TGIF...and the Holy Grail of Investing

I've decided to end this week on a positive note. No more rants until next week!

I want to bring to light what I would consider the HOLY GRAIL of investing...the magic of the Compounding of interest. Ya, ya , ya sounds so boring, I’ll try and make it interesting for you. This alone is how the rich get richer so why can’t our poor souls use it while we are young. We have the luxury of time on our side….don’t squander it!!!

Ladies you remember that last pair of shoes you purchased for around $100 (who am I kidding those are cheap right, but for simplicity I’m sticking with $100). Gentleman, you remember that last time you blew $100 on eating out and a bar tab? Yep every weekend for many....Well if you are 30 years old and placed that $100 in a Roth IRA and earned 10% a year till you were allowed to take it out at age 60.....that $100 is now magically $1,745! Let’s take it a step further if you maxed out your ROTH IRA contributions for the year, which is $5,000….when you retire that 5k is now worth $87,247….holy **** right??? Now just imagine the possibilities when you start throwing larger numbers into the mix.

It doesn’t matter how old you are…it is never too late….20’s, 30’s, 40’s, even 50’s…Make it happen, don’t put it off any longer. I urge you to go through that next week or two, and when you are about to make a big purchase that you really don’t need….look at these Numbers below….This is what you are really spending….That old quote “A penny saved is a penny earned” still holds true…now throw in the compounding of interest on that penny saved and it is how YOU will take care of your financial future.

Say it with me, that pair of shoes just cost me $2,810….that $300 I squandered eating out all month really cost me $8,431….you’ll get the hang of it….might even be fun if your sick like me…

Age

25-   $100 = $2,810
         $200 = $5,620
         $300 = $8,431

30-   $100 = $1,745
        $200 = $3,490
        $300 = $5,235

35-  $100 = $1,083
        $200 = $2,167
        $300 = $3,250

40-  $100 = $673
        $200 = $1,345
        $300 = $2,018

45-  $100 = $418
       $200 = $835
       $300 = $1,235

50-  $100 = $259
        $200 = $519
        $300 = $778

High Profile Crooks...

GM announced this week they have an IPO on the shelf. I urge you NOT to partake in this utter travesty. Let me make this clear…I hate GM with a passion after what they did last year. There is no difference between what GM did back when it entered bankruptcy to you or me breaking into an old Ladies house and stealing everything she owns. Really, I’m serious, General obaMa decided to screw ALL Bondholders which historically are supposed to be at the TOP of the Capital structure. Miraculously, when our President got involved, those “Fat-cat, rich bond-holders” (i.e. widowed old ladies living off a fixed income from their bonds they have held for 15 years), were deemed worthy of losing all their money. Yep, so that LOL (little old lady) lost all her $$$, because our LEGAL system was hijacked by a hidden agenda that voted in favor of the UAW pensions and healthcare benefits for former employees. I was appalled to see that the LAW was not upheld for the General Motors….never has this happened before….unfortunately I can’t say it will be the last time either. So that IPO being flung to the public is 18% owned by the UAW…and that LOL….well hopefully she can still afford those med’s….thanks General

Too say I will NEVER buy a GM vehicle EVER AGAIN is an understatement….

What’s good for the Goose ain’t good for the Gander….

You know what really fires me up, when I hear “people” adamantly stating that the Government needs to provide more stimulus, i.e spend more Money to get the economy going again. In theory this sounds great right? The Government can borrow a little money, spend it (flush it through the economy) and in turn get demand going again. Giving the Gov’t a Credit Card with an unlimited credit line, is a lot like giving that spend-a-holic spouse (thank god mine’s not) a credit card and hoping to end up with a bunch of stuff you actually need. Remember that beautiful down comforter fellas or those cute throw pillows? How about that big flat screen ladies? Problem is you end up with a whole bunch of **** you don’t need and a looming liability that has to be paid back!

Here are the cold hard facts, which in my opinion are impossible to dispute: Public (Gov’t) employees on average make $71,206 a year compared to the average Private worker taking home $40,331.(USA Today) That’s exactly 1.76 times the pay of a private worker. Please tell me how this is efficient? Actually I beg you to rationalize this….

Okay, you say that I’m looking to small, that’s only at the individual level. Fine, point taken, let’s take a look at all those individuals, add ‘em up and see how it looks on a larger scale. Let’s look at the State and local Governments across our nation….after all, these state and local Governments decide to pay their employees 1.76 times the private sector, they set the salaries, so let’s see how they have performed.  Currently, they have a projected Deficit of $180 billion for fiscal year 2011 and another $120 billion Deficit for 2012! And this as after they ran a $200 billion deficit in 2009 or another words spent 30% more than their General Fund (Income) allotted for.  That 1.76 X private sector = Money well spent right?  Logic tells me there's a little fat in that extra 1.76 multiple...don't tell the DMV receptionist that, she might treat you better.

