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December 5th, 2010
By: David Campbell, professional investor, developer, and founder of Hassle-free Cashflow Investing

This article is a sequel to my last newsletter, but can easily stand on its own. You are invited to read and comment on part 1 and 2 of this article on my blog.

I am absolutely certain we will (continue to) see high rates of inflation for the foreseeable future. Inflation doesn’t mean commodities will increase in value, it just means commodities will increase in price because of a devaluation of our currency. If you understand what inflation is, and you believe it will continue, you can either be a victim or a beneficiary of the phenomena. I went to the grocery store recently and was amazed (but not surprised) at how much food prices have increased. Rising prices is confusing and frustrating to most Americans, but it is a fact of life we must come to accept and financially prepare for. Inflation has a winner and a loser. Unfortunately, most people come out losers because they cannot out-earn or out-save inflation. When I observe signs of inflation (rising prices) around me it does not affect me emotionally, because I have prepared to WIN from inflation. When inflation happens, savvy investors like me get richer while workers and savers get poorer. This doesn’t make me feel good about the situation, but it is the economic reality we live in.

I spend a lot of time talking about inflation and taxes because these are the most important and misunderstood concepts in your financial life. Inflation is a hidden federal tax upon every dollar in circulation worldwide. If you are the US government, inflation is an ingenious invisible tax; if you are anyone else, inflation is taxation without consent (and, for most people, without knowledge). I am about to show you ways to profit from inflation, but in no way do I believe inflation is a good thing for society. If I could stop inflation, I would. Since I can’t stop inflation, the best I can do is make a profit from it.

Here are four ways to profit from inflation:

1) STEP ONE: purchase durable commodities today when the supply of dollars is less than the supply of dollars will be in the future. The durable commodities you purchase become assets on your balance sheet that maintain constant value while inflation drives prices up. When the supply of dollars increases and the supply of commodities remains the same, prices rise because more dollars are chasing the same basket of goods. Inflation as a result of increased money supply assumes demand for commodities has remained constant. If demand for commodities increases or decreases, there is a change in VALUE which may or may not result in a change in price. Value and demand are synonymous price is a metric of demand, money supply, and the velocity of money. We will talk about the velocity of money another day. Commodities may increase or decrease in value/desirability/demand, but inflation will make the PRICE of the commodity go up because of a looser money supply. For example, let’s say you bought a hammer in 1960 and it cost you $2.72. Over the past 50 years, the design and demand for hammers hasn’t really changed and therefore the value of a hammer in 1960 and in 2010 is exactly the same. Because the US currency has devalued (inflated), the price of the hammer is now $20. Over 50 years, the hammer has increased in price by 15% per year. RECAP: the value of the hammer didn’t change, but the price increased 15% per year because of inflation (15% per year is simple interest, but it can also be expressed as 4% annualized compounding rate of increase which is how inflation is usually described). If you had purchased a truckload of hammers in 1960 (for $2.72) and resold them at today’s inflated prices ($20), you would have a healthy paper profit that outpaced most investments even though the VALUE of the hammer DIDN’T CHANGE. While it is nice to find commodities that will increase in VALUE because of increased desirability or demand, it is easier to find commodities that will increase in PRICE because of inflation. Because of increases in the money supply (or increases in the velocity of money), it is possible to have a commodity drop substantially in value but resell at a higher price / profit.

2) STEP TWO: purchase durable commodities using as much debt as can be paid for by leasing out the durable commodity. Cash-flowing real estate is the perfect example of this. Real estate and hammers are examples of durable commodities, while oil or soybeans are examples of consumable commodities. No one will rent soybeans from you because they must be consumed to have value. Many people will rent real estate from you because it produces utilitarian value without consuming it. A bank will loan you most (sometimes all) of the money you need to buy an asset and the income from leasing the asset will pay off the loan. FREE MONEY! Now, let’s add inflation to the mix. Let’s pretend you bought a house in 1960 and the value of your house is 6,250 hammers and the price of a hammer was $2.72. (6,250 hammers x $2.72 per hammer = $17,000 house). Over the 50 years between 1960 and 2010 we know the money supply went through the roof and the price of things followed suit. Let’s assume the value of the house you bought in 1960 didn’t change over 50 years due to deterioration or increased demand and neither did the value of a hammer. In 2010, the value of your house would still be 6,250 hammers. However, as the supply of currency increased, the price of everything increased. Hammers went up in price and so did houses. If hammers now cost $20 ($20 per hammer x 6,250 hammers) your house must cost $125,000 even though the value didn’t change. What happened to the value and price of the debt? Let’s assume you had a 50 year interest-only loan on the property and you purchased it with 100% financing (eg. $17,000 of debt in 1960 and $17,000 of debt in 2010). This assumption is highly unlikely, but it makes our illustration easier to understand. Over 50 years, the price of the debt stayed the same while the value of the debt decreased. When you purchased the property, your debt was equal to 6,250 hammers or 100% of a house or $17,000. Sixty years later, $17,000 is only worth 850 hammers or 14% of a house. Inflation made the VALUE of debt decrease. If you know inflation is coming, you want to be a borrower of good debt (good debt is debt serviced by your tenants) and hold the debt as long as you can while the supply of currency increases. Thirty year fixed interest rate mortgages are on sale right now. Get as many of these mortgages as you can while the government is still subsidizing low interest rates.

