The Wealth Code - How the Rich Stay Rich in Good Times and Bad 2010 Finalist: Independent Book Awards - Personal Finance
The Canary in the Coal Mine. 03/26/2010
Yields on 10-year notes rose 2 basis points, or 0.02%, to 3.90%. Last June, they peaked at 3.94%, which was the highest since October 2008, when the credit crisis really took off and sent yields to all-time lows. From Bloomberg 3-26-10 Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates. Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television. “I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.” Rising rates cause companies to pay more to borrow. This effectively will cut off the greatest corporate borrowing spree we’ve seen in decades. Less capital, less growth. If rates rise, that draws people out of their stock positions as debt looks more and more attractive for the higher yields. The miners who had the longest careers were the ones who paid attention to the canary. Don’t ignore it. Add Comment Pay attention to Britney Spears! 03/24/2010
This morning the US ratings agency, Fitch, downgraded Portugal debt rating to AA. Still investment grade and a few notches higher than Greece, but a downgrade all the less. This will now cause Portugal to have to pay more for selling more bonds and will likely send them down the same pathway Greece is now travelling. Default. Funny how USA rating agencies are very quick to downgrade countries in the European Union, causing their debt problems to get compoundingly worse, and to issue statements like "they are not doing enough to control their debt and deficits!" Almost like they are diverting everyones attention away from the real countries with the biggest problems. Namely the USA, Japan, and the UK. Greece's deficit to GDP is 13%. Portugal's is 9.7%. USA is 11.5% (Assuming 2010 GDP growth is POSITIVE 3.2%). If they are wrong about our growth this year and I believe they are, are 2010 deficit will likely go from a projected $1.6 Trillion to well over $2 Trillion and that would be a Deficit to GDP of 14%. Can you say downgrade! Government believes they can push off anything to another day! The Repeal Of Economic Law: In January 1953, during his last week in office before handing over to President-elect Eisenhower, President Harry Truman issued his final “Economic Report”. In it, he said this: “It is the purpose of the Employment Act (passed in 1946) to prevent depressions. The act stands as a pledge of the people voiced through their laws that never again shall any such sacrifice be laid on the altar of ‘natural economic forces’. Thus, ...the act rejects the idea that we are the victims of unchangeable economic law.” This about sums up the government and the Federal Reserve beliefs that they can suspend economic law at the stroke of a pen and the push of a button on the dollar printing press. Recovery Shenanigans: Cash For Clunkers: Bad for America: you don’t owe anything and have a clunker. You get a credit of $4500 and buy a new car and now are indebted again to something you can’t afford. Now you have a car payment you didn’t have before. This was a brainchild of the Chinese Government. They are not accepting dollars for imports and demanded steal and metals. Thus the clunkers are destroyed and sent over to china for payment. Why else do you think they pour acid on the engine after you turn in your car? They are not planning on reselling the car to someone else, they just want the scrap metal to pay to China for credits for imported goods. LOAN MODIFICATIONS: The problem with all the government housing rescue programs, wither it’s taking over Freddie and Fannie Mae, or Loan modifications and lease for deed programs is they are just pushing the problem down the road. Piling up more and more homes which eventually will come on the market and continue the miserable economic conditions for everyone. Like giving an adrenaline shot to someone with a dying heart, keeping it beating a few more weeks versus doing what is necessary and having a damn heart replacement. But that is more effort and pain. Not the easy way out. How it works: What it means to these people. – Delays the inevitable, Ultimately to be kicked out at that point and they will be screwed in 5 years and they still will either bankrupt or shortsale and they have been taken out of the market place for a total of 8 to 12 years. What it means to the rest of us. Further delays the economic recovery by pushing the problem down the road and not dealing with it today. Drags it out for years and years. The best thing to do is a short sale. Blow the house out, your credit gets hurt for a few years, but use this time to save some money, and then you’re back in action. Maybe you’re able to buy a house with a real down payment of 20%, at a fair price due to housing finally being at the bottom, and which will actually gain equity as time goes on, and thus building some net worth. LEASE for deed: So let's review... buy a house way over your means, with nothing out of pocket. Use the most exotic loan possible so your payments on said house are say 40% of what they should be. If the house goes up in value, flip it! Or become a serial refinancer so you can live the good life, using home equity to buy cars, upgrade that kitchen, go on vacation et al. Now if by some chance the home value goes down... then you cry to government about how the font on your mortgage was too small and you were "tricked". Or, no one told you that home prices could actually go down. You enjoy that house and deserve it after all - even though the down payment and closing cost was rolled into the mortgage and you could never afford it. The lease for deed program basically is trying to keep people from walking from their homes and keeping that house from ending up on the market. They are giving people who are about to be foreclosed the ability to rent their house as sub-market rents as the government subsidized the whole effort. Bottom line at the end of the day. Home goes up, you win. Home goes down you win and the "responsible neighbors " who are paying their mortgages, just watch with jaws agape from afar. Main Problem: All these "housing rescues" do is a great job of just kicking the problem down the down another year or two and keeping inventory from pilling up higher than it already is. Overall with almost all these government programs - if you are trying to do the right thing you are punished. Formerly "on time payers" must first begin to "strategically" miss payments and then all the King's horses (and men) will come to save you. Moral of the story? Don't act like a responsible adult or government help machine WON’T find you. To Pay Down your House or Not? 03/14/2010
