Financial Judo ©

What does it mean when this huge housing bear decides to buy a house?

2008-08-30T14:07:00.001-07:00

I am buying a house.

This is way sooner than I expected to buy (I was thinking early next year or even later), but a fantastic deal on a bank owned property came up and my wife and I have decided to jump on it.

Why did I decide to buy?

The biggest reason is my wife is expecting and she is in major nesting mode right now. However, I was not about to buy an overpriced house and she knows that. According to my calculations, homes in our area should be in the $130 - $150/sqare foot range and that is the target I've been looking for. I calculated this by taking the pre-bubble value of my first home in 1998 ($96 square foot) and adding 3% - 4% inflation over the next 10 years. Most homes on the market right now are still priced $190 square foot and higher.

The home we are purchasing is for sale at the rate of $112/square foot! That is well below my target rate and, adjusted for inflation, is cheaper than the house I bought in 1998! The nominal purchase price is $30,000 lower (with about 40% more square footage) than what we sold our house for in 2006 and it sits on 3.5 acres!

This house also has some nice features we were looking for including straw bale construction (very well insulated), radiant heat, and a separate 800 square foot studio on the property.

On the negative side, this house is close to the highway, so there is some noise from that. I also wanted to move closer into town and this is about the same distance to Santa Fe (about 14 miles each way). So it's not an exurb, but it is farther out than I'd like.

Does this mean the housing market has bottomed out?

Not in your life, the resale market is still way too high. As I said before, most homes in my area are still over $190 square foot (and that is down from previous years). On the positive side, I have seen two houses in good condition being sold by motivated owners at $139/square foot this summer. Now that the summer selling season is over, I expect home sales to fall dramatically and only those people that are pricing their homes competitively will be able to move them in this market.

Nationally, the Case Schiller home index is down about 15% in the past year. I expect at least another 15% decline nationally in the next two years and it could overshoot that. Just as homes overshot on the high side, they will overshoot on the low side.

Am I concerned about my house value declining?

Absolutely. But I am buying this house a such a discount below the market that it would take a decline on the order of 40% from today's market to break below what I am paying for this house. I can live with that cushion and I still stick with my fair valuation of $130 - $150/square foot for this area.

The most important thing to know if you are buying in this market is to not overpay for real estate. There is such a dearth of qualified buyers that you can dictate the terms and the seller will probably capitulate (if he's smart). I recommend you look at the value of comparable homes pre bubble (2000 or earlier), then inflate that number by 3% to 4%/year to get your target. Only offer at or below that number.

I actually got the bank to agree to drop their price by $10k because I was paying cash for the property and promised a quick close! REO properties almost never drop their price so you can sense some desperation on their part as they are trying to unload their foreclosed properties.

Tread carefully in this market, there are bargains out there but you have to be patient and diligent.

MSM Headline: Commodities, Gold and Oil Plunging! Dollar rallying! Jim Cramer calls it "Economic Nirvana"

2008-08-21T19:59:00.000-07:00

I'm just assuming Jim Cramer was talking about the rock band "Nirvana" with the suicidal heroin addicted lead singer, but maybe he was talking about something else.

The truth is, if you bothered to actually look at the charts is that all of these commodities are still much higher than they were 1 year ago - right before Ben Bernake started cutting interest rates.

Please note: I am not giving investment advice. You need to do your own due diligence when it comes to any investment. I am an idiot and if you do what I say and lose money, it's your own dumb fault!

Let's look at some charts:

First gold (ticker: GLD):

Shares of the SPDR Gold shares went for 65.07/share (1 share = 1/10 oz. of gold) on August 21, 2007. Seven months later the shares surged to $99.17/share on March 17th, that's a 52.4% return! Since that time the direction has been basically down and it now sits at $82.30/share - but that is still a 26.4% return in 1 year!

Compare that to the Dow, Nasdaq and S&P since last August and it's no comparison. There's also wierd things happening in the gold market. Gold has sold off about 20% from its peak, but the US Mint just announced they were stopping production of their American Eagle gold coins (they did the same thing back in March with the American Eagle silver coins).

If the price of something goes down, its usually because demand is crashing (example: housing). How can prices be declining at the same time that physical supplies are disappearing?

So is gold down? Yes, from it's peak, but year over year its still up huge.

Next we've got oil:

ONE YEAR AGO OIL WAS AT $67/BARREL! Even with the recent pullback, oil is still 80% higher than it was last year! Sorry if I'm not happy that gas prices have come down about $0.50/gallon since it peaked in June. I'm still paying about $15 more per fillup on my vehicles than I was last year at this time.

How's the dollar doing?

One year ago the dollar index was at 81. After the most recent dramatic rally, the dollar now sits at 76, down 6% in one year.

It is true that all of these items have reversed course pretty dramatically this past month, but I'm thinking that the original trends will start to assert themselves strongly very soon.

How much lower can gold go when physical supplies of gold coins are almost non-existant right now?

How much higher can the dollar go when the government is getting ready to issue hundreds of billions of dollars in additional debt in order to bailout or nationalize Fannie Mae and Freddie Mac? BTW - Fannie and Freddie shares have crashed below their share price when the bailout was announced last month.

How much lower can oil go with all this crap happening between Russia and Georgia? Not to mention the continuing problems with Iran, Iraq and Nigeria constantly popping up in the news?

My thousand yard stare (http://financialjudo.blogspot.com/2008/07/1000-yard-stare.html) says that we are not done. The market was falling apart until March when Bear Stearns was bailed out, but that rally failed and the market plunged even further until Fannie Mae and Freddie Mac were bailed out. Now we look to be at the beginning of another dramatic leg down that could smash through the July lows in the market.

The past month hasn't been kind to my portfolio. In Mid July I was kicking ass and was up more than 5% on the year. However, over the past month I have faced a dramatic reversal and am now down about 6% on the year. That hurt, as I thought I had stress tested my portfolio pretty well.

However, compared to how the market has done this year. I'm still in good shape, even with the loss.

The next month should be interesting.

FJ Challenges the Conventional Wisdom: Who Really Benefits From Lower Interest Rates?

2008-08-11T20:46:00.001-07:00

If you ask your average economist, it will be taken as gospel that lower interest rates are a good thing. Lower interest rates lowers the cost of money for consumers, businesses and governments. When money is cheap, people and institutions spend more of it and that helps the economy.

It sounds like a pretty good arguement, and it sounds so benign. However, my argument is that lower interest rates benefit the banks much more than people and businesses.

It's clear that savers are being brutalized by the Federal Reserve keeping short term interest rates substantially below the inflation rate. The discount rate is at 2% right now and inflation is at 4% or more (depending on who is calculating it). That means the savings you can earn at your local bank causes you to lose purchasing power every year.

Contrast that to last year, before Ben Bernake started drastically cutting interest rates, when you could easily earn 4% or more in a money market account. At least last year you could keep up with inflation, not so this year.

But look at the banks. Because of these artifically low interest rates (that can only happen because the Federal Reserve manipulates interest rates to serve their members) one of their biggest expenses has been lowered. The interest rates they pay their depositers is substantially reduced.

This is very important when banks are as capital impaired as they are right now. They are capital impaired because they made reckless loans to people who couldn't afford them and now they need to be bailed out of their own bad decisions!

Keeping short term interest rates artifically low also spurs inflation. Remember, low interest rates means there is more money chasing the same amount of goods - that causes inflation. In response to inflation, bond investors start demanding higher interest rates for longer term bonds.

This causes the spread between short term interest rates and long term interest rates to widen. That is very profitable, especially when you borrow money with low short term interest rates and lend it out at higher interest rates like banks do. When spreads narrow, it becomes very difficult to make money.

So, the banks benefit from lower short term rates because it lowers their expenses. They also benefit as longer term rates rise because they can make more on the money they lend out.

That's Win-Win for the banks. Unfortunately savers get screwed in the process and debtors only end up getting a little relief.

It's quite ingenious how the debate around interest rates revolves around should the Fed cut interest rates or raise interest rates? Unfortunately, nobody ever asks why the market isn't allowed to set short term interest rates. After all, if the market can set long term interest rates fairly and efficiently, why would it be any different with short term rates?

Just something to think about the next time you get your bank statement and they've paid you $0.10 on your $100 deposit.

What's the Problem With The Economy, Part 1: No Organic Demand

2008-07-31T20:16:00.001-07:00

Sorry it's been so long since I posted last, I actually wrote this last week, but then I lost it before I was able to post it to the blog.

Everybody in the media (except for Phil Gramm) appears to be on board at this point that the economy is in the crapper. However, most people really don't understand why. There are several big factors that are affecting the economy right now and a lack of organic demand is the one I want to talk about today.

What is organic demand? Simply put, organic demand happens when someone decides to replace a product they own or they decide to purchase said product for the first time.

Think about cars. Every year you have a whole new group of people that are ready to buy their first car (mostly teenagers and young adults). Likewise, there's also the large group of people that own cars but they need to replace it for whatever reason (cars break down, leases run out, etc.). This is a built in customer base for the auto industry and every month of every year these two groups of people provide a revenue stream for the auto makers. That is organic demand.

Now I want to go back to a dark day in our history. The terrorist attacks of September 11th, 2001. I don't know if you remember, but in the days following those attacks the economy almost completely stopped. General Motors decided to roll out a very bold advertising campaign in order to spur sales for the company.

The campaign was called "Keep America Rolling" and it appeared to be a great success. GM, for the first time, introduced 0% financing for up to 60 months on all new GM cars.

They thought they were spurring new sales, however all they actually were doing was bringing demand forward. People that were thinking about buying a new vehicle in the next 6 months decided to buy now. All GM was doing was stealing from the future.

Then the campaign ended and GMs sales fell through the floor. In order to bolster their sales they had to bring back the 0% financing and then start adding cash back incentives to spur sales. More people came in and bought cars, but again all they were doing was stealing from future sales.

The next step for GM was to start lowering their credit standards. Now marginal buyers, people who were "upside down" (meaning they owed more than their trade in was worth), or people that needed to finance a car for 6 or 7 years in order to afford the payment bought cars. In many cases people were getting greater than 100% financing to drive away in a new car.

Eventually what happens it that you hit a wall. You've pushed forward demand as far as you can go. Your pool of potential buyers has shrunk down to almost nothing because everybody that needed or wanted to buy your product for the next few years already did.

Then you throw in $4/gallon gas and you are ready for a catastrophie. GM sales are down 25% as compared to last year (and last year wasn't that great, either). There is no market for the big SUVs and trucks (GM's bread and butter) because of gas prices.

And it's not just GM. Ford, Nissan, Hyundai, even Toyota are getting hit hard with plunging sales. In June, only Honda was able to eek out a 1% gain in sales, and that's because they specialize in smaller vehicles. Every other manufacturer saw sales crash 20% or more. Only small, fuel efficient cars are selling well right now.

What can be done about this? Right now, nothing. You have to naturally allow that organic demand to form again. With high gas prices and a slowing economy, people are holding onto their cars longer. You have to let that demand build back up. Sadly, this could take several years and I'm not sure GM and Ford can wait that long for the economy to turn around.

It is the exact same problem for housing. Basically, everybody that wanted to buy a house did over the past 4 years. It didn't matter whether or not you could afford the house, or had a down payment, or even a job. The organic demand for housing is almost non-existant right now.

On top of that, you have a massive housing glut from all the overbuilding of the past few years (and they're still adding about 1 million housing units a year to our housing stock!). Right now the only real demand for housing is from people like me who are waiting for prices to come back down to a reasonable level. It will be years (maybe 2012 at the earliest) before organic demand comes back into the real estate market.

How Safe Is Your Bank?

2008-07-14T20:47:00.000-07:00

With the recent Federal siezure of IndyMac bank and many banks and financial institutions getting a beatdown on Wall Street, it's important to check and see if your bank is okay.

First of all, here are the rules for FDIC insurance:

http://www.fdic.gov/deposit/deposits/index.html

The insurance is for up to $100,000 per depositer per insured bank. IRAs are insured up to $250,000 if the money is deposited in a FDIC insured bank account.

However, don't wait for the bank to be taken over by the FDIC (there were lines of people outside the IndyMac bank waiting to get their money today). Once the bank is taken over, your ability to access your money will be severely limited. If your bank is in trouble, go there tomorrow and take all your money out and put it in a better institution (again, do your research).

FDIC only has about $50 billion in capital available to insure every bank account in America. They estimate IndyMac is going to cost them about $10 billion. If one failure will suck up 20% of their capital, how much is the next one going to cost, and what's going to happen when they run out of money?

You can check the rating on your bank at bauerfinancial.com. They rate it on a 5 star scale (my bank still has a 4 star rating) and you can purchase a report on your bank if you're interested.

However, there is no guarantee. Apparently FDIC keeps a list of troubled banks (not disclosed to the public). There are about 90 banks on this list right now. The shocking news is the IndyMac WAS NOT ON THAT LIST WHEN IT FAILED!

Also, try to keep an eye on your bank appearing in the news. Have they had to do any emergency capital raising? Is the bank based out of California or Florida (ground zero for the housing bubble)? Has their stock price recently plunged? Is Senator Chuck Schumer talking about your bank? All of these can be signs that there are problems.

At this juncture, it might make sense to keep a little cash around the house just in case. Am I being paranoid? Probably, but better safe than sorry.

Be proactive! Don't be a victim! This is going to get worse before it gets better.

The Pickens Plan

2008-07-11T12:51:00.000-07:00

I was at the gym last night doing my cardio and watching Lou Dobbs. Then during a commerical break (where I normally tune out), I happened to catch an ad for "The Pickens Plan". Here's the website:

http://www.pickensplan.com/

The man in charge of this is T. Boone Pickens, the billionare oil man. I have been following him for a while and this guy is very, very smart!

Several years ago, when talking about oil prices, Pickens said in a interview that the world will never see much more than 85 million barrels a day in output no matter what we do. Why is this? Because any gains we get from new fields (like ANWAR or offshore drilling) will be completely offset by declines in existing, aged fields (like Cantarell in Mexico).

This is important. The era is cheap oil is over. From here on out oil is going to be expensive and difficult to get. Likewise, we import nearly 70% of our oil from foreign countries, meaning we spend $700 billion a YEAR on oil imports (that's 4x what we are spending in Iraq). We have to spend our wealth in order to get this oil, so every year our country becomes poorer while totalitarian countries like Saudi Arabia, Venezuela and Iran become richer.

