The economic collapse to come

wow... I can't believe I am writing this, but I am. Read the economic depression to come, and tell me if I was nuts back then - I even think I am nuts, but I can put everything together now... and it makes sense...

Currently, there are huge deficits, people losing jobs, states robbing municipalities of their money, the federal government robbing citizens of their tax dollars, and so on. This collapse is coming from the inside - and it stems from the inability to raise taxes to pay for deficits that are ever increasing. Why are they increasing? For multiple reasons - The first and probably most important reason is from the collapse of the automakers - and there'll be more to come over the years - The inability to sell the 10 million needed units will have the Government Managed car companies reducing the amount of dealerships, which is already happening. This will drive tax revenue for cities downward, and effectively bring the tax revenue for states down. As the states begin to increase taxes on businesses, they will slowly make their way from heavily taxed states to lower - as seen by the film industry. Consumers will follow. As taxes go up, people will spend less and less for obvious reasons, which will have an effect of less tax revenue for the federal government - as people spend less, more businesses will pay less taxes because of less taxable income or they just go out of business.

Moreover, when the states, like California, begin to become so insolvent, they are forced into bankruptcy, the federal government will step in and bailout those states - causing massive debt loads for the government. Soon, it will get to a point where the dollar isn't worth nearly what it was and the interest rates are going to soar because of the default risk associated with it. We will see a collapse similar to that seen in and around 1994 with Mexico, but the problem being is who will bail us out like we did to Mexico? China?

Well, with that, the major businesses will slowly be bought by countries that have more money than us - China - and we will slowly lose our economic power to generate internal profits.

I want to elaborate about what I see for national security, but for fear of big brother, I choose not to - This is only a prediction and is not reality, but at the rate we're going, it will be reality.

What can fix this? Well, for starters, we need to tax more. We need to renegotiate government union contracts. We need to get rid of the pensions (sorry seniors), especially those that pay 90% of your highest grossing year, we need to quit paying our CEO's 100x more than the lowest paid worker. We need the government out of business. We need to let things fail.

Unfortunately what my resolutions are sound a bit two faced - How can we let big business be free of regulation, but also have CEO's earn only 10x the amount of it's lowest paid worker? Well, we also need to understand we're not a consumer based economy anymore, and the days of buying the Hummer with the McMansion for $500K is over.

We have officially started the new economy, but everyone believes it's going to be just like last time (look at the stock market and home sales numbers), but it won't be. The next wave of the economic collapse will be disheartening to everyone who is jumping in to buy homes now. This will be a long and painful depression that will effect everyone, but we need to prepare for the future and quit living for today.

Current State of Real Estate

Recently I have begun to dip my toes into the waters of real estate. I have tried to tame my urge to buy a beautiful home for my family to live in - But, I am slowly getting tempted. Why? Well a few reasons. Our place is horribly small, 920 sq. ft. We are outgrowing this place with more and more crap. And ideally, I want to work on a house, giving me projects to do over the weekend.

So, I began talking to a real estate agent, and I started hearing the same lame excuses as why it is a good time to buy - Real estate is lower than it's been in a long time, renting is just throwing money away, interest rates are lower than they've ever been, etc, etc... So, I started realizing what is going on in the real estate industry - and it is now time NOT TO BUY.

Here is what I see as problems and forecast for this.

#1: Interest rates are lower than they've ever been: Okay, this may be true. But, here is the truth of this. Affordability has increased due to the decrease in interest rates. What does that mean? Well, a home that is normally 200,000 at 10% has a payment of 1755.14 for 30 years. Now, when interest rates decrease to 5%, the payment then goes to 1073.64 making for an apparent 39% increase in affordability. These numbers are obviously not accurate, but for the simplicity of it, take it as a roundabout truth. With this, "fact", then more people can afford a home causing an increase in the demand side of home prices. The supply side must then reduce, causing a price increase. Therefore, with a reduction in interest rates, prices will rise... THIS HAS NOT HAPPENED: Prices have been reduced because of alot of varying factors. #1, personal credit has been shot. #2, the economy has shrunk causing real incomes to reduce, causing deflationary pressure on all prices #3, over building has caused increase inventory which has increased the supply side #4, the lowering of asset values has left people to walk away, thus increasing the supply side #5, foreclosures, etc increase supply side.

Sure, demand is rising, but not enough to keep up with the supply side. Moreover, with interest rates lowering, the prices should be rising, so effectively, there is a "real" reduction in home values more than what would be seen if interest rates have risen or stayed the same.


