Hi all, I’m just attaching a PDF that I sent out to investors and potential investors in our real estate fund. For your perusual.

Presentation #3.PDF.edited

As we enter the 2nd half of the year, I will become a lot more serious in my warnings that something monumental is brewing. Sure the stock market is rallying, which I warned it would, but this is not a sign that our economy is out of the woods; it merely shows that capital is already looking for a hedge against sovereign debt. What I’m telling you is the truth, the truth that the government will never tell. The government, with the press as their allies, can literally fool the public 100% of the time. But the intellectuals? They can’t fool them, which is why historically intellectuals are always targeted first in a crisis.

We are headed towards a crisis of monumental proportions and the public is still asleep. Financial panics come in all different flavors. You have the dot.com bubble that pops and business as usual resumes in about 3 months. A standard real estate correction is a little worse because the equity in a home is perceived as savings, so spending declines and you see a contraction in leverage, which leads to an economic slowdown. But we recover from a real estate contraction soon enough and all is back to normal.

But a debt crisis? Now this is a different beast.

You see rising taxation at a time when the economy can least handle it. You see a flood of bonds hit the market, which drives up interest rates at a time when our debt load is at its greatest. You see a run on the currency, which is viewed as a close cousin of bonds. And when Federal debt is at obscene levels and government needs to contract while almost half our population are government workers? Watch out. Calling for austerity now is like mandating by official decree for unemployment to rise! True stupidity.

The Great Depression is viewed by economic historians as being caused by a stock market collapse. This is just plain stupid. Why didn’t the much bigger one week crash in 1987 create a Great Depression? No one thinks with common sense anymore. The truth is the Great Depression was primarily caused by a sovereign debt crisis in Europe. This created a stampede into dollars that imposed deflation on our economy at the same time we had a Dust Bowl and half our population worked on farms. So of course you are going to get massive unemployment: if prices and wages fall while debt burdens remain constant, you are going to have a crisis.

The Keynesian elixir is not working because it is akin to medicine that has been overused, so the body adjusts to it. Chronic deficit spending with rising rates of taxation is NOT what Keynes, a true genius, envisioned. What we have now is a crisis in confidence, which means even with low interest rates no one is borrowing to start a business. If the government can raise taxes at a whim, this can literally wipe out your entire projected profits. Why would anyone invest in this environment? The best thing the government could do is to keep taxes flat for a preset period of time; this would create a boom for the ages.

European Debt Crisis

The Euro experiment was doomed to fail from the beginning. Essentially what you have is European banks holding sovereign debt as reserves because they were forced to. So weaker European countries got lower interest rates than a pure free market would have ever given them. This created a sense that they were a lot more stable than they actually were even with rising entitlements and populations heavily employed in the public sector.

When you combine different countries with different cultures in the same monetary union, you are asking for trouble. One country will be booming while the other is contracting. A boom in a country like Germany will create demand for Euros. Unfortunately, a demand for Euros is akin to deflation for countries that are in contraction mode, which exacerbates the crisis there. And countries like Greece don’t even have the option of inflating away the burden of their debt by devaluing. This is the type of politically created monetary chain that gold was in the 1930′s. We are walking down the same path.

It is so utterly stupid to have a monetary union without one debt. European leaders believed it would defend against currency attacks against weaker nations. Well yea, it did. But what they didn’t realize is that a short on a sovereign bond is a synthetic short on the currency. How they didn’t think of this is beyond my comprehension. Furthermore, imagine if a state like New York could issue federal debt and place the burden on a state like Nebraska. This is obviously very stupid, but this is the arrangement the geniuses in Europe created.

Gold

So now we come to gold, which is going to be one of the few assets that do well in this debt crisis. People misunderstand gold for so many reasons. For example, the 1970′s were an inflationary period according to the CPI and gold rose dramatically, so people automatically correlate gold to inflation. But no one ever talks about how almost half of the CPI was composed of home prices. And home prices in the U.S. rose almost 50% during the 1970′s adjusted for inflation.

