Although we know there’s a lot more to real estate than just housing, it’s a HOT topic right now … and for good reason.
Last time we delved into the housing bubble talk that’s been percolating lately … especially from Wall Street, who seems to be blind to their own bubbles.
Candidly, just about EVERYTHING is bubbling right now which makes it REALLY hard to discern real from fake.
But it’s a critical distinction to make.
Real estate investors are proud they invest in something “real” … a tangible, physical plot of land with improvements and utility people are willing to pay for.
Precious metals investors feel the same way, although most PM investors haven’t figured out how to get their holdings to cash flow (there are ways).
But an all-too-common denominator is nearly all investors are preoccupied with the dollar-denominated value of the holdings. The PRICE in dollars.
Of course, in a world where the dollar is king, this makes perfect sense.
Like playing tag as a kid, dollars are “home base” … it’s where you’re safe. When the going gets rough, you liquidate everything and park dollars in the bank. Safe.
Or is it? Bank counter-party risk notwithstanding, the dollars themselves present risk.
Anyone paying attention (except the Fed) can see prices for everything going up. It takes more dollars to buy the same stuff. That’s real-world inflation.
Of course, we can’t blame the Fed for missing it. After all, they don’t live in the real world.
The problem is few investors really know how to navigate inflation. Most are investing to collect more of the very dollars which are falling in value.
And even though we’ve been commenting on this for MANY years, it seems as though the conditions we’ve been preparing for are getting closer … if not already upon us.
So, at the risk of redundancy, we think it’s important to once again draw your attention to key concepts …
… and encourage you to become MUCH more aggressive in your education on the dangers and risk mitigation strategies for dealing with a falling dollar.
Dollars aren’t wealth. They’re claim tickets on wealth.
Read it again and really THINK about it.
Real wealth is stuff. You want dollars so you can redeem them for stuff. Food, energy, houses, cars, toys, tools, trips … the more the merrier.
What gives dollars value is the willingness of wealth owners and producers to accept them for something of real value … food, energy, healthcare, use of a building, tools, equipment, supplies, etc., … the list is huge.
Of course, the government and Fed (NOT the same thing*) uses two sneaky tricks to insure demand for dollars.
(* we just confirmed G. Edward Griffin to our 2021 Investor Summit faculty)
First, they levy taxes payable only in dollars. Now taxpayers must trade their labor and goods to obtain dollars; or adjust their behavior to avoid taxes.
It’s notable that by their own admission, taxes aren’t necessary to fund the government in the fake money system established in 1913.
That’s the year we got income tax, the Fed, the IRS, and inflation. In case you were wondering.
And the obscene debt and deficits make it blatantly obvious government can and will spend FAR in excess of income.
In fact, if all this spending were really about stimulus, they could have used all the stimulus from 2008 and the pandemic to simply pay off everyone’s debt.
Imagine how stimulated the economy would be if people could redirect their debt-service dollars into buying more stuff!
Of course, this would undermine their other dollar demand driving trick …
The second way dollar demand is fabricated comes from lending dollars created out of thin air to borrowers everywhere. The more debt the better.
That’s because dollar debtors are forced to become dollar earners, trading real labor and goods for freely printed dollars.
Of course, there’s a BIG story behind the dollar’s ascent to the throne … and we’re watching as the world is pushing back. It’s a bigger threat than most think.
The point is that dollars are created out of nothing and have no value except for their ability to pay taxes, service debt, and make CLAIMS on real things.
So again, dollars aren’t wealth. They’re merely CLAIMS on wealth that producers create.
You earn your claim tickets (or should) by creating something of real value. And you trade them for real things others provide … and vice-versa.
But what happens when someone can just fabricate claims without making a contribution?
Hopefully it’s obvious they now have purchasing power they didn’t earn. They have a claim on the wealth others produced or possess.
They get to take products OUT of the system without needing to put anything in.
Common sense says that’s not only unfair, but also not scalable or sustainable. At some point (perhaps approaching quickly), the system fails.
But it’s a gradual cancer which infects an economy.
Every new claim on wealth fabricated without contribution of wealth dilutes the value of all the existing claims on existing wealth.
This is “inflation”.
But inflation isn’t necessarily rising prices (although we’ve crossed that line).
Inflation first negates productivity gains which should have lowered costs. More stuff for less is prosperity. Less stuff for more is not.
When gains are prevented from reaching the market, prices may not be rising, but all the productivity gains which should have accrued to the producers and consumers is stolen.
It’s a subtle, but VERY important distinction. And in our view, it’s the fundamental flaw in Modern Monetary Theory.
