Sunday, September 28, 2008
Who's next?
Is Wachovia at risk? I gave my opinion on GM earlier. Is Ford a bailout candidate? What criteria is being used to determine whether a bailout is warranted? Taxpayers are already strapped. Can they afford a bigger tax hit? I like the concept of taxpayer-funded bailouts enabling taxpayers to enjoy any upside via warrants, but even if that best-case scenario plays out 5 years from now, will the funds actually trickle down to the taxpayers? Or will the government continue to be poor stewards of said funds?
Washington Mutual...what's next?
I posted this last week on WaMu:
Well, another shoe just dropped--the biggest bank failure ever. Washington Mutual was just seized over night, so good luck to any depositors with over $100,000 in their accounts. I'm going to guess there are many Californians, Floridians, New Yorkers, and Washingtonians who lost millions.
Hate to be the bearer of bad news, but this is getting ridiculous. I saw this coming a couple years ago, and adjusted accordingly, but my friends thought I was a doom and gloomer, when in hindsight, I wasn't gloomy enough.
So what's next? More bank failures, I assure you. Berkshire Hathaway's Warren Buffett (only the wealthiest man in the world), just mandated that one of their portfolio companies stop insuring any assets above the FDIC limit of $100,000. That should tell you something--get any amount over that limit out of there--now! Bank deposits, money markets, etc. are NOT the safe haven you thought they were. Check the capital reserves of your bank (banks are required to have reserve requirements to cover bad loans) to measure how healthy they are. I predict hundreds, if not thousands of banks will fail going forward. Heck, the biggest ones are failing before our eyes--expect this to cascade to other major money centers, as well as smaller regional banks. The Federal bailout programs may save some, but if they let big commercial banks like WaMu go under, and big investment banks like Lehman fail, should we have confidence that the local bank around the corner will be saved?
I hate to be an alarmist, but I can't in my conscious NOT give my opinions. As always, seek professional investment and tax advice from your investment advisor and tax advisor. But please, do your own research as well, because they are human and not infallible.
Looking further out, I predict General Motors will be insolvent within 18 months. Shareholders will be slaughtered. Their manufacturing costs are too high relative to their nimble competitors, and their obligations to fund the pension fund and healthcare will drive them to bankruptcy. Instead of building hybrids in the face of $5 a gallon gas, they continued to build gas-guzzling SUVs.
In between banks failing and American industry icons going under, everything else is Jim Dandy. :-) The economy will recover, but it's going to be a long time before things get better. I'm thinking we bottom out in 2010, which means we've got a few more years of pain.
Keep a cool head, stay the course, and tell your loved ones how much they mean to you.
Well, another shoe just dropped--the biggest bank failure ever. Washington Mutual was just seized over night, so good luck to any depositors with over $100,000 in their accounts. I'm going to guess there are many Californians, Floridians, New Yorkers, and Washingtonians who lost millions.
Hate to be the bearer of bad news, but this is getting ridiculous. I saw this coming a couple years ago, and adjusted accordingly, but my friends thought I was a doom and gloomer, when in hindsight, I wasn't gloomy enough.
So what's next? More bank failures, I assure you. Berkshire Hathaway's Warren Buffett (only the wealthiest man in the world), just mandated that one of their portfolio companies stop insuring any assets above the FDIC limit of $100,000. That should tell you something--get any amount over that limit out of there--now! Bank deposits, money markets, etc. are NOT the safe haven you thought they were. Check the capital reserves of your bank (banks are required to have reserve requirements to cover bad loans) to measure how healthy they are. I predict hundreds, if not thousands of banks will fail going forward. Heck, the biggest ones are failing before our eyes--expect this to cascade to other major money centers, as well as smaller regional banks. The Federal bailout programs may save some, but if they let big commercial banks like WaMu go under, and big investment banks like Lehman fail, should we have confidence that the local bank around the corner will be saved?
I hate to be an alarmist, but I can't in my conscious NOT give my opinions. As always, seek professional investment and tax advice from your investment advisor and tax advisor. But please, do your own research as well, because they are human and not infallible.
Looking further out, I predict General Motors will be insolvent within 18 months. Shareholders will be slaughtered. Their manufacturing costs are too high relative to their nimble competitors, and their obligations to fund the pension fund and healthcare will drive them to bankruptcy. Instead of building hybrids in the face of $5 a gallon gas, they continued to build gas-guzzling SUVs.
In between banks failing and American industry icons going under, everything else is Jim Dandy. :-) The economy will recover, but it's going to be a long time before things get better. I'm thinking we bottom out in 2010, which means we've got a few more years of pain.
Keep a cool head, stay the course, and tell your loved ones how much they mean to you.
China
Even the most optimistic have conceded that the Chinese will be the next superpower within a decade. It's inevitable. But they will have huge growing pains as well (witness the recent precipitous decline in the Chinese equity market), much like America did when we became a superpower. Look at their human rights and how they deal with social injustice and civil unrest, as well as their deliberate flogging of environmental issues (although America has no right to point fingers, given our track record of polluting). I just don't want America to be the next UK--a financial center with little else. The UK experienced a huge brain drain to the US because of our manufacturing and economic might. There could be a mass exodus of smarts out of the US this time--actually there already is.
My opinion of Sarbanes Oxley is that it has driven entrepreneurial spirit under or overseas. Instead of developing next-generation technology, entrepreneurs have become bean counters and lawyers, dealing with compliance instead of focusing on their core competence. London is now underwriting more IPO's than New York. Legislators rant about the evils of the outsourcing of jobs overseas--yet they misguidedly enact laws which encourage it. We don't need more regulation--we need enforcement of existing laws on fraud.
I've been engaged with venture capitalists and serial entrepreneurs focusing on China, the next great frontier for not just making Nike shoes, but also highly intellectual property-intensive semiconductor technologies. I used to be a vendor selling enabling tools to these semiconductor companies (I now manage money), and I was lucky enough to participate in the tech boom in silicon valley in the late 90's. These people are replicating that business model in China. Some VC's ONLY invest in Chinese startups--serial entrepreneurs (Chinese natives) who had success in the States, and aim to replicate it in their return to China. They are creating another silicon valley in China--lots of them. The brain drain is already occurring.
For instance, those from San Diego are well aware of Qualcomm, the developer of the 3G wireless standard. They double dip because they make money on the semiconductor hardware as well as through royalties from their intellectual property (3G technology). Broadcom (socal) and Marvell (norcal) are also semiconductor icons which have had very successful IPO exits in the last decade. They are industry leaders in networking and storage, as they developed the silicon content enabling many technologies. The intellectual property in these leading edge technologies resides in the silicon, much like Intel's Pentium controls your computer.
Hence, the Chinese are getting tired of paying royalties on technologies and standards US companies developed. The domestic Chinese market is big enough to support development of their own standards--they're basically saying "screw the US--we can do it better and more pervasively--and we're tired of paying you royalties". And while there are challenges--this stuff ain't easy--they will get there.
And don't pooh pooh these efforts. Some of you recall the last big downturn in the economy, the housing markets, and the thing called the S & L crisis--during the early 90's. We had the riots, the closing of naval bases, debilitating earthquakes, the defense industry downturn, etc. as well. You could have bought a home on a 1/2 acre lot in Beverly Hills (north of Wilshire) for half a million, and a 12 unit apartment building in Long Beach for $350,000 via foreclosures.
Sounds awfully similar, doesn't it? Low-end homes have tanked first this time, and it's just a matter of time before higher-end markets take a dump, too.
But here's the silver lining: do you also remember when the internet was spawned (no, Al Gore did not invent the internet)? It happened many years ago, then known as DARPA, part of the Defense department communications network. Companies like Netscape and Yahoo rolled out the internet to the masses during these dark economic times, thereby enriching thousands of shareholders and employees. They went public in the teeth of that recession--I would argue they helped end the recession and catalyzed the start of the great tech boom.
I can assure you innovation in labs is still occurring today, what techies geeks affectionately coin "disruptive technology". These soothsayers can see around corners and will develop the next "new thing". My concern is that the next wave of value and wealth creation in the US will be dampened because much of this technological innovation is occurring overseas. The wealth generated by these startups won't be as widely distributed in the States. In other words, we need more Google's and fewer pets.com's. Long-term, I shouldn't be so cynical, because it is not a zero sum game. We should encourage innovation abroad as well as domestically. But my fear is that the US will not be playing at the adult table--and relegated to the kiddie table.
I've been a doom and gloomer for 2 years, and people thought I was heretical. Well, the manure did really hit the fan, and it turned out I understated the magnitude of this crisis. We'll climb out of it, and I have a feeling I'll be fine by staying close to the next wave of faster bandwidth, Moore's Law, and bio-entrepreneurship, but I'm afraid the deep end of the pool is going to be more treacherous this time. More people will lose their homes and jobs, and more realtors and loan officers will be waiters and waitresses. It's disheartening, but we are paying penance for our excesses.
Until our schools seed more engineers, scientists, and computer scientists, we will lose more high-intellectual, high-paying jobs overseas. It's got nothing to do with outsourcing--capital flows where it gets more bang for its buck. It's got everything to do with upgrading our skill sets, because the market will determine where the next good jobs will be.
My opinion of Sarbanes Oxley is that it has driven entrepreneurial spirit under or overseas. Instead of developing next-generation technology, entrepreneurs have become bean counters and lawyers, dealing with compliance instead of focusing on their core competence. London is now underwriting more IPO's than New York. Legislators rant about the evils of the outsourcing of jobs overseas--yet they misguidedly enact laws which encourage it. We don't need more regulation--we need enforcement of existing laws on fraud.
I've been engaged with venture capitalists and serial entrepreneurs focusing on China, the next great frontier for not just making Nike shoes, but also highly intellectual property-intensive semiconductor technologies. I used to be a vendor selling enabling tools to these semiconductor companies (I now manage money), and I was lucky enough to participate in the tech boom in silicon valley in the late 90's. These people are replicating that business model in China. Some VC's ONLY invest in Chinese startups--serial entrepreneurs (Chinese natives) who had success in the States, and aim to replicate it in their return to China. They are creating another silicon valley in China--lots of them. The brain drain is already occurring.
For instance, those from San Diego are well aware of Qualcomm, the developer of the 3G wireless standard. They double dip because they make money on the semiconductor hardware as well as through royalties from their intellectual property (3G technology). Broadcom (socal) and Marvell (norcal) are also semiconductor icons which have had very successful IPO exits in the last decade. They are industry leaders in networking and storage, as they developed the silicon content enabling many technologies. The intellectual property in these leading edge technologies resides in the silicon, much like Intel's Pentium controls your computer.
