I’ve lived through a few recessions in my time, and came out the other side just fine, so can we just get back to shopping yet!?” That’s how most Americans view this “recession,” but what they don’t realize is that we’re not experiencing a recession…
We’re experiencing the mother of all wealth cycles that will end (as a cycle of this type historically does) with…
- Deflation that will put the Great Depression to shame.
- Hyperinflation that will destroy the US Dollar.
Or BOTH, in the form of a “Hyperinflationary Depression”, as Michael Maloney and Robert Kiyosaki predict.
What’s important to understand, is that this Super Cycle has repeated itself hundreds of times, in hundreds of countries since the dawn of man’s first currency. This time it will not be any different. It is inevitable, and there’s nothing you and I can do to stop it. But with all great change comes great opportunity, and it is possible to end up on the winning side.
So What Are Wealth Cycles? Simply put, a wealth cycle shows how you can move your money from an over-valued asset class in a bubble, to an undervalued asset class. Then ride the new asset up until it becomes over-valued, sell, and repeat the process. A great example of this is the Dot.com bubble of the late 1990’s. Many people don’t realize this, but the tech investing boom actually started in the early 19802s just as the last gold ans silver boom was ending. Much of the money moved out of gold and silver, which was over-valued by 1980, into emerging tech stocks and internet start-ups. As gold was sucked dry, it’s priced dropped from $850 in 1980, to $255 by 2001. Much of that wealth moved into tech and created the largest asset bubble in history at that time by the year 2000. In 2001, the peak of the.com wealth cycle had been reached, and the money started flooding out of tech stocks, and into tangible assets and real-estate. As the final phase of real-estate progressed, trillions of dollars flooded into housing, fueling the largest housing boom in history. The price of a median family home went from $169,000 in 2000, to $247,900 in 2007, but then it peaked, and the money is now pouring into the next sector… Precious metals. If you understand the current cycle, you can get wealthy by selling at the top of the current one, and buying at the bottom of the next. Unfortunately, the uneducated public does the exact opposite. They buy assets that are hot and rising, and then sell in a panic at a loss, not realizing that the cycle has ended and that the smart money has already moved on. This is why understanding Wealth Cycles is the single most important part of your investing strategy.
The Current Wealth Cycle: But something interesting happened during this cycle… Banks made an unprecedented number of loans to people who should not have been given a loan. Then they took those bad loans and packaged them into derivatives, which were then sold again. This flood of money fueled a global level of growth unlike anything the world had ever seen. Entire cities sprung from the desert sands of Dubai in less than 10 years. People were using their increasing home equity levels like a massive ATM machine to by luxury cars, vacations, and to invest into the market. But there was one tiny problem… While the housing bubble was the largest in history, it wasn’t inflated by existing money like the tech bubble was. It was inflated by newly issued DEBT in the form of these home and equity loans. It was filled with poisonous IOU’s held by people who had no way to ever pay them back. Then on August 6th, 2007, the “American Home Mortgage Company” filed for bankruptcy – quietly popping the real-estate bubble, and throwing a wrench into what had been a pattern of manageable wealth cycles fueled by existing money that moved from over-valued assets, to undervalued assets.
The mortgage company’s closure was the sign that the global system could not absorb any more of the debt that had fueled the incredible growth seen in the US, in Dubai, in Singapore, in Malaysia, China, and many other countries who had experienced massive booms in real-estate and development. That day, the debt bubble burst, and because all of this debt had been collateralized and resold time and time again through derivatives, it was an event that was felt around the world. Now the popping of any credit bubble is a deflationary event, and in the case of the great depression, it was extremely deflationary. When a home goes into foreclosure, a loan gets defaulted on, or when someone files bankruptcy, that currency simply disappears back into currency heaven where it came from. So as credit goes bad, the currency supply contracts and deflation sets in. This is what happened in 1930-1933. As a wave of foreclosures and bankruptcies swept the nation, one-third of the currency supply of the United States evaporated into thin air. Over the next 3 years, wages and prices fell by 1/3. Companies could not afford to pay their people, and those people could not afford to pay their bills. And as we all know, whether it’s from stories of our grandparents, or pictures from the history books, it was disastrous period in our country’s history.
This process began once again, in 2008 with the popping of the housing credit bubble. Over the past 24 months, deflation has sucked an estimated 60 TRILLION worth of credit out of the global economy. That’s 60 Trillion dollars worth of fuel, which was flaming the fires growth around the world, and it virtually disappeared over night. What appeared to be wealth was only a mirage, and the massive global economy has been slowly grinding to a halt as the debt unwinds and works through the system via deflation. Normally, this would be an extremely painful, but natural and healthy remedy for the problem. Companies and individuals who made poor decisions, and who were reckless with their debt levels (like GM, Lehman Brothers, Fannie Mae, Freddie Mac, etc) would fail as they deserved to.