What a wild ride 2017 has been … and 2018 is looking even MORE intriguing!
There’ve been SO many fascinating stories. Trying to pick the MOST interesting is a real challenge …
… a historic and unorthodox Trump presidency
… the record-breaking ascent of the stock market
… the record-breaking U.S. and global debt
… the meteoric, hyperbolic rise of Bitcoin, and crypto-currency’s move from libertarian fringe to mainstream …
And of course, there’s the ongoing saga of China’s drive to dethrone King Dollar; the drama in the House of Saud; and the (allegedly) strong U.S. jobs market.
All these things affect the financial eco-system our real estate investments live in … so we pay attention to them.
After all, we don’t want our backs to the beach if a tsunami is coming. We did that once and it was NOT fun.
So what’s the biggest story as we end 2017 and press into the new year?
We think it could be oil. But perhaps not for the most obvious reasons. Here’s why …
Currency is like the blood of an economy. It circulates … transporting energy to individual cells … many of which are organized into vital functions.
We teach our syndication students the importance of designing an effective business model … a circulatory system … to be sure cash flows to all vital functions.
Failure to nourish all cells (individuals) and vital organs (critical activities conducted by groups of individuals) can result in sickness, permanent disability, or death.
This is true for individuals, for businesses, and for nations.
After World War II, the U.S. dollar was crowned the world’s reserve currency.
Backed by gold, the dollar circulated the globe … transporting economic energy to individuals, businesses, and nations.
In 1971, the gold-backing was removed, and the dollar became severely ill … with a disease called “distrustitis” … commonly known as rejection. Nations didn’t want it.
So, they began aggressively trading in their dollars for gold …. bidding the price of gold up from $35 an ounce in late 1971 to nearly $700 in early 1980 …
Ironically, U.S. citizens were locked out of gold ownership until December 31, 1974 when President Gerald Ford revoked the ban imposed by President Franklin Roosevelt way back in 1933.So what does all this have to do with oil in 2017 … and why do we think it’s important heading into 2018? And how does any of this tie into real estate investing? We’re getting there!
First, a little more history …
Uncle Sam discovered an un-backed dollar wasn’t very popular. And when nations dumped dollars, it created The Great Inflation of the 1970s.
Back then, the cure for the dollar’s “distrustitis” was to force dollar demand through oil (the petro-dollar) and high interest rates (they reached 20% in 1980).
Cheap labor from China sucked up some inflation … while a recession slowed economic velocity to suck up even more. But those are topics for another day.
The point is there’s a long linkage between the dollar, gold, and oil … and all three have substantial influence on geo-politics … even today.
Of course, now there’s a new kid in town … crypto (a.k.a. Bitcoin) … which started a ridiculous run in 2017 …
Hmmmm … that chart pattern for 2017 looks a lot like when gold took off the last two times there were outbreaks of dollar distrustitis …
Probably just a coincidence.
But it makes you wonder if crypto and oil might get together as a way for Uncle Sam’s adversaries to escape the dollar … oh, wait …
… which brings us to why we’re closely watching oil going into 2018.
In many ways, oil is the asset of choice to back currency. It’s been the backbone of the dollar since the 1970s and the world knows it.
That’s because the world runs on oil.
And unlike gold, every productive nation MUST have oil. It isn’t a philosophical commodity … it’s pragmatic.
As Investor Summit at Sea™ faculty member Chris Martenson reminds us, EVERY economy needs energy to operate.
Because oil is the world’s most in-demand commodity, whatever currency it trades in is sure to be in high demand.
China, the world’s #1 buyer of oil, knows this. And they’re using their economic muscle to position their currency, the yuan, for a greater role in global trade …
Of course, with $20 trillion in debt and a debt-to-GDP ratio over 100% … more than THREE times what it was when high interest rates were used to crush inflation …
… the U.S. economy probably couldn’t handle 10% interest rates, much less 20%.
So if all the forces aligned against the petro-dollar succeed, might the U.S. experience some painful inflation?
Of course, when you own real assets … especially those which produce (like farmland or oil fields) … or channel productivity (like rental real estate) … you’re hedged … you preserve wealth.
But the key to PROFITING from inflation is to short the dollar. And that’s done with debt.
When you can fix the debt and own the asset, as the asset’s dollar price goes up against the fixed debt, the debt becomes smaller.
Of course, as we’ve discussed before, income-producing real estate is the safest way to play this game.
Now if we’re Uncle Sam and worried oil might end up backing a rival currency, we need to prepare for role reversal.
When the world wants dollars, all Uncle Sam had to do is print and import. The world gets dollars, and the U.S. gets stuff. Nice.
But if something replaces the dollar, then Uncle Sam needs to export stuff the world wants, in exchange for whatever currency is now in demand.
Are we saying the world will stop taking U.S. dollars? No.
But they might want a lot MORE dollars to buy the same stuff (inflation), which would weaken the U.S. economy.
Not surprisingly, the U.S. is taking steps to stimulate domestic oil production.
And agree with it or not, the Trump Administration is very friendly towards the oil industry.
Bringing this all back to Main Street and our daily real estate investing …
First, the relationship between oil and the U.S. dollar has the potential to impact the purchasing power of our dollars, interest rates on our mortgages, and the cost of living for our tenants.
We’re very interested in ALL those things.
Next, if Uncle Sam stimulates domestic energy production with investment incentives and regulatory easing, it might lead to economic booms in energy-rich geographies.
Remember, energy was a top driver of job creation post-2008 … with Texas being the biggest winner.
That’s what took us into Dallas after the recession … and keeps us interested today.
Oil, gold, the dollar, China, new faces on the Fed, tax reform, Bitcoin …
… are all converging in 2018 for potentially massive changes to the future of money and wealth.
And they’ll all be very important topics of discussion on our 2018 Investor Summit at Sea™ … which just might be the MOST important Summit in our history.
Until next time … good investing!
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