So, what is going to happen? The problem also lies in the fact that inventory
has been bought up, and speculators are coming out buying thinking it's a great time to buy - causing artificial demand. On top of that, we've had a moratorium on foreclosures, giving the false sense of inventory levels decreasing and an end to the real estate mess. So, where are we now? Now that the moratorium is over, we will see a rise in inventory levels. That will further depress prices, causing some to walk away from their homes if they lose value. The economy has yet to see it's bottom, and that may take another hit on people who have just bought a house believing their jobs were stable, and they aren't.

With interest rates being at historical lows, there is only one way up. With the government increasing it's debt size, the interest rates are going to rise due to default risk. Inflation is a thing of the past as there is not enough money chasing the number of goods produced, depsite the governments best efforts. (Think about this: how many trillions of dollars have been lost in the stock market from March of 2007 to the present? Now, think about the paper losses of real estate that have happened from 2005 to present - Next, think about how much the government is spending to help "revive" the economy? Yeah, it doesn't come close to what was lost). So, with the fact that interest rates are going to go up, that will cause prices to further be depressed. Many other factors are inclusive of this, but I am trying to keep it as simple as possible.

Now, let's think about down payment. On that $200,000 house at 5%, you'll need 3% for FHA or 20% for conventional. So, $6,000 or $40,000. Let's go back to our 5% rate 10% rate example. If interest rates double, let's assume real estate drops 39%, as evident by the decrease in payment. That then brings that 200,000 home down to 122,000. If you wait, your downpayment is now 5% or 33%. Your payment at 122,000 at 10% is the same as it would be at 200,000 at 5%, difference being that you now owe less...

So, anyone thinking it's a great time to buy a home - Wait it out... The recover won't be a V, nor a U - It'll more than likely be an L - And that is my prediction on real estate... We are a long way from the bottom.

:::Disclaimer:::

Greetings out there to all who are reading this. I am starting this new blog on blogspot because I like the format and the layout of it. Not just that, but because of search engine crawlers, it will be able to pick this site up, and hopefully get it publicized better than that of myspace - Plus, I hardly use that at all. Not just that, but it is much easier and user friendly. As a disclosure, I have not read those postings for years - I merely copy and pasted them into this blog. Therefore, I apologize if I offend anyone with my transparent language. I tend to speak my mind and the truth and sometimes fail to realize that it may offend people. So, if you have a problem, I will be more than happy to change it. I know I once posted on myspace a specific name of a financial advisor that I thought of as a douche because he lied to his customers merely to make his commission - I subsequently removed his name.

I have in the past 15-20 minutes transcribed all of my pertenant postings from myspace to help you understand that I am not new to this. I have been following the economy quite closely since 2002ish, and following the equity markets since 1998. The previous postings are written from an unbiased approach to the markets, as I have no financial interest in anything I speak of, and if I do, I explain what my interest is. I am not a cheerleader, and the underlying fundamental for myself is that there are certain times to buy assets and certain times to sell. I have been a stock broker for the past 4 years, been in the stock market since 1996 with my first mutual fund - actively traded stocks, mutual funds, options, and commodity ETF's since 2005. I have my undergrad in business finance and minor in economics. But, the basis among my rants is that I speak the honest truth as to how I see it.

I don't care about making money - If I want money, I will go get another job to get more. I am not motivated by money. I have cheap taste, my dream car being a Jeep Wrangler - which I have. I've always wanted a cruiser motorcycle - which I now have. I've always wanted an amazing wife - I have this now. I've always wanted a great daughter - I have that too. What does all this mean? I am not looking to grow my possessions, as that doesn't make a person. So, my rants, posts, blogs, whatever you want to call it - They all stem from an unbiased approach and look on the markets.

With that, I move to my first real post of this blog - the others are all from myspace that have been written over the past few years.

State of everything today

::: Transcribed from personal myspace blog account:::

Ladies and Gentleman, out there reading this blog right now - This will probably be my last financial blog, because I am working on economyandmore.blogspot.com - Check it out and comment...

I just went back through my past postings and realized, wow... I was right about just about everything going on in the economy. I made some dire predictions, and they were right. From the stock market falling, to real estate, to interest rates, and even unemployment. Well, why is that? It is simply because I speak the truth. I am not afraid of NOT making money based on my statements. In the financial markets, it's all based on fear and greed - the person to speak the truth is silenced in one way or another. But, the truth is that peoples actions and impulses are predictable and foreseeable. But, because people want to make money, they won't tell the truth. This factored in with the truth, it will always come through - the truth.