Not only is this a bad idea, it's not sustainable and we need alternatives.

This is a viable solution and it makes a lot of sense. His proposal is to start a massive investment in wind power across the great plains of this country (which he identifies as one of the windiest areas in the world) and use that capacity to replace the electricity that is currently generated by natural gas power plants. We can then redirect the natural gas they were burning to our transportation network and he estimates that would reduce our oil imports by 38% in 10 years!

Natural gas should be thought of as an equivalent to oil. It is highly portable, can be transported through pipes, and has a high energy content per unit - all of these are the same as oil.

Oil is what powers our transportation because of it's portability and high energy content. That's the reason why you don't see any coal powered cars on the streets. Coal has to be mined (which is more difficult and expensive that drilling), it has to be transported by rail, and the energy content is much less than oil or natural gas (you get more BTUs out of a pound of oil than you do out of a pound of coal).

Right now about 20% of our electricity is powered by Natural Gas plants. Using Natural Gas to generate electricity is wasting a valuable resource. Natural Gas should be diverted to our transportation needs just like oil (we already do have natural gas vehicles in this country but they are not widespread).

Other benefits include helping revive many of these small towns in middle America that have been in economic decline for decades. This will also spur investment in cars that can run on natural gas and expanding the infrastructure to distribute natural gas (Now I'm thinking since most homes already have natural gas service, why not just add a pump at your house? You can fill up at home and pay for it when you pay your utility bill.- Business opportunity!!!!)

Does this solve the energy problems we have? Absolutely not, but I think it's a step in the right direction and will help reduce the price of oil (because demand will fall), increase the wealth of this country and help the environment (natural gas burns clean and wind power has no emissions).

I encourage you to talk to your friends and representatives in government about supporting the Pickens Plan.

Day of Defiance

2008-07-04T14:12:00.001-07:00

Happy 4th of July, everyone!

I hope you get your fill of hotdogs, beer and fireworks today, I'm sure I will. And it is a day to celebrate the fact that we are Americans and we are lucky to live in a country with the freedoms we have.

However, when you think about the term "Independence Day" and what it represents, this is a day that we should celebrate our defiance of authority.

Our brave forefathers rose up and defeated a world power to finally achieve their freedom. Think about the brass balls that were required to do that! Britain had colonies all over the world and we were one of their crown jewels. They had a fearsome army and a formidable navy that could outmatch anything our "rebels" could muster.

Have you actually ever read the Declaration of Independence? If you haven't read it in a while, you really need to read it again. Here's a link:

http://www.ushistory.org/Declaration/document/index.htm

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

BRASS FUCKING BALLS! Imagine sending that letter to King Fucking George. I would be shitting my pants delivering such a message! (Pardon my French, I just got a little worked up.)

Here' another thought, George Washington was a terrorist according to the British Empire! He was the most dangerous person in the world in 1776!

We were the rebels! We were the insurgents! We were the terrorists! Just because we didn't want to be ruled under the iron fist of a foreign power.

That is what independence day should be all about. It should be a clear and consistant message to our government that they need to "keep on the straight and narrow, or else!"

We should have rallies in front of the capital buildings of all 50 states and in front of the White House and Congress as well on Independence Day. Not about any particular issue or anything. Just to remind them that WE THE PEOPLE are the boss and THEY are the servant.

You look at all the shiftless corruption, bribery and scandal among those 535 congressmen and the president and it makes me sick! It's time to remind them exactly who they are, what their function is and that their job is to serve us!

The 1,000 Yard Stare

2008-07-02T19:50:00.000-07:00

...

What is the 1,000 yard stare?

I first learned about the 1,000 yard stare when talking about soldiers returning home from Veitnam. The stare was them constantly scanning the horizon for any trouble, even if there was absolutely no danger where they were at. In this case it was trauma, but the idea of a 1,000 yard stare intrigued me.

In my case, it is the long term view that I consider when looking at economic and financial issues.

Whenever I see a new trend developing, I always ask myself what are the long term consequences if this continues? Regardless of whether the trend is positive or negative, I move my investments to areas that will be positively impacted by that trend.

Using this technique, I was very skeptical of technology stocks as early as 1997. The housing bubble popped up on my radar in 2002. These things were easy for me to see because I knew that the long term fundamentals were out of whack.

I am firmly convinced that most people, not just in America but around the world, are severely nearsighted when it comes to financial matters. I often have told my friends and colleagues that most people are absolutely unable to see things more than 30 days out from today. Why 30 days? Because that's when the next bill is due.

One of my favorite blogs is the Irving Housing Blog. One post that always makes me crazy are the refi and Home Equity Line of Credit (HELOC) abusers that he talks about. Most of the comments are from exasperated readers wondering how someone could refinance their house 5+ times this decade, taking out hundreds of thousands of dollars in additional debt under increasingly onerous terms (the borrowers always move from a fixed mortgage to an ARM to an Option ARM before the house ends up in foreclosure) only to lose everything to a foreclosure.

In my view this was a completely logical choice for them. They were so busy with their distractions: work and family, buying expensive toys, taking exotic trips, plastic surgery, home renovations, etc., etc., that they couldn't see the impossible levels of debt that were building up. As soon as they got in any financial trouble, the easy answer was to refi or open a HELOC and the problem went away for a while. Rinse and repeat until the home is taken away from them.

Lets look at the recent runup in commodity prices, especially oil. When did this start? Oil prices have been steadily rising since 2000, but all of a sudden last September they moved from about $70/barrel to now at $142/barrel. A 100% gain in 9 short months.

What happened? Is this the fault of speculators, as the commentators on MSNBC or politicians are saying? In fact it is not. This was the easiest thing in the world to see, I saw it coming from a mile away. Last August/September Ben Bernake, the Chairman of the Federal Reserve decided to start cutting interest rates in response to the subprime crisis on Wall Street.

Why is that significant? Last year it was very easy to earn 4-5% in cash on your accounts. So if you had $100,000 sitting in a money market you could pocket about $4,000 - $5,000 in interest essentially risk free. Now, after multiple cuts, most money market funds are paying between 1% and 2% (treasury funds are paying even less). So your cash is earning significantly less than it was last year.

On top of that, inflation has picked up. Even the government statistics (which I feel are massively understated) show inflation is running at about 4% right now. So the return on money is lower than inflation. If you keep your money in cash you are losing purchasing power!

So, what is the logical response of people who have their money in cash? The response is that they move their money into riskier investments (also called engaging in speculation) in order to try to earn a rate of return greater than inflation. This is the same thing happened when the Fed lowered rates to 1% in 2003 - 2004, all the cash flowed into real estate causing the housing bubble. This time the money has flowed into commodities causing tremendous hardship because of high energy and food prices.

This will not change until the Fed starts raising rates again. Once the interest rates on cash start going up, people will be less inclinded to put their money in risky commodities. The Fed knows this but won't do it because raising interest rates would kill the housing market and tank the economy.

Unfortunately, the housing market and the economy are not going to be saved by low interest rates. Both are still going into the toilet, all we're doing is prolonging the pain.

I've already given several predictions and we'll see what happens with them. Right now it appears I'm on the right track on all of them, plus I was right on with the gas price call back in February.

One big trend I'm looking at now is a possible crash in oil prices. As I said earlier, prices have doubled in 9 months. We're at $4/gallon gas. The economy is slowing and you can see demand destruction everywhere. Just this week I read an article about how teenagers aren't cruising nearly as much as they used to and Indian truckers are on strike because of high fuel prices.

This indicates to me there will soon be a glut of oil on the market soon. I've been debating whether or not I should be shorting oil at this time. I think it's a solid play, but I'm not sure how much farther oil has on the upside. Everything I'm seeing now suggests to me that we've got a blow off top on oil (think Nasdaq in January - March of 2000 when it moved up 20% in less than 90 days right before it crashed). On the other hand, it looks like oil could push as high as $200/barrel before it pulls back (and Iran is a big question mark, too).

Of course, I'm not giving investment advice and you need to do your own research.

Inaguration Day

2008-06-26T15:24:00.001-07:00

Back on June 6th, in my diatribe against George W. Bush I made a prediction that the Dow would be lower at the end of his presidency than it was at the beginning of his presidency.

However, I miscalculated when his presidency started. I said January 20th, 2000. In fact, George W. Bush became president on January 20th, 2001.

That makes a big difference because the Dow was lower in 2001 than it was in 2000. January 20th, 2001 was on the weekend so the last close before he took office was January 19th, 2001. On that day the Dow was at 10,587.

However, I AM STICKING TO MY PREDICTION! The Dow will be below 10,587 on election day this year.

I'm not really sticking my neck out here, The Dow closed today at 11,453 today, only 102 points higher than my previous prediction. We could cross that threshold tomorrow.

It was another great day to be betting against the American economy. Gold and Silver soared, dollar was down (benefitting my foreign currencies), oil was way up, the markets were way down (benefitting my Bear market funds). However, I must mention that every day the market goes down (both real estate and stock) makes me a little more bullish. I'm not moving into stocks or real estate yet, but we are getting closer. There is still a lot of excess that has to be wrung out.

We've been through this before

2008-06-24T19:48:00.000-07:00

This is a print from 1875.

It's funny how people have to keep learning the same lessons over and over - the hard way.

Thanks to Housing Panic for finding this! You can check out his blog on the right.

John McCain is a debt addict

2008-06-17T09:18:00.000-07:00

John McCain and his wife, Cindy, have just released their Senate Financial Disclosures

http://www.nytimes.com/2008/06/14/us/politics/14disclosure.html?_r=1&adxnnl=1&oref=slogin&adxnnlx=1213719453-ooHy+UQsLIo2G7EQs6+DXQ

The bulk of the McCains’ obligations stemmed from a pair of American Express credit cards that are held in Cindy McCain’s name. According to the disclosure reports, which present information on debts in a range rather than providing a precise figure, Mrs. McCain owed $100,000 to $250,000 on each card.
Another charge card, held by what was described as a “dependent child,” had also accumulated debts of $15,000 to $50,000. In addition, a credit card held jointly by the couple was carrying $10,000 to $15,000 in debt, the filing indicated, at a stiff 25.99 percent interest rate.

Here's the confusing part

In other filings, the McCains have reported total household assets of $24.6
million to $39.5 million. In recently releasing a summary version of her 2006 tax return, Mrs. McCain reported income that year of more than $6 million, some $300,000 of which was derived from her salary as the chairwoman of Hensley, which was founded by her father.

Why in the world would you carry so much credit card debt at high interest rates when you easily have the assets and income available to pay them off. By my calculations, they could save anywhere from $52,000 - $130,000/year in interest charges by paying those cards off! American Express must LOVE the McCains!

That's almost John McCain's gross salary from the Senate (his salary is $167,000/year)! Shoot, after taxes they probably spend all of John's net salary and net pension (from the Navy) on interest payments on these two credit cards! And somehow, $6 million in income isn't enough to keep from accumulating large amounts of debt on credit cards!

This is just one more big question mark in regards to someone who is running for the most powerful office in the land. How can he run as a fiscal conservative when he handles his personal finances so recklessly? This just reeks of irresponsible spending but fortunately they have enough in assets to bail themselves out if they get into trouble.

I can't say the same of most Americans who find themselves deep in credit card debt.

Housing Re-Virginization

2008-06-12T09:15:00.000-07:00

I found out something interesting this past week.

Did you know that if you sell your primary residence and are out of the market for 2 years that the IRS considers you a "first-time homebuyer" again?

That's right! I read about this online and called the IRS to confirm that it is correct.

I was directed to Publication 590, page 55

"Generally, you are first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquistion of the home which the distribution is being used to buy, build or rebuild. If you are married, your spouse must also meet this no-ownership requirement"

This means that if you sold your house more than 2 years ago, you can take up to $10,000 out of your IRA with no penalties (you do still have to pay income taxes). If there's two of you buying a house, each person can take out $10,000!

The big caveat on this is that

"When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000."

So, if you already dipped into that well the first time you bought a house, that penalty free withdrawl is no longer available. However, if you only took out $5,000 from your IRA the first time you bought a house, you could take out another $5,000 for the next house.

This is also only for IRA accounts. You cannot do this if you have a 403b or 401k (those plans often allow you to borrow against your balance if you need the money).

Given that I didn't use any IRA money for a down payment on my house back in 1998, I will now be able to use this, if I want to, starting in January, 2009. My next big question is would I qualify for all the various "first-time homebuyer" programs available in Santa Fe?

Please contact a tax advisor for more information about this if you are going to use this strategy.

Why I hate George W. Bush and 3 Shocking Predictions

2008-06-07T13:40:00.000-07:00

Ronald Reagan coined a great phrase when running for reelection in 1984. He asked, "Are you better off now than you were 4 years ago?". His reasoning was that if the answer was "yes", then you should vote for him. We all know that 49 states went for Reagan in 1984. What a glorious time to be a Republican.

Asking that question now, I would have to answer "yes" again. Since 2001, my net worth has doubled and then it doubled again. I should be in the rabid, hard core Republican consituancy (you know, the 25%-32% that still think the President is doing a good job or the 19% of the population that thinks the economy is going in the right direction).

Fortunately, I am not in that brainwashed camp. I think this administration has done more harm to our economy, our foreign policy and our laws than any other administration (maybe even all previous administrations, combined).

So where does this venom come from? Point of fact, I never voted for George Bush. I was more ambivalent about him than anything else back in 2000 (not being a big fan of the first George H.W. Bush administration, I wasn't eager for a sequel). In 2004, I was not liking what was going on with a Republican controlled congress and executive branch, so I voted for Kerry in an effort to bring some balance back to the branches of government even though I thought Kerry was a putz.

My turning point happened during Hurricane Katrina. That was when it finally clicked for me that this administration, despite all of it's pandering and efforts to keep us "safe" from the terrorists, was found to be nothing more than one big lie. Watching those people at the Superdome, which was a FEMA designated Hurricane shelter, literally starving and dying on television while our government did NOTHING was enough to send me over the edge.

All that money that was spent on forming the "Homeland Security" department, all the money that was designated to help states, cities and communities "prepare" for a horrible terrorist event was wasted on ineffective, politically connected contractors that never did a damn thing. My biggest issue with Katrina was what would be the difference in Al Queda loaded up some big trucks with high explosives and blew up the levees around the city? The end result would have even been more death and destruction (remember, the city was virtually abandonded when Katrina hit, imagine those floods with it's 2 million citizens trying to get out).

