The Next Market Crash: Consider This Your Official Warning

First off, I'm sorry it has been so long since I last made an entry. Somehow, I figure you were able to manage. I have been completely occupied with navigating this insane market and trying to keep clients solvent. About four weeks ago, I began studying the European debt crisis at the microscopic level. After a week or so of being literally buried in balance sheets and mind numbing piles of economic data, I emerged more concerned than ever. I began contacting clients and setting up meetings in order to get them out of stocks and into safer investments. Since then, global markets have dropped nearly 10%. I am absolutely convinced this is only the beginning. Let me explain my reasoning.

     The situation in Europe is only the beginning. Europe is basically suffering from the same problem we are. Their governments are spending far more than they are taking in. Governments were able to do this in the past due to the ever expanding economy and the tax revenues this expansion generated. As we all know, that expansion has come to a grinding halt. Government revenues have pulled back and governments' spending, due primarily to aging populations and ever-increasing social spending that accompanies it (pensions, medical expenses, prescriptions, etc.), has continued to rise. Now, nearly every Euro Zone country has significantly more debt than the total output of their respective economies. To cover the shortfall, Euro Zone governments must borrow money from investors, mostly in the form of government issued bonds. However, due to these budget issues, investors are growing increasingly concerned that these governments may not be able to pay them back. In return, bond purchasers are demanding higher interest payments to justify the increased risk, much like a bank charges us higher interest on a car loan if we have a lower credit score. As interest rates rise, the amount of money required to make the annual interest payments to bond holders rises as well. In order to pay the higher interest rates, the government must issue more bonds, at even higher interest rates, and the problem quickly begins to snowball. What makes this more worrisome is that all 17 Euro countries cannot print their own money as they all use the same currency: the Euro. Most in the financial industry didn't see this as a big deal and figured that the European Union would simply print more Euros in order to stabilize the situation. Somehow, and don't ask me how because I still don't understand, those same "financial professionals" overlooked the fact that the contract binding the Euro Zone countries together unequivocally denied the right of the European Central Bank (ECB) to print money in order to cover a budget shortfall for an individual member government. Additionally, why would Germany and France, the biggest economies in the Euro Zone, agree to have their currency diluted in order to cover the profligate spending in neighboring countries? Well, simply put, they aren't. Even if Greece, Spain, Italy, and Belgium were somehow bailed out, that wouldn't begin to cover the massive European banking system that is completely exposed to the floundering bonds issued by each country. Additionally, the real estate collapse that has plagued our economy has spread overseas and is now wreaking havoc in Europe. When you consider the fact that the economy of the European alliance is bigger than our own economy, you begin to realize the scope of the problems we are facing.

      Now, the issue that no one is talking about is the fact that China is the largest owner of Euro Zone debt and their real estate market is beginning to wobble. It is also estimated that Chinese banks are now leveraged to a greater extent than our own banks were prior to the financial crisis. Additionally, after more research, I found that Japan's government is in worse shape than any Euro Zone country. I could literally spend a day going through each economy and each country, illustrating in real numbers how bad this situation is getting. If you would like that information, email me directly and I will be more than happy to lay it out for you.

     The point of this entry is not to scare you. I am trying to warn as many people as possible. Get out of the markets. Or, make sure you are in safe assets that will appreciate in times of crisis. Don't listen to anyone who tells you that the prudent course of action is to take a disciplined approach and see this through. I work in this industry, and I am telling you point blank that brokers say that because they don't understand the reality of what's going on. We are looking at a situation that could dwarf the financial crisis of 2008 in terms of severity and length. As always, I am happy to help and consult anyone. Just email me at zkabraham1@gmail.com, and we can take it from there. Make no mistake, we are facing issues that will most likely destroy countries and economies for decades. If you don't bury your head in the sand, easy steps can be taken to insulate yourself from this chaos.

     Good luck to all of you. I will be updating this situation as frequently as possible. Please be smart and make sure you are protected.

           

Making Money In This Crazy Market

Are you motion sick? Well, you're not alone. We have recently experienced unparalleled market volatility (markets going up and down). Buckle up. I see absolutely no evidence that this trend will reverse itself in the near future. Everyone and their mother have a reason as to why these crazy swings have become common place. The plain truth is that there isn't one reason for the volatility. Markets move up and down on rumors, errors, lawsuits, activism, anger, greed, speculation, and nearly every other possible human influence. However, I would echo the sentiment that it indeed is different this time. The swings are more violent and sudden than ever. So, when tackling the cause for most anomalies, I find that it is most helpful to start with one very simple question: What has changed? The answer for this is simple and predictable. The government has injected itself, via capital infusions and new regulations, into the marketplace like never before. As predicted in this blog some time ago, it has not been effective. Despite the impotence of the stimulus and new regulation, the market has become absolutely enthralled and dependent on the infusion of free money. Without fail, the biggest market swings have occurred within hours of Fed meetings and presidential speeches. The market rallies huge on the speculation of new stimulus and collapses when government and fed officials elude to the monstrous debt being a limit as to what action they can take. This is illustrated simply by looking at the conclusion of QE 2 (quantitative easing 2; the fed pumping money into the market). Markets rallied violently when the program was announced and pushed up to 3 year highs. QE 2 ended on June 30th of this year and our markets have dipped 20% (give or take 5% depending on the day). In stark contrast to what many experts and pundits argue, the government can boost the economy and the markets. The problem is that it does not last and is fiscally unsustainable simply due to the fact that the amount of tax revenue generated by increased business activity that is a result of the stimulus doesn't even cover a quarter of the amount of the cost of said stimulus. As Winston Churchill stated so eloquently, "It's like standing in a five gallon bucket and attempting to pick yourself up by the handle."

Recently, I have been reminded of a lesson I learned sometime ago. The lesson is simple, and yet, I still find myself violating it from time to time. I might add, violating this lesson has NEVER failed to lose me money. At the behest of a client, I recently tried to trade in a few stocks that I believed could benefit from current events. I was simply trying to grab some short-term gains on stocks that I didn't necessarily believe in over the long term. As you may have guessed, we got hammered. Luckily, I insisted on modest bets so my actions didn't damage the long-term viability of our strategy. Regardless, it still stung. What made it so much worse is that I knew better. Now, in no way am I discouraging trading. Over the past few years, I have made quite a bit of dough for my clients through short-term trades. The difference is simply that the profitable trades were when we were opportunists and capitalized on what we saw as an imbalance in the market. A trade should be a short-term excercise with a pre-determined exit strategy that has been developed through months of observation. Simply buying a stock that has gone down in the hope of it having a Phoenix-like resurrection is nothing more than betting. With that being said, trading will be an integral part of generating returns in this crazy market. The age old "buy and hold" will not begin to work again until global economic growth gets back on track. Who knows how long that will take? So, I would advise using a "Tactical" and aggressive mutual fund to accomplish this as most individual investors, despite their ardent beliefs, are not conducting enough active research to trade competently on their own. I would also suggest talking with a professional trader and perhaps hiring them to handle that portion of your portfolio (Warning: most financial advisors are mutual fund salesmen. Despite their rhetoric, most do not know anymore than you do).

Buckle up and prepare for this madness to continue for some time to come. When the markets go up, don't get caught getting complacent. No one ever went broke taking a profit. Also, DON'T EVER be afraid to carry large portions of cash in your portfolio. A good cash reserve will help you take advantage of trading opportunities and will protect you when markets plunge. Good luck, and don't ever to hesitate email questions. Also, as a reminder, feel free to email me directly at zkabraham1@gmail.com if you would like to talk off the record.