Hence, the Chinese are getting tired of paying royalties on technologies and standards US companies developed. The domestic Chinese market is big enough to support development of their own standards--they're basically saying "screw the US--we can do it better and more pervasively--and we're tired of paying you royalties". And while there are challenges--this stuff ain't easy--they will get there.
And don't pooh pooh these efforts. Some of you recall the last big downturn in the economy, the housing markets, and the thing called the S & L crisis--during the early 90's. We had the riots, the closing of naval bases, debilitating earthquakes, the defense industry downturn, etc. as well. You could have bought a home on a 1/2 acre lot in Beverly Hills (north of Wilshire) for half a million, and a 12 unit apartment building in Long Beach for $350,000 via foreclosures.
Sounds awfully similar, doesn't it? Low-end homes have tanked first this time, and it's just a matter of time before higher-end markets take a dump, too.
But here's the silver lining: do you also remember when the internet was spawned (no, Al Gore did not invent the internet)? It happened many years ago, then known as DARPA, part of the Defense department communications network. Companies like Netscape and Yahoo rolled out the internet to the masses during these dark economic times, thereby enriching thousands of shareholders and employees. They went public in the teeth of that recession--I would argue they helped end the recession and catalyzed the start of the great tech boom.
I can assure you innovation in labs is still occurring today, what techies geeks affectionately coin "disruptive technology". These soothsayers can see around corners and will develop the next "new thing". My concern is that the next wave of value and wealth creation in the US will be dampened because much of this technological innovation is occurring overseas. The wealth generated by these startups won't be as widely distributed in the States. In other words, we need more Google's and fewer pets.com's. Long-term, I shouldn't be so cynical, because it is not a zero sum game. We should encourage innovation abroad as well as domestically. But my fear is that the US will not be playing at the adult table--and relegated to the kiddie table.
I've been a doom and gloomer for 2 years, and people thought I was heretical. Well, the manure did really hit the fan, and it turned out I understated the magnitude of this crisis. We'll climb out of it, and I have a feeling I'll be fine by staying close to the next wave of faster bandwidth, Moore's Law, and bio-entrepreneurship, but I'm afraid the deep end of the pool is going to be more treacherous this time. More people will lose their homes and jobs, and more realtors and loan officers will be waiters and waitresses. It's disheartening, but we are paying penance for our excesses.
Until our schools seed more engineers, scientists, and computer scientists, we will lose more high-intellectual, high-paying jobs overseas. It's got nothing to do with outsourcing--capital flows where it gets more bang for its buck. It's got everything to do with upgrading our skill sets, because the market will determine where the next good jobs will be.
Wednesday, September 24, 2008
Bailout or No Bailout?
I'm from the school of let 'em die. If you and I make poor investment decisions, we have to suffer the consequences. These executives applied far too much leverage, took on way too much risk, and after plundering their firms, they get golden parachutes. Where's the accountability factor?
I'm all for the founders of Google earnings billions because they have created a lot of value for consumers, business, shareholders, and employees. But when executives run their firms to the ground, they should not profit from said disasters, whether their firms get bailed out or not. A meritocracy rewards those who add value, not those who detract from it.
As much as I hate that the taxpayers bear the brunt of rescuing an AIG, I reluctantly agree they should probably be bailed out, because if they implode, the cascading illiquidity would essentially freeze up markets worldwide, as the sovereign funds, hedge funds, pension funds, mutual funds, private equity firms, and every financial institution would suffer a loss of confidence in the US financial markets, which would bring about a dark age analogous to the Great Depression. No one wins in that scenario, save the few bottom fishers with cash and balls to step up and play in the deep end of the pool.
But make no mistake: the intended recipients of these bail outs are the big institutions--not necessarily the common man, altho we all are in the same boat.
Having said that, there is a downside to this massive injection of liquidty--re-inflation. Interest rates should be favorable short-term, but when oil approaches $150 a barrel, when gold flirts with $1500/oz, the Fed will have no choice but to raise rates. Again, the lesser of two evils, but still an evil...Eventually, the economic shocks worldwide and the domestic slowdown will eventually dampen demand and cost of living increases, but until then, gold seems more stable than the US Dollar.
You know the world is turned upside down when there is more concern about the USD than the Brazilian currency, Russia has a flat tax, and the US has the 2nd highest tax brackets in the western world. Our leaders have forgotten what has made this country (and California) great.
I'm all for the founders of Google earnings billions because they have created a lot of value for consumers, business, shareholders, and employees. But when executives run their firms to the ground, they should not profit from said disasters, whether their firms get bailed out or not. A meritocracy rewards those who add value, not those who detract from it.
As much as I hate that the taxpayers bear the brunt of rescuing an AIG, I reluctantly agree they should probably be bailed out, because if they implode, the cascading illiquidity would essentially freeze up markets worldwide, as the sovereign funds, hedge funds, pension funds, mutual funds, private equity firms, and every financial institution would suffer a loss of confidence in the US financial markets, which would bring about a dark age analogous to the Great Depression. No one wins in that scenario, save the few bottom fishers with cash and balls to step up and play in the deep end of the pool.
But make no mistake: the intended recipients of these bail outs are the big institutions--not necessarily the common man, altho we all are in the same boat.
Having said that, there is a downside to this massive injection of liquidty--re-inflation. Interest rates should be favorable short-term, but when oil approaches $150 a barrel, when gold flirts with $1500/oz, the Fed will have no choice but to raise rates. Again, the lesser of two evils, but still an evil...Eventually, the economic shocks worldwide and the domestic slowdown will eventually dampen demand and cost of living increases, but until then, gold seems more stable than the US Dollar.
You know the world is turned upside down when there is more concern about the USD than the Brazilian currency, Russia has a flat tax, and the US has the 2nd highest tax brackets in the western world. Our leaders have forgotten what has made this country (and California) great.
Tuesday, September 23, 2008
The massive bailout and how it affects us...
Berkshire just injected $5 Billion into Goldman Sachs, while the Fed and Treasury announces a $700 Billion bailout. Despite the market turmoil, I'm going to guess this signals we're closer to a bottom than a cataclysmic meltdown in equities and real estate. We'll still have to endure a couple more years of pain before the economy and the housing market recovers. I think we'll have a couple more big legs down and more bank failures, but bottom fishers should eventually do well by investing in companies with strong balance sheets. Having said that, Christmas will be subdued this year.
The big risk is that more financial institutions become victimized by the cascading insolvency, as many are linked due to naked derivatives. which encourages high-risk speculation without accountability, which got us into this mess in the first place. Leverage works both ways--it's great for maximizing returns in a healthy economy, but it's lethal when markets are unwinding. Right now, we are experiencing a de-leveraging process not seen since the Great Depression. If more big banks start going under, buy more ammo--it's going to get uglier.
Hopefully, the worst is behind us, but I'm not jumping in just yet--I need more proof this tanker is going to turn around. The thought of buying into a fire-sale is enticing, but I'm not going to try to catch a falling knife--it can cut you. I want to see more blood in the streets, and the whites of people's eyes before I dive into the deep end of the pool. For now, I'm happy to be wading in the kiddie pool.
Good luck people--it's going to be a wild ride. This downturn will be a doozie--the worst in our generation, but eventually we will recover, I assure you.
Hunker down, work the extra overtime, use generic instead of designer labels, and ride this sucker out. Don't wait for the other shoe to drop--even if you are currently employed, be prepared for impending layoffs. Work you network, stay in touch with your influencers, and plan for the worst, while hoping for the best. Save for a rainy day, because this is that rainy day. And remember: equity is not cash. Cash is cash. Stay liquid.
The big risk is that more financial institutions become victimized by the cascading insolvency, as many are linked due to naked derivatives. which encourages high-risk speculation without accountability, which got us into this mess in the first place. Leverage works both ways--it's great for maximizing returns in a healthy economy, but it's lethal when markets are unwinding. Right now, we are experiencing a de-leveraging process not seen since the Great Depression. If more big banks start going under, buy more ammo--it's going to get uglier.
Hopefully, the worst is behind us, but I'm not jumping in just yet--I need more proof this tanker is going to turn around. The thought of buying into a fire-sale is enticing, but I'm not going to try to catch a falling knife--it can cut you. I want to see more blood in the streets, and the whites of people's eyes before I dive into the deep end of the pool. For now, I'm happy to be wading in the kiddie pool.
Good luck people--it's going to be a wild ride. This downturn will be a doozie--the worst in our generation, but eventually we will recover, I assure you.
Hunker down, work the extra overtime, use generic instead of designer labels, and ride this sucker out. Don't wait for the other shoe to drop--even if you are currently employed, be prepared for impending layoffs. Work you network, stay in touch with your influencers, and plan for the worst, while hoping for the best. Save for a rainy day, because this is that rainy day. And remember: equity is not cash. Cash is cash. Stay liquid.
Monday, September 15, 2008
Lehman and Merill Lynch this morning....
I wrote this in response to a concerned client:
XXXXX, on the contrary. These firms (investment banks, commercial banks, and insurance companies) invested in mortgage-backed securities, thinking they were safe. Little did they know it was just another asset bubble bursting.
Life insurance companies are more conservative by nature, investing premium payments in short- and long-term bonds, and in the case of indexed products, are linked to stock indexes like the S & P 500. With your contracts, if the S & P tanks, you are still guaranteed a 1% floor--which isn't much, but it's better than losing 15% or more, which is what your current stock portfolio is doing. They are able to guarantee the 1% due to options trading, much like they cap you at 15%.
Expect a big loss in the stock market this morning, as this is really, really bad news, but not something I didn't warn you all about several months and years ago. I predicted the real estate bubble, and it's coming to fruition as well. While the more expensive neighborhoods of the bay area are holding up, expect high-end prices to start declining. Manhattanites continue to brag their real estate market has held up, but do you really think that will continue, now that hundreds of billions of dollars are vanishing? Not only are Wall Street bonuses going to disappear at the end of this year, but many investment bankers will be lucky to have jobs. Having a consortium of banks to band together to raise money to prevent the next disaster is akin to gathering 10 cancer victims into a leaky boat--a few will get tossed over the side. First Bear Stearns, Countrywide, now Lehman and Merrill Lynch. Don't forget insolvent Freddie Mac and Fannie Mae, who only hold trillions of dollars of mortgages (70% of all US mortgages). Check out their share prices--they've lost over 90% of their market cap, which makes the tech bubble look like Disneyland.
