Jan 25

Recessions and Personal Finance

Posted by Kristjan Velbri | Posted in Personal Finance | Posted on 25-01-2010

Economic contractions come and go, but the imprints they leave on people vary a lot. One of the good things about economic contractions is that they allow one to take the time off and reflect on the past in terms of personal finance. How did I end up spending so much? Why didn’t I save more? How come I bought assets when they were overvalued compared historical averages? I don’t think I’m the only person who is torturing himself (or herself) with questions like this. There must be millions like me. However painful these questions are, one has to start answering them to prepare for the future. It is the duty of present you to find answers and solutions to these questions for the benefit of future you. We humans have the strange habit of finding good in situations and relationships that are filled to the rim with pain, insults, face-slaps and humiliation. The current crisis is a prime example of the negative emotions that can arise, but after a short period of self remorse and blaming everyone else, we have to pick ourselves up and move one.

Moving On

The first thing you should do is start investigating what really happened. Pick up a few books and start reading. You might also want to add a couple of blogs to your reading list – there is plenty of free and reliable information on the internet, you just have to be a bit skeptical about what you read (if it doesn’t make sense of smells like a conspiracy, it probably is). If you already have a good overview of what happened the next step is to evaluate your own behavior and see if there is anything you could improve on the next time. Before the crisis I didn’t have the habit of saving money but a 15% fall in my home state’s GDP (I live in Estonia) and the bankruptcy of two media companies that paid me for content did plenty to change that . I now have a clear goal in mind – I want to grow my savings account to a minimum of three months’ expenses (the ideal would be a one year cash cushion). I don’t care that my savings account doesn’t yield much because I don’t want to risk my emergency funds. The bigger the potential reward, the bigger the risk.

Historical Averages

I remember buying stocks in October 2008, one of the worst times to be entering the stock market. I wasn’t too worried about my investment because I used money I could afford to lose, which is what one should be doing. Scared money will only bring you losses and misery over the long term. I bought the stock when it was trading around $25. When it fell to $5 in March 2009, I felt stupid. Really stupid. I knew it would rebound so I had no problem holding it. But I knew I had made a grave mistake. When buying stock in that company, I was so enthusiastic about it that I didn’t care about the broad market or the economy. I thought their products were positioned so good that there was no way they could suffer. Besides, the stock had already come off from its highs in the $70 range.

I should’ve kept the money and waited for a better opportunity. In hindsight I can see clearly that the dollar was in an uptrend (bad for US dollar denominated stocks) and the broad market was in terminal decline due to a credit crunch (due to the failure of Lehman). I eventually sold my stocks when it reached the $20 range.

When making an investment in any asset class, be it stocks, commodities or real estate, always check the historical averages and look at the trendlines. Estonia, much like the rest of the world experienced a spectacular real estate boom (without the option ARMs and RMBSs, luckily) and I always knew it was going to pop. I’m not saying I’m an expert, because that knowledge was largely based on the magazine cover indicator and the number of real estate shows on TV. But now I know how experts do it. The experts look at historical averages. There are many such as standard deviation plotted on a price chart, all the numerous housing affordability measures, population growth to asset price ratios, inflation adjusted prices etc. To top it off, it doesn’t hurt to buy a couple hundred bucks worth of books before buying a house. I’ve heard many people call in on the Financial Sense Newshour Q-lines saying that they avoided buying a house during the boom times and are now starting to look around for a bargain. Most people buy one house during their lifetime and it doesn’t really matter if you push the purchase forward a few years. They probably got at least 50% compared to the height of the boom.

Recession come and go but if we learn from our mistakes, we will most certainly benefit from them or, at the very least, we’ll be able to weather the storm the next time it hits. I’ve read about some great deals over the last year. People that are older than me and have more experience, who know the ins and outs of business cycles, picked up some great deals at bargain prices and are now selling at 100% or even 300% gains. They didn’t go along with the euphoria, held on to their money and bought assets when they were truly cheap, not just attractive.

In the end, we can’t do much to change the business cycle. They exist in every economic system so doing away with capitalism, as some have suggested, isn’t going to solve it. Swinging from one extreme to the other is a recurring theme in nature and since prices are a reflection of the collective action of all the market participants: private individuals, companies and organizations comprised of people; economies are bound to have booms and busts. The best we can do is adapt and prepare. Do a service to future you and start learning today. Future you will thank you for that.

http://en.wikipedia.org/wiki/Real_estate_bubble#Housing_affordability_measur

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Aug 23

Who is Gerald Celente?

Posted by Kristjan Velbri | Posted in People, Personal Finance | Posted on 23-08-2009

Gerald CelenteGerald Celente is a trend forecaster, owner and founder of the Trends Research Institute. He is a citizen of the United States and lives in New York State. He was born (29-11-1946) and brought up in Bronx but originally he is of Italian descent.

