The EU Debt Crisis
Anyone who invests their money anywhere should be watching the economic events unfold in the Euro Zone.
People who know me know that I’m not too optimistic about Europe’s chances to emerge unscathed (and united) from their latest economic debt (or rather, spending) crisis.
Why? The leaders don’t seem to be willing to sit down at the proverbial kitchen table, make a budget that is realistic, and live within their means. Until that happens, they have a problem.
What is the crisis? Most countries spend more than they make, and borrow to make up the difference.
Imagine you spent $150,000 for every $100,000 you made, and you had to borrow the additional $50,000 every year. This can only go on for so long.
To understand why this is a really really big problem, imagine that you and your friends all live this way, and you all are the ones loaning each other money to live this extravagant life.
Eventually, the bill comes, none of you have any money (and you all owe each other $$), and something has to give. Watch this quick video for a better idea of what I mean, then keep reading:
But that’s Europe – why should we care?
Investors will be impacted by what happens in Europe, either directly through stock in European companies, owning mutual funds or stocks of North American companies that invest (or do business) in Europe.
If you own European Banks, you’ve probably seen some of your wealth evaporate (and get ready – more will go soon!); If you own gold, you’re probably doing pretty well watching the credit chaos unfold.
If you invest in real estate, and have loans against the property (like a mortgage or a line of credit), then you’re exposed too (We wrote about this previously here: From Greece with Love).
When lending to Europeans looks riskier, money sources look to stable markets like Canada and the United States to loan to, increasing the amount of capital our banks have access to, pushing rates down (or allowing them to stay low, as we’re seeing this month).
So, what should I do?
I would (and, all of this is just what I would do… talk to a financial advisor for advice thats right for you) minimize my exposure to Europe.
The riskiest assets to be invested in, in my opinion, would be assets that have strong links to the EU economy, or that are sensitive to fluctuations in the Euro or the EU stock indices. That means alot of financial stocks, and the stocks of many companies that do significant business in Europe. Needless to say, I also don’t think buying the Euro is a good idea right now, but what do I know…
Buy tangible assets. Something you can see & touch – that you understand. Residential real estate rentals (either smaller investment property or Apartment Buildings) tend to do very well, since people always need a place to live, and they produce a consistent cash payment every month (that the property is rented).
If you’re investing in real estate, buy in areas that have a strong emplyment base, good schools (K-12 and College & Universities), prices that haven’t skyrocketed recently, and are near other major centres. Just my two cents.
What do you think? Let me know in the comments.
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Hey Benjamin — I’ve never understood the long term investor’s ability to sometimes rationalize putting hard earned capital, or even profits into obviously socialistic countries, with a track record for leaning relatively far left politically. Think about it — a strong capitalist puts risk capital in a state driven by collectivist beliefs. It’s as if you’re tryin’ your best to lose weight, but insist on eating four large bowls daily of premium ice cream.
Investing in real estate? I steer my clients/readers away from commercial stuff, i.e., office buildings, retail, strip centers and the like. When they go sideways, you could literally give your tenants a dollar a foot to stay, and they’d still be outa business. Meanwhile, their employees are goin’ home to my smallish residential income properties.
The strategy I’m implementing for most clients these days involves gaining higher cash flow, in areas you correctly described. We then have them take the cash flow plus any available spendable cash they may have access to elsewhere, and systematically pay down the loan(s). Even if things go sideways down the road, they’ll have free ‘n clear properties with relatively reliable income from strongly motivated tenants.
It’s the only way I know to take investment capital and in 7-15 years or so, end up with 20-40% cash on cash return based on the original amount spent. When I explain this in seminars and conferences, it almost always gets pretty quiet. Some are grinning, and some are, um, not.
You are a smart, smart guy Jeff.
I appreciate you stopping by and sharing some of your wisdom!
It’s good to hear from real estate investors who are doing well in the US right now. I know a few, but they don’t speak up a lot..
Great points, Benjamin. Real estate is probably a safe haven as I can not imagine the world settling down anytime soon.
The Euro has gone from the darling currency 2 years ago to a discussion who is going to get kicked out (Greece) or who is going to pull out (Germany). The flaws in the Euro concept are really starting to show as the political structures and outlook towards social programs are to divergent.
The risk to bonds and stocks is increasing. The chances of a full blown recovery with so much risk in Europe and the USA is slim, as we can see in the rise of gold. We are at the tail end of the Baby Boomers work life and they are investing like crazy. This explains why the stock market is maintaining. There is still so much inflow.
Residential real estate has gone through it’s bubble. It may not appreciate much in the near term, but it will not lose much. This is not bad in unstable times. Jeff’s approach to moderate income rental properties is the safe and sweet zone of the US market.
I know Canada has held up much better than the USA in real estate values so I can not talk to how this is up north, but if you are going to invest, you could do much worse that real estate.
I think this hits the nail on the head. Euro needs to take drastic actions to correct their own mess. G20 has not gone far enough. Simply re-stating past minimal commitments.
If you want to be smarter about $$, go read this comment from @BawldGuy http://ow.ly/20k43 – better than the post it’s on !
This comment was originally posted on Twitter
“The Euro has gone from the darling currency 2 years ago to a discussion who to kick out” @tomroyce drops knowledge http://ow.ly/20ojz
This comment was originally posted on Twitter