Kiyosaki’s Words of Wisdom

There is a saying that goes, “When your picture appears on the cover of Time Magazine, your career is over.” If you have access to the June 13, 2005 issue of Time Magazine, you will see a picture of a man hugging his home. The title and subtitle say, “HOME SWEET HOME: Why we’re going gaga over real estate.”

There is another saying that goes, “As General Motors goes, so does the U.S.” Well, today, both General Motors and Ford have had their corporate bonds downgraded to “junk bond” status.

Rich dad would say, “As one party ends, another begins.” This real estate bubble has made many people very, very, rich. I hope it has made you rich. It has certainly made Kim and I very, very rich. But in my opinion, this party is over… so see you at the next party.

Despite his being widely disliked, I think Kiyoski makes some excellent points. The real estate boom is over (especially in places like California and Florida). You have to blind and deaf (or maybe just incredibly naive) to think otherwise.

The US government is essentially bankrupt. It has trillions of dollars worth of debt on the books. Not a good sign.

But there’s always a bull market somewhere. If you keep your eyes and ears open, you’ll always make money. You just need to get there before everyone else. As Milton Keynes once said, “The art of investing is anticipating the anticipations of others!”.

PS: Kiyosaki was quoted from an August 2005 article which you can read here.

Why the Dollar Will Collapse!

A few days ago I posted an article on why the dollar hasn’t collapsed. Robert Kiyosaki has a good counter-argument on why he thinks it will.

The Last Days of the Dollar

by Robert Kiyosaki

Tuesday, October 17, 2006

In 1966, I was traveling the Pacific aboard a freighter. I was 19 years old at the time and attending the U.S. Merchant Marine Academy at Kings Point, N.Y.

As part of my academy education, I spent a year as a student officer on freighters, passenger liners, oil tankers, and even tugboats. It was a great way to see and study the world.

An Instructive Exchange

One of the earliest lessons I learned at sea was about currency exchange rates. Even though currency valuation was not a subject taught at the Merchant Marine academy, my ship constantly traveled from one country to the next, so my education in what is today called FX — or foreign exchange — began.

Back then, the formal exchange rate in the banks was 360 Japanese yen to one U.S. dollar. On the black market in Hong Kong, I could get 366 yen to the dollar.

This made me aware of the games banks and countries play with their currencies: In 1966, the six-yen difference told me that Japan was buying more from Hong Kong, which is why yen was cheaper in the then-British colony.

A six-yen difference might not seem like much, but for a student earning just $105 a month every little bit counts. So I would wait for my ship to stop in Hong Kong and then trade U.S. dollars for yen. Then I would travel back to Japan and go shopping with the yen. Although the money I saved wasn’t substantial, the lessons it offered in currency exchange were priceless.

The End of the Golden Age

It was pretty easy to understand foreign exchange back in the mid-‘60s, since much of the world was following the Bretton Woods Agreement. Enacted in 1944, this agreement made the U.S. dollar the global medium of exchange.

Because the U.S. dollar was pegged to gold, figuring exchange rates was a cinch. If we purchased too much from Japan, then the Japanese could ask us for gold. If we had less gold, we had less money.

In 1971, President Richard Nixon changed everything by removing the U.S. dollar from the gold standard. Suddenly, the dollar was still the world’s currency, but now it was backed by nothing. The United States was free to print as much money as it wanted, and the world went along.

Because of this change, understanding foreign exchange became a bit more complex. Today, to understand the world of currency, you need to think a little differently — essentially because things don’t make sense.

For example, today, the United States is perceived to be the richest country in the world. In reality, though, we’re the biggest debtor nation in the world. And who are we indebted to? What many consider to be a Third World country: China.

For Richer and Poorer

The irony is that many Americans think we’re rich and China is poor. Exactly the opposite is true. This is because the removal of gold’s backing from paper money has created a virtual explosion in credit and liquidity. The sheer amount of liquidity around the globe is incalculable.

