Category: Economy
January 4, 2010 ·
Re-Inflating the Debt Bubble
Reading the news has never been the best way to inspire optimism. This phenomenon has never been more true than it is today for financially astute people that are aware of causes and consequences. In a recent press conference, the US President was touting a new blitz of government programs to get the US economy “back on track.” On the surface, this seems like a laudable goal, until you consider what is meant by getting the economy back on the track it was previously traveling.
It is not a secret that the precipitous collapse of the US economy was created by a prolific expansion in debt financed investment and consumption. This helix of credit escalated asset prices upward in a speculative bubble until they were so high new buyers could no longer be found to continue paying the ever increasing prices. As the prices contracted, many people and funds with overleveraged positions found themselves ‘upside down’ when values plunged below the purchase prices. This downward vortex was fed further by people who had purchased home mortgages that they did not have the capacity to afford based on the assumption that their homes would continually increase in value. As prices fell, foreclosures increased, which further depressed prices, which created more foreclosures.
Most people of even an elementary education level intuitively know that this much debt cannot be undertaken without a tremendous level of risk. True economic growth is fueled by increases in the level of productivity for labor output that allows a nation to increase the amount of output with the same amount of input. Misalignments of prices from market manipulations frequently disrupt this natural progression of labor productivity increases with boom and bust cycles. The unfortunate fallout of this phenomenon is that politicians are frequently more interested in creating an artificial ‘boom’ that they can claim credit for than fostering genuine economic growth
For evidence of this phenomenon, one must look no further than the efforts of the current Presidential administration to re-inflate the debt bubble as a means of artificially propping up the economy in absence of a discernable improvement in the underlying fundamentals. After many months of campaigning against traditional populist straw dogs of “Greed” and “Corporate America” the people currently in charge are repeating the exact same actions that perpetuated the last debt bubble.
For example, one of the ‘fixes’ proposed was to increase allowable debt levels so that more people could refinance their homes. Another round of government sponsored programs was to give away taxpayer money to new home buyers and new car buyers. In each of these cases, the government is directly encouraging further indebtedness to finance short-term consumption. The philosophy guiding these actions is a belief that this debt-financed consumption will “get the economy moving” again.
Looking at the total credit outstanding across all sectors as a ratio of Gross Domestic Product shows a startling trend of increasing indebtedness. Even more startling is the fact that the recent economic collapse served as little more than a speed bump in this upward trajectory, and all signs point to the current administration accelerating the debt bubble with ballooning record budget deficits and fiscal policy directed at encouraging debt to stimulate short term consumption.
The intense irony of this situation is that it is a carbon-copy repeat of the behaviors that caused the current financial mess in the first place. Sustained economic growth can only come from production and innovation. These things cannot be produced by government fiat or market manipulations. They must emerge from individual people having the right incentives to create valuable products and services. As long as the government continues to engage in ‘smoke and mirrors’ forms of market manipulations and debt bubble inflation, it is not very likely that the necessary conditions for a market recover will emerge.
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December 24, 2009 ·
Fiscally Fit: A check-up for your financial fitness
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What happens to home values when the replacement costs increase?
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The go up like a rocket
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They go down because nobody can afford to build
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They are pulled toward the cost of new construction
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They don’t change . . . construction costs don’t matter
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What is happening to the economy now that the debt bubble has burst?
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The recovery going to happening, because Ben Bernake said so
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The government attempting to re-inflate the debt bubble in order to stimulate short-term demand
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It’s just like the great depression, only worse
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The recovery has already started . . . the government reporting agencies are just suppressing the information
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What is happening to real unemployment?
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It is going up, contrary the manipulated numbers that are published
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Can’t you read? . . . it’s going down because the stimulus package is working
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It’s already higher than during the great depression
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It’s going to be back below five percent in no time
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What happens when government spending becomes a bigger portion of total GDP?
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It gets the economy back on its feet
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It erodes long-term growth by displacing private investment capital
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It make people more equal by re-distributing income
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It makes the environment better because of government regulation
Answers: 1) c, 2) b, 3) a, 4) b
Explanation of Answers:
What happens to home values when the replacement costs increase?
Over time, home prices naturally converge toward the cost of construction. The reason for this is twofold. First, new housing starts tend to boom when prices are high, creating an increase in supply that generates more competition and usually lowers market prices toward equilibrium. Second, when prices are depressed and market values dip below the cost of construction, new housing starts will drop off precipitously. As an extended period of time passes with no new homes being built it will slowly pull prices up toward equilibrium. Thus, in all cases the cost of construction plus land is the approximate equilibrium point to which home prices naturally converge.
What is happening to the economy now that the debt bubble has burst?
The impact of the debt bubble bursting was a dramatic contraction in the availability of credit. This meant that many people who were previously spending on credit are no longer able to continue spending. In this kind of economic environment, many people begin ‘deleveraging’ or actively reducing their debt burden. However, in this economic cycle the government is attempting to stimulate short term demand with credit based spending, ostensibly re-inflating the debt bubble. The way that they are doing this is with tax credits for new home buyers or rebates for people that trade in old cards to purchase new ones. These programs are all encouraging increased indebtedness in an attempt to stimulate the economy. Unfortunately, sustained economic growth can only come from increases in production and productivity, and none of the government programs is addressing either fundamental factor of economic growth.
What is happening to real unemployment?
The way that government statistics track unemployment is to remove ‘discouraged workers’ from the pool by only tracking people that are actively seeking work. Fundamentally, this means that people who stop looking for work (and are not employed) are removed from the pool for counting the statistics. This means that the total number of jobless people can actually go up, while the unemployment rate goes down like what happened in July’09. Furthermore, the official numbers count people who are under-employed in part time work but would like to work full time as fully employed. It also counts people who work in commissioned sales like Real Estate or Insurance as being employed, even though they may not have earned a commission check for quite some time. When analyzing the strength of the economy, it is important to not only look at the published statistics, but the underlying assumptions.
What happens when government spending becomes a bigger portion of total GDP?
The important to thing to consider when talking about government spending is that the government cannot spend a single dime without taking it away from somebody else first. This comes from direct taxation, borrowing in the credit markets (displacing private capital), and printing money (devaluing the savings and equity of all people who hold dollar-denominated assets). As the government grows larger, it must necessarily displace or destroy private investment and spending to finance its operations. Since government operations are necessarily politically motivated, it naturally follows that the real output of government spending will result in substantially less production and productivity improvement than if that same capital had been deployed though private channels. As the government seizes control over more and more of the economy, it pushes more decisions onto the desk of politicians and neutralizes the market forces that create economic growth.
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December 21, 2009 ·
Double Dip Recession
The recent financial news has been abuzz with exhortations over the anticipation of an end to the recent financial calamity. The stock market has already discounted this optimism into its valuation, as current market values represent a multiple of forecasted earnings per share well in excess of historical trends. The conventional wisdom is that the economy will get “back on track” in the next few months and resume its previous trajectory of long term growth. The factor that nobody seems to be considering is the fact that the previous ‘track’ the economy had been traveling down is the express route to collapse that generated this whole financial meltdown in the first place.
It is not a secret that the explosive economic growth experienced during recent years was largely caused by debt financed consumption artificially increasing demand for goods and services. Unfortunately, this debt bubble inflated beyond the capacity of many people and financial institutions to carry. When the bubble eventually burst, it created a cascading devaluation of financial instruments, which triggered forced deleveraging, which further depressed values, which triggered more forced deleveraging.
Now that the government is throwing money away at an unprecedented, breakneck speed there is additional stress on the system since the overspending is being financed with the undertaking of additional debt and monetary expansion by the Federal Reserve. These irresponsible actions will eventually have the impact of raising interest rates, and may push the economy back into recession.
