real asset investing report

Real asset

How to Grow and Protect Your Wealth

Against a Falling Dollar

Russell Gray

RealAssetInvestingHow toGrowandProtectYourWealthAgainstaFallingDollar

1

© 2013 ‐ 2014 Russell Gray ‐ All Rights Reserved

By Russell Gray

With insufficient modesty, let me say this is one of the most important articles you will ever read. Not

because it’s brilliant, but because it’s TIMELY.

HappyBirthday

December 23, 2013 was the 100 year anniversary of the Federal Reserve. That’s 100 years that elite

central planners have enjoyed (abused?) what has become unfettered and unaccountable control over

the U.S. dollar.

Don’t worry. This isn’t a diatribe about the nefarious origins and motives of the banking cartel. My

friend G. Edward Griffin has written the iconic tome on that topic. The Creature from Jekyll Island is an

excellent read and I highly recommend it. To balance it out, you might also want to read The Lords of

Finance by Liaquat Ahamed. Neither is light reading, but if nothing else, I hope this article motivates you

pay closer attention to the Fed.

Remember: whether the 10 ton elephant in the room steps on you because it hates you, or because it

made a mistake, you’re just as squished. So I simply watch the elephant like a hawk and try not to get

crushed.

TheAssaultonSavers

Right now, savers and seniors are being crushed by artificially low interest rates and rising living costs

where it matters most: food, energy, and now healthcare (though you can’t blame health care on the

Fed). This is a bad combination that cuts interest income while increasing essential expenditures. Ouch.

I won’t bore you with the unabridged history of how we got here. The past is cast. And as much as I

might want to end the Fed, until that happens, we have to learn to dance with the elephant. So this

isn’t a piece on economic policy or how to fix the system. It’s more about how to dance with the

elephant and not get crushed.

Nonetheless, I think it’s important to review a few key dates and concepts. For some, this will be

review. For others, this will be enlightenment. In any case, it’s essential to lay a foundational

understanding from which to chart a course forward.

MeettheElephant

I am of the belief that the Fed is the most powerful, yet most misunderstood entity on earth. It

controls the value of the world’s reserve currency, the U.S. dollar. And the U.S. dollar affects every

economy and virtually every human being on earth (except maybe the pygmies in some African jungle).


2


We’re talking interest rates, loan availability, the cost of goods and services, and the values of our

stocks, bonds, mutual funds, real estate and precious metals. The Fed operates in the shadows, yet

their activities permeate every facet of our lives.

So here’s how it happened in a nutshell:

In 1913, bankers and politicians conspired..oops…“worked together” to pass The Federal Reserve Act.

This on the heels of the 16th Amendment, which gave the United States the income tax and the IRS.

Great. Prior to that, people were free to keep the fruits of their labors. The government was smaller

and more affordable, and was funded largely through foreign trade tariffs and excise taxes.

The purported purpose of all this legislation was to protect the economy from terrible economic events

like the Crash of 1907 (never let a good crisis go to waste).

How? By providing emergency liquidity to banks. If you’ve ever seen the movie Mary Poppins, set in

1910 England, then you know how scared bankers are of “runs” (people all wanting their money out at

the same time).

Of course, in just a few years after the Fed was created, excess liquidity (too much money and credit in

the financial system) fueled the wild speculation of the 1920’s which culminated in the Great

Depression. Oh well. It was a nice idea.

But rather than fix the real problem, Franklin Roosevelt’s “solution” (The Raw New Deal) included the

confiscation of all privately owned gold. The premise was that “evil hoarders” (a.k.a. savers) were

responsible for the crash. If only those pesky savers would actually spend money and stimulate the

economy. Yes, Lord Keynes was in his prime back in those days. And so began the outright assault on

the American virtue of thrift and savings.

HaveIGotaDealForYou

To be fair, Uncle Sam didn’t actually confiscate the citizens’ gold. He just forced them to sell it to him for

$20.67 per ounce. Of course, as soon as Uncle Sam had it all, he re‐priced the gold at $35 an ounce.

Great deal for Uncle Sam. Not so good for U.S. citizens. Why there wasn’t a revolt right there, I’ll never

understand. I guess people valued “safety” over freedom. Oops.

“He who sacrifices freedom for security deserves neither.” ‐ Benjamin Franklin

By 1944, between the confiscation of private wealth (the aforementioned gold purchased at a discount)

and the profits from financing a couple of world wars and the resulting reparations, Uncle Sam was the

proud owner of about 80% of the world’s entire gold stock. And back then, gold and money were one

and the same. Gold hadn’t yet been relegated to the status of “barbarous relic”.


3


Uncle Sam had some big clout. So in 1944 he went into a place called Bretton Woods and cut a deal

with the rest of the world. Instead of settling international debts with gold, Uncle Sam said, “Just use

dollars. They’re lighter, easier to count, and you can always turn them into Uncle Sam for real gold.

Trust me.”

So the world looked at Uncle Sam’s pile of gold, powerful economy and big army and said, “Okay.”

A couple of years later, two brothers opened a little diner in Atlanta, Georgia. It was the smallest

restaurant in the area, so they cleverly called it the Dwarf Grill. And no, they didn’t cook little people.

That restaurant is still open today, but they changed their name to Chick‐Fil‐A. Since then, they’ve

opened a few more. You’ve probably heard of them. At the back of this report is an actual copy of their

original 1946 menu. But hold that thought, we’ll come back to it in a bit…

So for the next 20 years, America boomed. We invented stuff. We built stuff. Smart people came from

all over the world to enjoy freedom, opportunity and take their shot at the American Dream. Sure, we

started having some cultural issues, but by today’s standards, it was Pleasantville.

StepRightUpandGetSome FreeStuff

And while America got rich, politicians got lazy.

They found it was way easier to buy votes than to earn them. Just promise people a piece of American

prosperity whether they earned it or not and you get all kinds of votes. It’s the flaw of democracy when

not chained by rule of law. That’s why our democratic republic came with a Constitution and Bill of

Rights.

Because when a person’s private property isn’t protected by law, then a majority vote can take

it…usually under the cover of some noble cause…children, education, national defense, helping the

poor. Pick one. Americans are good people and when you tug at their heart strings, they open their

wallets.

The problem is that when you’re busy being prosperous and the camel sticks its nose under the tent to

nibble from your plate, unless you’re intensely principled (like the Founders, who rebelled over what

today would be considered a virtually insignificant tax) you let it slide.

Until one day, you wake up and the principle is all but forgotten, and private property can be taken and

redistributed through a myriad of arcane laws. Of course it didn’t happen overnight. It was a series of

incremental incursions. The Federal Reserve Act in 1913 was a big grab. So was the New Deal, the Great

Society, the War on Terror, and now the Affordable Care Act. Along the way, there were lots of little

ones. But they all have their roots in money.


4


So in the mid‐60’s, still thinking he was rich, Uncle Sam created MASSIVE spending programs (Johnson’s

“Guns and Butter” programs), which outstripped American productivity. Just like when you spend more

than you earn, you run…bleed…hemorrhage…red ink.

So the Fed is printing dollars like…well, like dollars…and the world is flooded with them. But remember,

back then, you could turn your dollars in for gold. Unless you were an American citizen, in which case it

was still illegal. Go figure.

Side note: Thanks in large part to the courage of one noble patriot named James Blanchard, President

Ford finally lifted the ban on private gold ownership in America in 1974. It just proves one guy or gal

with a spine can make a difference.

Sorry,We’reClosed

Meanwhile, Uncle Sam’s international trading partners started showing up at the “gold window”

redeeming their paper dollars for the real thing (gold). And guess what? Uncle Sam starts running out of

gold.

So on August 15th, 1971 Richard Nixon, by Presidential decree, closed the gold window “temporarily”

(we’re still waiting…), effectively disconnecting the dollar from gold. His justification? Borrowing from

FDR’s playbook, he blamed a nameless, faceless villain. FDR blamed “hoarders”. Nixon blamed

“speculators”. The irony is that unfettering the dollar from gold opened up speculation in financial

markets the likes of which had never been seen.

Also (and the main motivation), with the dollar now effectively disconnected from gold, the Fed was free

to fund as much government largesse as it wanted. Who needs a balanced budget when you can just

print all the money you want?

No surprise…government debt sky rocketed. Just look at the chart on the next page.

Yikes. That’s a lot of red ink!

