Wow. The lack of leadership is stunning to me. The U.S. Federal Reserve just announced that they are cutting interest rates again today .. but they didn’t even specify what the cut is going to be! In a move not seen before, Bernanke announced that they are reducing the overnight lending rate from the current 1% to “a target range of between 0% and .25%“. So that really means they’re cutting rates somewhere between .75% and a full 1%. They’re so confused down in Washington, they can’t even decide on setting a specific rate cut. No wonder the U.S. mess continues to get worse! I guess they want to give investors the hope of a 0% interest rate, without ACTUALLY saying they’re going to 0%. Comparisons with the Japan experience when they went to zero and struggled through more than a decade of deflation and asset price erosion quickly spring up when talk of 0% interest rates come about. What does really this mean to investors? First, it means the economic storm is clearly not over. But more importantly, it really means that money is getting cheaper to borrow, if you can borrow it. The best thing an investor can do it right now is borrow lots of money at VERY low interest rates, and LOCK IN fixed rates for the long-term. For example, buy a good piece of real estate that cash flows well and will hold its value, and then finance it to the teeth. If massive inflation comes (which I believe is now inevitable, as these ridiculously low rates will be one of the fuels on that fire), your fixed debt becomes a powerful asset for you. Because while your asset will likely rise in value, your debt is fixed and will not raise. While it may not seem logical, DEBT IS YOUR BEST FRIEND in inflationary times. CASH IS YOUR ENEMY because it loses value. If you believe (like I do) that we’re in for major inflation going forward, you need to understand why it is that debt makes you very wealthy when inflation hits, and you want that debt locked in before the inflationary pressures build. Note that I am NOT saying that ALL debt is good. You want debt that is paid by someone else (such as the rent you collect on an income property). If you can acquire that kind of debt, you want all of it you can get, because it will make you VERY wealthy. Even though the CPI (the made up, phony and false rate the government pretends is a measure of inflation in the market) dropped more in November than in ANY one month period EVER, don’t be fooled.. the government wants you think DELFATION is coming, because then you’ll make ALL the wrong decisions with your money – which will buy them a little more time with the mess they’ve made for themselves. It seems that many people don’t really understand what inflation or deflation mean so that will be something I cover more in detail in the next few days on my blog. Until then, it comes down to this: In inflationary times, debt is good, saving cash is bad, and hard assets benefit.]]>
6 Responses
great piece…sure is difficult to have faith in our “fearless leaders” at present.
You mentioned last month you would be putting together a piece on buying gold. When can we expect to see that?
I’m waiting for gold to hit $900 so I can say that I was right. 🙂
Just kidding. It’s coming, just that I’ve been more interested in the more recent activity of the Fed.
Greg,
In today’s posting and in some recent postings I sense there’s a frustration that the market is not doing what you expect it to do. As the negative entries in my personal investment ledger prove, the market is ALWAYS right, regardless of what I may want or think.
The fact that the interest rate on the US 30-Year Treasury Bond closed today at 2.87% says something. Either investors are stupid to be lending money to the US government for 30 years at 2.87%, or bond buyers are convinced that something awful may be about to happen in the US economy.
Time will tell.
I wish I knew, as I thought that the 30-year rates were ridiculously low when they broke 4%, and here we are at 2.87%. Have been bloodied too many times by trying to catch falling knives, and knowing that property values continue to drop in my local area, I personally think it is best to wait for some sort of rebound and retest before borrowing too much. It’s one thing to pay off loans in inflated dollars, but IF, indeed, we do have severe deflation all bets are off, and cash is king.
Keep up the good work. I think about your comments a lot!
— Lyle Latvala
Hi Lyle:
I agree with you. My post implies that now is a good time to be buying, which wasn’t the point. I’ll clarify that on my next entry. The point was that inflation destroys debt. Having lots of debt is a good thing during inflation. What I didn’t mean to suggest is that TODAY is that day. I meant to say, IF you think inflation’s going to rage, DEBT isn’t something to avoid.
If deflation sets in, debt will absolutely KILL you. The deflationary markets in real estate have proven that. So thanks for the comment, and I’ll clarify this so that people don’t hold me responsible if they run out and buy property with high debt, and get in trouble!
And yes, I am hugely frustrated by the markets. The reason – they are not following any fundamentals whatsoever. You are 100% correct .. the market is ALWAYS right. That’s not the frustration. The frustration is the complete lack of visibility right now, because that ratchets the risk up exponentialy. So you need to be slow and cautious to avoid major disasters, which also means being shy of opportunities. But I see no alternative in today’s markets. I’d rather be cautious and have money to play with next year than take a risk and lose it all.
Hi Greg,
How do you think all of this will impact Canada? I think that if the USD tanks, the CAD should once again become par or even higher. That will hurt exports to the US tremendously. I’m quite certain resource-based provinces will continue to do well, but provinces like Ontario will most likely suffer even more than they are now. I know during the great depression it was the US that pulled is down with them, and it’s only logical to assume that this will happen again.
So I guess my question is if the US suffers from major inflation, do you think our government will drastically devalue our dollar (create more inflation) to stay below the USD?
I appreciate your thoughts and your advice on these issues, Greg.
Thanks!
I believe the CDN $ is headed to par next year. Possibly beyond, depending on how bad things really get in the US. The trillions of dollars of bailouts, etc., are going to hurt the US $, and I don’t see any way around it.
Canada’s going to do much better than most other countries, ESPECIALLY the US. The west will do better than the east. Ontario will struggle due to its focus on manufacturing, and the CDN $ strengthening will hurt that.
If the US $ declines, commodities such as oil are priced in US $ and their ‘price’ will rise because of this, notwithstanding any intrinic value in oil’s price.
In other words, if the US$ declines by 20%, oil prices go up 20% because it takes more US$ to buy each barrel. This is in part why oil prices are low right now – the strength of the US$ reduces the cost, in US$, for a barrel.
All in all, I think Canada’s still going to lead the G7 over the next couple of years in growth and stability. Our #1 ranking for world’s safest banking system is a big reason for that.