The most likely way that this scenario will unfold is that the Federal Reserve will either contract the money supply in response to inflationary pressure or allow the currency to inflate until investors refuse to purchase bonds at face value and demand higher coupon rates. Thus, the ‘front door’ for interest rate increases is controlled by the Federal Reserve since they can contract the money supply, which will force up short-term interest rates and incentivize long-term bondholders to sell and buy short-term notes with higher yields. The “back door” for interest rate increases occurs when investors lose confidence in the ability of the government to meet its debt obligations without devaluing the currency and refuse to purchase bonds unless they are discounted by the treasury.
These interest rate increases will have two significant impacts on the economy. The first is in relation to long-term interest rates, which serve as the basis for fixed rate mortgages. When mortgage rates are forced up in conjunction with long-term bonds, it will immediately slow whatever housing recovery may be under way as it increases the cost of borrowing to purchasers. This will have the net effect of decreasing the amount of house that can be purchased per dollar of monthly payment. The impact of this phenomenon will be a downward shift in the range of home prices that people can afford, which will ultimately stall the housing recovery.
When these effects eventually spill over to short term rate increases when the Federal Reserve eventually begins a campaign to fight inflation, the impact will travel further downstream in the economy. The reason for this downstream impact is the fact that short term interest rates influenced by the Federal Reserve are the basis for revolving credit account and lines of credit that many consumers have been using to finance their consumption spending. When the short term interest rates increase, it will initiate an upward shift in the amount of interest owed on consumer debt and will also increase the required payments. This will have the net effect of reducing the amount of income available for consumption spending.
As these two effects compound on top of one another, they create a very real possibility of a ‘double dip’ recession that continues downward after a brief period of stabilization. The ultimate reason for this phenomenon is a continued campaign of market manipulation by the government to ‘stimulate’ the economy in absence of market fundamentals that are supportive of sustained long term growth. Unfortunately, this boom-bust cycle will continue indefinitely until the focus eventually returns to creating the necessary market fundamental for long term growth instead of sponsoring government programs to stimulate demand with borrowed money, but make no changes in the incentives that guide investment decisions.
As astute investors, it is important to be wary of market sentiment that amounts to ‘wishful thinking’ for an economic recovery in the absence of supporting fundamentals. Recognizing these boom-bust trends and the propensity for government entities to manipulate the financial markets is a key tool for investors that are looking to protect their wealth and prosperity. At the Financial Freedom Report, we advocate investment in real assets that are secured by fixed-rate debt and rented out to tenants as the optimal strategy for fighting this campaign of market manipulation by the government.
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December 18, 2009 ·
Talking with the Stars . . . Jason’s marquee guests on the Creating Wealth Show
In the last few months, Jason has had some big name guests on the Creating Wealth Show. Some of Jason’s recent guests of note are Pat Buchannan, Robert Kiyosaki, and Catherine Austin Fitts.
Pat Buchannan is well known in the United States as an outspoken conservative voice in favor of limited government, and less globalization. In his Jason’s interview with Pat, they discussed the prospect for large amounts of inflation in the near future. Pat commented that the US debt would be floated away on a sea of inflation. At the Financial Freedom Report, we couldn’t agree more with this sentiment, and advocate that investors defend their financial wellbeing with income producing assets that are financed with fixed-rate debt.
Robert Kiyosaki is the author of the noted “Rich Dad” series of books, games, and videos. In his interview with Jason, he discussed the importance of financial education in achieving success. They also discussed the importance of passive income to financial success, and the impact of dynamic investment strategies. Robert rightly pointed out that it is possible to make money in any kind of investment, and also possible to lose your shirt in any kind of investment. The key is always to become educated. At the Financial Freedom Report, we couldn’t agree more with this sentiment.
Catherine Austin Fitts is the founder of the Solari report, and is a renowned thinker in the financial world. She advocates for a decoupling from the centralized banking model that channels influence toward the dominant industry players and government. Put another way, she is an advocate of free markets but the current system is nothing even remotely resembling a free market. We advocate direct ownership of investment property as a way to help circumvent the systemic bias toward institutional players.
The Creating Wealth show will continue to seek cutting-edge thinkers that help provide insight into investing and the economy. We firmly believe in the importance of becoming educated, and the best source of education is frequently to seek advice from experts. This does not necessarily mean that we agree with everything that all of our guests say . . . what it means is that we believe there is always something that can be learned.
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October 29, 2009 ·
The Bottom Line: Current Investment Outlook
As with all difficult times, it can be very hard to see glimmers of light in the midst of economic freefall. With the current trajectory of job losses, economic contraction, and government intervention into the economy, there are many people who are on the verge of giving up hope for a brighter future. The most important point to consider in this situation is that national policy is not within the circle of influence for most individuals. What this ultimately means is that we must focus our energy on the things that we can do within the political environment we live in.
Thus, our attention must shift away from the speed in which the economy is being nationalized and move toward the ways we can position ourselves to avoid personal financial disaster from said circumstances. We must proactively direct our focus off of the way financial markets are being manipulated, and shift in the direction of learning how we can structure our portfolio to avoid the market manipulation entirely.
Make no mistake that there are very difficult times ahead. The generations that were swept to wealth on the bull market of the last 25 years will soon realize that the fundamentals driving previous market rallies are no longer present. The notion of comfortable retirement may extend out of reach for ordinary workers who follow the dogma of savings and investment in the stock market, as returns disappoint and consumer prices skyrocket from government monetary policy.
As proactive, astute investors, it is the responsibility of all of us to structure our finances in such a way that our future is not dependent on the actions of a political movement. At the Financial Freedom Report, we recommend accomplishing this goal through investment in rental real estate located in sensible markets, financed by high- quality, long-term debt. By maintaining a keen focus on the actions that are within our sphere of influence, each of us can create a financial future that remains bright in the midst of chaos and uncertainty in the marketplace.
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October 22, 2009 ·
The Creating Wealth Show #105:
Propelling investment success using econometrics and
competitive analytics
In the one hundred and fifth episode of Jason’s extremely popular Creating Wealth show, he interviews David Savlowitz, the head of Competitive Analytics (CA), a niche full-service market intelligence firm. In this show, David explains the way that his firm uses a multiplicity of data to generate more robust information for their clients than can be obtained by the simplistic scorecards that are employed by most of the financial media. The methods that CA employs analyze supply and demand by using statistics, econometrics, predictive modeling, comprehensive research, and applied mathematics.
In this show, Jason talks with David about the ways that Competitive Analytics uses comprehensive data analysis to drive prediction models for their clients. One of the methods that they frequently employ is an economic composite score that is based on a multiplicity of weighted indicators. When applying this methodology to the general economy, David’s model is predicting the bottom of the economic cycle in Q4, 2009 with a return to equilibrium by Q4, 2011. Furthermore, David’s models are forecasting a U-shaped recovery that will have an extended trough. This stands in sharp contrast to previous V-shaped recoveries that experienced an immediate “bounce back” from the market lows. The reason for this extended trough is because a significant adjustment needs to be made in order to equalize the debt-financed over-consumption that fueled the recent asset bubbles.
The unique part of David’s methodology is the fact that his team uses a very wide variety of input variables in an attempt to capture future items that may become big swing factors. He rightly understands the implicit danger that can be present within quantitative economics for people that do not fully understand the analysis. This danger stems from the fact that econometric analysis uses trends in the past to predict the future, and thus cannot anticipate the impact of events that have never happened before. The importance of this insight comes from the fact that rare events like September 11th, 2001, the Russian Financial Crisis, and the collapse of credit default swaps were never incorporated into any prediction models because they had never happened before.
Each of these events had an unfathomable impact on the marketplace that left people who were blindly following technical trends of the past absorbing unbelievable losses (or pushing those losses onto the taxpayer in the form of a government bailout). As a point of reference; the hedge fund “Long Term Capital Management” was the brainchild of Robert Merton and Myron Scholes. It made heavy use of econometrics to undertake highly leveraged arbitrage trades in the bond market, but nearly collapsed the financial markets after the Russian Financial Crisis in September of 1998. This became the first iteration of a “too big to fail” argument, and is being used as the precedent for the government bailouts of financial institutions that are currently being pushed on the marketplace.