ReaHow to

© 2013 ‐ 201

If you’re f

ahead. Th

Meanwhi

few more

First, in fi

or a car l

holder”.

lAsseGrowand

14 Russell Gray ‐ A

familiar with

hink of it as a

le, in keeping

e fundamenta

nancial terms

loan. It mea

Make sense?

etInvProtectYo

All Rights Reserved

all this, then

trip down m

g with The Re

al points.

s a “note” is

ans you, the

vestinourWealth

d

you’re tracki

emory lane.

al Estate Guy

an IOU. Like

issuer of the

ghAgainst a

5

ing just fine.

ys’ “no investo

the promisso

e note or “n

aFallingD

Good job. P

or left behind

ory note you

ote maker”,

Dollar

Please don’t g

d” philosophy

sign when y

owes the le

get bored and

y, I need to co

ou get a mor

nder or the

d skip

over a

rtgage

“note

ReaHow to

© 2013 ‐ 201

So let’s t

Jackson.

United St

from Jeky

now have

Notice th

And the F

But since

because o

FRNs. Th

pieces of

The irony

TrueCo

In fact, w

Ruml, gav

“The nece

true for st

Why? Be

fund prof

But it gets

lAsseGrowand


ake a look a

He was the P

ates way bac

yll Island (sorr

e.

at it’s a Fede

ed is the note

1971, you ca

other people

is is why hav

paper.

is that the Fe

onfession

way back in Ja

ve a speech b

essity for a g

tate and local

cause state a

ligate spendin

s better…

etInvProtectYo

All Rights Reserved

at a greenbac

President who

ck in 1833. It

ry…that line w

eral Reserve N

e maker (the

an’t turn it in

need dollars

ving an incom

ederal govern

s ofaMad

anuary 1946,

efore the Am

overnment t

l government

nd local gove

ng. So they g

vestinourWealth

d

ck. I chose a

o successfully

t was 80 year

was too good

Note (FRN). T

one who owe

n for gold any

to pay their t

me tax is impo

nment doesn’

dBanker

then Chairm

merican Bar As

o tax in orde

ts, but it is no

ernments don

go broke. Just

ghAgainst a

6

twenty doll

y dismantled t

rs before it w

d to pass up),

That means y

es).

ymore, so wh

taxes too, the

ortant. It cre

’t need taxes

man of the Fe

ssociation. W

er to maintain

ot true for nat

n’t have a prin

t ask Stockto

aFallingD

ar bill becau

the second a

was resurrect

, which is the

you are the n

hat is it good

ey will trade y

eates a dema

to pay its bill

deral Reserve

What he admit

in both its ind

tional govern

nting press. T

n, Vallejo and

Dollar

use it has a p

ttempt at a C

ed in the for

e Federal Res

note holder (t

d for? Only p

you goods an

and for these

ls. And they k

e Bank of Ne

tted publicly

dependence a

nment.” [Emp

They can’t jus

d Detroit.

picture of An

Central Bank

rm of The Cre

erve Bank th

the person o

paying taxes.

d services for

otherwise us

know it.

ew York, Bear

is shocking.

and its solve

phasis mine]

st create mon

ndrew

in the

eature

at we

owed).

. And

r your

seless

rdsley

ency is

ney to


7


“Two changes of the greatest consequence have occurred in the last twenty‐five years which have

substantially altered the position of the national state with respect to the financing of its current

requirements.

The first of these changes is the gaining of vast new experience in the management of central banks.

The second change is the elimination, for domestic purposes, of the convertibility of the currency into

gold.”

Remember, this was back in 1946. Foreigners could still turn dollars into gold.

Of course, since Nixon closed the gold window in 1971, today NO ONE can go to the Fed to convert

paper into metal. Once again, thanks to James Blanchard and President Ford, at least you can convert

paper to metal in the open market. Which means Uncle Sam gets to keep all his gold. Clever.

TaxMatters

So why tax if the government doesn’t need the money? After all, it only makes the voters mad.

Basically, Ruml said the purpose of taxes is to control businesses and effect social control. Really. Those

are his exact words. This is why I don’t think the system will change anytime soon. Those in power hate

to give it up.

I know. It sounds like conspiracy theory. But don’t trust me. You can read it yourself from the source

document, which is a scanned image of the original publication, American Affairs, January 1946, Volume

VIII, No. 1. I’ll even make it easy for you. Just send an email to [email protected] and I’ll

send it you.

Again, I’m not trying to be political. I’m just explaining how the system works, why it’s unlikely to

change, how it affects you, and (if you’re patient…) what you can do to protect and grow your wealth

inside of a system that is truly counter‐intuitive.

BecauseISaidSo

Now back to our perusal of the greenback…

Do you see how the FRN says “This note is legal tender for all debts public and private”?

In fact, this decree (called a legal tender law) or “fiat” (why people call un‐backed currency “fiat

currency”) is what gives a piece of paper value. Otherwise, it’s not really much good for anything. It has

no “intrinsic” value like a commodity such as gold, silver, oil, etc. The only reason people accept it is

because they are compelled to. And because they trust the next person will accept it too.

When that trust starts to fade, people will look for alternatives. Like Bitcoin.


8


Again, sorry if this is too basic. But absent this fundamental understanding, the rest of this piece won’t

make as much sense.

TakeThese…IInsist

The Fed gets to print as many of these notes as they want (paper or electronic), which are basically

IOU’s that the Fed never has to re‐pay in real money (gold).

And through legal tender laws, all U.S. citizens are forced to “buy” dollars (by trading their labor and

productivity to collect FRNs to pay taxes).

And through the Bretton Woods deal, all foreign countries have to buy dollars to settle their

international trade.

That’s a lot of “have to” demand for U.S. dollars. In a free market, demand is usually the result of “want

to” because the item being offered rises to the top of the competition. For decades the U.S. dollar has

really not had any competition.

Can you imagine if YOU were permitted to sit down and write, print or otherwise fabricate, as many

IOU’s as you could create, knowing that you could go out into the market and use them to buy real

goods, services and commodities? Absent any moral hindrance, how many would YOU print? Exactly. A

gazillion.

Sure, if you went on a bender and got carried away, you might promise to taper. All addicts promise to

stop. But they can’t. Why would you want to stop? Just slow down a little and hope no one cares

enough to do anything about it.

There’sANewKidInTown

How, you ask, can they get away with this?

Actually, it’s been easy up to now. When you have the biggest army, the strongest economy, and the

most gold, the rest of the world pretty much has to play your game.

But what happens when there’s another big kid on the block?

It’s generally accepted that China will soon surpass the United States as the world’s largest economy.

Sure, it’s true that recent breakthroughs in fracking technology and the United States’ abundant energy

reserves could give the U.S. a boost to stay in 1st place a little longer. Thank God we have natural

resources!


9


But China has blown by every other country to come nipping at Uncle Sam’s heels. And they just

announced they’ll be easing on their one child per couple policy. That’s not a social decision. It’s a

financial one.

That’s what happens when you go from a Communistic worldview in which people are a burden on the

state, to a more capitalistic worldview where people are an asset to the economy. Sure, China is still a

“command and control” economy, but they understand capitalism, which is so powerful, that it can

actually function inside of a totalitarian system.

But stop and think about what unleashing the re‐productivity of the mammoth Chinese population

means in about 20 years.

There’s going to be whole lot more producing and consuming going on in China. Remember what the

baby boom did for the U.S.? Well, China’s starting point is TEN TIMES bigger. Do the math. And when

your population is that big, and you own all the natural resources you need (they’ve been buying them

left and right), you don’t need foreign markets. You can sell to yourself.

So China is coming into its own and they know it. Americans need to pay attention.

Cluesin theNews

If you follow the news faithfully (obsessively) like I do, then you may have seen some of these headlines:

China, Russia to drop dollar in bilateral trade ‐ MarketWatch ‐ The Wall Street Journal, Nov 23, 2010

“China and Russia will stop using the dollar to settle bilateral trade…though the news is not meant to

signal a challenge to the dollar”

Really?

That would be like Microsoft and Intel deciding they were only going to do business with Bitcoin. Why

would you do that unless you were trying to get away from the dollar? But it’s just a point on the curve.

We’ll have to see if there’s a pattern of behavior.

