QUESTION: Hi Marty, I come from a golfing family and remember very well the shock when a Japanese investment group bought the Pebble Beach Golf Links, in 1990, for $850 million. The previous October Japanese investors bought the Rockefeller Center, triggering a flurry of Japanese purchases of signature U.S. properties such as Pebble Beach.

Was all this investment caused by The Plaza Accord in 1985, which devalued the USD by 40 percent? Which, as you’ve pointed out, also devalued American assets held by Japanese, igniting a sell-off of American investments and the 1987 crash. With cash repatriated back to Japan, the capital inflows into Japan ran the Nikkei up to its peak, in 1989. Within this late-80s early-90s timeframe, this is when the Japanese made their global malinvestments such as Pebble Beach, which they sold just two years later, in 1992, for $500 million, taking a 42 percent loss. Do I have the correlations and causations correct?

Thanks,

TGM

ANSWER: Yes. The Japanese bought US assets at the peak of their markets in 1989. As you can see, the dollar against the yen kept falling into April 1995. Not only did the Japanese lose money on US assets, but they also lost, even more, when they sold them and converted it back to yen on the decline in the dollar.

Currency is EVERYTHING. It dramatically alters the capital flows and can destroy economies because people remain clueless about how foreign exchange markets even function. That should be no surprise since they still teach all the economic theories of the Bretton Woods fixed exchange rate era including Keynesianism.

That is why everyone in the field is self-taught. You cannot get a degree in hedge fund management. Christine Lagarde of the IMF and soon to be head of the European Central Bank is a lawyer with no experience in funds management. People run for president spouting economic promises without the slightest background even in economics. What they teach in school has become ever more irrelevant in the real world. Other than a doctor or lawyer, it is hard to find someone who is working in the field in which they obtained a degree

QUESTION: Hi Martin.. thanks so much for all your world/economic content and perspective. I was reading a comment you made recently concerning real estate mortgages. In the comments, you suggested carrying a low fixed-rate mortgage rather than paying off the property.

My question is what happens when a financial institution goes bust. You’ve taken out a mortgage on your house and deposited the excess money from the mortgage in your bank account. Doesn’t this expose you to bankruptcy risk? If the bank collapses you could potentially lose what’s not covered by FDIC insurance. In one case the house is paid off and the money is out of the banking system. In the second case, the money is held in the banking system and is at risk. Or am I missing something?
Cheers,
Bob

ANSWER: If you have cash at a bank, then you have the risk of the bank failing. However, if you are the borrower and the bank holds the mortgage, then as long as you are current on your payments it cannot foreclose. It will typically sell its assets to raise cash so your mortgage could be resold to another bank or an investment pool.

The problem you will have in a crisis is that real estate is illiquid. When I was growing up, a friend of my father owned virtually the entire main street in town. I recall talking to him and he said that he bought the entire main street in town back in 1937 because he had cash and bought it for 10% of its 1929 value.

If you borrowed and have the cash on the side, you will be in a far better position to sell liquid assets and buy the house at a discount if the bank is in trouble.

QUESTION: I am a bit confused. You have forecast that interest rates will rise but official rates will decline. Exactly how does this materialize?

Thank you

GF

ANSWER: People seem to look at just the official interest rates set by the central bank and assume what I am saying is wrong. They have to look at what is really going on in interest rates. We have witnessed the greatest gap between official rates and private rates in history. While deposit rates are virtually zero, car loans which are secured, are at about 4.5% in the United States (up to 9.5% outside the USA). The Bank of America, N.A. prime rate was 5.25% as of August 1^st, 2019.

In 1981, the Fed’s Discount Rate for banks was 14% at the peak back in 1981. The Prime Rate peaked at 21.5% at that time. This meant that the Prime Rate was 53.5% above the Fed’s Discount Rate. In August 2019, the Fed’s Discount Rate is 2.75% and the Prime Rate is 5.25% or a 90% markup. The spread between public and private rates has nearly doubled.

Official rates can be manipulated by the central bank for it can control the short-term rates, but not the long-term without instituting some form of capital controls. But they close the free markets in government bonds.

The spread on the private rates v official rates has doubled! I am nor forecasting the superficial trend in manipulated rates by central banks, but the real world rates in the private world. I have stated numerous times, the bankers have NOT passed on the lower interest rates to the people. The spreads have doubled – not declined nor did they even stay the same. If the spread was the same as it was in 1981, then the Prime Rate should be 4.2% instead of 5.25% and a secured car loan should be 3.4% instead of 4.5%.