This excess funny money causes people to feel rich and almost everything to be more expensive. Today, stocks, real estate, automobiles, and gasoline become more expensive as the dollar becomes cheaper.

While some people do become richer in this system, funny money actually punishes working people who save money. It devalues the value of your work and your savings, even though you may feel wealthier.

In overly simplistic terms, China and many countries in the world today lend us billions of dollars to buy their goods. They send us products like computers, televisions, cars, candies, and wines, and we send them funny money in return.

Since they can’t spend those dollars at home, they simply lend them back to us so we’ll buy more of their products. That would be like me going to my local grocery store and asking them for a loan so I could buy their tomatoes. A logical person would say, “That makes no sense.” Yet it’s exactly what happened after 1971, and to many highly educated people — bankers and politicians, for instance — it somehow does make sense.

An Uneven Trade

You can find current smaller examples of such financial insanity. For example, many people refinance their homes to pay off their credit cards. This makes no sense; you and I know that someday that debt will have to be paid.

Yet getting deeper into debt does make sense as long as you can repay your lender with cheaper dollars, and as long as your lender is willing to take those cheaper, less-valuable dollars. To use my earlier analogy, it would be like buying an orange for $1 on credit and then paying him back for it a year later with 80 cents. As long as the grocer is happy with this arrangement, things are fine.

In real-world terms, one of the reasons the U.S. dollar only buys approximately 110 yen instead of 360 yen today is because the Japanese allowed us to continually devalue the dollar — that is, to pay our debts with cheaper dollars.

Over the years, the yen got stronger and the dollar got weaker simply because we, as a nation, printed more and more money, all the while consuming more and producing less. Japan would lend us money and we would buy their products. Japan’s economy boomed, and so did ours.

Game Over?

The problem today is that China isn’t willing to play the game the way the Japanese did. If we drop the purchasing power of the dollar, the Chinese, by pegging their currency to the dollar, also drop the value of their currency. The United States then pays back its debt with a cheaper dollar.

The irony is that we accuse China of playing games with their money. It’s more honest to say that China just isn’t willing to play the game we want to play.

But an even bigger problem is looming: It seems like the rest of the world is less willing to play our money game. That’s why the European Union introduced the Euro. If China creates an Asian equivalent of the Euro (which, admittedly, is a long shot) then the U.S. dollar could be in real trouble.

If the oil-producing nations stop accepting the dollar and switch to gold or the Euro, things will definitely get sticky. The world might be tipped into a global recession and possibly even a depression.

For now, though, this funny money game continues. How long will it last? I don’t know. I do know that throughout history, all paper money has eventually come back to its true value, which is zero. That’s when the game truly ends, and a whole new cycle of pass the buck begins.

Why Kiyosaki Is Buying Gold.

Robert Kiyosaki has a column on why he’s buying in gold. I don’t know why it has tomorrow’s date on it, but its pretty interesting nonetheless.

Bet on Gold, Not on Funny Money
by Robert KiyosakiTuesday, July 25, 2006

Gold recently dropped more than $100, or 14 percent, after hitting a 26-year high of $730 in mid-May. With that drop in price, I became a buyer of gold once again.

Can the price of gold go lower? Absolutely. If it drops to $500 an ounce, I’ll buy more. Let me tell you why.

But first, to give you some background, I’ve been in the gold market since 1971, when then-President Nixon took the U.S. dollar off the gold standard. Back then, gold was pegged at $35 an ounce, and ran to a high of $850 an ounce by January 1980. In the same period, silver hit approximately $40 an ounce.

Today, as I write, silver is around $13 an ounce. So I’ve seen the price of precious metals go up and down.

Mining a Hunch

In 1996, I founded a gold mining company in China and a silver mining company in South America. Both companies eventually became publicly traded on the Canadian Exchanges.