3) STEP THREE: Protect your profits from income taxation. As the price of real estate goes up with inflation, there is no income tax on the gain until the property is sold for a profit. It is also possible for an investor to “borrow the profit” out of a property and reinvest it without paying a single penny of income tax. Many types of investments (interest income, business income, mutual funds, oil and gas, etc.) must pay income taxes on their profits every single year. Annual taxation of your profits radically erodes your return (earning power) because you lose the ability to generate compound earnings on the portion you paid in taxes. If you could double your money every year ($1 : $2 : $4), one dollar would equal one million dollars in twenty-one years. Apply a 30% income tax rate before each year’s doubling and twenty-one years results in only $41,000. Can you see how ESSENTIAL it is to have income tax deferral as a central component of your wealth building strategy? The equity growth in real estate is automatically tax deferred (like an IRA) while also creating a tax shelter for the ordinary income through depreciation of the real estate structures. Depreciation is a topic for another day.

4) STEP FOUR: Acquire income streams whose value will be enhanced by rising prices. Let’s assume rent has a fixed value of 60 hammers per month. In 1960 rent would be $163 per month (60 hammers x $2.72) and in 2010 rent would be $1200 per month (60 hammers x $20). The value of rent didn’t change, but the price changed because of increases in the supply of dollars (fiat currency). Let’s assume our rental house in 1960 had operating expenses of 28 hammers per month (taxes, insurance, maintenance, management) and mortgage payments of 30 hammers per month. There would be 2 hammers per month left over as the investor’s profit (60 hammers of income – 28 hammers of expenses – 30 hammers for mortgage). Over time, the PRICE of operating expenses will increase in direct proportion to the rate of inflation. However, the VALUE of operating expenses is not going up, the increase in the currency supply is making the PRICE of everything go up. Over time, the PRICE of your fixed interest rate mortgage will stay the same thus reducing its VALUE. In 1960, your mortgage is 30 hammers x $2.72 = $81.60/month. In 2010, your mortgage is still $81.60, but the price of a hammer has gone up with the money supply. Your mortgage in 2010 is $81.60 divided by $20 per hammer = 4 hammers. In 2010, you collect 60 hammers of income less 28 hammers of expenses (income and expenses didn’t change) less 4 hammers for mortgage = 28 hammers of investor profit (28 hammers x $20 = $560). The value of rent and expenses stayed the same, while inflation caused the VALUE of the mortgage to decrease therefore increasing the investor’s profit. Real estate is powerful because it allows you to control a very large amount of debt whose value is eroded by inflation. As the value of debt is eroded, the borrower of the debt wins. An investor doesn’t need the PRICE of his debt to decrease, to make a profit, he just needs the VALUE of his debt to decrease. If the cost of debt is 5% simple interest, but the rate of inflation was 15% simple growth between 1960-2010 it is obviously profitable to be a borrower of good debt during inflationary times (eg. borrow at 5% and earn 15% = 10% profit on the funds borrowed). Government inflation numbers are reported as compound rates of growth and that confuses people into thinking inflation is less of a factor than it really is. 4% inflation compounded annually over 50 years is the same as 15% simple interest. Here is an easy to use inflation calculator if you want to see how much the price of things have changed over the past 100 years.

