Welcome to this week’s Urban Survival Newsletter, brought to you by the famous Urban Survival Playing Cards, available at www.UrbanSurvivalPlayingCards.com. They’re not only fully functioning playing cards, but they also include 52 urban survival tips, tricks, and techniques that you’re likely to forget in a stressful survival situation.

Before we get started, I just want to say that the response to last week’s newsletter on picking a permanent retreat location was awesome…more than 240 comments so far! You guys are an incredible group of people and I really appreciate you.

On to this week’s newsletter.

It’s been a crazy last 5-10 days…

-4 major underwater internet trunk lines were “accidentally” cut within days of one another, disrupting internet and voice connectivity across much of Africa.

-Tornadoes killed at least 12 so far in “rare” February tornadoes. Having grown up in tornado country and having had one F4/5 go directly over my head and another go within feet of a house my family was taking shelter in, my prayers are with everyone who was impacted by the tornadoes.

-The American Institute for Economic Research reports that “real” inflation is at 8%, rather than the paltry 3.1% reported by the CPI (Consumer Price Index). I’ve been beating this drum for quite some time and it’s great that this story is getting more attention.  In case you’re wondering, the CPI that gets reported by politicians and the media discounts silly things like food, fuel, and any other item that happens to be going up in value, whereas the AIER inflation numbers reflect what people are actually buying.

What’s all of this mean?

First of all, the first two stories illustrate how incredibly vulnerable we are to forces completely outside of our control.

Whether the under-sea internet trunk lines were purposely cut or accidentally cut, the impact is the same…a breakdown of internet commerce, electronic commerce, and multiple forms of communications. Just because it happened half a world away doesn’t mean that it can’t happen here.

Even though our current internet networks have multiple redundancies, they have chokepoints that can be exploited…both with kinetic and with digital attacks. Every day that we continue to have efficient communication and electronic commerce is a gift that we should appreciate and be grateful for…not something that we expect to continue indefinitely without interruption.

In practical terms, that means enjoying it while it lasts, but having a plan in place for when the system breaks down.

Personally, I make a majority of my income through the internet taking electronic payments. I also have physical products that I sell and have multiple ways of taking payments. I’ll continue to use the online options for as long as possible, but know that I have the ability to switch over to physical delivery whenever necessary.

I also encourage people to keep some cash on hand at all times…balancing the fact that cash is an easy target for thieves with the flexibility that cash gives you when ATMs and credit cards stop working.

As a quick note on this, I LOVE safes, but I recognize them for what they are…a big “cookie jar” for thieves with lots of good stuff all bunched together.

Safes only protect your stuff when you’re not home. If you and/or other family members are home during a home invasion, you WILL open your safe and give the home invaders everything inside at some point to save yourself or your family.

How do you get around this shortcoming? First, you accept that a safe is simply a tool to delay thieves from getting to your stuff. Second, you diversify. There are dozens of caching techniques, but one that’s relatively easy and straight forward is to keep a sealed envelope with cash and an encrypted USB drive with digital copies of important documents with a couple of friends.

Rare” February tornadoes…

Again, my prayers go out to those impacted by the tornadoes. For them, the statistics or historical context of the event don’t matter…the only thing that matters is what they’re experiencing.

For everyone else, though, it’s important to keep the big picture in mind. February tornadoes aren’t THAT rare. 2010 was the first February in recorded history without a tornado in the US. Since tornado detecting equipment is advancing at a geometric rate and since tornadoes typically occur in clusters and not evenly spread out across the country or across time, it’s easy to say that any cluster of tornadoes is historic. Since homes and the contents of homes seem to be getting more fragile and more expensive, it’s only natural that the damage done by storms keeps going up over time and constantly hitting new records.

One example is actually January 2012…a month that had the 2nd highest number of tornadoes in recorded history. That being said, most of those tornadoes happened in 2 clusters and most were only detected because of advances in tornado detecting technology.

So, before you jump to any conclusions about tornadoes happening more often and being more violent, keep in mind that what you’re hearing may just be the media’s attempt to get and keep your attention. It could also be that they’re reporting statistically significant news, but more often than not, they’re just trying to get and keep your attention.

Why Current Real Inflation Numbers Mean a 40% Drop in Real Estate Prices is Likely

If someone has $1,000 a month to spend on a mortgage, they can get roughly $187,000 of house at 5% interest.

Right now, 30 year mortgages are being advertised at 5% or less. Meanwhile, real inflation, according to the St. Louis Fed and the American Institute for Economic Research is in the 8-8.5% range. To explain why this is a problem, we need to look at banks quickly.

Some businesses are easy to understand. A hardware store buys a wrench for $1, sells it for $3, and if they sell it in a short enough period of time, and cover all of their expenses, they make 30-60 cents apiece. Do that enough times with enough items, and they stay in business.

