Money. That's what it's all about. Pavel Ryba, chief economist and founder of Golden Gate CZ, has been in business for over 20 years. Although he doesn't own any real estate (and he actually doesn't even own shoes, since he is known to walk barefoot), he understands money. In an interview with LP-Life.cz, he explained why it is good to invest in gold or silver, when we should expect the next economic crisis, or why apartments are so expensive and when their prices will drop.
I started walking competely barefoot two years ago. Before that, I used to walk in barefoot shoes for five years. They weren't five finger shoes, they looked more or less decent. Then a client of mine came barefoot to a meeting and asked me why I wouldn't take them off. So I took them off and we went to lunch together. In winter, barefoot.
I think they usually don't. Of course you can't be liked by everyone, that's been given for a long time already due to the structuration of society. But I wear nice clothes, people only perceive another dimension of these things being alright.
It is a scientifically proven significantly healthier way of life and existence. It has nothing in common with the universe, energy or spiritual things. It's a fact that since then I've had significantly less problems with my lower back than before, my digestion has improved, my mind is sharper, I'm more alert, I have never been ill since then.
I take my shoes when we go to the National Theater, they won't let you in without them, I respect that. Of course, I suffer greatly in those contraptions. I also wear shoes for extreme sports performances, because when you want to run a long-distance track through the woods, you can't keep paying attention to the stones all the time, so that you wouldn't stub your toe. So I'll rather wear minimalist shoes. Otherwise, my wife is completely cool with it. My children are naturally trying to imitate it, especially my younger daughter. She often wants to walk barefoot, sometimes it causes her troubles, because she wants to walk barefoot even at school. And not everybody understands that yet.
They call me the "boss without boots". Since I have founded a company with a turnover of two billion crowns, they call me that. People acknowledge it a lot. Moreover, when you surround yourself with intelligent people, not those who have prejudices, you will find that in most cases, the level of prejudices is dropping in society in case of people with a higher intelligence. It's a causality, it's been proven.
These people have no prejudices. Many times, they simply ask, I can explain it to them and they appreciate that you have an opinion, an attitude, that you can defend something you're invested in. And they perceive you as a person who is not afraid to be different. I think we need to be different, because if we join the herd, the mediocricity of the herd will pull us down. I acknowledge that, and so do the people around me. They know what they can expect from me, and they know that I am not an instrument of someone or something else, since I can stand up for my attitude and opinion.
From what you said in the Fast Confession, I understand that we were not quite as well off as we could be. I was a little scared to hear that mortgages should be more expensive, and that the price of bread will go up.
As far as bread and mortgages are concerned, these are two different things that are, however, related to some extent. If we consider the environment of the last hundred years, the natural market interest rate should be significantly higher than around zero, where central banks have artificially set it today. This extreme, where some states even have negative interest rates, only became possible with the advent of modern central banking and with a different setting of the monetary system, the one we have right now. The central bank has a patent on what interest rates and other mechanisms in monetary policy stance should look like, which basically means a council of gentlemen who we believe to be wiser than all the free market mechanisms in a given society and economy. This leads to the fact that nowadays, they can shift interest rates as they see fit. To some extent, this allows a situation where we have no money that would be tied to anything real, tangible, we just have fiat currencies, built only on trust and debt. In history, gold or silver were usually currency commodities.
In this environment, where the central bank, and especially commercial banks, can form an almost unlimited number of monetary units in society, this logically led to the fact that we are extremely over-indebted at all levels today. We are all indebted - states, companies, citizens. In order to bear the debt burden, they lowered the interest rate from 20% in the early 1980s to today's zero. This mathematically works out, if rates keep dropping on a long-term basis. If you're paying twenty percent from a million, which is 200,000 in interest, then if someone cuts your interest rate in half, to ten percent, you can take a double loan while still paying the same interest.