Let’s continue…

China and Brazil in $30 billion currency swap agreement ‐ BBC News, Jun 22, 2012

“Analysts said that Beijing has been trying to push for trade to be settled in yuan, rather than in US

dollars…’The motivation is to be less reliant on the US dollar,’ Sean Callow, chief currency strategist

Westpac told the BBC”

“China is Brazil’s biggest trading partner.”

ReaHow to

© 2013 ‐ 201

Wow. Wh

Australia,

2013

“The agre

Australian

“China is a

“…trade b

Okay, so

billions. I

we’re talk

Forgive th

Check this

lAsseGrowand


ho’s the big do

, China reach

eement does

n dollars or yu

already Austr

between the c

another $13

tip my suppo

king trillions.”

he shock and

s out…

etInvProtectYo

All Rights Reserved

og now? But

h agreement

away with

uan into U.S.

ralia’s biggest

countries [is]

3 billion. Bu

orters with bi

”

awe assault o

vestinourWealth

d

still…it’s only

on currency

the need for

dollars.”

t trading part

valued at…US

ut what’s tha

illions. Your

of informatio

ghAgainst a

10

y $30 billion.

y deal ‐ Mark

r companies

tner…”

S$133 billion…

at to a titan

puny billion

n. I just want

aFallingD

Next…

ketWatch ‐ T

and currency

…”

like Uncle Sa

dollar deals d

t to be SURE

Dollar

The Wall Stre

y traders to

am? “Billion

don’t phase m

you get the p

eet Journal, A

first convert

s? Ha! I sc

me. Call me

point.

Apr 8,

t their

coff at

when


11


Source: Dezan Shira & Associates as presented in China Briefing News (http://www.china‐

briefing.com/news/2013/10/15/china‐signs‐45‐billion‐euro‐currency‐swap‐deal‐with‐eu.html)

FYI: A “BCSA” is a Bilateral Currency Swap Agreement.

Double WOW. That’s a lot of countries getting cozy with China to do deals without the dollar. Notice

the dates of the deals. All are post 2008. Do you think post‐crash management of the dollar had

anything to do with all this deal making?

And what about India? After all, they’re pretty big too. Funny you should ask…

India could sign currency swap deal with China ‐ The BRICS Post, August 29, 2013

“China has repeatedly shown interest into entering into such an agreement.”

“Currency swap agreements involve the exchange of one currency for another ‐ a measure made popular

after the 2008 financial crisis.”

Do you remember what happened in the wake of the 2008 financial crisis? Exactly what Peter Schiff said

would happen. Helicopter Ben Bernanke fired up the printing presses.

Remember, when you print lots of dollars, the dollar loses some value. It’s like slicing up a pie. If you cut

it into 8 pieces, each piece is…well, 1/8 of a pie. And if you look at the menu and decide to buy a slice,

you base your value decision on the price and the size of the slice.

But what if the guy in the back decides he wants to get more slices out of the same pie, so he cuts it into

24 pieces? Now you’re only getting a sliver. Technically, it’s still “a slice”. But it isn’t what you thought

you were getting. You got gypped.

What does that have to do all with major countries positioning to abandon the dollar? A lot.

Except it isn’t pie these countries buy. It’s the dollar and Treasuries (Uncle Sam’s IOU’s denominated in

dollars).

So if you kept getting served up a thinner and thinner slice of pie, would YOU come back for more?

China, Japan lead record outflow from Treasuries in June ‐ Reuters, Aug 16, 2013

“China and Japan led an exodus from U.S. Treasuries … they accounted for almost all of a record $40.8

billion of net foreign selling of Treasuries.”

“The sales were part of $66.9 billion of net sales by foreigners of long‐term U.S. securities in June, a fifth

straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed…”


12


Okay, so the folks back East are a little miffed about the condition of the dollar. But surely our pals on

the other side of the pond are with us…no?

Let’s take a look…

China signs second‐biggest swap line with ECB ‐ Reuters, Oct 10, 2013

“The deal is the latest of a string of currency swaps that China has created with other nations to promote

usage of the yuan in global commercial and financial transactions, with the ultimate goal of rivaling the

dollar as a reserve currency.” [Emphasis mine…like it needed emphasizing]

“China's swap deal with the ECB comes after French President Francois Hollande said in June that France

is working on setting up a currency swap line with the world's No. 2 economy.”

Wow x3. Notice how the rhetoric has changed from when the deal with Russia was announced in 2010.

It used to be “this isn’t mean to attack the dollar” to “down with the dollar!”

To quote Princess Leia talking to Han Solo after he got beat up by Lando Calrissian’s henchmen in The

Empire Strikes Back, “You sure have a way with people.”

And in related news…

Chinese state media calls for ‘de‐Americanised’ world after US shutdown ‐ Agence France‐Presse in

Beijing, Oct 13, 2013

“’..it is perhaps a good time for the befuddled world to start considering building a de‐Americanised

world,’ the commentary on state news agency Xinhua said.”

China’s Dagong Cuts U.S. Credit Rating After Debt Limit Raised ‐ Bloomberg, Oct 17, 2013

“Dagong, one of China’s four biggest credit rating companies, downgraded the local and foreign

currency credit ratings of the U.S. to A‐ from A, maintaining a negative outlook…”

“China is the largest foreign holder of U.S. Treasuries and increased its holdings to $1.28 trillion as of

July, according to U.S. government figures…”

Okay, so China has a reason to be upset. Again, would YOU keep buying ever smaller pieces of pie?

Apparently, China’s continues rethink its “pie” purchasing policy…

China May Cut Back on Purchases of US Treasurys ‐ Moneynews, Nov 22, 2013

“The People's Bank of China (PBOC) has indicated it may curb its dollar buying, which could also mean a

reduction in Chinese purchases of U.S. Treasurys.


13


China represents the largest foreign holder of Treasurys, with $1.29 trillion as of September, according to

data from the Treasury Department.”

So if China held $1.28 trillion as of July (which we read in an earlier news article) and holds $1.29 trillion

as of September, that means they “only” grew their holdings of Uncle Sam’s debt by $.01 trillion in two

months. What is that? About $5 billion per month? And the Fed is buying $40 billion per month (with

the other $45 billion of QE4ever buying mortgage backed securities to pump air into real estate prices).

But if the Fed is buying the lion’s share (and they are) with printed money, how does China feel about

that?

“’But, ‘it's no longer in China's favor to accumulate foreign‐exchange reserves,’ Yi Gang, a deputy

governor of the PBOC, said in a speech Tuesday, Bloomberg reports.”

Ya think?

If China is buying $5 billion and the Fed is buying $40 billion (with freshly printed money), how watered

down are the dollars China’s getting paid back with? Remember, inflation (a falling dollar) favors the

borrower (Uncle Sam and every other debtor owing U.S. dollars) at the expense of the creditor (those

people holding debt and getting paid bank in cheaper dollars). Hold that thought, because it factors into

the strategy used to win in this backwards system.

Meanwhile, it seems the Fed wants to taper its purchases to prove to the world the American economy

doesn’t need the life support. At least it wants the world to think it will taper.

But while the Fed is talking tapering its purchases of Treasuries, the Chinese HAVE tapered their

purchases (leaving the Fed to fill the gap, because who else is going to do it…Spain? Greece? Japan?),

because China wants to REDUCE their exposure to the U.S. dollar. Wouldn’t you?

ClingtoWhat’s Real

Meanwhile China is snapping up real assets like gold, farmland, manufacturing businesses, and mining

operations all around the world.

And THAT’S what this is really all about. I know. It took some time to get here. Thanks for sticking with

me.

But it’s critically important to understand what the dollar is (and isn’t), where it derives its value, and

where it’s headed. If you disagree with my assessment, then you probably won’t like the strategy, which

is fine. But if you agree, then I trust the real asset investing strategy (the one China is using) will make

sense to you.


14


So once you realize the enormous downward pressure on the dollar, you’ll see the need to fortify your

portfolio against a falling dollar.

Even better, you’ll see TONS of opportunity that most will miss because sadly, most people can’t be

bothered to study this topic, unless you’re weird like me. Most find it boring and irrelevant.

I think it’s URGENTLY important. So I thank you for reading this and encourage you to share it with

others.

So what happens if the dollar loses its status as the world’s reserve currency? Or if something like

Bitcoin gets sustainable traction and provides a real alternative to the dollar as a medium of exchange?