Expect more big losses and layoffs--it is going to be a bloodbath--the biggest since the Great Depression. Insurance companies were the only ones standing in the aftermath of the Depression, as thousands of banks failed. They set premiums based on actuarial data, not based on speculative lending practices. Banks use 10:1 leverage, which works great in a growing economy, but is terrible in a downturn, as bad loans mount. Expect Washington Mutual to fold, too--unless they get bailed out. It amazes me that people still think banks are safe, despite pervasive evidence to the contrary. How many more banks have to fail before people get it? In any case, insurance companies are forbidden by law to implement that type of leverage.
The VC market has dried up as well--last quarter was the first time ever that there were no IPOs. The liquidity crisis is spreading up and down the food chain--couples with high FICO scores and sizeable assets are having trouble getting financing. Cash is more important than ever, so curb your spending and hoard it. Don't mess around this time, this ride is going to be hell.
In summary, this is EXACTLY what should be doing in a severe downturn, where every asset you turn to is dropping like a Thai thunderstorm downpour. The next 2 (or more years) will be very difficult, and when the last bulls finally turn bearish, basically giving up all hope and expecting the world to end. hopefully we will reach a bottom. Real estate agents and stock brokers have been preaching to me their respective markets will turn around for the last two years, and given their polyannish outlook, I know this hellstorm is going to last longer. They're like Colonel Klink in Hogan's Heroes--whatever they say will happen, do the exact opposite.
If you had to pin me down, the meltdown recovers in 2010, which means you can expect a climactic abyss in stock markets late 2009. THAT will be the time to nibble at good companies who got thrown out with the baby wash--the companies themselves are solid, but the financial hurricane took them down unfairly Pick the winners of each struggling group: Goldman Sachs will be a screaming buy in a couple years, but don't try to catch a falling knife--it'lll cut you. Wait till they bottom and bounce off the bottom a couple times. It's better to be late when bottom-fishing (buying), and it's better to be early when selling.
Of course, I could be wrong and too optimistic on the recovery time, at which point, all bets are off. Just to give you an idea of how bad it is, Warren Buffett of Berkshire Hathaway just sent a directive to one of his portfolio companies, a reinsurer who guarantees funds above the FDIC limit of $100,000 for banks. They lost a mint in guaranteeing losses when IndyMac went under recently, so the reinsurer just notified thousands of banks they are no longer guaranteeing accounts above $100,000! Do you think wealthy depositors are going to react to that?
As an aside, the formerly venerable Lehman firm was the preemiment fixed-income (bond) banker who got themselves in trouble with junk offerings years ago. Buffett actually stepped in and helped bail them out at the time. Obviously, he's not bailing them out this time. These subprime mortgages are the latest cyanide, only this time the Kool-Aid is a lot more toxic. You thought I was a doom and gloomer earlier, and it turns out I understated the magnitude. And unfortunately, it's going to get even worse.
XXXXX, on the contrary. These firms (investment banks, commercial banks, and insurance companies) invested in mortgage-backed securities, thinking they were safe. Little did they know it was just another asset bubble bursting.
Life insurance companies are more conservative by nature, investing premium payments in short- and long-term bonds, and in the case of indexed products, are linked to stock indexes like the S & P 500. With your contracts, if the S & P tanks, you are still guaranteed a 1% floor--which isn't much, but it's better than losing 15% or more, which is what your current stock portfolio is doing. They are able to guarantee the 1% due to options trading, much like they cap you at 15%.
Expect a big loss in the stock market this morning, as this is really, really bad news, but not something I didn't warn you all about several months and years ago. I predicted the real estate bubble, and it's coming to fruition as well. While the more expensive neighborhoods of the bay area are holding up, expect high-end prices to start declining. Manhattanites continue to brag their real estate market has held up, but do you really think that will continue, now that hundreds of billions of dollars are vanishing? Not only are Wall Street bonuses going to disappear at the end of this year, but many investment bankers will be lucky to have jobs. Having a consortium of banks to band together to raise money to prevent the next disaster is akin to gathering 10 cancer victims into a leaky boat--a few will get tossed over the side. First Bear Stearns, Countrywide, now Lehman and Merrill Lynch. Don't forget insolvent Freddie Mac and Fannie Mae, who only hold trillions of dollars of mortgages (70% of all US mortgages). Check out their share prices--they've lost over 90% of their market cap, which makes the tech bubble look like Disneyland.
Expect more big losses and layoffs--it is going to be a bloodbath--the biggest since the Great Depression. Insurance companies were the only ones standing in the aftermath of the Depression, as thousands of banks failed. They set premiums based on actuarial data, not based on speculative lending practices. Banks use 10:1 leverage, which works great in a growing economy, but is terrible in a downturn, as bad loans mount. Expect Washington Mutual to fold, too--unless they get bailed out. It amazes me that people still think banks are safe, despite pervasive evidence to the contrary. How many more banks have to fail before people get it? In any case, insurance companies are forbidden by law to implement that type of leverage.
The VC market has dried up as well--last quarter was the first time ever that there were no IPOs. The liquidity crisis is spreading up and down the food chain--couples with high FICO scores and sizeable assets are having trouble getting financing. Cash is more important than ever, so curb your spending and hoard it. Don't mess around this time, this ride is going to be hell.
In summary, this is EXACTLY what should be doing in a severe downturn, where every asset you turn to is dropping like a Thai thunderstorm downpour. The next 2 (or more years) will be very difficult, and when the last bulls finally turn bearish, basically giving up all hope and expecting the world to end. hopefully we will reach a bottom. Real estate agents and stock brokers have been preaching to me their respective markets will turn around for the last two years, and given their polyannish outlook, I know this hellstorm is going to last longer. They're like Colonel Klink in Hogan's Heroes--whatever they say will happen, do the exact opposite.
If you had to pin me down, the meltdown recovers in 2010, which means you can expect a climactic abyss in stock markets late 2009. THAT will be the time to nibble at good companies who got thrown out with the baby wash--the companies themselves are solid, but the financial hurricane took them down unfairly Pick the winners of each struggling group: Goldman Sachs will be a screaming buy in a couple years, but don't try to catch a falling knife--it'lll cut you. Wait till they bottom and bounce off the bottom a couple times. It's better to be late when bottom-fishing (buying), and it's better to be early when selling.
Of course, I could be wrong and too optimistic on the recovery time, at which point, all bets are off. Just to give you an idea of how bad it is, Warren Buffett of Berkshire Hathaway just sent a directive to one of his portfolio companies, a reinsurer who guarantees funds above the FDIC limit of $100,000 for banks. They lost a mint in guaranteeing losses when IndyMac went under recently, so the reinsurer just notified thousands of banks they are no longer guaranteeing accounts above $100,000! Do you think wealthy depositors are going to react to that?
As an aside, the formerly venerable Lehman firm was the preemiment fixed-income (bond) banker who got themselves in trouble with junk offerings years ago. Buffett actually stepped in and helped bail them out at the time. Obviously, he's not bailing them out this time. These subprime mortgages are the latest cyanide, only this time the Kool-Aid is a lot more toxic. You thought I was a doom and gloomer earlier, and it turns out I understated the magnitude. And unfortunately, it's going to get even worse.
Tuesday, August 12, 2008
Good news, bad news...
The good news is that oil and fuel prices have backed down, as I predicted recently. Further good news indicates Americans are driving less, reducing our carbon emissions. The bad news is that the reduced tax revenue from fuel sales has left the federal and state governments even more cash-strapped.
Another gem I saw on the news is that our superhero Governor has mandated all non-emergency response state employees will now earn the minimum Federal wage of $6.55 an hour. That paycheck should really help pay the variable mortgage about to reset--not.
The US is a mess, and a recent trip by a friend to Australia illuminates the growing gap, as the land Down Under is experiencing a bull market in natural resources, fueled by booming economies in China and India. Australia is clean, modern, and their citizens are in good spirits, buoyed by a tourism boom as well. Kinda reminds me of us in the late 90's.
Meanwhile, China and India are aggressively securing energy and natural resources, acquiring equity stakes in suppliers, setting the stage for the US to be forced to buy at spot prices.
The Fed has to continue printing dollars in order to sustain an unsustainable balance of economic growth and fiscal responsibility. A money manager quipped that he senses the public believes we're in the late innings of this recovery, which is true--but not when you consider it's a 7-game World Series, not a one-game wonder. In other words, we should continue to have record foreclosures and bankruptcies for a couple more years before we turn this tanker around. The good news is that equity prices should rebound a year before the actual bottom, as the stock market is a forward discounting mechanism.
Another gem I saw on the news is that our superhero Governor has mandated all non-emergency response state employees will now earn the minimum Federal wage of $6.55 an hour. That paycheck should really help pay the variable mortgage about to reset--not.
The US is a mess, and a recent trip by a friend to Australia illuminates the growing gap, as the land Down Under is experiencing a bull market in natural resources, fueled by booming economies in China and India. Australia is clean, modern, and their citizens are in good spirits, buoyed by a tourism boom as well. Kinda reminds me of us in the late 90's.
Meanwhile, China and India are aggressively securing energy and natural resources, acquiring equity stakes in suppliers, setting the stage for the US to be forced to buy at spot prices.
The Fed has to continue printing dollars in order to sustain an unsustainable balance of economic growth and fiscal responsibility. A money manager quipped that he senses the public believes we're in the late innings of this recovery, which is true--but not when you consider it's a 7-game World Series, not a one-game wonder. In other words, we should continue to have record foreclosures and bankruptcies for a couple more years before we turn this tanker around. The good news is that equity prices should rebound a year before the actual bottom, as the stock market is a forward discounting mechanism.
Sunday, July 13, 2008
Innovation and junk: are both good?
There are small pockets of very bright and industrious people who are collaborating on creating innovative technology, and ultimately higher value for consumers, whether it's faster, smarter computers, faster bandwidth pipes, the treatments or cures for illness and disease, or sustainable technology. Private industry is holding hands with university labs. And there is even cross-national corroboration. But America needs to remain a major player in this innovation process, even if we are no longer the only or even biggest player.
The will to develop new technologies is there, but the government needs to not get in the way of innovation, because that is the only way we'll grow out of this mess. The early 90's recession didn't prevent research labs from rolling out to the masses internet access--in fact, it catalyzed and spawned the great tech boom. Sure, there was the requisite aftermath of a bust, but that comes with the territory (steps need to be put in place to dampen volatility--that's another topic).
