Our Opinion
The following opinions expressed are solely those of the writer, intended to be general in nature, designed to be informative but not meant as investment advice tailored to the specific objectives and tolerances of any individual. They do not represent the solicitation of any security, are time sensitive and are subject to change. Please refer to the appropriate professional for all tax and legal matters. Special Financial Crisis Opinion Letters January, 2009 In the 31 years Steve has been in the financial planning business, even before it was called financial planning, the present time is the most hazardous and least predictable, with the most dire financial consequences still to come, in our opinion. Drastic bailouts have more than doubled the federal deficit, and now the government is much more involved in our capitalist economy. The Federal government is taking upon itself the process of rewriting mortgages and guaranteeing the resulting new mortgages. Aside from exposing the government to tens of billions of dollars of potentially defaulting mortgages, the burden of which will ultimately fall on the tax payers, this type of planning embeds the government deeper into the housing market, and will perpetuate instability. When the government bails out banks, investors, homeowners, corporations and quasi-government institutions (like Fannie Mae), the lessons of sound investment and fiscal discipline will not take hold. Many market sectors will continue to undertake risky investments and expect that, in the future, if their investments go south, the Fed will intervene again by creating more money (bailouts), more credit (Treasury Bills, Notes and Bonds) and print up more dollars to "lend" to Federal Reserve Banks (at the Discount Rate). Unfortunately, our society is now a debt-addicted economy; and a major additional weakness we have is the fact that a large portion of our debt has been borrowed from foreigners. When short-term interest rates are reduced to zero, and the supply of Treasury Bills, Bonds and Notes exceeds the global investors willing to buy, long term interest rates will be forced up because they are subject to market conditions, and not controlled. Right now, however, regardless of what the new administration may plan or do, the fact remains that the world's speculative bubbles have burst in housing, commercial real estate, stock markets and commodities, and debts of all kinds. All the world's leaders, with all their radical measures, cannot override the law of gravity - no matter how much money they spend - and stop investors from selling or force banks to lend, or consumers to buy. Debt by itself is usually tolerated. As long as borrowers have the income, or as long as governments can continue to supply enough money, debtors can continue making payments. Deflation is also no so bad. It can help make homes more affordable, a college education more reachable, and a tank of gas easier to fill. It's when debts and deflation come together that an economic depression strikes, like it did in the 1930s. Currencies began to float against one another in 1971, when the Gold Standard was completely abolished, and countries could no longer exchange their dollars for a fixed amount of gold. But a silver lining in the global deflation cloud is that the current global market environment is shaping up to be very good news for the U.S. dollar long term. In a rush to a global safe haven, the world reserve currency tends to do very well when compared to its major currency competitors. Global demand for products that are wanted, but not needed, is dependent on massive amounts of pools of liquidity that have dried up in the developed economies of the U.S., Europe, the U.K. and Japan. In my opinion, the U.S. dollar will continue to strengthen in the current environment, despite the inflationary pressure of the coming large amounts of new dollars that are being injected into the system. All told, it's estimated that the Federal Reserve has now loaned, invested or committed over two trillion dollars. But, it can't save the eye-popping 50 trillion in interest bearing debts outstanding in the U.S., or the 600 trillion in derivatives worldwide. (A derivative is a risk-shifting financial instrument which derives its value from the value of some other financial instrument or variable). It's preposterous and naive to believe that the U.S. Government can save every failing entity on the planet. Could the government be planning another currency devaluation, as it did in 1934, but this time with a partly gold backed dollar, as a way that will finally restore confidence and stability? After all, we have the strongest, most flexible economy when compared to others. In the event of a currency devaluation, hyperinflation, or a less likely currency breakdown, gold bullion coins could prove to be a bulletproof storehouse of value. April, 2009 The Primary Reserve Fund is the oldest money market fund started nearly 40 years ago. This past September, during the official beginning of the unfolding of the world financial crisis, the Reserve Fund had to deny the continuation of liquidation requests because of the default of Lehman Brothers commercial paper in the Fund, affecting the $1.00 per share value. As of April, 2009, seven months later, approximately 10% of the Fund is still unavailable to shareholders, and the $1.00 per share price has not been maintained. This time is indeed a unique, worldwide financial crisis. Before the Federal Reserve came into existence in 1913, a one-ounce $20 gold coin bought a fine men's tailored suit. Back then, a $20 bill was backed by one ounce of gold, when gold was $20 per ounce. In 1934, the dollar was re-pegged to gold at $35 per ounce (a 75% devaluation). Now that same one ounce of gold still buys a fine men's tailored suit at today's spot price of over $900. So, at this point in time, owning gold bullion coins has been a storehouse