This is not to say that quantitative analysis and econometrics are implicitly dangerous. It is simply to say that it is a tool . . . a very powerful tool that needs to be understood before it is used. When applied by knowledgeable professionals, it can generate valuable insights. When given over to pseudo-intellectual or short-sighted agents, it can become a tool of mass financial destruction as the algorithms become an item of blind faith that drives insane investment decisions. As with all tools, the result depends largely on how it is used. Thankfully, David keeps the scope and limits of his analytics in perspective. A strong dose of this perspective is highly advised for anybody that seeks to incorporate econometric analysis into investment decisions.
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October 15, 2009 ·
Patrolling the Plastic: Keeping Track of the Consumer 
Credit Market (From the Chart Store Weekly Chart Blog for the week ending July 10, 2009)
Analysis of the total consumer credit outstanding shows that the last 10 years, the total consumer debt outstanding as a percentage of disposable personal income has rounded the hump from its all-time high, and is retreating downward. The recent credit market disruption has left many people deleveraging their debt positions, and is pushing this index down further. Unfortunately, the average amount of consumer credit outstanding is still very high relative to the average of 17.5% from 1959 to 1994. Much of the economic expansion in the late 1990s and early twenty-first century was based on debt-financed consumption.
The resultant debt bubble has compromised the ability of many families to continue with their prior spending habits. In practical terms, this means that a prolonged period of adjustment is very likely as consumers slowly move toward a sustainable equilibrium of credit that is nearer to the historical average. This period of adjustment is very likely to result in a downward shift in spending patterns, as well as the observed level of prosperity for the average consumer. Prudent investors should position their portfolios so that they control assets like entry-level rental housing that will be in demand by people who are adapting to the reality of living more modestly.
Non-Dollar-Based Assets Will Rock Your World (From the JasonHartman.com blog)
We’ve been talking a bit lately about how, in our humble opinion, the dollar is poised for a headfirst plummet off a very high cliff. When it does, get ready for the cloud of dust slowly rising up into the sky, just like in the Roadrunner cartoon when Wile E. Coyote makes yet another serious error in judgment.
It doesn’t take much pondering to arrive at the conclusion that a good place to be when the currency crashes is – drum roll, please – OUT of that currency. You need hard, tangible assets. Like commodities? Yes, but probably not what you think. Running out to buy gold and silver is better than Wall Street stocks and bonds, but you can still do much, much better if you turn to income property investing.
After all, what is a structure on land besides a collection of basic commodities like copper, wood, brick, etc? We call it Packaged Commodity Investing™, and this is one (perhaps the only way) to survive the coming fiat currency implosion with your wealth intact. Can you imagine actually being able to create wealth while others around you, especially those who stayed in stocks, are being turned into paupers overnight?
People will still need a place to sleep at night and you will own the pillows. This is how to position yourself to become wealthy in the future. Own something of real value, like real estate. Companies come and go with frightening regularity off the stock market indices. Terra firma beneath your feet? It’s probably going to stay.
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October 12, 2009 ·
Fiscally Fit: A Check-Up for Your Financial Fitness
1. What is the best way to avoid future market bubbles?
a. Gold . . . lots and lots of gold.
b. A survival bunker isolated on 30 acres in the woods, surrounded by barbed wire.
c. By directly controlling universally needed assets.
d. By only investing with the “good” fund manager.
2. How does big government relate to big business?
a. Government works for us, and will stop those corporate pigs from cheating the little guy.
b. Government regulations shield big businesses from competition by increasing barriers to entry for new competitors.
c. Big Business has no influence on government now that the Republicans are out of power.
d. It doesn’t matter because all of the jobs in America are being outsourced to China.
3. What causes sustained price inflation?
a. Increases in demand from a hot economy pulling up prices.
b. Increases in the money and credit supply creating more dollars chasing fewer goods.
c. Big Oil, OPEC, and Corporate America.
d. Evil HMOs increasing the cost of health care.
4. What is the principal risk of econometric technical analysis?
a. There is no risk if you know what you’re doing.
b. The risk that your friends and relatives will become jealous of your success.
c. The risk of no government assistance if you are not associated with Goldman Sachs.
d. The risk of excessive reliance on quantitative models that do not have the ability to predict highly disruptive events that have never happened before.
Answers: 1) c, 2) b, 3) b, 4) d
Explanation of Answers
1) What is the best way to avoid future market bubbles?
Market bubbles result from large numbers of people flooding an investment simultaneously based on speculation that the values will continue to climb, even in the absence of supporting fundamentals. It is pleasing to assume that one can find a “good” fund manager who will anticipate these bubbles and avoid them, but the numbers clearly show that outperforming the market on a sustained basis is extremely rare, and that those who do so may only be “coin flippers” who happened to guess correctly over an extended period of time.
Controlling universally-needed assets such as rental housing helps individuals to avoid bubbles by decoupling from financial markets with cash-producing physical assets. Gold represents an inflation-stable medium of exchange (i.e., a constant value currency), but it does not produce regular cash flow, and is therefore dependent on the whim of speculators for its market price. Finally, survivalist isolation may be attractive to some people, but is not the first choice for most investors. Thus, it becomes necessary to find ways for avoiding market bubbles without totally exiting from society.
2) How does big government relate to big business?
Government regulations impact the cost of operation for business entities. As the government increases regulations, it makes things increasingly difficult for new businesses to grow, thus shielding large business entities from competition. The circle closes when the business entities spend on lobbying politicians for legislation that further protects them from competition. In this way, big business and big government become two sides of the same coin, standing in the way of innovation and growth.
3) What causes sustained price inflation?
Changes in commodity prices can create temporary spikes and troughs, but the way that overall market prices establish equilibrium depends on the level of output, the amount of money in the economy, and the velocity with which that money circulates. A spike in the price of one commodity cannot move prices in the entire marketplace unless that price spike significantly contracts production. The only way that prices can increase in a sustained manner is for the government to continually expand the amount of money in circulation at a rate greater than the productivity improvement of capital and labor.
4) What is the principal risk of econometric technical analysis?
Technical analysis can be a very powerful tool, but it lacks the ability to predict future rare events that have never happened before. The reason for this is because econometric algorithms are based on market movements in past years. These models frequently do a fantastic job of modeling normal market gyrations, but cannot incorporate the impact of events that have never happened before. Because of this, over-reliance on technical analysis leaves investors susceptible to the impact of rare events that cause massive market disruptions.
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October 5, 2009 ·
We don’t mean to scare you – well, actually we do. The words above were spoken by President Obama at a recent press conference. Ouch. Does that mean the U.S. economy is a car with a bone-dry gasoline tank still rolling slightly from 233 years of inertia?
Maybe?
A better analogy might be the economy is a car with a bone-dry gasoline tank still rolling slightly from 233 years of inertia heading off a cliff! What can we, as law-abiding citizens, expect when our government continues to bankrupt itself and devalue our currency? Seriously. The federal government is a Ponzi scheme that makes Bernie Madoff look like a piker.
Here’s a glimpse into the future after the dollar collapses:
1. An explosion in prices as Americans scramble to buy basic necessities.
2. Sparse grocery shelves and long gas lines.
3. Failed businesses and a breakdown in commerce as long-term transactions vanish due to worthless currency.
4. Rampant crime and unemployment.
5. Disappearing government services.
Sound like fun? What can you do to protect your wealth? The simple answer is to own income- producing property. It’s the only investment liable to have any value when the fiat currency collapses.
The time to act is now. There may still be time before the greenback dies as the major player on the global currency market. But there may be less time than you think. Wall Street is already coming apart at the seams from greed and incompetence. Make it a point to explore history’s best bet when it comes to investing. Platinum Properties Investor Network offers free educational services for any investor interested in weathering the coming storm. Check us out at www.JasonHartman.com.
