Are margin accounts a smart way to build a portfolio?
Ever thought about borrowing money to invest?
Don’t do it! At least, not till after you listen to this episode of The Goldstein on Gelt Show!
Margin accounts, borrowing money to invest, is a risky investment strategy that shouldn’t be done without careful consideration Find out what a margin account is and why it may be a bad idea.
Four questions to consider before creating a margin account
Doug has four questions that every investor should ask if they are tempted to borrow money for investing. Margin accounts are a high-risk move, and most people aren’t comfortable with such a drastic investment strategy. Ask these four questions to decide if borrowing money makes financial sense for you.
Richard Duncan, the developer of Macro Watch and author of The Dollar Crisis and The New Depression, forecasts an upcoming recession in the global economy. Richard also points to recent events that could lead to an American recession. He and Doug discuss how investors can plan for economic downturns. Listen to discover some investment strategies that can help you weather the storm if the market bubble bursts.
Check out Richard Duncan’s show Marco Watch for more of his insights. Visit www.richardduncaneconomics.com.
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Douglas Goldstein and Richard Duncan, author of numerous books and former financial sector specialist for the World Bank, discuss U.S economic policy. Is it likely that another crash is going to happen soon? If it is likely, how should you prepare yourself for it? Richard also talks about a much better investment than gold.
Douglas Goldstein: I'm very excited to have on The Goldstein on Gelt Show, Richard Duncan, who has written a number of books about the global economic crisis. He does a video newsletter called "Macro Watch" and he’s probably most well-known because he called the crash of 2008 in his book, The Dollar Crisis. Richard, you are now calling for another crash. Are you just an interminable pessimist or is there a good reason for this?
Richard Duncan: It's not so much that I'm calling for another crash. What I believe is that we came very close to collapsing into a new Great Depression once the bubble popped in 2008. The policy makers managed to reflate that global economic bubble with trillion-dollar budget deficits and trillions of dollars of quantitative easing.
The Issue With President Trump’s Policies
The bubble now has once again been reflated, and hopefully it will remain reflated. My concern at this point is with President Trump's proposed economic policies. We don't know for certain what he will do, of course, in terms of his policies. If he does what he said he was going to do: cut taxes on the wealthy and on corporations, increase government spending, and at the same time put large trade tariffs on Chinese and Mexican goods, then that's a recipe for disaster. It's going to cause interest rates to spike and the global economic bubble to implode back into a 2008-style recession or worse.
Douglas Goldstein: Before we delve into the macroeconomics, because I want to talk about what people should be doing, I just want to touch on this issue about using debt to get out of a bubble. There are certainly Keynesians, probably today most loudly applauded or led by Paul Krugman, who talk about the need to sometimes borrow money. Stimulate things so that ultimately down the line, you'll be able to develop earnings, build infrastructure, and get companies back on track. In fact, I think in 2008 that this was the model that he said would get us out of it. A lot of people looking back over the past few years, say, "All right, listen. Maybe there's more debt, but look at how the stock market has done," and “most people have jobs these days in America.” Were they completely off base?
Richard Duncan: No. If you look back, in the United States at least, going all the way back to 1950, any time total debt in the U.S. grew by less than two percent, and that's adjusted for inflation, anytime that happened, the U.S went into recession. The same happened for debt or credit. It didn't recover from that recession until there was another very big surge of credit growth. In my work, I really focus on the role that credit has played in driving the economy for the last several decades. We need credit growth to make the economy grow.
Douglas Goldstein: If we are getting credit growth and we are borrowing more money, that seems to me that we're following the right path, according to your model.
Richard Duncan: Yes, you have to look at where the credit is coming from. The problem is that the private sector, now in the United States, has become so heavily indebted that in 2008, they just didn't have enough income to repay the interest on all of the debt. That's pretty much where they still are now. They have too much debt relative to their income, so that means that the government has had to step up and borrow and spend more.
By doing that, it has reflated the global economic bubble by reflating the U.S. bubble. They managed to finance almost a third of the increase in government debt in the United States, by printing money from thin air; quantitative easing. The combination of a large physical stimulus financed with paper money creation has been very successful in reflating the global bubble. The question is, what next?
Douglas Goldstein: You're using the word “bubble.” You obviously seem to be suggesting that there's going to be a pop. When is that going to happen and what should we do?
Pop Goes The Bubble?
Richard Duncan: It greatly depends on U.S. economic policy. For instance, the U.S. government’s debt is only around 100% of U.S. GDP. Japan's government debt is now 250% of GDP. The Japanese bubble popped 27 years ago, and they have managed to keep the thing inflated. They have done this by running very large budget deficits and by increasing amounts of quantitative easing to finance those deficits. The United States could do the same thing. It's just a question of whether it will choose to do that or not. It requires a continuation of globalization for this arrangement to work.
Normally, countries can't get away with printing a lot of paper money, as that would lead to very high rates of inflation or even hyperinflation. The reason the United States has been able to get away with it, and for that matter Japan and Europe and UK, is because of globalization. It's very deflationary. It pushes wages down. You no longer have to pay someone $200 a day in Michigan to build a car, because you can hire someone in Western China and pay that person $10 a day.