The fact that China is boldly calling for the replacement of the dollar and Bitcoin has generated

enormous buzz domestically tells you that people are nearing the end of their patience with the dollar.

A system that runs on faith and trust can quickly unravel.

You work in faith because you trust the dollars you receive as compensation will be accepted in the

marketplace. But what if they aren’t? And then what happens to the value of all the dollars you’ve

collected in your bank account? Think (or Google) Weimar Republic.

PaperRoses

But the economy is growing, right? The stock market is up. Real estate prices are up. It’s all sunny. No?

Yes and no.

People are “making” a lot of money on paper. Businesses are “growing” on paper. The economy is

“recovering” on paper.

That’s the problem. It’s all on paper and in paper. And paper is the problem.

When paper is deemed to be money, but it really isn’t, then everything measured in that paper is

subject to value perversions. Not the Miley Cyrus kind of value perversions, but in terms of accurately

measuring the value of things.

So again, here we go with another key concept you’ll need to noodle through. Put a new battery in your

thinking cap and let’s get through this together.

Let’s say you open a restaurant in 1946. The same year NY Fed chair Ruml gave his talk. And just for fun,

we’ll call it the Dwarf Grill.

And let’s say you’re selling steak plates for 65 cents. After all, it’s 1946.


15


And if you’re selling 1,000 steak plates a month, you’re doing $650 a month in steak plates.

And suppose you need 4 employees to serve those 1,000 steak plates a month.

To quote Don Henley, “Are you with me so far?”

Now let’s jump forward to today and suppose you’re still in business. Good job.

And today, you’re still selling 1,000 steak plates a month and you still need 4 employees to serve them.

Except now, steak plates sell for $6.50, ten times more than in 1946, but it still seems like good deal

today, right?

So this means your business has “grown” from $650 per month in 1946 to $6,500 per month today.

BUT…

Are you serving any more people? No. You’re still serving 1,000 customers. Or maybe less if some big

guys order two plates a time.

Are you employing any more people? No. You still have 4 employees. But you’re probably paying them

a lot more…to do the same work.

So if your costs went up proportionately, are you any more profitable percentage wise? Probably not.

And you may be taking home more dollars, but everything you buy at home costs more too, so you

might have the same standard of living (if you’re lucky).

So really your business hasn’t grown anywhere… except on paper.

You haven’t expanded the number of people you serve or employ. You’re still providing exactly the

same value to the world as you were in 1946. Only the numbers that measure that value have changed.

If you didn’t know better, you might think you were making more money than ever. But really it’s just

the same. More dollars, but the same money (value).

So that’s you as a business owner. What about you as a customer?

Let’s say you’re a diligent saver. Old school values…work hard, earn money, consume less than you

make, and put something up for a rainy day.

What if, instead of buying the steak plate in 1946, you decided to save the 65 cents so you could enjoy a

steak plate in 2013? You are a Jedi master in the art of deferred gratification!

Obviously, your 65 cents wouldn’t go too far today, would it?


16


Well, that’s an interesting question. It depends…on HOW you saved your 65 cents.

Let’s say you took your 65 cents in 1946 and entrusted it to the bank. If you averaged 3% per year

interest, you could show up in 2013 and take out $4.71 cents. Yes, I realize you’d be taxed on the

earnings along the way, which would significantly decrease today’s amount. But that’s too complicated,

so let’s just assume the growth is tax free and compounded.

So today you have $4.71. Not quite enough for the steak plate, which now costs $6.50. You might have

to settle for the spam plate. Yuck.

In other words, even though your bank balance “grew”, your purchasing power shrank. Your 65 cents in

1946 would buy an entire steak plate. Today, your $4.71 would only buy the spam plate.

Thereis aSilverLining

Now let’s say that back in 1946, instead of entrusting your 65 cents to the bank, you’d taken two brand

new Washington quarters, a new Roosevelt dime, and a Jefferson nickel and simply put them in a jar?

Back then, quarters and dimes…and even some nickels…had silver in them. In fact, the quarters and

dimes were 90% silver!

So according to Coinflation.com, at the time of this writing, your savings change in that jar has a “melt

value” (just what the raw metal is worth apart from any premium as a collectible coin) is as follows:

1946 Washington Quarter… $3.55 each x 2 = $7.10

1946 Roosevelt Dime… $1.42 each

1946 Jefferson Nickel…$.05 (face value is higher than melt value).

So now your total savings is worth $8.57. In the open market, you might even get a little more. But

certainly enough to buy the steak plate and leave a small tip.

The point is that by holding your savings in something that’s REAL, as opposed to paper, your savings

held its REAL value (what it’s worth relative to other REAL items, like the steak plate).

DollarsShmolllars

The lesson is to be careful not to measure your wealth or economic activity in dollars. Dollars are

perverted now, so dollar valuations can be misleading…and easily manipulated by those who may want

to color the statistics. No… (shocked face)… who would want to do that?

Instead, measure wealth and economic activity in units of REAL value. It sounds easy, but it’s hard to do.

All of our conditioning, conversation and financial news trains us to think in terms of dollars.

ReaHow to

© 2013 ‐ 201

That’s wh

don’t mak

growth in

Think abo

business w

employed

Have you

they serve

They put

The point

As invest

shocked w

For examp

When we

think we’v

Let’s say

worth 10

Twenty ye

ground, b

lAsseGrowand


hy we think th

ke more unit

terms of uni

out your Dwa

was expandin

d, you’d think

ever noticed

ed on their s

“Over X billio

is that it’s ea

ors, we can

when we retir

ple…

e buy a 3 bed

ve made mon

that when w

cars.

ears later, car

but we’re not

etInvProtectYo

All Rights Reserved

he economy h

s of stuff, we

ts of real valu

arf Grill. If y

ng. But if you

k very differen

d that the mo

igns? It’s wh

on served.” M

asier to make

get confused

re with more

droom, 2 bath

ney. But in te

we bought the

rs cost $25,00

really richer.

vestinourWealth

d

has “grown” b

e don’t expor

ue.

you saw you

measured it

ntly.

ost successful

hat they focu

Maybe that’s w

better decisi

d into thinkin

money than

h house for $

erms of real v

e house, we

00 and the $2

ghAgainst a

17

because GDP

rt more stuff

r sales “grow

in terms of s

l restaurant i

sed on. They

why they’ve d

ions when yo

ng our portf

we’d ever tho

$50,000 and t

alue, have we

could buy a

250,000 hous

aFallingD

is up. But we

to other nat

wth” measure

stores opened

n history alw

y didn’t say “

done so well.

ou keep the m

folio is growi

ought we nee

then 20 year

e grown at al

brand new c

se will still tra

Dollar

e don’t have

ions. Big num

ed in dollars,

d, customers

ways puts how

“Over X billio

main thing the

ing when it

ed, but not en

rs later it’s wo

l?

ar for $5,000

ade for 10 car

any more job

mbers, but n

, you’d think

served and p

w many custo

n dollars in s

e main thing.

isn’t. Then

nough to live

orth $250,00

0. So the ho

rs. We’ve he

bs, we

o real

k your

people

omers

sales”.

we’re

on.

00, we

use is

ld our


18


And in terms of what a house is supposed to do (house people), is the $250,000 house of today any

more useful than the same house 20 years ago when it was $50,000? No. It still only houses 3 people.

So REAL wealth isn’t measured or stored in dollars. It’s in adding more units of REAL value to our

portfolio…more ounces of gold, more houses, more barrels of oil, more acres of farmland, more shares

of profitable businesses, etc.

In fact, had you decided to put your $50,000 in the bank at the same 3% average growth over 20 years,

the bank would return to you just under $88,000 twenty years later (again, assuming no taxes). Again,

you’ve LOST purchasing power even though you have MORE dollars.

“Hey honey! We’re up $33,000!”

“No we’re not. We’re down $162,000. We should have bought the house 20 years ago.”

Safeas MoneyIntheBank

Worse, with your money in the bank along the way, you were subject to counter‐party risk. That is, the

risk that the bank would go out of business and default on its IOU for your savings. (Surely, you know

the cash isn’t in the vault).

Of course, modern day Americans never worry about counter‐party risk when it comes to deposit

accounts. Those accounts have FDIC insurance, right?

Sure. And Cypriot depositors had government guaranteed savings, too. How’d that work out for them?