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October 1, 2009 ·
Within the lexicon of business terminology, there is a popular phrase entitled “too big to fail” that is frequently used to describe large industry players that are kept afloat by the government when they are faced with financial ruin. The theory behind these bailout initiatives is that liquidating a major industry player will result in a total market collapse. These claims are very difficult to substantiate, since the government frequently uses this rationale to justify its arbitrary actions, but never seems to allow one of these failing ventures to go into liquidation like a normal business.
In practice, the “too big to fail” phenomenon exists to perpetuate vested interests by artificially maintaining the status quo. Unfortunately, this phenomenon also applies to political movements as well. When individuals or movements are viewed as “historic” or “symbolic,” there is frequently a sentiment that it is “too big to fail” and that any level of incompetence or power obsession must be overlooked to avoid failure for the favored parties.
What we have seen is that attempts by government to manipulate the market frequently create much larger problems than those that were originally set to be “solved.”
In these situations, there is an endless litany of excuses that serve as the convenient justification for the expansions of government power that are necessary to protect businesses and individuals that are deemed “too big to fail” by the powers-that-be. Ultimately, we will find that the price of this massive government power grab is paid by the producers that make the country run. As these initiatives compound on top of one another over time, the ranks of the producers will contract as fewer people find it profitable to engage in business. Similarly, the ranks of the idle masses will rise as the number of people seeking free entitlements expands.
It is inevitable that a ”breaking point” will be reached at some time in the future where the burden foisted on the backs of the producers will be too great for them to bear. The optimal situation would be for a political reversal to happen before that point comes, so that the wanton damage being inflicted on the country by the power obsession of its leadership is stopped. In the interim, prudent investors should seek to pursue strategies that will allow them to profit from the government irresponsibility so that their wealth will not be totally destroyed before control of the government is returned to more responsible hands.
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September 28, 2009 ·
A recent article published by Matt Tiabbi in Rolling Stone magazine articulated the role that Goldman Sachs is believed to have played in market manipulations since the Great Depression. The thesis of this article is that Goldman Sachs places itself in the middle of speculative bubbles by selling financial instruments that it knows are of low quality, and then re-purchasing them at depressed prices after the market bubble collapses. In the midst of the populist political rhetoric and conspiracy theories peppered throughout the article, there are some important points that can be taken away by those who are astute enough to see them.
The most important point is that investment banks and financial institutions have an incentive to drive up asset bubbles, and then pick up the pieces after a collapse and repeat the process. The reason why such nefarious activities perpetually persist is because financial companies tend to have very strong lobbying influence with both political parties. As an aside, it is important to divorce ourselves from the foolish notion that “Wall Street” is for or against Republicans or Democrats. Wall Street is in favor of whoever is in power, and politicians are typically in favor of whoever gives them the most money.
Regardless of the inherent morality (or lack thereof) in the actions of financial institutions, it is important to understand that simply complaining about their despised actions will do absolutely nothing to remedy the situation. The only way that corrupt brokerage houses will be held to task is when a market movement away from their financial products dries up their river of capital. The reason for this is because political restrictions will always be laced with loopholes, and even extreme financial malfeasance will be bailed out by the reigning political powers under the notion that said institutions are “too big to fail.”
Thus, it becomes clear that the only way to side step the ”Bubble Machine” of Wall Street is to develop a portfolio of direct investments that you personally control. The reason for this strategy is because direct control allows you to determine when assets are bought, sold, refinanced, etc. For example, if you own a portfolio of rental properties, you can personally make the call when to raise rents, refinance the properties, buy new investments, and sell to trade up to larger deals.
Whenever your investment assets are outsourced to Wall Street, fund managers get placed in control of all these decisions. Thus, it should not come as much of a surprise when these same fund managers funnel your resources into a speculative bubble in the hopes of capturing large bonuses on the returns generated while the bubble is inflating, and then take those returns to the bank after the bubble pops and your investment assets experience a sharp reduction in value. Direct investment allows an individual to select investment areas that are less susceptible to the effect of speculative bubbles through prudent analysis and due diligence.
Over the coming decades, it is likely that many more bubbles will expand and pop as the government attempts to use monetary expansion and market manipulation to mask the fact that it is unable to meet its entitlement promises that have been used by politicians to secure elected office. Unfortunately, many people will be taken along for the ride, and have their wealth systematically destroyed by the bubble machine. As prudent investors, each of us needs to be aware of this market reality and actively step around the manipulations of government and Wall Street so that the bubble machine passes us by while unleashing its path of destruction on the financial world.
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September 16, 2009 ·
Jason Hartman’s 10 Commandments of Holistic Survival (Part 2)
#6 – Thou Shalt Control What Is Put Into Your Body
#7 – Thou Shalt Defend Yourself
#8 – Thou Shalt Possess and Control Universally Needed Goods And Resources
#9 – Thou Shalt Protect Your Own FIR
Finances, Identity & Records
#10 – Thou Shalt Have A Support Network
http://HolisticSurvival.com
6. Thou shalt control what is put into thy own body
Health and nutrition are an important part of survival in a catastrophe. Thus, it is extremely important that you control what you put into your body so that it can work at top performance and heal itself adequately in a crisis situation. This is doubly important if you have a family to take care of, because crisis situations will require extensive manual labor and may also see you needing to care for small children who do not have the capacity to care for themselves. One thing that can be done as a regular form of practice is to prepare meals without processed or packaged ingredients. Processed food is certainly convenient, but it is not likely to be available in a crisis situation.
7. Thou shalt defend thyself
It is entirely likely that a crisis situation will invoke looting and rioting. It is also likely that these activities will be heavily concentrated in urban areas with large populations of people who will be simultaneously without resources. Desperate people tend to do desperate things. Similarly, desperate measures will create lots of chaos, and this chaos is frequently concentrated in the areas where there is the most desperation. The principal areas expected to be the target of chaos are metropolitan urban areas with high levels of population density. The more remote suburban, exurban, and rural areas are not expected to be in much danger from riots, due to the difficult of organizing a mob sufficient for it to move out into the suburbs. Since it is not practical to move out of the city for the express purpose of being safe from riots, it is highly advisable for people living in dense cities to engage in very careful preparations for the contingency of a descent into chaos.
It is also possible that you will need to defend your family from attackers, even if prudent preparations have been made. Precautions such as security systems, martial arts training, and access to weapons may help to ward off attackers if conditions turn desperate. It is important to note that many items that are not typically considered as “weapons” can be used to defend your family if necessary. Regular household items such as steak knives, tire irons, mop handles, and frying pans can be the difference between keeping your family safe and being looted by rioters.
8. Thou shalt possess and control universally needed goods and resources
The current economy depends upon currency-based exchanges. In practical terms, this means that everybody accepts dollars in exchange for goods and services. Consider what will happen in the event of severe inflation. What if dollars decline in value, and are no longer accepted in exchange for food, gas, or clothing? In the event that commerce regresses back to barter and trade, you will want to control goods and resources that are universally needed so that you can trade them for other things that your family requires. Typical barter items are things like non-perishable food, gasoline, medical supplies, over-the-counter medication, and maybe even gold, silver, cigarettes, alcohol, or ammunition. This strategy can also be extended to your investment portfolio. The most effective way is by shifting your investments away from “paper assets” such as stocks, bonds, or mutual funds, and purchasing items of universal need, such as rental housing. By denominating your investments assets in “things” that everybody needs, it will place you in control of critical resources when they are needed the most. For more information on this strategy, visit www.JasonHartman.com.
9. Thou shalt protect thine own FIR (Finances/Identity/Records)
One of the first things to happen during times of chaos is a drastic rise in crime and theft. Not surprisingly, identity theft is one of the fastest-growing classes of crime. Keeping your identity safe requires that some prudent precautions be taken so that you do not become an easy target.