In my next newsletter, I will prove the Federal Reserve must inflate the price of real estate by 50% or banks will continue to fail in huge numbers. There were 140 bank failures in 2009 and 149 bank failures in 2010. Here is an interesting interactive map showing where bank failures are occurring. What is worse for our economy, widespread bank failure or rapid inflation? The Fed has been explicit in its public commentary on this issue; aggressive inflation is preferable to continued bank failure, therefore heavy inflation must be targeted at the real estate sector to pull the banking industry out of its nose dive. The Fed has made its decree public knowledge. What are you going to do about it?

If you are like me and believe inflation is inevitable, how will you prepare yourself for it? Doing nothing means your savings and wages will be eaten up through increased consumer prices. Acquiring positive cash flow real estate with 100% financing makes you the ultimate winner during inflationary times.

Don’t become a victim of inflation! Acquiring Hassle-free Cashflow Real Estate is a very simple step towards prosperity in the coming years. If you would like help building a successful real estate portfolio, please call me right away while prices are low, long term interest rates are low, and banks are still lending to qualified buyers. Inflation is coming, and this beautiful buyer’s market will not last forever.

Best regards,

David Campbell
Real Estate Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com

by David Campbell
Professional Investor and Developer
Founder of Hassle-free Cashflow Investing
November 22nd, 2010

Regardless of your political opinion about whether quantitative easing is good or bad for our country, the government is telling us they are printing dollars as fast as they can. The question is are you prepared to profit from this inflationary phenomena?
QE2 is a fancy term for “hidden tax on savers, seniors, and foreign nations for the benefit of the US federal government, banks, and owners of leveraged commodities.“ If you know who benefits from, or is hurt by, quantitative easing (aka inflation), doesn’t it make sense to put your chips on the winning side of the equation? Rising prices makes private lending more attractive because as the price of a lender’s collateral rises, the loan to price ratio becomes more favorable (safer) to the lender. Rising prices make owning leveraged commodities such as positive cashflow real estate more attractive. As price of commodities rise with inflation, rents go up, real estate prices go up, and debt can be repaid with ‘cheaper dollars’.

I frequently talk about inflation because it is the most important economic force in our lives. It is by political design that very few people talk about or understand what is happening with inflation. Here are some excellent Youtube videos describing what is happening with inflation and the dollar – Quantitative Easing Explained,

Glenn Beck: Just Realize What’s Going On – Part 1

Glenn Beck: Just Realize What’s Going On – Part 2

Peter Schiff on FOX news

The Attack On the Dollar by Richard Maybury

High inflation in the United States in the foreseeable future is inevitable for the following reasons:
1) The federal government controls inflation and they have the most to gain from it. It’s like the fox guarding the hen house. Congress and the Fed have publicly stated their desired rate of inflation is a doubling of commodity prices every 15 years. This is one way for the US to fund their current budget obligations while staying ahead of the cost of interest on the national debt. If the US government is successful with their monetary agenda, a hamburger that cost $5 today will be $10 in 2025, $20 in 2050, and $40 in 2065. While it is hard for me to comprehend $40 hamburgers, it’s equally hard to imagine my parents going to the movies as children and only paying twenty-five cents!

2) It is more popular to inflate than to raise taxes. Inflation is a way for the federal government to tax your savings, because as prices rise, the dollars in your savings account buy less. Savvy investors with political influence know how to profit from inflation and simultaneously shift the tax burden onto the financially illiterate working class. Americans are indoctrinated into a compulsory system of government controlled education which teaches: get a good education, work hard at a job for 40 years, and save your money in banks, the social security retirement fund, and invest in Wall Street. This is another example of the fox watching the hen house. People are starting to realize this system doesn’t work, because inflation is consistently outpacing the profits generated by savings accounts and Wall Street investments.
3) Inflation is a tax upon foreign nations. The US dollar is the world’s reserve currency for oil. Every country in the world buys or sells oil denominated in US Dollars. Regardless of whether you are Japan, China or France, every country in the world must hold huge reserves of US Dollars to buy or sell oil. As the US prints more money, each dollar in circulation buys less stuff and is therefore the dollars they are holding are robbed of valued (inflation). Foreign governments don’t like this because this gives the US an unfair advantage. The US can print an infinite number of dollars with the click of a mouse to purchase valuable commodities such as oil from foreign nations. As long as the nations of the world are forced to conduct international oil commerce in US dollars, there will be a need for them to hold US dollars. It is hugely important to note that more US dollars are held by foreign nations than by Americans. The moment OPEC starts trading oil in a currency other than US Dollars, there would be sudden and catastrophic inflation in the United States as foreigners race to trade in their worthless paper money for commodities denominated in US currency such as US real estate, food, and precious metals. (Digression: I haven’t met anyone who can explain why the US military is in the Middle East, but making sure OPEC does not denominate oil in a currency other than US Dollars seems just as plausible a reason as anything else.)
Fortunately, profiting from inflation is relatively simple and I will be covering this topic extensively in my upcoming newsletters.
Best regards,

David Campbell
Real Estate Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com

PART TWO CAN BE FOUND HERE.