But with every boom/bust cycle, there has been a huge residual benefit. The junk bond scandals actually birthed a whole new industry of alternative financing previously inaccessible to most companies. Junk bond financing and deregulation created a multitude of competitors for Ma Bell, ushering in a new era of innovation ranging from long-distance service to internet protocol (much later). Without junk bonds, there would have been no MCI or Sprint--at the time, banks certainly weren't lending to them.
Junks bonds and venture capital also financed innovation in computers, creating a whole cottage industry for funding high-tech startups. Junk bonds also forced incumbents to streamline operations via leveraged buyouts.
So yes, recessions are a necessary cleansing process of excesses. But they also naturally fertilize intense innovation which leads us to the next recovery. The ability to see around corners is priceless. We need to enable these tech soothsayers to play with their toys, because those are the toys that will put food on our tables when they become pervasive.
The will to develop new technologies is there, but the government needs to not get in the way of innovation, because that is the only way we'll grow out of this mess. The early 90's recession didn't prevent research labs from rolling out to the masses internet access--in fact, it catalyzed and spawned the great tech boom. Sure, there was the requisite aftermath of a bust, but that comes with the territory (steps need to be put in place to dampen volatility--that's another topic).
But with every boom/bust cycle, there has been a huge residual benefit. The junk bond scandals actually birthed a whole new industry of alternative financing previously inaccessible to most companies. Junk bond financing and deregulation created a multitude of competitors for Ma Bell, ushering in a new era of innovation ranging from long-distance service to internet protocol (much later). Without junk bonds, there would have been no MCI or Sprint--at the time, banks certainly weren't lending to them.
Junks bonds and venture capital also financed innovation in computers, creating a whole cottage industry for funding high-tech startups. Junk bonds also forced incumbents to streamline operations via leveraged buyouts.
So yes, recessions are a necessary cleansing process of excesses. But they also naturally fertilize intense innovation which leads us to the next recovery. The ability to see around corners is priceless. We need to enable these tech soothsayers to play with their toys, because those are the toys that will put food on our tables when they become pervasive.
Saturday, July 12, 2008
Income and estate taxes
While I endorse a flat income tax, it'll never happen. The infrastructure of tax professionals, including CPA's, attorneys, consultants, financial service companies, etc. in America is too entrenched. They don't want to see their cash cow go away.
Flatten the income tax brackets, make loopholes go away, and many highly paid professionals lose their livelihood. Long-term, it will catalyze our economy, but there are too many powerful special interest groups lobbying to keep the tax codes complicated.
That's why it is imperative that people stay current on tax codes and implement strategies coherent with tax laws. Most people are unaware that their qualified retirement savings plans are subject to income and estate tax rates of up to 90%. That doesn't include the penalties levied if the retiree starts withdrawing from their savings plans outside the age corridor of 59 1/2 and 70 1/2. Those penalties are 10% and 50%, respectively, not including state penalties. And that's on top of income and estate taxes.
That's why most retirees feel helpless--they're taxed to death, and when they do die, their children and grandchildren are taxed as well.
Design your own retirement plan, or the government will design one for you, and it won't be pretty. When the government "qualifies" these deferred retirement savings plan, does it not make sense that they benefit the government?
Flatten the income tax brackets, make loopholes go away, and many highly paid professionals lose their livelihood. Long-term, it will catalyze our economy, but there are too many powerful special interest groups lobbying to keep the tax codes complicated.
That's why it is imperative that people stay current on tax codes and implement strategies coherent with tax laws. Most people are unaware that their qualified retirement savings plans are subject to income and estate tax rates of up to 90%. That doesn't include the penalties levied if the retiree starts withdrawing from their savings plans outside the age corridor of 59 1/2 and 70 1/2. Those penalties are 10% and 50%, respectively, not including state penalties. And that's on top of income and estate taxes.
That's why most retirees feel helpless--they're taxed to death, and when they do die, their children and grandchildren are taxed as well.
Design your own retirement plan, or the government will design one for you, and it won't be pretty. When the government "qualifies" these deferred retirement savings plan, does it not make sense that they benefit the government?
Taxes and a competitive workforce
A sales tax would hurt lower income people. What we need is a flat income tax rate. It encourages investment and risk-taking among the well-to-do.
While taxes and tariffs hurt imports and exports, America's uncompetitive workforce is what's driving manufacturing jobs out of the country. There's no getting around that fact. It's empirical by definition. Think about it: if a company performs a site search for manufacturing facilities, they're going to take into account the cost of doing business in every location, domestic or offshore.
I've actually gone thru the process. I worked for a small, high-tech company in the early 90's, and we already had manufacturing facilities in Korea and the States. We kept our US plant for its proximity to our R & D team, but we ended up expanding into Costa Rica fdue to its high literacy rate, low-cost labor, tax incentives, time zone (vs. overnight difference in Asia) and English-speaking managers. It turned out we were the 2nd high-tech company to take advantage of the tax-free enterprise zone. Intel was the first.
The chase for the highest bang for your buck is in constant motion. At one time, Mexico, Japan, and Korea were the objects of our ire. Then it was China and India. Well, now they are losing jobs to countries like Vietnam, Malaysia and Indonesia. All have their pros and cons. But the bottom line is that as long as your workforce can climb the value chain (higher skills, higher knowledge, higher productivity), they won't be outsourced. American workers have not kept pace with that value curve.
While taxes and tariffs hurt imports and exports, America's uncompetitive workforce is what's driving manufacturing jobs out of the country. There's no getting around that fact. It's empirical by definition. Think about it: if a company performs a site search for manufacturing facilities, they're going to take into account the cost of doing business in every location, domestic or offshore.
I've actually gone thru the process. I worked for a small, high-tech company in the early 90's, and we already had manufacturing facilities in Korea and the States. We kept our US plant for its proximity to our R & D team, but we ended up expanding into Costa Rica fdue to its high literacy rate, low-cost labor, tax incentives, time zone (vs. overnight difference in Asia) and English-speaking managers. It turned out we were the 2nd high-tech company to take advantage of the tax-free enterprise zone. Intel was the first.
The chase for the highest bang for your buck is in constant motion. At one time, Mexico, Japan, and Korea were the objects of our ire. Then it was China and India. Well, now they are losing jobs to countries like Vietnam, Malaysia and Indonesia. All have their pros and cons. But the bottom line is that as long as your workforce can climb the value chain (higher skills, higher knowledge, higher productivity), they won't be outsourced. American workers have not kept pace with that value curve.
Tuesday, July 1, 2008
Assets
I don't think real estate and raw land would have been a safe hedge if you purchased 2, 3, 4 years ago. In fact, in some regions, you'd be grossly upside down.
Having said that, I called the real estate top 2 years ago, and called the severity of the subprime mortgage crisis last July as well as the second leg down on banks last month (ironically enough, in sports message boards). The take away message is the commodities listed (oil, gold, futures, etc.) are just assets, altho a different category of assets. Some were dormant for 20 years, and have recently come back with a vengeance. But you would have lost your ass several times over going long on them for all those years. They are just another class of assets, just like biotech stocks or mortgage-backed securities are financial assets. Some shine during certain periods of economic cycles, while others have their own value trajectories.
You're better off being a contrarian, buying assets that are beaten down and hence, grossly undervalued. Call me dumb, and that's okay, but I've never made any money following the crowd--in fact, I've always lost money going against my instincts. I will be a net buyer of certain downtrodden assets in the next couple years, as this downturn is going to last longer than most predict. We have time in this buyer's market to be choosy. But the bottom will be well-formed before the economic indicators pick up. That's my next call: when there's blood on the streets for the next 2 years, there will be huge buying opportunities. Just when the last bulls throw in the towel is when expectations will be lowest for even the most optimistic. That's when the secular low will be reached. The economy will eventually crawl up again, much like other recoveries, but entirely unique because inflationary pressures won't be dormant this time. In fact, that alone will temper the upside a bit.
I really do think future boom/bust cycles will be more pronounced, but that's not the worse part. What's worse is that the US is on its downslope in terms of being the top dog on the world stage. The 20th century experienced major dislocations as well, but America came back stronger than ever each time. These next recoveries won't be as crisp. We will have to accept that while we will still be one of the two biggest consumers of the world's goods, the adult table will now be more crowded. We will fall back into the pack along with China and a handful of powers.
One thing is for sure: we are in for a rough ride. I just find it counterproductive that the pundits and experts always want to look back retrospectively for a cure to prevent the next boom/bust cycle. But in doing so, they will introduce more legislation that merely adds to the cost of doing business. The laws to prevent fraud are in place--it's the enforcement that is lacking. Adding more legislation after the FSLIC S & L fiasco didn't prevent the current mortgage crisis. It just created more complexity and increased business costs. Just like Sarbanes/Oxley won't prevent the next stock market bubble. All S/O did was drive smaller companies out of business. They ended up too busy with compliance in lieu of concentrating on their core competence of running their businesses.
Bottom-line: we need to just accept that greed and fear have always, and will always drive market fluctuations. Irrational exuberance (coined by former Fed Chairman Greenspan) exists in every market boom, just like panic selling occurs with every market meltdown. Now, can measures be put in place to attenuate volatility? Perhaps, but the cure shouldn't be worse than the illness.
Having said that, I called the real estate top 2 years ago, and called the severity of the subprime mortgage crisis last July as well as the second leg down on banks last month (ironically enough, in sports message boards). The take away message is the commodities listed (oil, gold, futures, etc.) are just assets, altho a different category of assets. Some were dormant for 20 years, and have recently come back with a vengeance. But you would have lost your ass several times over going long on them for all those years. They are just another class of assets, just like biotech stocks or mortgage-backed securities are financial assets. Some shine during certain periods of economic cycles, while others have their own value trajectories.
You're better off being a contrarian, buying assets that are beaten down and hence, grossly undervalued. Call me dumb, and that's okay, but I've never made any money following the crowd--in fact, I've always lost money going against my instincts. I will be a net buyer of certain downtrodden assets in the next couple years, as this downturn is going to last longer than most predict. We have time in this buyer's market to be choosy. But the bottom will be well-formed before the economic indicators pick up. That's my next call: when there's blood on the streets for the next 2 years, there will be huge buying opportunities. Just when the last bulls throw in the towel is when expectations will be lowest for even the most optimistic. That's when the secular low will be reached. The economy will eventually crawl up again, much like other recoveries, but entirely unique because inflationary pressures won't be dormant this time. In fact, that alone will temper the upside a bit.
I really do think future boom/bust cycles will be more pronounced, but that's not the worse part. What's worse is that the US is on its downslope in terms of being the top dog on the world stage. The 20th century experienced major dislocations as well, but America came back stronger than ever each time. These next recoveries won't be as crisp. We will have to accept that while we will still be one of the two biggest consumers of the world's goods, the adult table will now be more crowded. We will fall back into the pack along with China and a handful of powers.
