Everyone is talking about health care. “How could the politicians do this with a strong majority of American in opposition?”

This video provides some insight into the never-ending string of government takeovers, and seeing the whole picture is alarming. One lesson from all of this is that complaining doesn’t work. Neither does disapproving. What does work is being prepared to defeat government takeover attempts.

Discussed in the video is what I believe is one of the most fundamental characteristics for a free society. Enjoy!

When listening to feedback from Nabers Group clients, one message is loud and clear, “We want to see investment opportunities from you.”

I sent out a survey to all of my clients recently, and I’d love your input too. With my activities in many circles, I have access to mounds of solid investment opportunities. If you complete this survey it can help me understand what types of opportunities you are most interested in.

Click here to take the survey.

What is inflation?

I believe this is the most important financial question a person can ask. I am constantly on a trek to better understand money and wealth. Here is some of what I’ve learned thus far:

Per its original meaning:

• Inflation is not a rise in prices
• Inflation is a rise in the money supply

I have a 1920 Webster’s dictionary that says inflation is a rise in the money supply. I have a 2006 Webster’s dictionary that says inflation is a rise in consumer prices. From this point forward, I will use “inflation” for its original definition (an increase in the money supply) and I will use “price inflation” to refer to a general increase in  prices.

How did this “Newspeak” happen?

Inflation is harmful because it leads to a rise in prices. When everyone’s expenses are rising faster than their incomes as a result of the actions of the government and banking system, it is like a tax on the American people.

With the harm being a rise in prices, the focus on the topic of “inflation” shifted from the cause (inflation) to the effect (rising prices). And so, over a period of decades, everyone (news media included) shifted into speaking about inflation as a rise in prices.

Why don’t inflation and price increases correlate directly anymore?

You can take simple economic examples and draw a direct correlation from increasing the money supply to a rise in prices not complemented by a rise in incomes. These are usually fictional stories of a group of people being stranded on an island and creating their own economy. They will illustrate with great clarity that increasing the money supply takes from the regular person and gives to the banker or his friends (such as the government).

Now apply those concepts to our current economy and you will be so confused, it will be easy to surrender to saying, “Gosh this stuff is for super-geeks to figure out and I’ll just go with whatever is reported to me.” Of course, we’ve learned that following the crowd and getting your information from normal reporting sources is a sure way to be led off the edge of a financial cliff.

Why do these simple concepts work in simple, theoretical economies and not our real economy? Why can’t we draw a direct correlation between inflation and price increases? We are on a trajectory away from a free market. Our country started with a 6 page Constitution. People and businesses were once operating in a free[er] market. We developed our understanding of the economy based on a free market. Today we have over 100,000 pages of laws and regulations. And each year we add to the pile. Almost every law interferes with the way things occur naturally. And almost every law takes us one step further away from a free market.

Our understanding about economics and money is based on the past, but we are in the present. In the case of inflation and price inflation, manipulations make the connection difficult to see. In a free market, inflation would create  price inflation clearly and directly. But in our economy, the government has already tinkered with prices in countless areas. There are subsidies, tariffs, minimum price mandates, maximum price mandates, etc, etc. The buyers and sellers of the market don’t come together to determine price. They come together to try to transact within the confines of the 100,000 pages of laws and regulations that the government imposes. Within that system the price of one thing may skyrocket while other things stay the same.

What does monetary inflation do today?

In the case of the housing bubble, the Fed created tons of money through interest rate manipulation. In a free market that new money would have gone everywhere and prices of everything would rise. In our actual market, Fannie Mae and Freddie Mac (government-sponsored enterprises or GSEs) then attracted mortgage borrowers in ways that non-GSE private businesses couldn’t. That directed all of the new money into real estate and took its prices to the moon and then back down to earth. Now we all have whiplash and lighter pockets.

Meanwhile, the government organization that measures price inflation (BLS) has found that reporting price inflation (through CPI, the Consumer Price Index) is quite challenging. “Man, what do we do?! The prices of certain things are moving erratically!” thought BLS. They (and other governments) decided to make many adjustments to not count things rising rapidly in price. Through many phases of altering their calculations and adjustments, CPI charts have effectively become pieces of art with the economic utility of a Jackson Pollock piece.

