Category: Inflation
March 29, 2010 ·
The stock market is continuing its rally from market lows early in 2009. To many free market economists, the stock market is seen as a harbinger of sentiment concerning the future of economic growth. This has created jubilation on the part of many journalists and investment advisors, based on the belief that current stock market returns are predicting a robust economic recovery. However, deeper analysis of this rally shows that it is heavy on ‘hopes and dreams’ while unfortunately light on fundamentals.
Analysis of the relationship between the S&P 500 market price and the earnings per share or dividends per share shows a much different picture. Over the last 15 years, the ratio of prices to dividends reached astronomical levels. This indicated a shift of market sentiment away from the fundamentals that drove earnings and dividends toward speculation on future appreciation as the primary driver of value in the stock market. This phenomenon is also evident in the cycles of expansion and contraction in the P/E ratio for the S&P 500 index.
The recent market turmoil has escalated P/E ratios to unseen levels that will require dramatic increases in earnings for the current price levels to be supported by fundamentals. The ratio of prices to dividends are also still very high relative to the historical average, communicating that market sentiment is still firmly in the camp of valuing the market based on the anticipation of future value appreciation instead of the fundamentals that drive earnings and the dividends that are paid out of earnings.
All of these trends point toward a further perpetuation of value bubbles, market crashes, nominal recoveries that create more bubbles. Furthermore, these market cycles are likely to increase in severity over shorter and shorter time horizons. The reason for this is a near complete disconnect between market values and economic fundamentals. As this fracture continues to widen, it will result in market values fluctuation wildly.
Another major factor in these anticipated fluctuations is the government exercising its monetary authority to finance deficits by expanding the money supply. (also known as ‘monetizing the debt’) It is likely that future nominal value contractions will be ‘eased’ by infusions of new money by the government. This will result in nominal value fluctuations that look moderate, but real value going down precipitously because of the dollar’s progressive weakening, due to expansionary monetary policy.
http://www.CreatingWealthPodcast.com & http://www.JasonHartman.com
Podcast: Download
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.
Podcast: Download
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.
Podcast: Download
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.
Podcast: Download
December 16, 2009 ·
Economic deliberation with Britain’s financial author and Journalist of the Year – Gillian Tett.
Jason Hartman’s Creating wealth show has had a wide variety of notable guests over the last few months. One of Jason’s recent guests was Gillian Tett, a British journalist, whose recent book Fool’s Gold confronts the current banking and financial crisis. In March 2009, Dr. Tett was named the Journalist of the year at the British Press Awards. During her interview with Jason, she spoke at length about the systemic problems of the current system, and potential solutions.
The principal problem inherent in the current banking system is that free market forces are not allowed to prevail, as demonstrated by the government efforts to bail out failing banks. The problem created by this system is that when financial institutions are protected from failure by the government, it incentivizes them to take extremely large business risks since their upside is vast, and their downside is covered by the government. In response to this upside-down set of incentives, many have called for increased regulation of banks. One of the difficulties discussed was the fact that some of the problems that precipitated the credit collapse were the direct result of regulations imposed on the banks by public authorities.
Ultimately, the principal source of the problems for financial institutions is the fallacious notion that risk can be eliminated. By perpetually shifting risks onto counterparties, the financial world devolves into a large game of ‘hot potato’ where everybody tries to toss the hot potato to somebody else before the timer expires and the ticking bomb explodes. An example of this phenomenon is the practice of securitizing mortgage products into collateralized debt obligations. As these products were combined with one another, it became more and more difficult to ascertain the risk profile of a given security. When the credit crisis emerged, these became ‘hot potato’s’ as investors tried to offload the securities onto one another before the values collapsed.
Podcast: Download
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
Please feel welcome to subscribe by
following the link below:
http://www.BusinessOfLifeLlc.com
Podcast: Download
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!
Podcast: Download
August 31, 2009 ·
In this video from http://JasonHartman.com, we will look at the “calm before the financial storm”. Times are coming when interest rates will go up, and getting mortgages will become harder. Invest now. http://CreatingWealthPodcast.com
To those who have learned how to read the economic trends, it has been painfully obvious for quite some time that significant inflation is on the horizon. Platinum Properties Investor Network has long supported a strategy of fighting inflation through rental real estate that is financed with fixed-rate debt. The advantage of this strategy is that the debt payments will stay the same throughout the inflationary period as prices are pushed higher. While this is happening, the rents paid by the tenants will be consistently increasing as the scourge of inflation is eroding the value of the dollars that are being used to repay the mortgage.
All of the people who have read Jason’s blogs or listened to his Creating Wealth show for a significant period of time are well acquainted with this phenomenon. The piece that is now important to internalize is the fact that this ‘door of opportunity’ will close at some point in the near future. The reason for this is because of the chain reaction that the inevitable inflation will unleash.
Once the impact of inflation begins to unfold, it will result in more investors selling bonds to avoid seeing their wealth destroyed. This will place upward pressure on bond yields as investors will no longer be willing to accept rock-bottom interest rates for government treasuries. As the treasury yields are pushed up higher and higher, there will be a ripple effect to mortgages that are indexed to these treasury notes. This increase in mortgage interest will increase the ‘effective’ price of real estate since the same monthly payment will not buy as much house as in previous years. As this stall in purchasing power ripples through the market, it will place downward pressure on prices and appreciation. At this point, buying in to the real estate market will become a much more tenuous matter since interest rates will be higher, creating increased mortgage payments and lower cash flow to owners. During this time, the investors who locked down low fixed rate mortgages will be watching their profits expand while their costs stay flat.
The bottom line is that this tremendous opportunity will not persist forever. Once the rocks begin to fall, it is likely that the avalanche will quickly follow. Prudent investors should seek to be ahead of the masses, and lock down their investments while rates are still low, prices are still depressed, and opportunities are still plentiful.
Podcast: Download
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.
Podcast: Download
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.
Podcast: Download
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
Podcast: Download
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
Podcast: Download
June 18, 2008 ·
Jason reveals how you can actually profit from prudent borrowing. Then Jason and Ben, a local businessman and caterer, discuss inflation and rising food prices. Visit http://www.jasonhartman.com/radioshows/
Podcast: Download