But even if this dilution didn’t occur, how is it equitable that one group is able to fabricate claims on wealth, while others must produce in order to earn them?
And worse, what happens when the group of non-producing claimants becomes the majority … with more consuming and less producing becoming the trend?
The answer is shortages and rising prices. Sound familiar?
That’s inflation 101 and it’s a tidal wave that’s been building on the horizon for decades.
Historically, every time the wizards paint the public into this corner, their escape route is often hidden behind some form of crisis.
As Mark Twain said, “History doesn’t always repeat itself, but it often rhymes.”
We’re watching it play out right now in real-time.
So the BIG question is what to do?
Of course, there are all kinds of strategies and tactics … and no one-size-fits-all answer.
If it were easy, we wouldn’t gather with big brains for the week to work on understanding the challenges and seeking solutions.
But to distill it all down into ONE fundamental paradigm shift and open up all-new ways of approaching the challenge of wealth building and preservation …
Think outside the dollar. That’s because inflation distorts values and disguises reality.
It’s called nominal confusion. And the wizards are great at using it to create a faux world. Think “blue pill”.
For example, let’s say you buy a 3-bed 2-bath house today for $200,000; and gold is $2000 per ounce; and a basic car costs $20,000.
A few years later, the house is now worth $400,000; gold is $5000 an ounce; and a basic car costs $40,000.
Did the house appreciation make you “richer”?
Well, you have $200,000 in new equity, so in dollar terms … yes. But you still only own a 3-bed two-bath house.
So in terms of real estate, you’re no richer. The house didn’t get bigger. It won’t sleep more people. You didn’t acquire any new tenants.
You just have “wealth” on paper. The numbers are bigger measured in dollars.
But outside of dollars, you’re not doing so well.
After all, when you bought the house, $200,000 would buy 100 ounces of gold. Now it’ll only buy 80. It could have bought 10 cars, but now only 5.
Measured against real stuff, the “new” dollars are worth LESS.
The point is that none of the real stuff changed. Only the dollar. And if you’re collecting dollars, you’re falling behind … and you might not even know it.
This is nominal confusion. The numbers don’t tell the story. They hide it.
Similarly, inflation also confuses how the economy gets measured and how businesspeople make decisions.
If a business makes and sells 1 million widgets a year at $100 per widget, it’s a $100 million per year company.
And let’s say this $100 million business employs 100 people and generates a 10% net profit of $10 million.
But when inflation drives up the costs of materials, energy, taxes, and interest … the company is forced to raise their prices to $120 per widget.
Suddenly, they’re a $120 million per year business.
Did they grow?
By dollars, yes. They grew 20%. Break out the champagne. Pay bonuses. Consider going public.
BUT … they’re still only making 1 million widgets and employing 100 people. So in terms of adding widgets to the world and creating jobs, have they grown?
They didn’t grow by a metric that matters in the REAL world.
Worse, the costs rose too. So instead of a 10% net profit, it’s now only 8%. So instead of a $10 million profit, it’s only a $9.6 million profit.
Of course, if the owners were to use the net profit on $120 million in sales at 8% to buy their own widgets, they could only buy 80,000.
When widgets cost $100 and sales were “only” $100 million … the owners could use their $10 million net to buy 100,000 widgets.
Sales are “up”. Profits and purchasing power are down.
This is nominal confusion.
You think you’re doing better because you’re measuring success in dollars, but in terms of real production and purchasing power, you’re LOSING.
So this widget company’s 20% growth “success” story is really a sinking ship.
But it gets worse …
It turns out not all customers can afford the price increase, so sales fall to 900,000 widgets at $120 each or $108 million in annual sales.
Okay. But the business still “grew” by 8 percent in dollar terms. Not shabby.
But they no longer need 100 employees, so they cut 10 jobs. Now they’re at 90.
This helps profitability in spite of higher materials and energy costs, so now the net profit is 9% or $9.72 million.
Again, at $120 per widget, the profits will only buy 81,000 widgets. So the owners are still down quite a bit in purchasing power.
But the world is down by 100,000 widgets and 10 jobs. Less products and less jobs. All caused by inflation.
But inflation is the “tool” of the wizards to stimulate “growth”.
Nominally, the economy “grows” and Wall Street and the politicians take a victory lap. Meanwhile, on Main Street, there are less widgets and less jobs.
So whether you’re running a business or a balance sheet …
… the sooner you learn to think outside the dollar, the easier it will be to measure what matters so you can make better decisions.
Here’s a hint: Income-producing real estate, mortgages, and precious metals are all in the mix. The secret is in how they’re organized. Stay tuned!