The bank version of a wrench is cash. They buy dollars from customers in the form of CDs at a low interest rate, and they sell those dollars to other customers in the form of loans, like mortgages with a higher interest rate. So, a bank might offer 2% interest on CDs, turnaround and loan it out at 5%, and if the borrower pays on time, they’ll make 3%. Historically, the spread has been about 2.7%, but it tends to get smaller as rates go lower and get bigger as rates go higher. There’s a whole extra layer of complexity when you include fractional reserve banking, but it’s not necessary to talk about that right now.

With proper underwriting, this is a fairly stable system. Banks compete for CD money and usually have to pay customers close to the rate of inflation, or even a little more.

In recent years, this system has been turned upside down. Instead of borrowing money from customers in the form of CDs, banks are increasingly borrowing money from the Federal Reserve at incredibly low rates that have driven CD rates and mortgage rates down to unrealistic and unsustainable rates. In simplified terms, we’re both creating money out of thin air and borrowing money from China and other countries at rates that are lower than the rate of inflation, and that cheap, plentiful money is propping up the real estate market.

At some point, China, other Treasury buyers, and CD buyers are going to demand a return on their money that is at or above the rate of inflation in the US. So, let’s see what would happen if banks started offering CDs at 8%, or slightly below our current 8.5% inflation rate, and they loaned it out at 10%.

That $1,000 payment that used to buy a $187,000 house at 5% only buys $114,000 worth of house at 10% interest. This is HUGE. That’s a 40% drop in value, and in my mind it’s not a matter of if it happens, it’s how soon and how quickly it happens once it starts.

Houses have historically gone up in value due to inflation and rising wages, more demand than supply, low interest rates, and poor underwriting. In most parts of the country, low interest rates is the only one of those factors that’s still having a positive effect on housing. Inflation without rising wages doesn’t necessarily help housing. More restrictive underwriting and higher down payment requirements has squeezed many buyers out of the market and made supply higher than demand. All in all, we’re starting to pay the piper for the artificial increases in real estate prices since 2001.

Enough of the doom and gloom…what can you do to put yourself in a good position if this happens?

The first thing is to not worry about it happening. You have control over the decisions you make, but there isn’t anything that you can do as an individual to keep food inflation or higher interest rates from happening. I see this playing out in one of two ways. Either prices will suddenly and catastrophically drop due to an event, or China and other Treasury buyers will pressure the Fed to start raising rates gradually but consistently over the next several years.

The Fed says they’re keeping rates low through 2014, but they also have to keep the IMF, credit reporting agencies, and Treasury buyers happy, so there’s no telling what will happen.

If you have a home that you intend on staying in long term, enjoy it and don’t worry about the value.

If you just bought a home at “historically low” interest rates and don’t plan on staying there long term, you may want to reevaluate your plans with a trusted and competent financial advisor. As a former stock broker, I’d suggest finding someone who understands and enjoys macro and micro economics and real estate. This isn’t a conversation to have with someone who only understands insurance or only understands stocks. Forward this article to them, have them look at it, and get their thoughts. HOPEFULLY, I’m all wet and there’s no basis at all for my concerns.

If you are looking to buy a home in the near future, get to know the major players in the real estate investor community in your local area and try to buy a house that’s significantly under market value. There are incredible deals (25%-50% below retail) across the country right now that will give you some cushion if interest rates shoot up and prices drop.

If you’re currently living in an urban area and looking to buy a piece of rural land that you could use as a retreat location and grow food on, don’t waste any time but don’t make any rash decisions. Specifically, don’t pay too much for a bad piece of property. Also, look in non-conventional places to find properties for sale. As an example, if EVERYONE in your area looks in the MLS, Craigslist, and the newspaper to find properties, then make sure you’re also looking in the Thrifty Nickel and on Ebay.

Also keep in mind that the increase in farm prices, the drop in inventory, and increase in demand make it more likely that if a disaster happens in the near future that you’ll need to survive right where you currently live. Remember, the workable plan that you have in place will ALWAYS beat the perfect plan that you haven’t taken action on. Keep making daily forward progress in improving the survivability of your current living situation. And if you haven’t checked out the www.SurviveInPlace.com Urban Survival Course lately, I encourage you to head over to www.SurviveInPlace.com and check it out.

What are your thoughts on the cut internet lines in Africa and how they exposed the vulnerability of the Internet…not only in Africa, but right here? How about the tornadoes and other extreme weather…are we getting more, or is it just being reported more? And how about interest rates and the future of real estate?

These seem like pretty diverse topics, and they are, but they all matter to preparedness minded people living in an interconnected society. That’s why it’s SO important to have a broad based preparedness plan and why I focus so much on fundamentals in the www.SurviveInPlace.com course.

Until next week, God bless and stay safe!

David Morris

P.S. My sympathies also go out to Andrew Breitbart’s family, who died on Thursday at the age of 43. Some people on this earth die inside in their 20s and are buried 40-50 years later. Andrew was a warrior who lived every minute of every day to the fullest.