Once home prices were replaced by rents, the CPI naturally moderated. If the CPI right now were composed of 40% home prices, we would most likely be experiencing deflation. Yet gold is rising. What I’m trying to tell you is to stop accepting conventional wisdom and start understanding what the hell gold is.

Gold is first and foremost a hedge against government fiscal stupidity. When the entire Western world and Japan is mired in a debt crisis (300% debt-to-GDP ratio for Japan), why do you think people would start flocking into the Euro, Yen, or Dollar? This is just irrational. Look at what people are doing in Greece because this is a precursor to what will happen worldwide. They are rushing to gold. Most other assets are domestic in nature meaning they can be manipulated for political reasons. But gold is outside the system, which is exactly what people desire when it hits the fan.

So yes, we are doomed, probably starting around 2016. Gold will probably hit $5000 by 2020, and this is not that big of a deal. Markets, especially in a panic, always rise exponentially. That’s just the way markets work– dynamically. The gold market has been in consolidation mode for quite some time so people are losing interest, but believe me, when the rally comes, it is going to be magnificent.

Bonds are without a doubt the most important asset class to grasp in this particular crisis. The fundamental problem with bonds is that our leaders had this genius idea that they could spend and spend year after year without repurcussions. As I’ve said before, this is a failure in our political system because the only way to get elected is to spend, spend, spend. And when the crisis does arrive? Well, that’s someone else’s problem!

Investment Habits

I learned recently that there is a specific part of the brain that “saves” habits, which means that habits never really die. Investing habits are no different- people by way of habit believe that bonds are a “safe” investment. Financial advisers with asinine formulas telling you how to allocate your retirement money between bonds and stocks are sending people right over the cliff. Things are going to get nasty because the largest demographic in America (Boomers) are about to be wiped out due to conventional wisdom. This is why I would bet any amount of money that social unrest is coming.

It is just unfathomable that anyone would be investing in sovereign debt with deficits rising at an accelerating pace. Demographics are working against all Western nations, and so is something called compound interest. Even with balanced budgets, our debt is mathematically guaranteed to rise exponentially. There is no way out of this sovereign debt crisis absent a complete restructuring of the monetary system. Currently there are 2 choices: inflate or create a new world currency. Inflation is probably the option our leaders will take, which means bonds are going to crater.

This is going to be THE big crisis because the bond market dwarfs all other markets (besides the currency market, which works a little differently anyway). When the stock market crashed in 1987, the world didn’t end; in fact, it was the beginning of an age of prosperity. But when bonds collapse, huge amounts of capital are wiped out in a blink of an eye. And when a large portion of your capital disappears, you are not going to spend money- unless it is to buy tangible assets that rise with inflation. This is why a collapse in bonds will lead to a massive rally in inflation hedges. You are already seeing this dynamic take place in stocks and distressed real estate in the U.S.

Debt-to-GDP Ratio

An important thing to understand is that whenever we had high annual deficits, we had a relatively low debt-to-GDP ratio. And when we had a high debt-to-GDP ratio, we had relatively low deficits. Well now we have high annual deficits and a high debt-to-GDP ratio. So economic pundits who claim that our debt-to-GDP ratio has been this high before so there is nothing to worry about are only telling you half the story. Either they are flat-out lying or they don’t know what the hell they’re talking about. I personally tend to favor the latter.

It’s funny because 99.99% of countries in recorded human history have defaulted on their debt. The only thing to consider is when we will default. Gold right now is a clear buy, I don’t care if it falls to $1300 from here- there is just too much risk of Europe falling apart for you to sit on your hands. I’m warning you to get your money out of banks and into tangible assets. If and when the banking system freezes, it will happen suddenly.

Today I will talk about the most divisive asset class of them all– gold. Even though real estate has been crushed, the general thinking still is that real estate is a good long-term investment. Bonds are still a viable investment for many people, as evidenced by falling yields. But gold? Good luck trying to convince people on that one.

