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
Monday, February 28, 2011
Thursday, February 24, 2011
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
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
Tuesday, February 22, 2011
Rough Day
Well, that was ugly. The market finally paid attention to all of the problems out there. In my opinion, this is only the beginning. I'm not saying that this Libyan situation will spiral into a world conflict. I'm not even suggesting that Libya will certainly devolve into all out civil war. I am, however, suggesting that civil unrest and rioting will become a daily occurence. Governments throughout the world have overextended themselves and made promises that they simply cannot keep. Buckle up; it's going to be a bumpy ride.
Something happened today that I would I like to address: I fielded a phone call from a worried investor who saw that the market was down substantially and was worried that their account was taking a beating. I went on to explain that when the market is down, even significantly so, there are things that are actually up. Such was the case with this person's account. We had been preparing for quite some time for pending issues such as Municipal defaults, inflation, and civil unrest. So, we concentrated our accounts in things that tend to do well in volatile environments (i.e. oil, gold, silver, copper, and utilities). We actually made money on a day like today. In no way is this possible to get right all of the time, but I just wanted to illustrate that the market is not a one way escalator. You can make money when everyone is losing it and get absolutely hammered when everyone else is swimming in dough.
Now, for the rest of the week, I am keeping an eye on oil prices and gold. If oil tops $100 a barrel, it could shoot substantially higher which is going to negatively effect the larger market. More expensive oil = higher input costs for tractors (corn, wheat, sugar, etc.), plastics, trucking, construction, and nearly everything else. If oil goes much higher, it could signal a much bigger pull back in the market. Gold seems poised for another run as inflation seems to be creeping into the picture. Please pay attention to what is going on out there. It can be a bit scary but it is unbelievably fascinating as well. History is being made nearly every day. We are also living out a real life economics experiment. Can governments spend their way into prosperity? Can we really "stimulate" our way back to prosperity? Fundamental conflicts and debates are happening all around us, and you have a front row seat for the show. Stay informed.
Oh yeah! When watching the market, pay closer attention to the S&P 500. The S&P is a composite of the top 500 companies. The DOW, which we tend to watch more carefully, is actually only a measurement of the 30 biggest industrial companies. Also, pay more attention to percentage moves rather than the points themselves. This will give you a much clearer idea of what is actually going on.
We'll talk again soon,
Zach
Something happened today that I would I like to address: I fielded a phone call from a worried investor who saw that the market was down substantially and was worried that their account was taking a beating. I went on to explain that when the market is down, even significantly so, there are things that are actually up. Such was the case with this person's account. We had been preparing for quite some time for pending issues such as Municipal defaults, inflation, and civil unrest. So, we concentrated our accounts in things that tend to do well in volatile environments (i.e. oil, gold, silver, copper, and utilities). We actually made money on a day like today. In no way is this possible to get right all of the time, but I just wanted to illustrate that the market is not a one way escalator. You can make money when everyone is losing it and get absolutely hammered when everyone else is swimming in dough.
Now, for the rest of the week, I am keeping an eye on oil prices and gold. If oil tops $100 a barrel, it could shoot substantially higher which is going to negatively effect the larger market. More expensive oil = higher input costs for tractors (corn, wheat, sugar, etc.), plastics, trucking, construction, and nearly everything else. If oil goes much higher, it could signal a much bigger pull back in the market. Gold seems poised for another run as inflation seems to be creeping into the picture. Please pay attention to what is going on out there. It can be a bit scary but it is unbelievably fascinating as well. History is being made nearly every day. We are also living out a real life economics experiment. Can governments spend their way into prosperity? Can we really "stimulate" our way back to prosperity? Fundamental conflicts and debates are happening all around us, and you have a front row seat for the show. Stay informed.
Oh yeah! When watching the market, pay closer attention to the S&P 500. The S&P is a composite of the top 500 companies. The DOW, which we tend to watch more carefully, is actually only a measurement of the 30 biggest industrial companies. Also, pay more attention to percentage moves rather than the points themselves. This will give you a much clearer idea of what is actually going on.
We'll talk again soon,
Zach
Monday, February 21, 2011
Maiden Voyage....
Ok. Here we go. After much urging and prodding from clients and friends, I have thrown my hat into the blogging universe. I have committed myself to a 6 month run of at least five updates a week. I will be discussing/analyzing what is going on in the markets and trying to break it down in a sensible and manageable fashion. I can't tell you how many times I have taken calls from clients, smart clients, educated people who are completely frustrated and confused as to what is going on in the financial world. The main reason for much of the confusion lies in the structure of the financial world itself. It is a rapidly moving, constantly evolving, self important good old boys club. The members of this club invent and use their own form of financial pig-latin to impress those around them and to reinforce their belief that all of us commoners desperately need them to control our country and our money. Anyway, after you learn a bit of the "pig-latin" you will be shocked to see just how simple many of these issues become. And therein lies the goal of this blog. I will attempt to break down the financial news on a daily basis in a way that will hopefully enable you to prepare yourself for upcoming changes and/or profit from new developments.
First off, who am I? Well, due to industry regualtions and company rules, I will have to maintain a certain level of anonymity and go simply by my first name, Zach. I am a stock broker for one of the big wire houses. I have a bachelors degree in finance and worked formally in the financial industry for the past 5 years, informally for the past 8. I will be happy to take questions but due to various regulatory issues, I cannot give specific stock tips. If anyone would like specific investment advice they can email me directly. Now to the point of this whole thing
Monday, February 21
The middle east is on fire. I'm sure you have all seen the Wisconsin protests. Despite what you hear on the news, the two situations are completely unrelated. Let's start with the middle east.