Market Madness!!: Buy Insurance For Your Investments

Markets like these can give you motion sickness. I must admit, I am currently wearing a neck brace from the whip lash over the past few weeks. For those of you who have been reading the blog, you may remember in a recent post that I believed this market would continue higher until the Fed quit pumping money. Well, the second round of quantitative easing (money printing) ended June 30th. We are down roughly 20 percent from that point. Now, our portfolios have held up much better, down roughly 5% from the recent highs, mostly due to profit taking and our substantial gold positions. If you want to know the best ways to own and buy gold, email me. I encourage investors to be cautious but opportunistic. I have been saying it for years and will continue to say it: the days of endless government spending have caught up with us and gold offers one of the only ways to profit and safeguard from the mayhem that is caused by currency instability. The economic picture for governments will not be improving any time soon. Cutting costs severely enough to balance government budgets will be extremely hard for the markets and the larger economy to digest. Yet, we cannot print our way out of these problems without inflicting even more damage to our currencies. Gold should do well in either scenario as it is a safe haven/inflation play.
      I think we will go lower still, maybe not immediately, but soon. Now is not the time for wholesale selling. Drops like these are precisely why we were taking profits and building up cash three months ago. There are some good buys out there but be very careful. Just because a stock has dropped a lot does not make it a good buy.

There are many ways to protect your portfolio from drops like the one we have recently witnessed. I use hedging strategies in many or my clients' accounts that can actually make money when the market goes down. However, these strategies are often very complex and can be risky. So, what can investors do to protect their assets? In a recent conversation regarding the market, a client jokingly suggested that a financial institution should develop portfolio insurance. Well, they have!!

When I first entered the business, Annuity, as least as I was concerned, was a dirty word. People had a habit of flocking to annuities in times of hardship and locking in a low but guaranteed interest rate after taking a pounding in the market. The vast majority of annuity purchases would happen in the aftermath of a massive market correction. Sadly enough, investors that employed this strategy sold low and missed out on the rebounds that came after the devastation, often locking their money up for years and earning a paltry 3%. How the industry has changed. I recently discovered products that were offered by annuity companies that offer upwards of 150 funds and investment options, offering 100% control over your money. At the same time, the company guarantees growth to your income base. Sound too good to be true? It's actually very simple. Annuities are traditionally income investments. You give the company a lump sum and they guarantee a payment for the rest of your life. If you don't take the guaranteed payments, your lump sum grows by whatever amount your guaranteed payment is (invest $100,000 in a 4% annuity you can take $4,000 in payments or your income base grows to $104,000). These new annuities offer the same thing but you are able to invest the lump sum as you see fit. If you invest well and the market goes up, great! It's just like owning a mutual fund portfolio. However, if the market crashes, your income base (principal originally invested) continues to grow by the guaranteed amount. I recently found a company that offers a guaranteed 10 year income base double. So, if you invest $500,000 in their 5% product, regardless how the investments that have chosen perform over the next decade, after ten years you will be able to take 5% of $1 million for the rest of your life. Now, we would obviously hope to that our investments would outpace that, but it sure makes is easier to know that your retirement income is growing regardless of how the market is doing. These products aren't for everyone but they certainly have their place. For those of us who are within 15 years of retirement, annuities can prove invaluable. They are truly the equivalent of purchasing an insurance umbrella for your portfolio. Again, feel free to email me with any questions.

The Great Debt Debate: THERE IS NO RISK OF DEFAULT!!!!!!

I really have no idea how many people still read this blog. BUT, if you do, if you happen to be one of the faithful ten or so readers who still subject themselves to my rants regarding the utter madness that our economy has become, PLEASE email this blog entry to everyone and anyone you know. For those of you who know me personally, you can attest to the fact that although I am not always right, I am intellectually honest and will only present the facts when professing to do so. That being said, I have done my research and crunched the numbers and I am simply unable to remain quiet regarding this convoluted Desperate debt debate. So, being true to the nature of this blog, I will attempt to break the situation down in the accessible and simple manor in which it should be discussed.

First, let's define the terms. Default: Not paying all or some of a payment, in a timely and agreed to fashion, that one party is contractually obligated to pay to another.

Debt (as it relates to our government): Almost exclusively and entirely made up of bonds that are issued via the full faith and credit of the federal government to investors.

We are in no risk of defaulting on our debt. We just aren't. Our government brings in roughly (give or take a billion) $200 billion a month. Our interest payments on all bonds, social security, medicare and medicaid, military costs (including all additional war costs and veteran benefits), add up to about $165 billion. Now to be fair, our other costs that do include social programs and other entitlement programs do add up to more than the $35 billion remaining. Cutting back on these programs or not funding them does not equal a default. It actually would have the opposite effect. If we made hard and meaningful cuts into these social programs we would most likely preserve our AAA debt rating by reducing our long-term commitments and liabilities. For the record, I am not suggesting that this would be easy or even that it is the right thing to do. I am simply illustrating that we have no real risk of default unless our government consciously chooses to not pay our debt.

As far as the aforementioned cuts to social spending and entitlement programs, it is not something I support unequivovally. No matter your view on entitlement spending, making deep and meaningful cuts into social programs is a painful enterprise. One must approach the matter with a sense of sobriety, knowing full well that such cuts will impact struggling families and hungry children. At the same time, we must acknowledge that the tens of trillions of dollars that have been spent on social programs since the inception of LBJ's heralded Great Society programs, the poverty level in this country has risen from 14% to 14.3%. You can draw whatever conclusion you want to but the numbers don't lie. Is it possible that the more we spend to help the poor we simply create more poor? Is it possible that the more comfortable, palatable and dignified we make living in a state of poverty that we are simultaneously encouraging more Americans to join the ranks of the impoverished? I am not, and will never, suggest that we should end social programs. My wife and I are ardent believers in helping those less privileged, both with our personal monies as well as our tax dollars. Yet, when looking at the cold hard numbers, we must take a serious look at how we are spending the money and examine whether or not we have pursued the correct course and philosophy as it relates to helping out our fellow man.

The other aspect of this debt and spending debate that seems to get ignored by both parties is the unsustainable nature of our out of control spending. REGARDLESS of how necessary you believe that any or all of the innumerable amount of social programs are, you cannot ignore the cost. We must all wake up to the fact that the government is spending ACTUAL money. The government does not have access to some magical bank account with supernatural replenishing powers. Therefore, the governments first concern should always be taking care of and carefully managing its main source of funding, the taxpayer. It is immaterial what programs you believe to be necessary and moral if the money does not exist to fund them. Furthermore, how compassionate is to recklessly spend and borrow to fund certain social programs while simultaneously straining our tax and borrowing base to the point of endangering ALL government programs. Additionally, we must cease looking to the taxpayer, whether rich or middle class, to pick up the ever expanding tab. If that worked, the EURO zone and its 50-60% tax rates would be amply funding their social spending. The fires burning in Greece and Italy (Spain will be there shortly) would suggest otherwise.

Cutting budgets and spending is never fun. You have to be a sadist to truly delight in the slashing of social programs. But I find it to be a much more bizarre and sadistic practice to endanger the solvency and existence of this great republic by the fervent refusal to curtail spending. Should we include such things as military and law enforcement? As unpalatable as that may be to the majority on the right, the answer is simply yes. There is waste to be trimmed in all areas. But, we must keep in mind what the ultimate goal of this Union was upon its founding. This country was based on the aim of securing life, liberty, and the PURSUIT of happiness. As one of my favorite movies points out, this country is obligated to give you fair shot at happiness. Even in 1776, our forefathers knew that we could never make happiness a certainty. Therefore, our spending must always be dedicated, first and foremost, to the preservation of our union and the safety of her citizens. We absolutely cannot risk our future solvency and survival in the hopes of securing and guaranteeing the comfort and happiness of all our citizens. That would truly be the pursuit of destruction.

The Budget Battle in Washington: A Synopsis of the Issue

I have been absolutely amazed at the misinformation and contradictory summations of what exactly is going on in Washington regarding the budget and the debt ceiling. So, I'm going to keep all opinion out of my explanation and deliver only the facts. I believe it is imperative that every citizen of this country understands exactly what's going on and what the ramifications are for all proposed solutions. But, let's first take a look at what has been going on in the markets.