When you consider there is only about $25 billion in FDIC reserves against some $5 trillion in insured

deposits, it seems clear that FDIC insurance is…”inadequate”. Can you say “drop in the bucket”?

Worse, a big chunk of those reserves are invested in U.S. Treasuries, which are themselves IOUs,

denominated in dollars, and backed by the deficit spending U.S. Government. So if a bank fails, there

are only two responses for the FDIC.

BAIL IN: Give savers a “haircut” like they did in Cypress. Bail in authority is buried in the Dodd‐Frank

law; OR

BAIL OUT: Have the Fed print more money (which is akin to pouring gas on the fire in terms of

accelerating the demise of the dollar) to fund the FDIC’s shortfall. Because even if the FDIC sold their

Treasuries to raise a cup of water to pour on the raging fire, who’s going to buy most of them? You

guessed it! The Fed…with freshly printed money.


19


Losing YourBalance?

Do you see why the Fed has been obsessed with propping up the balance sheets of the banks? If the

banks fail (further), there is no way to convince the world that the dollar isn’t in free fall. Everyone

knows the answer will be to print more money and further devalue the dollar. And when the rest of the

world loses faith in the dollar, its fall accelerates to warp speed.

Okay, so enough of the doom and gloom. I’m not trying to freak you out. But you can’t afford to be

naïve about this either.

Show MeTheWay

So, here’s the long awaited GOOD news…

There are specific things you can do to protect your portfolio and profit from a falling dollar. But

again, you can’t measure your success in dollars, because it will have you feel rich when you’re not, or

feel poor when you’re rich.

If the dollar crashes and prices skyrocket, people will start to sell real assets (gold, real estate, stocks) to

raise dollars to pay for inflated goods and services.

Don’t think you’ll be tempted? What if gold went to $5,000 an ounce? Would you sell? Effectively,

you’d be trading something real (gold) for paper which is rapidly becoming worthless. You’ll think

you’re rich, but you aren’t. You’re just not as bad off as people who don’t have gold.

So, since this is a report and not a book, let’s get to the meat of the Real Asset Investing philosophy.

After all, it’s what you came for.

Based on the aforementioned premise…that long term, the dollar will continue to lose value against

things of REAL value, we don’t want to hold more dollars than absolutely necessary to provide essential

liquidity in this (currently) dollar denominated system.

So, we should ignore (or at least not obsess over) the relationship of the dollar to other fiat currencies.

Just because Japan is ruining their currency faster than the U.S., doesn’t mean the dollar is strong. At

best, it’s just less weak.

Real asset investors aren’t speculating on currencies. All governments own printing presses. China is

just as bad. The only purpose of using currency in this perverted system is for getting in and out of a

transaction to acquire or trade a real asset or the income derived therefrom.


20


MissionPossible

Our mission, then, is to find things of real value to own (buy and hold), which mitigate exposure to

counter‐party risk.

So we’ve mentioned counter‐party risk a few times. But what is counter‐party risk and why is it bad?

Simply stated, when you own something that is only valuable if the other party performs, then you’re

exposed to counter‐party risk. In a fragile economic environment, this is a risky place to be.

For example, if you loan someone money and they give you a promissory note, you can put that note on

your balance sheet and call it an asset. Banks do it all the time…and so do you. What do you think that

savings account balance on your balance sheet is? It’s a valuation on the bank’s promise to give you

your money on demand.

But if the other guy doesn’t keep his promise, then the “asset” is worthless.

Now if you’re smart, you’ll link any such loan to something on the other guy’s balance sheet (collateral)

so that you can take it if he fails to pay. It the collateral is a car or a piece of property, fine art, or stack

of gold coins, you’re in pretty good shape. Obviously, items that hold their value well and are easily

located and repossessed are best.

But what if the “asset” on the counter‐party’s balance sheet is just another promise to pay from

someone else? And that promise from someone else is backed up by yet another promise to pay on yet

another someone else’s balance sheet? This is how balance sheets all get linked together so that when

one counter‐party goes down, they pull the entire daisy chain with them.

That’s what happened in 2008.

So, when debt assets (bonds, notes, and those nasty derivatives) go bad, it spreads like wildfire when

asset holders fear that any counter‐party in the chain is in trouble. Everyone starts dumping the assets

to reduce exposure. Remember what Federal Reserve Notes and Treasuries are. Then think about what

China is doing.

Now the faster the asset can be dumped (liquidity), the more exposed you are.

Fire!

On the one hand, it’s great to have an asset that is easily sold to raise cash. But the dark side of that is

that holders of similar assets can dump them fast too. And when whatever black swan event sends

everyone scurrying for the exits, you’re in trouble…unless you think you can sprint to the exits sooner

than the biggest, fastest traders on earth. The probability is high you will be stuck holding near

worthless paper as you get trampled running for the exit.


21


The key is to get out early and quietly. Again, think about what China is doing.

Now I know some of you love paper assets. They’re clean…sterile even. You can sit at your computer

and jump in and out of positions. It’s like a video game for investors. Or a slot machine at Vegas. And

it’s cheap to play.

I was a registered rep (that means I sold securities) during the 1987 crash. I watched my then‐wealthy

father lose everything in one day. I was only 27 at the time. It made a lasting impression.

PrettyPaper

So the only paper assets that fall into the “real asset” category are stocks (preferably private) of highly

profitable companies whose businesses have limited exposure to the most fragile currencies and

economies, and that pay a consistent dividend. In other words, you’re buying income, not stock price

appreciation.

The challenge is that finding these private placements isn’t as easy as going to your computer and

logging into your brokerage account. So most people buy publicly traded businesses.

With publicly traded companies, it’s important to remember that a stock price is determined by

comparative sampling.

In other words, if you own a share of ABC Company and some other investor anywhere in the world

buys or sells a chunk of shares of ABC, which might only represent a very small percentage of the

outstanding shares, then EVERY share EVERYWHERE (including yours) is deemed to be worth the same

amount as that other guy’s transaction…until the next transaction occurs.

But if lots of people want to get out at the same time, then all the air comes out and the price tanks.

The speculation that is rampant on Wall Street can cause stock prices to fluctuate wildly. As of this

writing, there’s a raging bull in the U.S. stock market.

But if the Fed turns off the spigot, the bull might get eaten by a bear. Because when speculators break

for the exit, everyone holding stocks hoping to sell to the “greater fool” will get out fast.

And because getting out is easy to do, share prices can tank fast too.

Of course, if you’re a real asset investor you don’t care. The share price is meaningless. What matters is

that the company stays in business and pays the dividend. If the share price crashes, it’s a chance to buy

more. Think units, not dollars. Just remember, there are a lot of middlemen in the stock business, and

real asset investors prefer to be closer to the asset. Fewer expenses, more control, less shenanigans

behind the curtain.


22


CashMeIn

Now let’s move on to liquid reserves…

It’s just a fact of life (for now) that you need to have dollars in the bank. It’s nearly impossible to

conduct business otherwise. Bitcoin would like to change that, but be careful not to get…bit. Bitcoins

aren’t tangible and don’t even have a legal tender law behind them.

Now, there are different categories of cash on hand. These might not be generally accepted accounting

terms (I’m not a CPA) but they make sense to me.

First, you have your float. This is the money you have coming in and out of your account. Even though

every dollar is spoken for, if you were to view your account balance on any given day, you always have a

minimum amount there.

Next, you have your reserves. This is money you’ve set aside for a long term obligation or a

contingency. Real estate investors have (or should have) lots of reserves for repairs and maintenance,

tenant deposits, etc. Responsible business owners, and even home owners, probably have reserves set

aside for contingencies (insurance deductibles, building and equipment maintenance / replacement,

etc.).

And of course, you have your savings. These are the excess dollars that you’re holding on to for the next

great opportunity, or money you want to spend later…like having that nice steak plate in your golden

years.

By now it should be obvious that a real asset investor doesn’t want to be long the dollar because it’s

falling. And conscientious objectors to the Federal Reserve System probably don’t want to have any

more dollars in the fractional reserve system than necessary. One way to fight the beast is to starve it.

What’s On theDollarMenu?

So a real asset investor is going to look for alternatives.

One of my favorites is precious metals which are held outside the banking system. I’m not a fan of

paper metals (again, counter‐party risk). But with bullion tucked away in a private vault (or buried in the

backyard), there’s no counter‐party risk.

