#59 – The Four Pillars of a Micropreneurs, by Jason Hartman

The path of a micropreneur is one with unique attributes and challenges.  With a business that you operate yourself, it may seem that resources for accomplishing your goals are severely limited.  However, it is quite possible to leverage business relationships so that you are able to take advantage of vast resources and knowledge.  By operating your own shop, it will allow you to maximize the time spent in pursuit of your business goals and personally control the direction of your business.  The fundamentals of being a micropreneur are articulated in the four pillars.  These four pillars are Passion, Profits, Control and Leverage.

1)      Passion

1. A primary purpose of becoming a micropreneur is the ability to pursue your life’s passion.  In some cases this passion can be a particular line of work or industry, and in other cases this passion can be time with family and freedom to travel.  The most important first step is to do some serious soul searching to determine your life’s passion.  Generally speaking, a burning passion is something that doesn’t feel like work when you are doing it.
2. A famous cliché of the professional world states that “If it was fun, it wouldn’t be called work.”  That sentiment is truer than many of us would like to admit.  By creating and building an entrepreneurial venture that is oriented around your personal passion, it will help to create the necessary fire for building a business that pushes past failure to cross the line of success.
3. It may be that your ventures as a micropreneur start in a small niche that is chosen specifically for its viability in producing immediate profits.  As your business ventures continue, you will have opportunities to shift the emphasis of your activities toward your personal passion.  You are in total control of the direction your business takes.

2)      Profits

1. One of the common characteristics of a micropreneur is somebody that is pursuing a personal passion, and in some cases there are more profitable business or employment opportunities available.  The hitch is that these other opportunities either require an onerous time commitment, are particularly unpleasant, or both.  While it is important for a micropreneur to pursue their passions, it is also critical to generate profits from your entrepreneurial activities.
2. In the beginning, many micropreneurs generate very modest revenue, but succeed because their expenses are kept very low.  When you engage in a scalable business with expenses that do not increase at the same rate as your revenue grows, it can allow you the opportunity to generate increasingly attractive profits in the future.  When you are starting as a micropreneur, it is most important to take action that generates immediate cash flow.  There will be time and opportunities to scale-up your revenue in the future, but nothing will happen if you do not take action.
3. It is certainly true that many people value lifestyle considerations over money, but it is equally true that money is a necessity of life.  As a micropreneur, it is critical to leverage your time and the time of people who you work with.  This will allow your business to accommodate your lifestyle, instead of forcing your lifestyle to accommodate your business.

3)      Control

1. Many people currently feel that their lives are spinning further out of control with each passing day.  It is well known that many corporations require employees to ‘play the game’ if they want to succeed and achieve promotions.  This frustration has left people with a feeling that their professional lives are being dictated by their company and that they must absorb ever increase time commitments.
2. There is also a sizeable population of people who are losing control of their financial life. In many cases, these are people who have been trained in an area of specialty that is not delivering the level of income that is necessary to support their lifestyle.  These people are facing a very real choice between lowering their lifestyle and finding a way to increase their income.
3. The path of a micropreneur is frequently appealing to both types of person, since it provides financial opportunities to people that do not fit into the mold for traditional corporate employees and provides control over time and work to experienced professionals who have grown tired of the demands placed upon them by their profession.

4)      Leverage

1. Robert Allen once commented that wealth is when small efforts produce large results and poverty is when large efforts produce small results.  Producing large results with small efforts is the fundamental basis of success, since it allows you to multiply the impact of your time.  As a micropreneur, one of the primary goals that you will be seeking to accomplish is both business and financial leverage.
2. Business leverage allows you to automate your business activities so that a maximum amount of activities are handled by somebody else or something else.  Business systems are a typical means by which this kind of leverage is achieved.  As a micropreneur, you can attain business leverage without the necessity of hiring employees.  This is accomplished by partnering with service agencies that will conduct routine business activities on your behalf in exchange for a negotiated fee.  By simplifying business activities, it allows more time for the entrepreneur to focus on the strategy of their venture instead of the day to day operations.
3. Financial leverage is the art of using other people’s money to capitalize your investments and ventures.  This will allow you to generate passive income, and larger rates of return on attractive investments.  By utilizing financial leverage, a micropreneur can minimize the amount of time devoted to work so that more time is available for other interests such as family, education, or personal hobbies.

http://www.CreatingWealthPodcast.com & http://JasonHartman.com

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#58 – The Faith Based Rally Continues, by Jason Hartman

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

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#57 – Designing Your Income, by Jason Hartman

Most of us are familiar with the notion of income and expenses, gross and net, profit and loss.  These terms frequently work themselves into conversations about our financial wellbeing when we describe our income as X or our ‘take home’ as Y.  However, there is a somewhat more complex understanding that makes income and expenditures take on a new dimension.