I WAS WRONG. There. I said it. I have been opining for months about how this market is overvalued and we are headed for a big sell off. Well, that hasn't exactly happened. Don't get me wrong, the economy is still a disaster. Record unemployment, houses still in free fall, and bad consumer spending are still dogging this so-called recovery. However, Wall Street is in full rally mode and keeps pushing ever higher. This has absolutely confounded me until my recent epiphany. I grossly underestimated the effect of the stimulus and the mountains of free money that the Fed has pumped into the system. Companies have been able to refinance their debt at essentially zero percent, make capital investments they previously could not afford, and use the free money to purchase short-term investments and essentially fabricate profits. Did you know that many investment banks that were bailed out on your tax dollar are borrowing money from the Fed to purchase short-term government bonds? This means that the big banks are using government money to purchase government debt, stripping off the interest payments and pocketing the profit, and then paying the Fed back with the proceeds from the sale of said government bonds!! So, they are borrowing your money to purchase investments that pay interest with YOUR tax dollars. Now, this is obviously unsustainable and is not without its consequences. All of this free money floating around is going to be a millstone around the neck of the dollar's value for years to come. Anyway, my point is simply that at least in the near term, Wall Street will continue to be able to post profits as long as the Fed keeps interest rates artificially low. So, barring any unforeseen events, my position now is that this market will probably keep floating higher. Yet, I am not changing my investment approach as the party has to end at some point and nobody knows when that will be.

Now to the budget. We have discussed the budget crisis at great length in previous posts so I will try to stick to the current debate and not digress to previous discussions. First off, this is not a partisan or politically based issue. People are trying to make it a political issue but it is simply an economic issue. Both parties have been spending more than we are bringing in for some time. Now, our debt has surpassed our entire gross domestic product. We currently do not have enough revenue coming in to cover all of our obligations. So, the President is advocating that we raise the self-imposed debt limit in order to issue more government debt (sell more bonds) to pay our bills. Republicans are refusing to raise the debt limit unless the government cuts spending that at least equals the amount that the debt will be increased. Democrats are advocating that taxes be raised in order to pay for the debt increase. Republicans will not sign on to the debt increase if tax hikes are included and the Dems have vowed to nix any plan that doesn't include tax increases as well as any reductions to entitlement programs like Welfare and Medicaid. We are at a bit of a stalemate.

What's the answer? As much as I hate to say it, we must raise the debt limit, TEMPORARILY. As for raising taxes, we do not have a revenue problem. What other company or organization in the world confronts a budget crisis without making cutting costs an absolute priority? We can no longer pay for programs that we BELIEVE government should provide without considering whether or not we can afford them. As for raising taxes, it's just not a good idea in a recession. First of all, the assertion that raising tax rates equals more tax revenue is ridiculous. Tax hikes may result in a segment of society paying more money, but large corporations and the wealthy will simply move the equivalent amount of capital or business offshore to counteract the tax increases. This equates to less jobs and money here at home. This is best illustrated by the fact that GE profited nearly $14 billion last year and didn't pay a cent in federal income taxes. They simply routed the profits through international channels and absorbed the costs here at home. In short, tax increases are dead weight on an economy and many on the Left refuse to accept it. What we need to do is cut spending and incentivize businesses to do more business here at home. For example, does the government make more money if 100 people are paying 35% of their income in taxes or if 120 people are paying 30% of their income taxes? You don't have to have a mathematics degree from Harvard to realize that more people paying a lower percent will yield more revenue for the government. We need to create more jobs and get this economy cranking again as well as cut government spending in order to pay off this ridiculous debt and avoid fiscal calamity in the future. Let's hope reason wins out in Washington. Well, that may be a bit naive!

The Greek Debt Crisis And How It Can Impact Your 401k

If you have been paying attention to the news then you most certainly have heard about the Greek debt crisis and have probably noticed the coinciding drop of our own stock market. What's the connection? Is there a connection? The simple answer is yes, there is a very important and critical connection. So, what's going to happen? That is the million dollar question. Is it possible that everything will work out in the European Union and that they will successfully deal with the Greek debt issue? Sure. One thing I have learned is that you should never underestimate the resourcefulness and determination of market forces to stabilize potentially damaging situations. However, what's more interesting, and scary, is what the situation in Greece is showing us.

The situation in Greece is fairly simple. Like nearly all other European Union member countries, Greece has a socialist society. By socialist I simply mean that the government provides cradle to grave benefits for its citizens which are paid for with pretty steep tax rates. When the global market melted down, so too did corporate and personal income tax payments. Greece, much like the US, ramped up spending and debt with the assumption that revenue from taxes would keep increasing. Well, we all know what happened. Greece now lacks the money necessary to make the interest payments on their outstanding debt and is relying on the EU to bail them out (write them a check for $12 billion to make their immediate payments). The problem is that Greece will be in the same situation 60 days from now. The long and short of it is that if Greece defaults it will send shock waves through the banks that own Greek debt could create a crisis much like the collapse of Lehman Brothers. The most concerning aspect of this is that there are several other EU countries that are in similar shape. Actually, the most concerning thing is that the US is in similar shape. So, what does this say about the market and your 401k?

There are 2 ways to deal with the problems that Greece, the entire EU, and the US are currently dealing with. The first method is to monetize the debt. This means simply that you print money to pay off your debts. Monetizing the debt is precisely what we, along with the EU, have been doing. The hope here is that the increase in the money supply that is caused by all of the printing will feed into the economy and will result in greater tax revenues which will enable the government to slowly and gradually balance the budget. Well, as we all know, the economy is not cooperating. The only other way to fix the problem is to drastically cut budgets. Politicians in the US and abroad refuse to do this as providing expensive social services has served as the most effective way to stay in office. Basically, the problem is quickly coming to a head and the governments around the world, including ours, are running out of time. At some point, the printing will have to stop. When this occurs, the economy and the society, as we are seeing happen in Greece, behaves much like an addict coming off heroine. Riots break out and social services come to a grinding halt. As you can imagine, this has devastating effects on the stock market as commerce is gravely hindered. Markets crash.

Now, this may be a worse case scenario but it is all too possible. Basically, now is not the time to be aggressive. Investors should be focused on preserving principal rather than making profits. Commodities have taken a bit of a hit lately but stick with them. If you don't own gold in your portfolio, buy some. Gold stocks are taking a hit right now along with the rest of the market. However, they are suffering from guilt by association. Gold is the one thing that has held up, nearly unscathed, during this recent market downturn. Gold stocks will bounce back as soon as the market realizes that they are being unfairly punished. In fact, the mining sector may be the only sector to garner healthy profits in the months to come. As the fears of default and more money printing build, gold will continue to rise as it is seen as the only way to hide from the wide spread currency devaluation. 

Once again, if you have any questions or would like further information on how to protect your investments, never hesitate to email me. If I can't help you I can certainly direct you to someone who can. Best of luck

The Real Reasons Our Economy Is Not Recovering

Although my wife may ardently disagree, sometimes I don’t like being right. If you look over the older posts on this blog, you will see that I was claiming quite some time ago that the story of “Recovery” that the administration was trying to sell was complete garbage. There is no recovery. The only thing that has improved is the stock market and that has been because Wall Street thinks things are going to get better. The market is now overvalued and has pulled back significantly because it is realizing that it had greatly overestimated the recovery. So, in this entry, I will attempt to explain why I believed there was no recovery and there will be no recovery until we change course. Most “financial experts” will disagree with my premise, just as they disagreed when I said housing was going to crash; just like they disagreed when I said we should be buying gold; just like they disagreed when I said silver was overvalued; and just like they disagreed when I said “stimulus” wouldn’t work. Please do not interpret what I am saying as bragging. Rather, I am attempting to illustrate that by deploying common sense and basic reason, we can all outsmart the “experts” who are usually too smart by half. I am no genius; I can assure you. I’m just the guy in the back of the crowd who is attempting to point out that the king simply isn’t wearing any clothes.