of purchasing power. In the last few decades, approximately 70% of Gross Domestic Product (GDP) came from consumer consumption. In other words, the economy will not return to what it was unless Americans start spending again. Should the public buy things they don't need with money they don't have with the objective of jump starting the economy that has slowed down for good reasons? Maybe we need to relearn what "the greatest generation" came to know - buy what you need with the money you have, and pleasure, power and possessions are no substitute for peace of mind and heart. June, 2009 Make no mistake about it, in my opinion, despite the last few months rise in the U.S. stock market (a "dead cat bounce"), the economy is still in a long term bear market. Jobs continue to shrink, housing starts are down, auto sales have collapsed, consumer credit is significantly reduced, and the banking industry remains in trouble. The result of the above is a contraction of Gross Domestic Product (GDP), a reliable indicator of the state of the economy. Many other developed countries' economies are in worse shape than ours, with the possible exception of China. Our economy is severely depressed now because we built too many houses, too many shopping centers and too many office parks paid for with too much borrowed money lent by banks with too much leverage and securitized by investment banks with too little "skin in the game". The U.S. Government has become the leader in spending and lending, and can print money it does not have. Our government will continue to meddle in the economy, ratcheting up inflation and devaluing the currency because inflation benefits spenders and borrowers, not savers, unless you're lucky enough to continually keep pace with increasing prices. In a double digit inflationary atmosphere, energy and food prices will rise first, as will natural resources, commodities and precious metals. Sooner or later, the stockpiles of money horded at miserly interest rates will find its way back into the stock, bond and real estate markets. However, it remains to be seen if the U.S. economy can function efficiently in a long term hyper inflationary environment. But no matter how much money or purchasing power we lose, we still have our most valuable asset - time. November 12, 2009 Our financial system remains extremely damaged. Credit growth is negative, despite the fact that the U.S. monetary base has significantly increased, because banks are not lending. Further, consumers are not borrowing, and are saving more and spending less. The Federal Reserve is determined to (artifically) keep long-term rates low by buying U.S. Government bonds. Although Washington rhetoric espouses a strong dollar, results point to a devaluating dollar. The real unemployment rate is about 17% when it includes workers forced to work part-time and discouraged workers. Demand is weak and prices can remain low or decrease, as the financial system deleverages. But sooner or later, pennies may disappear and thousand dollar bills may reappear. It's a good thing that U.S. consumers have been (again) forced to realize that prosperity comes from spending time and effort, coupled with talent and intelligence in our free market, and not from leveraging, credit creation and spending borrowed money to buy things that depreciate in value. Like C.S. Lewis said, "God whispers to you in the good things in life, talks to you in your conscience, and shouts to you in your pain." May 2010 Inflation is not prosperity. It is the gradual, surreptitious theft of purchasing power. If the financial crisis resulted from excess credit created by the Federal Reserve, doubling the money supply can hardly be a solution. Real unemployment is still above 17%, and may be as high as 22%. The real culprit of the financial crisis is the Federal Reserve that has no restraint in its money creation operation in order to serve big government's spenders, and members of the banking cartel. Especially over the last decade, the middle class has experienced a reduction in their standard of living, and a decline in the value of assets. This is not your financial planner's or accountant's fault, or a lack of financial acumen, or procrastination in planning or saving. Until the Federal Reserve is audited and abolished, and we return to a system of sound money, bubbles and busts will continue. And if the government keeps up the present pace of borrowing, our country will eventually be owned by the foreigners we borrow from. What should we do to protect our assets from the next unexpected financial crises, and the government movement toward socialism? Some suggestions are to own gold and silver bullion, stay away from long-term bonds, beware of the possibility of some states defaulting on their debts, and tread lightly in the international and domestic stock markets. Avoid banks that have engaged in banking shenanigans, and are, in reality, insolvent. Money market funds, savings accounts and CDs pay paltry interest, so why not keep more cash on hand in the unexpected event of a "bank holiday? December, 2010 Using the original unemployment model, we have over 20% unemployment now. The market wants deflation that helps unemployment, but Washington wants inflation to pay back debt with cheaper dollars, and to encourage Americans to continue to borrow and spend themselves into debt slavery. But we wouldn't be citizens of the greatest nation there was if we were all stupid enough to continue to do what clearly doesn't work for ourselves as individuals. The citizenry knows that the banks that are "too big to fail" are really "to broke to save," if their assets were to be "marked to market." Instead of true accounting methods, our government now allows banks to "mark to fantasy," chicanery that Congress knows hides the consequences of the banks' greed that resulted from years of sustained NINJNA mortgage lending (no income, no job, no assets) to