But we are at the end of a certain notional debt cycle, where there is no way to relieve the debtors even more, because rates in the economy are already at or near zero and everyone is extremely over-indebted, which causes imbalances in the markets, as was reflected quite significantly in the mortgage and real estate crisis ten years ago, which was very similar to today's situation. Low interest rates, overly cheap mortgages, which an incredible number of people had taken. Logically, there was an increase in inflation in such a loose monetary environment, as a result of which the central bank had to raise interest rates and the biggest economic crisis since the 1930s was born.
Mortgage interest rates in the Czech Republic are about two and a half percent today, which is far from, say, the 6 to 7%, which should be a healthy median mortgage interest rate in the last twenty years. It is far from how high interest rates were in ancient Mesopotamia, Egypt, or the Old World. That is to say, we have terribly cheap mortgages and a lot of people have accumulated huge debts they are hardly able to pay now. They are living on the edge, unable to put aside four or five thousand crowns to a savings account, a reserve, so that they could keep paying off their debts in case they lose their job, the price of their property drops or mortgage interest rates rise.
These people are struggling to make ends meet and they shouldn't have mortgages. If they took them, they carry a risk that they cannot fully control. That's why I say that mortgage interest rates should rise rather than fall, so that banks wouldn't have so many bad loans and overly risky portfolios and clients.
And the bread? Its price will rise with inflation, which central banks are targeting at 2 percent, but we currently have higher inflation. Growing prices are only a symptom of what is happening with the currency supply. Food prices are rising faster than the 3-percent-inflation published by the statistical office. If you go shopping sometimes, you must have noticed. 30 years ago, in 1989, 1 kilogram of bread cost 4.40 crowns; today it costs around 35 crowns. That's an almost eightfold increase in price. Seen through this lens, and given the dynamic changes we will be facing in economy in the near future, my 150 crowns in 30 years might have even been an optimistic estimation.
Considering these simple principles, why are properties so expensive? They are expensive because mortgages have been pushed too low. If mortgages were at an interest rate of 8%, there would be around two-thirds less buyers than in recent years. Under these circumstances, a large number of people wouldn't make it through bank scoring and couldn't buy a property they don't have money for, which nobody would lend them because they have low incomes. Therefore, there would be much less demand for real estate, there would be fewer buyers, so a property wouldn't cost four million, but for example two – that is half, maybe even less.
High real estate prices are almost exclusively a result of the tremendous expansion of monetary, credit supply. With their low rates, central and commercial banks caused real estate prices to skyrocket. And yes, they are unaffordable for a normal person today. When we look at the rich world, it is interesting that one of the richest countries in Europe and the world, Switzerland, has the lowest proportion of people in Europe living in their own housing, they make up only 44 percent of the population. These people are used to renting. And they're definitely not poor.
I also rent, why would I buy overpriced real estate. I'll wait for the economic recession that will grow into a crisis. It is economically and historically certain that it will happen, we can talk not about when it happens, not if it happens. Whether it will be in a year or in five years. Real estate prices will drop, the price of my investments, which I've put into countercyclical assets, such as gold and silver, will multiply, and I will exchange my gold and silver that I've bought cheaply, overvalued in the future, for a property, which I'll be able to obtain literally for lower tens of kilograms of silver. I'll be a real estate owner eventually. And completely without debt. Thanks to the money multiplied in silver or gold, what I would buy for ten million today, I'll probably be able to get for two million of today's money, of course stored in precious metals now.
That's how it works, read history and books, it's how it always worked. As an economist, I can say it has always been this way, the commodity stock cycle and the commodity real estate cycle work this way. I even have lectures about these cycles for the public at the University of Economics and I can prove everything on historical and economic principles and laws. I use 150-year-old graphs and data, I don't just choose, for instance, the last ten years that fit my theory best.
People need to expand their horizon by general information, economic contexts, fundamentals of investment. And I don't mean with a financial advisor. In most cases, those people merely sell certain products. I have come across hundreds of financial advisors in my profession, who didn't understand the context very much and often didn't even care to. In essence, they don't make their living from consulting, but from commissions that they earn on the products sold. In most cases, a financial advisor won't give you advice, that's, unfortunately, the sad reality of today's investment consultancy. If you try to make your own opinion and find your own way, read and educate yourself, it will grant you much more freedom and you'll know what to do in which situation, and most importantly why.