One thing is for sure: we are in for a rough ride. I just find it counterproductive that the pundits and experts always want to look back retrospectively for a cure to prevent the next boom/bust cycle. But in doing so, they will introduce more legislation that merely adds to the cost of doing business. The laws to prevent fraud are in place--it's the enforcement that is lacking. Adding more legislation after the FSLIC S & L fiasco didn't prevent the current mortgage crisis. It just created more complexity and increased business costs. Just like Sarbanes/Oxley won't prevent the next stock market bubble. All S/O did was drive smaller companies out of business. They ended up too busy with compliance in lieu of concentrating on their core competence of running their businesses.
Bottom-line: we need to just accept that greed and fear have always, and will always drive market fluctuations. Irrational exuberance (coined by former Fed Chairman Greenspan) exists in every market boom, just like panic selling occurs with every market meltdown. Now, can measures be put in place to attenuate volatility? Perhaps, but the cure shouldn't be worse than the illness.
Friday, June 27, 2008
401K, IRA--or not?
1) 401K's are good, but not great. If the company matches your contribution, that's a good thing, but I would not contribute more than that.
2) The reason why a 401K is merely good is due to its deferred tax status. You get a small tax break during the contribution phase, but you get clobbered with income taxes during your harvest years.
3) Roth IRA's are better than a standard IRA, but a Roth comes with restrictions and most high-income individuals don't qualify. So it's better than good, but it is not best (the tax-free harvest makes it better than a regular IRA).
4) Indexed funds are better than MOST managed funds, but there are hidden costs when indices get re-balanced. It's still better than most managed funds due to lower fees and better performance. Better yet, there are vehicles linked to the indices, but not investments IN the indices. Hence, they also provide downside protection. This is huge. And oh, btw, they also allow tax-favored accumulation and access.
5) Perhaps small cap funds have outperformed large cap funds, but that depends on the time window, and small caps are historically more volatile. That is not a good fit for older investors. Most of my clients aren't 25, because most 25 year olds have no assets.
6) Risk is a relative value, and there are efficient ways for diversification and risk mitigation.
7) Dollar cost averaging only works if there is a general uptrend or steady state. If you had dollar cost averaged into the Great Depression, you would have had to wait until the mid 1950's to get back to even. If you had dollar cost averaged into the tech bust, you may never get back to even.
8) There are many geniuses who are financially misguided. The first thing I would ask a finance professor is how much is their net worth and how did they achieve it.
9) I advise people to contribute to a 401K only to the level the company matches, as they are basically paying for the taxes you will owe during the distribution phase (retirement). Deferring taxes only means postponing taxable events when your portfolio will be worth more--the government set it up so that they get to take a bigger slice of your accumulated values. In this scenario, a typical American worker gets a $60,000 tax break during their contribution phase, and gets taxed $800,000 during the distribution phase (retirement). And if their estate plan is poorly structured, their non-spousal heirs get taxed another 72% upon death. That is, of course, unless they die exactly in the year 2010. After 2010, the exemptions from estate taxes revert back to pre-2001 levels.
There are a select few who stack the odds in their favor, looking for high reward/risk opportunities.
The younger you are (or the more you earn), the bigger the potential mistake. Think about it--compounding is great if it works in your favor. When it works against you, it is crushing.
2) The reason why a 401K is merely good is due to its deferred tax status. You get a small tax break during the contribution phase, but you get clobbered with income taxes during your harvest years.
3) Roth IRA's are better than a standard IRA, but a Roth comes with restrictions and most high-income individuals don't qualify. So it's better than good, but it is not best (the tax-free harvest makes it better than a regular IRA).
4) Indexed funds are better than MOST managed funds, but there are hidden costs when indices get re-balanced. It's still better than most managed funds due to lower fees and better performance. Better yet, there are vehicles linked to the indices, but not investments IN the indices. Hence, they also provide downside protection. This is huge. And oh, btw, they also allow tax-favored accumulation and access.
5) Perhaps small cap funds have outperformed large cap funds, but that depends on the time window, and small caps are historically more volatile. That is not a good fit for older investors. Most of my clients aren't 25, because most 25 year olds have no assets.
6) Risk is a relative value, and there are efficient ways for diversification and risk mitigation.
7) Dollar cost averaging only works if there is a general uptrend or steady state. If you had dollar cost averaged into the Great Depression, you would have had to wait until the mid 1950's to get back to even. If you had dollar cost averaged into the tech bust, you may never get back to even.
8) There are many geniuses who are financially misguided. The first thing I would ask a finance professor is how much is their net worth and how did they achieve it.
9) I advise people to contribute to a 401K only to the level the company matches, as they are basically paying for the taxes you will owe during the distribution phase (retirement). Deferring taxes only means postponing taxable events when your portfolio will be worth more--the government set it up so that they get to take a bigger slice of your accumulated values. In this scenario, a typical American worker gets a $60,000 tax break during their contribution phase, and gets taxed $800,000 during the distribution phase (retirement). And if their estate plan is poorly structured, their non-spousal heirs get taxed another 72% upon death. That is, of course, unless they die exactly in the year 2010. After 2010, the exemptions from estate taxes revert back to pre-2001 levels.
There are a select few who stack the odds in their favor, looking for high reward/risk opportunities.
The younger you are (or the more you earn), the bigger the potential mistake. Think about it--compounding is great if it works in your favor. When it works against you, it is crushing.
Investments and taxes
To be honest, it's more an academic discussion for me, as I don't play the markets like I used to, and when I do, I follow astute managers who happen to have similar philosophies on markets--and life. When my philosophies are congruent, I don't allow myself to second guess my decisions, and to me, second guessing has been my achilles heel when it comes to investing. I've lost far too much money when I let emotions, politics, and other people influence me unduly. That's one of the reasons I disdain politics: like the talking heads on CNBC, I follow it with mild interest, but only to get a beat on the general consensus, and I use it as a contrarian indicator. Because let's face it, when it comes to investing, most people get it wrong. The average 35 year old American has a net worth of $15,000. We are taught from day one to go to school and how to get a job, but we have had zero training on personal financial management. And the mortgage crisis just happens to be one big symptom of that mentality.
My whole investment methodology turns conventional wisdom upside down, but in reality, I am merely a good plagiarizer--I just follow unpopular strategies that the majority of the population is not exposed to, but are readily adopted by the wealthy. Even some of the brightest and best investment managers aren't privy to these strategies--or their emotional makeup doesn't allow them patience to implement them. They're great at picking stocks, and a few are even good at market timing, but they don't understand asset optimization--the optimization of ALL assets.
Dawgbytes is 100% correct--Wall St. money managers like to brag that the long-term returns of equities is between 8-12% historically (depending on the time window), but that's only if dividends are reinvested. Without that boost, the Dow and S & P's returns are closer to 2-3% or less, underperforming inflation. And since divies are taxed as earned, it ends up being a losing game.
And because we are humans, with emotions, the average investor thinks they can time the markets, when in reality, they are terrible at it. Owning stocks between 1983 to 2000 was the best time to own equities in the history of mankind--the annual rate of return for the S & P was over 12%. Guess what the average investor earned? 2.3%. They suffer from the casino delusion--that somehow they can beat the house.
So what does that mean? You better pick the right stocks for long-term appreciation and income--or pick the right money manager. Which means you eliminate 96% of the mutual funds out there, as they underperform the Lipper averages and indices. That's mainly due to exorbitant trading transaction costs, as well as the more unscrupulous window dressing. The gentler explanation is that the funds are "actively managed", and yet clients have to pay a 3% load to have it actively managed. It's unbelievable what many of these managers get away with. So cheat with my wife, and stick me with the hotel bill while you're at it.
Then there's the indexed method of investing which I espouse, as the loads are lower, but even in that case, there are hidden transaction costs as indexed funds get re-balanced as companies exit/enter the index and market caps vary. But at least clients get a semblance of earning the averages, which 80% of active money managers can't even meet. And then there's the taxation.
People have no idea how taxes hurt investment portfolios. They think they do, but they have no idea of the magnitude.
An individual earns an income, and gets taxed on that income. After paying expenses, and he/she is disciplined enough to save enough money to invest, and lucky enough to earn a positive rate of return on that money, they are taxed again (hopefully at the lower capital gains rate). Dividends are taxed as earned. Tax what I make, tax that same money short-term, and long-term. That sounds like a triple tax to me.
That's why tax-free accumulation and income is so crucial. $1 doubled 20 times ends up being over $1 million. $1 doubled 20 times, but taxed as earned at 27%, nets a little over $50,000. I'd rather have the million.
My whole investment methodology turns conventional wisdom upside down, but in reality, I am merely a good plagiarizer--I just follow unpopular strategies that the majority of the population is not exposed to, but are readily adopted by the wealthy. Even some of the brightest and best investment managers aren't privy to these strategies--or their emotional makeup doesn't allow them patience to implement them. They're great at picking stocks, and a few are even good at market timing, but they don't understand asset optimization--the optimization of ALL assets.
Dawgbytes is 100% correct--Wall St. money managers like to brag that the long-term returns of equities is between 8-12% historically (depending on the time window), but that's only if dividends are reinvested. Without that boost, the Dow and S & P's returns are closer to 2-3% or less, underperforming inflation. And since divies are taxed as earned, it ends up being a losing game.
And because we are humans, with emotions, the average investor thinks they can time the markets, when in reality, they are terrible at it. Owning stocks between 1983 to 2000 was the best time to own equities in the history of mankind--the annual rate of return for the S & P was over 12%. Guess what the average investor earned? 2.3%. They suffer from the casino delusion--that somehow they can beat the house.
So what does that mean? You better pick the right stocks for long-term appreciation and income--or pick the right money manager. Which means you eliminate 96% of the mutual funds out there, as they underperform the Lipper averages and indices. That's mainly due to exorbitant trading transaction costs, as well as the more unscrupulous window dressing. The gentler explanation is that the funds are "actively managed", and yet clients have to pay a 3% load to have it actively managed. It's unbelievable what many of these managers get away with. So cheat with my wife, and stick me with the hotel bill while you're at it.
Then there's the indexed method of investing which I espouse, as the loads are lower, but even in that case, there are hidden transaction costs as indexed funds get re-balanced as companies exit/enter the index and market caps vary. But at least clients get a semblance of earning the averages, which 80% of active money managers can't even meet. And then there's the taxation.