Libya, Egypt, Tunisia, Bahrain, and to some degree the whole middle eastern and Northern African regions are a mess. This has been a long time coming. Despots and dictators like Mubarak and Qadaffi have used military violence, or the threat of violence, to oppress and rob their people for decades. Only problem with throwing many of these guys out is that they served as a firewall between the developed world and the radical cleric run states like Iran. Who knows who will move into this power vacuum? Let's hope for the best. In the meantime, oil is going to remain high. This is why I have been buying oil related stocks for almost all of my clients for the past 2 years. Global uncertainty= higher oil prices. The threat of conflict could also signal a pull back for the markets here. So, do higher oil prices and a pull back in our markets here at home signal that some really smart people out there think that a conflict in the middle east is imminent and that said conflict could plunge the world into violence? Not at all. The market is simply telling us that it doesn't know what is going to happen. This is huge. If you have paid attention to nothing else, pay attention to what I am about to say. It can make/cost you alot of money. The market HATES uncertainty. Oil is going up because the market doesn't know what is going to happen. A perfect example of this would be a company that many of my clients own, we'll call it ABC oil. Earlier this year, the parent company of ABC wanted to sell them for various financial reasons and due to the fact that they were shifting their focus. The price of ABC tanked by about 25%. Most of my clients wanted to dump it but I urged them to hold and even buy more. The company was solid, paid a great dividend, and the fundamentals were unchanged. The market was simply hating the fact that they didn't know who was going to buy ABC. ABC is currently up more than 50% off its lows. So, moral of the story is uncertainty can often be an opportunity. Oil should conitnue to do well until some of this global instability subsides.
Wisconsin is another matter. I will try to avoid political commentary in this blog and will attempt to address only the financial issues at hand. Part of the issue in Wisconsin is that the governor wants to limit the unions ability to negotiate benefits. They want to do this in order to make long term budget projections and planning more certain and controllable. You decide for yourself if you think thats a good idea. The remainder of the disagreement is due to the governor attempting to get the unions to pick up a portion of their medical insurance and pension plans. Moves like this are going to become common place around the country. Ideology no longer matters. Governments simply don't have the money. They have over promised in order to stay in office and the bill has come due. Some argue that state governments should merely raise tax rates on the rich and corporations to cover the short fall. This works until the rich and the corporations pick up and move (see New York, California, Vermont, etc etc). What does this mean for your investments? Stay away from Municipal Bonds. It's gonna get ugly and could be for quite some time.
Well, that's it. Blog #1 is in the books. I will be back tomorrow. Please feel free to comment.
Until tomorrow,
Zach
First off, who am I? Well, due to industry regualtions and company rules, I will have to maintain a certain level of anonymity and go simply by my first name, Zach. I am a stock broker for one of the big wire houses. I have a bachelors degree in finance and worked formally in the financial industry for the past 5 years, informally for the past 8. I will be happy to take questions but due to various regulatory issues, I cannot give specific stock tips. If anyone would like specific investment advice they can email me directly. Now to the point of this whole thing
Monday, February 21
The middle east is on fire. I'm sure you have all seen the Wisconsin protests. Despite what you hear on the news, the two situations are completely unrelated. Let's start with the middle east.
Libya, Egypt, Tunisia, Bahrain, and to some degree the whole middle eastern and Northern African regions are a mess. This has been a long time coming. Despots and dictators like Mubarak and Qadaffi have used military violence, or the threat of violence, to oppress and rob their people for decades. Only problem with throwing many of these guys out is that they served as a firewall between the developed world and the radical cleric run states like Iran. Who knows who will move into this power vacuum? Let's hope for the best. In the meantime, oil is going to remain high. This is why I have been buying oil related stocks for almost all of my clients for the past 2 years. Global uncertainty= higher oil prices. The threat of conflict could also signal a pull back for the markets here. So, do higher oil prices and a pull back in our markets here at home signal that some really smart people out there think that a conflict in the middle east is imminent and that said conflict could plunge the world into violence? Not at all. The market is simply telling us that it doesn't know what is going to happen. This is huge. If you have paid attention to nothing else, pay attention to what I am about to say. It can make/cost you alot of money. The market HATES uncertainty. Oil is going up because the market doesn't know what is going to happen. A perfect example of this would be a company that many of my clients own, we'll call it ABC oil. Earlier this year, the parent company of ABC wanted to sell them for various financial reasons and due to the fact that they were shifting their focus. The price of ABC tanked by about 25%. Most of my clients wanted to dump it but I urged them to hold and even buy more. The company was solid, paid a great dividend, and the fundamentals were unchanged. The market was simply hating the fact that they didn't know who was going to buy ABC. ABC is currently up more than 50% off its lows. So, moral of the story is uncertainty can often be an opportunity. Oil should conitnue to do well until some of this global instability subsides.
Wisconsin is another matter. I will try to avoid political commentary in this blog and will attempt to address only the financial issues at hand. Part of the issue in Wisconsin is that the governor wants to limit the unions ability to negotiate benefits. They want to do this in order to make long term budget projections and planning more certain and controllable. You decide for yourself if you think thats a good idea. The remainder of the disagreement is due to the governor attempting to get the unions to pick up a portion of their medical insurance and pension plans. Moves like this are going to become common place around the country. Ideology no longer matters. Governments simply don't have the money. They have over promised in order to stay in office and the bill has come due. Some argue that state governments should merely raise tax rates on the rich and corporations to cover the short fall. This works until the rich and the corporations pick up and move (see New York, California, Vermont, etc etc). What does this mean for your investments? Stay away from Municipal Bonds. It's gonna get ugly and could be for quite some time.
Well, that's it. Blog #1 is in the books. I will be back tomorrow. Please feel free to comment.
Until tomorrow,
Zach
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