After 10 years of continuous stock growth, when we witnessed the longest expansion of the economy in US history, economy keeps continuously growing, we have the most expensive stocks, the most expensive real estate, the most expensive bonds in human history. But let's go back to recent history. In the last crisis, central banks saved the economy by printing money and lowering interest rates. If we look at the essence of the crisis ten years ago, it was caused by a large amount of money supply, a large amount of debt and low interest rates. Politicians and central bankers decided to tackle this crisis, which had been caused by these three causes, with an even greater flood of money, even more debt in the economy, and even lower rates. Basically, they fought fire with fire. It's like treating a drug addict by continuously increasing their dosage. It works in the short term. They won't have withdrawal symptoms and they'll feel better. In the long run, however, you won't cure them, you will slowly kill them.
After the crisis in 2008 and 2009, the price of gold and silver rose sharply. When it was certain that the crisis was over, gold and silver began to fall. And from 2011 to 2016, the price of silver kept dropping in principle until last year. Again, we are completing the real estate and commodity stock cycle. Gold and silver are becoming historically very undervalued in relation to stocks and real estate, and in the future economic crisis, it will be the other way round. Precious metals up, stocks and real estate down - and the cycle is completed. That's when I'll leave precious metals behind and start buying stocks and real estate instead.
How long do we have before the crisis comes? If I bought an apartment for 4 million today, do you think it would cost $ 800,000 in a year or five?
I don't think so, let's not think about the worst possibility. I can imagine that real estate in Prague will fall in the range of 20 to 40%, in the last recession real estate in Prague fell by 21 percent. I don't think that the scenario we are talking about here will become reality in 2020, because central banks have already cut rates this year, the American FED three times, the European Central Bank has started printing money to delay the outbreak of the problem.
There is an election in the US at the end of 2020, and Donald Trump will do everything he can to win again, which means he will cut rates. He will push FED into triggering quantitative easing to keep it all together for another year. So I think it's a question of 2021 or 2022, when the crisis breaks out. And it will last several years since the outbreak.
Either the economic crisis will be shallower and shorter, that is if the central banks won't allow it to run its course, which means they will try to save everything and everyone with an enormous flood of money. However, this will not solve anything and in the future, it will cause the collapse of the entire system, if it doesn't occur already in this episode, which I can actually imagine.
Or the crisis will be deep, prompting the cleansing of the economy and society itself. Those who behaved in a risky or irresponsible manner will be ruined and go bankrupt. At that point, the economy would be cleared of wrong debts and subjects that have nothing to do in the market, because they rely on low rates, fiscal stimulus, subsidies, or something similar.
In this case, however, we would then have room for many decades of sustainable, rapid economic growth and the subsequent growth of a higher standard of living. In the short term, however, we would suffer more. Again, it is similar to the drug addict case. International as well as world economy is the patient addicted to money printing and constant debt expansion. Politicians and central bankers behave like gamers throwing more and more money into the debt machine, hoping that one day higher economic growth they could repay old debts with will drop out of the gaming machine.
But it doesn't work that way. Thanks to interest, which is an integral part of debt and the setup of our monetary system, there are not enough currency units in the world to pay off all of the debt. The total amount of debt in the world economy is higher than the amount of money available to pay it off. Slot machines are also set the way in which you statistically lose. Until the system and its creators have changed, we will keep losing. We will pay for it by a loss of living standards, higher inflation, and we will inevitably reach the point when we have to rebuild the system one day, by means of monetary reform. That is when the economy will largely rid itself of the debt. But it will be very painful and expensive.
They should diversify, they should add gold and silver to their assets, 98% of the Czech population doesn't have it there. Even economists who hates gold say that you should have 5, sometimes even 10% of your property in gold. People should have gold, and given how close we are to the crisis, the disproportion in which stock, bond and real estate prices have risen compared to gold, due to loose monetary policy, I think you should have more than ten percent of your property in it.