 Once again, this is not a political critique. I ABSOLUTELY disagree with anyone claiming that Obama and/or his administration were lying about the recovery. I am quite certain that they did and still do believe they are on track and taking the necessary actions to get us back on track. The reason I am so confident that Obama, Bernanke and the rest of their ilk are sincere is because I have spent quite a bit of time in the collegiate economics circles. My time at a certain unnamed mutual fund company had me submerged in the theories of academic types who accept Keynesian (if you are reading this blog for the first time and are unfamiliar with Keynesian economics, we discuss it at great length in previous posts) economics as gospel. They all live in an echo chamber, horrifically afraid to go against the grade lest their colleagues and contemporaries think less of them. To me, the problem is simple: the Fed began pumping money into the economy in an effort to buoy the banks and the financial system at large. None of the underlying problems that created the mess were dealt with. So, surprise surprise, companies have accumulated large piles of cash and have trimmed costs WHEREVER possible. They aren’t dumb. They realize that money is cheap right now. Interest rates will be moving up in the near future which makes borrowing money more expensive. CEO’s get paid based on their company’s profitability. As cash gets more and more expensive to borrow that large stock pile will become increasingly valuable and let them take advantage of opportunistic situations, such as mergers and acquisitions. That is how they will increase their working force and grow the business. The economy and the consumer are in trouble right now, you know it and so do they. Herein lies the problem with trying to spend your way out of this mess. The underlying issues that are prolonging—unemployment and housing—are actually getting worse. The only way to get housing to stabilize is to improve the employment picture. The only way to improve the employment picture is to give companies an incentive to hire. How would you do that? Well, I believe the most effective way to do that is to lower tax rates on corporations. Hear me out here. If we just give companies money to “stimulate” them, they will do what they are currently doing which is sit on it. If you give them tax breaks instead, they are forced to transact more business. The only way to take advantage of a tax break is by making money. Also, that cut in taxes has made transacting business less expensive as those tax savings drop right to the bottom line. Well, we all know companies and CEOs are greedy. So, that greed will drive them to exploit that tax cut as much as possible (transact more business) which will require them to hire more people. It is the only way to grow profits and for CEOs to hit their bonus targets. By pumping money, we are rewarding companies for sitting still and cutting costs. By cutting taxes, only the companies who transact more business will make more money.

Let me state plainly that I am not advocating getting rid of taxes. Furthermore, the answer isn’t ALWAYS just cutting taxes. Taxes are really a balancing act. For instance, most people think that increasing tax rates will increase government revenue. Well, if the tax rate was 100% the government would receive no revenue. In other words, if you had to pay 100% of your income to the government you would most likely quit working. The flip side of that argument is if the tax rate was 0%, the government would receive no revenue either. The trick is finding the sweet spot, and I can assure you that right now, with this economy on the ropes, that sweet spot is not higher. Consider this: would the government make more money with 100 people paying 50% of their income in taxes or with 120 people paying 40%? It’s not even close. We must find that sweet spot and let the free market do what it has proven it can do time and time again. The free market has created more wealth and raised the global standard of living more than any other social or financial system in the history of mankind. Why do we doubt it now?                             

I hope people took my advice and took some profits in the last few months. I may be wrong, but I believe this market could keep heading south in a big way. We are keeping cash on hand and holding on to our gold positions. As I suspected, silver has come back down to earth. I continue to love dividend stocks as long as your cash position is big enough. Oil could be under some pressure, but I really think it is a compelling buying opportunity at 90 or below. I really believe that we will see another round of quantitative easing and look for gold to go much higher. It may get a bit pinched in the short term, but it should do well over the longer term.

To Those Who Paid The Ultimate Price: A Thank You

Please have the patience to read this entire entry and take the time to contemplate it upon finishing. If you must, skip the next paragraph as it is merely an introduction.

I have succumbed to the seemingly inevitable fate of nearly all those who begin writing blogs or journals: life got in the way. Well, I'm back with a renewed dedication that is equal parts excitement and obligation. I began this blog not because I am foolish/arrogant enough to believe that anyone needs my words or insight. I simply wanted to record the abhorrent fiscal and social policies of the day with the hope of once and for all answering one of the most pertinent and consequential questions of our time: can government and her policies save and keep this great nation or will they usher in its demise? If I can help or inform anyone along the way then that would be an added bonus. So, as most of you know, markets are closed today. On this Memorial Day, I would like to take this opportunity to dedicate this "comeback" entry to the courageous and selfless warriors who have so willingly sacrificed their freedom, future, life, and American dream in order to protect all of those things for people they have never/never will meet. Thank you.

As I sipped my coffee this morning my wind wandered, thinking about the meaning of this day. I wondered how many others were doing the same. Disappointment set in. For far too many, this day bookends a 3 day hiatus from monotony and obligation. It's for baseball and barbeques, for yard work too long passed over. The more responsible and "patriotic" among us may proudly display a "Thanks to all who have served" as our status on Facebook. I demean none of these observances as I am actually pleased that such uniquely American pieces of our culture have been graphed onto this most hallowed day. But, as I looked at my daughter playing at my feet, I couldn't help but think of the generations of fathers who proudly handed over the privilege/right to watch their own children grow in exchange for the hope, just the hope, that their children wouldn't need to consider paying such a price. Too often, we as Americans are the "Sunshine Patriots and Summer Soldiers" that Thomas Paine so eloquently lamented. We love our country and her ardent and noble protectors on Memorial Day. We may even tear up a bit as we dutifully and intently listen to our National Anthem serving as the preface for the sporting event we attend on the eleventh day of September each year. Do such emotions flood over us on June 11th? Does such pride and allegiance drive us to tears on November 11th or Labor Day? Does our tearful admiration rise to the surface while we hurriedly pass by an impeccably organized and camouflaged clad young adult in the airport as we indignantly rush to our gate, righteously angered at the 15 minute delay that is jeopardizing our connection flight home? Do we, for that matter, consider exactly to what foreign and inhospitable hell hole this young warrior is traveling to, our flight home serving simply as the first leg of a journey that could quite possibly be their final destination? I say this not to apply the leverage and pressure of guilt, or extol my own virtue of not succumbing to such short sighted and selfish oversights; for such observations are possible ONLY through experience and self examination, as I too am guilty of these selfish oversights. I say this because I fear that far too many of us in this culture have been lulled into a self focused and historically inaccurate understanding of what exactly this America is. We believe that America IS the freedom of speech, the right to a fair wage and paid for medical care. We bluntly and universally speak of our "rights" and entitlements as if they were an inheritance, a currency awarded to all who had the good sense and foresight to be born here. We debate and question war and violence as they are clearly the arcane tools of our less evolved, albeit brave and dedicated, predecessors. However, at the very least and to our credit, we will agree and state with a tone of patriotic sophistication that our uniformed guardians have "preserved and protected" the liberty we so enjoy and too often abuse or under-appreciate. Yet far too rarely we recognize those breathing and living uniformed Talismen of freedom for what they are. Those young soldiers aren't the protectors of America; they are America. Unlike nearly every other country on the face of this earth, America is not the natural evolution of a geographically concentrated race or culture. We are a people of different descent, different creeds and cultures, ironically bound together in an inner-dependent community that is based on the very freedom that has enabled our individuality and self determination. Uniquely, America was birthed of blood and conflict. We are the adopted children of armed engagements and fierce battle. We are the barefooted 16 year old boy that fought through the ravages of starvation and dysentery to march toward Princeton through a freezing winter storm on a Christmas night in 1776, resigned to death, but determined to die standing up in what was seen at that time as being the final gasp of our all too young Revolution. We are the brothers who spilled each others blood on the fields of Antietam and Gettysburg. America is not the result of such men, it is these very men. America is not freedom or opportunity. Rather, freedom and opportunity are the offspring, the result, of the ultimate price that so many young men and women selflessly paid. America is selflessness, courage, conviction, blood, and sacrifice. Freedom and liberty are merely the miraculous benefit that blossomed from the bloody soil that served as the final resting place for our best and most courageous. Don't let this definition of what we are get lost or contorted. Teach your children of the sacrifice and unmitigated tragedy that gave birth to the freedom that they will grow and prosper in. And, when you see a soldier or think of one on hallowed days like today, don't thank them or shed tears for what they have done. Thank them and cry appreciatively for what they ARE. They are America. Freedom, Life, Liberty and the pursuit of happiness are merely their byproduct. Thank You to all who have served and/or paid the ultimate price. As for me and my family, we will never forget and will fervently attempt to be ever mindful of the price you have so selflessly paid so others might enjoy the life that you forfeited. May God Bless You and may you forever Rest in Peace.