I formed gold and silver mining companies then because I believed that gold and silver were at “lows” and were set to come back up. At the time, gold was around $275 an ounce and silver was around $5 an ounce. If I’d been wrong, I would have lost the mines.

I was confident about gold and silver because I wasn’t betting on them. Rather, I was betting against the dollar and oil. In 1996, oil was about $10 a barrel, and that seemed low. My suspicions were that the dollar was strong, and I believed it would drop when oil went higher. I felt the conditions were right for a massive change in the markets. So far, I’ve been pretty accurate.

I’m confident that those conditions haven’t changed. With the current national debt, balance of trade, and ongoing war in Iraq, the dollar is growing weaker and oil is going higher. That’s why I recently bought more gold as well as more silver — to bet against the dollar and oil yet again.

Inflation or Recession?

In many ways, the conditions are far worse now than they were in 1996. Today, we have a slowing demand for the dollar. At the same time, it appears that the Federal Reserve is increasing the supply of dollars.

As you know, low demand and high supply means a drop in value of anything, including the dollar. And in order to save the dollar’s purchasing power, Ben Bernanke, the new Federal Reserve chairman, may be forced to raise real interest rates. By “real,” I mean an interest rate that’s higher than the rate of inflation.

(For example, if inflation is at 5 percent and interest rates are at 5 percent, the real interest rate is 0 percent. So, in this example, to increase demand for the dollar, the Federal Reserve would have to raise interest rates above 5 percent, to, say, 8 percent. That would means investors would receive a net 3 percent return on their money.)

So Bernanke has a tough choice to make: If he prints more money to bolster the dollar, inflation increases and the dollar may collapse. If he raises interest rates to slow inflation, the economy may go into recession.

The Oil Problem

Granted, if Bernanke moves to save the dollar by raising interest rates the price of gold and silver will probably decline — but so will our economy. If the economy begins to slow, the stock market often slows or turns into a bear market.

Personally, I suspect he’s more afraid of deflation than inflation. So for now, I’m betting that he’ll continue to increase the supply of dollars, which may be why the U.S. stopped reporting M3 in March of this year. (M3 measures how many dollars are in the system, and not reporting it is akin to not opening your credit card statement and pretending you’re not in debt.)

But oil adds another wrinkle. Oil producers are seemingly less and less willing to accept dollars because the purchasing power of the dollar keeps falling, precisely because we continue to print more money.

To compound the problem, we’re running out of easy-to-produce light, sweet crude. While there’s still a lot of oil to be extracted, it’ll be more expensive to produce, which makes $100-a-barrel oil very possible in the future. This, in turn, makes inflation more possible.

Historically, one barrel of oil has been worth about 2.2 grams of gold. Even when the dollar dropped in value, the ratio between gold and a barrel of oil remained pretty fixed. But recently, it has taken 3.4 grams of gold to buy a barrel of oil, which means either oil is expensive or gold is cheap.

I’m betting that gold is cheap, and that it’ll correct as oil goes higher and countries such as Russia, Venezuela, the Arab states, and Africa become more reluctant to accept the U.S. dollar. For a while now, we’ve been allowed to pay for the goods and services from other countries with funny money, but the world appears to be less and less willing to take it as payment.

Good Money Before Bad

Which way will the new Fed chairman take us? Will he be inflationary, which means printing more money, or deflationary, which means raising interest rates and tightening the flow of money? Does he save the dollar, or save the economy? Does he increase the money supply, or increase demand for the dollar?

My strategy remains the same as it’s been for years: I bet on real money, which is gold and silver. I also continue to borrow funny money to buy real estate. Since oil and gas are in high demand globally and appear to be going up in price, I also invest in oil and gas production.

Again, I’m not really betting on these assets — I’m primarily betting against the dollar, and the leaders who manage the U.S. economy.

Now you know why I buy more gold and silver every time they drop in value in the current economic environment. What smart investor wouldn’t gladly spend funny money to buy real money?