|
| |
| Invest in inflation - It's the only thing that's going up
|
Some years ago when Kay and I lived in Washington, D.C., we went to see a new science-fiction movie, The Day the Earth Stood Still, at the RKO Keith Theater, located across the street from the White House. As the movie opens, a huge flying saucer is landing on the ellipse, south of the White House. Ironically, at that moment in the real world, some police cars or fire trucks were going right past the theater with their sirens blaring, at the same time we were watching this huge flying saucer land on the screen. It sounded like there was actually something serious going on. As the movie progressed, the actor, Michael Rennie, came out of the flying saucer with a huge robot and announced that he was an ambassador from a Federation of Planets who were worried about the war-like tendencies of this planet and were there to impose peace on us, which he later did by stopping all electronic and electrical devices - elevators, airplanes, trains, cars, etc.
When we left the theater, I had to reassure myself that everything was still working - that we could still get on a real-world bus or streetcar and go home and it would all work normally. I've never forgotten that dramatic day. What we have seen in the last few weeks equals what happened - the earth has stood still. Wall Street, no longer exists, and is a hiss and a byword. Merrill Lynch is a distress merger, as well as Washington Mutual. Fannie Mae and Freddie Mac are sick, Bear Stearns and AIG are gone, and Lehman Brothers is bankrupt, Citibank is near collapse. The government has taken over almost everything we used to call "Wall Street."
How did this all happen in a few short days? What happened? Whose fault is it? What should you invest in? Is there opportunity here? It started with a naked Democrat-driven political decision in Congress in the '80s that they could acquire more votes if they could make it possible for people who couldn't afford them before, to buy homes, usually poor minorities, so they will vote Democratic. So, starting in the 80's, Congress began talking about "red lining," which means that banks would write off certain parts of the community for disapproval of mortgages because most of the home buyers could not qualify financially or credit wise, and the banks worried if their loans could even be repaid.
Soon Congress passed criminal penalties for banks and mortgage companies that would turn down a mortgage for any reason, legitimate or not. Mobs from the radical, left-wing activists (ACORN?) would sit outside the offices of the CEOs of banks to intimidate them so they would grant mortgages that they should have declined. So people who really could not afford mortgage payments or didn't have a down payment or good credit could get a home mortgage, and could suddenly become "a homeowner." Bankers then offered Adjustable-Rate Mortgages (ARMs) with low starting rates for two to five years, after which the interest rate would jump up, and stupid home buyers did not read the small print in their contracts to be sure they could make their higher future mortgage payments.
Mortgage companies saw a chance to earn commissions by approving these easy sells. That created a huge bubble of real-estate sales, and the Federal Reserve kept rates as low as one percent for years, and buyers believed home prices would keep going up. If they had to, they could just refinance the homes. Because they had no skin in the game (no down payment), they had nothing to risk.
Then, surprise! Interest rates rose slightly and suddenly people found that their adjustable mortgage interest rates had gone up, and they couldn't pay them, and foreclosures began to soar as home prices fell. As real-estate prices topped out and foreclosures grew, the inventory of unsold properties started to rise. They could not refinance or sell their homes. Home values plummeted, and they still are as this is written. People with no cash invested in the homes thought "I can just walk away from it; I can't lose any equity, because I don't have any." A wave of foreclosures swept across the country. Vacant, foreclosed homes in their neighborhoods drove down the value of all homes, even for those people who were current on their mortgages. Soon millions owed more than their homes were worth.
Mortgage Backed Securities
Now the plot thickens. Bankers and brokers bundled their mortgages into bond-like instruments called "Mortgage-Backed Securities" (MBS) and sold them to investors and big financial firms, giving them more cash to loan again to new buyers. Mortgage-Backed Securities became the basis of the balance sheets of the world's largest financial institutions. The credit-rating agencies gave them AAA ratings because they felt they were secured by real estate, so the world's largest banks and other financial institutions bought them in droves for their portfolios. AAA? Why not! They were paying higher yields than almost anything else. When it dawned on some that some of these mortgages were not worth the paper they were written on, forecloses rose. The value of the underlying security, the real estate, began to be in question. The financial institutions that added Mortgage-backed Securities to their balance sheets found they could not accurately determine the real value of their portfolios.
GAAP
How did giant Wall Street institutions fail so abruptly? GAAP (Generally Accepted Accounting Principles) accounting rules were modified so financial institutions had to "Mark to Market" their assets. If the market had no bid nor ask, no one knew what the MBSs were really worth, so the market for them dried up. Some bank assets were marked to "zero," so their assets just disappeared overnight. Banks would not loan or borrow from each other, because their balance sheets were now suspect.
I had said in The Ruff Times: "The issuance of mortgage-backed securities began to decline with less money inflow into the system, and home prices began to fall faster, throwing the whole bubble into reverse. Since the viability of the related paper assets was dependent upon rising real estate prices and asset valuations, the entire edifice began to crumble."