Gold, Budgets, and Down Grades...Oh My!

What a week!! S&P (Standard & Poors), a company that specializes in assigning credit ratings to corporations and companies (sort of like a Free Credit Report.com for big companies and governments), came out this week and officially stated that the future outlook for the US is negative. This means that they see problems in the future as it relates to our country being able to pay its debts! My use of exclamation marks are to express my amazement, not to celebrate or underscore my unbridled enthusiasm at the impending fiscal disaster we are facing. But come on, this is historic stuff. I understand that it's scary and disheartening, but we are firsthand witnesses to unprecedented economic occurances. In addition to the S&P downgrade, the head of HSBC bank came out this week and stated plainly that Americans are in debt denial. I know I have promised to avoid politics but all of these historic developments have forced my hand. We as a country, must wake up to the fact that we are out of money. We owe nearly 15 trillion dollars and are forced to pay interest on that ghastly amount every year. We are adding to that debt to the tune of 1.6 trillion a year. You are going to hear so much political nonsense on both sides of the aisle as it relates to this budget issue. The truth is simple: cutting spending isn't cruel, mean, heartless, greedy, or unfair. Reducing our spending is a necessity. Let me ask you a simple question: what good are we to ANY ONE of our downtrodden or needy citizens if we default on our loans and experience catastrophic fiscal collapse? This is not a political issue. It's a reality issue. Anyone that tells you ANYTHING else is either uninformed, illiterate, dishonest, or attempting to use this disaster as political leverage. Focusing on any other issues in the political arena at the moment would be the equivalent of arguing about the color of paint on the walls while the house is on fire. Both parties must get serious about this issue unless they want to relegate the US to third world status. It really is that simple.

Despite all of this bad news, the market goes up. It may sound strange, but the market is going up because of our problems, not despite them. The weaker the dollar gets, the more investors will migrate from federal and municipal bonds into stocks with the hope of making money faster than our currency is depreciating. Also, many money managers, myself included, are terrified of the unavoidable interest rate hikes that are coming our way. You see, as the dollar continues to weaken, the fed will be forced to raise rates to keep our debt attractive. In an effort to get out ahead of this, we are abandoning our bonds and migrating to stocks and commodities. This migration is forcing the market higher.

I cannot tell you how many times I have been laughed at over the past five years whenever I expressed my belief that gold would rise to $2,000 an ounce. Well, we have hit $1,500. I have talked about gold ad nauseum in this blog so I will keep it short. This meteoric rise is simply due to the diluted US dollar. I'm not forecasting $5,000 gold. However, I'm certainly not confident in our politicians' intestinal fortitude that will be needed to reign in this riotous spending. Until that happens, stay long gold. This same scenario holds true for oil. While the threat of Middle East unrest resulting in supply disruptions has certainly propelled oil higher, the falling dollar was already pushing it in that direction.

If you want to be a real market geek, pay attention to the VIX going forward. Just type in VIX in whatever tool you use to look up stock market prices. The VIX is the volatility index. It measures the number of Put option contracts that are being purchased. Put option contracts are just instruments that pay off in the event that a stock goes down. It's like placing a bet that a stock is going to lose. The VIX is historically low which has me worried. As Warren Buffet says, "be greedy when everyone else is afraid, be afraid when everyone else is greedy." This economy and country are on very shaky ground and everyone is being VERY greedy. I'm not freaking out and selling every stock we own. However, we continue to proceed with caution.

Where's The Recovery???

Here's a challenge: turn on any news channel or stock market show and see if you can go five minutes without hearing some Ivy League blue blood opining about this incredible bull market and the continuing recovery. They cite earnings, balance sheets, employment numbers, and a plethora of other "Wall Street" stats. It's actually pretty convincing, at least until you talk to your neighbor who hasn't worked in ten months and who is raiding his IRA in a futile attempt to keep his house out of foreclosure. So, why the huge discrepency? Why is this magical land of 7 figure bonuses and penthouses overlooking Central Park that we call Wall Street seem to be swimming in cash while the rest of us are hawking family heirlooms so we can afford to fill our gas tanks? Before I attempt to answer that question, lets go over what has been taking place in the market.

For the most part, stocks continue to go up. The relentless upward trend continues but is failing to keep up with rising commodity prices such as gold, oil, timber, silver, and natural gas. As I have said before, this trend will continue as long governments, namely ours, continue to print money and devalue our currency. Personally, I don't see any sign of the money printing subsiding. We continue to love gold and oil. Natural gas seems to be gaining some momentum as our brilliant politicians begin to reluctantly accept the fact that wind and solar technology are nowhere near being able to power this country. Domestically, the US has more natural gas than the Middle East has in oil reserves. What fuel, other than natural gas, do you know of that you can burn in your home 24 hours a day without sacrificing the quality of the air that your family breathes? Natural gas is clean and is just as effective in providing power as coal and gasoline. Natural gas will be a vital part of our energy independence going forward. Silver continues to move sharply upward as investors continue to believe it is undervalued compared to gold. Be careful with silver. Rising inflation should push silver higher but don't expect it to keep up with gold. A lot of people out there are misunderstanding the difference between the two metals. Gold is being traded and treated as if it were an actual currency. It is seen as a shelter from all of the currency devaluation. Silver may go higher for many of the same fundamentals that are pushing gold higher. However, simply put, silver isn't gold. When the proverbial excrement hits the fan, governments and institutions want to own gold. Gold is in much shorter supply than silver and is a hallowed and intimate aspect of both Chinese and Indian cultures. Gold is the true currency hedge. Be wary of higher silver prices. In my humble opinion, silver is riding golds coat tails. Companies will begin to announce first quarter earnings in the near future. I'm paying close attention as I believe that these higher commodity prices will begin to erode corporate earnings. In the short term, I expect this market to continue to drift upward. BUT, I'm being very careful as global conflict and rising material costs could bring an ugly and sudden end to the party.

So, where is the recovery? Why are companies posting record profits while the rest of us are sucking wind? Well, in an attempt to "save" the economy, the government has been pumping unheard of amounts of cash into the market. Why isn't this money filtering down to the average worker? Well, if someone handed you a million bucks right now, would you be lending it out or purchasing businesses in this market? I certainly would not. I would be investing in inflation proof assets and staying liquid in case this economy and market takes another tumble. Well, corporations are doing just that. Business is just as hazardous and precarious as it was 3 years ago. Costs are going up and tax rates are just as penal as they were before the crash. Washington, in their infinite wisdom, have stuffed the pockets of corporations hoping that money would filter down and feed into the economy while taking no measures to decrease the cost and risk of doing business. In my humble opinion, we would have been much better off cutting corporate taxes and employment taxes. This would make the cost of doing business much less and encourage companies to actually do more business and make more money. In other words, to benefit from lower taxes a company MUST do more business. In order to do more business you have to hire more people. As companies begin hiring more people, they begin to compete for talent and are forced to raise wages to stay competitive. Corporate America would still be able, through lower costs, to build up the large cash stores they currently enjoy but only by actually doing more business. As it currently stands, they have all the cash WITHOUT having to take the risk and do anymore business. Essentially, this money pumping is actually preventing corporations from hiring and expanding; they simply don't need to. Many of the politicians claim we can't afford more tax cuts. Well, that is true only because we have spent ourselves into oblivion through all of this "stimulus" spending. If we are going to spend the money one way or the other, why not spend it in a way that actually encourages investment and expansion rather than hoarding? But, now I'm assuming that politicians actually make sense and are capable of making rational decisions. Who's the idiot now??