The most common arguments against gold I hear are: Isn’t gold expensive? And, gold serves no purpose (the “I can’t think for myself but I’ll believe whatever Warren Buffett says” argument).

The easiest argument to shoot down is the one that claims gold is expensive. Gold has doubled since 1980 while the stock market has risen about 15X and somehow gold is the overvalued asset. Interesting. Heck gold hasn’t even kept up with the growth in the national debt, but again, somehow gold is overvalued. Doesn’t make sense to me, but that’s fine because it is nearing the time to load up again.

So now we get to the question of what purpose gold serves. I might upset some gold bugs here, but let me just say that I would even hesitate to call gold a store of value. In times of stability, gold is a horrible store of value- there’s no other way to put it.  But in times of instability, and more specifically, times of fiscal irresponsibility, gold is much more than a mere store of value. It is the only asset people want to flock to, period.

Projections of $3000-$5000 gold are still laughable, and this is what keeps me bullish. The world economy is going to collapse at the seams and we will all see if gold has any utility. If the Euro experiment fails, which it will, what do you think people will do, run to the Yen? Are you kidding me? If anything the fundamentals for Japan are worse, and they are probably next to go after Europe. Then once Japan defaults do you think people are going to be confident in buying dollars? Maybe temporarily, but this won’t last long. So after all the smoke clears, which currency will be left standing? Gold.

A very simple question I need to ask for all the gold bubble experts is: Where is the parabolic move in gold? The next target in gold is at least $2000, and this will amount to merely a 20% rally. The stock market rallied 20% in a couple of months, but have you noticed almost no one (except perhaps Robert Prechter) is calling it a bubble? Be balanced and treat each asset class more or less the same. Stocks will probably double before 2020, but so will gold. What’s the big deal? This is just a manifestation of where the world is headed economically and politically.

If you’ve followed this blog for awhile, you know I love buying gold when it is unfavored. I think the consolidation pattern we have seen is going to unwind at the latest by the 2nd half of the year, and it will lead to a very crazy rally. Just stay the course, know why you are invested in gold, and when gold rallies, we will prove the naysayers wrong–again.

This week I will be writing about 3 asset classes: real estate, gold, and bonds.  I’ll write general public posts and then have e-books ready within weeks with some more information. Today I’m going to talk about real estate in the United States.

To do well in real estate you don’t need a degree in economics or anything like that. What you do need is a good dose of common sense and the moxie to go with your gut instinct.

Bearish sentiment in real estate is unfounded in my opinion, especially in distressed markets. The naysayers claim that although rental yields suggest opportunity, there is way too much inventory for projections to be valid. Well the truth is ROI projections are legitimate; believe me, there is demand for rentals because although people lost their homes and have horrible credit, they still need a place to live. I am really not exaggerating when I say this is one of the best investment opportunities you’ll see in a generation.

What I like to call the “small time big-time investors” are getting active. These are people not on any Forbes list who have acquired a large amount of wealth by playing it smart with a good dose of common sense. I know for a fact that many of these investors are getting active in the distressed markets, which is why the distressed markets are starting to appreciate while real estate throughout the country falls. NYC was down almost 10% on an annualized basis in January while Phoenix and parts of Florida are starting to appreciate. This is what I expected to occur starting in 2012, and it is all going according to script.

The natural tendency of people is to stay away from the most distressed areas. But the best strategy is to jump into the fray and take “risks” others aren’t willing to take. If you can acquire a loan and be leveraged at 5% for 30 years, many homes in Vegas are returning about 50% cash on cash. That’s not a typo. And this is before appreciation, which is just icing on the cake. In my opinion, the bottom is in and appreciation should start this year.

There’s much more to real estate than general domestic economic conditions. There are currency considerations. There are demographic considerations. There are interest rate considerations. And there are foreign investor considerations. I’ll talk about all of these variables in depth in the coming e-book, and to an extent in my newsletter. If you understand the converging trends, it is a very simple thesis. The complexity lies in making the connections.