate market … but like many parts of the world, real estate there is tied to U.S. dollars.

The market is down 10 percent since August of last year and is predicted to be down another 10 percent by 2020.

When you’re looking at moving markets, that’s not necessarily a bad thing.

Populous markets have a lot of drivers … and in Hong Kong those drivers have caused prices to go down quickly. That doesn’t mean they won’t go back up.

Hong Kong is generally considered to be very safe for property rights, personal liberty, and financial stability. It’s an economic capital in that part of the world.

All of these factors are clues that tell the smart real estate investor it might be worth digging deeper to determine whether a market has a good chance of turning upward.

If it does, a temporary downturn can be a lasting opportunity.

Clue in on taxes

There are plenty of markets on the move within the United States … and a lot of that has to do with taxes.

Any time you have changes in the tax code, you will see changes in the way people invest their money. It’s an essential clue in identifying market trends.

New York City is the perfect example.

For the first time in a long time, the median price of condominiums in Manhattan has dropped below $1 million. That’s DOWN 6 percent from a year ago.

Under the previous tax code, you could deduct your state and local taxes from your federal income tax.

If you lived in a high-tax state like New York, you could mitigate a lot of those high taxes by simply deducting them from your federal liabilities. You can’t anymore.

As a result, markets like New York City and California’s Silicon Valley are moving down … and low-tax jurisdictions like Las Vegas, Phoenix, and Florida are moving up.

Learn from moving markets

You might never invest in London, Sydney, Hong Kong, or New York … but you CAN learn a lot by looking at why those markets are moving.

Markets move in different direction for different reasons. The more you understand, the more easily you can identify patterns in the trends occurring in your market of choice.

Studying markets on the move is an invitation for you to do the research. A market that works for one investor doesn’t necessarily work for another.

Markets have personalities … just like people.

You wouldn’t marry somebody just because they were the first person you talked to or because your best friend thinks they’re interesting.

You decide on your own investment life … where you want to be, and what you want to be doing.


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STRONG economy, BUT ….

This may be one of the most interesting times in economic history. 

The pace and amount of change is creating significant challenges and opportunities for both investors and entrepreneurs … not to mention policy makers.

It’s fun to watch, hard to keep up with, and impossible to avoid.

The changing future of money and wealth will affect everyone … believe it or not, like it or not, prepared or not.

Aside from growing threats to dollar dominance in global trade … there’s a tug-of-war going on between stimulating and constraining the flow of dollars through the economy.

We recently said the rollback of Dodd-Frank might increase community lending … especially into real estate.  This stimulates the economy.

But the Fed decided to raise interest rates again … ever so slightly … and toss in some hawk talk (more hikes coming this year).

Obviously, higher rates mean fewer borrowers qualify for loans, and those who do can’t borrow as much.  This constrains the economy … and directly affects real estate investors.

Earlier this year, Uncle Sam implemented tax cuts and a ginormous government budget.  Tax cuts leaves more money in the hands of individuals and corporations, hoping they’ll spend it.

That’s stimulating … IF they really deploy the funds.

Of course, even if individuals and corporations won’t spend, the government is going to (shocker, we know).  This generally stimulates the economy.

Meanwhile, rising prices … led by gas prices and healthcare … and let’s not forget tariffs … mean dollars don’t go as far, so people can’t buy as much.  This constrains economic activity.

Dizzy yet?  It’s like watching a tennis match.  And we’re not done …

The dollar is strengthening because of an improving economy, rising rates, and its safe-haven status in times of geo-political uncertainty (like now).

strong dollar makes foreign products cheaper for Americans.

Domestically, this can stimulate activity … if people buy more stuff … if it’s made overseas … and if it’s not subject to tariffs.

On the other hand, a strong dollar makes exports harder to sell, which is a drag on sales made to foreigners.  This potentially constrains cash coming into the USA.

Meanwhile, a tight U.S. labor market and the rising wages we’re told will follow tends to increase people’s ability to borrow and spend.  This stimulates the economy.

Unsurprisingly, both consumer confidence and small business confidence are VERY strong right now.

People and businesses generally feel good about their economic future.

When people feel good, they spend, borrow, and invest.  All are stimulating to the economy.

So on the surface, the U.S. economy seems to be leaning towards growth and stability.  And because a rising tide lifts all boats, real estate investors should be very happy right now too.

Still, there’s an obvious tug-of-war going on between stimulating and constraining the economy.

The challenge (and opportunity) is that SO much is changing SO fast.  Too much stimulation is a problem and so is too much constraint.

And with so much happening at once, it’s probably dangerous for an investor to put TOO much emphasis on any one thing … or prepare for only one outcome.

After all, the economy is a very complex system.

Investors who bought too much into the sunshine narrative leading up to 2008 weren’t prepared for a storm. When it came, many got washed away.

Those who bought too much of the gloom and doom story missed out on one of the best real estate cycles in recent memory.

So it’s important to listen to a variety of viewpoints … then have a plan for variable outcomes.

For years, we’ve talked about the benefits of healthy tension … opposing forces tugging hard at each other.  Just like an old-fashioned rooftop TV antenna …  it’s the tension between opposing positions that creates stability.

So we like all the debate and chatter in the market right now. It’s less confusing than comforting.  It helps us see both the opportunities AND the risks.

Robert Kiyosaki reminds us all the time to stand on the edge … so you can see both sides of the coin.  And there’s no one-size-fits-all answer.

We think it’s important to keep in mind that strong economy and astrong financial system are two very different things.

It’s like getting into a boat and thinking it’s seaworthy simply because it’s fast.  A bad hull with a slow leak will eventually sink even the fastest boat.

Right now, even though corporate profits are up and more jobs are being created, interest rates are rising in the largest sea of global debt in history.

As we learned in 2008, when debt goes bad, financial ships can sink VERY fast.

But dangerous global debt levels is only one of several concerns about what some consider to be a fragile financial system tasked with supporting robusteconomic activity.

Will it hold up?  What if it doesn’t?  How will you know things are starting to break?  What will you do if it does?

Sunshine is awesome and we should all enjoy it.  But it’s always smart to watch the weather reports … and pack an umbrella just in case.

We’ll have much more to say on this important topic in the near future …

Until next time … good investing!


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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.