Monetary Policy: Leveraging from an irreconcilable economic fact

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So you’re all up to speed with the fantastic efforts from the central banks in Australia and New Zealand to “make borrowing cheaper” again, “boost the economy” again and most importantly drive the “housing market UP” again. Sadly none of this is about making “Australia or New Zealand great again”… and frankly, the place where the narrative of making anything “great again” comes from isn’t doing that great of a job either.

But that’s a whole different conversation.

In my day to day operations here at Property Magnets, I have the privilege of not only speaking to a number of our students/investors but I also interact with the wider economic mob, both academic and floor traders across the US, EU and Asian markets. I find it rather distressing to see how little attention is directed in understanding the geopolitical events across the world and its impact on the wider housing market conversation related to Australia and New Zealand.

This is particularly true for the mainstream media across NZ and AU that seem to be living inside some bubble and refuse to read data objectively, considering the geopolitics and economic facts unfolding across the globe.

But that’s hardly unusual for the mainstream media so why am I even bringing this up. You’re right. Its a waste.

The mainstream media says its all China’s fault. Its the trade war between the US and China that’s leading the world economy down the path of recession.

Its the problems with Brexit (what a mess that is BoJo) that’s causing all this… and look look look… how so proactive and prudent of our central banks  – they are right there, pushing QE and “forward guidance” programs to get things back in shape. Leading from the front. What an example… Marvelous (Richie Benaud style)

If you bought this rhetoric, please go back and ask for a FULL refund – its an empty sales pitch. The reality is a bit different. Scratch that. The reality is MASSIVELY different.

Regardless of that, you’ll still come across educated folks here at home that will say (referring to the geopolitics) “yeah but that’s America. It will never happen here (in Australia or New Zealand). Our banks are different. Our governments are different.” – Of course, you’re so right Jane (LMAO).

The so called developed economies are used to deploying short term measures to keep things going, denying that there’s a much deeper and bigger underlying problem that’s not being treated – hasn’t been for the past 7 decades (or longer if you go all the way back to the Roman era).

And this deeper issue that I’m referring to is this:

The current monetary policy.

The reliance on the currency note in your wallet that is nothing more than just an “I Owe You” from the Reserve Bank to you, the holder.

The currency that is not backed by anything…hasn’t been since Mr. Nixon removed the gold standard in 1971.

Everyone loves free money. Everyone loves the capitalist doctrine…especially the investor types. Everyone wants to have low interest rates when it comes to borrowing.

Capitalism is not a self-organising structure. It needs cooperation between governments/central banks and market makers to keep things going.

The problem, however is that central banks, that are meant to act as referees are becoming active players on the field with their exacerbating QE policies and forward guidance programs all in the name of “printing more FIAT currency”.

Consider the following analogy to understand the farce that is QE:

Introducing Jane (On the left), the consumer, John the Central Banker (Dodgy looking, European banker type).

Jane wants to buy something that’s priced at $20. Jane is broke. Jane only makes $10. The economy is bad. She is struggling. Not only her, the entire nation is struggling.

John, the central banker announces reduction in interest rates and a cheaper borrowing cost and also a promise to introduce more cash into the economy – a stimulus package designed to get the Janes back into the swing of things. But… John also has to maintain an inflation target to make sure the excess cash in the market does not lead to a bigger economic problem.

Jane goes to the bank to borrow $20 to buy that thing. Gets the loan, only to realise that that thing is now $30 instead of $20. So now Jane has to borrow $30 to pay for something that was $20 just a few days ago while her income is still $10.

Using pre-school math, Jane’s now 3 times her income in debt instead of 2, which is what would have happened had the price stayed $20.

Because of inflation, Jane has had to pay more. Jane has had to borrow more. Jane will end up paying more in interest payments while her income has not increased by any stretch of imagination. Jane got scammed and didn’t even know it.

So this influx of cash – did it really help Jane? This reduction in borrowing cost – did it really make things cheaper for Jane? This stimulus package designed to put the Jane’s back on track – did it really put Jane back on the track or did it push her backwards?

So who is the winner in this game of QE?

What’s worse, is that Jane will need to keep borrowing to stay ahead of the inflation curve and the way the system works, she will NEVER escape this cycle.

This was the story of inflation. There’s an even bigger issue at hand that will probably get me in trouble for just bringing it to the forefront.

BLING BLING BLING

Anyone with basic economic sense will agree that at some point, the total cash supply needs to be reconciled with a credible and reasonable store of value – the most logical choice being Gold.

The current money supply isn’t backed by anything, as I mentioned above.

If the total global money supply which is still largely using the US dollar as the reserve currency was to reconcile with the total amount of gold reserves, you will quickly find out that the current value of an ounce of Gold (at the time of writing it is ~NZD 2,400/ounce) will have to go up to something like NZD $21,000/ounce in order for the books to be balanced.

I know… you’re thinking where did I get this data from?

Here it is:

Total global currency in USD = $90.4 trillion (worth mentioning that total global debt is $215 Trillion…we’re all so F****D). Source: MarketWatch

Total Global gold volume in USD – According to the World Gold Council, as of 2019, total volume of gold mined was 190,040 metric tonnes. There are 35,274 ounces in one metric tonne. And currently gold is priced at USD 1,500 an ounce (approx). So total value of gold = ($1,500 x 35,274) x 190,040 = $10,055 Trillion (Oh! We’re so royally F****D).

