Archive for February, 2011
For decades we’ve been made to believe that Economics is a “science” that should be handled by a handful of intellectuals. After all, we shouldn’t worry much about the details! We should leave those in the hands of those that have the ability to analyze and make decisions. All too often I hear about the idea that man-made economics is far better than the free market economics. It’s been now more than 60 years that our economy had used the Keynesian man-made approach but does it really work? I wonder if man – as smart as he is – recognizes that sometimes the universe is bigger and more powerful than he is.
Reality is that economics directly affects our lives. Just because we never lived to experience an economic depression doesn’t mean we’re immune from such crises. The good news is that we can do something about it. All it takes is to be active on our financial affairs. We don’t need a PHD in Macroeconomics to understand that economics is the study of human action, which is sometimes rational, sometimes irrational, sometimes predictable, sometimes unpredictable. We also don’t need a degree to learn how credit and currency are created by the central bank or to understand how savings accounts vanish during high inflationary times.
Asset preservation is the perfect way to keep what we’ve worked so hard for. What we should know about assets is that there are basically two types.
Financial Assets, also known as paper assets typically lose value during inflation. Bonds, stocks, derivatives are all manufactured assets by Wall Street. That’s why Wall Street is biased towards this kind. If we’re wondering how come our stock portfolio is doing so well today, the simple answer is that this is the result of the money that was poured in by the government when tax payers have bailed out Wall Street. This rise in the financial sector market is artificial and so are the gains that show on our statement.
Hard Assets, also known as real assets generally keep up with inflation. Commodities (energy, agriculture, precious metals) and real estate are on the top of the list. Think of them this way. What do people need the most during a crises? Food to survive, a roof above their heads, heat, electricity, gasoline for their cars to get to work, and a sound medium of exchange when currency had been debased. And when it comes to real estate it amazes me to see people sitting on the fence when prices are so low and opportunities so abundant. Very few even know that they can invest their IRA in real estate. Very few know that gold can be added to their IRA portfolio.
I often wonder why the knowledge had not been spread out. Could it be just a coincidence that a majority of books on investments have been written by Wall Street? Just about any book on Economics taught in universities dedicates 90% of knowledge on investments in financial assets. “The one who has the gold makes the rules.” If this is true it means that they get to keep the gold, they make the rules, and we keep the paper assets. As far as I am concerned, I’d rather keep the gold, make my rules, and let them keep their paper assets.
One thing I noticed with modern economists and that is that most of them use common language when given the opportunity. Jargon such as Quick Ratio or Liquidity Ratio – as they’ve been taught in the ivy leagues schools – has only one purpose and that is to get the average folk buried in the details of the investment analysis that ultimately leads to mass confusion. Such has been the Status Quo in the Investment/Economics arena for too long and with less than desirable results.
While I am writing this post one thought goes through my mind…”can’t see the forest for the trees”. And that’s exactly what we’re missing when we fail to look at the big picture. When Peter Schiff is considering his investment strategy he actually looks at the big world out there; contrary to the modern advise he looks at the macroeconomic picture; his focus is not on micro analysis details but in the inflationary environment, the monetary policy, and the economic growth.
On the inflationary topic, the question to ask yourself is “Are we going through an inflationary trend”? Even Ben Bernanke – after years of denial – is finally admitting that we are. One important thing to know – and that’s something your stock broker won’t tell you – is that during high inflationary times stocks eventually end up under-performing and bonds are even worse. Commodities though will end up performing quite well, but again, that’s not what the majority of the people invested in securities want to hear today and certainly not what Wall Street is preaching. But we haven’t reached the highest point of inflation, yet, so time will tell.
Monetary policy of the Federal Reserve? With such a ballooning national debt, rapid expansion of the money supply, and a U.S. dollar on the verge of losing its world reserve status, should there be in any doubt where our currency is heading? A currency debasement leading to collapse. Simply put if you’re caught with lots of dollars in the bank, you stand to lose despite the FDIC enticement to keep your money there. A debased dollar will decrease your purchasing power and your standard of living.
Economic growth? Ha! Based on what? On consumer spending during Christmas time, on an inflated stock market as a result of generous government bailouts, or on “productivity” of the military complex? I am astonished to hear “intellectuals” talk about economic growth when, for the past decade, we’ve been programmed to consume not to produce, to spend not to save. Let the Chinese produce for us, why should we produce anything? After all, we’re the King, right?
What I want to leave you with is the idea of asset preservation, hard assets such as gold and real estate, so that when the dust finally settles your life will be least impacted by economic events.