At that point I made a drastic move with my investments. Over the next two years I moved most of my money to investments outside of the American Financial system. I purchased foreign equities, bonds and currencies. I purchased gold, silver and precious metals stocks. I purchased oil, energy and commodity positions as well.

I could see what a falling dollar was going to do to our economy. I could see how a housing bubble was going to devastate our economy once it popped (it was still going strong in 2005). I could see the fraud permeating from the highest levels of government and business and it made me sick.

I found myself betting against the United States and I was rewarded richly for it.

That is why I hate George W. Bush so much. He made me bet against my country. Our country, the shining city on the hill, the last greatest hope for the world has devolved into the bubble chasing, conspicuous consuming, debt addicted, gambling addicted, balkanized society we see today.

Of course, not all of this is President Bush's fault, but his policies made these problems worse during his tenure and that's where I fault him. If you look at almost all of his policies and initiatives they all have the same fundamental problem. He hires politically connected lobbiests to run his various departments and he stops enforcing the laws that are on the books.

Why do we have an illegal immigration problem? Because he defunded the department in Immigration and Naturalization that enforces immigration law on employers. The result of this is the construction, hospitality and agriculture industries were able to hire as many illegal immigrants as they wanted with almost no chance of getting caught. It's the same as outsourcing our jobs for cheap foreign labor.

Why did we have a housing bubble? Because he used the Office of the Comptroller of the Currency (OCC) to stop states from passing any anti-fraud laws against predatory lenders back in 2001-2002. The result is that fraud exploded by both lenders and borrowers because they knew there would be no repercussions. Likewise I can't help but think, in my most cynical thoughts, that the banks encouraged this fraud because they knew when the whole thing blew up, Congress and the President would bail their sorry asses out because they are "too big to fail". I am still holding out hope that Bush vetoes the latest housing bailout legislation that's moving through Congress, maybe he can be redeemed in the next few months.

In Iraq we have notorious contractors like Halliburton and Blackwater who receive billions of dollars on no-bid contracts, with no accountability and are given complete immunity from our government. We also conduct a costly and, in my opinion, neverending war but don't ask the citizens of this country to sacrifice one tiny little thing outside of that small minority of citizens that have actually served in Iraq. Of course, we are still sacrificing at the pump, but instead of that money going to the government to pay for this war (through a gas tax)- it goes to Exxon Mobile and to fund the very foreign governments in the Middle East that hate us and want to kill us. In the meantime, Osama Bin Laden and Al Queda are allowed to reform and regroup unmolested in Pakistan. This is insanity!

There are dozens of other issues (trade policy, dealing with Iran, outsourcing, growing the size of government the most since LBJ's Great Society, government surveillance, repealing Habeus Corpus etc.) where I am in complete disagreement with George W. Bush. Shoot, even things I agree with him on, like privatizing Social Security, were completely bungled by this President. It's like he can't do anything right!

I am not one of those "hate America" or "blame America first" types. However, I do think our country has become the drug addicted son that I am no longer willing to help. This self destructive behavior has to stop or else the country will die. That's right, our country is on the verge of a massive O.D. unless it drastically changes its ways. Unfortunately, the pusher is George W. Bush and nothing's going to change as long as he's in office.

That is also why I am flummoxed by John McCain. I actually supported McCain's bid for the presidency in 2000, but in my eyes he has lost all of his independent and "maverick" credibility during the course of his current presidential campaign. He is parroting the same crap policies that Bush has been forcing down our throats for the past 8 years. It's like he sold his soul to the devil in order to be the nominee. For God's sake, John, you've got to distance yourself from this administration if you have any hope of getting elected

In the end, I offer the following predictions for our President by the end of his term:

1. On January 20, 2000 the Dow was at 11,351. I predict that by election day, the Dow will be lower nominally. Adjusted for inflation, the stock market will have lost 25%+ during the course of his administration.

2. November will see a full scale rout of Republicans at the National, State and Local levels. Karl Roves "permanent majority" dream will come true. Unfortunately, it will be the Democrats who inherit this mantle. The Republicans will become a permanent minority party and may split up (cultural/religous conservatives seem the most likely to start their own party).

3. The Dollar index will sink to 60 before election day (it's currently at 72). That means this President will have overseen a 50% drop in the value of our currency during his tenure.

Mr. President, if I may coin a phrase, you are the WORST. PRESIDENT. EVER. You have been a disaster for this country and we will be a better place once you are gone. I hope you appreciate the scale of your efforts. You destroyed the economy. You destroyed your party. You have failed in nearly every effort you have undertaken as President.

I will be one that cheers on January 20, 2009. Don't let the door hit your ass on the way out!

FJ Quote of the week

2008-05-30T11:26:00.000-07:00

In a bust that has lasted three years, they have gone through phases: denial, blaming the media for messing with the heads of buyers, predicting bottom soon and laying off staff. Now a chastened industry has reached a new stage, openly acknowledging its mistakes.

“‘We’ve effectively stolen from the future. The demand we should be having now we stole in 2005 and 2006. We’re paying for the sins of our past right now.’”

President Tom Sullivan of San Diego's Sullivan Group Real Estate Advisors.

http://www.sacbee.com/103/story/975645.html

My Take on Inflation versus Deflation

2008-05-27T21:48:00.000-07:00

It is really hard to make a case for deflation when the price of just about everything is going up right now. My previous post was about $4 gas (up 25% in a year). Likewise, commodities and precious metals have been soaring over the past year and have been in long bull markets for the better part of a decade now.

But what if I was to tell you that we are actually in a deflationary environment right now. Deflation is defined as a contraction of the money supply, it is achieved by banks lending out less money and credit being destroyed in the marketplace.

If you look at the housing market and the credit markets, they are screaming deflation right now. Yesterday, the Case Schiller Home index says that housing values fell by 2.2% in March! That's on top of a 2.6% drop in February (revised up). That's almost a 5% loss in two months! Annualized out that's a 30% drop in home values.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYDfc3P6rZys&refer=home

The value of housing in America is about $20 trillion. That means we lost $440 BILLION in housing wealth in March alone. We lost nearly $1 TRILLION in housing wealth in those 2 short months!

Can the price increases were seeing in food and energy possibly offset that gap?

Oil prices have risen from $80/barrel to $135/barrel in the past 6 months. America consumes 20 million barrels of oil a day. That means we are spending $1 BILLION a day more on oil than we did last year. That's only $30 Billion a month in inflationary pressure against that giant wall of deflation coming down from the housing market.

When you consider the fact that the energy market is bigger than any other commodity, and it has moved up much more than any other commodity over the past 6 months, it's easy to conclude that commodity inflation is no match for housing deflation.

The housing market is too big. Even when you add in the inflationary pressure from a falling dollar, it doesn't appear to be enough to overpower the losses in the housing market.

Just today there was a major move down in commodities and oil. I'm thinking most of these markets are overbought at this point and we will see a pretty good pullback over the next few months. That's deflationary, too.

In deflation, cash is king. People scramble to unload their assets at greater and greater losses. Those with the cash can buy up this stuff for pennies on the dollar. I still think this is the end scenario, but we may not see it until after the election.

The losses in the housing market are almost unfathomable they are so huge!

Follow Up on FJ Prediction from February 11th, 2008

2008-05-24T19:58:00.000-07:00

Back on February 11th, I predicted that we would be seeing $4 gas by Memorial Day. Here's a link to the previous post.

http://www.blogger.com/post-edit.g?blogID=1336300683106618557&postID=2190842543631246914

BTW, the picture above is from a local gas station here in Santa Fe. As you can see, I was damn close in my prediction! Of course, at the rate oil is going up right now, I'm probably a week early on my prediction. But $4 gas is a reality now in many parts of the country.

Saudi Arabia and OPEC have us literally over a barrel right now. Poor pathetic Bush went to Saudi Arabia begging them to pump more oil, but why would they do that? Of course they said no, and they also told him that they don't like us devaluing our dollars like we've been doing.

They've told us they are going to raise the price of oil $4 (or 3%) for every 1% the dollar goes down in value. That's a pretty steep penalty but I'm still not sure that our leaders get it, yet.

Well, they get it, but they're doing the wrong thing. Congress is talking about suing OPEC, like that's going to help us get more oil. We've also got Hillary and Obama wanting to increase taxes to oil producers (which I think is a big mistake).

The biggest impact our Government could have on energy prices right now is to support the dollar. Just think what would happen if Bernake on Tuesday made a surprise 1% rate increase to the Fed Funds rate. Immediately, you'd have a flood of money move out of the commodity market and into dollars. Likewise, ending the war in Iraq and bringing the troops home would also be a big support to the dollar. Pipe dreams like a balanced budget would also work, but I'm not counting on that happening until China and Saudi Arabia decide they don't want to loan us money anymore.

In the meantime, the best way we can fight back is to use less oil. That means driving less, being more strategic with your errands so you can combine trips helps. Keep your car tuned properly and make sure the tires are properly inflated. If you're in the market for a new car, buy a more fuel efficient vehicle.

Oh yeah, call your congressmen and women and tell them you're not going to vote for them in November unless they do something to strengthen the dollar!

More predictions coming soon! They will be doozies!

Masking a lousy market with a declining dollar

2008-05-15T14:54:00.000-07:00

So, what do you think of the bull market in stocks that we've been in since 2003? In 2002 the Dow bottomed out at 7701. It recently closed at about 13,000, and has been as high as 14,000. That means the market has gone up about 81% during that time.

The S&P also doesn't look that bad. It bottomed out at 800 in late 2002. It currently sits at about 1423, which is about 78% higher.

However, during most of this time, the dollar index has been declining against most other major currencies in the world. In 2002 the dollar index topped out at about 120, today it sits at 73, which is a decline of 39%. That means that the dollars you hold can purchase, on average, 40% less than they could just 5 short years ago.

So what, you say? After all, if your investments are up 80% and the dollar is down 40%, then that means you are still up 40%, right? Actually that's wrong. Losses are magnified on the way down. A 50% decline wipes out a 100% gain.

It's important to view our market from a foreigners perspective. After all, they have lots of money and they choose where they want to invest it. Many foreigners like to invest in the United States and our stock market because it has been such a good place to keep their money for many years. That is, until this latest bull market.

From 2002 to 2004, the stock market was in major rally mode. Aggressive rate cutting by the Federal Reserve (down to 1% on the Fed funds rate) gave the stock market a reason to rally. The market jumped up 33% during this time, but to foreigners the rate was not that great because the dollar declined 30% during this time. So all the gains in the market were not realized by foreigners, they essentially broke even on a nominal basis.

2005 was a more interesting year. The Federal Reserve decided to start raising interest rates again. They steadily moved the Federal Funds rate up from 1% in mid 2004 to 5.25% in early 2006. During this time the dollar rallied 10%. However, on the stock market side, it was the weakest year of the rally. The stock market went up about 5% in 2005. For American investors, this was a so-so year. Foreigners, on the other hand, had their best year of the current market because the 10% gain in the dollar juiced their 5% market gains to give them a 15% return for the year.

Then, starting in 2006, the dollar resumed it's slide down from 90 all the way down to where it currently sits at 73. That's a 19% decline in the value of the dollar. However, on the stock market side, the S&P 500 went from 1285 to it's current value at 1423, that's only a 10.7% gain. This means the market has been declining for foreigners during this time, they're down 8% even if nominally the market is higher.

So, over the past 5 years the average foreign investor has not made any money in the stock market. I could make the argument that it's the same for American investors because our dollars buy so much less than they did back in 2002 (thank you inflation).

I have talked in the past how dependent we are on foreigners to fund our excesses. If you were from France, or China or Saudi Arabia, how much longer would you have patience in the American stock market if it's earned you a big fat goose egg for 5 years running? I've got a feeling that their patience is wearing thin and they're looking for any excuse to pull their dollars out of our market and go invest it in something else.

Of course, everyone is talking about how the dollar is set to rally right now. After hitting an all time low of below 71 in March, it has moved up to 73 currently. However, what is going to cause foreigners to want to buy more dollars (more demand for dollars will cause the dollar to rally)? I don't see any rally in the dollar until Ben Bernake grows a pair and starts to raise interest rates.

Despite the tepid rally in the dollar right now, I think it's setting itself up for another 10% plunge before the end of the year, maybe more. In the meantime, any rally in the stock market will be completely offset by declines in the dollar.

There is no new wealth being generated in our country, there hasn't been for a long time.

Meat!

2008-05-02T11:38:00.000-07:00

With all the bad news about inflation going on right now, especially regarding food and energy prices, there is some good news out there.

The price of meat is going down. Way down.

In fact, last week I picked up some 85% lean hamburger meat for $1.65/pound. I also picked up boneless, skinless chicken breasts at $1.88/pound.

This week in my Albertsons circular they are advertising USDA Choice Top Sirloin or Petite Sirloin steaks at $2.99/lb. Roast beef is only $6.99/lb. These prices have to be about 30% lower than they were a few months ago!

Are you ready for the horrible reason why these prices are going down? The herds are being culled. Feed and grain has gotten so expensive that many ranchers are killing off a big portion of their herds to save money. This has created a temporary glut of meat in the marketplace. Therefore prices are going down!

It is time to go to your local grocery store and stock up! Fill your freezer to the brim with as much as you can now, because in a few months the glut will be over and prices are going to rise in a dramatic fashion.

A typical frost free refrigerator can keep meat fresh for about 6 months. A deep freezer can keep meat fresh for years. I recommend you try to estimate how much meat you will eat during the next 6 months to a year and go out and purchase it now!

Likewise, look to milk, eggs and other dairy products to keep going up (hens and dairy cows are getting slaughtered, too).

An Inflation First

2008-04-24T20:13:00.000-07:00

Sorry I haven't posted in a while, it's been a busy few weeks. Last weekend I drove up to Denver from Santa Fe and I got my first real inflation shock.

For the first time ever I spent $100 on gas in one day.

I did two fillups and that's all it took to put me over that limit. I also had to fill up twice on the way back and again on Wednesday.So, since last Thursday, I've spent close to $250 on gasoline.

Holy crap that's a lot!

Also, since last Thursday when I filled up in Santa Fe, gas has gone from $3.39/gallon to $3.65/gallon. Again, this is in one week.

I'm pretty confident that my $4/gallon prediction will happen in the next month.

