Here’s what most people don’t know when it comes to the financial world.
Instead of listening to the endless opinions and agendas in the mainstream press, they’d be better off picking up a history book.
You quickly find the same things happening today as yesterday.
I see it every day. Today’s Morning Money shows you what I mean…
1790 comes around again
Take the recent court settlement involving Argentina. The short version is Argentina defaulted on a large amount of bonds 15 years ago. Then the government tried to write off the debt.
A US hedge fund bought up the bonds at a fraction of their value, and sued the Argentinian government to get paid at par. The battle’s been running for a decade or more. They just settled.
Argentina is going to pay US$4.65 billion to the hedge fund that paid $50 million to buy the bonds in the first place. That’s 25% less than the hedge fund was after. Don’t feel too sorry. The US hedge fund will make 100 times its initial investment.
There’s plenty of people who will tell you that a vulture fund just ripped off the people of Argentina. The country is going to try and raise US$15 billion in the capital markets just pay off these debts.
But then again, shouldn’t debts be repaid? What do you think?
This debate is not new. After the American Revolutionary War, the tiny US government had incurred major debts to bankers in Holland and the government of France.
The bonds issued fell in value, sometimes as low to 10 or 15 cents on the dollar, according to Beard’s Basic History of the United States.
Let’s see what happened then. According to Beard:
‘Discouraged by the prospect of a total loss or needing money, hundreds of Americans had sold their bonds for almost nothing, to speculators who gambled on the chance that the cheap paper would someday be paid off in full by the government.
‘Should it be paid in full or at a sum below face value? If paid in full, should discrimination be made between the rate paid to persons who had originally bought the bonds from the Continental government and the rate paid to speculators who had bought the bonds from original subscribers at a low price?’
Maybe you’ve already guessed. The bondholders were paid off in full. Not only does history repeat, what it usually shows is that creditor class will never allow debts to be written off. You just need to get the right man in power to make it happen.
Of course, we don’t have to look as far back as 1790 to see the financial world going around in its circle.
They’re not just flipping burgers in the US
Take the recent news out of the United States today. Remember, it’s only now that the country is really starting to shake off the backlog of bad debts and negative equity that has blighted the country since the collapse of 2008. Rampant and corrupt speculation in the housing market bought this on, and transmitted the recession worldwide.
And what do we see? A return to house flipping! Housing data firm RealityTrac it has increased in 75% of markets across the United States in 2015. It was the first annual increase after four years of decline.
This behaviour of course stems from the fact that the regulations and conditions brought in after 2008 deal with the symptoms and not the cause that resulted in the bubble in the first place. The cause is still with us.
It’s also why people who point to the volatility in the US stock market as some sort of indicator of impending US recession will be prove wrong.
The US is travelling along better than people think. The Wall Street Journal reports that US households ended 2015 with their home equity at its highest point in a decade. This is exactly as my colleague Phillip J Anderson forecast, while everyone else jibbered on about the debts and gold and China.
The value of US real estate climbed to US$25 trillion against US$9.5 in mortgages in 2015. Further to that, it’s their home, and not a stock portfolio, that underpins the net worth of the average American household.
And by the way, the net worth of US households and nonprofits is at a record US$86.8 trillion, according to the Federal Reserve.
To be blunt, if you’re taking your cues off the stock market to get the direction of the US economy, you’re going to get led astray. It’s much better to understand the land market.
So you have a choice. You can go back and study 200 plus years of US history to see how patterns in the US real estate market repeat. Or you can listen to the man who’s done it all for you.
After all, here’s another lesson from history: luck follows the prepared mind.
Go here and you could get very lucky indeed.