You’ve heard me talk about the effects of money printing, global shortages on a lot of things, substantial inflation is coming and you got to invest to protect your cash.
You might disagree with me and you can completely ignore what I said.
But I don’t think you should ignore one of the most successful investors of all time and currently the seventh wealthiest person in the world.
He’s here today to answer the question “are you seeing signs of inflation beginning to increase?”
The message is loud and clear, isn’t it?
Warren talks about a buying frenzy because people have a lot of cash in their pockets.
So let me show you the M1 money supply in the United States and in Canada.
What’s M1 money supply?
It measures the amount of cash in circulation, plus the chequing account balances.
Here’s the M1 money supply graph in the United States since the beginning of 2019.
The M1 money supply had been pretty stable at around $4,000 billion US dollars before the pandemic.
Then it started to increase because of all the money printing for all the pandemic support programs.
See how scary the increase is since the beginning of this year?
The amount of cash on the market now is 4.7 times more than before the pandemic.
You see, that’s why there’s a buying frenzy.
Let’s take a look at Canada.
The situation is not as bad as in the United States, but you can also see a significant increase in the M1 money supply.
The amount of cash on the market now is 1.5 times more than before the pandemic.
With a sudden increase of that much cash in the economy, obviously the value of cash is going to depreciate.
Let’s suppose the price of things increase at 10% per year for the next 3 years.
Prices are actually increasing at a much steeper rate than 10% right now, but let’s just say 10% per year.
Francis and John each have $150,000 cash right now.
Francis has decided to keep the cash in his account.
Each year, his cash is losing 10% of its value because things are 10% more expensive.
So by the time we get to 2024, the $150,000 he has today would only be worth around $109,000.
On the other hand, John has decided to purchase a $750,000 pre-construction unit.
His $150,000 cash would work as the 20% deposit.
So the value of his unit increases 10% per year, just like everything else.
When we get to 2024, his unit would then be around $998,000.
So he goes to the bank to get a mortgage for the final closing of the unit.
The bank gives him 80% of the original price of the unit, that’s $600,000.
$150,000 from John in 2021, $600,000 from the bank in 2024, that makes up the original $750,000.
Now, let’s calculate John’s net worth in 2024.
The unit is around $998,000.
$600,000 belongs to the bank.
So John has $398,000.
You see, Francis and John started with the same amount of cash today.
Just 3 years later, John is 3.6 times richer than Francis.
And the only thing he has done is to invest his cash today.
You see, nothing has gone crazy about the housing market in this example, it’s just increasing at the same 10% as everything else.
The cost of building materials increases by 10%, labour cost increases by 10% and so the end product, your unit, also increases by 10% every year.
But the money you invested does not just increase at 10% per year, it has increased 165% over the course of 3 years.
$150,000 becomes almost $400,000.
That’s why real estate investing is so powerful.
It’s because of the leverage.
You only chip in 20% of the price, but you enjoy 100% of the growth.
What other investments can give you this kind of leverage?
And here’s the thing.
When raw material prices go up, the suppliers would up their prices and the price increase propagates down the supply chain.
Eventually, consumers like you and me would see a price increase on the end product.
Let’s suppose raw material prices come down one day, do you think we would see a price reduction on the end product?
Or do you think each party along the supply chain would just make a little bit more profit?
You see, it’s easy for prices to go up, but it’s very hard for them to come down, if they ever come down at all.
I hope you realize how dangerous it is to keep cash when there is an abundance of cash in the market.
And the primary purpose of investing is to protect your wealth so it doesn’t keep shrinking.
You see, investing is not a luxury, it’s not a nice-to-have, but it’s a MUST in this pandemic economy.
If you’re ready to protect your wealth, you can click the link below and schedule a call with me.