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 move. The 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
“ … 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”.