Economic Freedom in America

Obama and the second great depression

I read Amity Shales "The Forgotten Man" that describes all of the mistakes that FDR made during the thirties. The Great Depression was not a failure of capitalism. It was created by government meddling and punishing the private sector.

Obama has followed FDR's model quite successfully so far. He has created an atmosphere of business uncertainty, demonized business and "the rich". This is the second time in history that Keynesian economics has proved to be an utter failure.

Will the US electorate learn from history and reject Obama. FDR fooled people for a decade.

Read "regime uncertainty and the great depression"

Stopping Junk Mail and Annoying phone calls

One of the best ideas I ever came across on the Internet was the location of web sites to stop junk mail, get on the No Call List and Opt out of Credit card offers. This has literally saved me hundreds of hours per year that I can focus on making money or just relaxing. Taking action is really simple and takes no more then a few minutes for each registry, but great in reducing wasted time. Most highly recommended.

Will the banks ever lend again?

During the early part of the last decade banks seemed to have unlimited money available to lend. Credit card offers poured into my mailbox, "no doc" loans for buying property were common. 100% financing for investment property was easy to obtain.

No more - during the past 18 months all of my HELOC's have been cut to zero. Funny, in my location (western NY) property values never sky-rocketed as they did in other parts of the country. And while other housing markets are seeing a big burst of the bubble, my market has continued to climb in value. Despite this, the automated valuing programs that banks use to assess property value seem to use a "one size fits all" approach.

I had several unsecured lines of credit available to me that have also been cut. In fact, every time I make a payment, the credit limit is cut some more. Despite my debt load dropping 10% during the past year and never being late for a single payment, my credit score is dropping like a rock as my balance increases relative to my total credit available.

What to do? Actually, I am reducing paying off debt and increasing the amount I send to my emergency cash reserves. It seems like not what Dave Ramsey would advocate, but if something major happens I can no longer count on borrowing from a bank.

Even Peer to Peer Lending sources like LendingClub have become more selective.

Despite what our government officials tell us, the money lenders tell us not to expect much of an economic recovery for a long time to come.

Gold, the US$ and a Train Wreck

The price of g0ld has recently spiked over $1100 an ounce after sitting under $1000 for several months. Meanwhile the value of the US dollar has continued it's slide downwards. The Fed recently stated that they will continue with their easy money policy until unemployment starts to pick up. With unemployment likely to keep moving up, it means that the Fed will continue to flood the world with dollars.

What does this mean? Is this 1978 when gold will increase in price by a factor of 5 in 18 months and inflation soared to our highest levels? One can't but help to think that history is set for a repeat. If other commodities follow the price of gold, a second economic collapse might be in the offing.

The Fed is stuck between a rock and a hard place. They can't lower interest rates anymore. If they do the right thing (like Volcker - raise interest rates), it will hurt the current politicians as unemployment rises. If they do nothing, another massive bubble will blow up and create a train wreck bigger then we saw last year.

Goldman Sachs and the price of oil

The more I read about Goldman Sach, the more I see them as an evil company - the type of company that gives capitalism a bad name. Heres a story about how GS and some of the oil companies are manipulating oil futures markets

GS is making these "round trip" trades without actual oil ever exchanging hands. GS will sell an oil contract to BP and BP will sell the same contract back to GS. The price goes up, other traders see the high volume of trades and jump in, driving the price even higher.

Right now the world demand for oil is very low. Oil tankers are sitting full with no place to pump their cargo, yet the price still keeps going up.

The point of the futures markets was for companies to hedge against future prices increases or drops. Now an unregulated ICE outside the US has become a dark pool where insiders can drive up the price of oil to pad their outrageous bonuses.

Will the government investigate this? I doubt it. Paulson was from GS as well as Geithner. Sometimes, I feel like a crazy conspiracy theorist.

Hope to make money in stocks?

Last week I attended a GetMotivated seminar. I was hoping to see some of the great speakers I had heard years ago while in Amway - Zig Ziglar and Robert Schuller. However, both are quite along in their years and were really unable to speak very well. Zig has suffered a brain injury and just sat on stage while we watched a video of some old speeches. The most memorable speech was given by an Indian immigrant (whose name I don't recall).



I did listen to a speaker called Phil Town who was making a stock based sales pitch and ended up signing up for a 2 day seminar. This is an organization connected to Wealth Magazine. Apparently this company is owned by TD Ameritrade. The web site is at Investools.com.