One of the famous quotes by Robert Allen is the observation that “Wealth is when small efforts produce large results, and poverty is when large efforts produce small results.”  This sentiment can be extended toward your personal income by asking how much effort you must put forth for each dollar of income that you earn.  This will give you a good idea of how far your talents can be leveraged to create income.

Another way of thinking about this concept is to classify your efforts into High Maintenance Income and Low Maintenance Income.  High Maintenance Income (HMI) must be worked for with consistent, difficult effort.  Low Maintenance Income: (LMI) is earned passively, and requires relatively little direct effort.  In many cases, people believe that the key to prosperity is to increase their hourly earnings.  However, they eventually find that their ability to increase hourly earnings hits a plateau.  Furthermore, many highly compensated occupations require large time commitments and extensive travel.

Conversely, pursuing Low Maintenance Income means that you will be constructing a portfolio of passive investments that do not require direct effort from you to produce earnings.  By leveraging your time and effort, it can allow you to continue growing your income without increasing the amount of hours you work.  In some cases, you will even be able to increase your income while decreasing the hours of work by cutting or outsourcing low value activities.

Generally speaking, High Maintenance Income can be earned by simply working more hours. This makes it easy in the short-run, but difficult in the long-run.  On the other hand, Low Maintenance Income requires significant up-front effort, but produces continual returns once it is set in motion.  This makes it difficult in the short-run, and easier in the long-run.  Most people have a mix of High and Low maintenance income.  The ‘secret’ to building great wealth over time is to systematically replace the High Maintenance Income with Low Maintenance Income so that each month, year, and decade brings you closer to financial freedom.

The art of designing your income can only be employed if you are willing to be decisive and take action.  It requires the acquisition of financial intelligence, the courage to fail, and the ability to adapt when new opportunities present themselves.  For those who master this art, and create a perpetual machine of investments that produce Low Maintenance Income, there is literally no limit on the wealth that they can accumulate or the opportunities that the wealth will create.  The key is continually taking action to design your income so that it takes the shape of your dreams and ambitions.

http://www.CreatingWealthPodcast.com & http://JasonHartman.com

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#57 – The Barbell Strategy of Investing

The “Barbell” strategy of investing

In the marketplace of ideas, there is no shortage of strategies for investing to produce superior returns. These range from the ‘crackpot’ infomercials schemes that infest early morning television to people that are afraid of the stock market altogether, and also include the research of Nobel laureate economists. The key question for an aspiring investor to ask is what they can learn from each method and strategy.

Let’s start with the Nobel economists. There have been many prominent thinkers who have extolled the virtues of portfolio diversification as it relates to investment in the stock market. The analysis and conclusion of their models are very logical and convincing. When combining securities whose price volatility is not highly correlated, the aggregate effect can be to lower the volatility for the total portfolio, while still preserving average returns. The factor that this analysis misses is the impact of rare, but catastrophic events like a total market collapse. While it is true that portfolio diversification can reduce normal volatility, it is also true that this diversification will not protect against a systemic market disruption.

On the other end of the spectrum, we find people who are afraid of the stock market altogether. Many of the people who express this sentiment were heavily influenced by the stock market crash of 1929 and the great depression. Typically, these people gravitate toward the perceived safety of bonds in lieu of stocks. The implicit problem with this strategy can take one of two flavors. The first is if the bonds are conservative low-interest instruments with guaranteed principal values. There is a significant risk that the value of these bonds will not keep pace with inflation. The other side of risk with bonds is if the investor seeks out high-risk bonds that pay out attractive interest rates, but are issued by companies in dangerous financial condition that may default on their debt obligations.