Now it’s true that metals have been slammed this last year when measured in dollars, but even a dead

chicken will kick around for a while. The dollar may go on a long time before it eventually dies. It might

even end up as the last currency standing. But it’s a small consolation to be the last person who

drowned on the Titanic.


23


A real asset investor isn’t focused on accumulating dollars. He wants more units of real value. If the

item is on sale (goes down denominated in dollars) while you’re accumulating, great. Buy more. The

only reason not to is if you think the dollar will be worth MORE in 20 years than it is right now

(compared to things that are real like metals, real estate, commodities, etc.)

What’s great about metals is they’re highly liquid. If you need to convert them into dollars, you can.

Even better, some innovative suppliers have created metals backed credit cards. This allows you to hold

your liquidity in metals and only convert fractions of your holdings to dollars when you need them. It’s

kind of like “Just In Time” delivery for dollars. No need to carry much inventory.

The downside is that the conversions from metal to dollar and back again have premiums and fees. So

to me, metals are really for the long term. This makes it easier to ride out the writhings of the dollar to

gold ratio. I watch it every day, and believe me, it’s all over the place.

To be clear, gold isn’t really an investment because it doesn’t produce value. It merely retains it, which

is the core essential function of money. This is where the dollar is failing in its role as money and why

people and nations are actively seeking alternatives.

ToInfinityandBeyond

But before we get back to real asset investing options, let’s talk about another alternative. This one isn’t

so much a substitute for the dollar, but to the banking system.

There is a very powerful concept in cash management called Infinite Banking. Again, this isn’t an

investment, though if done properly it can create cash flow through interest rate arbitrage. And it

doesn’t quite fit the real asset investing principle of mitigating counter‐party risk because you’re

exposed to an insurance company as opposed to a bank.

With that said, the Infinite Banking concept is intriguing because it allows you to take advantage of

features in the tax code which allow you to process your cash through an insurance contract and

effectively, at least partially, opt out of the fractional reserve banking system.

It also allows you to redirect some of the interest you might otherwise pay to 3rd parties and keep it in

the family.

I don’t purport to be expert in this, but I know many sophisticated investors who’ve successfully

incorporated this tool into their business and investing. It’s a way to reduce the interest you pay to

others, and to shield some of your cash reserves from the shenanigans that go on between the Fed and

Wall Street.

I won’t do you the disservice of attempting to explain Infinite Banking further. I merely call it to your

attention so you can look into it if you wish to find alternatives to conventional banking.


24


Now back to real asset investing…

I’mInYourDebt

Based on the premise that a real asset either produces value or effectively retains it, and that a true

investment needs to produce value, then a real asset investment is something that produces income

while mitigating or eliminating counter‐party risk.

So while a bond might produce income (interest payments), its value is inextricably linked to the balance

sheet of its issuer. And we’ve already discussed the issues with that.

The point is that counter party‐risk is to be avoided when possible, because if the dollar dies, all the debt

holders will feel pain. That’s why China is nervous.

So a real asset investor doesn’t want to be a debt holder (at least not an unsecured debt holder), or to

be exposed to someone (like banks) that have a ton of bonds on their balance sheets.

In short, real asset investors don’t like lending (owning bonds). But we like being in debt!

Hey wait! Come back!

I know the idea of being in debt is anathema to most good old fashioned, hard‐working, conservative

savers. I get it. And you can still be a real asset investor without using debt. But there are some

reasons why you may want to consider it.

ILikeYourShorts

First, if you’re familiar with shorting stocks, then debt is a great way to short the dollar.

In the shorting of stocks, you borrow a stock today so you can sell it at today’s price, which you hope is

higher than tomorrow’s price. Tomorrow (or sometime in the future before the “cover” date, when the

“loan” is due to paid back), you buy the stock in the open market and pay the stock back.

If you get it right, and the stock drops, you get to buy back the stock cheaper than you sold it for earlier.

The difference is yours to keep, which is why people do it. So, in short (pun intended), shorting is a way

to profit when prices are falling.

Of course, if you guess wrong and prices go up, then you might have to pay back with a higher priced

stock, and you’re stuck paying the difference (plus the interest on the loan). Oops.

However, the dollar has a long and well documented history of losing value for the last 100 years. Sure,

it has its moments, and currency speculators can get caught on the wrong end of a short trade. But if

you look at the long term trend (or the Dwarf Grill menu), the direction of the dollar is blatantly obvious.


25


So when it comes to the dollar, if you borrow long (like, REALLY long…as in, say a 30 year mortgage), you

aren’t staring down the barrel of a short term cover date. That takes a lot of the pressure off shorting.

MyNameisSamandI’maQEaholic

Just ask yourself if the fundamental actions taken by the keepers of the currency today (the great and

powerful men behind the curtain) are essentially the same as those of their predecessors, which

brought us to where we are today.

“Insanity is repeating the same mistakes and expecting different results.” ‐ Narcotics Anonymous from

page 11 of the Basic Text Approval Form Printed November 1981

It seems the central planners aren’t familiar with addiction. No wonder they’ve got everyone hooked on

QE.

So assuming you think the dollar will continue to lose value over time when compared to real assets, do

you want to buy dollars (save) today or short them (borrow) so you can buy real assets today?

MyBFF

This is where real estate can be your best friend.

Yes, I know real estate has had a bit of black eye over the last few years. Stocks before that. Gold now.

When most people think of real estate, they think “But real estate prices crashed.”

Be honest. Did you think that too? I know you did.

See? It’s so ingrained to think of everything in dollars. Remember, we don’t really care about the asset

price in dollars. It’s all fluff anyway…just like stocks. The purpose of equity is to produce income. It’s

the income that matters.

So before you dismiss real estate as a viable investment vehicle, chew on this:

Those who are fearful of real estate because of the 2008 disaster should consider that the crash was

really caused in the bond market…emanating from mortgage‐backed securities (bonds) laced with

hidden sub‐prime poison (counter‐party risk).

It wasn’t that everyone suddenly wanted to sell their house. It was that big speculators suddenly

wanted to dump their mortgage‐backed securities to get out of the daisy chain of counter‐party risk.

When Joe six‐pack defaulted on the sub‐prime mortgage he had no business getting in the first place, his

default daisy‐chained through the system and panic set in. The race to the exits began. All sellers and

no buyers. Bad scene.


26


Now, without ready buyers of MBS, mortgage lenders had no money to lend. Without lenders,

borrowers couldn’t borrow to bid up house prices, so the net effect was the same as everyone wanting

to sell. People still wanted to buy. They just couldn’t get the loans to do it.

In other words, there wasn’t enough demand with capacity to pay to keep the air flowing into housing

prices. So down they came. But the problem wasn’t housing. It was bonds.

Most non‐real estate investors only think of real estate in terms of the house they live in, and maybe a

second home. But true real estate investors look at real estate as income producing assets and they

invest for the income.

So if you were a close observer of the real estate “crash” when it happened, you’ll recall that what

crashed were asset values, but not incomes.

Why is that?

Houses are valued in much the same way as stocks…by comparative sampling. So when one house sells

at a certain price, every other similar house in a 1 mile radius is deemed to be worth the same amount.

It’s called the Comparative Method of Appraisal.

Of course, just like a stock, when everyone wants to sell and/or no one wants to buy (or can’t), the real

price is far lower than the price established earlier by the one guy who actually sold.

This is a reality many a real estate agent struggles with trying to get a stubborn home seller to

understand. Appraisals don’t determine the sales price. The market does. And with proper exposure, if

there’s no buyer at your price, then your price is too high.

But for INCOME producing properties, it’s different. With an income producing property, value is

determined by income. And the income is generated by rents.

What’s great about rents is that rent is a sale of the use of the property in units of time…usually a month

at a time…so the transaction consummates every month. And since the pricing is established by lease, it

doesn’t fluctuate month to month. That is, the same buyer and seller do business over and over and

over again each month as the tenant pays the rent and the landlord provides use of the property.

WhoHastheNicestAsset?

Because having a roof over their heads is typically a high priority, buyers (tenants) don’t just sit out

when the economy gets choppy. Stock market up. Stock market down. Interest rates up. Interest rates

down. Rumors of wars. Acts of terrorism. Blah, blah, blah. While paper traders are scurrying to and fro

like so many lemmings, rent checks just keep coming in.