People have no idea how taxes hurt investment portfolios. They think they do, but they have no idea of the magnitude.
An individual earns an income, and gets taxed on that income. After paying expenses, and he/she is disciplined enough to save enough money to invest, and lucky enough to earn a positive rate of return on that money, they are taxed again (hopefully at the lower capital gains rate). Dividends are taxed as earned. Tax what I make, tax that same money short-term, and long-term. That sounds like a triple tax to me.
That's why tax-free accumulation and income is so crucial. $1 doubled 20 times ends up being over $1 million. $1 doubled 20 times, but taxed as earned at 27%, nets a little over $50,000. I'd rather have the million.
Bernanke and interest rates
While the printing of dollars may prove to be our economy's undoing, one of the charters of the Fed is to avert an economic disaster. So dropping interest rates was something Bernanke had to do (at least politically). The economy was tanking, and dropping interest rates is usually the right prescription.
The problem is that the economy is fractured already, and the Fed faces a conundrum--increase rates to stave off inflation, which puts us into the black hole of deep recession, or drop rates and run the risk of runaway inflation. Volker took the more prudent but less popular route in the early 80's, and willed us into a deep recession in doing so, but it allowed us to recover structurally stronger (excesses were drained out in the process). We had to take our medicine, much like we have to pay today for our penance in the aftermath of the subprime gluttonous orgy.
Bernanke doesn't have the will to do that--mainly because he doesn't have Bush's blessing to drive us deeper into recession. But, it does look like cronyism, as he is saving a few of his buddies on Wall St., by bailing out big banks, and temporarily staving off a deep recession. He's only delaying the inevitable, which may heighten the severity of an economic downturn. But in doing so, he may have induced a stagflation type scenario which hasn't been seen since the Carter years. Either way, we are looking at at least a few years of real damage. Stay liquid and pounce on oversold opportunities.
In other words, Bernanke is screwed if he does, and he's screwed if he doesn't. He inherited an economy that was based on smoke and mirrors, and whose structural cracks were masked by easy money, but now the truth is coming out, albeit way too late. A strong economy can withstand financial shocks, but ours was too weak to survive the magnitude of the subprime earthquake. Frankly, Bernanke may be a weak steward of our fiscal ship, but I'm not sure the best captain in the world could do much better. We are so screwed that only time will get us out of this mess.
The problem is that the economy is fractured already, and the Fed faces a conundrum--increase rates to stave off inflation, which puts us into the black hole of deep recession, or drop rates and run the risk of runaway inflation. Volker took the more prudent but less popular route in the early 80's, and willed us into a deep recession in doing so, but it allowed us to recover structurally stronger (excesses were drained out in the process). We had to take our medicine, much like we have to pay today for our penance in the aftermath of the subprime gluttonous orgy.
Bernanke doesn't have the will to do that--mainly because he doesn't have Bush's blessing to drive us deeper into recession. But, it does look like cronyism, as he is saving a few of his buddies on Wall St., by bailing out big banks, and temporarily staving off a deep recession. He's only delaying the inevitable, which may heighten the severity of an economic downturn. But in doing so, he may have induced a stagflation type scenario which hasn't been seen since the Carter years. Either way, we are looking at at least a few years of real damage. Stay liquid and pounce on oversold opportunities.
In other words, Bernanke is screwed if he does, and he's screwed if he doesn't. He inherited an economy that was based on smoke and mirrors, and whose structural cracks were masked by easy money, but now the truth is coming out, albeit way too late. A strong economy can withstand financial shocks, but ours was too weak to survive the magnitude of the subprime earthquake. Frankly, Bernanke may be a weak steward of our fiscal ship, but I'm not sure the best captain in the world could do much better. We are so screwed that only time will get us out of this mess.
Saturday, June 21, 2008
Today's entry, a year later...
Today's entry:
I've never made money following the crowds. I've always made money going against the masses. If I were to hire someone to manage my money, I'd rather them have a background in crowd psychology and mob theory, instead of degrees in econometrics. People tend to rely too much on numbers on things not necessarily controlled by numbers. It works for designing innovative technology; it does not work for predicting behavioral finance. |
An entry from last year
I posted this almost a year ago, on a sports message board, of all places:
| Posted: Thu Jul 26, 2007 1:43 pm Post subject: | |
There's a lot of misinformation going on here. Some of you guys assume that the high-technology boom and bust cycle is unique. Perhaps it's more volatile than most, but it is far from unique. | |
Monday, June 16, 2008
When will markets recover?
I had a steak dinner with a former colleague I hadn't seen in years. He is doing well and it was nice to see him with his daughter, an adorable 4 year old. His methods of raising her resonated with me--he showered her with love, but when she got out of line, he wouldn't respond until she apologized and they exchanged hugs. No entitlement there...
Speaking of entitlement, does the honest, hard-working American worker deserve to foot the bill for government-subsidized bailouts of bad loans, badly-run financial institutions, and poor fiscal policies encouraging rampant speculative bubbles and busts?
Is there something more insidiuous at play? Many conspiracy theorists claim there is in the form of a Working Group formed by Ronald Reagan back in 1988, originally created to prevent a stock market collapse. Coined as PPT by a Washington Post reporter, this insider group of the nation's most influential financial leaders has long been rumored to be manipulating financial markets--for the benefit of market participants. But is it beneficial to the greater good--or just an elite few? Are they lining the pockets of their friends at the major banks? I won't go into it--it's easily Google-able, but what is surprising is that officials, including past Fed Chairmen, admit publicly it is their charter to do whatever is necessary to avert a financial collapse. Yet, when pressed specifically to address recent illogical market movements, they experience a sudden amnesia on what exactly it is they do to prevent said collapses. The normal defense is the market experiences corrections, but the frequency of these patterns is suggestive of market intervention.
Are these actions more harmful than helpful? Some very astute financier friends of mine have made me aware of these interventions, and their inclination is that these interventions are not only possibly illegal and immoral, they are also counterproductive--only delaying and exaggerating the market downturns. Financial manipulation is not only unethical, but it also doesn't work long-term. The Hunt brothers found out the hard way in their attempt to corner the silver market in the 70's. Let's hope this recent alleged intervention by the SEC, CFTC, Treasury Department, and more importantly, the Fed, doesn't turn this market "correction" into a rout. The last thing we need is a loss of confidence in the markets--and that the average Joe doesn't have a chance. Maybe that's why casinos are gaining in popularity.
I hope everyone had a happy Father's Day.
Speaking of entitlement, does the honest, hard-working American worker deserve to foot the bill for government-subsidized bailouts of bad loans, badly-run financial institutions, and poor fiscal policies encouraging rampant speculative bubbles and busts?
Is there something more insidiuous at play? Many conspiracy theorists claim there is in the form of a Working Group formed by Ronald Reagan back in 1988, originally created to prevent a stock market collapse. Coined as PPT by a Washington Post reporter, this insider group of the nation's most influential financial leaders has long been rumored to be manipulating financial markets--for the benefit of market participants. But is it beneficial to the greater good--or just an elite few? Are they lining the pockets of their friends at the major banks? I won't go into it--it's easily Google-able, but what is surprising is that officials, including past Fed Chairmen, admit publicly it is their charter to do whatever is necessary to avert a financial collapse. Yet, when pressed specifically to address recent illogical market movements, they experience a sudden amnesia on what exactly it is they do to prevent said collapses. The normal defense is the market experiences corrections, but the frequency of these patterns is suggestive of market intervention.
Are these actions more harmful than helpful? Some very astute financier friends of mine have made me aware of these interventions, and their inclination is that these interventions are not only possibly illegal and immoral, they are also counterproductive--only delaying and exaggerating the market downturns. Financial manipulation is not only unethical, but it also doesn't work long-term. The Hunt brothers found out the hard way in their attempt to corner the silver market in the 70's. Let's hope this recent alleged intervention by the SEC, CFTC, Treasury Department, and more importantly, the Fed, doesn't turn this market "correction" into a rout. The last thing we need is a loss of confidence in the markets--and that the average Joe doesn't have a chance. Maybe that's why casinos are gaining in popularity.
I hope everyone had a happy Father's Day.
Saturday, June 14, 2008
North Beach Festival
I attended my first North Beach Festival in San Francisco today, and it reaffirmed my love of two things: good music and good food. The salmon sandwich from Rose Pistola's was to die for, as I opted for the lesser of the evil food booth choices: the usual 12 different types of sausage sandwiches, the venerable Philly Cheesesteaks, the ubiquitious gyro, and the all-American corn dogs, among others. Wash that down with garlic fries, and you have the recipe for a perfect heartburn, as well as slamming your arteries shut with high-grade plaque. I could have sworn I heard sirens on multiple occasions--probably related to the numerous heart attacks caused by one too many Bratwurst.
The bands on the main stage at Washington Park were great, especially the Gator Alley Band, and the headliner, Cathy Richardson, formerly of Jefferson Starship. The Gator Alley is a tribute band for Lynyrd Skynyrd, and they did them justice. You can catch them on Shoreline, along with The Scorpions and Sammy Hagar on August 2nd. Not a bad lineup.
Thanks to cell phone technology, some of my friends were able to hear the music from the comfort of their couches, as I called it in from the front row. I talked to the lead singer after their set, and gave him my card next time they ARE the headline band.
I met up with two of my good bay area friends, offered some friendly financial and relationship advice over a killer Napoleon milles feuilles pastry, only it was in an Italian bakery instead of a French one (after all, we were in North Beach). Money shouldn't be an unpleasant topic, but unfortunately, in many instances, it can be rather uncomfortable for some.
On the way back to the BART station, on the 30 bus, I stopped at Old Navy to buy some beach paraphernalia, since it was dirt cheap. Plus, the bathrooms were much cleaner than the porta pots at the concert venue. Since I got hungry again, I rode the 30 back to Chinatown, but everything was closed. All except some underground cafe, at which point I asked two departing diners whether it was good. They nodded in agreement and I noted the local non-English speaking crowd, and I knew I was in good shape. The food was excellent--and cheap. Altho like most Chinatown cafes, you probably are glad you can't see the kitchen.
All in all, it was a great day--except for the fight that broke out on the 30 bus from North Beach to the Powell BART station. Apparently, there was one too many shoves while some were trying to get out. People panicked and de-bussed (is that a word like "de-planed" often used by flight attendants?). A couple girls cried, but I just used the opportunity to take a seat as they opened up, and waited for the popcorn. I've witnessed a few fights in my lifetime, and sparred thousands of times, but let me tell you, this was not a fight, it was patty-cake, patty-cake.