One of the first things to do is limit your internet footprint to only the providers that you fully trust, and check your credit report regularly to see if anybody is accessing your information. In addition to this, it is important to keep all personal documents and information locked away where it cannot be easily accessed or stolen. Also make sure to shred any documents you are throwing away that contain personal information or account numbers. When safeguarding your identity, consider the fact that times of chaos may be dealt with by the government in a very oppressive fashion. It may become necessary to drop “off the grid” in order to protect your family. Take some time to consider what you will do if this course of action becomes necessary.
10. Thou shalt have a support network
Consider who you will be depending on for support in a time of chaos. Also consider who will be depending on you. If a rapid deterioration of economic and societal norms emerges, it will be very important to have a strong community of people in your local vicinity. Creating and maintaining this community is one of the strongest defenses that you can build against a crisis or catastrophe. By pulling together the skills, resources, and expertise of people in your general vicinity, it will help to organize your efforts, undertake larger tasks, and make you a less attractive target for looters. Make sure to keep networking . . . of all the commandments, this may be the most important for protecting your family.
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September 15, 2009 ·
Jason Hartman’s 10 Commandments of Holistic Survival, Part 1
#1 – Thou Shalt Think Independently, Understand the Threats And Become Educated
#2 – Thou Shalt Be Prepared To Do Without
#3 – Thou Shalt Maintain Control
#4 – Thou Shalt Be Self-Sufficient
#5 – Thou Shalt Practice The Primitive Annually
http://HolisticSurvival.com
The notion of Holistic Survival is based on the idea that survival in uncertain times requires an all-encompassing or “holistic” approach to be successful. As a way to articulate this principle, we have prepared “The Ten Commandments” of Holistic Survival as a guide for preserving your personal and financial wellbeing in the current volatile environment. The importance of these guidelines is found in the fact that the world is becoming more complex and uncertain at a frighteningly fast pace. Thus, the strategies of yesterday are no longer suited for the environment of tomorrow.
The Ten Commandments:
1. Thou shalt think independently
Being prepared for the unexpected requires people to develop an aptitude for thinking outside the box. It is important to think about the types of disasters that can occur in the area where you live, and what you would do in response. In crafting your plans, it is also important to anticipate the response of other people who are not prepared. It is very likely that people who have not adequately prepared for disruptions or problems will resort to rather drastic measures such as looting or rioting. Thinking independently includes adequate preparation to provide for your family, along with proactively avoiding the likely focal points of increased chaos. Another important part of being prepared is to learn the emergency plans that have been established for your community. This will enable you to gain a preview of how events are likely to unfold in response to a state of chaos.
2. Thou shalt be prepared to do without
This commandment revolves around having an emergency plan for your family. This emergency plan should be inclusive of planning for going without supplies such as food and water, along with going without information or direction from the political authorities. It is also important to understand that your family may not be at the same place when a chaotic situation unfolds. Furthermore, contemporary means of communication like the internet and cell phones may not be available. In this kind of a situation, communication through Citizens Band (CB) radio and ham radio may become the only reliable means of communication. Of these options, ham radio is the only broad-reach communication option that is outside of the traditional communication grid. Each family should develop a holistic emergency plan and be prepared for the chaos that frequently results from crisis situations.
3. Thou shalt maintain control
The crux of this commandment is to stay cool and calm in a crisis situation . . . similar to our Creating Wealth commandment to maintain control of your investments. Stay positive and avoid excessive stress or panic. Panic only places extra stress on top of a highly stressful situation. Controlling your emotions will allow you to keep a level perspective, and place yourself in a position of strength. Staying positive is doubly important because of the high likelihood for panic to spread out to other people in crisis. Many social problems can result when panic becomes a pandemic and people make rash, emotional decisions out of fear. Many downcast people eat, spend money excessively or become addicted to abusive substances during difficult times. These kinds of self-destructive behaviors need to be proactively avoided so that you will be able to maintain a cool head and clear mind.
4. Thou shalt be self-sufficient
Self-sufficiency is primarily about having the ability to provide for your own food, clothing, water, shelter, medicine, transportation, communication, power and plumbing over an extended period of time.
ost families prepare for this contingency by assembling an emergency kit. You should seek to have sufficient supplies for you and your family to survive for up to 3 months on your own without doctors, grocery stores, or other modern amenities. Consider what you will do if there is no medical care available in your area, or if all of the hospitals are swamped. In the event that a disaster occurs, it is likely that all of the local grocery stores will be out of stock within a few hours. It is important to ensure that your family is prepared for this contingency.
5. Thou shalt practice the primitive
Every year you should prepare by drill or practice to return to the primitive. This means intentionally depriving yourself of the conveniences that we have become accustomed to. The easiest way to practice this is to go on a yearly camping trip and live in the wilderness. Other ways to practice are turning off your power or water for an extended period of time. The importance of these drills is to help your family to develop the skills of rapid adaptation to abrupt changes in the amount of contemporary comforts available.
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September 11, 2009 ·
In today’s video from http://JasonHartman.com, we will compare Madoff’s ponzi scheme with the ultimate pyramid scheme we are experiencing with the government’s spending and the treasury de-valuing our currency. http://CreatingWealthPodcast.com
In the wake of the recent $50B Madoff ponzi-scandal that has left many affluent people absorbing massive investment losses, there has been a lot of attention paid to fraudulent pyramid schemes by the media. However, this focus has been in exclusion of an astronomically larger pyramid scheme that is hurtling toward a dramatic collapse.
There are two very large forces that are pushing this ‘pyramid scheme’ toward collapse. The first force to reckon with is the perpetually increasing amount of debt-financed consumption. The second looming specter is the dramatic liability from government entitlement programs that will be revealed in the coming decades.
Let’s begin by discussing the trend of debt-financed consumption. In and of itself, debt is not inherently good or bad . . . it is all a matter of what the debt is used to finance. When money is borrowed at a fixed rate of interest for investment in long-term projects with a higher rate of return, it produces very good results. When long-term money is borrowed to finance short-term consumption, it requires that future production be sacrificed to repay the obligation. The intense problems come when the amount owed to finance short-term consumption grows so large that the interest cannot be paid from current income. (This is true for both individuals and governments.)
The second large force in this pyramid scheme is the government entitlement liabilities from programs such as Social Security, Medicare, Medicaid, and subsidizing financial institutions. The Department of the Treasury currently estimates the aggregate net entitlement liability at approximately $57 trillion dollars. (This amount grows to $61T when state and local government liabilities are added-in, which represents over $500k per household.)
The most likely result of this pyramid scheme is that the treasury will ‘print money’ or de-value the currency by increasing the amount of dollars in circulation to finance the nominal obligations. (Politicians have a noted tendency to terminally avoid decisions that involve dramatically raising taxes or dramatically cutting benefits.) This will have a net effect of destroying the purchasing power for income and savings, while diminishing the net impact of outstanding debt obligations.
Best Wishes,
Doug
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following the link below:
http://www.BusinessOfLifeLlc.com
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September 10, 2009 ·
This http://JasonHartman.com video as you to “take stock” of the stock market during this economy. It explains how the stock market works, what it was intended to be, and how it has changed into a gambling casino. http://CreatingWealthPodcast.com.
Conventional wisdom has long held that the way to become wealthy over the long term is by compounded investment in the stock market. The reason for this was quite clear when one looked at the chart of historical returns. By making very modest investments at regular intervals over a long period of time, small investors could create very large amounts of wealth. This line of thinking is what has prompted most employers to source their 401k retirement plans with mutual funds that invest in the stock market.
Unfortunately, the movement of stock market investment into the ‘main stream’ of America has caused it to become less of an investment vehicle and more of a gambling casino. The primary purpose of the stock market is to provide companies with a means to raise capital for business investment by selling a partial ownership stake (also known as a ‘share’ of ownership). Typically, investors were rewarded for their investment by the payment of dividends from the company profits. Thus, stock market investing was originally based on the notion of finding a company that was likely to make sufficient profits to pay healthy dividends.