The most alarming and sickening statistic I’ve seen is the fact that since the peak of the last business cycle (2007) the Private sector has CUT 8.5 million jobs….wait for it…the Public sector (Gov’t) has CUT 200,000 jobs….uh-huh...I'm starting to choke on that goose right about now.  That’s less than 2% of the jobs lost.  Hold on...I can't breath, the goose is lodged in my throat....All those Private sector 401k matches…GONE….Private sector Profit sharing from employers…Forget about it....Longer hours, less pay….Yes Please, but wait extra MSG please!!!  Correct me if I’m wrong but last time I checked Public employees haven’t seen a halt to their retirement benefits…Please, sombody! I need CPR, help me get that goose outta my throat....cough cough….or god forbide ask the Public employee to work more than the union mandated 8 hour day….with a lunch and a mid-morning break….Oh jesus...I'm having a full fledged heart-attack over hear now...swallowed to many of those geese or is it gooses?  doesn't matter...not much time left I'm on the way to the E.R. now...Maybe I'll see the United States of America on the operating table next to me...hopefully that little machine doesn't flatline quite yet...

Move over World...

China has officially passed Japan to become the World's 2nd largest Economy....I think they have officially emerged!

In recent years China has flown by... #6- UK, #5- France and #4- Germany....

some see U.S. being passed by 2030 ?!?!?

The Economy, Housing and YOU...

Recently, seemingly everywhere I turn, I hear from people, pundits and realtors (undoubtedly) that this is a GREAT time to purchase real-estate. To all I come across directly, I pose the very simple question….”WHY?” To those indirectly, I pose that same question? This little write-up began about a month ago when I interacted with a friend who is contemplating purchasing a piece of property. The answer I received from my question was uninspiring and lackluster and in-turn provoked me to finally Put Pen to Paper, well actually keystroke to computer, MY thoughts on the matter. As it turns out, I wrote about way more than just the housing market, so even if you already own a home, I dive into the economy, banking system, etc., so there should be a little bit of everything for everyone. Everyone has an opinion, and I undoubtedly love forming my own, I also love debating critical thinking with others, and am always willing to admit when I’m wrong. So feel free to fire back at me where you disagree. Below is my overly long, detailed, “Outside the Box” thoughts and analysis. As you will see I refuse to go along with the Herd Mentality and I refuse to listen to a real-estate agent who tells me that this is a great time to buy a property, but can not answer my simple question with any relevance.
Feel forward to forward this on to anyone who might like some controversial reading over the weekend.

Today, almost 3 years after one of the worst recessions of all time began, the Ultimate Cause, has not been solved…..DEBT! What started as an overly Debt-laden Private sector was transferred directly to the Public Sector….aka Uncle Sam’s balance sheet. You throw in a depreciating environment in the only places Americans derive there wealth from: Homes, Jobs and Portfolios….and you have a Private sector that has barely De-levered at all. That’s right, most Americans are in worse shape than they were in 3 years ago! The fact that a very small percentage of this Debt has been paid down means Governments and Individuals will be forced to spend less and save more. This will prove to be a very gradual process, think about how long it took to reach the “Great Excess” we saw just 3-4 years ago. I am confident that we are still in the early innings of what I’m coining the “Great De-Leveraging”. This process could take years, maybe even a decade to work through.

The U.S. Economy- (If numbers and forecasts bore you skip to next paragraph) We are currently seeing below average growth and a weak economic recovery out of arguably one of the worst recessions of all-time. The 2nd half of this year will be worse than the 1st half of the year. Fiscal stimulus has worn off. The 1st half of this year had Comparisons from the 1st half of ’09 that were about as low as we’ve ever witnessed. That does not bode well for 2nd half forecasts as the 2nd half faces tougher Comp’s than the 1st half . 1st quarter GDP growth for this year was forecasted at 5%, then was steadily lowered from there and the official Final number was revised to 3.7%. 2nd quarter GDP numbers just came out and 2.4% was the reported number, down from the originally estimated 3%. Then the U.S. trade data came out after GDP report and it and all but guaranteed that the 2nd Qtr GDP will ultimately be revised down to 1.0 -1.4%. Two quarters in the bag, two quarters dreadfully lower than expected. Final sales will be worse in 2nd half of the year as inventory rebuilding is all but completed, thus pushing Growth even lower for the 2nd half of the year. 1% GDP growth for the 2nd half of the year could be about right and technically would not be defined as a Double Dip recession. A recession is defined as two sequential quarters of Negative GDP growth. 1% however, coming out of the steepest recession since the Great Depression will definitely feel like another recession. I argue that this meager growth is not sustainable to create new jobs, new business investments and therefore could ultimately push us downward into a Double Dip Recession. The Washington uncertainty…. the Bush tax cuts are set to expire and are up in the air, financial regulation leaves question marks for Banks, and the uncertain costs for companies trying to price there future healthcare costs does not bode well for future investments. If the economy limps along at +1% growth….consumer loans, auto loans, credit card debt and student loans will continue to become a larger and larger proportion of Americans budgets.