Anyway, what was much more harrowing was a drunken driver almost hitting me and another pedestrian, before slamming on the brakes. Sorry, I couldn't hold back and told him to fornicate off--the other pedestrian was a better man because he didn't let out a peep. I need to turn the other cheek more often.
The economy is headed south, and the only growth businesses in this environment are crime, law enforcement and bankruptcy law. Law enforcement budgets are being slashed as the number of crimes are skyrocketing. It makes sense: when people aren't working, more turn to crime. So let there be a lesson: the next time someone cuts you off on the freeway, don't flip them the bird or tell them to do something to themselves--gather yourself, and move on. You never know who's on the other end of that 9 millimeter.
The bands on the main stage at Washington Park were great, especially the Gator Alley Band, and the headliner, Cathy Richardson, formerly of Jefferson Starship. The Gator Alley is a tribute band for Lynyrd Skynyrd, and they did them justice. You can catch them on Shoreline, along with The Scorpions and Sammy Hagar on August 2nd. Not a bad lineup.
Thanks to cell phone technology, some of my friends were able to hear the music from the comfort of their couches, as I called it in from the front row. I talked to the lead singer after their set, and gave him my card next time they ARE the headline band.
I met up with two of my good bay area friends, offered some friendly financial and relationship advice over a killer Napoleon milles feuilles pastry, only it was in an Italian bakery instead of a French one (after all, we were in North Beach). Money shouldn't be an unpleasant topic, but unfortunately, in many instances, it can be rather uncomfortable for some.
On the way back to the BART station, on the 30 bus, I stopped at Old Navy to buy some beach paraphernalia, since it was dirt cheap. Plus, the bathrooms were much cleaner than the porta pots at the concert venue. Since I got hungry again, I rode the 30 back to Chinatown, but everything was closed. All except some underground cafe, at which point I asked two departing diners whether it was good. They nodded in agreement and I noted the local non-English speaking crowd, and I knew I was in good shape. The food was excellent--and cheap. Altho like most Chinatown cafes, you probably are glad you can't see the kitchen.
All in all, it was a great day--except for the fight that broke out on the 30 bus from North Beach to the Powell BART station. Apparently, there was one too many shoves while some were trying to get out. People panicked and de-bussed (is that a word like "de-planed" often used by flight attendants?). A couple girls cried, but I just used the opportunity to take a seat as they opened up, and waited for the popcorn. I've witnessed a few fights in my lifetime, and sparred thousands of times, but let me tell you, this was not a fight, it was patty-cake, patty-cake.
Anyway, what was much more harrowing was a drunken driver almost hitting me and another pedestrian, before slamming on the brakes. Sorry, I couldn't hold back and told him to fornicate off--the other pedestrian was a better man because he didn't let out a peep. I need to turn the other cheek more often.
The economy is headed south, and the only growth businesses in this environment are crime, law enforcement and bankruptcy law. Law enforcement budgets are being slashed as the number of crimes are skyrocketing. It makes sense: when people aren't working, more turn to crime. So let there be a lesson: the next time someone cuts you off on the freeway, don't flip them the bird or tell them to do something to themselves--gather yourself, and move on. You never know who's on the other end of that 9 millimeter.
Friday, June 13, 2008
Our favorite teachers
I posted this on a school alumni social networking site I created, after hearing some closing remarks from the mortgage seminar I attended:
Teachers can leave indelible marks on us. Does anybody remember who the 2007 Miss Universe was? Or the 2007 Nobel Laureate winners? Or even the 2007 NFL MVP? Yet, we certainly remember who are favorite teachers were--even if our aging memories are starting to fail us.
In fact, I'll start a new discussion on favorite teachers: Mrs. Nelson, my 4th grade Lewis School homeroom teacher. She motivated us, not with too light a hand, or with a heavy hand, but she certainly gave us a definitive moral compass, sprinkled in with good-natured, but sharp humor--but with a stern message--live by the golden rule, and treat others with respect. She even invited us to her home to play with her St. Bernard's.
Mr. Horst, the most stern, anal retentive person I ever met. We were all afraid of this 7th grade English teacher at Lincoln Jr. High, and that fear was founded, but he sure got us to use proper grammar. And once in a while, he cracked open a wry smile. The guy was classic old school, but he occasionally had a little bit of Eddie Haskell in him (for those old enough to remember Leave it to Beaver).
Just like I wish I could have told my father one more time how important he was to me before he passed on, I wish I could tell these teachers how much of a positive impact they had on me. As I get older, I realize how much more important teachers are to all of us. Seriously, and I hate to sound corny, we all should share our gratitude to our former teachers as much as we can--as well as others we've learned so much from--including our parents. I'm sure they would appreciate it. They make a real contribution.
Another sign pointing to a recession...
This may be my most accurate economic indicator ever--traffic flow. If it takes an hour and a half to drive from Century City to Manhattan beach on the 405, we have full employment. On the other hand, if it takes 20 minutes, bet on a recession. That's assuming no highway drive-by shootings...
I also hear some homes in San Bernardino are going for 20 cents on the dollar, as long as you buy 100 of them at a time. That might seem too tempting to pass up--until you factor in that life expectancy in the Inland Empire is 10 years shorter than the beach areas.
The best deals around the country seem to be in high disaster areas. But then again, the reasons are self-explanatory.
My girlfriend is vacationing in Australia later this month. She got a good deal on the airfare and hotel, but I warned her that she may get sticker shock once she lands on resource-rich Down Under. The dollar is tanking, thanks to Bernanke's alleged life-respiratory reduction of the Fed rate. That's fine, until you figure out you just deposited your monthly rent into the fuel tank of your Chevy Suburban. The Aussies seem to be holding up well. Probably because China and India are buying up all their ore.
Actually, the US has strong exporters, too. Foreigners are eating up cameo appearances of Paris, Lindsey, and Britney on TMZ...
I have a feeling at some point down the line, I will have a rant about our priorities and our educational system. I'm proud of the fact that I have no idea who won the latest American idol (okay, that was a lie--I remember him now as I caught the finals--I just don't know his name). My girlfriend no longer forces me to watch it, just like I don't force her to watch Golf Channel anymore.
I also hear some homes in San Bernardino are going for 20 cents on the dollar, as long as you buy 100 of them at a time. That might seem too tempting to pass up--until you factor in that life expectancy in the Inland Empire is 10 years shorter than the beach areas.
The best deals around the country seem to be in high disaster areas. But then again, the reasons are self-explanatory.
My girlfriend is vacationing in Australia later this month. She got a good deal on the airfare and hotel, but I warned her that she may get sticker shock once she lands on resource-rich Down Under. The dollar is tanking, thanks to Bernanke's alleged life-respiratory reduction of the Fed rate. That's fine, until you figure out you just deposited your monthly rent into the fuel tank of your Chevy Suburban. The Aussies seem to be holding up well. Probably because China and India are buying up all their ore.
Actually, the US has strong exporters, too. Foreigners are eating up cameo appearances of Paris, Lindsey, and Britney on TMZ...
I have a feeling at some point down the line, I will have a rant about our priorities and our educational system. I'm proud of the fact that I have no idea who won the latest American idol (okay, that was a lie--I remember him now as I caught the finals--I just don't know his name). My girlfriend no longer forces me to watch it, just like I don't force her to watch Golf Channel anymore.
Signs we are in for rough seas...
A couple days ago, I attended a seminar for mortgage brokers looking to increase their deal flow. One of the many stats cited by the seminar speakers indicates that there's been a 40% attrition rate among loan officers. The positive spin is that there are fewer loan officers chasing the same deal, altho deal flow has decreased significantly, especially refi's. In any case, since I have a couple mortgage planners in my affiliate network, I wanted to get an indication on how bad the industry was, as all I heard from them was doom and gloom about the mortgage industry. My attendance at the seminar confirmed it. I got depressed via osmosis.
Thru a referral from a realtor friend, I visited a senior loan officer, one of the top revenue producers in the country prior to the mortgage industry balloon popping. He went from funding up to 104 loans a month to virtually nothing today. He's lost 5 of his 7 homes, basically losing millions in equity, and starting over. He is sharp, proactive, a strategic thinker--and broke, with a plummeting FICO score. He's working 3 times as hard on each deal, and each deal is bringing in one third the revenue he used to make on loan origination fees. In essence, he has to work 9 times as hard to fund one deal. And only 1 in 10 applications are being funded (the seminar speakers said 1 in 5 applications are accepted). It got me thinking--here was the one of the top producers in the country, and it was no fluke as he was on top of his game. Yet, he was flat broke. What is going on here?
I told him I'm having my best year ever, and so are my affiliate partners in the lending and real estate business. Why? Because my clients protect their equity, thriving even in a severe real estate downturn. I create a need for clients to either refinance--or to sell their existing home, and purchase a new one, in order to acquire new tax-deductible debt. It's due to Rule 264, which defines the limits of acquisition indebtness. Most individuals are unaware of this rule--and so are their CPA's.
The aforementioned loan officer is sharp, he may become a client, and we definitely will work together to shore up his clients' balance sheets. It's too late for some, but there are some who will need our assistance.
I also visited another realtor friend who was a multi-millionaire the last time we met. He owned 5 beautiful homes scattered across the bay area, each worth over a million each. Today, he is upside down on all of them, barely able to fill up the gas tank on his luxury SUV. I know the technical definition of a recession is two consecutive quarters of negative GDP growth, but I really don't care what the government statistics cite. We are deep into a recession--and it's going to get worse. These aren't exactly low-paying jobs people are losing.
The anecdotal evidence is mounting--UBS' mortgage-backed securities department laid off 400 of their staff of 450. JPMorgan Chase bailed out Bear Stearns, the country's 4th largest investment bank. Bank of America bailed out Countrywide--the country's largest mortgage lender. And Texas Pacific Group, a private equity firm, injected billions of capital into Washington Mutual, that little commercial bank on every street corner. It's the ultimate trifecta--investment banks, mortgage banks, and commercial banks. This triple crown of exploding debt is going to implode the US economy. On the other hand, the thoroughbred Big Brown didn't have a chance at his Triple Crown...
And the government continues to artificially deflate reported inflation numbers for their best interests, but to the detriment of every American consumer, but especially retirees living on a fixed income, tied to the cost-of-living index. What's noteworthy is that the cost of food and fuel are not included in the inflation index, with the reason being they are "too volatile" month-to-month to be included in the "core" inflation index. Well, that's Jim-dandy, but the problem lies in the fact that those are the two household components whose costs are skyrocketing. Does anybody really think inflation is only growing at 3%? Pleeze...