This sentiment changed as the secondary market for trading stocks became more popular. A ‘primary’ issue of stock happens when a company issues more ownership shares.
A ‘secondary’ stock transaction happens when one investor exchanges an existing ownership share with another investor. This is where the stock market turns into a casino. When the focus of investment shifts away from the ability of the company to viably pay dividends on a consistent basis toward the probability that the secondary market will pay more for the company stock at a future date, stock investment becomes much more akin to gambling. When returns are primarily based on price appreciation, continued growth in market value requires a perpetual stream of new buyers. This phenomenon is true for both stocks and real estate, and explains the recent booms/busts very thoroughly.
The only factor that can push up the entire stock market is if there is an aggregate increase in investment capital (similar to how increases in the money supply from the Federal Reserve drive price inflation). When corporate profits grow, it is natural to assume that more capital will be attracted to the market. However, when market values rise faster than corporate profits, the only cause can be a net influx of investment capital.
In the United States, there were two ‘Sledge Hammer’ events that sparked a colossal 25-year bull market for stocks. The first was the passage of the Employee Retirement Income Security Act (ERISA) in 1974, which created standards and stability for company-sponsored stock market investment plans that dramatically increased the supply of equity capital. The second was the pairing of tax cuts in the 1980s and a significant reduction in the cost of debt capital that spurred a rapid growth in corporate profitability. These two events combined to generate a massive increase in stock market investment that pushed values sky-high.
However, these massive gains came with a bit of a shadow. This problem has been created as investors stopped directly buying stocks of individual companies and started investing in funds where a manager buys and sells the stocks. Now these brokers and managers have control over incredible amounts of other people’s capital. This control gives them the power to create or destroy tremendous amounts of value based on the decisions that they make. It also channels market activity more and more toward ‘gambling’ as managers seek to maximize value appreciation. (This set of incentives is very adverse to investor interests, as managers have incentives to take insane risks, since big gains mean tremendous bonuses and losses only mean that they get fired.) Furthermore, most managers charge very hefty fees for their services, which cut into the net investor returns. (Thus far, we have assumed that the fund managers are honest . . . when the ‘crook’ dynamic is factored in, the risks increase significantly.)
Fundamentally, there are four principal risks implicit in this kind of stock market investing:
1) Your broker may be a crook.
2) Your broker may be incompetent.
3) Even if your broker is honest and competent, he will take a big slice of your profits in the form of fees and commissions.
4) These problems are not limited to your brokers . . . all of the middlemen like stock promoters, CEOs, bankers, and all other flavors of hucksters or salesmen.
On top of all these risks, there is a bigger dynamic to consider. Currently, corporate profits are taking a very steep tumble relative to their prior levels. In addition to this, most of the working population is already invested in the stock market, so there is no large pool of capital to attract so that valuation can continue to inflate. Finally, the current market Price/Earnings ratio is well above its historical average. This means that the market is discounting-in a future increase in corporate earnings. If that increase does not come, or takes longer than expected, it will most likely result in market values decreasing.
Finally, there is a longer-term risk of very average performance. Even if the anticipated recovery happens as expected, there is no looming influx of capital to push the market up at explosive growth rates. This means that future market appreciation will look very average by historical standards. (Granted, nominal values will be pushed up by inflation, but real returns will still be very much in the ‘average’ category.)
Ultimately, the stock market is in the midst of a ‘return to reality’ from the large rates of return in prior years. The fundamentals are pointing toward difficulty in maintaining prior growth rates out into the future, including the risk of more near-term price compression if the forecasted economic recovery does not materialize as expected. Granted, there is a probability that the stock market will recover better than expected and produce favorable returns. However, prudent investors should seek to diversify their investment activities into other emerging areas of opportunity to limit exposure to the stock market.
Situations such as prudent real estate investing with a small to negligible downside and significant to infinite upside are what economists call a ‘free option’ . . .principally because the investment volatility runs mostly in the ‘up’ direction because of the downside risk mitigation. Needless to say, these are the investments that we would like to create.
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September 9, 2009 ·
In today’s video from http://JasonHartman.com, learn how to continually make NON-TAXABLE money from properties investment. http://CreatingWealthPodcast.com
Platinum Properties Investor Network has a series of core concepts that we communicate to our investors. One of these is to ‘Refi ‘Til Ya Die’ with your rental property portfolio. While this description may sound a bit snarky, it is a very powerful strategy for multiplying your wealth over the long term.
The most unique part of this strategy is that it stands in stark contrast to the popular strategy of ‘flipping’ properties by buying and quickly re-selling them for quick profits. The strategy that we recommend is the exact opposite of this. At Platinum Properties, we advocate buying and holding prudent rental properties over a long period of time. This enables investors to build real wealth, instead of constantly churning properties (and creating taxable gains).
There is another very powerful force behind our strategy of buy and hold investing. That power comes when the rents and value of your property increase over time. Typically, an investment property will start with low cash flow, and will grow in profitability as tenant rents are increased. This increase in revenues carries with it a tremendous tool for growing your wealth.
The way that you employ this tool is to refinance your property for more than your original purchase price, based on the increased cash flow. This will allow you to re-invest the amount of your loan that exceeds the original purchase price. And here comes the kicker . . . these net proceeds are not taxed!!!
The reason that you will not owe taxes on the re-financing of your properties is because loans are not taxed. Since you are taking out a loan instead of selling the property, no taxable transaction is triggered. Granted, capital gains can be deferred via 1031 exchange, but you will still lose 5% to 6% of the property value off the top from realtor fees. Thus, investors can ‘Refi ‘Til Ya Die’ and legally avoid paying taxes on the increased loan amount of their properties. (In addition to this, the increased interest payments from your new loan will reduce the tax burden of your regular cash flow.)
These strategies can super-charge wealth creation by allowing investors to capture their equity growth for re-investment. These perpetual re-investments accelerate the natural compounding of your investment portfolio. It also carries the benefit of consistently increasing your use of fixed-rate debt as a shield against inflation. Prudent investors realize the incredible power of this strategy, and should seek to capitalize on it to build their wealth during these increasingly difficult times.
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September 8, 2009 ·
In this article by Mark MacVay for http://JasonHartman.com, you will see exactly how inflation acts like a termite on your investments, and how to use the power of inflation to create wealth instead. http://CreatingWealthPodcast.com
Do your investments have termites? It may sound like an odd question. But if you’re like many Americans with the typical savings accounts and mutual fund/stock portfolios, then you are subjecting yourself to the ravages of a specific type of termite which is slowly, and clandestinely devouring away at your financial portfolio, taking away the prospects of a secure retirement with it.
What type of termite could do such a dastardly thing, you ask? This termite is called inflation and it is both the scourge of financial security and the product of our current monetary system.
Allow me to explain. Most of us have been brought up to believe that saving and investing are good and getting into debt is bad. While I certainly agree with this general sentiment, it contains one important fallacy – it presumes that the money supply in our economy is static. The reality could not be further from the truth; the money supply is increasing at an ever-faster pace. You see, every dollar added into the economy cheapens those already in existence, and the Federal Reserve in conjunction with the government are increasing the supply of dollars and credit at an alarming rate. This means that your savings and portfolio accounts are being reduced in value as the dollars they convert into buy progressively less and less. Sadly, this termite assault on your wealth is ongoing and relentless.
But, you ask, I heard on the radio that inflation was under control, that the CPI (Consumer Price Index) was relatively low… what gives? Suffice it to say that the CPI is sufficiently manipulated by the government to give the public a much more benign view of inflation than actually exists. To see just how ravaging this inflation termite is, simply look around you – oil, commodities, health care, education, housing, food and now even postage have been going up substantially in the last few years. These increases far eclipse the relatively modest gains in the stock market over the same time period.