What's A Deficit?

And I'm back. I'm sure you all were waiting with baited breath, relentlessly checking the blog for my latest post. Or not. Anyway, I had the pleasure of being a stay-at-home mom last week as my wife was out of town on business. Needless to say, the blog was the furthest thing from my mind. We had a great time, but it was truly a baptism by fire! Much respect to all of the mothers out there--especially my wife (my wife added everything after the hyphen).

Now to the markets. We have seen a healthy comeback from the lows of the Japanese disaster. However, proceed with caution. Volumes (the number of shares traded on a given day) are very low. This is telling me that despite the rising stock prices, real conviction is lacking, and the market is moving north in a subtle manor. Historically speaking, light volumes are often followed by very sharp declines but not always. Something I found very telling were the earnings that were reported by Nike. Nike has been a solid mover and earnings producer throughout the recovery. Nike shares were pounded when they reported earnings that were significantly less than analysts' expectations. Nike cited higher input costs (oil, cotton, dye, energy, etc.) as being the main reason for the earnings' miss. This is precisely what I have been worried about. It will be very tough for companies to keep increasing profits (higher profits = higher stock prices) when they can no longer cut costs (jobs), and the materials that are necessary to produce their goods are more expensive. As for me and mine, we are cautiously moving forward--never hestitating to take profits. A wise man once said, "It's impossible to go broke taking profits."

So what's a deficit? That could quite possibly be the most often thought yet never spoken question. We constantly hear people talking about government deficits and debts; I have referenced them myself in previous posts. I realize that I have mounted my soap box and addressed this in previous entries, but I believe I failed in explaining in simple terms exactly what "deficit" means. It is vitally important that we all understand what a deficit is and what it means. I will do my best to explain: simply put, a deficit--as it relates to government spending--is the amount of the budget we are forced to borrow. Government generates "revenues" (I hate using the word revenue when it pertains to taxing the public) through income taxes, fines, permits, etc. Currently, government revenues are somewhere around $1.6 trillion a year. Our budget is around $3 trillion a year. That difference is made up through borrowing. The vast majority of that borrowing is done through issuing bonds. So, our deficit is $1.4 trillion this year alone. That breaks down to about $4 billion per day going directly on the proverbial credit card. Numbers this big are staggering--almost incomprehensible to the human mind. Our national debt is a whisper from $15 trillion. Next year, our debt will reach 100% of our GDP (Gross Domestic Product - the number that represents the total output of the U.S. economy) for the first time in our country's history. I truly believe it is important to understand the fiscal and political trends in any economy before you can put your money to work and invest. The question we should all be asking is this: how much debt can we handle? This is not a political question as neither party seems to show any real commitment to restoring fiscal sanity. However, it is a question that will impact all of our lives and our ability to provide for our families. Knowledge is power. Hopefully, when you understand the terms and parameters of the discussion, you will be able to sift through all of the noise out there and be able to make an informed decision.

On another note, I still have not received a single question. Email me directly with any topics that you would like me to address. All questions are confidential, and I will not use any names. Trust me, I have plenty of topics swirling around in my overactive mind. However, I would much rather address questions or concerns that you have.

Why The Unions Are So Upset

I REALLY want to talk about the union situations in Wisconsin and Michigan (and coming to a state near you, mark my words). They need to be addressed because they are intimately tied to what is going on in the markets and our economy. So, I am going to. First, let's discuss what is happening in the markets in general.

Confession: when I said in the Sunday post that it was a big week for the market and that we were really close to a big pull back, I was cheating a little bit. Before I wrote the post, I was on the internet watching the opening of the Nikkei (Japanese stock market). I saw Japanese stocks getting pummeled. When you add that to what is going on in the Middle East, it seemed simple: this market was going to shrug off this bad news as it has been doing for nearly two years, or we were finally going to see some reality set in. We were down huge early today and bounced back pretty remarkably. We did post an ugly loss, but we actually made up more than 50% of the losses that the market was showing this morning. I cannot reiterate this enough. This is not the market in which to learn how to trade stocks. I promise you that I am not saying this simply because it is what I do for a living. I'm saying it because it's scaring me too! The swings are SO violent and normal information is no longer driving the markets. We have reached a breaking point. The market wants to move violently upward or downward. It just hasn't made up its mind which one. Let's keep a good amount of cash on hand, earn our dividends, and see where this thing goes. Keep your eye on the action this week. I look at Friday as a HUGE hallmark for things to come. If we close Friday higher than we are now, I look for us to move substantially higher. Likewise, if we close lower I will expect that trend to continue into next week.

Now to the Unions. We have all seen the stories and news casts from Wisconsin, the debate raging on whether or not we should limit the rights of labor unions to use collective bargaining. It is important to point out that collective bargaining itself is not on trial. Collective bargaining for state employees is the issue. The issue can be boiled down to this: do state employees have the same right or ability to make demands when they are being paid with tax payers dollars? Interestingly enough, Federal employees gave up the right to collective bargaining in 1979 because the federal government decided it was not fair to have unrestrained bargaining over tax payer dollars. So, why are the state employees putting up such a fight? Well, I'm gonna give you my unadulterated view of this whole thing. States cannot carry the burden that all of these mandatory raises, paid vacation hours, deluxe health insurance, and pension plans. That is not an opinion. Can you afford to pay more taxes? How much will be enough? Now, here is where I differ from many people that hold that same view. Is this problem the union's fault? Are we really going to lay this monumental fiscal disaster at the feet of the middle class government worker that has served us all for their entire career? Truly, the union's have a great point. For the last 40 years, the value of a union wage has been diluted and eroded. However, this dilution is not because of  unsubstantial "COLAs" (cost of living adjustments) or insufficient wages. Ironically, the fiscal handicap of the modern day government union member,--or any union member for that matter--can be laid at the feet of the very politicians who claim to be "fighting" for unions. The greatest tax and monetary blow to the working middle class is the depreciation of our currency. As the dollar falls, goods such as oil, corn, plastic, gas, lumber, copper, wheat, coffee, sugar, cotton, and nearly everything else we consume, increases drastically in price. The upper class is able to offset such increases through investments and economic growth. Your average middle class union worker lacks the readily accessible 100k to purchase oil futures and benefit from a weakening dollar. The very politicians who have lobbied for increased government spending and "programs" have unwittingly undermined the foundation of our middle class. A middle class union member used to own a home and two cars. Now, a union wage gets you a mortgage that's underwater and a car payment that's double than what you paid in rent on your first apartment. Inflation is insidious and truly is the greatest tax on the middle class. In fact, it is decimating our middle class as we speak. Perhaps government cut backs and fiscal restraint won't ruin the middle class or the union family; it may be their only hope.

Where Is This Market Heading?

I hate making predictions. They are so irrelevant when it comes to making money. The one thing that I don't think enough people understand is that the best traders and investors don't particularly care what certain stocks are doing. They invest in certain stocks and sectors because they believe in the fundamentals that will eventually win out. Short-term price movements are irrelevant. Most of us are trying to make money in 5-10 year windows. So, invest in funds and stocks for fundamental reasons. If the price of that particular security goes down, and the fundamental reasons you like it remain unchanged, buy some more. Stay unemotional. That is exactly why I hate predictions. If your prediction doesn't come true, one will often assume that they were wrong and reverse their stance, only to get slammed soon after. Try to avoid predictions and stick with fundamentals. That being said, I'm going to make a prediction!!