I've not really done well in my stock market investing career and been somewhat ambivalent about investing in stocks Vs real estate. However, I left the seminar with a renewed interest in stock investing. While the main purpose of the seminar was to sell really expensive education courses ($5000 to $25000), it did provide some insight into key ideas that I have been missing in stock market investing. Previously, I had dismissed technical analysis, but the speaker convinced me that the market indeed gives lots of signals about what it may do in the future.



So, I'm going to use the tools for the next 9 months and see if they can at least prevent me from taking a beating during the next market crash.

Paul 4 - IRS 0

Well, the IRS struck out again in their quest to get more out of me through an audit. I've never been impressed by the knowledge of the auditors. They are friendly enough but I seem to always have to explain the tax laws to them.

Having your files organized and being able to document what you put on the tax form never ceases to impress an auditor. Must be that most people being audited don't have documentation.

To Hell with the Banks

I've always paid every credit card payment, every HELOC payment, every mortgage payment on time - for over 30 years now. Last summer the banks sent me multiple notices on every property eliminating my lines of credit, claiming that my properties were worth less (they weren't - property values continue to rise here)

In the last six weeks my two credit card companies have (without reason) tripled the interest rate on my cards. I have cancelled both cards. My credit score was excellent (over 750) but these banks have decided that those that make payments are going to bail out the looters that default on their credit cards. To hell with them. I will not pay another bank for credit card interest again.

Theives all of them

Another IRS audit

I'm beginning to think that there is an IRS conspiracy against rental property owners. I've received another notification for an IRS audit of my rental properly documents. This will be the 4th time I have been audited.

I'm not really worried about this. Three previous audits ended in no change and one gave me additional refund. But it is a pain to have to spend 3 hours with an auditor.

I wonder if the IRS tax cheat in chief (Geithner) will be audited as much as I have been?

Increasing Income

My company has announced no raises for 2009 and no bonus. I have to make an extra alimony payment to my ex-wife out of a non-existent bonus and I usually use it to pay down on debts. Like many people I either need to increase my income or cut expenses. My expenses are pretty barebone right now, so there is little to cut

What do I do now? Invest in more real estate? Take a part time job? Find another source of income?

Is the real estate market at a bottom yet? Probably not in the hot markets of the past few years if you look at this graph. The market neither increased rapidly nor dropped in the Buffalo area (it's up 4% in the past 12 months). Underwriting for investment loans has become very strict the past year. If I could get a real estate loan, I would re-finance one of the properties I own that has a variable rate loan. I just cannot see any purchases of real estate at the moment. Besides, cash flow from my properties is revenue neutral and I wouldn't expect that a heavily financed purchase would produce a positive cash flow.

I mentioned here and here about my experiences with multi-level marketing through Amway/Quixtar (I read this weekend that they are now dropping the Quixtar brand and reverting to Amway). I don't really consider Amway an option due to the high people skill requirements for success.

I "tried" the Internet with this blog. But my 25 months of blogging has earned me a cumulative $2.46! Of course, I do not have a good sense of how to make money on the net. One of the aspects that I really grasped with Amway was the "franchise" concept (see point #2 here). Distributors like Dexter Yager had created an excellent "system" for success.

As I mentioned a couple of posts ago, I have been looking into SiteBuildIt. It seems to me that the creator of the site has done a pretty good job of building a good system that can be followed by most people. The system looks pretty comprehensive. If you are (like me) uncertain what type of Internet business to create, there is a Brainstorm section which provides lots of data. You can use the data to determine supply Vs demand for any particular keyword (i.e. business idea). His C-T-P-M model makes a lot of sense (and points out why this blog doesn't make much money!).

I am applying for a Census job and have thought about taking a second job. The problem with second jobs is that they have little flexibility. Since my boys have not been willing to get their driving licenses, I still need to do a lot of chauffeuring.I thought about becoming a Real Estate Agent and took an on-line CCI - but, as I suspected, the competencies needed are much like Amway and I scored in the lowest 20%.

So, over the next few weeks I will explore a web site in more detail and may pursue that for the time being.

Ending 2008 Net Worth update

Well, I've updated my net worth on NetWorthIQ. Like many (or most) others, my net worth suffered a sharp drop in the forth quarter of this year and is at its lowest level since 2006. The big killer was the sharp drop in my 401k which is largely invested in equities. And, fortunately, unlike a lot of others in many real estate markets, my property values are not declining.