So there’s $90 trillion in circulation, $215 Trillion in debt but only $10 trillion in gold (at USD1,500/oz value).

So in order to reconcile all the cash in the market against gold, based on the current volume, gold needs to come up to around USD13,425 per ounce  or … are you ready? USD 320,729 per ounce if all the global debt was to be reconciled.

The latter will never happen because no one is interested in having debt paid off.

Oh and by the way, this number is going to continue head north because the big 22 central banks have only just started their third phase of QE. More printing to come.

But… at any rate, this is pretty messed up – don’t you think?

The US dollar’s days as the world’s reserve currency are limited.

Russia and India just did a major arms deal using each others’ national currencies bypassing the USD altogether.

China and Russia have been doing similar deals for a long time and so is Iran.

Any clues as to why the US’s foreign policy rhetoric is so starkly against Iran, Russia, China and also (in recent days) India? Perhaps the fact that they are all circumventing the US dollar has something to do with it. What would I know about that… I’m just spitballing.

At the same time, those very nations are also stockpiling gold in their national vaults. Don’t take my word for it. Check it out yourself.

Now that we have that out of the way, lets continue to understand how all this has anything to do with you, the investor, the one looking to create wealth through property.

Once the dust settles, and you’ve reconciled with all this (in your head), you will find yourself asking the question – well what do I do with all this technical info?

Am I saying that you should ditch the property portfolio and start buying gold?

No. I’m not saying that at all. In fact, I’m not saying anything.
All I am trying to do is get you to think objectively about what’s happening in the broader economic arena and make some educated decisions about what decisions you ought to be making.

The property market will do well moving sideways for the next several years and dare I say, again, as my sole opinion not meant to influence anyone’s decisions, that the double digit capital gains are remnants of a past that is unlikely to ever repeat itself – perhaps in another generation.

Definitely not mine or yours.

Economies around the world are going to face more and more downward pressure as the younger, more educated, more connected and more nationalist by nature group end up having to fund the entitlements of an older generation that the social welfare programs are no longer able to sustain.

Look at any form of civil unrest that’s happening now. Be it Hong Kong, Italy, Greece, Brazil or even the US of A – the average age, the educational background, the gender variations – these are all pointing toward a younger millennial generation that’s already starting to see the cracks in the “SYSTEM”.

The answer?

Cashflow.

Cashflow is the King Supreme or maybe I should say “Queen supreme”, to keep things gender neutral and appease the politically correct that are ever so eager to poke holes in my statements just to feel superior and important. Eek.
Find a way to increase your cashflow and become more liquid.

Liquidity in times of economic turmoil is the greatest asset. It gives you the flexibility to respond with speed, agility and in your best interest without being dependent on a third party such as the bank and do so without compromise.
Self-reliance is an important aspect of sustainability through this economic storm that’s on the horizon.

Using the current equity in an asset and refinancing it to fund the expansion of your property portfolio carries risk beyond just the volatility in the market. Any sharp declines could force you to “top up” your borrowing to bring it down within the LVR range that will keep the lender happy. Trust me, its a “hit by a truck” scenario that you’d be better off avoiding altogether.

The time is right for you, Jane and Joe, to learn how to CREATE money without using your own capital or risking equity in something you already own or by taking on more debt than you already carry. It is time to understand how to use the current economic situation to your advantage and create quick, chunky cash from the market that you can use to further build your portfolio – be it property, precious metals, equities or anything else you fancy.

Use smart strategies to generate cash in the current climate that is absolutely ripe for the harvest using the tools of Property Options. Pump that cash into picking up discounted, troubled and distressed rental properties.

Watch rental demand outstrip ownership aspirations over the coming years (because during this period, the poor will get poorer, the middle class will fall further below their standard and only the rich will get richer) and just create that cashflow income for you starting NOW instead of waiting for when the proverbial truly hits the fan.

The point here is to use the market to create quick cash – where you use that cash is for you to decide.
So with that, I shall bring my rant to a close. Please post a comment below if you liked what I wrote above or even if you have a differing opinion – or don’t if you don’t feel like it.

Be SMART. Invest in your education.

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4 thoughts on “Monetary Policy: Leveraging from an irreconcilable economic fact”

  1. Hi Manus, This is inline with a lot of other investors that i have been following not as actively in any programme but purely for information grounding.I am a fan of crypto currency and currently observing gold and silver as well as is with property. I am just finding my feet at the moment and have been involved with bitcoin platforms leveraging very small amounts of coin. a couple have gone bust and i have pulled out of stock trading etc as it was time consuming. However i do like the property platform that you are promoting as you do not have to be licenced and you are in a sense helping others which is what i like doing in particular my family. I tried to introduce certain ideas to my immeadiate family but simply just dont get the concept… you know the Kiyosaki concept : go to school get good grades get a great job and work your arse off for the next 45 years and pay taxes unlike the very wealthy who dont pay taxes…. Thanks for the read and hope fully can afford to join your platform for property…. Regards – Daniel.

    Reply
    • Hi Daniel
      Thanks for the note. Yes, 99.99% of the world doesn’t understand the hampster wheel they are running on 24/7. Its great that you are actively involved in the pursuit of meaning in this whole messed up world of investing and the economic “dog’s breakfast” our next generation is going to inherit. Feel free to reach out to the support team to see if they can get you access to the program. – Manas

      Reply

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