The other day, somebody sent me a link to this chart and asked me what can be drawn from it. I replied that data was gathered, processed and reported differently from one decade to the next. It would be like taking the price of apples in the 50s, bananas in the 60s, oil in the 70s, cotton in the 80s, and wheat in the 90s. Now put that onto a chart. What does it mean? Nothing. Just like price inflation. CPI didn’t report the same thing 20 years ago as it does today, and putting the different reports on a chart and connecting dots with lines is almost as arbitrary as children’s connect-the-dot puzzles.

The difference is the child knows it’s a meaningless game. With our arbitrary line graph puzzles, we make big decisions based on them. Ouch.

In a recent meeting with a couple of real estate investors, I was posed with the question:

Doesn’t the weak dollar eat into the profit of foreign real estate investing?

Not at all; in fact, quite the contrary. A weak dollar makes spending dollars in foreign countries disadvantageous. I ran into this a few years ago in Sweden. I went to buy a t-shirt and it cost the equivalent of $85 USD. I asked my Swedish friend if this shirt was expensive, and he replied “no”. That’s when I learned firsthand that the plummeting dollar is making international vacationing more expensive for Americans.

Spending money on foreign real estate

The same does apply to real estate purchase for personal use. If you find a beautiful property in a foreign country that you’d like to buy for personal use, it’s going to cost a lot more today than it did 5 years ago. You’re spending US dollars and you’re going to have to spend a lot more now since they are worth less thanks to inflation.

Investing money in foreign real estate

Investment into real estate is done to accomplish one or both of the following objectives:

1. Produce [Rental] Income – I believe this should be the primary objective of any investment. Income is more predicable and controllable than appreciation.
2. Appreciation / Capital Gains – This is the focus of most novice investors.

When investing in foreign real estate, you convert the appropriate amount of US Dollars into local currency, and you will purchase the property in local currency. Regardless of whether you receive your return on investment from #1 above, #2 above or both… you will receive it in local currency. If you buy property in Sweden, you will receive rental income in kronor (Swedish crowns) and proceeds from the sale of the property will also be in Swedish crowns.

Scenario 1. If the dollar is weak (relative to its historic value), but its value remains constant during your ownership of the Swedish property, your return-on-investment (ROI) will be unaffected by the dollar’s weakness.

Scenario 2. If the dollar is weak, and it continues to weaken during your ownership of the Swedish property, your ROI in Swedish crowns will remain unaffected, but in USD your ROI will be increased.

Scenario 3. If the dollar is weak, but it rebounds and strengthens in value during your ownership of the Swedish property, in USD your ROI will suffer. The dollar can only bounce back if the Fed completely reverses its monetary policy. In this case, interest rates will go up to 13% – 20%, and the entire US economy will essentially crash. Here there will be so many opportunities that as long as you didn’t put your entire investment portfolio into the Swedish property, riding the bear market down in short positions will more than compensate for the lessened ROI on the Swedish property.

Weakening dollar makes domestic real estate investment a bad idea

The weakened dollar has hurt real estate in the last 2 years. During this time, inflation has been at 10% – 12%, while housing values have been stagnant or even declined in some localities. This means all our homes have decreased in actual value 10%+.
If you believe interest rates will remain low and that Fed will continue its inflationary policies, investing in U.S. real estate might not carry a very good ROI. If your property is returning you 12% annually, but inflation is at 12%… you have successfully stored and protected your wealth, but you have not grown it. The continued weakening dollar will hurt domestic real estate unless real estate appreciation outpaces inflation. Using the increasing money supply as a forecaster, inflation is heading towards 16%. I don’t think real estate values (or rents) will increase by 16% per year over the next few years, so this tells me that while our inflation continues, domestic real estate investment performance [in general] will suffer.

Summary

• The weakened dollar has made spending money in foreign countries expensive for Americans.
• The weakened dollar has not affected real estate investment into foreign countries.
• Should the dollar’s weakening/debasement continue, ROI in foreign investments will increase.
• Should Fed’s monetary policy reverse, we will experience deflation and an economic collapse. In this circumstance, there will be tremendous investment opportunities for anyone who has enough liquidity to take advantage of the moving markets.

Concepts to consider

• Reduce your exposure to the US Dollar now to protect your wealth
• Keep enough liquidity to enable you to react to the possibility of coming reversal in Fed’s monetary inflationary policies
• Hold that liquidity in assets denominated in a foreign currency – preferably a currency from a country whose monetary system is generally sound and stable such as Canada or Switzerland