That being said, I don't plan on buying any properties this year. I'm hoping that one or more tenants will exercise their options and purchase the house that they are leasing, but I'm not holding on to much hope. My big concern is the one property that I have which is on a variable interest loan (currently at 10.1% interest). I tried to refinance it several times last year and expect that it will be just as difficult to obtain a new loan this year. I have no hope that the current occupant will buy it and am concerned that all this money that the Fed is pumping into the economy will cause massive inflation. If that happens any variable rate loans will jump since the Fed will have to rapidly raise interest rates.

I'm in the process of applying for some temporary work with the Census. Beyond that I've also been exploring SiteBuildIt and the possibility of an Internet business. But for what, I'm not sure.

Bubbles and Demographics

Like many during this current economic crisis, I have been trying to figure out what happened and when (if) we will get out of it. Will I have a job until I can retire? Will my 401k recover? Will Social Security be around when I'm retired? Will my company be able to cover it's pension costs?
I'm normally an optimist but this article has me wondering if any of the above will happen. The crux of this article boils down to one paragraph:

"There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear. "

A look at the key graphic shows the problem:

The law of Supply and Demand is going to be hard pressed to overcome the demographic problem that the West has. The reduced population will have a low demand for the older generations money and homes. There will be a limited supply of money (i.e. taxes) to fund SS and pension funds.

My wife often argues that it is much better to have only one child so that you can have more for yourself. It is a view held by many, but in the end, this is a shortsighted and selfish view of the world. By failing to reproduce, we doom ourselves to a very bleak future.

Update: More from the same author with the Pope's views on free markets.

What's the forecast with Obama and experimentation?

The economy looks as bleak as I have ever seen since the 1970's. Consumer spending seems to have fallen off precipitously. I looks like the government hasn't got a clue as to what to do. Treasury Secretary Paulson sold Congress on a $700 billion bill to purchase toxic assets (TARP). However, Paulson changed his mind and forced large banks to give some of their equity to the US government in the largest nationalization in our history. The markets have predictably reacted by dropping some more.

Last Sunday night on "Sixty Minutes" President-elect Obama indicated that we was going to follow FDR's model of experimenting with the economy. However, what Obama does not seem to understand is that the markets do not like experimentation. Uncertainty creates volatility. Here's a useful chart of stock market volatility during the last century.

Many Democrats idolize FDR as a saviour but the facts show that if anything, he made the economy worse. Now the electorate has put all their faith in a new Saviour who promises to repeat the mistakes of history.

Irrational Pessimism

Many remember Alan Greenspans claim of irrational exuberance during the 1990's stock market run up. Now the market value has dropped about 40% from its peak and each day brings news of triple digit market losses. Foreclosures are up as well as joblessness and it's hard not to be afraid, especially for those in their mid-fifties who were hoping to retire in 5 to 10 years.

So is the world ending as we know it? Many people are thinking that way, claiming that this is the next Great Depression. The media claimed for over a year that we were in a recession despite the fact that the economy was still growing. Self fulfilling prophecies are part of the reality we deal with and as people are told that things are bad they change their behavior until things do become bad.

One contrarian is Warren Buffet who recently published an article recommending people buy now. I think that is exactly what smart investors need to do. Stocks have always come back. And some areas may have good real estate values where sellers have irrational pessimism (though I think that values will have to drop by 50% or more in some markets).

Stocks Vs Real Estate III

I've written in the past about why I thought real estate was a better investment than stocks. The current 40% (and counting) drop in the stock market serves to underscore many of the points I made.

Now, many people who were trying to use the greater fool theory to flip houses in rapidly escalating real estate markets during the past few years may disagree. I used to watch "Flip this (or that) House" and wonder if I could ever make money in real estate in the Buffalo area. However, at the moment I seem to be at the right place to own real estate. My real estate basket has a positive cash flow and is appreciating.

Meanwhile my 401k has lost over 6 figures in value and if I look at that alone, I have no hope of retirement until I am in my 70's. I think that the country is in the verge of electing the most far left socialist in our history. His ideas of increasing capital gains taxes and taxes on small businesses as well as anti-NAFTA rhetoric is reminiscent of the 1930's. I wonder if it will make FDR look like a conservative a few years from now.

Fortunately, hockey season starts tonight and the Bills are winning. Otherwise, I might just jump off a skyscraper.