Globalization is extremely deflationary and it completely offsets all of the inflationary pressure that normally would result from paper money printing. This has created a unique moment in history where, as the last eight years have demonstrated, it is possible for the U.S. government to borrow and spend trillions of dollars that it doesn't have, through debt suspending and to finance, a third of that with paper money creation, without creating higher rates of inflation.
That creates a once-in-history opportunity for the U.S. to borrow and spend aggressively. If it spent the money wisely, investing in new industries and new technologies, then we could grow our way out of this crisis and the bubble would never have to implode. On the other hand, if it just wastes the money, with too much consumption at home and unnecessary wars abroad, then ultimately the bubble is going to implode with catastrophic consequences.
Douglas Goldstein: We’re talking with Richard Duncan who is the author of three books on the global economic crisis. His latest book is The New Depression: The Breakdown of The Paper Money Economy. Richard, you've been giving us the big picture. If, for example, Donald Trump is listening to this show today, he'll take some of the suggestions you're giving. Let's bring this down to our regular listeners. What should people who are listening to this show today, who are concerned about a breakdown of the dollar or breakdown of the financial sector, be doing? Should they be buying guns and ammo and go out to the hills?
Richard Duncan: We don't know how this is going to play out. It could result in high rates of inflation, if President Trump chooses to put up 45% trade tariffs on Chinese goods, and end globalization. On the other hand, it could end the other way, in extreme deflation if the global banking system collapses again. Or in fact it could be a sequence. We could first experience high rates of inflation, and then the bubble could implode and we could have extreme deflation and depression.
What If There Is a ‘Pop’? How Should People Prepare Themselves?
Douglas Goldstein: That’s a lot of uncertainty right there. People have to make decisions, though. They are saving for retirement and they are afraid that the money won't be worth anything by the time they get there. Some are saving to help their kids. Should people be buying, going along with the stock market trend, or should they stick money in the bank? Then again, should they be buying pieces of gold and hope that they will be able to use that one day?
Richard Duncan: Forpeople who want to be most risk averse, it’s safer for them, in the United States at least, to buy a piece of land with a house on top of it and rent it out. The more of those that you can buy, the better. In that scenario and with that strategy, if we get high rates of inflation, then your home price is going to go up. If we have a collapse and the global economy really goes into depression, the value of your home is going to drop but you're still going to have cash flow from the rental income.
In my opinion, buying a land with a house on top as rental property is a much better investment than gold. The land price will go up. Compare that with gold, which doesn’t provide you with any rental income.
Douglas Goldstein: Have you been buying properties around the world, these days?
Richard Duncan: I have some properties, though not as many as I would like to have.
Douglas Goldstein: What about in 2008, when the housing crisis hit? The value of people’s properties dropped, and a lot of people weren't able to collect rental income.
Richard Duncan: I think you can always collect rent. It may not be as much rent as you were collecting before the crisis hit. The thing with deflation is that if there's a general deflation and crisis collapse, the banking system fails. That leads to all of the prices falling. The price of everything will fall and your rental income will be less. The price of everything else will be lower, also. You'll still be better off than those people who don't have any assets to rent out at all.
Douglas Goldstein: Got it. For the people who don't want to be a landlord per se, do you think it's a good idea for them to buy pools of real estate? Should they, probably, buy a real-to-real investment trust, which is a more liquid way of getting into the real estate market?
A Real-To-Real Investment Trust or Owning Land With A House?
Richard Duncan: If they feel comfortable in that sort of environment, then yes, they should. The difference is that each one of those investments is unique, and some may be structured to the disadvantage of the buyer. That is often the case in the world of finance. Whereas if you own your own land, then you are in charge. You know where the land is, and you know where the title to the land is. You're much more secure that way, in my opinion.
Douglas Goldstein: Interesting. Other than buying property, do you have any other source of investments that you think people should consider, if they are afraid of a major crash in the market?
Richard Duncan: I think that's the best, safest asset; land with rental property on top. Of course the trick is not to have it so highly mortgaged. Your mortgage would have to be low enough, so that you could continue to service the mortgage even if your rental income falls significantly.
Douglas Goldstein: Low interest rates make it easier to mortgage. A lot of people often point out that if you have a mortgage, when you're paying back the money 10, 15, 20, or 30 years later, you're actually paying it back with deflated dollars. You're able to borrow more valuable dollars and pay back much less valuable dollars, so it's an even better deal to do a mortgage. Does that make sense to you?
Richard Duncan: Yes. In the U.S. for instance, it's possible to borrow money and lock it in. You can lock in your mortgage rates for 30 years. I prefer 15-year fixed-rate mortgages. In that case, if you borrow and we end up with high rates of inflation because of trade tariffs on China, then it would be exactly as you said. Your debt would evaporate because of the higher inflation rates.
Douglas Goldstein: Richard, in the last few seconds, please tell us how people can follow you and your work.
Richard Duncan: I now produce a video newsletter called "Macro Watch". Every couple of weeks, I upload a new video to my website analyzing developments in the global economy, and how they're likely to impact asset prices. Your listeners could check that our by visiting my website, which is richardduncaneconomics.com. The video newsletter is called "Macro Watch", and I hope they'll check it out.
Douglas Goldstein: Great. Richard Duncan, thanks so much for your time.
Richard Duncan: Thank you, my pleasure.