The Global Economic Shift
Written by
The Global Economic Shift
Please read this letter in its entirety even though it is a bit longer than usual. I will be addressing numerous economic topics in this letter, and I will be making a significant announcement about our interest rate.
First, let me start by saying we always strive to stand up for the interests of our investors. We want to be a trusted and reliable ally. Our dedication to protecting and growing the hard-earned wealth of our investors is at the heart of everything we do.
The recent, and as-of-yet unfinished, banking crisis is merely a symptom of much larger and systemic issues. Issues like excessive debt, growing geopolitical tensions, and concerning societal unrest/polarization. The economic, financial, and political system we have been accustomed to is showing serious cracks. Moving forward, it’s becoming more likely that central bankers and governments will not be able to simply “paper over” our problems. There is, however, good reason to be optimistic about the future, while also considering the risks and challenges ahead.
We think truth has never been more relevant and is of the utmost importance. The banking crisis is not over. History tells us the unwinding of excessive debt never happens in a predictable or orderly fashion. This time will be no different. Bank failures are the first symptom of a shift in the “economic sea.” Higher interest rates will have a growing impact on a global financial system accustomed to cheap credit. I discussed reasons for recent bank failures (like Silicon Valley Bank) in previous emails. To summarize, for many years, banks have been able to finance themselves through short term deposits and short-term loans. These short-term deposits and loans have then been lent out long term to consumers. This practice resulted in a profit from the interest margin. Since the summer of 2021, this has become increasingly difficult.
Consequently, central bankers are finding themselves in an incredibly difficult situation. Several factors are limiting their ability to fight and kill inflation decisively. A recession is needed to push inflation down. So, more drastic tightening might be required. However, a hard-landing scenario and subsequent long-term low growth are feared in view of high debt levels. On the other hand, a return to quantitative easing bears the danger of out-of-control inflation. Central bankers are literally stuck between an inflationary rock and a recessionary hard place. The key question is whether they can tame or even stabilize inflation without inflicting severe economic pain. Many economists believe economic growth will remain lackluster for the foreseeable future. Central bankers are attempting to pull off a difficult balancing act of what most are hoping will be a “soft landing.” The trick is keeping inflation from running out of control, avoiding a credit crisis, a stock market crash, and a severe recession. Stock market valuations seem high and appear prime for another correction.
Inflation has receded somewhat since the beginning of the year. However, the 2% objective seems difficult to achieve in the foreseeable future. There are too many forces at work that are bound to keep prices high for quite some time. That said, I’m coming around to the idea that interest rates will not be going back to the ultra-low levels they were at over the last 15 years.
Since 3D Money’s investment focus is on cash flowing real estate, the interest rate discussion seems to be the giant elephant in the room. Real estate is the 800-pound gorilla, as it is by far the largest asset class. Real estate accounts for half of all global wealth. The residential real estate market alone in the US is worth $285 trillion. This dwarfs all other asset classes. This is relevant because, more than ever, real estate is financed with debt. We believe central banks and politicians will avoid rocking that boat by raising interest rates too far to fight inflation. Additionally, bank and government balance sheets are highly exposed to rising rates. Banks, because of their high level of mortgage exposure. Governments, because of their continuing budget deficits and massive ballooning debt.
There are several ways the government can reduce or mitigate the excessive debt levels they find themselves in. The most likely path seems to be inflation and financial repression. Inflation (or currency devaluation) eventually depreciates the purchasing power of creditors and savers. Consequently, it can be used as a form of debt reduction. It leads to a slow and covert destruction of wealth and debt. Politicians frequently choose this option because the price the public pays in not immediately felt. The bill comes due later. Financial Repression means regulations and taxes in favor of government finances. As Vladimir Lenin put it, “The way to crush the bourgeoisie (middle class) is to grind them between the millstones of taxation and inflation.”
So, the current situation we find ourselves in creates a difficult dilemma. The fundamental questions are, “Should I be in the market or out of the market?” And … “Should I hold cash in banks that seem unsafe, or invest in stock markets that look unstable?” History tells us there are periods of time that have more predictable cycles, while there are other periods of time that are more volatile with the ups and downs of a roller coaster. We are currently in the latter, more volatile option.
Against this backdrop, 3D Money stands as a defensive beacon. A lighthouse, if you will, that can help you navigate the economic dangers and perils that are all around us. A “shotgun approach” to diversification (a bit of every asset class, sector, and geography), or a passive buy-and-hold strategy with a traditional 60/40 equivalent portfolio, will likely not work well in this environment.
We are in an age of “real stuff,” and we should expect to see tangibles outperform other financial assets in the foreseeable future. Historically, alternative investments have done well in terms of wealth preservation during times of elevated inflation and rising interest rates. Alternative investments are best described as assets that don’t fall into traditional investment categories such as stocks and bonds. They can include commodities like gold and silver, real estate, and private debt. Beyond that, there are also other investments such as art, classic cars, wine, antiques, etc. Bottom line, the rising tide that drove US equities to perform well during the last decade is likely subsiding. We need to accept the fact that we are experiencing a fundamental and global transformation. It will bring amazing new opportunities, but it will also bring some pain. The world we live in today is different from what we have become accustomed to over the past few decades. More importantly, the paradigm of cheap money is looking like a thing of the past.
With that in mind, we spent significant time praying about and considering the current 6% interest rate in our Offering. We were hesitant to raise rates, because our fundamental belief was that higher rates were temporary in nature and would go back down in due time. With that reality fading, we have decided to raise our interest rate on new money and renewing notes to 7%. This change will be effective immediately. Please give our office a call if you have recently (within the past few months) invested or reinvested money with us at 6%. We are prepared to adjust your interest rate accordingly. Bottom line, we want happy investors, and we will do our best to accommodate when possible.
I close with a quote I recently came across from John Piper, “Once you walk through the door of love into the massive unshakable structure of Romans 8:28, everything changes.” He goes on to explain that when God’s people really live by the future grace we’ve been promised, we are the freest, strongest, and most generous people in the world. Our light shines as we give glory to our Father in heaven.
Praying your light continues to shine brightly,
Jeff Huston and the 3D Money Team
320-905-3306