The 10% is an insurance policy, and at the same time it is an investment with a high probability that the price will rise sharply in the negative scenario on the markets and in the currency arrangement, precious metals have the potential to rise very sharply. In the last crisis, gold rose by lower hundreds of percent, silver rose by almost 600 percent between 2009 and 2011. So we are not talking about an increase of 50 percent, but a level higher. And those ten, twenty or maybe thirty percent of the assets that put away in gold or silver at affordable prices today can be used three or five years later to buy real estate without a mortgage, or high dividend shares without any debt. And to reap profit as an investor or rentier.
Because it cannot be printed, multiplied, it cannot be artificially manufactured. It is increasingly expensive to mine it, although the cost of mining is not what determines the price of gold. The reason is that it is still an alternative to the dollar and other world currencies, where it is historically certain that these world currencies will fail due to some form of currency reform, hyperinflation, or collapse of the monetary system. Because every time a currency began to be covered only by the state's promises to repay its obligations, it was an unsustainable debt scheme. So far, in 100% cases in the history of mankind, the "state" money we are using today has failed. There is no documented case in which higher tens of years worked. The average lifetime of this system has historically been around 40 years. It's been 48 years since the Brettonwood system broke down. Our monetary system is starting to overrun statistics.
And so all monetary institutions, governments or central banks have partly or completely returned to gold and silver. It is the best assurance, cover against the systemic risks that await us. And because all banks and institutions are aware of this, gold holds its purchasing power. Throughout six thousand years of human history, it has never become worthless and has never lost the attribute of currency. Today, with a few exceptions, such as the Czech National Bank, central banks around the world hold or buy gold. This is proof that even large institutions perceive it the way I do.
If someone has 30,000 net, how much should he buy gold for? If they decided right now that they want to be prepared for the crisis, but couldn't afford to take a couple of thousand and go buy gold...
They have to think about how they're going to manage their finances. There are people who are struggling to make ends meet with 30,000, people who are struggling to make ends meet with 150,000, and then there are those who earn 20,000 and manage to save up. It's largely about whether you are willing to cut back, because many people can't make ends meet no matter how much money they have. It's about how disciplined they are.
I'm not saying that we should live like hermits, on bread and tap water, but if I'm earning thirty thousand net and have no savings, I should tell myself it's time to start creating them. Otherwise I will be poor when I retire, I may not be able to take care of my children, I am not ready for situations such as dismissal from employment. One should set aside at least 10% of their income for some form of investments, optimally more, since they're likely to suffer a significant loss on stocks, bonds and real estate within a one to five year horizon. Given the current phase of the economic cycle, gold reserve should form the larger part. One possibility is saving in gold, a commodity account, where you can send as little as five hundred or a thousand on a monthly basis. This will buy you physical bricks of gold and silver. Even a normal person who moves tens of thousands or lower hundreds of thousands into gold in two to three years can be sure to stabilize their assets in the future crisis, they can even paradoxically become rich. Those who have accumulated debts and loans and are operating on a tight budget have to adjust their expenses and mainly increase their competences, simply start earning more money. Get a second job, change their field, start a business. Anything but wait with their arms folded for the bailiff to knock on their door when the economic crisis arrives.
And we don't have much time to spare. Through this lens, I might be beating a retreat in four or five years, warning you not to gold anymore. The ratio of gold price to stock price will be in overvaluation of gold to stocks, not inundervaluation as it is today. On the contrary, in five years, I will be sounding an alarm – start selling your gold now, withdraw profits from it and go buy cheap real estate and stocks. And you can profit from the knowledge of commodity acceleration we're talking about.
Be concerned with your future and yourself. Don't trust information you've read somewhere, but verify if it's true. Make your own opinion on all things in your life and don't be afraid to act according to what you've found out. Don't go with the herd. The herd historically grows poor, gives up its freedoms, fulfills the dreams and visions of someone else, often politicians, dictators, or employers. If you change this pattern, you will be freer, happier, more responsible and thus richer people.