In any case, last Tuesday, one of my mortgage planner partners is refinancing 7 properties for 4 of my clients, totaling approximately $4 million. I'm also putting those very same clients into something that is safe, liquid, earns more than their tax-deductible mortgage interest, and compounds tax-free. For those that don't know me well, I'm applying Missed Fortune concepts, a safe, conservative strategy on building wealth by optimizing current assets.
Last night, I had a meeting with a former colleague, who is now at a major investment bank (one of those two-name ones). Altho Missed Fortune concepts are antithetical to what Wall Street espouses, even he agreed to the unconventional, yet straight-forward principles. His caveat is that a money manager can beat Missed Fortune strategies if he/she can achieve a 15% annualized return, pre-tax. I say, good luck...most hedge fund managers strive for 12-15% pre-tax growth, and most money managers underperform the Lipper market averages. My clients earn the index averages tax-free, with a guaranteed floor, and sleep at night. Albert Einstein said "Compounding interest is the 8th wonder of the world". If that's true, tax-free compounding is the 9th wonder.
Doug Andrew, my mentor and friend, really is a genius. Each component of Missed Fortune isn't novel--but how he has taught me to structure each plan--both liabilities and assets--THAT is the secret sauce.
Thru a referral from a realtor friend, I visited a senior loan officer, one of the top revenue producers in the country prior to the mortgage industry balloon popping. He went from funding up to 104 loans a month to virtually nothing today. He's lost 5 of his 7 homes, basically losing millions in equity, and starting over. He is sharp, proactive, a strategic thinker--and broke, with a plummeting FICO score. He's working 3 times as hard on each deal, and each deal is bringing in one third the revenue he used to make on loan origination fees. In essence, he has to work 9 times as hard to fund one deal. And only 1 in 10 applications are being funded (the seminar speakers said 1 in 5 applications are accepted). It got me thinking--here was the one of the top producers in the country, and it was no fluke as he was on top of his game. Yet, he was flat broke. What is going on here?
I told him I'm having my best year ever, and so are my affiliate partners in the lending and real estate business. Why? Because my clients protect their equity, thriving even in a severe real estate downturn. I create a need for clients to either refinance--or to sell their existing home, and purchase a new one, in order to acquire new tax-deductible debt. It's due to Rule 264, which defines the limits of acquisition indebtness. Most individuals are unaware of this rule--and so are their CPA's.
The aforementioned loan officer is sharp, he may become a client, and we definitely will work together to shore up his clients' balance sheets. It's too late for some, but there are some who will need our assistance.
I also visited another realtor friend who was a multi-millionaire the last time we met. He owned 5 beautiful homes scattered across the bay area, each worth over a million each. Today, he is upside down on all of them, barely able to fill up the gas tank on his luxury SUV. I know the technical definition of a recession is two consecutive quarters of negative GDP growth, but I really don't care what the government statistics cite. We are deep into a recession--and it's going to get worse. These aren't exactly low-paying jobs people are losing.
The anecdotal evidence is mounting--UBS' mortgage-backed securities department laid off 400 of their staff of 450. JPMorgan Chase bailed out Bear Stearns, the country's 4th largest investment bank. Bank of America bailed out Countrywide--the country's largest mortgage lender. And Texas Pacific Group, a private equity firm, injected billions of capital into Washington Mutual, that little commercial bank on every street corner. It's the ultimate trifecta--investment banks, mortgage banks, and commercial banks. This triple crown of exploding debt is going to implode the US economy. On the other hand, the thoroughbred Big Brown didn't have a chance at his Triple Crown...
And the government continues to artificially deflate reported inflation numbers for their best interests, but to the detriment of every American consumer, but especially retirees living on a fixed income, tied to the cost-of-living index. What's noteworthy is that the cost of food and fuel are not included in the inflation index, with the reason being they are "too volatile" month-to-month to be included in the "core" inflation index. Well, that's Jim-dandy, but the problem lies in the fact that those are the two household components whose costs are skyrocketing. Does anybody really think inflation is only growing at 3%? Pleeze...
In any case, last Tuesday, one of my mortgage planner partners is refinancing 7 properties for 4 of my clients, totaling approximately $4 million. I'm also putting those very same clients into something that is safe, liquid, earns more than their tax-deductible mortgage interest, and compounds tax-free. For those that don't know me well, I'm applying Missed Fortune concepts, a safe, conservative strategy on building wealth by optimizing current assets.
Last night, I had a meeting with a former colleague, who is now at a major investment bank (one of those two-name ones). Altho Missed Fortune concepts are antithetical to what Wall Street espouses, even he agreed to the unconventional, yet straight-forward principles. His caveat is that a money manager can beat Missed Fortune strategies if he/she can achieve a 15% annualized return, pre-tax. I say, good luck...most hedge fund managers strive for 12-15% pre-tax growth, and most money managers underperform the Lipper market averages. My clients earn the index averages tax-free, with a guaranteed floor, and sleep at night. Albert Einstein said "Compounding interest is the 8th wonder of the world". If that's true, tax-free compounding is the 9th wonder.
Doug Andrew, my mentor and friend, really is a genius. Each component of Missed Fortune isn't novel--but how he has taught me to structure each plan--both liabilities and assets--THAT is the secret sauce.
Thursday, June 12, 2008
Innovation cycles in an economic downturn
I am a student of history, and it seems innovation accelerates during economic downturns. Innovative technologies blossom as the economy recovers, serving as a catalyst to increasing our productivity. California was in a serious recession in the early 90's, but that backdrop merely served as a precursor to the adoption and pervasiveness of the internet. What followed was an unprecedented boom in technological innovation (and equity market capitalization). While California was in the depths of a recession, researchers in university labs and private industry were busy bringing interconnectivity to the masses. Innovative high-tech companies, especially forward-thinking incumbents, were increasing their R & D budgets, while their competitors were merely trying to hold market share. Startups by nature, were continuing to develop the next great mousetrap.
You could probably follow the timelines of breakthrough technologies for the transistor, integrated circuits, PC's, biotech, software, databases, web technology, etc. and see similar trajectories of mainstream adoption and penetration.
Unfortunately, we are entering one of the steepest economic declines in quite a while, due to the mortgage lending crisis, rampant abuses and over-speculation (that's polite-speak for greed--does this sound familiar?). I am hoping that the silver lining is that our industry overall will be allocating more resources to develop the next gee-whiz technology. The companies who slash their R & D will suffer relative to their competitors when we turn the corner--whenever that is. Increasing research expenditures may be unpopular during a downturn, but it is absolutely crucial in order to thrive in the next upcycle.
University research labs need to deepen their relationship with private industry. I have visited several campuses recently, trying to get a glimpse of the next new, new thing. I believe UCSB, my alma mater, and other university engineering departments are doing the right things, increasing their fund raising efforts, as well as collaborating with private industry. They still need to maintain their academic integrity and independence, but by working closer with private industry, they can make a bigger impact and monetize their research efforts quicker. Time to market still matters even in academic ivory towers. It takes initiative and commitment.
The promising technologies I predict will be in sustainable technologies (greentech), nanotechnology, and biotech. Moore's or Metcalfe's Laws won't be invalidated, as we continue to make tools and products faster, smaller, and cheaper. These incremental improvements will be crucial to nurturing nascent industries. But the "Blue Ocean" industries will be spawned from breakthroughs developed in labs where pocket protectors are fashion accessories. I'm enthused that UCSB's Engineering departments share my vision, and that they are applying a multi-disciplinary approach to solving our society's pressing needs, engaging with other departments on campus, as well as corroborating with other universities.
I've made visits and taken tours of Cal Tech and plan on doing so at Stanford and UCI, as these outstanding institutions map out how we all will live years from now. They are corroborating with private industry more than ever, and raising their visibility among influential alumni in private industry. Many faculty members continue to create and invest in promising, innovative early-stage companies.
My fear is that myopic legislators and technocrats do what is traditional and popular--cut R & D spending, which will portend very bad outcomes for our country, because the rest of the world isn't standing still. If the US wants its citizens to continue enjoying our high standard of living, we have to remain competitive as a technological power. Terrorism isn't our only foe: so is poverty.
My next blog will dispel the myth that the US is not in a recession...
You could probably follow the timelines of breakthrough technologies for the transistor, integrated circuits, PC's, biotech, software, databases, web technology, etc. and see similar trajectories of mainstream adoption and penetration.
Unfortunately, we are entering one of the steepest economic declines in quite a while, due to the mortgage lending crisis, rampant abuses and over-speculation (that's polite-speak for greed--does this sound familiar?). I am hoping that the silver lining is that our industry overall will be allocating more resources to develop the next gee-whiz technology. The companies who slash their R & D will suffer relative to their competitors when we turn the corner--whenever that is. Increasing research expenditures may be unpopular during a downturn, but it is absolutely crucial in order to thrive in the next upcycle.
University research labs need to deepen their relationship with private industry. I have visited several campuses recently, trying to get a glimpse of the next new, new thing. I believe UCSB, my alma mater, and other university engineering departments are doing the right things, increasing their fund raising efforts, as well as collaborating with private industry. They still need to maintain their academic integrity and independence, but by working closer with private industry, they can make a bigger impact and monetize their research efforts quicker. Time to market still matters even in academic ivory towers. It takes initiative and commitment.
The promising technologies I predict will be in sustainable technologies (greentech), nanotechnology, and biotech. Moore's or Metcalfe's Laws won't be invalidated, as we continue to make tools and products faster, smaller, and cheaper. These incremental improvements will be crucial to nurturing nascent industries. But the "Blue Ocean" industries will be spawned from breakthroughs developed in labs where pocket protectors are fashion accessories. I'm enthused that UCSB's Engineering departments share my vision, and that they are applying a multi-disciplinary approach to solving our society's pressing needs, engaging with other departments on campus, as well as corroborating with other universities.
I've made visits and taken tours of Cal Tech and plan on doing so at Stanford and UCI, as these outstanding institutions map out how we all will live years from now. They are corroborating with private industry more than ever, and raising their visibility among influential alumni in private industry. Many faculty members continue to create and invest in promising, innovative early-stage companies.
My fear is that myopic legislators and technocrats do what is traditional and popular--cut R & D spending, which will portend very bad outcomes for our country, because the rest of the world isn't standing still. If the US wants its citizens to continue enjoying our high standard of living, we have to remain competitive as a technological power. Terrorism isn't our only foe: so is poverty.
My next blog will dispel the myth that the US is not in a recession...
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