So, what is the truth today? People are losing alot of money. People have lost savings that they made over the past 5-7 years. People are scared for their financial security. Their spending patterns are changing because of this. Banks are being greedy - and aren't lending money. What is happening? The future will pan out like this. We are in a changing time. We are in a revolutionary period where people are going from spenders to savers. The reason being is because they have no more money to spend. Children are going to grow up in the next 10 years being more frugal than the generation just before that. Over the next 10-20 years, people won't spend like they used to and the economy won't grow like it once did. We are going to see massive deflation, prices will come down, but jobs will be hard to come by also.

You can tell the future by seeing the truth. Everything is a lie, but there is truth to every lie. And if you find that truth, you will see the future.

Truth of Mutual Funds

::: Transcribed from personal myspace blog account:::

Okay, so let me break it down for you, whoever is reading this. Mutual Funds Suck. Yeah, and the buy and hold strategy is shit too. Why do you ask? Brokers are trained to say day trading isn't good. Even if you miss 1 up month out of 2 years of day trading, your returns will be much less than a buy and hold strategy. You know what, if you want to hear all the rhetoric, just go talk to Michael Hanson from Wells Fargo Investments. He is full of shit. So, why do these people say such things if it is stupid? Well, a buy and hold strategy is merely a marketing plan that was put in place to make the mutual fund company money. In fact, I truly believe it is risk free business, and it is one of the best businesses to start - hence all of the hedge funds that have come about.

Okay, back to mutual funds - So, you buy in, they charge... you hold, as they say to do, and they charge... So, let's look at it on the flip side of things... If you are to have a mutual fund company and merely try and gain assets, you charge, let's say a modest 3% to get into the fund - Right then and there, that is great money. Then, every year, based on this proliferation of information saying to buy and hold, you will then charge 1% a year... That means that every year, you will be making money off of the amount of money brought into that fund. So, then, the sales charge gives you the commission to your sales people and the rest is just gravy...

Okay, so let's use a real life example. Let's take Dreyfus Technology fund (DTGRX). Just to buy it, you are paying 5.75% - Then, to hold it, you are paying 1.42% PER YEAR - Let's say you hold it just for 3 years - You need to make 2.875% to break even. To keep up with inflation, you need to get almost 6%. And that's just to start making money - Still, after taxes, you are going to lose. But, let's flip it around again. DTGRX has a total of $267,350,000 invested. So, just to buy in, the mutual fund company has made $15,372,625 and keeps making $2,673,500. per year for doing nothing more than managing money...

Okay, so they need to make money by managing it, understandable... But, what does managing mean? Well, depends on if it is Tactically managed (Which most funds are NOT), or strategically managed. What does that mean? Tactically simply means that they do what is needed when is needed to manage the portfolio. Strategically sounds really cool, but it means they have a strategy put in place that is set by default. Meaning that they choose to do a punt, but the situation arises that they could do a fake punt pass - they won't, because they have planned to take the punt... In other words, they are set to principles that are preplanned.

Okay, so it doesn't seem too bad. They rebalance the portfolios 4 times a year, usually quarterly. But, what do they do in the mean time? Well, they're making huge profits... Okay, so for the lay person, mutual funds are good... They allow the ignorant to invest with minimal hands on and, afterall, you tip your waitress 20% - this is just 1.5% - Well, maybe I should open up a mutual fund company...

::: Transcribed from personal myspace blog account:::

All things have an inherent value that fluctuates with many variables. For example, a fast food place that is working has an inherent value – it is nearly never at 100% efficiency resulting in a 100% possible value. The resulting problem lies in the fact that the value is reliant upon those efficiencies. The risks involved are the employee problem, the structure problem, the services problem and the problems that limits efficiency for example the infrastructure problem. In the problem with the employee, it is linked to the fact that employees more often times than not have different agenda’s than that of management, where the structure problem is the management that is implemented have problems. The services problem is that the utililties used by and for the employees isn’t stream lined nor is it possible to stream line it. The infrastructure problem is simply the problem that is caused by the infrastructure being mismanaged and leading to huge inefficiencies that run down the entire leghnth of the management. This leads to greater efficiency problems and can only be fixed from the top down.

Because of this, all businesses have an intrinsic value. Depending on the industry, market conditions, and other external forces – a business is only worth so much. But, within the same industry, there are internal problems that make the businesses worth more or less based on certain aspects of what is spoken of from above. Analyzing the corporate structure and how these inefficiencies are managed can result in an arbitrage situation where you are able to restructure management and cause an increase in it’s intrinsic value.