Today I had a very interesting conversation with a man that called to ask me about one of my rental properties. The question that prompted me to write about it was “Why is your property still available when we found that all houses in the $900 rent range have already been rented?” Great question easy to answer. Primarily there are two reasons for which my rental has not yet been occupied. First of all, my previous tenants have just moved out a week ago and we just did the final walk through yesterday. Secondly, I am somewhat picky when it comes to pre-screening potential tenants. I will write more in a future post how and why I do such a “heavy duty” due diligence on this process.
My point with this article is that while the value of real estate has obviously gone down during the past 3 years the rental value has not. In addition, the market for rentals has increased as a result of people’s inability to buy and qualify for mortgage loans. Just think for a moment of the millions of people that have lost their homes due to foreclosures. These people all have families, kids, dogs – maybe mother-in-laws – so they most likely all need a roof above their heads. Need I continue to prove my point?
Now, fast forward to 2015. Yeah, you may say that’s far into the future but trust me, you’ll blink a few times and four years have gone by just like this. In 2015 I can guarantee you that either the dollar had collapsed or it’s close to collapsing. The four major world economic powers (China, India, Brazil, Russia) are working hard at making sure the U.S. dollar will seize to be the world reserve currency. Our government is also “working hard” at destroying it by adding unsustainable debt. In 2015 we won’t be buying a loaf of bread for $3. The $3/gallon gasoline price will be just in our dreams. In 2015 the middle class will be closer to the same standard of living of the poor class. What’s this got to do with real estate rentals? Just in case you haven’t yet figured it out, hard assets such as real estate may not be a bad thing for many to be invested in. You see, it’s all about positioning yourself TODAY for the future. And don’t be so sure the 401-K securities will be there for you when you need them the most!
There are three major needs that humans have: food, energy, and housing. Be invested in at least one group. Few of my friends including myself prefer real estate, it’s tangible and real, it’s a hard asset. You don’t want to be a landlord? Fine, you don’t need to but you can be an investor. That’s why there are property managers that will do just about everything for you. You want to place real estate in an IRA? Good, you can do that, too. You want to invest in Trust Deeds? Who says you can’t? Want to preview some ideas? Great, just click on my Amazing Deals tab and start thinking.
All in all, just do something, be proactive rather than reactive. Make sure you won’t be one of those people that will say “I wish I had done something about it but I didn’t”!
Back in the early 1980’s when I arrived in America, the land of opportunities, I was picked up from the Los Angeles airport by an acquaintance. I wasn’t familiar with California and it turned out that nor was he. My final destination was San Bernardino where I was supposed to stay with my host family. During my first few minutes of chatting with my kind guide I asked if he knew his way around, at which he calmly responded “Don’t worry, God will show me the way”. It seemed a bit odd to me but I really didn’t take him literally on his words. We were about two hours on the road when I noticed a slight discomfort on his part. After asking if everything was OK with him I found out that we were lost. It was already dark outside so it made sense to me to stop and get some directions or maybe get a map (where was the GPS when we needed it?). Being a young and inexperienced girl at the time I was unfamiliar with the concept of “men don’t stop for directions” so in my mind I kept wondering why we would not stop. Alas, another hour had gone by and we were still figuring out in what direction we were going. Finally it wasn’t until we entered the California desert when we stopped, refueled and got a map. We turned back and after using the directions from the map two hours later we made it to my final destination.
I tell you this because today I often witness people that don’t have a financial plan in place. I have talked in previous posts about an economic crises that most of us living today have not yet experienced. I have talked about the collapse of the U.S. dollar that will impact the majority of the people. I have mentioned the facts of unsustainable debt our government has acquired and I will keep on talking about it because only a very small group of Americans recognize how important it is today – more than ever – to have a financial strategy in place. If you think your retirement account that was invested in financial assets will be intact by the time you retire I highly recommend you revisit the idea. If you think your purchasing power will not be affected by the inflation that will occur – despite the Fed’s attempt to cover it up by delaying its effects – you may want to think twice. Bottom line is that one must prepare in advance and the time is now, when we still can make sound decisions with a clear mind, and not when it’s too late.
I will conclude with a thought that will hopefully blossom in your mind. Think “Hard Assets”, real tangible assets such as precious metals and real estate. In my next post I will discuss in more detail the “why, how, what, and when” of those assets for a better understanding. Until then consider this “food for thought” and never underestimate the power of knowledge.