Once again, I just wanted to thank our illustrious leaders for leading us down this path of inflation hell. How are those rate cuts working for you?

So, Ben Bernake and the Feds have desperately and recklessly cut the Fed funds rate to save the banks and the housing market. They have failed miserably because housing is still imploding and the banks are still insolvent (for making too many bad loans to jerkoffs that could never afford them).

Now the value of the dollar is imploding (it's fallen from 82.5 down to 72.5 since they started cutting rates last August). Energy and food prices are exploding (now we have rice rationing at Sam's Club and Costco). Rates on money market funds are in the 1 - 1.5% range - well below the current rate of inflation.

This is the Fed solution, blow another bubble to bail out the housing bubble. Only this time we get a commodity bubble and people are going to starve to death! Right now, people in Haiti are eating DIRT because they can't afford food anymore!

We are being led by failures who don't know when to stop making bad decisions. I urge you to call your Senators and Represenatives and tell them to stop bailing out the morons who caused this mess. Tell them to stop spending money we don't have and tell them to stop destroying the dollar and the economy!

Do something, or else you'll be left with nothing.

FJ Quote of the Week

2008-04-11T17:22:00.000-07:00

This goes right back to my previous post about 3rd Generation Wealth. I encourage you to read the whole post. "Market Ticker" is one of my links and I encourage you to check out his blog. I may not agree with everything this guy says, but he is right way more than he's wrong.

America simply will not stop being foolish. We have no leaders in this nation who will tell it like it is, and give it to us hard and straight, even when that is exactly what we need. Stocks are always supposed to go up, even when there is no consumer income growth to support rising sales. Home prices never go down. Incomes never decline and people never get laid off and businesses never fail.This is the fantasy land that America lives in, and it sucks.

I fight the outrageous consumerism that is drilled into my daughter's head by everyone she comes in contact with each and every day. No, you cannot have a $500 cell phone, and I don't care if your friend has one. No, you don't need a $100 pair of jeans; the $20 pair is just fine. No, you don't need three more swimming suits; you have two that fit. No, you don't need a new IPOD, you have an MP3 player and it works perfectly well.

This is not an accident. It is a matter of ingraining greed into our youth and ultimately into us, and it will destroy us. When times are good its fine to spend on vacations and toys, but not beyond what you can afford, because times are not always good.

Yet we never seem to remember that, or if we do, we don't care. We continue to believe that we can have something for nothing, whether its "free" health care, "free" prescription drugs, "free" retirement money or "free" digital music. When we don't get what we want we either whine to our government and demand it or, in some cases, we just steal it.

I'm tired of it folks. I see it every single day, all around me. Kids who think they are entitled to cars when they turn 16. No, they don't need to go get a job and buy one, they deserve that car and Daddy must buy it for them. Kids that once they get that car, don't need to buy their own insurance or gas - that's the parent's problem too. They won't ride the bus to school because its
"beneath them", and insist on driving the day they turn 16 - but they won't work to earn the money necessary to make that happen.

Here's the link to his post

http://market-ticker.denninger.net/2008/04/unbelieveable-stupidity-whiffs-abound.html

We Are All Paris Hilton

2008-04-09T19:36:00.000-07:00

Bleech! I can't believe I'm putting a picture of this spoiled, brainless princess (with the dead eyes) on my blog, but I need to in order to make a point.

When it comes to family wealth, it typically follows this path.

Generation 1 is hard working and earns the wealth.

Generation 2 inherits the wealth and feels guilty about it, so they try to compensate by spoiling their children excessively.

Generation 3 is the most entitled and lazy generation and they usually end up pissing the family wealth away and end up broke.

Guess which generation Paris Hilton belongs to? Here's another one to ponder... guess which one George W. Bush belongs to?

Even though I am a member of Generation X, I feel that we are that Third Generation. And even though my generation is bad, Generation Y and the Millennials are even a more amplified version of spoiled and entitled.

We are constantly told that we are the richest and most powerful nation in the world, but if you look at the facts it speaks otherwise.

Americans have had a declining savings rate for decades and for the past 3 years we have had a negative savings rate.

Americans equity in their homes has hit it's lowest point since since the 1940s.

One of the biggest issues in this presidential campaign is National Healthcare. But, like the Medicare Prescription Drug Plan from a few years ago, no one is talking about how to pay for it. The Prescription Drug Plan added $9 trillion in unfunded liabilities for our government. The fact is there is no way it could have passed if the Medicare tax had been increased to pay for it. I feel it's the same for National Health Care, there is no way it will pass if it requires a tax increase because everyone is broke and the voters expect something for nothing.

Here's more insanity. The big $600 tax rebates everyone is going to be getting in a few months is being 100% financed by debt. We are borrowing money from the Chinese so we can go out to Wal Mart and buy some Chinese crap!

The Iraq war is also being 100% financed by China and the Middle Eastern nations buying our debt. If you think the war is unpopular now, just wait until they pass some kind of "war tax" or "gas tax" to help pay for it!

Big American corporations like Citibank, Merrill Lynch and Washington Mutual have had to go begging sovereign wealth funds (again owned by China and Middle Eastern Nations) and hedge funds to give them a cash infusion or else they'll implode. The concessions that the corporations are giving these entities are obscene and essentially loot the companies and screw the shareholders!

Our country requires $2 billion/day in foreign capital inflows in order to function.

Look at the proliferation of gambling in our country over the past 30 years. The poor play the lottery and gamble at the local Indian Casino. The middle class gamble in the stock market and in Las Vegas. The upper class have their hedge funds and gamble in Monte Carlo. The problem with this is that none of this actually creates "wealth", it's all just pushing dollars around while the dealers (the casino, Wall Street and hedge fund managers) skim a percentage off the top.

We actually spent through all our wealth years ago. The past 12 years we've been living in a bubble economy (first tech and then the housing bubble) which gives us the illusion of wealth and allows us to borrow money in order to maintain that illusion. However, like spoiled, 3rd generation heiresses, there will come a time when the banks say "no mas" when you call to get another increase in your credit limit.

We'll kick and scream and cry. We'll say "Do you know who my daddy is?!?" We'll threaten them with lawsuits or worse. However, in the end it won't matter. We'll have to reap what we have sown. It won't be pretty, but it will be necessary.

Maybe our country will learn a very valuable lesson. Nobody owes us a living. We're going to have to figure that out for ourselves the hard way.

Who knows, maybe the next generation (post-Millenials) will know how to build real wealth again.

Excess Capacity

2008-04-05T20:27:00.000-07:00

A few years ago I read the following article.

http://dir.salon.com/story/tech/wire/2003/08/29/cars_and_drivers/index.html

In 2003, our country had a major turning point. For the first time in history, there were more automobiles in the United States than there were DRIVERS! What did I read into this article? I read that used car prices were going to plunge. Why? Because in a supply and demand model, if there is more supply than demand – prices go down!

In fact, this past week Yahoo had an article on the fastest depreciating automobiles. One item that stuck out on me was they were talking about the Kio Optima Minivan. This is a car that retails in the Mid $20k range if you buy new. It’s also one of the fastest depreciating autos in the country, losing more than 80% of it’s value over 5 years!!! To put it another way, the driver of the Kia Optima is paying about $416/month in depreciation costs just to drive that vehicle (that's on top of fuel, insurance and maintenance costs).

Even the "best" vehicles that maintain the highest resale value (think Honda and Toyota) lose approximate half their value in 5 years. That is a huge cost incurred by drivers of new cars, but if you are a buyer of used cars - this is to your advantage because you are able to keep more of your wealth.

I talked about autos in detail in my post “The Depreciation Monster” back in December (check it out).

I don’t want to sound like a broken record, but excess capacity is the problem with housing right now. There are simply too many houses/condos/lofts out there when compared to current demand.

It is very, very hard for me to pay full price for anything anymore. The big reason is that I know there are hundreds, if not thousands of people who I know bought something at full price, have never used it (or used it once or twice), and now want to sell it for pennies on the dollar.

Here’s another example. I am currently renting a house (I sold my house last year) which has a very dated kitchen. When we moved in, both the dishwasher and the refrigerator were original appliances and somewhere near 30 years old. Our landlord, who is a very old gentleman, was very resistant to replacing these artifacts. So my wife and I took it upon ourselves to find suitable replacements. Last year we found a 10 year old dishwasher in great shape at a garage sale. What did we pay for this dishwasher? It only cost us $25. We then went to our landlord and said we would give them the dishwasher if they would pay to install it. It was a done deal.

Then we set our sites on the refrigerator. Our landlord didn’t want to buy a new one. So we negotiated that we would replace the refrigerator if he gave us a break on the rent. He agreed, so this past weekend we finally found a suitable replacement. Someone in our neighborhood was selling their 5 year old refrigerator for $200. I went to see it and it was in great shape, I offered $175 and he accepted. This is a fridge that would easily cost about $600 if it was bought new.

Did you know that most retailers do have a policy that allow you to negotiate on the prices of what you purchase? Even big national chains like Best Buy allow it!

http://www.nytimes.com/2008/03/23/business/23haggle.html?ref=todayspaper
Excess capacity is everywhere. Remember how hard you work for your money and use every tool at your disposal to get the best price.

"...since the Great Depression."

2008-03-28T15:23:00.000-07:00

Maybe it's just me, but I've been seeing this comparison more and more in the media when it comes to our economy.

Here's some examples:

"Savings Rate Lowest Since Great Depression"

http://www.breitbart.com/article.php?id=D8FF6D700&show_article=1

"Lawrence Yun, the Realtor's chief economist, said it was likely the country has not experienced a decline in home prices for an entire year since the Great Depression."

http://biz.yahoo.com/ap/080124/economy.html

"Fed takes boldest action since the Depression to rescue US mortgage industry"

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/12/cnfed112.xml

In fact, if you Google the words "...since the Great Depression" you get 2.1 million hits! Apparently this is becoming a popular phrase.

I'm pretty sure that it's going to get even more popular as we move forward.

Bill Fleckenstein is my hero! FJ Quote of the Day

2008-03-24T10:31:00.000-07:00

"Congress and the White House are now attempting to right past wrongs with bailout schemes -- some aimed at lenders and others at borrowers. And of course, the Fed is being called on -- and has willingly obliged -- to provide more easy money in the hope that more of what created the problem can solve it.

The latest example by the Fed: Handing JPMorgan Chase a $30 billion credit guarantee to get it to buy Bear Stearns.

The insidious and dangerous unspoken corollary to all this: Financial pain is now unacceptable. Those in trouble demand to be rescued, and the government seems to agree that the "creative destruction" component of capitalism must not be allowed to do its work. It's a sad irony that as former communist countries embrace capitalism, we seem to be headed in the other direction."

- Bill Fleckenstein, "Contrarian Chronicles"
March 21, 2008

Here's the link to the article:
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/CateringToTheBailoutNation.aspx?page=1

FJ Challenges the Conventional Wisdom: High Housing Prices are BAD for the economy and consumers!

2008-03-16T20:30:00.000-07:00

Are high housing prices a good thing?

If you listen to the media, the politicians and the financial industry when asked about the housing crisis - overall you'd come away with the impression that this is true. And all of their "solutions" come down to finding a way to maintain those high prices no matter what!

However, if we delve into the pre-bubble mentality. High housing prices are often seen as a liability for a community.

I live in Santa Fe, NM, which has always had a certain cache - it's considered a highly desirable place to live (and retire to). Because of this, it's always had high housing prices. There are other places like this including Aspen, Colorado and Jackson Hole, Wyoming.

1. The biggest problem with high housing prices is that it makes it very difficult to attract businesses and develop the local economy. Employers aren't that eager to have to pay above market wages to compensate for the high cost of living. In Santa Fe's case, we are the state capital, so there are lots of government jobs. Likewise, we have a large tourist economy that is highly dependent upon the economy. Housing is the third biggest employer in the city (and we know how that's going right now). We have no major employers outside of these sectors (Thornburg Investments and Thornburg Mortgage are probably the single largest private employers in the city, but Thornburg Mortgage is on the verge of going bankrupt because of margin calls and that could result in 400+ high paying jobs evaporating and further damage a struggling housing market).

Because we have no industry, wages in Santa Fe are not good. We often have a problem with teachers, policemen and firemen being able to afford houses in the city where they work. If you want to find "affordable housing" in Santa Fe you have to go to the ghetto-like southwest side (where, according to an article in the paper today, affordable is $250,000+), buy a mobile home and live in a trailer park, or buy an affordable house in Albuquerque and commute 60 miles each way to work.

Likewise, we have a brain drain where the smartest kids in our city can't wait to leave because the opportunities in this city are so limited. We are also saddled with a high dropout rate amongst the disenfranchised kids and minorities.

2. Another big negative for high housing prices is high property taxes. One good thing about New Mexico is that we have very, very low property taxes (most of our school funding is paid for by our "gross receipts tax" which is like a sales tax on everything except medical care and food). On the house I owned until last year, my annual taxes were only about $1,200 on a home that I eventually sold for $345,000. However, in most parts of the country, property taxes come to about 1% of assessed value. That means that over the past 5 years the average person's tax burden on their home doubled or more, even if they didn't do anything to the property. When you talk about someone paying $3,000/year in property taxes on their home when a few years ago their taxes were only $1,500/year - that creates financial pressure on homeowners, especially when wages have been stagnant like they have been this past decade.

3. Then there's the whole maintenance issue. If you have all your money going toward a high house payment with high property taxes, how are you going to be able to afford to pay for the upkeep of your property? When it comes to budgeting for the purchase of a home, they say that you will spend about 1% of the cost of your house on maintenance and upkeep each year. Then, every 10-15 years expect a major repair, like a new roof or the house needs to be restuccoed. Major repairs can set you back $10,000 or more. High housing prices hurt the homeowner's ability to properly maintain their property.

So, that's what you get with inflated housing prices:
Communities can't attract businesses
Brain Drain and high dropout rates
People who work in the community can't afford to live in the community.
Depressed wage base
High property taxes

On the flip side, lower housing prices aren't the end of the world. People will be able to afford houses again without having to take on a toxic mortgage. Property taxes will come down. People won't have to commute hundreds of miles a week to their job. Maintenance issues will be a minor nuisance as opposed to a financial crisis. Finally, you and your partner won't have to work 80 hours a week at multiple jobs in order to afford a home.

That doesn't seem so bad to me.