NEW YORK (TheStreet) — Gold price manipulation is the most controversial theory that has circulated among gold bugs for 20 years.

Conspiracy theorists think that gold prices have been illegally suppressed over the last two decades by central banks and governments. GATA or Gold Anti-Trust Action Committee is the biggest complainant.

Central banks reportedly have 32,000 tons of gold, with the International Monetary Fund accounting for 2,800 tons. Under the Washington Agreement on Gold, its members can only sell a maximum of 400 tons a year thereby restricting the amount of gold in the open market place.

GATA argues that central banks in actuality have less than 15,000 tons of gold and that the missing gold has been secretly sold into the market preventing gold prices from rising to their actual price, which helps the country’s paper currency, bonds and interest rates. The suppression theory means that global economies are in worse financial shape than investors think and that gold should be bought as the ultimate safe haven.

The New York Post recently reported that the the Commodities Futures Trade Commission and the Department of Justice have launched criminal and civil probes into JPMorgan’s trading in the silver market to determine if the investment bank depressed the silver price for their advantage. There are also rumors circulating that a major New York law firm will launch a similar lawsuit against the investment bank.

I interviewed Chris Powell, secretary and treasurer of GATA to get the facts of this alleged manipulation.

Can you explain the basics of silver/gold manipulation?

Powell : Gold, and to a lesser extent, silver are currencies. Governments have intervened in the gold market in the open throughout history. Our complaint is that more often now they’re doing it surreptitiously as a mechanism of supporting their currencies, supporting government bonds and suppressing interest rates.

So can you break it down, how the government is doing it on the sly as you said?

Powell: Yes, the manipulation of the gold market now is achieved through two mechanisms mainly. One is the outright sale or leasing of central bank gold reserves to add gold to the market. The other is the sale of futures and options, gold derivatives by the big investment banks that have special relationships with the central banks, particularly with the Federal Reserve. These are essentially naked short positions in the gold and silver markets.

We believe they are pretty much backed up by the central banks, which will, at least in the gold market, provide whatever gold is necessary when somebody actually wants to remove gold from the system to really liquidate a position. The problem is the gold supply has been inflated in the futures market so there’s so much more gold paper out there than there really is gold.

For someone who has no idea what this means, how do the central banks lease to the bullion banks?.

Powell: It basically began as a carry trade. It was in the interest of most central banks and the investment banks. The central banks would lend gold at a very low interest rate, perhaps 1% to an investment bank. The investment bank in turn would sell the gold for cash and use the cash to fund its operations.

And this worked very well for the investment houses as long as they had some confidence that the gold price would not rise and destroy the carry trades. Central banks liked it because it kept the price of gold, the competitive currency down. It kept interest rates down. It supported the government bonds and the government currencies. Now this carry trade is breaking up a bit. We think because central banks are running out of gold that they can distort.

So that doesn’t seem so bad. You lease gold, it goes into the markets. So what’s the problem?

Powell: Well the problem is it’s surreptitious. It’s a matter of deceiving the gold market and more importantly, the currency and government bond markets as to what the government is doing. It also gives inside information to the investment houses that are working the trades that the government wants done. It’s a grand deceit. If it was done in the open, people would understand what the government policy was. But open policy would not have the effect of deceiving the markets. If you remove the deceit from the gold pricing scheme, the scheme is of very little use.

How long do the investment banks get to lease the gold for, from central banks?

Powell: The leases may be written in limited periods of a year or two years or three years. We believe that most of the central bank gold sales, or supposed gold sales in recent years, were not really gold sales at all. They were cash settlement of lease gold that could not be recovered and returned to the central bank without causing a huge spike in gold prices.

Continue the article HERE.

Purchase Professionally Graded Gold and Silver Coins HERE.