Lofty Matters

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Do we really appreciate the magnitude of the financial crisis we see unfolding before our very eyes? It’s tempting to allow the soothing words of politicians to comfort us into believing that this crisis won’t personally touch us…much.

Unfortunately…this is not going to be comfortable and it is very, very real. And it is getting worse with each passing day.

There have been several ideas paraded out in an attempt to put off the inevitable. The economic stimulus checks we all received were great for a few extra trips to Walmart. Did you know that they cost we taxpayers $107 billion and did NOTHING to even slow down the economic downturn?

The next efforts we’ve seen have been the bailouts. These were akin to the little dutch boy with his finger in the dyke holding back the floodwaters.

Last night President Bush presented the latest plan and that is to attempt to protect the growing number of bad debts, failing banks, and dying money market funds. Bush promises that this will effectively end our debt crisis and allow confidence in our system to be restored. Will this work?

Let’s see…

I predict that there will soon be some encouragement for the inexperienced investor to purchase financial assets at low, attractive prices. During this time those that know better will be using this short time of market stability to sell everything that they can for as much as they can.

It’s obvious to the whole world that the US has a huge financial crisis going on here. This latest plan will most likely produce more fear instead of calming nerves. Selling follows fear. World investors abhor risk and following the unveiling of Bush’s latest plan look for these investors to start to bail out on their US investments even faster than they were before.

Unfortunately, the market average will continue its downward trend and our retirement accounts are going to be decimated in the process.

Most Americans have no safety net anymore. Any equity we earned on our mortgages is gone and we are in dangerous debt. As the economy gets worse the unemployment rate will start to climb. At this point the downward trend will begin to get worse fast. Credit card offers will stop. Balance transfer offers will cease. There will be no more lending offers for Americans who are defaulting on all of their current debts.

As this continues where will the Fed get the money they need to fund their plans? They will have two options:

• Borrow from investors who don’t want to lend it to them

or

• Take it from taxpayers who don’t have it to give them

The bailouts that have already occurred have cost us $1 trillion. That’s not the final tab, though. Oh no, no, no. If Fannie Mae and Freddie Mac don’t stop their continued decline that bill to the taxpayers will be more than $10 trillion.

The wise and prudent will take some steps to protect themselves now.

Look for interest rates to begin to rise. This is simple law of supply and demand. With the demand slated to be exceptionally strong, prices are going to go up dramatically. This also means that the Fed will be forced to pay more interest for the money it needs to fund these bailouts.

Obviously, the rising interest rates are going to affect us personally, too. If your mortgage is financed with a variable rate and you have ANY money in the stock market or bonds get it out NOW and pay off your mortgage before you lose even more money in the stock market.

Also…do NOT increase your debt!

If you have been putting money in an employer sponsored IRA you won’t be able to withdraw it without penalty until you are at least 59.5. You can move your balances though. A gold fund or a precious metal fund or a commodity fund is a good place to put your money right now. Experts agree that gold is going to be a safe place to invest during this crisis.

Investing in real assets is the best course of action at this time. This includes natural gas, mining, minerals, energy, agricultural, livestock, farm land, and precious and industrial metals.

While the housing bubble deflation has been going on for some time now…up until now commercial real estate has not yet begun its deflation process.

Watch how this is going to unfurl, though.

• With house prices declining, people can’t borrow on the equity in their homes to fuel their over consumption any longer

• As interest rates rise, ARMs will also rise…as will the cost of anything that is considered a commodity

• This will also affect consumption and force it to decrease

• As consumption declines, the industries and businesses that depend on consumer consumption will begin to fail

• Workers layoffs will begin in earnest and these people will be forced to reduce their consumption even more

• As the unemployment rate climbs, the rents on commercial real estate will have to be lowered

• This will create an implosion of commercial real estate prices that may be even more significant than the implosion of house prices

• As this is happening, consumers will stop being able to even pay the minimums on their credit cards

• This will result in further escalation of pressure on the already hurting lending institutions

Our foremost goal must be preserving what we have worked hard to earn. Please do NOT allow yourself to be comforted into believing that this “will all work out.” There is a huge sell-off looming and once this starts it is going to shake the world down to its very foundation.

Tags: commodity, economic crisis, Fannie Mae, Fed, Freddie Mac, stock market, unemployment rates

Election Theme Yet Again:  “It’s the economy, stupid.”

Americans are desperate for economic leadership.

Both candidates are relying heavily on promised tax cuts to fix the economy’s major problems. No surprises here, however…both have fallen back on their traditional party instincts.

McCain promises to keep tax rates low for all and to reduce corporate tax. This is a traditional Republican recipe for jump starting a suffering economy and creating jobs.

Obama is proposing tax cuts for the many that will target help on the middle classes. He will eliminate tax cuts for the very wealthy and reserve them for those that need it badly.

The Federal budget deficit, already at $400 billion, will absolutely grow in the new fiscal year.

Spending on healthcare, energy security, and alternative power all may be in danger if the candidates are serious about their promise to balance the books. The market’s lackluster response to the latest economic boost shows that whoever wins in November will face a long struggle to get America strong again.

It is not clear whether the result of the upcoming election will have an impact on either the economy or prospects for investors. Basically, the most powerful man in the world is less influential than one might think.

The actions taken by the Federal Reserve have had a much bigger influence on the US economy than the President’s tax relief package.

As for the markets, a research firm has released statistics showing that the Dow Jones average has risen an average of 7.2% a year under Democratic presidents compared with just 3.6% a year under Republicans.

Let’s not forget the important of the balance of power between Congress and the White House. When Democrats have controlled Congress (predicted to occur this year) the post-election year has been good for investors under a Democrat President (+12% on average) but poorer under a Republican (-1% on average).

History shows that a positive stock market performance between August and October of an election year precedes the re-election of the incumbent party about 80% of the time.  A weak stock market has a similar ability to predict a change in party.

No one has said this won’t be interesting!

Tags: Congress, democrat, Economy, Federal Reserve, McCain, Obama, Presidential election, republican, stock market