The turmoil at Bear Stearns is illustrative. Bear Stearns had made lots of money speculating in subprime real estate, buying subprime loans and selling and buying mortgage-backed securities. Though the amount of money involved in the Bear Stearns crisis was relatively small, the implications of the phony and suspect MBS values sent shock waves reverberating through a system chockfull of such phony valuations, trillions upon trillions of dollars of bank assets which are based on low valuations and unpayable debt. Reduced flow into the financial system and the vaporization of bank asset values has created the "credit crunch" which is causing all the panic. Businessmen are finding that the money they were counting on is drying up. Hedge funds are failing left and right, others are taking heavy paper losses, and still others are stopping investors from withdrawing their money. The very system itself is vaporizing, because the value of their assets is suspect, to say the least.
The entire global financial system has collapsed. Consolidations have disguised failures by the movement of bad assets off their books via the derivatives markets, and phony accounting - with the complicity of regulators and guilty politicians who encouraged this corruption. Some big banks are bankrupt several times over, protected only by the illusion that the assets on their books have value, but those illusions - which are all that kept the banks open - have faded.
As the level of panic rose, the central banks (the Fed?) turned on the spigots. They panicked when they realized the dimension of the losses facing the system. Irrational fear is now calling the shots. The politicians panicked, the markets panicked, the banks panicked, the central banks panicked. This game was over.
In October, 2008, Wall Street and the securities industry were socialized by Congress, and the Democrats used $700 billion, allegedly to buy up the bad mortgages that people can't pay, and alter the terms to stop foreclosures so everyone, no matter how unworthy, can own a house they can't lose, whether they make the payments or not.
When large amounts of the portfolio on their balance sheets could not be valued (marked to a non-existent market), banks began placing whatever value they thought they could get away with, and their accountants often gave them zero value. Overnight, when large portions of their balance sheets disappeared, the banks didn't have enough assets to meet the statutory requirements for cash reserves.
Almost overnight, big institutions that had invested heavily on these mortgage-backed securities began to fail. That's when Wall Street imploded. Goodbye Merrill Lynch, Lehman Brothers, Washington Mutual, Bear Stearns, etc. With no market to determine the real worth of the assets on their balance sheets, they had to mark these assets down, sometimes to zero, and trillions disappeared from balance sheets overnight. When a bank or brokerage house balance sheet is deeply impaired, they have to raise additional capital. When that is happening to everyone, who will loan you money? Consequently, the assets just plain disappeared, and the normal credit system froze up.
Root of the Problem
Congress and the Administration decided to bail out these firms that had bought all these bad mortgages and whose balance sheets had disappeared. But government money is not without its strings, so government took equity position as part of the price of their loans, and took control of Wall Street. At the same time, Barrack Obama, who was elected President, had made a trillion dollars in additional new promises, and they had to get the money from somewhere.
To sum up, this mess had three roots: 1) a political decision to buy votes; 2) the unprecedented view that everyone should own a home, whether they could afford it or not; and 3) the accounting rules had tightened up. In my book How to Prosper During the Coming Bad Years and in my newsletter, The Ruff Times I tell you how to profit from the inevitable consequences that had been brewing for years and were accelerated by these recent events, creating serious systemic weaknesses in society. And I'll explain why the real long-term consequence will be runaway inflation.
The ones who did it to us are politicians - legislators. But this is not just a Democratic issue; a lot of ignorant, weak-kneed Republicans forgot their conservative principles and were enablers. And guess who we asked to fix the problem? The ones who had caused the problem! If they want to find the villains, they should look in the mirror. The average American has no grasp of the real facts, so they are easily buffaloed. The real solutions are politically impossible. We must allow the foreclosures (voters) to continue until the market "clears." The villains would be unmasked. Lots of luck!
My role is to tell you what will really happen and then help you middle-class Americans deal with the world as it really is and profit from it. This is close to being a problem beyond the ingenuity of human leadership; so big and perverse that they decided they had spend billions to buy up bad assets from banks and stop foreclosures, bailing out improvident borrowers by buying their mortgages and readjusting the terms so they don't get thrown out of the home they can't afford and should not have bought! It may kick the bankers' problem down the road, but it won't fix America's problem. Everything you have been reading about and seeing on TV is aimed at saving the tattered reputations of the politicians who created this problem, and the really dumb borrowers. The consequence will be inflation after a few months of price deflation, with its accompanying recession and unemployment.
Throwing Money at Problems Eventually Equals Inflation
The only way Congress knows how to try to fix an economic problem is to throw money at it. They create the money out of nothing. They vastly expand (inflate) the money supply to try to stop deflation because it could cause a 1930's-type depression. One of the immutable laws of the financial universe is that when you expand the supply of a paper currency, you create monetary inflation, often and sooner or later, this inevitably causes price inflation (currency dilution), with deflation in the interim.