Congress Acts - Extends Crisis 10 years

Every one is running around in a panic predicting that we are facing imminent doom if Congress doesn't pass out a bail out bill for Wall Street. Politicians are all about blaming greedy capitalists but greedy home sellers are as much to blame. But people, whether on Wall St or Main St were simply acting in direct response to the incentives that our benevolent politicians have provided for us. Easy money and the Community Reinvestment Act have combined to drive up housing prices to unsustainable levels. Having the government buy these "bad" loans at inflated prices will not solve the problem. Houses in most areas will still be over priced.

How do I know this? Just look at prices of homes in the greater Buffalo area. Housing prices in many areas of the country are still 400-500% greater. Now, I know people will pay a premium for a better location. But once the lending industry is reigned in, most people will not be able to afford a 500% premium. So, they will default or move.

So, I predict that we will (like Japan did) suffer from slow economic growth over the next decade or until we let the free market set housing prices unrestricted by government intervention.

Liberal Fascism and Free Markets

I've been reading Jonathon Goldberg's book Liberal Fascism during the current economic crisis. The book is an eye-opening look at the "religion of the state" as Goldberg defines fascism. Fascists, progressives, and liberals are all one and the same and dedicated to the idea that the government alone can solve all problems, prevent all harm, absolve all sin.

There is no doubt that the real estate bubble was created by the religion of affirmative action. Government intervention (with a push by Obama) in the markets black-mailed banks into loaning money to people that couldn't pay for it. The solution proposed to solve the "crisis" is more government intervention into the markets.

President Sarkozy of France has declared that laissez-faire capitalism is dead. But, truth be told, the fascists have been in control of the markets for most of the past 100 years and the free markets of Joseph Schumpeter have not been allowed to work.

There is wide spread panic that if the Congress doesn't pass this bail-out package we are headed for the second Great Depression. I believe that we need the creative destruction of the free market to wring out all of the stupidity that has been fostered during the past 15 years by bad government policies.

I was happy that the bail-out package failed but I fear that ultimately, politicians cannot do the right thing. Here's a good description and solution to the problem.

P.S. You don't think we have a religion of the State???? Here's a creepy worship song to the Dear Leader.

Root Causes of the Market Turmoil

Based on what I've been able to discern there are two causes to the current market crisis. The first began a decade ago when our meddling politicians decided that the lenders were being racists by not lending to poorly qualified minorities in slummy urban areas (CRA). So the government relaxed lending standards and created tremendous liquidity. This allowed people to refinance property and created two bubbles - first the stock market and second in real estate.

I was able to purchase property because of this liquidity with virtually nothing but my credit score. Some of the property I got was foreclosed when the homeowners couldn't pay after borrowing many times the value of their property. (One property I got for $5k had a $71k loan against it. In truth it was probably only worth $1k, but it was owned by a minority and no one wanted to discriminate by valuing the house at its real value)

The second part of the crisis is due to a FASB accounting practice called "mark-to-market". About 8 months ago I started getting letters from all my HELOC's stating that the value of my property had fallen and my credit line was no longer available. Although property values in our area have increased, suddenly the loans I owed money on were valued at over $100k more than I owed on them. So the big companies like AIG and Lehman had to revalue all of the loans to market value suddenly showing tremendous losses and cutting all market liquidity. It didn't matter if I (and most other homeowners) were still credit worthy and paying off the debt. These firms found themselves stuck.

So the politicians that created this mess are all decrying the "greed" of the Wall Street managers (and no doubt there is greed there). But the truth is that Washington created this mess by trying to interfere in the market.

Net Worth Update for 2nd Quarter '08

I've updated my net worth at NetworthIQ. My net worth dropped by $5k. Despite adding $3k to my 401k that account dropped by $6k. My debts dropped slightly, off-setting some of the loss in retirement savings.

One interesting thing has occurred which (I hope) underestimates the value of one of my properties. In 1998 I made an offer to purchase a home on 5 acres for $180k. Someone else outbid me and now has that property on the market for $369k. I purchased a slightly nicer property nearby for $195k which I have valued at only $235k. I still own that property (with my ex) and think that it is pretty comparable. If so, I may have more equity than I currently think in real estate.

Data from the local Realtors indicates that property values have continued to rise at their slow 3-6% rate as they have for the past 8 years. However, the banks have all sent me notices that the values of my properties has dropped dramatically (20%!!). I guess that they don't want to loan out any more money. At any rate, I've not changed the values of any of my properties.