The final piece of the spectrum is the ‘crackpot’ schemes that are pushed by slick-sounding hucksters. Most of these so-called ‘fool proof’ systems promise fabulous returns by following a few over-simplified steps. Typically, these systems are designed for a particular market environment. When the market shifts, the strategies that once produced tremendous wealth can suddenly generate crippling losses. A prime example is the ‘house flipping’ mania that swept across the country during the real estate bubble. One investor after another reported tremendous gains from buying houses, doing modest rehab work, and then re-selling the house for a significant profit. This system seemed to be working great until the market shifted and the speculative buyers disappeared. At that point, there were suddenly a large number of people holding investment properties that they couldn’t afford to pay the mortgage on, could no longer afford to rehab, and were not able to rent out for a sufficient amount of money to pay the mortgage and taxes.

Each of these strategies carries strengths and weaknesses. The optimal way to blend these factors in an advantageous way is what has been affectionately labeled the “barbell” strategy. The basis for this name is based in the notion of combining relatively stable assets such as income real estate with speculative investments such as stock options. Traditional investment theory recommends channeling funds into the middle of the investment spectrum with a diversified stock portfolio. However, the impact of rare events has shown a need for stability that stocks do not adequately provide. Thus, in order to capture upside growth opportunities it is optimal to speculate with a small portion of the total investment portfolio so that the risk of loss is mitigated by the stable portion of your portfolio.

In the end, this style of investing defies almost all of the advice that is popular in the news media. Traditional advice is tilted toward primary investment in the false sense of security that is offered by a ‘diversified’ portfolio of stocks. Unfortunately, this strategy lacks the ability to withstand rare market disruptions, while possessing a limited upside growth opportunity because of the portfolio’s diversified nature. Prudent investors should seek to build a base of returns from assets like income real estate that are spread around in fragmented markets so that speculative opportunities can be pursued without endangering the base portfolio value.

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#56 – Re-Inflating the Debt Bubble

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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#55 – Packaging Your Commodities

Packaging your Commodities: Commodity Investing through Residential Real Estate

For most people, it is difficult to read through a financial newspaper or watch late night television without seeing repeated (possibly obnoxious) exhortations to invest in commodities such as gold or silver. The logic of these advertisements is frequently sound, since it is certainly true that government irresponsibility is leading toward a currency collapse and massive inflation. What frequently gets left out of the analysis is the other options available for investment that offer far greater prospects for return than gold or silver.

At the Financial Freedom Report, we are in absolute agreement over the prospect for commodity price inflation in the future. We are in absolute agreement over the massive deficits, crushing debt, and lax monetary policy of the government being a harbinger of runaway inflation over the coming decades. We are also in agreement over the dimming long-term prospects for the stock market, since there does not appear to be a new pool of investment capital to propel the stock market into an upward spiral like the one experienced over the last 25 years.

The strategy that we advocate at the financial freedom report is to use the attributes of rental real estate to invest in the commodities used for home construction. By following this strategy, we gain ownership of valuable commodities such as wood, concrete, petroleum products, and other building materials with the advantage of leverage from the bank and tax advantages from the government. We affectionately refer to this phenomenon as ‘packaged commodity’ investing because the commodity products are packaged into a residential home instead of sitting in a warehouse. The culmination of this strategy lies in the fact that commodities packaged into real estate investments can be rented to tenants. As an investor, this allows you to purchase commodity products while outsourcing the interest payments to a tenant and hedge against inflation with fixed rate debt, while delaying the payment of taxes through a section 1031 exchange.

*Theoretical example created through www.building-cost.net

The way that this strategy ultimately plays out is that the packaged commodities produce rental income through your property while inflation pushes up the cost of materials and the cost of labor. Over time, these increases in construction costs will generate a ‘rising tide’ that drives up market values. The cost of construction for new homes is split between materials and labor roughly even, with a contractor profit margin right around eleven percent of the construction cost. As the cost of materials and the cost of labor rises, it is likely to drive increases in replacement cost since the contractors do not have the ability to absorb large cost increases into their profit margins over an extended period of time. In practice, this will result in cost increases being passed along to the consumer in the form of higher prices.

