Booms Don’t Repeat, but Do Rhyme

By: Doug French

Back in the wild west days of the housing boom, say 2004-2005, there was a mortgage loan officer who used to pitch an idea to us he called wealthbuilder. He would trot out a spreadsheet and plug in a person’s mortgage amount, and assume a variable rate loan with the low teaser rates that were being marketed at the time. 

He then would subtract that minimum payment by the then going rate for a conventional 30-year fully amortizing loan payment. What to do with the monthly savings? Invest it in the stock market that was then roaring. The mortgage man would then assume that stocks appreciate 10 percent a year. At the end of the spreadsheet, voilà, you would have built lots of wealth. 

Don’t worry about the debt, he’d claim, pay as little toward principle as possible, because, first of all, houses never fall in value and the stock market always goes up. In hindsight, that sounds crazy, but many financial pros were pitching the same idea. Chapter 5 of my book Walk Away is entitled, “Building Wealth by Never Paying Off Your Mortgage” where I mention numerous books and strategies published during that boom urging home owners to pay as little as possible towards their homes. 

For instance, “The authors of Untapped Riches: Never Pay Off Your Mortgage— and Other Surprising Secrets for Building Wealth, Susan and Anthony Cutaia with Robert Slater claimed in their book that the fixed rate mortgage was the worst mortgage in history.”

“KEEP YOUR MONEY OUT OF THE BANK’S HANDS,” was the wealth-building strategy #3 from the husband and wife team. “NEVER PAY OFF YOUR MORTGAGE—NEVER!”

From the Journal of Financial Planning, September 2004, came this nugget, “The popular press, following conventional wisdom, frequently advises that eliminating mortgage debt is a desirable goal. We show that this advice is often wrong . . . mortgage debt is valuable to many individuals.” 

Ric Edelman, listed as one of the top 100 financial advisors in Barron’s from 2006-2010 advised “Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off (assuming you can afford to make the payments on the mortgage).”

Again, the assumption was home values never fall and stock values always rise.

What’s the use of this walk down bad memory lane? MicroStrategy’s Michael Saylor appeared with Dr. Saifedean Ammous on The Bitcoin Standard Podcast recently and essentially made the same case for Bitcoin hodlrs. 

Speaking to corporate financial officers, Saylor said eventually no one will ever sell their Bitcoins, because it would be irrational to do so. Bitcoin will continue to appreciate while any U.S. dollar debt incurred will be depreciated away by the Fed’s money printing.

Saylor sees Bitcoin becoming the equivalent of Apple stock, the S & P 500, or 30-year treasury bonds, all stores of wealth. If cash is needed, borrow against your Bitcoin. He offered no instruction on where to find such a loan. But, it’s coming, he says. 

Important to his thesis is that Bitcoin will double in value every couple years and that the top-shelf cryptocurrency brand will never see $10,000, $20,000, $30,000 or even $40,000 ever again. Meanwhile, the U.S. dollar is headed for the trash bin. 

In one of Saylor’s “Bitcoin Corporate Strategy” podcasts he illustrates his point with a story about an Argentinian farmer converting all assets and cash flows to U.S. dollars, while borrowing in pesos. After all, the peso, in his example, goes from 1 to 1 with the dollar to 80 to 1.

It all sounds good on paper. 

But, sometimes, reality bites. 

Ex-Federal Reserve Chairman and current Treasury Secretary Janet Yellen is no fan, saying, “To the extent it is used I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”

Be that as it may, traders Moritz Seibert and Jason Shapiro agree “clearly, the risk of not owning Bitcoin is higher and greater than the risk of owning Bitcoin.”

They said own, not leverage.

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