Moving on to Government Policy. What can the Government do to help stave off a slow-down this time? There is significantly less Ammo that the Fed/Treasury has at there disposal for this round. Rewind back to ’07-‘08….interest rates were at 5%....today 0-0.25%...that’s right as close to zero as you can get. That means as the economy struggles, the Fed has ZERO Monetary Policy flexibility, after-all you can’t lower interest rates to below zero! Rewind again to ’07-’08, the Federal Balance Sheet was in much better shape. We were able to essentially backstop the entire financial/banking system without creating havoc on the Governments cost of borrowing. As our Federal debt continues to rise (currently +100% of GDP) and we require 50%+ of our Nation’s Deficit to be funded by Foreigners we begin to enter a danger-zone. Now let me be clear, nobody, I mean nobody, knows when creditors finally seize to buy our debt. Look at Greece …everything was fine until one day it simply wasn’t and there cost of borrowing skyrocketed. No-one can predict when that line is ultimately crossed. I’m not even saying that it will happen here in the U.S., I’m simply saying that we can not afford risking getting close enough for it to even be a possibility as it would be catastrophic. Greece had the European Central Bank to step-in and bail them out….who steps in for the US Treasury???

Moving onto banks…the good the bad and the ugly of the current environment. Banks are currently sitting on over $1 Trillion of reserves earning a meager 0.25% from the Federal Reserve. Now before you say those damn banks, they are at fault, and now they aren’t helping, please remember the glory days…Yep that’s right, back when YOU or a Family Member or Friend or Neighbor got a Loan for a home without a problem and Benefited from the transaction. You or your family member or Friend or neighbor suddenly made a whole pile of cash as that home rose in price…then the mindset suddenly shifted to thinking the House could never, and would never, ever, go down in value. This caused the good ‘ole fashioned piggy-bank or Home-Equity line of credit to be tapped in conjunction with those Pretty Plastic cards….Those delightful drapes, great granite countertops, beautiful boats and who could forget those tremendous trips that were being taken….they were all to plentiful....Yep the “Great Excess”, how it felt oh so good. Oh how the “Great De-Leveraging” is going to feel oh so BAD. Were the banks at fault for these no-doc loans and was Wall-Street at fault for the securitization and shameless promotion of these securities? Absolutely! Shame on them! Was it “Us” Americans who are at fault for gorging endlessly on the seemingly endless abundance of money that was now suddenly growing on trees? Absolutely! Shame on “Us”! That money that was created and spent throughout the “Great Excess” had no business being in the system, it was artificial, and then that artificial money was levered and levered again, therefore creating a compounding affect that was unsustainable. WE Americans, collectively are at fault, not the banks and not the individuals alone…WE acted dependent of each other, everyone had their say and now….Unfortunately, it is time to fall from that money growing tree Together.

Today, these banks are still in risk-aversion mode from the “Great Excess”. They still have bad loans on there books. Yep that’s right you borrowed that Money, they didn’t force you to take it and now your balance sheet is upside down, thus creating stress on the banks, now Wonder why the Banks maintain their cautious stance!

Finally….Housing - the whole point of this rambling right? Back in 1992, about 4 million homes were being purchased every year. A decade later, 5 million, only a 25% increase. Then the boom, a short 3 years later that number jumped to 7 million units a 40% increase! Today, the residential real-estate faces numerous headwinds. Everything stated up to this point, both indirectly and directly effect housing in a very negative way. So let’s look a little closer at the Micro picture.

Loans….Once given to anyone with a pulse, are now tough to get. Inventory…extremely high and shadow inventory almost unquantifiable. All those foreclosures, not yet released by banks…all those speculators or flippers who are underwater just salivating at the thought at getting out even or anywhere near….waiting, lurking ready to sell. Over the past few months I’ve had a dozen clients mention they are waiting to sell a house, but haven’t listed it yet…case and point. Unemployment….remains high, will continue to be remain high and does not provide adequate backing to a sustainable recovery in housing. Lastly, very simply put…..Prices….they remain too high!

How can houses continue to be priced to high after over a 30% decrease? Using almost all quantifiable metrics this is still the case. Consider prices relative to income. From 1977 through 2010, the median price was 4.1 times median household income. The mean today is still above that 4.1 level, and that “mean” level is even artificially high because of the 2002-07 boom. Take a look at the chart below (top). We have room to fall. And it would not be surprising to see prices over-correct below the mean before it is all said and done. Home Prices vs. Rents shows the same picture, Prices remain too high (2nd picture below).

Government interaction has put a temporarily pause to the decline in home prices. The tax credit and mortgage modification programs helped stave off supply entering the market over the short-term. However, now that the tax-credit has expired and the modification program has proven to be widely unsuccessful, the market will go back to figuring out the appropriate equilibrium for prices over the Long-run. With all the cyclical, structural and long-term headwinds mentioned, this price-equilibrium will be found at much lower prices.

To overly simplify the analysis, there will continue to be far more Sellers than Buyers for the foreseeable future. So if you don’t have to be a Buyer right now…I urge you to happily wait on the Sidelines, it is not as bad a place to be as the Media and pop culture makes it out to be!