When things go wrong as they sometimes will, when the road you’re trudging seems all up hill,
When the funds are low and the debts are high and you want to smile, but you have to sigh,
When care is pressing you down a bit, rest if you must, but don’t you quit.
Life is queer with its twists and turns, as every one of us sometimes learns,
And many a failure turns about when he might have won had he stuck it out;
Don’t give up though the pace seems slow – you may succeed with another blow,
Success is failure turned inside out – the silver tint of the clouds of doubt,
And you never can tell how close you are, it may be near when it seems so far;
So stick to the fight when you’re hardest hit – it’s when things seem worst that you must not quit.
I often feel lucky to have grown up in a country where the government was powerful enough to control its people. I know this may sound crazy but that experience enabled me with a keen intuition and a desire to be less governed. After all, this desire to be less governed prompted me to come to America. Following is simply my perspective on the government’s power to interfere with the housing market that has been the epicenter of the current economic crisis; a crises that is impacting not only the United States but the entire world.
We’ve been programmed to think that these events are the result of the “instability of the free market”. Great excuse that supposedly justifies more government regulation of the mortgage business and the housing industry.
Inviting government to step in and regulate the life out of business may be the status quo today but a handful of people – including myself – believe more rules and regulations to be even more detrimental to our frail economy in addition to the threat to our individual liberties. As a matter of fact it is the government interference that largely contributed to set this disaster in motion.
Few of you may know that during the 1990s the Federal government began a huge regulatory push to create “affordable housing”, under the presumption that the cost of acquiring a home was out of reach for a growing number of American families. Democratic and Republican members of Congress and both, President Clinton and President Bush administrations put pressure on lending institutions to lower their credit rating standards. So, we ended up with banks offering loans with low or no down payment, to people with marginal credit and unstable income and employment, many of these loans being adjustable rate mortgages with low introductory rates that would increase after 2, 3 or 5 years.
Initially banks were not happy to take on such a risk but there are few primary reasons that led to ultimately “convince” them to do it. One of them was the intimidation from the bank and mortgage regulators. They threatened with anti-discrimination law suits if banks did not increase their lending to targeted socio-economic groups that were less credit worthy. The other way to convince them was by allowing them to sell their loans to the two semi-governmental agencies, Fannie Mae and Freddie Mac. What that did was to transfer the risk (of a subprime marginal borrower’s loan) from the banks to Fannie and Freddie agencies. We all know how in 2008 these agencies have been declared insolvent and were put under government conservatorship. In short, the risk of such loans had been transferred from the banks to the American tax payer.
Another major factor that contributed to the housing collapse was the monetary policy of the Federal Reserve. In 2003 and 2004, the Central Bank kept interest rates artificially at historically low levels. As explained by the Austrian School of Economics – Murray Rothbard, in particular in “Economic Depression, their Cause & Cure” – when interest rates are suppressed via Central Bank and are NOT a result of a free market, it leads to malinvestments. I will discuss more about malinvestments occurring during Economic Bubbles in a separate article. For now, just keep this thought in mind…”Malinvestments”.
In conclusion, could the economic Bubble/Bust have been avoided? Absolutely, if only the government did not interfere with the markets! No imposed lower credit rating standards, no bailouts of Fannie & Freddie, no bailouts of companies that offered Credit Derivatives, no rate manipulation triggered by the Federal Reserve Bank, and our lives and children’s future would most likely not be as threatened today.
“Government means always coercion and compulsion and is by necessity the opposite of liberty.” Ludwig von Mises
As a concerned parent I always thought that raising my daughter to be money-conscious and smart with her own money is quite important. Our kids and grand kids are our future. We live in a culture that is constantly pushing credit cards and forcing students to take out huge loans for education. So, I decided to share with you a few helpful hints to pass on to your kids and grand-kids.
1. Teach your child the VALUE of money, no matter at what age. Your child should understand that money does not grow on trees, you have to work for it. You can’t just buy, buy, buy – there has to be a period of saving up for something that you want.
2. Teaching a teen to use and balance a checking account is also important. If the account becomes overdrawn, don’t constantly bail your teen out of trouble; your teen needs to learn to pay for his or her own mistakes.
3. Another critical concept that teens must be taught is the magic of compound interest. There are numerous calculators online that can help teens see this, as well as calculators that will show a teen how long it will take for them to pay off a debt.
4. And finally, setting a good example is perhaps the most effective way to raise a money smart son or daughter. Talking is one thing, but children learn by what they see. If they see you making wise choices they are likely to follow suit.