Banks ask Congress to fill a $3 Trillion Hole

2008-03-13T20:14:00.001-07:00

"Watch that first step, Doc. It's a lu-lu!" - Bugs Bunny

How much trouble are the banks and financial companies in relation to this housing bust?

In my previous post I demonstrated how they essentially milked out all of the equity Americans have in their homes through their fruadulent and corrupt lending practices.

In summary, back in the 90s Americans had $10 trillion in housing wealth against $5 trillion in mortgage debt. During the height of the bubble both numbers swelled to $20 trillion and $10 trillion respectively. We are now on the downslope and it will end with $10 trillion in housing wealth being backed with $10 trillion in mortgage debt.

However, it's even worse for the banks. Because 30% of the houses in this country are owned outright. This means that the endgame, is that there is $10 trillion in debt held against $7 trillion in housing wealth. The fact that the mortgaged housing stock is still "valued" at $14 trillion doesn't matter because it's shrinking every day (last month national housing prices fell almost 2%, that's $400 billion in housing wealth up in smoke).

This is what is making the banks and financial companies crap their pants. They know that $3 trillion of what they are holding is almost certain to default. Once people have lost all their equity, they'll have very little incentive to stay in the house (especially if rents are cheaper). When you also throw in the fact that we have millions of "homeowners" who never put a penny down on their homes and the debt slaves who HELOCed and Refied all of the equity out of their house these past 5 years, you have a very, very big problem.

But wait! The problem is even bigger. You see many of these banks and financial institutions went out and used this debt as collateral to leverage up their portfolio by 20 or 30 times! So one bank could have $100 million in mortgage debt receivables on their books, but they could have used that to borrow $20 - $30 BILLION more. What did they do with that money? Well they bought more debt instruments: like CDOs or US Treasuries, or Agency debt.

It was all supposed to be very safe. But when you have leveraged yourself to the hilt, a tiny move in the wrong direction (if you're leveraged up 20 to 1, it only takes a 5% move to WIPE YOU OUT!) can send you to bankruptcy very quickly.

If you want an example, look at the Carlyle group and Thornburg Mortgage. They both overleveraged their positions, the value of their collateral dropped by a small amount and generated huge margin calls. Both of these companies have been unable to sell their debt securities (because the debt markets have been frozen for months and they continue to deteriorate), so both of these companies are both going to evaporate.

Poof! Like magic, they will disappear forever.

So now these big and powerful financial firms, who made hundreds of billions of dollars on the way up are now begging the government to fix this.

The only problem is, the hole is too big!

Both the Government and the Federal Reserve are doing everything they can to try to fix and unfixable situation. In the entire history of our country (that's 232 years) we've only now been able to accumulate $9.4 trillion in debt. Now the bankers and financiers are looking for a $3 trillion handout to bail them out of their own greedy stupid mess that THEY CREATED! Shoot, the annual Federal Budget is $3 trillion!

Look at some of the crazy proposals out there right now:

Ben Bernake wants lenders to REDUCE THE PRINCIPAL of mortgage balances for people that are underwater. I talked about this in a previous post on Debt Negotiation - THEY WOULD NEVER EVEN CONSIDER THIS UNLESS THE SITUATION WAS BEYOND GRAVE AND THE ALTERNATIVE (MEANING LET THE HOMES GET FORECLOSED ON AND TRY TO RESELL THEM IN THE OPEN MARKET) WOULD END UP COSTING MUCH, MUCH MORE!

Congress is proposing tax credits of $5,000 to $15,000 for people to buy a home. Personally, I'm waiting for a bigger tax credit before I would buy.

The Federal Funds rate has been reduced from 5.25% to 3% in less than 6 months and it will probably be dropped another 0.75% next week, even with inflation and commodity prices soaring and the dollar depreciating more than 10% since they started cutting interest rates!

Fannie Mae, Freddie Mac and the FHLB have all had the limits raised on conforming mortgages. So now a conforming mortgage can be up to $729,000 in some parts of the country (so much for helping the poor afford homes).

Sorry, banks. You created a problem that's too big to fix. Everyone sees that all of these proposals don't help homeowners, they help the banks and financial institutions that created this mess.

Just look at how Agency debt from Freddie Mac and Fannie Mae have been tanking since they raised the loan limits. Everyone knows that this is just a ploy to allow companies like Merrill Lynch and Citibank to pawn off their toxic debt onto the government (meaning, us taxpayers). No one wants to come within 100 yards of this toxic debt! In the meantime we have to suffer with higher gas and food prices (along with everything else) just so they can keep their game going until at least after the election in November.

It won't work, and I don't think they can hold this thing together for another 9 months, but that's just my opinion.

Pump and Dump

2008-03-06T20:25:00.000-08:00

Here's the Headline on Yahoo today:

Homeowner Equity Is Lowest Since 1945
Thursday March 6, 2:15 pm ET By J.W. Elphinstone, AP Business Writer
Federal Reserve Report Shows Homeowner Equity Dipping Below 50 Percent, the Lowest on Record
http://biz.yahoo.com/ap/080306/home_equity.html

How is this possible? Haven't we just experienced the greatest decade ever
for housing appreciation? Didn't the average price of a home in the United
States double during this time?

But wait, the news is actually worse than what's reported. Right now the value of housing in America is about $20 trillion. There is a total of about $10 trillion in mortgage debt held against this equity.
Everything looks pretty good so far, right?

However, about 30% of the housing stock is owned outright ($6
trillion). So that leaves only $14 trillion in housing equity against $10 trillion in debt - all of a sudden that cushion doesn't look as big as
it did.

In the past year, the Case-Shiller Home Price Index has said that
housing values across the country have plunged by almost 10%! Take away 10% from $14 trillion and you're down to $12.6 trillion in equity. Uh oh, all it's going to take is another 20% drop to WIPE OUT ALL OF THE HOME EQUITY IN 70% OF THE HOUSES IN THIS COUNTRY!

This, my friends, is a classic pump and dump of the housing
market. If you understand economics you will know that all pricing
power happens at the margins. Housing is a product that has very small margins. At any given time, only about 1%-2% of the existing housing stock is for sale (there is about 100 million housing units in this country).

Because of easy financing (no down payment, no documentation, liar loans, option ARMs, etc., etc.) you had a large number of people enter the housing market. Anyone knows that when you increase demand without a corresponding increase of supply (housing supply takes about 2-3 years to catch up) the price goes up. In this case, the price went up substantially.

Now we have about 4% of the homes in America for sale and you would think it was the end of the world! However, at the margin prices need to come down substantially in order to clear out this excess inventory. The fact that sales are also slowing substantially is another problem because it puts even more pressure on prices to come down.

So where are house prices going? To answer this question I want to take you back to the last bubble, the tech bubble. From 1996 to 2000 the Nasdaq went from 1052 to 5048. Then the bubble burst and the Nasdaq fell all the way to 1142 in October of 2002.

ALL OF THE GAINS OF THE BUBBLE WERE WASHED AWAY ONCE IT POPPED!

Even today, 8 years after the Nasdaq reached that lofty high, the
Nasdaq closed at 2220. That's almost 60% off it's all time high. If you add in inflation (3%/year), the Nasdaq is still down OVER 80%.

In my opinion, the same thing is going to happen to the housing
market. ALL OF THE GAINS IN THE PAST 10 YEARS WILL BE LOST! That means the average price of a home in America is going back to around $100,000. Also, because the housing market is not nearly as liquid as the stock market, it will take longer to deflate than the Nasdaq did. The peak of the housing market was in the fall of 2005, so we're 2.5 years in right now and prices are only down 10% (and all of that loss occured in 2007).

Equity is a phantom, but Debt is permanent!

In the end we'll have $10 trillion in housing stock backed by $10
trillion in debt. That means Americans will have, on average, NO EQUITY in their homes when this is all done!

That means the end result is that we, as a nation, have become poorer due
to the housing bubble. Not to mention we now have to live through the massive housing led recession that we are entering right now.

We've been played, America! We were the Mark and we fell for it, and now we have to suffer the consequences. The scam artists are laughing all the way to the bank!

Oh My God!

2008-03-05T19:38:00.001-08:00

Thank you "Mess Greenspan Made" blog for finding this. Feel free to check out this excellent website.

There is a closed gas station that I pass by on the way to work that still has prices listed on its sign. There it is, frozen in time: $1.37/gallon for unleaded.

Ahh, the good old days!

Be Careful of What You Wish For

2008-03-03T21:55:00.000-08:00

I remember back in High School I had a conversation with this girl, Kelly (who was my date to the Prom). We were talking about what time period we would like to have lived in. We both agreed that the 1920s would have been awesome. This was really against the grain because most of the kids my age would have said the sixties.

Why did I say the twenties? Well, it was a really exciting time in America. It was a decade long party filled with jazz music and flappers (hubba, hubba). It was an incredible time for artists, architecture(Art Deco), design, and pop culture (movies like “Metropolis”). It was a time of exciting technological innovation like the automobile, radio and flight. There was an economic boom and a stock market boom. Everyone was getting rich, and it just looked so classy!

My younger self always thought how cool it would have been to have lived in such a time. Of course, I wasn’t that concerned about what happened in the decade after the roaring 20s – the Depression.

It’s interesting because the more I learn about the roaring twenties, I see eerie similarities to what has transpired in our country over the past dozen years. The beautiful and popular spent their time and money at clubs where you could pay $1,000 for a private table and spend $400 on a bottle of liquor (with a 2 bottle minimum). Women salivated at $1,000 Jimmy Choo shoes and $5,000 Christain Dior handbags. Not to be outdone, men bought things like $3,000 Plasma Televisions and $50,000 Hummers and Escalades. We also had the internet revolution during this time - think about how much that changed your life. Finally we were blessed with twin bubbles, first in technology and then in housing to power all this excess.

The dark side of the 20s was that it was all fueled by debt. Consumers and Businesses took on massive amounts of debt in order to live “the good life”. Unfortunately, it was all a house of cards. Once the debt reached a certain level, people couldn’t service it anymore. People started to default on their obligations and the economy collapsed in a deflationary spiral. The banking system seized up and there was no more credit or liquidity that people could use to fuel the economy. In order to service the high debt loads, people had to sell their assets (including stocks, bonds and houses) at greater and greater losses. As an example, by 1933 home prices across the country fell 90%! That's a fact that the NAR will never tell you about.

So, I guess I got my wish. Near as I can figure, the past decade has been as close to the 20s as I could have experienced. Did I enjoy it? Yes I did, but I could never embrace the debtor lifestyle. It would have been so easy for me to have pulled hundreds of thousands of dollars out of my house and gone on exotic trips, bought overpriced foreign cars and lots of techno gizmos to impress my friends and relatives. I could have gotten myself a dozen credit cards and maxed them all out on shopping trips, expensive restaurants and entertainment.

But that’s not me. I knew that would be a dead end that would only end in tears. I can only imagine what is happening across this country with people who owe more on their home than what it is worth, who are in danger of losing everything because they took on too much debt. The stress and fear must be overwhelming, and it is something that – hopefully – I will never have to experience myself.

The plus side is that if we do hit a deflationary spiral like what occurred in the 30s, I will be waiting with baited breath and cold, hard cash to buy those assets at pennies on the dollar!

FJ Quote of the Day

2008-03-01T21:36:00.000-08:00

"Many Americans are now realizing that being tied to material items comes at a heavy costs. If you have beaucoup debt you are unable to do other things. When you ask Americans to imagine a wealthy individual, they will tell you that they drive in a foreign luxury car, wear a $5,000 watch, and live in an uber
McMansion. Yet the reality is very different. As highlighted in the Millionaire Next Door, many of the day to day millionaires drive nice but not super expensive cars, live in modest homes, and don’t spend ridiculous amounts
on artifacts of wealth. The book was written before the housing bubble but the fact remains, wealth is not possession of expensive items. Wealth is having the freedom to do what you want. Having massive amounts of debt hanging over your head is not wealth, it is a financial albatross that will take your freedom away."

Thank you Dr. Housing Bubble for such an eloquent quote! I also recommend you read "The Millionaire Next Door", it is a fascinating book about what it takes to become wealthy in this country!

I've also added a link to Dr. Housing Bubble's website on the right. Please check him out. His "Real Homes of Genius" are awesome!

FJ Prediction: $4/gallon gas by Memorial Day

2008-02-27T20:04:00.000-08:00

Please note, I am not giving any investment advice. You need to do your own due diligence in regards to investing.

We’ve got a perfect storm brewing in the energy markets right now. Oil has recently hit, and for the first time closed at, over $100/barrel this past week. On top of that, the springtime has many refineries switching from winter blends to summer blends. Alongside both of these issues is the fact that Memorial Day kicks off the summer driving season when gasoline consumption tends to peak.

All three of these trends lead me to believe we are going to see a major uptick in the price of a gallon of gas starting now. Here in Santa Fe we’ve already seen gas jump up by about $0.50/gallon in the past month, to about $3.09/gallon (and I have seen some stations at $3.19 for regular unleaded).

I know that oil also was hovering around $100/barrel oil in November and December of last year. For some reason we didn’t see a big bump in the price of a gallon of gas. Here in Santa Fe, prices remained in the $2.60 - $2.80/gallon range during that time. I’m not sure why prices stayed so low (although my conspiracy theorist has lots of ideas about government manipulation to keep prices down over the critical Holiday shopping season).

Regardless, we didn’t face the other two issues back at the end of last year. Refineries are already stretched to their limit trying to keep up with our energy consumption. When they start to switch over in the next few months, expect major increases in the price of gas. Last year, even though oil was in the $60/barrel range, gas prices jumped over $3/gallon because of the refinery bottleneck.

I’d be interested in finding out if they’ve been shipping extra number fours (for the signs) to local gas stations in anticipation of the $4/gallon being breached. For the record, I also thought this was going to happen last year, but that never materialized. Nevertheless, everything seems much more likely this summer.

The only thing that could change this prediction is a sudden and dramatic slowing of the economy in the next 3 months. Even though this is a possibility, and the economy is slowing right now, I doubt this is going to have much of an impact on oil prices. There is a real bull market happening in energy right now and I expect that to continue in the short term.

However, longer term I’m positive that prices will be falling rapidly starting in Winter, 2008. I think by that time you are going to see real recessionary indicators on both the American and world economy. If worldwide oil consumption drops by only 10%, that could result in a 50% drop in the price of oil (back to $50/barrel and probably under $2/gallon gas). I hate calling this good news because it only happens if the recession is stronger and deeper than anyone thinks right now.