Furthermore, it is important to consider the fact that many people need to be paid from the contractor profit margin on new construction. This makes home building an inherently volatile industry, since profit margins can expand or contract very dramatically, depending on the market cycle. Because of this, we advocate a strategy of purchasing attractive rental properties from somebody else instead of moving into the homebuilding business ourselves. This strategy allows us to ‘outsource’ the risks of new construction and focus on finding attractive deals.

*Theoretical example created through www.building-cost.net

An example of how this dynamic plays out is illustrated in the theoretical graph comparing market values against replacement costs. In an environment where the market value exceeds the replacement cost for new construction, it will trigger new housing starts by builders that recognize the opportunity for profits in excess of normal market conditions. In the case of a speculative bubble like the one that recently collapsed, huge amounts of resources pour into the home building industry to pursue the large profits. As this shift continues, the market will eventually become over-built with inventory, resulting in downward pricing pressure as bulders attempt to sell off their inventory at discounted prices.

Once the market value falls below the replacement cost in a given market, it will create a sharp decrease in new housing starts. The reason for this phenomenon is because people will be able to purchase existing homes for much less than the cost of construction from individuals that need to sell or from banks that are attempting to liquidate foreclosures. During this time, builders will find themselves in a terrible financial bind since the market prices will not be high enough to profitably build new houses. In many cases, bulders will have to operate at a loss for an extended period of time while they build out on permits and lots that have already been purchased in an attempt to recourp some of the costs. Over time, if the market values inflate back above the replacement cost, it will trigger another wave of building.

*Theoretical example of market prices and replacement costs

As this boom-bust cycle plays out, astute investors will have tremendous opportunities to profit. The most pronounced of these opportunities is to buy when prices are depressed and sell when prices are inflated. On the surface, this sounds very simple to do but it is an extremely difficult strategy to execute, because it requires prospective investors to move contrary to the prevailing market forces. During speculative booms or value rallies, the pressure on everybody is to buy and buy fast. When values are going up, up, up, there is no shortage of people who are willing to pay silly prices on the belief that they can always sell for a profit. Conversely, when values are depressed it can be very difficult to get the necessary investment capital for financing purchases. There will be more sellers than can possibly be imagined, but buyers will be extremely scarce.

At The Financial Freedom Report, we advocate a strategy of counter-cyclical buying for long term cash flow and appreciation. We prefer to target properties at prices below the replacement cost that generate attractive levels of cash flow. This produces a two-headed benefit of residual cash flows from rental income that can be used to pay for the mortgage, and a naturally low purchase price that is likely to become very attractive when market values eventually regress back toward the replacement cost. The key to this strategy lies in being able to ‘wait out’ the market gyrations with strong cash flow. By avoiding large amounts of negative cash flow, investors will remain solvent so that when inflation pushes up the replacement cost for their property and market values regress back to equilibrium, creating attractive gains in value.

It is unfortunate to think about the way in which the government has created speculative bubbles and inflation. We would all prefer to live with a responsible government, but that does not appear to be a realistic possibility at any point in the near or distant future. Because of this, prudent investors should position themselves to take advantage of government irresponsibility. The best way to accomplish this goal is by capturing attractive purchase prices from deflated bubbles, and by riding the wave of inflation as the cost of materials and the cost of labor push up the replacement costs for properties. By engaging in this strategy for wealth creation, it will place astute investors in control of real assets that produce real value for real people. Over time, this will allow you to side-step market manipulations and speculative bubbles while providing for the needs of yourself and the people you care about.

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#54 – Income Property Investment Myths

Income Property Investment Myths

Why aren’t more people investing in income properties when it’s the most lucrative, safest choice in history? Good question. Probably because people would rather watch television than improve their financial condition. Sure, everybody says they want to get rich but what are they actually doing about it besides flapping their gums?

Talking wistfully about something you have taken no action to achieve is called whining. Don’t go into the Green Parrot Bar in Key West with that attitude. It’s an official ‘no sniveling’ zone.

So let’s take a quick peek a some of the more common excuses people use to not get wealthy in real estate.

Reason #1 – “I don’t have enough cash.”

Sorry. Not a legitimate reason. Find a great deal and cash will find you. Negotiate the purchase price! Take equity out of your home – it’s losing value by the day in there anyway! Have you looked into the sweet $5,000 down deal Platinum Properties Investor Network has arranged in Atlanta? Next!