Now, at this point, I presume you’re scratching your head and asking… well, how do I eliminate this termite? How can I secure my financial house from this destructive insect? The truth is that there is no Orkin man, no Terminix for this type of pest – that would require a major overhaul of our monetary system. Alas, we are stuck with this troublesome termite for the foreseeable future.
However – and this is where it gets interesting – while you can’t eliminate this pestilence, you can use it to your own advantage to maintain and grow your wealth rather than have your wealth eaten away. How, you say? By properly turning the tables on our financial system and becoming a debtor.
Heretical, no? If you recoiled in disgust, I understand as it runs counter to the way many of us have been brought up. But allow me to elaborate. By debt, of course, I don’t mean going out and indulging yourself on fancy meals, cars and vacations. There is no long-term benefit of purchasing those items using debt. In contrast, by selectively purchasing tangible assets which throw off cash flow, and by buying these assets with the bank’s dollars in the form of a mortgage/loan, you achieve the financial equivalent of a double play. Long term, your asset most likely increases in price as more and more dollars flood the economy, and, just as importantly, you are paying for that asset year after year in progressively worthless dollars thanks to the inflation termite eating away at the dollars you’re now repaying to the bank. Not only is this a shining example of leverage, it can also be thought of as a form of financial martial arts – you are harnessing the energy of your opponent (inflation) and using it against him.
Of course, one of the best asset classes with which to follow this path is investment real estate, a proven path to wealth for many and a good hedge against inflation. In the interim, your tenant helps pay your debt obligations while you allow the aforementioned economic forces to work their magic. Of course, you have to do your due diligence and choose your properties and loans carefully. Nevertheless, this is a powerful technique to build long-term financial wealth.
How ironic that the best defense against the termite of inflation is an investment property with a big mortgage!
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September 3, 2009 ·
Economic collapse is a real possibility in this financial climate. Are you prepared for the worst should society implode from the financial stress? This video from http://JasonHartman.com introduces you to viable survival strategies in today’s economy.
In the midst of financial collapse, massive government deficits, high unemployment, bailouts, and inflationary spending, there is a rising tide of people who are becoming skeptical about the prospects for continued economic growth in the near future. There are many people who are sounding the alarms of doom, but there are precious few who are offering viable strategies for individuals to prosper in such an environment. One of the places where these strategies live is Holistic Survival.
Holistic Survival is an initiative created by Jason Hartman to address the needs of people to protect their wealth, family, and property from the economic turmoil that is expected to come. As the castle of debt created by the government through fiat currency and runaway spending begins to collapse, there will be tremendous disruptions to the lifestyle that people have come to expect. This ‘prosperity collapse’ is expected to have many repercussions throughout the economy.
As inflation comes about from the massive monetary expansion of world governments, sharp price increases are expected to hit the poor dramatically. Some people expect that these price spikes will spur riots and looting, which in turn could result in martial law and government price controls or rationing. In this case, people will need to know how to survive in a world where the supermarket is not always open for business. Extended periods of time with no food available may become normal.
As the currency continues to collapse, it is also likely that barter and trade will begin to replace traditional monetary commerce. It is also likely that many of the products that are currently purchased at the grocery store may need to be acquired through the ‘black market’ in goods that are price-controlled or rationed. This will require people to adapt very quickly in order to avoid very dire circumstances. These are not pleasant thoughts to have, but there is a chance that they will become a part of normal life for many millions of people throughout the world.
There is a famous saying that luck favors the prepared. At Holistic Survival, we couldn’t agree more. We desperately hope that the expected economic catastrophe does not transpire. We remain hopeful that the free market will eventually prevail and return the country back to a path of growth. Nonetheless, it is prudent to be aware of the possibilities and prepared to exist in the world that may exist after the prosperity collapse. Find out more at www.HolisticSurvival.com.
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September 1, 2009 ·
In today’s video from http://www.JasonHartman.com, review the Financial Market Update and Monetary Update for the United States. Learn the best types of properties investment during financial Armageddon. http://CreatingWealthPodcast.com
The recent stock market rally has inspired a rising tide of hope and optimism within the investor community. Evidence of this is seen in the gentle step-up in market values from the floor of their recent decline.
This optimism seems to be discounted into the Price to Earnings ratio of the S&P 500 Index as well, since the current price of $921.23 represents a P/E ratio of 31.2 times the next four quarters of forecasted earnings per share for the index. Since the historical valuation for this index is significantly below the current level, it stands to reason that the investor community collectively believes that the government initiatives will create a market recovery in the near term.
At the Financial Freedom Report, we are not yet convinced that the fundamentals of the market justify such an optimistic valuation.
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August 28, 2009 ·
In this video from http://www.JasonHartman.com, test your fiscal IQ and learn what it means to be Fiscally Fit. Learn more at http://www.CreatingWealthPodcast.com
1) When is debt good?
a. When I feel like spending money
b. When I am buying something that I can see and touch
c. When I am buying something like a house or car
d. When I am buying an asset that produces income
2) When is debt bad?
a. When it causes you to be highly leveraged on an investment
b. When it is used to finance consumption
c. When you use your credit card
d. Debt is always bad
3) What causes inflation?
a. Evil businesses raising prices on the little guy
b. The federal reserve increasing the supply of available money
c. OPEC constricting output to push up prices
d. A tri-lateral conspiracy between George Bush, the Illuminati, and the Vanderbilt Family
4) What is the result of inflation?
a. It destroys the value of savings, equity, and debt
b. It creates jobs by increasing the amount of money in people’s pockets
c. It makes me more wealthy by increasing the value of my house
d. It makes me more wealthy by increasing the value of my 401k
5) What happens when the government increases spending?
a. It means that I get free money in my mailbox
b. It means that those rich people will finally have to pay their fair share
c. It means that the government must extract more resources from the private economy through taxes, borrowing, and inflation
d. It means that the country starts to run better, because the government always does things more efficiently than the private market
1) When is debt good?
The way that debt can work to your benefit is if it is used to finance an income-producing asset that pays your interest costs. The most typical example of this is rental real estate. As the owner, you take out a fixed-rate loan on the house, the tenant pays you rent, and you pay the applicable tax, insurance, and mortgage expenses.
Over time, inflation will increase the value of the house and the rents paid by your tenant. However, the amount you owe on the house will stay flat because of the fixed-rate debt. This will result in your profits increasing.
2) When is debt bad?
Generally speaking, debt will work against you when it is used to purchase anything that doesn’t produce income. The reason for this is because the interest for debt that is used to make these purchases must be paid out of your income. Furthermore, as the amount of debt goes up, it consumes more and more of your income. By concentrating debt in assets that produce income, you can escape this ‘debt spiral’ trap that keep many people confined in financial prison.
3) What causes inflation?
As tempting as conspiracy theories can be, the money supply is the principal factor that drives inflation for the overall economy. Supply and demand can create price spikes and drops in specific products like oil or corn, but the only way to make everything more expensive at the same time is to increase the amount of money in circulation while the amounts of goods and services stays flat or decreases. This phenomenon is known as ‘more money chasing less goods.’
4) What is the result of inflation?
Inflation erodes the purchasing power of all things that are denominated in dollars. When the prices of everything you buy go up, but your savings account only grows at 0.2% per year, it results in a negative ‘real’ rate of return since the savings will now buy less than it did before. In practical terms, this means that dollar-denominated assets, like home equity, savings, and CDs, along with liabilities like debt, will all have their value destroyed by inflation. Because of this, the optimal strategy is to have your assets denominated in physical things and your liabilities denominated in dollar-based debt.
5) What happens when the government increases spending?
The government does not have the capacity to produce anything. The only way that it can spend anything is to first take it from somebody else. Sometimes this is done directly through taxes, and other times it is done indirectly through borrowing or inflation. The way that borrowing takes money is by displacing private debt with government borrowing, effectively reducing the amount of capital available. The way that inflation takes money is by eroding the purchasing power of people’s salary, savings, and home equity to finance government spending.