I will follow up with this on Memorial Day to see if my prediction comes through.

Sorry I've been so sporadic with my posts. This month has been crazy, but I've got lots of stuff to talk about going forward. I'm going to try to post some more real soon!

Old School Housing Truisms

2008-02-17T19:39:00.000-08:00

Amid the housing frenzy of the past few years, there was a lot of conventional wisdom which got ignored. I want to remind all of you that it was not that long ago that all of these rules were rigidly followed (and had been followed successfully for 50 years).

When I bought my first house in 1998, all of these rules were still being followed.

1. YOU NEED A 20% DOWN PAYMENT. This shows the bank that you have discipline and are able to live below your means. It also means the buyer has some "skin in the game" and will be less likely to walk away from this debt. If you didn't have 20%, you have to pay Private Mortgage Insurance (PMI). PMI was a very expensive penalty, it would usually add another $100 - $200/month to your mortgage payment, which further reduces how much home you can afford.

2. GET A 30 YEAR FIXED MORTGAGE. If you couldn't afford a 30 year fixed, you couldn't afford the house. Adjustable rate mortgages, interest only mortgages, subprime mortgages made up a very small percentage of all mortgages and were reserved for very special cases.

3. IF YOU NEED TO SELL YOUR HOME WITHIN 3 YEARS OF BUYING IT, YOU WILL PROBABLY LOSE MONEY. This is why when you took a job in a new city you rented! If you weren't sure if you were going to be in a place for at least 3 years, you didn't buy a house! Remember, when you sell there's a 6% commission plus closing costs (about 1.5%). You needed about 3 years of appreciation in order to cover those costs, and even that wasn't a guarantee.

4. HOMES ONLY APPRECIATE AT THE RATE OF INFLATION. This goes back to point #3, you could only count on about 3%/year appreciation on your house. That means a $100,000 house should only increase in value by about $3,000/year. After 3 years, a $100,000 house would be worth about $109,272. If you needed to sell and paid 7.5% (commission and closing costs) you would net out about $101,000.

5. YOUR LIFE WILL BE THOROUGHLY DOCUMENTED, TOP TO BOTTOM, BEFORE A BANK WILL GIVE YOU A MORTGAGE. They want to see two years of steady employment (pay stubs, W-2s and tax returns). They also want to see your investment and savings accounts, and no more than 25% of your down payment can be a gift from your family. They check your credit report to see if there are any judgements against you, and if there are - you need to pay them off. This is a grueling process and they basically find out everything about you before they end up loaning you money.

6. HOUSING PRICES CAN AND DO GO DOWN. Despite what Realtors tell you, every housing market - at some time - has gone down. Even some of the biggest and most expensive housing markets, including San Francisco, Honolulu and New York, went through periods of sustained housing declines. These declines take years before the losses are recovered. The bank wants to be sure you will stick it out and keep making your payments and that's why they wanted a large down payment and a full documentation of your financial situation in the first place.

All of these rules are slowly being reinstated in the wake of this massive housing bust currently in effect.

For 50 years the homeownership rate in this country held steady at 65%. In the past 10 years they've been able to push that up to 70% but only by repealing every one of these rules. The entry of approximately 15 million homeowners over that time caused the average price of a home to double. Now those 15 million fake homeowners who never put any money down, who used no documentation loans and Option ARM or subprime mortgages will lose their homes and prices will go back to their inflation adjusted norms.

And there's nothing that the Republicans or the Democrats can do about it.

Demergophobia

2008-02-13T19:25:00.001-08:00

Demergophobia - The Fear of Debt, The fear of falling into debt.

AMERICA, YOU HAVE BEEN TAMED!

There was a time not so long ago when Americans feared debt. When you bought something, you paid cash.

If we go back 100 years, the use of credit was actually considered a moral weakness on the part of the user. It was typically extended to desperate people who couldn't pay their bills.

When people did go into debt, it was used for an extremely large purchase, like a home. And when you did go into debt, you worked your butt off to pay it off and pay it off quickly. Did you know that back in the early part of the 20th century, mortgages used to be paid off in 10 years?

Back in the day, there was something called "mortgage burning parties". No kidding, people would throw a big party and invite all their friends over when they finally paid their mortgage off! They would light that mortgage note on fire and everyone would cheer. The symbolism of the burning mortgage note was the homeowner was now released from servitude to the bank.

Now, compare that to our modern ideas about the use of credit and debt. Debt is no longer feared, it is embraced. Debt is not shunned, it is encouraged at all levels of our society. In fact, our culture has become so twisted by the use of debt, in many ways your level of "success" is directly correlated with the use of debt. People who are up to their eyeballs in debt are typically viewed as the most successful. They have the nicest and most expensive houses, cars, clothes, electronics, etc.

The problem with this widespread use of debt to finance a lifestyle is that it warps society's perception of what is successful. When you see Joe Blow driving around in an tricked out H2 and your tooling around in a 10 year old Toyota, even though you have a good job and make a decent income, you're going to start questioning your own self worth.

The use of debt also twists the actual value of what you buy. The use of debt creates an artificial demand for items. Remember in basic economics, when demand increases for any particular item - so does it's price. Look at what happened to housing over the past 5 years. The banks and Wall Street created products that allowed people to buy homes with no money down, no income verification and no assets. Shoot, you could get a mortgage that actually had negative amortization, that means the amount you could pay each month was less than the interest owed on what you borrowed (so every month you would end up owing more as that unpaid interest was added onto your mortgage balance).

This caused a large segment of people to enter the housing market that, in more sane times, would never had been able to buy a house. Their entry into the housing market caused a massive bubble. However, the lending was so loose and fraudulent that there is now a massive wave of defaults happening across the country. Banks and Financial instituations have responded by tightening up requirements. They now require you to verify your income and employment, they now want a down payment. This has removed a huge segment of the population from being able to buy a house. The predictable response is that the price of housing is now coming back down (right now the estimated losses in housing is 10% or $2 trillion, and we have a long way to go).

Most people don't realize that there was another massive housing bubble back in the 20s. After the great depression began the supply of credit almost completely dried up. Because there was no credit, no one could afford to pay the going prices for homes. The end result is that by 1933 (the worst year of the depression) house prices crashed 70 - 80% across the country!

You need to develop a fear of debt again. Don't trust the smiling bankers or the friendly "pre approved" credit card offers that come in the mail every day. Know your limits as to how much debt you can afford and refuse their offers to give you more than you can handle. Keep a tight lid on the amount of debt you have because it is so very, very hard to get rid of it once you take that debt on.

Debt Negotiation - UPDATED

2008-02-03T20:16:00.000-08:00

Did you know that most debt is highly negotiable?

If you are having a problem paying your debt, call your lender and talk to them. Most lenders are highly motivated to have you to continue making your payments.

Think your interest rate is too high? You can get that lowered usually with a call. Likewise, if you want to just make an interest only payment for a month or two, the lender will usually allow that. If you need to renegotiate the term of your loan (that's extending the time you make payments on a loan) they can adjust that as well. Finally, if you are able to make good faith payments toward your debts, you can also get penalties reduced or eliminated. All of these items can help in lowering your monthly payment and helping you if you're facing a short term cash crunch.

However, this negotiation does have its limits, and that's the debt trap. The bank wants two things from you: they want you to pay your interest due each month and they want the balance due. Of course, lowering your interest rate reduces the interest they collect - but they still collect interest from you.

Most people are so afraid of their lender, they never try to negotiate with them and just accept usurious levels of interest and penalties on their debt. When I hear about credit cards charging 30% interest, I am floored that anyone would even pay that. The banks only charge that because they feel they can milk that out of the populace.

Believe me, the lenders DO NOT want you to default! As long as you're making payments, they make money - never forget that. If you're having problems with your debt, or even if you're not and just want some better terms, call them today and see what they can do for you. If you get a lot of stonewalling from the first rep that comes on the phone, ask to talk to their manager. Move on up the line until you get satisfaction. Keep names and numbers of the people you talk too.

You do need to understand your limits, though. If you call your lender and ask them to reduce your credit card balance from $3,000 to $2,000 they will laugh at you. The companies can't do that. The only thing that discharges debt (that is releases you from the obligation of your debt) is bankruptcy or foreclosure.

UPDATE - On February 13th, Henry Paulson came out with another mortgage rescue plan that is more of the same. Six of the biggest mortgage lenders in the country (that make up about 50% of the outstanding mortgages right now) are going to freeze the foreclosure process for 30 days in order to do some "work outs" with these heavily indebted homeowners. This is basically the same plan as the "Hope Now" alliance that hasn't done jack squat since it was instituted back in the fall (Hope Now has helped a total of 10,000 homeowners since it was instituted - as a comparison we had 2 million foreclosures in 2007). The reason is because the work outs don't address the real problem, people took on too much debt. They're going to try to refinance these homedebtors into a fixed rate, lower the interest rate, remove penalties, extend the term of the mortgage, etc. However, this doesn't solve the problem of too many people took on too much debt that they couldn't afford.

This is problem that's happening in the housing market right now. When the government and the lenders talk about negotiating with homeowners, they're talking about interest rates, loan terms and penalties assessed. The problem is that most homeowners in trouble paid too much for their homes, they took on too much debt. It doesn't matter how you change the terms on the debt, you're never going to be able to get a person who makes $50,000/year able to pay a $500,000 mortgage.

That's it, game over.

The banks won't voluntarily discharge that debt. Those loans have to be defaulted on those homes have to be foreclosed on for that debt to be released from the system.

So, don't pay a penny more than you have to in interest or penalties. Remember that those expenses are a direct tax on your wealth. Don't be afraid to talk to your lender and get those expenses minimized as much as possible.

What is a Collectable?

2008-01-30T19:31:00.000-08:00

Unfortunately, the word "collectable" has become way too common in our society.

Everything from decorative plates to special edition DVDs to motorcycles slap that word on them in a desperate attempt to justify a premium price on a crappy, mass-merchandised depreciating liability!

I mentioned collectables as a type of asset that you should look to buy (please see: "Saving is boring, buy assets instead!"). But it's very important to actually define what a collectable is.

There is one, and only one factor that determines if something is a collectable and here it is:

SCARCITY

That's it, nothing more. If there are a million versions of your collectable item, guess what? It's not a collectable and will not be worth anything.

In our modern, post-industrial society it's almost impossible to find items that are truly scarce. In fact, the only time we come across any scarcity - it's usually manufactured that way. Think about iphones, or the Nintendo Wii, or Tickle Me Elmo. The manufacture of all these items are deliberately held back to create a false scarcity (it also generates publicity which is good for driving future sales).

Most items that are scarce are items that haven't been in production for years. Over the course of time, as things wear out, they are relegated to the scrap heap. The few working models that are still in existence (and in good condition) become steadily more valuable with the passage of time. Examples include classic cars, vintage clothing or antique furniture.

You are never going to find anything collectable in Parade Magazine, or on QVC or at Wal Mart - NO MATTER WHAT THEY SAY! Don't waste your money.

You also have to be very careful about bubbles forming in fake collectables. Probably the most famous example of this is Beanie Babies. In the late 90s the market for these little, plush stuffed animals went crazy. Prices were bid up to unbelievable levels relative to their actual value. Parents stupidly bought tons of these mass manufactured items as part of their kid's college fund.

True story, we actually had two little yellow Beanie Baby ducks that my wife found out were quite "rare". We contacted several collectors in our local market in 1998 (this was before ebay really took off) and were able to sell them for - I swear - $750 each! We then used that money to buy a new refrigerator for a house we just bought. I'm glad we didn't hold onto those things because today I doubt we could get $20 for them.

Then, predictably, the bottom fell out of the market and the Beanie Babies went back to their true value, which was almost nothing. In fact, this past October, we were at the local elementary school for a Halloween fair. One of the carnival games was a fishing game where you could win a random prize. I guess some parent got tired of holding hundreds of worthless Beanie Babies in their house because they were giving away tons of them as a random prize (not even a premium prize for winning one of the skill games) - it only cost 2 tickets and my daughter ended up with a little white seal.

Comic books were another similar kind of bubble that burst in the mid 90s. I had been a comic book collector since I was in grade school. Interest in comics had been growing for years, but it seems like it hit a manic stage when they killed Superman in 1992. Then the "special editions" and "collectable" issues multiplied like locusts and people snatched them up just as fast as they could. It was crazy, there were foil embossed covers, multiple covers of the same comic, little trinkets sealed in a bag with the comic (and don't you dare open that plastic bag or it will be worthless!). Prices on comics, both new and used, skyrocketed. Finally, the whole thing collapsed under it's own weight and all these really expensive comics became nearly worthless BECAUSE THERE WERE TOO MANY OF THEM. I've got boxes of comics at home. Some of them do have some value, but most aren't worth anything. I've been thinking about saving a few of my favorites, selling off the rest for as much as I can get and go out and buy one or two truly collectable comics from the golden or silver age (that's the 1930s to 1960s).

If you decide to dabble in collectables, it is probably the highest risk asset you can own. True collectables have a very limited market, there's only a small pool of buyers and sellers, and so that makes them very illiquid. On top of that, you have to maintain the item and worry about it becoming damaged or stolen.

Still, if you're in the right place at the right time, you can make a killing dealing in collectables.

Turning A Liability Into An Asset

2008-01-23T20:24:00.000-08:00

You've heard me ranting about how a car is not an asset, and that is still true.

However, you can still turn something like this from a liability into an asset. In December, I was flitting around on Ebay Motors and I found an auction on a 2004 Toyota Prius that was going to end in 30 minutes with no reserve.

I did a quick Carfax report on the car and it came back clean. I also confirmed that the title was clean (not salvage). I placed a bid and won the car for $15,400. My intention from the beginning was to resell this car for a profit.

I had to ship it from California and re-register the title into my name, that cost about $1,000. There was also about $250 - $300 in misc. costs (insurance, gas, advertising, etc.). So overall my total costs for the car was about $16,650.

I knew that I could sell this car for a proft and make some money. I put an ad in the local paper and placed some flyers around town and I eventually sold it for $18,200 just this past week! That's a profit of $1,550, or a 10% return in only 6 weeks.

So I made a nice little profit in a relatively short period of time. Remember, an asset is anything that has the potential to increase in value. Buy low, sell high, get wealthy!