individuals, as well as to deadbeat governments. When some big banks go bankrupt, merge or are nationalized, cash may not be as readily available. Do not use the big banks as investment vehicles, and keep more cash on hand than usual. Gold has stopped acting like commodity and more like a currency, and is viewed as a storehouse of value. It's unique in that the spot gold price can move based on fear and greed. As most assets increases in value, the downside risk and volatility usually correspondingly increases. Since jewelry makes up about 60% of world gold usage, and in a deflation/deleveraging/underemployment/recession atmosphere, jewelry consumption slumps, it's wise to take profits in precious metals mutual funds. In our opinion, the financial crisis is not over, but our stock market continues to act like it is for about a year now. One way to effectively partially protect the total performance of your portfolio from the results of another significant market downturn, is to purchase an inverse fund that can be viewed as "portfolio insurance." April, 2011 Is it wise for a financial planner to mention plitics or religion? What about philosophy? To deny the religious component in what Americans face today is folly. When militant Muslims make plans to destroy our nation and our way of life, religion affects us. When terrorists blow up the building you work in, religion affects us. It doesn't matter whether you are a Jew, Muslim, Christian or atheist. What people think about religion can have a profound effect on your life. The Ten Commandments are the most important part of our Judeo-Christian society, and the heart of our legal system. They are the basis of the economic, social and political principals our county was founded on. Now consider the Russian atheist oligarchs. They recognize no higher power. Like the Soviet Communists before them, they believe life on earth is all there is. Hence, they believe the only reason not to sin is because they might get caught, and even that rational is sometimes not enough. Atheists create a very different society. Societies that believe in a higher authority and respect for human rights have principals. In the last 50 years or so, America has seen many of the values that guided our society come under attack and fall apart. And that surely will continue to make a bigger and bigger difference on the financial planning waters, no matter how big and fast you build your financial ship. The Federal Reserve is as federal as Federal Express. It is a privately owned banking enterprise that has colluded with the federal government to print the nation's currency while charging U.S. taxpayers interest. When a nation's money supply wildly outpaces its productivity, hyperinflation is just around the corner. Inflation is a stealth tax. Every time the Federal Reserve increases the money supply more than the nation's overall productivity, they create inflation. The Bible says that a borrower is the servant of the lender (Proverbs 22:7). Debt has become more and more pronounced these last 50 years as the purchasaing power of the U.S. dollar has decreased, and people have been encouraged to go further and further into debt that enriches corporations and the credit industry. You may falsely believe that you can escapte debt slavery by paying off all your own debt. But becoming truly debt free in today's America is an illusion. In reality, we and our children are ultimately responsible for the debts incurred by financial excesses of several decades of congressional printing, borrowing and spending. The debts that America owes are ours. The dollar is a debt of our government. We are America. Congress is not spending monopoly money. They are spending much more than our tax dollars. And the spending continues to be done with the credit card of the U.S. citizenry. How can you be free and at the same time be a citizen of the greatest debtor nation in world history? In accounting, when an asset is mortgaged over and over, equity finally reaches zero, and the asset then becomes the property of the lender, since further loans on an asset fully mortgaged is folly. And always keep in mind that the final goal is to privatize gains to a few and socialize loss to the many. July, 2011 The gold bullion spot price fluctuates on both greed and fear. These past few years, financial fear has spread worldwide. With US government bailouts, company and industry takeovers, controlled, low, short-term interest rates, and the US print, borrowing and spend philosophy, the rich get richer and the middle class shrinks. In the beginning of 1970, spot gold was about $35 per ounce. Now, 41 years later, the gold spot price is about $1,600 an ounce, and that's about a 4400% increase. Gold bullion has surely been an effective storehouse of purchasing power, and without a single dividend paid. Even more spectacular these past 10 years, is the total returns on some gold mining stocks and precious metals mutual funds, outpacing the compounded CIP-U and even the real compounded inflation rate over the same time frame. However, we all know that fundamentals do not always have a timely or expected effect on the performance of any asset class. Herd mentality can be a significant factor, too, and should not be disregarded, especially concerning such a globally desirable asset like gold. But, as my father would say concerning aggressive investments, "if you don't leave something on the table when you get out, you're holding on too long, and getting greedy." Even with the 2008 credit crises, the US government has been able to borrow even more than it ever has, with long-term interest rates fluctuating in a narrow range. Purchasing power for Americans has decreased with the devaluation of the dollar, but our country still remains the most viable nation. Fundamentals say our interest rates should rise, but maybe not yet. After all, we're still the currency "schoolyard bully."
|
