Yes, I get it. I know what you want. You want to know how to make lots of money. You want the magic strategy that will create wealth.
Truthfully, there is no one magic strategy. There are, however, a variety of magic strategies.
One of those strategies is being able to have a macro perspective of what is going on in the world. Basically, it’s the ability to look at where we are in our economic cycle to give ourselves a rough idea of where we are headed.
This is one of my favorite things to do because it involves looking at facts and data, instead of emotions and hearsay. We can make an accurate estimate of what is going to happen, instead of playing a guessing game and visiting a fortune teller.
So here is what we will face sooner, rather than later: an economic downturn. (I personally believe that we will see much more than a downturn. I think we’ll see something similar or more catastrophic than 2008).
This isn’t a guess or a feeling, it’s just statistically likely. We are currently in the second longest bull market ever. That means that only one other time in modern history has the stock market gone up for this long.
Of course, that doesn’t mean we’ll see a crash tomorrow, but it does mean that we are more likely to see a decline rather than continued upward momentum.
So, if we know that we are headed towards a market decline, let’s prepare accordingly…
What will be the cause of a market decline?
Cheap money. That will be the cause of the next financial crisis.
Sounds a bit weird, right?
When we had our last crash in 2008, the US and the world never fully recovered – or more accurately, we were never able to recover naturally.
When the crisis in 2008 happened, the US government and central bank (the Fed) did extraordinary measures to combat the crisis. This included printing massive amounts of money and artificially lowering interest rates.
These artificial measures were copied by many other countries throughout the world.
Basically, instead of our economies recovering on their own, money printing and low rates were used to help the economy recover faster.
Truthfully, it worked. The US and world has seen an incredible bull market run since 2008 and the market today (Sept. 2016) sees daily record highs.
However, almost anybody could look at this scenario and think, “Hmmmm… so we never fully recovered in 2008, the market is hitting record highs everyday, and we are in the second longest bull market in modern history… something is telling me this is going to end badly!”
And anyone who thinks that is right. Governments and central banks can only print money and keep rates down for a limited amount of time. Eventually, the ‘hangover’ will catch up.
So, back to the cheap money.
Because of the massive amounts of money printing and low interest rates, people, companies and governments have been able to borrow lots of money for very cheap.
This ‘cheap money’ that they’ve borrowed has been used to buy things… We can look at all kinds of ‘things’ that have been inflated because of cheap money… like:
- The stock market
- Auto loans
- Student debt
- The housing market
- Company valuations (Uber at $70 billion?! Come on!)
And the people, companies and governments each have corresponding liabilities that can explode:
- People = Consumer debt
- Companies = Corporate debt / corporate bonds
- Government = Bonds
Sooner or later all of this debt will collapse. For now, there is enough confidence that this debt will be paid back…
But, in the case of the US Government, IT IS MATHEMATICALLY IMPOSSIBLE FOR THE DEBT TO BE REPAID. (I’ll explain this in depth in the future. For now, just know that taxes barely pay for the interest on that debt – think about what will happen when rates go up. And, as we all know the power of compounding interest when we are saving money, the opposite can happen when you are in debt. One way out of this scenario would be massive inflation and money printing, which could pay off the debt on paper, but would annihilate our economy.)
Very few people understand this, however, once they do, the game is over.
Will it happen this year after the US Presidential election? Maybe.
Or it might happen next year – or in several years, as governments might have a couple more tricks up their sleeve!
It may be frustrating to not be able to predict the exact time-frame of when this will happen, but we can strategize how to take advantage of this situation in the meantime.
Tomorrow, I’ll show you several ways we can do this.
The more I read about the pending doom the more I wonder if there will be a bank run and whether or not I should get in front of this. If a collapse comes, how far do you think we will fall? Is it important to have a lot of cash on hand?
I just found your site tonight and I love it. Any advice on good reads for someone who knows little about macro economics but is motivated?
Great questions… unfortunately I don’t think any of us will know the true answer until that time comes.
However, I share the same concerns as you. If a collapse or crisis occurs, it will be contagious in the banking sector. What many people don’t understand is that most of the US Dollars in existence are digital. So, if you go to the bank, there are no physical dollars to pull out (if lots of people have already pulled out their money, in a bank run scenario).
So, in theory, you haven’t lost your money – it’s just in digital form. BUT, the money is frozen… and you may not be able to use it… so it’s the same as not having any money!
I really try to avoid the idea that we are going to have a huge crash, but the rate of crazy monetary policy is just making a huge crash more and more probable. Like you said, there is opportunity is those times, so maybe it will be a good thing for the informed? I’d hate to succeed off of someone else’s failure… but in essence, that’s what life is about. Surviving.
Anyway, I’d read “The Creature From Jekyll Island.” That book will blow your mind if you’ve never heard of it.