Stress Test

2008-01-20T20:29:00.000-08:00

Please note, I am not giving investment advice. This is only based on my personal experience. Investing in anything is a risky venture and you can lose money, please do your own due diligence before investing in anything.

Holy crap! After eeking out modest gains in 2007 (the Dow up 6%, the S&P 500 up 4.5%, Nasdaq up 9%), the market has completely cratered in 2008.

Just this past week the Dow dropped 500 (the Dow is now off 14.5% from it's all time hit hit in October). The Nasdaq shed more than 4% of its value (the Nasdaq is now 18.2% off it's 52 week high, dangerously close to being labeled a Bear Market).

All of the 2007 market gains were wiped out in the first 5 trading days of 2008. Right now all the indexes are within 1% of breaking through their 52 week lows. In my opinion, all the momentum on the market is down. I'm also convinced that despite all the bad news that's come out over the past 6 months, we are just getting started.

So - How are your investments doing? Chances are you just got your year end statement and it looked pretty good. However, how is it doing now?

The first thing you need to do is compare how your overall portfolio is doing versus the market. Just look at the total value of your accounts and compare that to what the value of the account was on your last statement. Quick and easy. If your portfolio is down more than the market is down, you need to do a deeper analysis.

The deeper analysis comes by checking each of your individual investments (stocks, mutual funds, etc.) and see how they have done since the beginning of the year. This is going to allow you to see the weakest portions of your portfolio. For instance, if you have more than 20% of your money in technology, chances are your overall portfolio is underperforming the market. You need to reduce the weakest positions fast! Don't wait and hope it will come back. We are in a declining market and your losses are only going to be magnified going forward.

I encourage you to go online ASAP and check your investments and see how they have done since your December 31st statement was printed.

In this kind of market, you want something that will hold it's value, or even go up, when the market sucks like this.

Ever since the first market shock that occured last February, I've been adjusting my holdings and getting into investments that do well in a bear market.

The huge declines we've seen the market since the New Year started have barely affected my portfolio. My qualified portfolio (which is more aggressive) has only declined about 1% in 2008. My after tax portfolio has actually gone up abut 3% since the new year started.

So, how did I accomplish this? Well first of all, I stayed far away from real estate, technology and financial stocks - I was pretty sure that all of these sectors were toxic waste. The sectors that I favored were energy and industrial materials stocks (both are plays on commodities - which did really well last year). However, I only had about 20% of my money in stocks, 10% in domestic and 10% in foreign stocks. I also put some money into gold and silver (again with commodities). I was in investments that would benefit from a weaker dollar like foreign currencies and foreign sovereign bond funds. Finally, I decided to hedge 10% of my portfolio in BEARX, a bear market fund. Bear market funds go up when the market goes down. Let me tell you, when the market is going down like this, a bear market fund is your best friend and it helps offset other losses in your portfolio.

I have passed the stress test with flying colors with this portfolio. However, things are always in flux and I'm always considering changes depending on what's happening. Energy is a tough call right now, there is a real possiblity this commodity could crash if market sentiment says a recession is at hand. Likewise, I've been thinking about increasing my BEARX exposure to 20% of my portfolio.

Look at where the economy is going and invest accordingly.

The $20 Ipod

2008-01-17T20:11:00.000-08:00

If you want to get wealthy, and I mean really wealthy, here's the secret.

1. Find an item (this can be anything).
2. Convince people to pay you more for it than you paid for it.
3. Repeat until you are rich!

What does this have to do with Ipods? There is no one better than Steve Jobs at following this rule.

Did you know that it only costs Apple $20 to produce an Ipod? That's right, 20 bucks. Then, through one of the slickest marketing campaigns I've ever seen, they've been able to convince us - the consumers - to shell out $250 - $400 for one. That's a 1200% profit margin, MINIMUM!

Oh, it gets even better. The Ipod battery is only designed to last about 18 months and it's not easily replaced. So that means after a year and a half, you have to buy another one! Rinse and repeat and Mr. Jobs makes BILLIONS!

Freaking genius!

How about Starbucks? Somehow, they managed to convince people to spend $4 on a $1 cup of coffee - AND PEOPLE DID IT! How much do you think it costs them (in product) to make a cup of coffee? I'm guessing about a quarter including the cost of the paper cup. It's no wonder there's a Starbucks on every corner, that business model is INSANELY profitable!

It's easy to see this almost anywhere you go. Think about when you go to a restaurant and pay $7 for a burger and fries. You're not getting $7 worth of food. In fact, for $7 you can go to the grocery store and buy a pound of hamburger, some buns and a bag of fries - enough for 4 meals at least. Restaurants are a notoriously difficult business, though. Looking at that markup, I can see why. It's better if you go with something with a better margins.

Remember Dennis Kozlowski from GE and his $6,000 shower curtain (http://money.cnn.com/2002/09/23/pf/saving/q_tyco/)? Chances are that shower curtain didn't take much than a few dollars to produce. But someone had the hubris to convince Mr. and Mrs. Kozlowski that it was worth paying a 10,000% markup. Kudos to you, shower curtain salesman!

You can buy a spool of 100 blank CDs or DVDs for $30. Yet a new movie on DVD costs $20, a new CD costs about $15 - look at that markup!

When I was a mobile DJ, I maybe spent $15,000 - $20,000 on my equipment (and probably the same amount on music) over the 12 or so years I was in business. I turned that investment into $300,000 plus in gross revenues during that time. That's a huge markup for a relatively modest investment!

Here's another example. My wife is a fitness instructor and she presents at fitness conventions. I was pulling my hair out because she wasn't making any money on these outings (fitness conventions pay diddily). My solution, we decided to produce videos of the classes she teaches at these conventions. This way, instructors can buy the video of the class they just took. Our cost to produce these videos? A few hours and about $0.50 a DVD. We then sell these videos for about $10 each. It provides a nice profit source, even if we only sell a few videos.

So, go out there and find your $20 Ipod (whatever it is) mark it up and make some money!

Shuttle Launch

2008-01-13T20:28:00.000-08:00

If you follow the principles that I have laid out so far you will make financial progress. I will review them here (please see my previous posts)

1. Limit your debt (see "Debt Slave")
2. Use a home based/small business to shield your income from taxes. (see "Wage Slave")
3. Limit the amount of money you spend on depreciating crap. (see "The Worst "Investment" You'll Ever Make")
4. Buy Assets (see "Don't Save Money, Buy Assets")
5. Make sure your net worth is going up each year and your debt is going down each year. (see "The Matrix")

If you follow this year in and year out you will see financial progress. However, this is not a quick process. You will not achieve financial independence in a year or two.

I equate the progress you will make as similar to a shuttle launch. If you know physics, you know that it takes more energy to lift that shuttle 1 foot off the ground than any subsequent foot of elevation after that. As the shuttle ascends into orbit, it picks up speed and momentum. After a while these forces overtake the actual thrust and push the shuttle into orbit. Orbit is a self sustaining process that requires no thrust as the shuttle falls around the earth.

Stage 1: When you start this process, it will take lots of energy and focus on your part just to stay on track. Keeping with this same analogy, the thrust from the shuttle is your income. You use your income to purchase assets and pay down debt. When your shuttle is on the ground (or even in an underground silo if you have a negative net worth), you need to push that shuttle in the air and it is a slow process. You can spend many years in stage 1 depending on where you are now.

Stage 2: As you stay on this process for a few years, you will notice momentum start to impact your returns. The effects of compound interest and asset appreciation will start to have a bigger and bigger impact on your portfolio. In this stage you will find that more than 50% of the gains in your net worth are as a result of asset appreciation instead of asset purchases and debt paydown.

Stage 3: In stage three of your ascent into orbit, the total value of your assets will exceed the total value of your debt. I reached this point in early 2006 and even though most of my assets were in retirement accounts (so I couldn't really access them to pay off the debt without paying big penalties to the government), it was an incredibly satisfying day for me. At this point, you should be earning more each month in income (interest and dividends) and appreciation from your assets than you are paying in interest on your debt.

Stage 4: At this point your shuttle is entering orbit (financial independence). Big characteristics of this stage are paying off all your debt and earning more from your assets than you earn in your day job. Other than stage 1, this will be the stage you stay in the longest (hopefully the rest of your life). You will no longer need to use debt to purchase items because there are sufficient assets to pay outright cash for things. Please keep in mind that you will continue to accellerate when you are in this stage.

Orbit: You'll know you're in orbit when your assets generate enough income to provide you with a comfortable lifestyle and you no longer need to work to live. Instead, a person in orbit will live to work and live in financial freedom!

Unfortunately, everyone's orbit is different. Likewise, it's not always a straight shot (market downturns or large purchases can set you back). But as long as the overall trend is going up, success will be yours!

FJ Quote of the Day

2008-01-10T08:59:00.001-08:00

"Debt is the prolific mother of folly and of crime."- Benjamin, Earl of Beaconsfield Disraeli (1804–1881)

A great article from "The Simple Dollar"

2008-01-09T21:11:00.000-08:00

Everything you ever really needed to know about personal finance on the back of 5 business cards.

http://www.thesimpledollar.com/2007/11/29/everything-you-ever-really-needed-to-know-about-personal-finance-on-the-back-of-five-business-cards/

The Matrix

2008-01-09T20:44:00.000-08:00

So, how do you know if you're on the right track? You're working hard year in and year out and don't seem to be getting anywhere. I've developed a very simple matrix to help you know if things are going in the right direction.

There are two simple questions you need to ask yourself at the end of each year:
1. Has your total debt gone down?
2. Has your net worth gone up? Net worth is your total assets less your total debt. Please see my previous post about what an asset is.

Here's what the matrix looks like:

This is going to give you a real easy, quick check of how things are going financially.

The top left box is the sweet spot and indicates real financial progress. If your net worth went up and your debt went down you are doing great!

The top right box is more of a caution area. Your net worth went up, which indicates your investments did well, but your total debt increased as well. This could indicate a large purchase that you financed with debt, like a car. If your debt is increasing every year, you need to reassess your lifestyle because if your investments enter a bear market, you will quickly move into the big red box right below.

The bottom left box is also a caution area. If you're in this box, that means you've done a good job paying down your debts over the past year. Unfortunately, it appears that you are in a bear market because your assets are also going down in value. In this case you need to review your investments and make some changes there, but there's not much else you can do.

The bottom right box is the worst spot you can be in if you ever hope to achieve financial success. In this case you are in the worst of all worlds - your net worth is decreasing and your total debt is increasing. Ironically, you could be in this space even if your investments are increasing in value, but your debt is increasing even faster. If you are in this box you need to seriously reassess your entire lifestyle and make some changes quick because everything is going in the wrong direction if you ever want to achieve financial success.

Now, from personal experience I can tell you it is almost impossible to stay in the green box year in and year out. S*#t happens. You need to buy a new car or there's a bear market. However, as long as you're making progress on one of those two fronts and try to hit the green box every few years you'll be on the right track.

Because I'm an obsessive/compulsive I've been tracking this every year since we purchased our house back in 1998. Here's what it looked like for me:

1998: Net Worth Up; Debt Up (I purchased a home and a car)
1999: Net Worth Up; Debt Down (Score!)
2000: Net Worth Up; Debt Up (we started a new business for my wife)
2001: Net Worth Up; Debt Down (Trip #2 to the green box)
2002: Net Worth Up; Debt Down (3 our of 5 years in the green box)
2003: Net Worth Up; Debt Down (On a roll for 3 years in a row!)
2004: Net Worth Down; Debt Up (Danger zone, we bought a new car. Luckily the net worth only went down by about $200 when compared to the previous year)
2005: Net Worth Up; Debt Down
2006: Net Worth Up; Debt Eliminated! (We sold our house and paid off all our debt)
2007: Net Worth Up; Debt still at zero.

So 7 out of 10 years in the green zone, not bad. Please keep in mind that there were years my assets went down in value (like the 2000 - 2002 bear market), but I was saving money and paying down my debts so both those items helped my net worth. 2004 was also a tough year as our business income was down, we couldn't save as much and we purchased a new car. This caused our net worth to decrease even though our assets were increasing in value that year.

So, the New Year has just started and you can start to assess where you are. Use this matrix to make sure you are on the right path!

Don't save money, buy assets!

2008-01-06T16:09:00.000-08:00

Please note, I am not giving investment advice. This is only based on my personal experience. Investing in anything is a risky venture and you can lose money, please do your own due diligence before investing in anything.

Saving money sucks. Why save for a rainy day when that money is burning a hole in my pocket right now! Americans have become very good and not doing things they don’t enjoy, like saving. Our national savings rate has been negative since 2005 and it doesn’t appear to be showing any signs of improving.

So, instead of going out and spending your hard earned money on a bunch of depreciating crap that isn’t going to be worth diddily in 5 years (please see my previous post on the worst “investment” you can ever make)…why not use your money to buy assets?

Now, it’s important to understand what an asset is so you know one when you see one. Here are two questions you have to ask before determining whether or not something is an asset.

1. Does this item produce a steady income?
2. Does this item have the potential to increase in value over time?

If you can answer yes to either of these questions, you are looking at an asset.

Please note that buying assets is risky, but isn’t that the case with just about everything you do? It’s so funny to see people so worried about their small IRA account losing 10% in value (so they keep it in a money market) yet they go out and buy a brand new car every 3 years.

So, is a car an asset? Some might say that you need a car in order to get to your job, so a car is an asset based on question number 1. Unfortunately, this is not true. If you run your own business, a car is a liability. It is an expense which subtracts from your income. A car also does not increase in value over time (except in the case of collectables, I will talk about that in a minute).

Stocks and bonds are certainly the most common examples of assets. They both can earn income (stocks pay dividends and bonds pay interest) and they both have the potential to increase in value over time (bonds tend to appreciate when interest rates are falling, stocks tend to appreciate when economic conditions are improving).

Here are some other examples of assets:

Commodities
Foreign Currencies
Collectables
Precious Metals (gold and silver)
Bank accounts
Real Estate
Your Own Small Business

Here are things that you may think are assets but they are not
Automobiles, motorcycles, RVs, ATVs, etc.
Anything technology
Clothes and Shoes
Furniture
Jewelry (other than the metal weight)
Home décor

Keep in mind with all assets there are different degrees of risk and liquidity. Likewise, not all assets are good buys at the same time. Real estate has been a great investment in the past. I wouldn't go near real estate right now (for reasons I will post later).