Mr. Celente has appeared on numerous TV networks and is well known for his trend following and forecasting capabilities. He is one of the many who warned of the dangers that were lying ahead when the financial crisis started to escalate into an economic crisis. During the weeks and months that followed the bailouts of 2008, Mr. Celente gained audience as alternative and mainstream news media was eager to have him on due to his skills as a trend forecaster.

What does he do?

Mister Celente is a trend forecaster. He is not “the messenger” or “the prophet”, but rather someone who absorbs all the news and information out there and gives his best guess as to what might happen next. Mr. Celente describes it with the following phrase:  “current events form futures trends”. Not everyone is able to put two seemingly unrelated pieces of information together, but somehow, Mr. Celente and his team of 25 at the Trends Research Institute have managed to do that time and again. Mister Celente takes great pride in being a “political atheist” or in other words, someone who is not fooled by political religions (after all, Democrats and Republicans are two heads of the same dragon).

Mister Celente started his trend forecasting business back in 1980, after having been a government affairs specialist from 1973 to 1979. He named it The Socio-Economic Research Institute of America, a name which has now been substituted with a new name – The Trends Research Institute. Each quarter, Mr. Celente gives out a new publication, titled the Trends Journal which forecasts and analyzes business, socioeconomic, political and other trends. He also writes special forecasts for individuals and companies who have an interest in a particular topic.

What does his track record look like?

People that can “forecast” events pop up all the time only to fade away when people discover their track record or when they realize that their forecasts were as good as anybody’s. Given Mr. Celente’s track record, it is no surprise that the media is all over him. Here are just a few trend forecasts from the recent past:
2007 – The “Panic of ‘08″
2005 – Dollar Down, Gold to Soar
2005 – Alternative Energy Biz to Boom
2002 – Go for Gold – Beginning of gold bull market

And here are some from the previous century:
1996 – August 1998 Russian economic collapse
1988 – Rise of deep discount and warehouse shopping (think WalMart)
1986 – October 1987 world stock market crash

Why trust Mr. Celente’s forecasts?

The thing is, you don’t have to. As Mr. Celente says himself: “Don’t be a parrot, think for yourself!” He usually says that to illustrate the fact that too many Americans believe what the politicians and news media says. But I’d also apply that to what Mr. Celente says. What I’m saying is that no one piece of information should be taken as pure truth, especially if it’s a forecast, but it should, rather, be analyzed.

When I read the Trends Journal or listen to one of the radio broadcasts Mr. Celente regularly visits, my brain is constantly analyzing the information. I try to evaluate the validity of the information and compare it to what I’ve heard and read from other sources. The Trends Research Institute goes a long way to sift through all the information and make a forecast and their accuracy rate is pretty darn good, but in the end, you still need to use your own brain to decide to what degree you trust their analysis. There are no free lunches and this one is not an exception.
And remember, he forecasts trends, not specific events.

Where I can find more about him and his work?

The easiest way is to go to the Trends Research Institute website. Mister Celente is also a regular guest on many American TV and radio stations and more often than not, the video clips of his appearances are uploaded to YouTube (link to unofficial Gerald Celente channel on YouTube). Don’t be surprised to find a line or two from him or from his publications when you read the newspaper – every now and then, he is quoted in The New York Times, The Washington Post, The Los Angeles Times, The Economist and other major news publications.

Mr. Celente is also the author of three books:

1991 – Trend Tracking: The System to Profit from Today’s Trends
1998 - Trends 2000: How to Prepare for and Profit from the Changes of the 21st Century
2002 – What Zizi Gave Honeyboy: A True Story About Love, Wisdom, and the Soul of America

Just out

Gerald Celente’s most up to date trend forecasts can be found here.

Recently, Mr. Celente has been interviewed by Jim Puplava as well as Eric King. Here are the links to the interviews:
Gerald Celente on Financial Sense Newshour (interview starts at 19:10)
Gerald Celente on King World News (you have to listen to this!)

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Aug 15

Top 3 Podcasts on Finance & the Economy

Posted by Kristjan Velbri | Posted in Economy, Personal Finance | Posted on 15-08-2009

Podcast LogoIn these days, financial and economic news are not only reported on financial news media websites and personal blogs like Naked Capitalism or The Big Picture, but on online radio shows too, or in web-speak, podcasts. There is a large array of different podcasts available, some of which are downloadable versions of previously aired radio shows. Here is a selection of top three podcasts that I keep track of.