::: Transcribed from personal myspace blog account:::

I got a call the other day. It woke me up to the reality of the world. This call was no ordinary call. This was a call from the higher ups that I have spoken about once before. The call was to tell me that the bank needs more money. The bank is hurting for money, so regardless of your point of view on the economy and how the market will do - you must invest peoples money. By investing peoples money, a sales charge will therefore then be created and every year after that there will be a fee paid to the bank. Am I slacking in my numbers? Absolutely not. I have well over a million invested in this year alone. The problem is simply I am discouraging customers to put money into the stock market via mutual funds. I believe it is a great time to be liquid, or in short to medium term fixed income. There are theories that say not to time the market, that as long as you get in, that will be fine. However, I believe that there is no point to get in at a top when all of the clear indicators are saying the economy and the credit markets are tightening so much that the stock market is going to fall flat on it's face as all of the future potential revenue from corporations will dry up as the almighty spender begins to curtail it's spending by not making those purchases needed to support the economy. There are reasons why this is happening that I've written about before - but, it is getting VERY serious. So serious, the Federal Reserve is lowering it's target rate, now down to 4.25% - However, they are realizing this isn't doing anything, and are beginning to do something completely new by trying an auction to the banks for their money - to see how low the rate will go before banks begin to borrow to bolster the lending. The problem with the lending is that the risk is getting worse and worse and the banks have tightened their lending practices so much that the average person can't get a loan for a home. I am seeing this first hand.

So, now, back to my phone call. The problem that I had with the phone call is that I was told that I need to leave my opinions and advice to the side and begin selling regardless of my views - This I can understand. Afterall, I am in a position that is sales related. However, the problem lies in the fact that I can't bring myself to sell something that isn't worth the price they'll pay for it. I can now see how homes were selling for 400,000+ for a condo. (Notice I use the word were - they are dropping like a rock, and will continue to do so). The problem is that people don't care about one another. It's kill or be killed. The system is set up to take advantage of the poor and uneducated. The more uneducated a person is, the more likely they are to be taken advantage of. This could possibly be a reason why the public school system is going down the drain - the reason why there is no personal finance programs mandated in the public school system. The more ignorant one is, the more it is possible to take money from them. I think I've written about it before, but the entire system of going to high school with, "College Prepatory" classes teach you to go to college, get an education, and get a great job. Or, in other words, go to college - get in to debt - and then work for someones company because you feel so trapped by the debt you have you will then have to work for someone's business to help them make millions while you pay off those loans that are essentially are for a worthless piece of paper that gets you a mediocre job that barely pays for those loans - and then once you pay them off, it is pressured that you go to grad school to be competitive in the market and get a better position - but, let me reiterate. That is take on more debt so you can perfect your expertise so that you can be paid a little bit more to pay off those loans in order to make that business (owner) millions more while you are getting paid even less. Take those loans that you took out for school and plow them into a business that you would love to work at - not even that, just your dream, and you could possibly build your own business with all of those loans... But, taking on large amounts of debt is extremely risky.. right? Well, you're doing it with school...

Anyway, enough of that rant. But, on the other hand - The uneducated aren't proactive either. So, it's no wonder they get taken advantage of. I see hundreds of customers that are overdrawn on their accounts - and I try to teach them how not to do it... But they still do it. They must get that snickers bar at the checkout line... They must buy that scratch off lottery ticket... However, it's not just them. It is also everyday individuals that don't care to have a financial plan done. Why? They feel they are in control of their finances. Well, most of these people don't even have an IRA set up - They aren't saving for retirement nor are they ready. I am more ready than most of my customers, and I just started 2 years ago. So, why not take advantage of these ignorant, uneducated souls? They are asking for it. If I don't take advantage of them - there'll be another one that does and will profit immensely. So, why not help them, while getting a limited amount of their money, while the other person that would royally screw them (Real Estate Agent) ends up going out of business or not able to get that one customer I did? Afterall, the poor somehow always seem to stay poor. Why is it that public libraries seem to be in the poorer areas, and yet when you go inside, you don't see anyone except middle class individuals? Is it the education we give them, or is it that they do not want the education? Ignorance certainly is bliss, but the question remains - Do these people choose to be ignorant in order for others to take advantage of them, or is the system set up like that so that they have no hope because they don't even know?

These are the dilemmas that bother me. I am only one person, but can I save the ignorant and uneducated? Maybe I need to begin getting a share of this profit from the poor and uneducated. There are literally hundreds of millions of them, and there are only around 5 million or so multi-millionaires. Meaning, there is enough market share to take a bit from. Or, should I go the other route and increase the education and wealth of millions and take market share that way? Profit for myself, or help others profit?

Oh, and the next day after that conversation with that higher up, the DOW plummeted 300 points/2.5% - So, I guess I'm not too far off base.