It’s no secret we’re a couple of older dudes who got creamed in 2008. But like the economy, we bounced back. Unlike the financial system, we got the lessons.
Read that again and think about it.
If you got on board the real estate gravy train after the last crisis, congratulations … and welcome to your first crash. It’s looking to be a whopper.
For those who went through 2008 like we did, welcome back! We’re about to take a wild ride … and it should be a THRILLER.
The big message is: this is NOT the time to take a wait and see approach to portfolio and opportunity management. Things are moving too fast.
Investing intelligence is a blend of emotional control technical knowledge, and intellectual discipline.
Stress in the real world is where you test your skills. And yes, it’s a little unnerving.
Anytime the stakes are high and you’re pressed to edge of your confidence, it’s tempting to hide, deny, procrastinate, or complain about things you can’t control … to the detriment of diligently working on the things, you can control.
So rather than dive into the weeds of the plethora of clues in the news … they’ll always be there … we think it’s a good time to do some diagnosis.
After, all prescription without diagnosis is malpractice. You can’t know what to work on if you don’t understand the root of the problem.
In this case, we think there are two primary roots of the current crisis … one you can control, and one you can’t.
Let’s start with the root cause of the current crisis that you can NOT control.
It may or may not be interesting to you … and you might not agree with the premise … but be patient and work through it.
It’s arguably the most obvious yet misunderstood contributor to the malaise the coronavirus crisis is exposing.
In one word … debt.
Absurd, insane, unfathomable and unsustainable levels of debt … which has spread like a cancer throughout the global financial system.
The current metastasization started in 1913 with the founding of the Federal Reserve system, which gave bankers and politicians the ability to create unlimited amounts of debt.
The Federal Reserve Act and the 16th Amendment also created the income tax and the IRS, effectively equipping the government to use the productivity of the people to make the debt payments on all that debt.
Armed with this powerful new temptation, it took less than two decades to blow up a bubble known as the Roaring Twenties.
The expansion of credit led to mass consumerism, a stock market boom, and the nation’s “wealth” (based on inflated asset values) to double from 1920 to 1929.
Of course, the party ended in spectacular fashion leading to the Great Depression.
When debt bubbles implode, asset prices collapse … and the FIRST place this symptom manifests is in the stock market.
The Great Depression led to an unprecedented consolidation of power when President Franklin D. Roosevelt declared a “war on poverty” and gave America “The New Deal”.
So before there was World War II, FDR was already a wartime president.
Wait, we’re having deja vu.
FDR’s New Deal included Social Security, a proliferation of agencies and regulations, and the effective confiscation of the citizens’ gold.
FDR’s initial phase-out of the gold standard allowed the Fed to print virtually unlimited amounts of dollars.
In fact, the Chairman of the New York Fed admitted in a 1946 speech that there was no need for taxes to pay for anything because the Fed could print unlimited amounts of dollars.
He confessed the only reason for taxes was to “express public policy in the distribution of wealth and income” and in “subsidizing or in penalizing various industries and public groups”.
In other words, taxes allow the government to pick winners and losers in what is supposed to be a “free” market.
Wait, we’re having deja vu again.
Events like the Civil War, the Panic of 1907, the Great Depression, and 9/11 … demonstrate how crises always result in bigger, more powerful government and less personal freedom.
We’ll leave it up to you to decide if big government and less freedom is good or bad, but the facts are indisputable.
After 1933, it was illegal for Americans to own gold, while foreign holders of U.S. dollars and bonds could redeem dollars and U.S. bonds for physical gold.
But when the world realized the Fed was printing WAY more dollars than there was gold, it became obvious that the “official” gold price of $35 was too low.
So the world, led by French President Charles de Gaulle, started showing up at the U.S. “gold window” to redeem paper dollars for real gold.
By 1971, the U.S. gold reserves had dropped from 20,000 tons to less than 9,000 tons with no end in sight to the hemorrhaging …
… so President Nixon abruptly “closed the gold window” … effectively defaulting.
Of course, Nixon knew the dollar would collapse causing inflation.
So in an attempt to preempt inflation, Nixon also made it illegal for private businesses to raise prices or pay higher wages.
Yes, history buffs, in the “land of the free”, the government, unilaterally and without warning, mandated price and wage restrictions to private businesses … to “protect” everyone.
Of course, price controls didn’t last because they don’t work. More recently Venezuela tried it, and it didn’t work there either.
The Venezuela government said stores couldn’t raise the price of things like toilet paper. So when you showed up at the store, there wasn’t any.
To find toilet paper in Venezuela, you had to buy it on the street … and it cost a lot more than the official price.
Wait … we’re having deja vu again … again. That’s so weird.
So back to the dollar collapse after Nixon’s default …
In just a few years, gold went from $35 per ounce to $800 per ounce. Or more accurately, the value of the dollar crashed against gold.
Dollar holders smart enough to redeem their paper dollars for gold early did well. Those who didn’t, not so much.
By now, you may be recognizing some eerie parallels between the past and present. History doesn’t always repeat itself but often rhymes. That’s why we study it.
The point is these events kicked off an entire 49-year history … from 1971 to 2020 … of unhindered, exponential, and unsustainable expansion of debt.
If 49 years rings a bell for you, go look up the biblical concept of jubilee. It’s weird how all this is unraveling after 49 years. Probably just a coincidence.
(For more perspective on how the past helps predict the future, consider investing in our Future of Money and Wealth program. You’ll probably wish you bought it two years ago, but better late than never.)
Of course, YOU can’t stop Uncle Sam from spending trillions of dollars …
… or the Fed from printing trillions to fund government spending, push down interest rates, buy up toxic assets, and pump up asset values.
They’ve already begun doing all those things. The big question is whether the dollar can carry the load. It survived the 70s … mostly.
Time will tell what happens this time.
For now, it’s important to realize what the Fed is doing … and what history says is likely to happen when they do. Being confused or afraid isn’t a wise option … it only feels safer.
It’s like standing at the beach watching the distant tsunami coming toward you … it seems slow at first … then it’s on you. It can be hard to believe and scary.
But turning around so you can’t see it won’t make it go away.
So today, the COVID-19 coronavirus has stopped the economic heartbeat of the globe. Cash is not flowing, which means debt service is going to become a real problem real fast.
Remember, back in 2008, it only took a relatively few sub-prime mortgage borrowers to miss payments … and the financial system nearly collapsed.
The current debt crisis is probably going to be a LOT bigger. It could easily be The Real Crash Peter Schiff has vociferously warned about.
Of course, if the world had less debt and more savings, we could all shelter in place for a few months and everything wouldn’t unravel.
But the world is awash in debt, has little savings, and without productivity to service all the debt, a chain reaction of defaults seems virtually certain.
The government, the Fed, and the banks all appear to realize the gravity of the situation … and unlike 2008, they’re sprinting to get in front of it.
It really all comes down to the Fed and the dollar. The Fed is willing to print as many as needed to buy up everything and send everyone money.
It seems like either the debt will go bad (deflation) or the dollar will (inflation) … or both. And it’s all out of your control.
So what’s a real estate investor to do?
We’ll take that up in Part Two. Stay tuned …