Often I will be asked this question as to wither someone should pay-down the house (often said as invest in my home), or invest in other ideas. The real key to this question is the definition of an Asset or a Liability as discussed in the book, The Wealth Code. In general you want to invest in Assets, or financial vehicles which at the end of each month put money into your pocket. A liability is something that pulls money from your pocket each month. Is your house an Asset or a Liability? It is a liability. You have your mortgage expense, property taxes, insurance, and miscellaneous expenses each month. It is draining your pockets of valuable dollars which could be put into Assets which would be putting money into your pocket. Is a house an investment? Yes and No. It is real estate and that will appreciate in value as our dollars are devalued by the government. But the equity in a home effectively earns 0% interest. The more money you put into the house, the more money you have earning 0%. Don’t believe this. Imagine your house right next to my house. Both exactly the same. The difference is your house is paid off and mine is 100% leveraged. Let’s say that both houses have a market value of $100,000. Therefore you have $100,000 of equity inside your home and I have $0, since I have a $100,000 loan on my house. The next year the real estate market appreciates by 5%. Your house is worth $105,000, and incidentally my house is worth $105,000. I earned exactly what you earned! It is the house which appreciates not the equity inside. Thus the equity in a home earns ZERO %. Paying down a house is working with the concept of Lost Opportunity cost, and I explore it in great detail in the book. What you ARE doing by paying extra into the home? You are creating a situation that the mortgage holder salivates for. Each time you pay extra, you place more money in their hands for them to invest for THEIR well-being, and also you lower THEIR risk. Let me repeat again. As you put more equity into the home, the mortgage gets smaller, and there is more equity protecting the lien holder in case you can't make your mortgage payment for whatever reason. Death, disability, and divorce are common unforeseen reasons. If their risk is lowering, what is happening to your risk? It is going up. You have more to lose if you can't pay your mortgage, and they take your home to auction and only cover what is owed to them, the mortgage balance. Auctions are not meant to protect the seller; they are meant to protect the lien holders. Here is what I call unconventional or uncommon knowledge. Instead of paying extra into your home, make the exact same payment into a side account. Something that can earn 5–6% each year and compound on itself, and is fairly liquid. Even something with surrender charges will work. In the same time you would have paid off your house, in actuality faster, the side account will have grown to equal your remaining mortgage balance. At that point, you can take your side account and pay off your mortgage all at one time and own your home outright. The advantage to this financial strategy is many fold. First, you have an emergency reserve of immediate cash. Is equity in your home more liquid than a side account? No way. Unless you have a line of credit already established and it hasn't been taken away, like so many are today, then your equity in your home is stuck. Without a pre-existing line of credit, you could apply for a line of credit, refinance your mortgage, or sell your home to unlock the equity to pay for your emergency. Today, all three choices are exceptionally difficult and time consuming. In an emergency, time is not a luxury we usually have. Second, by not paying down your mortgage, you will retain more mortgage interest to deduct, which will give you greater tax rebates from Uncle Sam. If you really wanted to be aggressive with your saving, take the rebate generated due to the interest deduction and apply it toward your side account. Paying down a house is a two sided question and needs to be viewed from both sides to see which one is better for your personal situation.. The Census is a decennial survey mandated by the U.S. Constitution and has been conducted accordingly every 10 years since 1790. The last census was in 2000 and showed up in the jobs numbers as a couple hundred thousand jobs between March 2000 and May 2000, only for them to disappear in June. It will temporary show up under the employment numbers as big gains only to be pulled away as fast as they came within the next three months. I’m sure the Wall Street Hype-sters will reflect on the booming recovery and finally jobs has caught up. Oh and by the way, make sure you get your money into their stocks and bonds as fast as possible not to miss out on this recovery. It is obvious to them that the 68% rally in the S&P500 is just the starting point and we should expect another huge run up. The interesting point is insider sales of corporate stock are at all time highs right now. Why don’t the insiders (the CEO’s, CFO’s, Vice Presidents,….) believe in the recovery and are thus selling their own company stock at some of the fastest levels in recorded history? Maybe because they see the writing on the wall for their own company stock and are getting out while the getting is good. The GAAPing Cavern Gets Bigger? 03/03/2010
GAAP - General Accepted Accounting Principles. The method of accounting companies use to report everything from the cost of the lightbulbs to the CEO's pay and all the revenues received. | FREE SUBSCRIPTION!Receive Emailed Articles as they are Posted. Click Below on RSS Feed!Jason's Thoughts!My goal is to use this format to bring important and timely ideas to the surface on recent events which I feel will affect all of us financially. ArchivesAugust 2011 Categories |
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