Ok. I'm not really going to make a prediction--more like an observation. This is a HUGE week for the market. My overall feeling is that this market is relatively close to a big pull back. We have serious problems in Europe, rising inflation, rising taxes, and major global concerns. The other issue that I see out there is simply that I do not believe our economy is going to enable companies to continue their current earnings' growth. Companies have been relying on modest growth and major cost cutting to hit their earnings' projections. There just isn't that much cost cutting left to do. Consumers make up 65% of our economy. Continuing real estate weakness and inflation will continue to tax the average consumer thus decreasing their purchasing power. Anyway, I don't think we are looking at a total collapse, just a long period of sharp ups and downs. Never hesitate to take profits or buy the dips.

Continue to keep an eye on oil. It did breach $100 but with very little conviction. It appears to me that it will pull back a little here but then move back up and hover around these levels. This week will tell us a lot about where this market is heading in general. But, like I said, do not get too confident if it does indeed move in a positive direction. There are clouds on the horizon and everyone needs to move forward with extreme caution.

Inflation: The Dollar vs. Gold III

Well, I'm back. I hope you will forgive the long absence as my wife coordinated a wonderful and extended weekend for my birthday. Let's start where we left off.

In my last post, I discussed precisely why I saw gold as a good investment. Let me state plainly that I do not believe you should make gold your entire portfolio. It should be used in concert with other appropriate investments. That being said, how does one go about investing in gold? Should we go door to door and offer cash for old and/broken jewelry? Should you buy gold coins and bury them in your back yard? I have heard a lot of strange ideas and strategies. Here is what I think is the best way to take advantage of inflation.

There are ETFs (Exchange Traded Funds) and gold funds out there that allow you to invest in a fund that owns actual gold. I think this is a viable way to invest in gold and certainly has its place in your portfolio. I also think that you should invest in gold mining companies. While a downturn in the market would most certainly drag down gold stocks as well, eventually, the company's earnings would reflect the higher price in gold and the company's stock would eventually rise to reflect their higher earnings. Wall Street pays a multiple for earnings. Basically, this means that we can make more by owning company's that produce gold rather than owning the gold itself. Now, there are inherent risks with owning a company rather than the gold itself. However, both investing strategies can be useful and should be deployed. For specific companies or funds, email me directly and I will point you in the right direction.

I received a call from a really frustrated client today regarding the overall market. This individual was frustrated that many of our stocks were not performing as well as the overall market. I have to admit, I share this frustration and this phone conversation threw me into an afternoon of thought and introspection. I came to this: when we see insanity occurring, we must abstain from joining the party. This market has exploded in the past two years despite record unemployment and spectacularly out of control government spending. The endless pump of government money into this market has skewed the reality. I have sat and watched companies like Netflix endlessly rise despite the fact that their earnings are no where close to justifying their share price. I firmly believe that we are in the middle of another asset bubble that has been created by easy money. I will forsake short-term gains for long-term security and so should you. We must focus on quality companies, preferably those paying dividends, and investments that will protect us from inflation. We must not be tempted and coerced into chasing performance. We must stay disciplined and stick with the fundamentals. I learned this lesson 4 years ago while I was doing market research with a finance professor. At the time, the market was at all time highs and most pundits were arguing it was going higher.
    
"This is not the Tech-Boom. This bull market is fueled by earnings. Earning multiples are still conservative and this market is going much higher."

Sound familiar? I, along with the help of the good professor, began researching this very statement and inadvertantly stumbled on some alarming facts. We could not argue with the record earnings that company's were posting at the time. We wanted to know where the earnings were coming from. We found that the overwhelming amount of new jobs that had been added to the economy over the past 7 years were directly due to the real estate market. Banks and financial firms were making record profits, the overwhelming majority of which were from real estate loans and the various mutations thereof. Everyone and their mother was making up to 100% of their normal income by flipping a house or two. How many of you know someone who purchased a boat or a car by refinancing their home? The point is that nearly every aspect of the economic boom was directly attributed to the housing market. At that time, the housing market was appreciating by nearly 20% a year. History showed us that this was completely unsustainable and would come to a disastrous end. I promptly liquidated every investment that my wife and I had at the time (except our gold stock!). I even met with a portfolio manager at the mutual fund company that I worked for at the time and shared with him my findings. I was brushed off and told that nobody can time the markets and earnings were healthy.  Within the next year the market had fallen nearly 50% and the whole financial system hung precariously by a thread. I don't tell this story to proclaim my financial genius but rather to point out the irrational exuberance that almost always accompanies a rising stock market.

History is repeating itself. Consumers are in bad shape. Most of our homes are underwater. Unemployment is really near 17% (I will explain this statement and the unemployment rate in a later post). High oil, sugar, wheat, coffee, and corn are putting an additional strain on our budgets. Rising interest rates are on the way. So, why is the market going up? What has changed? The fed is pumping money. It can't continue forever. Be VERY careful and keep an unusually high amount of cash in your portfolio. Eventually, the fundamentals win out. Some argue that the government can continue pumping and "stimulating" this economy back to health. I will leave you with a quote from a man who was much smarter than I--
           
"We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle."    - Winston Churchill

Inflation: The Dollar vs. Gold II

Gold. I'm sure everyone reading this blog has heard about the price of gold. Gold is soaring right now at $1430 an ounce! The markets pulled back while gold and oil shot up sharply today. Clients of mine know that I am a big fan of taking profits and selling nearly ANY stock at historic highs. Well, not this time. Gold is an essential part of all stock portfolios. So, let's dig into what has pushed gold up and look solely at the facts. Bare with me while I frame the argument. I will try to keep it concise!!

As I wrote yesterday, gold is denominated in US dollars. This means that the price of gold is quoted in US dollars the world over. This is extremely significant because of the fact that the US dollar and gold are the most widely sought after and accepted currencies in the history of the world. It's not even close. They are DEEPLY linked.

Unlike gold, the dollar is a fiat currency. This means that a central bank has control over the currency and can print more of it whenever they feel the urge. Furthermore--and this is huge--the government can print the currency without doing ANYTHING at all to account for it: they don't need to put more gold in Fort Knox; they don't need to pay off debt. All the Federal Reserve Bank has to do is flip the switch and print away. The Fed, as well as nearly every other central bank in the developed world, has been printing, and quite vigorously at that. Meanwhile, gold is becoming more scarce because of the increasing demand in emerging markets and the fact that it's an element, and they aren't making anymore. The printing and overspending is taking its toll in global markets that were once seen as unshakable. Greece saw riots in the streets as their insolvent government could no longer meet its fiscal promises. The entire Euro zone is facing the real possibility of defaulting on loans. Meanwhile, our country is running a deficit (meaning simply the amount of our budget that we have to borrow because we lack the revenue) that is over 10% of our gross domestic product. To put this in prospective, we have averaged 3.5% of our gross domestic product for the last 80 years or so. That massive increase in spending is seen as a credit risk for our country. Simply put, the world no longer wants to pay a premium price for our government issued bonds that they once did. We are not seen as the risk free bet any longer. So, what would make investors continue to want to buy our bonds which would enable us to meet our fiscal demands? Well, we would need to pay a higher interest rate. Right? Remember, higher risk = higher interest rates.

I promise I'm coming to a point here, just bear with me. Ok, well we have established that our country is forced to borrow (which just means that they sell bonds) nearly half of our budget every year. But, we also established that investors are going to want a higher interest rate if they are going to take on the ever-increasing risk that is presented by our massive spending. Well, herein lies the problem: if we increase interest rates by 1%, the interest payments our government would have to pay out on those bonds would increase by over $250 billion dollars!! So, we would just be digging ourselves a bigger hole. Ok, enough of that. You get the idea. We are in real trouble. If we continue spending, we will actually get to a day in the not-so-distant future when the interest payments on our outstanding debt will surpass our entire federal budget. No kidding. With all of this going on--all of this deterioration of global currencies--how would gold not go up? Or, has gold gone up or merely adjusted itself to reflect the dilution effect that all of this printing has had?

Gold is the one currency that has not been printing.