27


(At the 2013 Freedom Fest conference, I sat on the Best Asset Class panel and debated this very issue as

a reprisal of a debate we did on our 2013 Investor Summit at Sea™ with Peter Schiff, Mark Skousen and

some other notables folks. It was fun. You can watch a video of the Freedom Fest debate here:

http://realestateguysradio.com/?p=11865 )

Another factor that provides stability to the value of income produced by real estate is that in any given

market there is typically a high level of absorption. If there’s not, you don’t want to invest there.

High absorption means that in a neighborhood where there lots of rental units, upwards of 90% are

occupied at any one time.

In other words, the pricing (rent) isn’t established by comparative SAMPLE. It’s based on thousands of

transactions occurring each and every month. It’s as though someone sold 90% of all Apple stock on the

same day. Whatever THAT price is (and it would be low compared to today’s price), that’s what a “fully

absorbed” price is.

Of course, in the stock market 90% of the available stock all for sale at the same time would be a train

wreck because there’s so much fluff in the share prices. That’s why no one dumps a huge quantity of

inventory on the market on purpose (except for gold, but that’s a different discussion). It would crash

the price. Instead, they’d meter it out slowly. Think about what China is doing with Treasuries.

Then again, sometimes the market panics and everyone in an uncoordinated fashion reacts to some bit

of information. The herd stampedes for the exits and prices collapse.

These crashes happen on Wall Street with a degree of regularity, but not on Main Street. People don’t

just leave their homes and businesses en masse when a bad rumor circulates.

So if you were watching the rental real estate market during the crash like I was, you noticed that while

house prices crashed, rental income did not. Sure, everything in the economy took a hit. But by

comparison, real estate rental incomes were very stable. No surprise then, that coming out of 2008,

some of the best performing funds were Real Estate Investment Trusts (REITS).

It’sNotComplicated.MoreisBetter.

So we don’t care about measuring our wealth in dollars. What we’re interested in is owning more units

of value. And in the case of real estate, how can we use debt to buy them today and pay for them later

with cheaper dollars?

So don’t think of real estate as the house you live in. As our friend Robert Kiyosaki constantly says, your

house isn’t an asset because it doesn’t pay you monthly to live there. You pay it. That makes it a

“liability” to his way of thinking. I agree.


28


When we talk real estate, we’re talking rental properties. They could be houses, storage facilities, office

buildings, shopping centers…and a few others we’ll discuss momentarily. Any property that someone

will pay you to use.

So think of real estate like dividend paying stocks (except better!).

With real estate you can borrow up to 80% of the purchase price. This is like shorting the dollar because

you get to borrow long (up to 30 years!) to buy now.

And what are you buying? A stream of rental income. There are many markets in the U.S. where the

cap rate (think interest rate on your savings account) is HIGHER than the cost of the borrowed funds.

Isn’t that what the banks do? They borrow your savings from you for a paltry 1% (or less), then buy U.S.

Treasuries at 2.5%. They make 1.5% profit on YOUR money. Of course, they lever it up with fractional

reserve banking and collect multiples of the 1.5% spread.

Think of it this way: If you could earn 8‐10% on your money, how much 5% money would you borrow?

My favorite answer is: ALL OF IT.

And just in case you don’t think 8‐10 % is realistic, take a look at the chart on the next page and look at

the cap rates listed on the right hand side.

Do you also notice that the top market all have low prices? Coincidence? Maybe.

ReaHow to

© 2013 ‐ 201

Other thi

rates, insu

CatchM

But think

shore?

And at lea

set up pro

sheltered

But I’m N

advisor to

shore.

lAsseGrowand


ngs to like ab

urance and m

MeIfYou

about this: h

ast for right n

operly, an off

from U.S. tax

NOT a tax guy

o see how m

etInvProtectYo

All Rights Reserved

bout real est

more.

Can

how does a g

now, foreign

fshore rental

xes until whe

y, so check w

oney earned

vestinourWealth

d

tate (hey, I a

government d

real estate is

property bu

n (if?) you re

with Google, G

off shore is

ghAgainst a

29

m a “real est

do a “bail in”

s WAY more p

siness genera

patriate the m

GE or Apple…

different tha

aFallingD

tate guy”!) in

” on real esta

private than

ating income

money.

…I mean, che

n money ear

Dollar

nclude tax br

ate…especiall

foreign bank

e earned offsh

ck with your

rned in the U

reaks, low int

y if you own

accounts. In

hore just mig

own qualifie

U.S. and move

terest

it off

n fact,

ght be

ed tax

ed off


30


The point is that real estate is one of the favorite kinds of investments for real asset investors. It’s real,

can be leveraged, produces income, and is hard to confiscate. Even in the U.S.

But just so you don’t think I’m only blowing sunshine, there are some issues with rental real estate.

First, you need great management. You don’t want to manage the property any more than you want to

manage your mutual fund or the company whose stock you own. You need experts running the ship.

The bad news is that you have to pick your managers. The good news is that you get to pick your

managers. And when you get a great one, you can load them up with properties to manage and you’ll

both make lots of money.

Above all, with rental real estate you need to pick the right market. Your income is based on the tenants

and businesses prospering in the local area. If you get it wrong, you can’t push rental increases… and

you might even have vacancy issues.

Location,Location,Location

In a soft economy, we favor low cost, low tax locations. Did you notice the best performing cash flow

markets were inexpensive? There’s a reason for that.

According to the Legatum Prosperity Index, the United States is moving down in terms of prosperity.

Robert Kiyosaki has been warning for years that the rich will get richer, the poor will get poorer, and the

middle class will get squeezed. It’s happening. And some upper‐middle class are quickly becoming

more middle‐middle class.

The middle‐class makes up a large portion of the tenant base for most residential real estate owners.

Middle‐class folks live paycheck to paycheck. Inflation doesn’t produce a wealth effect on their balance

sheets because they don’t own stocks and real estate that can bubble up and make them feel rich.

Instead, inflation victimizes the middle class by driving up their food and energy costs. Even though

those don’t count in the official Consumer Price Index, try to find a consumer that doesn’t buy food and

energy.

Add to that the rising healthcare costs and a soft labor market, and you can see why it’s very hard for

middle‐class folks to make ends meet.

Does that scare us away from rental real estate?

Not at all. In fact, it provides some great opportunities.


31


Because one of the great things about real estate is that it isn’t really an asset class. Each geography and

property is different…right down to the street address.

Compare that to stocks or gold. A share of Apple stock or an ounce of gold is about the same price on

any given day to any buyer anywhere in the world. And any share of Apple or ounce of gold could be

replaced with any other share of Apple or any other ounce of gold. They are uniform.

As stated, real estate is FAR from uniform. And because of the logistics of moving people and

businesses, there are inherent inefficiencies in real estate pricing that allow savvy buyers to get great

deals in ANY market.

So even though real estate is “down” on the macro, it might mean that one area is up while another is

down. That’s what happens when people favor one area over another. Think about how Boeing is being

harassed out of Washington State and is being courted by other, more business friendly, states.

When Boeing moves, it decreases the demand for real estate in Washington State while increasing the

demand in whatever state is lucky enough to attract them.

So think about the effect of inflation on the middle class…

As the middle class gets squeezed and baby‐boomers retire on fixed incomes, many will move to low

cost, low tax areas where they can find an acceptable quality of life. This can increase demand and put

upward pressure on the rents and occupancies…even in a weak economy. In fact it’s the weak economy

that creates the opportunity.

And if you, as an investor in the desirable area, have locked in your acquisition price and financing costs,

you’ll have a competitive advantage over people who come later and pay the higher price and interest

rates that come with inflation. It’s easier to keep your rental units when you are able to offer them for

less than the competition.

Still, it’s wise to have strategies to mitigate your portfolios exposure to soft rental incomes. And

fortunately, the Real Asset Investing philosophy has an answer.

CashFlow From Commodities

When a currency falls, anything real tends to hold its value relative to other things that are real. A 1964

silver quarter would buy a gallon of gas in 1964 and it will do it today because the silver is worth $3.55.

A 1965 quarter (a zinc plated token) will not buy a gallon of gas today because it’s still only worth 25

cents, while gas is way over $3.00. The 1965 quarter failed in its role as money. It didn’t retain its value

relative to the gas.

This simply highlights the point that just because you call something money, doesn’t make it money.


32


That’s why it’s so important to understand the difference between what’s real and what’s not.

