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Asset Classes

In my position I often get asked about investments. What would I consider the best investment, what about safety, what currency do I recommend, what do I think about gold and silver, what about real estate, stocks etc.

While it would take a book to cover this topic well, let me as briefly as I can give an outline of my thoughts and reasoning.

We have a global monetary system with very little variance from country to country. This monetary system is debt-based – each new dollar (or unit of currency) created is created at interest. Whether it’s a treasury auction, bank loan, or any other financial instrument – they all add to the money supply, and each addition adds debt to the system (have you ever wondered why every country in the world is in debt? There are other factors, but mainly, they are paying back the interest on the Central Bank created currency they have borrowed.) As a result of this system, we need growth. New growth, with new money creation, created to pay back the interest on the already created money. Without it, the money supply shrinks and the system implodes. The problem is, this system (of never ending new debt) has mathematical limits. This is why you have seen every country in the world face multiple monetary crises and currency collapses over the long term. With the Bretton Woods agreement in 1944, the U.S. Dollar was guaranteed a special place amongst currencies. A nearly inelastic demand for dollars was created by ensuring that all international trade would take place in dollars. So any country purchasing from another would first have to purchase dollars. This meant the US could continue creating new money and new debt and it was ok because the currency (debt) would always have buyers. This global dollar demand created the standard of living enjoyed in the U.S. and the reputation of the currency as being a safe and reliable.

This is coming to an end.

Many countries have either started trading outside of the dollar or are making plans to do so. At the same time the money supply in the United States has exploded. This is the classic situation when a commodity (in this case a currency) loses value or collapses entirely.

And to put this in perspective, the dollar is widely considered to be in better shape than the Euro! So this is a global problem, the world awash in central bank created debt, with no way to pay it back.

In this environment (for those who understand it) investments rooted in safety and asset protection become much more attractive.

As a rule of thumb, paper assets, leveraged assets, or assets levered to the dollar (or other at-risk currencies) are ones to stay away from.

But what makes an asset paper? We would all agree that stocks, bonds, etc are paper assets. But what about real estate? Certainly a house and/or land are physical. Well yes and no. The property itself is physical (and if it offers shelter, the ability to produce food and or water, will offer value in any environment). However what about the value of the real estate? In the U.S. (and much of the world) the price of real estate is determined by the debt markets (paper). For example, what would your home be worth if no one could borrow money to buy it? If real estate transactions had to take place in cash, not mortgages, what would your investment be worth? So I would argue, real estate, for the most part, is really a paper asset.

That being said there are parts of the world where real estate markets are not as dependent on financing. In Ecuador for example, the vast majority of real estate transactions are not financed (that is a trend that is rapidly changing). So the skew of value is much less. The price of real estate is much closer to its intrinsic value as opposed to being a product of the machinations of the debt markets. In addition, with the climate, ability to produce food, and abundance of water, the opportunity to purchase an asset that will provide value in any environment is great.

As a store of value the best thing to own is physical gold and silver. When currencies are weak or collapse, gold and silver do not. Priced in the weaker currency, they rise, potentially by enormous amounts. They are not at risk to being ‘bailed in’, can be purchased without a record, and can be stored locally. Anyone who follows the precious metals markets knows, the paper markets (price) of the metals are highly manipulated and kept artificially low. However you can purchase the physical metal for very close to this false ‘paper’ price! The physical supply of gold and silver do not exist in the world to cover anywhere close to the amount of paper ownership.

If one desires to stay liquid and own some amount of currency, the Chinese Yuan would be my recommendation. China has kept their currency artificially low (to boost exports) for years and while they have allowed some currency appreciation in recent years, the Yuan is not close to fair value even in the current environment. As the shift of power from West to East continues and the Yuan starts to back trade, it will continue to rise in value. In addition China has signaled they will eventually allow the currency to float freely and have removed many barriers to ownership.

So to recap.

  • Sell paper assets.

  • Real estate can be good if it provides value such as food, water, shelter, but is partially a paper asset.

  • Physical gold and silver are the best assets for wealth protection and have the potential for phenomenal return.

  • If you have to hold currency, hold Yuan.

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