Reason #2 – “I don’t have any time.”

Sorry. Everybody’s got time. You need to prioritize. We’re talking about your financial future here. Surely, it’s more important than three hours of slumming in front of the television or computer. Toss the kids and spouse in the car on a Saturday afternoon and cruise the neighborhoods looking for ugly houses for sale.

Reason #3 – “Everyone says this stuff doesn’t work.”

Everyone? Ask Donald Trump, Jason Hartman, or Steve Wynn. True, you’re probably getting a skewed perception of reality if your primary source of information is late night tv. This stuff does work when you do it right.

To learn how to do real estate the right way, check out www.JasonHartman.com for The Complete Solution For Real Estate Investors™

Reason #4 – “Realtors are a difficult bunch.”

This is very NOT true when you work with Platinum Properties Investor Network. Our local area managers are real estate agents who LOVE to work with you. If they don’t, we quit sending them business and, believe us, they want our business.

Reason #5 – “I might lose money.”

Real estate is way safer than the stock market. It’s funny. The pattern we’ve noticed over more than two decades in this business is, the more you education you get, the less risky real estate is. It’s a calculated risk, one you can control much better than Wall Street.

Reason #6 – “I don’t know what to do.”

You don’t need to know it all. You just need to know who to ask. Don’t let analysis paralysis get in the way of the rest of your life. It’s that important! Come to a Platinum Properties Investor Network seminar, then set up an appointment with one of our expert investment counselors and then do it. Pull the trigger. Buy your first property. We’ll hold your hand if needed and advise you every step of the way.

Had enough myth-busting for one day?

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#53 – Fiscally Fit Financial Quiz

Fiscally Fit: A check-up for your financial fitness

1. What happens to home values when the replacement costs increase?

   1. The go up like a rocket

   2. They go down because nobody can afford to build

   3. They are pulled toward the cost of new construction

   4. They don’t change . . . construction costs don’t matter

2. What is happening to the economy now that the debt bubble has burst?

   1. The recovery going to happening, because Ben Bernake said so

   2. The government attempting to re-inflate the debt bubble in order to stimulate short-term demand

   3. It’s just like the great depression, only worse

   4. The recovery has already started . . . the government reporting agencies are just suppressing the information

3. What is happening to real unemployment?

   1. It is going up, contrary the manipulated numbers that are published

   2. Can’t you read? . . . it’s going down because the stimulus package is working

   3. It’s already higher than during the great depression

   4. It’s going to be back below five percent in no time

4. What happens when government spending becomes a bigger portion of total GDP?

   1. It gets the economy back on its feet

   2. It erodes long-term growth by displacing private investment capital

   3. It make people more equal by re-distributing income

   4. 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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#52 – Double Dip Recession

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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#51 – Creating Wealth Show Stars

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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#50 – The Creating Wealth Show 114

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.

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#49 – San Antonio, TX – Platinum Properties Investor Network Analysis

In this video, discover the properties investment opportunities available in San Antonio, TX.  Jason Hartman’s Platinum Properties Investor Network provides analysis of the demographics, real estate market and business climate. http://JasonHartman.com http://CreatingWealthPodcast.com

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#48 – Orlando, FL – Platinum Properties Investor Network Analysis

In this video, discover the properties investment opportunities available in Orlando, FL.  Jason Hartman’s Platinum Properties Investor Network provides analysis of the demographics, real estate market and business climate. http://JasonHartman.com http://CreatingWealthPodcast.com

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#47 – Kansas City, MO – Platinum Properties Investor Network Analysis

In this video, discover the properties investment opportunities available in Kansas City, MO.  Jason Hartman’s Platinum Properties Investor Network provides analysis of the demographics, real estate market and business climate. http://JasonHartman.com http://CreatingWealthPodcast.com

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#46 – Houston, TX – Platinum Properties Investor Network Analysis

In this video, discover the properties investment opportunities available in Houston, TX.  Jason Hartman’s Platinum Properties Investor Network provides analysis of the demographics, real estate market and business climate. http://JasonHartman.com http://CreatingWealthPodcast.com

Podcast: Download