But what if YOU could produce things of real value? Or own a factory that did?

That’s working for the Chinese. They make most of the products the world buys. And they’re getting

rich doing it.

But we’re not talking about you starting a factory. The regulatory, financial and technical barriers to

entry are too high for the average investor.

Dividend paying stocks is one way to own little pieces of good companies. Just be sure to focus on the

yield (don’t overpay) and the stability of the business.

But what about owning an income producing oil well or some farmland growing a high demand, durable

crop?

Oil, gas, coconuts and coffee (to name a few) are fairly durable commodities which literally come out of

the real estate you own. And just like you don’t have to invent the next iPad to own Apple stock, you

don’t have to pick coconuts or pump oil in order to derive income from the commodities that come out

of the land.

The great thing about food and energy is that as the world’s population increases, so does the demand

for food and energy. Remember what China is doing…lots more people coming to feed and keep warm.

Another great thing about this kind of investing is that these commodities respond quickly to inflation,

whereas there’s a much bigger lag between commodity inflation and wage inflation. Prices go up before

wages do. That’s why it’s important to hedge your wage related income (rents) with some commodity

related income.

So while the lag works against you when the commodities that your residential tenant consumes are

going up in price faster than their wages (the squeeze), owning commodity producing assets (farmland,

oil wells) helps your portfolio income go up early when inflation comes.

Admittedly, it’s harder to use leverage for these types of investments, which is why having some

traditional rental real estate in the portfolio is useful for both shorting the dollars (acquiring debt) and

using depreciation (phantom losses) to offset taxes on real income.

The flip side is that while it’s hard to get loans on assets invested inside your self‐directed retirement

account, your IRA can be an easy place to hold private placements, foreign real estate, and cash flowing

oil and farm land.


33


TheTimeIsNow

This may go down in history as one of the great times to acquire oil wells and farmland because the cash

flows are already strong, yet you can lock in your costs at today’s commodity prices. As the dollar

declines, the value of the commodities will rise (denominated in dollars), enhancing your cash on cash

returns.

If that makes your head spin, think of it this way:

If you buy a dividend paying stock for $100 a share and it pays a $10 annual dividend, you have a 10%

cash on cash return.

If the company sells something that goes up in value, but most of their costs don’t (because they locked

in their equipment and financing costs), then their profitability and your dividend go up. Maybe now

you’re getting $20 a year or 20% cash on cash based on what YOU paid.

Now the new guy buying in has to pay $200 per share so HE only gets 10% yield. But you got in early, so

you’re doing better. (Note to self: get in early before inflation hits)

Remember, you don’t care that the stock is now $200 a share. It might make you feel good, but if you

sell it, then you’re selling something that’s real (shares of a company producing profits) for Federal

Reserve Notes (dollars) that don’t produce anything and don’t retain relative value.

If you close a position and convert into dollars, then you need to figure out what to do with them. So

trading is hard work. Buy and hold investing is smoother sledding.

Again, in a falling dollar world, piling up and measuring your net worth in dollars can be deceiving. Real

asset investors stay focused on acquiring more units…more houses, more ounces, more wells, more

trees, more shares, etc.

BeLikeKen

Our friend Ken McElroy (Robert Kiyosaki’s real estate guy) is a great real estate investor. He owns over

10,000 rental units. But I can’t tell you what they’re worth in dollars. He never talks about it and I don’t

care to ask. It doesn’t mean anything. What matters are the 10,000 tenants. That’s a lot of people

getting up every day and going to work to send the landlord 25‐30% of their income. That’s rich.

BeSmart

Now, besides the Fed and other Central Banks destroying the value of currencies worldwide, one of the

biggest threats to investors is a financial services industry that spends billions of dollars training

investors to speculate on risky assets that they don’t understand, can’t control, and are traded by

ruthless professionals at lightning speed on global exchanges.


34


And should you become fortunate enough to acquire some inside information, you risk jail time if you

invest using your advantage. Just ask Martha Stewart.

No, Wall Street wants you to stay in your crib with your smart phone app and click in and out of

positions, churning out commissions for them, and being victimized by the volatility the big boys create.

Sometimes you just have to know when you’re out‐gunned.

BeSafe

It’s my view that Main Street investors are better off with a Real Asset Investing strategy. It’s too

dangerous to swim with the sharks on Wall Street.

Convert dollars quickly into real assets that produce and retain value in the face of a falling dollar. And

avoid the temptation to think of wealth in terms of dollars. Instead count your units of value and let the

dollars fall where they may. And it’s a safe bet there’s more falling in the dollar’s future.

ClosingThoughts

Thank you for taking the time to read all the way through this report. It’s my sincere wish that you find

it helpful. If you do, please pass it along to friends and family.

The Real Estate Guys™ Radio Show’s mission is to provide unique ideas, strategies, perspectives and

resources to help our listeners grow and protect their wealth. You can find a huge library of past

episodes on our website or iTunes.

But information isn’t enough. You need resources to help you convert your ideas into action.

We carefully choose the members of our Resource Network, businesses who help underwrite our show,

based on their willingness and ability to provide education, along with products and services consistent

with the real asset investing philosophy. I encourage you to listen to the show and get to know and

support the fine companies who support us.

And I hope to meet YOU soon at a live event with The Real Estate Guys™. Meanwhile, I’ll look forward

to seeing you on the radio!

To your happy and prosperous future,

Russell Gray

Russell Gray has been the co‐host of The Real Estate Guys™ Radio Show since 2004. His background includes time in the insurance, securities and mortgage businesses. He is a former finance instructor for the California Association of Realtors GRI program.

For more information about The Real Estate Guys™ Radio Show, please visit www.realestateguysradio.com


35


The views expressed in this article are those of the author and are provided for educational and entertainment purposes only. Nothing said should be construed as financial, investment, tax or legal advice. All investing involves risk. Readers are strongly cautioned to consult with qualified professional advisors before investing. This document is not a solicitation of any financial or investment product.

461 SOUTH CENTRAL AVENUE

HAPEVILLE, GA.

We Serve ·Good Food, at Prices You

Like to Pay, and Remember, "How

You Feel Tomorrow Depends on

What You Eat Today."

Owned and Operated By BEN and TRUETT CATHY

OUR SPECIAL BLEND CO·FFEE

Sc Made Fresh Every Hour . . . with

Rich Cream

Waffles •

FRESH ORANGE JUICE

10c Delicious Florida Oranges Squeezed

Be-fore Your Eyes

20c With Melted Butter and Maple Syrup- Served Any Hour

Bacon, 3 Strips • 15c lSc 20c lOc

Sausage Ham Buttered Toast with Jelly • Doughnuts (Two) • Shoestring Potatoes (Order) Choice of Cereal, with Cream •

• Sc

15c 20c

DRINKS

Coffee, Our Special Blend • . Sc Iced Tea • Coca-Cola Buttermilk

• . . • . Sc . Sc . Sc

• Chocolate Milk Sweet Milk Fruit Juices

lOc IDe IOc

Hot Chocolate . • . . • IDe With Whipped Cream

....

17 \I

DESSERT SPECIALS I 0 c

OUR HOMEMADE PIES : • ICEBOX CHOCOLATE

... ..

. · .• ')·' t. oj

• HALF MOON PEACH f' .)· · ..

• HALF MOON APPLE.\<·.,/ \r OTHER DELI&ous .AKERY .PIES

BREAKFAST SUGGESTIONS

SERVED ANY HOUR

.. Help Us Please You • • • Order Yo,ur Br-eakfast as You Like It"

No. 1

One Egg, Any Style

No. 2

Two Eggs, Any Style

No.3

Two Eggs, Any Style

No.4

One Egg, Any Style

No.5

Waffles, Golden Brown

35c

Buttered Toast and Jelly

Coffee

35c

Bacon


Coffee

45c


Coffee

45c


Coffee

Melted Butter

Coffee

25c

Bacon

Ham

Maple Syrup

TO OUR FRIENDS AND CUSTOMERS :

We Are Deeply Appreciative of Your Patronage and Hope our Service and Delicious Food Please You

All prices are ceilir..g prices or below. By OPA regulation, our ceiling prices must be

in line with competetive priceo charged from April 4 to 10, 1943. Our menus for our first week, of operation are here for your inspection.

THE ARROW PRESs-Hapeville

real asset investing report

Documents