Because of this phenomenon, it logically follows that any time the government decides to do something that the private sector could do more effectively, it drags down the overall economy by displacing private economic activity. (Granted, the government frequently enacts arbitrary laws & regulations that artificially hamper the efficiency of private industry, thereby creating a perception that the private market is broken, when the problems are all a direct result of government fiat.) The adverse incentives implicit in this balance is that politicians derive their power from the amount of money that government spends. Because of this, politicians have an incentive to make government bigger, regardless of how much it erodes the economy, because it will result in them becoming more powerful and important.
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August 27, 2009 ·
The current economy offers both danger and opportunity, as the Chinese word for “crisis” explains. This video from http://www.JasonHartman.com explains the effect of inflation on investment prospects. http://CreatingWealthPodcast.com
The market is currently in a period of great uncertainty and volatility. Some believe that there is a budding stock market rally developing, while others believe that the recent economic problems are merely the first of many disruptions that will shake the foundations of America over the coming years and possibly for decades. Our belief is that there are many forces pushing against a return to the rapid economic expansion that many have come to expect over the past 25 years.
The first force is the dramatic government spending obligations that are being financed by inflating the US Dollar. This will indirectly ‘tax’ economic output by eroding the purchasing power of the currency. The second major force is the inevitable increase of interest rates and tightening of credit standards. This will increase the cost of capital for business activities in the midst of rapid price inflation. The most likely result of these two forces will be a dramatic slowdown in the growth rate for the US Economy.
This will create tremendous opportunities for investors that position themselves to take advantage of the upcoming demographic shift of people out of the homeowner pool, moving into the rental pool. As millions of Americans adjust their expectations for the standard of living that they can reasonably afford, they will be paying rent while this transition takes place. Prudent investors should place themselves in a situation to take advantage of this shift.
Direct investment in rental real estate continues to represent the best way to take advantage of this trend by allowing investors to collect regular cash flow and ‘outsource’ their fixed-rate debt to the renters. Over time, inflation will push up the rents and values of properties while the mortgage payments stay flat. This will generate tremendous wealth for astute investors who place themselves in a position to realize gains from the coming shifts and disruptions.
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August 26, 2009 ·
In this video from http://www.JasonHartman.com’s Financial Freedom Report, learn about the state of the US Economy. http://www.CreatingWealthPodcast.com
One of the most dramatic pieces of news in recent months has been the sharp increase in unemployment. May ’09 figures showed the national unemployment rate at 9.4%. This represents a 3.9% increase over 12 months, which ultimately means that unemployment is 71% higher than it was in May of 2008. During this period of time, the consumer price index fell quite considerably due to dramatic reductions in energy prices from the demand disruption that was caused by the global credit crisis.
We believe that energy prices will regress back to their long-term equilibrium as credit markets normalize. This is likely to contribute to a ‘double whammy’ with the monetary inflation that is expected to result from the Federal Reserve policy to expand the money supply as a tool for fighting deflation. In addition to this, it is unclear how much more employment will contract as the economy grapples with the new realities of tighter credit and increased government intervention.
The recent month has been a very volatile time in the credit markets. The most noted phenomenon is the resurgence of the ‘bond vigilantes’ who are liquidating positions in US Treasuries to diversify into other debt holdings. This phenomenon has begun to push up treasury yields relative to prior months because of concerns by funds and governments holding major positions of US bonds that the loose monetary and tremendous government spending obligations will compromise the fiscal stability of the United States.
As the recent monetary expansion by the Federal Reserve plays out, we are expecting to see one of two scenarios transpire. The first scenario is that when credit markets normalize, the Federal Reserve will contract the money supply to keep inflation in check. This will have the result of pushing up short term rates, and will likely trigger a sell-off of long-term securities by investors that are looking to capture higher yields by re-buying shorter-term products at higher interest rates. The second scenario is where the Federal Reserve simply leaves the monetary system expanded, and inflation rolls through the economy. In this case, we expect to see many bondholders liquidate their positions as the returns are eroded by inflation. This will also have the effect of pushing up yields.
In the end, there is an extremely high likelihood that future events will be pushing up interest rates. Because of this, prudent investors should seek to lock down as much fixed-rate debt as possible while the rates are in a temporary trough from the global financial crisis. It is impossible to determine how much longer the current low rates will persist, but it is very probable that they will climb rapidly once they begin moving up and will be elevated for a considerable length of time before coming back down.
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August 21, 2009 ·
Many people are stuck in stock market based investments because of their 401k. Jason Hartman shares how investors can break out of 401k Jail and build long term wealth with properties investments. http://www.JasonHartman.com & http://www.CreatingWealthPodcast.com
There are many investors who have heeded the advice of Jason Hartman, and are looking to diversify their investment positions out of the stock market. However, many of these people have a large percentage of their investment assets tied up in a company 401k that has limited investment choices. What can a person do who is being held captive to a limited menu of investment options in the current environment?
In this situation, the optimal strategy is to capture market returns, while minimizing the costs associated with acquiring those returns. Fund managers have a tendency to charge hefty fees for their services, and frequently under-perform their comparable market indexes. The reason for this is not difficult to reason out.
When the gains and losses of all the market players are added together, they average out to the market rate of return. This simple arithmetic dictates that if one manager over-performs the market, that he must be offset by another that under-performs the market. Furthermore, fund managers must overcome the hefty fees that they charge in order to beat the market return. The net result is a zero-sum game created by everybody chasing the same market returns that turns into a negative-sum game when costs are factored in. So how does a 401k investor get out of this fund manager prison of high costs and disappointing returns?
The answer to this dilemma is achieved through the use of index funds in a stock portfolio. By capturing the average market returns at a minimal cost, index funds allow investors to ignore the ‘noise’ of daily stock market volatility and focus on the fundamentals. For investors who are looking for further diversification without losing the advantages of indexing, they can choose market indexes for small or medium sized companies that tend to be more volatile and produce higher returns. Similarly, index fund investors can choose international indexes that produce favorable returns and reduce portfolio volatility.
In addition to this, there is another option available to ‘jailbreak’ some of your money out of the 401k, and that option is to take a loan against your retirement plan. This strategy is typically advised against, because most people use the loan from their 401k to purchase items like cars or boats that decline in value. However, if you are astute and aggressive, there may be an opportunity to use your 401k as a vehicle to acquire capital for investment in other assets like rental real estate.
It is no secret that prudent investors should seek to limit their exposure to the stock market. However, for investors that are in ‘401k Jail’ with their employers, there is a viable way to structure your stock market investments in such a way that the major pitfalls of traditional stock investing are mitigated. And for those who are more adventurous, most 401k plans allow the owners to take a loan against the plan balance for outside investment. By thinking creatively, prudent investors can mitigate the impact of ‘401k Jail’ and use this tool to help build long-term wealth.
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August 20, 2009 ·
Join this live seminar as Jason Hartman explains the Commandments 6 through 10 for Successful Investing.
6. Thou shalt diversify.
7. Thou shalt be Area Agnostic™.
8. Thou shalt borrow to maximize leverage and accelerate wealth creation.
9. Thou shalt only invest where there is universal need.
10. Thou shalt invest only in tax-favored assets.
http://www.JasonHartman.com & http://www.CreatingWealthPodcast.com
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August 19, 2009 ·
Join this live seminar as Jason Hartman explains the first 5 of his 10 Commandments for Successful Investing.
1. Thou shalt become educated.
2. Thou shalt have a professional Investment Counselor.
3. Thou shalt maintain control.
4. Thou shalt use prudent financial planning techniques.
5. Thou shalt not gamble.
Find out more at http://www.JasonHartman.com & http://www.CreatingWealthPodcast.com
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March 4, 2008 ·
On this show we’ll hear from Paul Harvey, Jim Rogers, Ron Paul and truth challenged Ben Bernanke about commodities investing and the virtues of trading fake dollars for real assets. Visit http://www.jasonhartman.com/radioshows/
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