Is this making sense? Let me know if I am confusing you. It is just SO important that everyone out there understand the intense severity of what is currently going on and how to protect their family's financial well being from the madness that has taken over our system. I also want to explain WHY gold is a good investment. On Thursday, I will pick-up where I left off and give you some thoughts as to what the best way to invest in gold is. Until then, keep an eye on this market. Oil is at a tipping point and could run much higher which will probably push this market much lower. This scenario should also play well for gold.

Inflation: The Dollar vs. Gold

Well, much to the dismay of your humble blogger, I'm back after a weekend that was a bit too short. First, I need some more followers! I have a bet going with another broker who thinks that this form of communicating with clients and other interested parties is a waste of time. I disagree. Also, feel free to disagree with me about ANYTHING. Post your disagreement. I absolutely believe in the respectful exchange of ideas. I firmly believe that our society has somehow lost the ability to respectfully disagree and debate and that this loss directly corresponds to many of the issues and hardships we are currently facing. So, fire away!

Ok, now to the topic of the night. INFLATION. I am sure everyone, at some point, has heard this word thrown around in the last year. This is a huge topic and I will be addressing it all week. Tonight, I would like to simply address the term itself. Somehow, logic and simple observation have elluded many conversations concerning inflation. In the last 20 years, we have seen the rise of the Keynesian economist. Keynesian economics have been around for a long time but just recently have been adopted as gospel. Keynesian economics can be summed up as the belief that a centralized bank within an economy can control that particular economy through the tightening and loosening of the money supply. Ok. That's a mouthful. Essentially, this means that through raising interest rates (monetary tightening), lowering interest rates and spending endlessly (monetary loosening), Keynesians believe that they can stimulate the economy and keep it on the right track. The reason I'm explaining Keynesian economics is that many of our current policies and definitions are put into place by this ideology. Inflation, for instance, is defined accurately as a particular currency losing it's intrinsic and perceived value. More simply, the dollar buys us less and less as time goes on. However, Keynesians use a strange sort of math to determine the level of inflation and firmly believe that there must be growth in an economy to have inflation. So, despite our government spending ungodly amounts of money, Keynesians believe that inflation is not something to worry about because our economy is not growing much at all. I laugh at this notion. This is as ridiculous as telling a starving man with a loaf of bread that all he has to do is cut each slice of the loaf in half and he will have twice as much food, easily satisfying his hunger. We don't need growth or high employment to realize inflation. If we keep printing money, or cutting that slice of bread in half, our currency will keep losing value. Doesn't that seem logical? This is actually magnified in a global economy because we are forced to exchange currencies with other countries. Countries that have remained fiscally responsible throughout this downturn are going to want to see our fiscal frivolity reflected in exchange rates. Since we are printing dough and they aren't, they want more of our printed dough in exchange for their goods. Another ridiculous aspect of this economic ideology is the manor in which they calculate inflation. Keynesian's do not include the price of food or fuel in their inflation calculation! That means that we could be paying 7 bucks a gallon and 9 bucks for a loaf of bread and that doesn't necessarily mean we have inflation!! I'm not sure any other type of inflation matters! To make matters worse, the job market isn't exactly rockin. I think we could all agree that the economy is a bit stagnant these days. This slower economy makes it increasingly difficult to earn a higher wage in order to combat this inflation. That means more expensive goods and the same old pay check. I don't know about you but I'm already feeling it in the family budget.

Now, I am going to talk at greater length tomorrow about the price of gold and whether or not it remains a good investment. However, with the logic laid out above, $1400 gold seems a bit more realistic. We can all agree that every action has an opposite and equal reaction. When you print and spend as massively as we are, what is that reaction? Well, things like gold, which are measured in US dollars, would have to reflect this printing or action, wouldn't they? Oil is also priced throughout the world in dollars. Filled up your tank lately? How about groceries? Did you realize that sugar and wheat are at historic highs? Did you know that one of the major cereal companies (forgot which one) recently raised their prices 5% across the board? What you will continue to see is that any asset that is priced in US dollars will continue to rise in price.

Well, we have clearly defined inflation and the problem that it's causing. Now, how do we protect ourselves? How do we profit from inflation? I will address that in the next post. Thanks for reading.

Zach

House Values and the Real Estate Market

At the risk of sounding arrogant I am going to request that you either tell people about this entry, read it to them, or heck, print a copy. This topic effects all of our lives and people are being lied to, misled, and simply misinformed concerning the housing market. I will try to summarize what is really going on.

I came up with the idea for this post while watching CNBC this morning. A reporter came on with the most recent home sales data for the month of January. Everyone on the desk was completely perplexed that home sales were down 12% last month alone. You would have sworn someone just informed them their new Rolex was a fake. They, along with nearly every other talking head, have been babbling about a housing recovery. We have all heard someone, usually the self proclaimed financial genius, talk about how he's buying properties now. Then there's the "the best time to buy is when the market is down" line. Buying beaten down assets is almost always a good idea. Not this time. Homes aren't stocks. Homes have always appreciated more in line with the inflation rate, not the S&P 500. In short, there is no housing recovery. We may see things normalize a bit more but we will most likely never again see a real estate market that comes close to resembling the market of the past ten years. Here's why

First, it wasn't a real housing boom built on real demand. The government passed new legislation in the late 90's that opened up lending to less qualified buyers. The loans were fed into the market via Fannie and Freddie, the much maligned and federally backed mortgage companies. They required no down payment and offered the interest only loans that we have all heard so much about. Over night, the feds practically doubled the amount of buyers in the market. That's where the surge in demand came from.

Second, interest rates were at historical lows. People don't buy houses, they buy payments. Think about it. When looking at houses, how many people do you know that actually pay cash for their home? Don't most people figure out the maximum payment they can afford and calculate what purchase price that correlates too? Well, higher interest rates mean a larger monthly payment. The base interest rate for our entire country is referred to as the Fed Funds rate. That rate is essentially zero. Now stay with me here because this is where it starts to get a bit sticky. The government cannot keep spending the way they are and keep rates this low. That would cause massive inflation and I will talk more about inflation in a future post. Anyway, the point is that interest rates WILL rise. That will make house payments more expensive thus limiting further the price that the average consumer can pay for a home. Higher interest rates= lower home prices.

Third, we have a huge inventory of homes on the market. A recent market survey found that 10% of homes in America are currently vacant! Can you believe that? That number does not include homes that are behind on payments or homes that are currently in foreclosure. Furthermore, rising interest rates will create even more foreclosurse for consumers that have interest only loans with adjustable rates. The point is simply that we currently have a huge supply of available homes, far more homes than buyers, and a boat load of homes that will be available in the near future. Foreclosures are going to be abnormally higher for years to come. More homes than buyers means lower home prices.

Fourth, every foreclosure means one less buyer. This is HUGE and I have heard no one address this. We all get that foreclosures mean another house on the market at a lower price. What no one is mentioning is that foreclosure kills credit scores. On average, a foreclosure will prevent someone from being able to qualify for a loan for 7 years. So, not only does the foreclosed house go on the market thus increasing the suppy, but we also lose another prospective buyer. This aspect of the housing debacle may prove to be the most menacing for the years to come.

I don't say this to bum you out or keep you up at night. We have very little control, if any, over this situation. Don't worry too much about being upside down in your home. Keep paying your payments and focus on paying down that principal. Also, if you have an interest only loan, refinance into a fixed rate AS SOON AS YOU CAN!!! As mentioned before, rates are going up. If you are upside down with an adjustable rate, there are programs available to get you refinanced. Shoot me an email and I can point you in the right direction. There are options out there but you have to act. Don't bury your head in the sand. Also, unless you come across an unbelievable deal, do NOT buy investment homes right now. Anyway, I will keep you posted on any changes in the housing market. Until then, don't count on housing prices rebounding any time soon.

All right! Now that I have completely rained on the housing parade, I'm going to call it a night. Again, relay this message to as many people as you can. There is a lot of misinformation out there and people need to know the truth.

Zach