The politicians won't even consider the only valid solutions. But I know how to profit from what is happening! When the government throws money at a problem, they eventually create monetary inflation. This flood of money dwarfs anything we have seen in our lifetimes. If you understand that reality, you can now profit from the sure thing - monetary inflation. One day we will wake up in the grip of huge price inflation.
But as Will Rogers said, "Invest in inflation, it's the only thing that's going up." In this artificial environment, you can easily turn small amounts of money into big fortunes if you know a few simple things to do.
What to Do
When I saw what was coming, I saw the need to write a book; but rather than writing a whole new book, I simply updated the humongous best-seller that I wrote back in 1978 (2.6 million copies) because the principles were again the same for the 21st century. This report updates it still further as of November, 2008. Will the principles that worked in the '70s work again? These principles are as close to eternal as financial principles can be.
Advice
How can your family cope with the coming inflation? Prices will eventually rise sharply due to big price inflation! Normal commerce is crippled by inflation. The commodities you ordinarily to buy whenever you want, at the price you want, may not always be there, as inflation drives up the cost of fuel so the trucks will find it harder to pull up to the back door of your local store and restock the shelves.
You must turn a liability into an asset. Prices will rise higher and higher. How do you turn this into an asset? Store things now while they are still relatively cheap, then consume them later at higher prices. This includes every commodity you would buy at your local store, ranging from food, to diapers, to soap, to auto parts, to everything else.
How do you survive in an age of Inflation? 1) Get out of debt, and pare down your consumer spending; 2) eventually exchange your cash and dollar-denominated holdings for inflation hedges; 3) if a politician promises to give you money, run don't walk to vote against him/her; 4) keep the old clunker for a few more years; don't buy a new car; 5) recognize socialism is here to stay; 6) the real-estate bubble has caused the biggest burst bubble in the history of bubbles. Government is trying to maintain our sick society by saving home buyers (voters) from their own stupidity.
Socialism
Socialism is government owning or controlling the means of production, like when they own large chunks of Wall Street banks or offer General Motors many billions of dollars if they agree to make small gas-sipping cars consumers won't buy, compounding their government-imposed collapse. 7) Social Security, Medicare and Medicaid, are unsustainable and can only be maintained by creating money, so we have a lead-pipe cinch guarantee of more inflation in the future. Prices will not go straight up. Take gas for example. The price has recently plummeted. Oil may fall to as low as $40 per barrel temporarily, but that doesn't matter. If inflationary prices retreat temporarily from time to time (price deflation), you can buy now at low prices to later consume at higher prices.
The Stock Market
Avoid blue chips and most mutual funds, as they are an endangered species. The recent decline in the Dow is a harbinger of the future. The stock market has many independent pieces, and some aspects of the stock market should prosper. 1) Uranium mining stocks. In the quest for cheaper energy, we will have to build nuclear plants. If they proceed with the nuclear plants that are on the drawing board or under construction today, there is only half enough uranium above ground to provide their needs. So buy the mining stocks. 2) Oil Service Companies such as Schlumberger and Halliburton. We will drill for oil off shore, and the companies that build and service the oil rigs will do very well indeed.
In the meantime, we will watch with interest as Congress throws money at the problem, creating runaway inflation. I repeat again what Will Rogers said, "Invest in inflation; it's the only thing that's going up."
|
| |
Articles
Finding Customers For Home and Small Businesses
Whether we are thinking about starting or have been operating a small and home business one for a period of time; we all confront the challenge of finding enough customers to support our business. All businesses are faced with burden of 'spreading the...
Avoid Risks in Investing
Investing can be the most invigorating as well as frustrating experiences in life. In Wall Street you hear the often repeated saying, 'Sell them and you'll be sorry, Buy them and you'll regret, Hold them and you'll worry, Do nothing and you'll fret.' You have to secure...
The Us Investing in US Economic Rebirth Plan
The financial markets are screaming that the $700,000,000,000 bailout is not enough. A rescue was needed but we should not be throwing more money at the very institutions and...
6 Important Components of a Successful Home Business
Not every business opportunity is alike. Out of all of the many business opportunities on the planet that you're being flooded with on a regular basis, how do you choose which is the best home-business opportunity for you? I'll provide 6...
Investing Secrets of the Wealthy
My favorite subject. Investment. Investing in your own e commerce business is the best, most time efficient way to make money. But to grow real wealth you need to diversify into other investments as well. Your e commerce business (or other business / high paying job) provides...
Mistakes to Avoid When Investing
'When you make a mistake, don't look back at it long. Take the reason of the thing into your mind and then look forward. Mistakes are lessons of wisdom. The past cannot be changed. The...
The Benefits of Online Forex Trading
Various situations present the need for someone to work at home. A new baby, an illness, or a simple lack of discipline may cause you to start looking into work at home opportunities. The...
|
|
|