However, if you take part of your income and devote it to buying assets, long term you will be in better shape that those fools who spend all their money on all those depreciating trinkets that make them think they're rich.

A New Years Wish

2007-12-31T11:32:00.000-08:00

Be thankful and happy for what you have.

Don't make yourself unhappy because of what you don't have. Remember, the media and advertising industry were created to promote discontent and unhappiness. They have sold us on the idea that if you buy product X, you will be happy.

Our society has bought into this hook, line and sinker. We work harder than any other nation on earth. We spend more than any other nation on earth. We have more debt than any other nation on earth and for what? Iphones and 60" LCD Televisions? Prada handbags and Jimmy Choo shoes? 3,000+ square foot "starter mansions" and BMWs?

Look around and see that we are blessed with an abundance which is unprecedented in human history. However, all this focus on "stuff" has taken energy and time away from the things that really matter, relationships with your friends and family.

If you are looking for a really good New Years resolution, make a resolution to spend more time with your friends and family. Instead of spending more money, spend more time with the people that matter to you! Spending time is infinitely cheaper and provides much more satisfaction than stuff does.

In the end, you can't take any of this stuff with you.

Nobody ever says on their death bed, "If only I spent more time at the office."

Happy New Year!

Next Post Delayed

2007-12-28T20:02:00.000-08:00

It's been a busy week with Christmas, family and a kid who's on vacation. I'm sorry I haven't posted. I actually wrote a great segment tonight about the Financial Success Matrix, but I realized once I wrote it, I needed to do a post on Assets first.

So, please forgive the delay. I will have both the post about assets and the Financial Success Matrix up in a few days.

Take Care!

The worst "investment" you will ever make

2007-12-22T19:45:00.000-08:00

Let's pretend I'm your financial advisor. I invite you into my office, sit you down and show you an investment that is GUARANTEED to lose anywhere from 80 - 90% of its value over the next 10 years. What would you do?

Of course you would storm right out, probably call me some kind of profanity and - if you're smart - get all of your money the hell away from my hands!

However, most people are more than happy to go out every day and spend their hard earned money on items that will do exactly this.

The picture above is a picture of my car. I purchased it in 1998 and paid $25,000 for the pleasure of calling it mine. Today that car is worth maybe $4,000 (but probably less).

Between 1992 and 2002 I purchased 4 computers and spent a total of about $8,000. The end value of each of these machines was somewhere in the range of $50 - $100.

What about CDs and DVDs? If your careful enough to keep them from getting damaged at home, you can maybe get a few bucks for each one (after spending anywhere from $10 - $30 each on them).

It goes right on down the line: clothing, furniture, toys, electronics, art, books, etc., etc. All this crap is worth pennies on the dollar the minute you bring it home. Even things like jewelry, which you think would be different, are only worth a fraction of you pay for them.

There's someone I'd like you to meet:

The depreciation monster eats your wealth and makes you poorer! Your job as a Financial Judo apprentice is to minimize the effect of the depreciation monster.

There are two ways to do this. This first is to recognize that what you are purchasing is going to lose most of its value and minimize the amount of money you will lose. After the 4 expensive, top of the line compters that I wasted all that money on, I have decided from now on I will spend no more than $750 on any computer. Guess what? I found a decent laptop, with more than enough power to run everything that I need it to for under that price point. I also purchased it on New Mexico's tax free weekend, so I didn't have to pay sales tax on it either. Finally, it was purchased as a business expense, so it is 100% tax deductible from our business!

The other option is to LET SOMEONE ELSE TAKE THE DEPRECIATION HIT! Let someone else buy the thing and full price and then take it off their hands for a fraction of the price. This is so easy to do in this day and age, places like ebay and half.com allow you to find great deals on just about anything you can imagine. Whenever we go to a bookstore or a music store, instead of buying something immediately, we go home and see if we can get a significantly better price online. I've found CDs that are retailing for $15 for only a dollar online.

So instead of plunking down $30,000 on a brand new car next year, why not consider looking at slightly used vehicles? You can get something from 1-3 years old with low miles and save yourself $10,000 or more. I just bought a fully loaded 2004 Prius with 25,000 miles on it for only $15,400. If I had bought a 2007 model I would have spent $27,000.

Of course, my plan is to resell this Prius for a profit, but that is a subject of a future post.

So, let's summarize the first three rules of Financial Judo
1. Don't be a debt slave
2. Don't be a wage slave
3. Don't have your wealth eaten by the deflation monster.

Have a Merry Christmas, everyone! I'll be posting again real soon!

FJ quote of the day

2007-12-19T09:31:00.000-08:00

"What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?" - Adam Smith, 1763.

Wage Slave

2007-12-18T19:20:00.000-08:00

Just as debt makes you a slave to the bank, wages make you a slave to the government.

Remember my previous post about how much you have to earn just to be able to pay for that plasma TV.

The big problem with being a wage slave is that you earn your money, then the government takes their cut, then you're allowed to spend what's left. Don't forget the fact that you still have to pay sales tax with those after tax dollars - further depleting your purchasing power. Most people's answer to this problem is to get a better paying job. However, a better paying job only increases your tax burden and and makes what you purchase even more expensive.

Another wrong solution is to just to refuse to pay your taxes. Even though the people who advocate this do have some legitimate points and concerns - I guarantee you the end result of this will be jail and massive fines. Which doesn't help your situation at all.

Fortunately, the government does offer us all a very legitimate and legal way to get out from under this wage trap. The solution is to start your own small business. Here's why, when you are a small businessperson you earn your money, THEN YOU DEDUCT YOUR BUSINESS EXPENSES, then you pay taxes on what's left.

That means all your legitimate business expenses are 100% exempt from all income and payroll taxes!!!! Also, any sales tax you pay on legitimate business expenses are deducted pre tax from your income, not after tax like most wage slaves.

When I was in my 20s, I liked to spend my money on music, computers and my car. I started a mobile disc jockey service because it allowed me to deduct most of what I spent on these three items. Over the course of the 10+ years that I performed as a moble DJ, I deducted thousands of dollars from my income on things that I probably would have bought anyway.

Here's another benefit. I always have had a home office. Having a home office allowed me to deduct a portion of what I paid in rent/mortgage, utilities and telephone expenses (basically whatever percentage of your home is dedicated as a home office is the percentage of your home expenses that you can deduct - so if your office is 10% of your home, then 10% of your rent, gas, electric, phone, water, sewer, property taxes, insurance, etc are deductable from your income).

My wife and I run a fitness studio now and here are some of the things that we deduct from our income and, therefore, don't have to pay taxes on:

video equipment

laptop computers

cell phone service

home office expenses

music CDs and itunes

auto mileage when we run errands (currently $0.485/mile)

internet connection

travel expenses

Please note, I am not advocating anything illegal. You have to make sure that whatever you are deducting has a legitimate business purpose. For instance, we have our own website so that allows us to deduct the internet connection.

So, the end result is our taxable income is probably much lower than many of my wage slave colleagues, yet my standard of living is at least equivalent, or sometimes greater, due to the fact that many of the things we both pay for cost much less for me because I buy them income tax free!

So, you have the second tool to help you become a true financial judo master. Find yourself a small business that will allow you to start writing off what you spend your money on!

Debt Slave

2007-12-16T15:36:00.000-08:00

One of the most important and critical parts of Financial Judo is to limit the amount of debt you have.

A person that chooses to spend more than they earn will inherit a lifetime of unhappiness, stress and anxiety. A person that chooses to spend less than they earn will inherit a lifetime of abundance, confidence and peace of mind.

The simple fact is that our entire economic system is based on debt and the accumulation of more debt. Think about how easy it is to get into debt. Let's say you want to to buy a new Plasma TV that costs $1,999. After we include 7% sales tax, your total bill is $2,139. No problem though, you just whip out your trusty credit card and put it all on there. Think about that, you want to spend $2,000 on something and you can borrow and spend 100% of that money instantaneously!

Now, the tricky part is paying it back. You have to pay back every penny plus interest (lets say you put this on your credit card at 15% interest). If you pay $100/month to your credit card, the debt will be paid off in 25 months. The total amount you have now spent including interest charges has increased to $2,500.

Hold on! It gets worse. You have to earn the money to pay that debt! You can't just go and earn $2,500 and pay that money back, you have to pay taxes on your income! So, in order to pay that $2,500 back, you have to pay 7.5% in FICA taxes (Social Security and Medicare), and I will assume 15% for Federal Taxes and 3% for state taxes.

All of a sudden, this $1,999 TV is going to require you to earn $3,400 in income in order to pay it off! If you're in a high tax bracket or a high tax state (like California), that number is even higher! In this case, you would pay a 70% premium on this TV when everything is factored in.

Realizing the true costs of these items will make you think twice before slapping down that plastic or filling out another credit application.

The system is set up to allow you to fall easily into debt - to voluntarily place yourself in debt bondage for some short term benefit that harms your long term options. Think about those kids graduating from college with $10,000 in credit card debt and $50,000 in student loans. They have a weight around their necks which will last most of their adult working lives as they struggle to make those payments while paying all the other bills. I sure hope that spring break in Daytona Beach was worth it, because they'll be paying for it for years and years to come!

The other day an aquantance of mine was discussing looking at colleges with her teenage daughter. They went to an Ivy League school (I think it was Vasser) and were informed that the total cost of a 4 year education was $250,000! Are you F***ing kidding me? That's a mortgage! What's the cost benefit analysis on that? Even if she gets a job paying $100,000/year (which we all know there are millions of in this country - sarcasm off), a student loan with a 30 year term and a 7% interest rate, that child will commit herself to paying $20,000/year in loan payments just for her education! You add in the taxes she'll have to pay on a $100,000/year job and she'll be paying 1/2 her income on these two items and we haven't included anything like paying rent, making a car payment, buying food, insurance - anything!

This is what a debt slave is. A lifetime of servitude to her bank and her employer (god help her if she becomes unemployed or can only find a job at Starbucks after she graduates).

Freedom is having choices. The more debt you have, the less freedom you have. The less freedom you have, the more of a slave you are!

Don't be a debt slave! Limit the amount of debt you have at all costs! I will talk about strategies for getting yourself out of debt in future posts.

Thanks for reading!

Why Judo?

2007-12-15T15:37:00.000-08:00

When I was in 5th and 6th grade my parents enrolled me in Judo class because I was often the target of bullies (I was one of the youngest in my class and super, super skinny).

Anyway, the first thing they teach you in Judo class is how to fall correctly. This is so you can fall without hurting yourself. You learn how to curve your spine and use your arm to break your fall against the ground.

The second thing they teach you is how to use your opponent's strength and power against them so you can gain an advantage. The founder of Judo was a small man who often had to compete against bigger and more powerful opponents. He developed trips and throws that allow you to put an attacker on the ground and in a weaker position. Even as a tiny 6th grader, I was able to throw kids much larger than me over my shoulder.

The official translation of Judo is "The Gentle Way" and I can see why. In most other martial arts it's all about projecting your power through punches and kicks onto others. Judo isn't really and attacker's sport. You wait for your opponent to come to you and then you throw them to the ground and apply a choke hold until they submit. It's very Sun Tzu in it's philosophy.

As far as finances go. The official line is that you're supposed to work hard, get a high paying job, and project your high status through the various trappings of wealth (expensive luxury car, oversized house, fancy clothes, shiny trinkets and gee-wizbang techno toys). This version of the "rich" is all about consumption and we see it all over our media every day. This is the model of "success" that gets pounded into our consciousness every day of our lives. This is the Karate version of wealth. Unfortunately, this version, the outward "look at how successful I am" is a big reason why American's are drowning in a sea of debt and are trapped in a lifestyle they can't afford.

The Judo definition of wealth is a more "gentle" way. This wealth is about having choices and options. My wife and I made a decision many years ago to value our time over money. We live a modest lifestyle on a modest income, but we have a nice sized nest egg and it gives us lots of options. For instance, I only work 4 days a week (I get a 3 day weekend every weekend!). My wife has been self employed for 7 years running a fitness studio and she only works about 20 - 30 hours per week. We have worked very hard our whole adult lives to limit the amount of debt we have (currently we have zero debt, something that I haven't been in since my senior year of college). We have also diligently saved and invested our money prudently.

This blog is going to talk about our experiences, our strategies, and our challenges of leading a lifestyle that is outside the mainstream. There is another way!

I will be posting again real soon, so come back and check it out!

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2007-12-13T15:38:00.000-08:00

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2007-12-13T15:17:00.000-08:00

Financial Judo ©

More Regulation is not the answer - FRAUD IS ALWAYS ILLEGAL!

What does it mean when this huge housing bear decides to buy a house?

MSM Headline: Commodities, Gold and Oil Plunging! Dollar rallying! Jim Cramer calls it "Economic Nirvana"

FJ Challenges the Conventional Wisdom: Who Really Benefits From Lower Interest Rates?

What's the Problem With The Economy, Part 1: No Organic Demand

How Safe Is Your Bank?

The Pickens Plan

Day of Defiance

The 1,000 Yard Stare

Inaguration Day

We've been through this before

John McCain is a debt addict

Housing Re-Virginization

Why I hate George W. Bush and 3 Shocking Predictions

FJ Quote of the week

My Take on Inflation versus Deflation

Follow Up on FJ Prediction from February 11th, 2008

Masking a lousy market with a declining dollar

Meat!

An Inflation First

FJ Quote of the Week

We Are All Paris Hilton

Excess Capacity

"...since the Great Depression."

Bill Fleckenstein is my hero! FJ Quote of the Day

FJ Challenges the Conventional Wisdom: High Housing Prices are BAD for the economy and consumers!

Banks ask Congress to fill a $3 Trillion Hole

Pump and Dump

Oh My God!

Be Careful of What You Wish For

FJ Quote of the Day

FJ Prediction: $4/gallon gas by Memorial Day

Old School Housing Truisms

Demergophobia

Debt Negotiation - UPDATED

What is a Collectable?

Turning A Liability Into An Asset

Stress Test

The $20 Ipod

Shuttle Launch

FJ Quote of the Day

A great article from "The Simple Dollar"

The Matrix

Don't save money, buy assets!

A New Years Wish

Next Post Delayed

The worst "investment" you will ever make

FJ quote of the day

Wage Slave

Debt Slave

Why Judo?

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Judo Image