1. Financial Sense Newshour with Jim Puplava and John Loeffler
This has got to be one of my favorite radio programs! Jim Puplava is an excellent interviewer and has the best finance and economics book authors appear on his show each week. Jim and John make a great team and their jokes spice up the show only to make it more enjoyable. John also has his own show, called Steel on Steel.

Guests this week: Robert McHugh, Peter Schiff (of EuroPacific Capital), Joseph Dancy, James Turk (founder of GoldMoney), John F. Wasik (2nd hour book guest), Eric Coffin. Previously he has interviewed James Howard Kunstler, Gerald Celente, Michael Panzner, Bud Burrell, Charles R. Morris, William Fleckenstein and many more (see archive).

2. King World News with Eric King
I don’t know how he manages it, but somehow Eric gets all the best guests on his show on a consistent basis. This show is definitely a must listen for each weekend. There is also a special section for gold bugs, which is also updated each week. Like Jim Puplava, Eric King is an excellent interviewer.

Guests this week: Peter Barnes (CEO of Silver Wheaton), Bill Fleckenstein (Fleckenstein Capital), Gerald Celente (Trends Research Institute), Ted Butler and a guest from GATA.
Previously on KWN: Harry Markopolis, Barry Ritholtz, Marc Faber, John Mauldin, Alan Grayson, Jim Rogers, Peter Schiff and many more available in the King World News archive.

3. McAlvany Weekly Commentary with Don and David McAlvany

Weekly shows that are uploaded every Wednesday. MWC has a different style than the shows above and that’s what I like about it. Who would enjoy listening to the same stuff all over again? The show is well worth listening to and I suggest you check it out.

This week on MWC: Richard Bookstaber (an excellent interview!)
Previously on the show: G. Edward Griffin, Marc Faber, Thomas E. Woods Jr. and more (see arhive).

You can subscribe to all of the above podcasts using RSS/Atom feeds! This video helps you understand what a feed is. Look for the feed logo to subscribe.

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Jul 03

Gold Price Manipulation? So What?

Posted by Kristjan Velbri | Posted in Gold, Markets, Personal Finance | Posted on 03-07-2009

Whether or not the price of gold, as many have been arguing here and elsewhere, is being manipulated or not, interestingly enough, doesn’t matter.Gold is told to be an excellent preserver of wealth, especially in rough times like these and I agree with that but I don’t think the manipulation hypothesis should be given as much focus as it’s been given so far, simply because there is nothing wrong with central and commercial banks occasionally pushing the price lower.

Why? Well, the central banks, led by the Federal Reserve, have been printing huge amounts of new ‘money’ and as soon as it gains velocity, inflation will propel gold to new highs. One way to preserve wealth is to buy gold and the best time to do it is before inflation kicks into high gear. Let’s assume that the manipulation hypothesis holds true and the price of gold is being artificially suppressed. As an individual who is trying to buy gold I could not wish for a better setup, I would be glad to be able to buy gold at a suppressed price.

If gold exploded in a manner that it did almost 30 years ago, the hypothetical manipulators would be unable to hold the price of gold down. Margin calls would be all over the place and the hypothetical manipulators would have to exit positions en masse. That is very likely the scenario that would play out during another violent push higher. If you factor in the amount of deliveries that would be taken in the case of a price explosion, there would be nobody left to manipulate the price of gold.

If the price of gold will not explode, I still won’t be worried about the effect of the alleged manipulation because even the ‘manipulators’ have been unable to stop the price from rising so far. I will preserve my wealth with or without intervention by the banks.

Manipulation or no manipulation?

I’m not saying the manipulation hypothesis holds true. I’m not saying it is completely wrong either. In fact, I don’t even care much because in the long run, it really doesn’t matter. If there is merit to the manipulation argument, I don’t care because I can’t do anything about it (let’s face it, manipulation hypothesizers, you’ve been all over it for years and you haven’t had any influence on the CFTC). If the manipulation hypothesis is just that, a mere hypothesis, I don’t care either. All I care about is the price of the yellow stuff and as I pointed out earlier, the ‘manipulators’ have been unable to keep gold price from rising from the low $200s to almost $1000.

There are much larger forces in play that will determine the price of gold in the coming years. We have all heard the inflation story, but added to that are growing signs that China is diversifying its foreign reserves away from the dollar and into gold. The population of the planet is in an uptrend and will continue climbing for the foreseeable future, this means that there will be less ounces per capita – more wealth and more people makes for a greater need for wealth protection. Of course, I haven’t listed all the factors that contribute to the rise of the yellow metal and that is not the point of this article. The point I would like to make is this: buy gold when it dips and don’t fret about the manipulation hypothesis. We are in a secular bear market for stocks and a secular bull market for gold (see the chart of DJIA/gold) and market intervention, real or not, doesn’t make a difference.

Disclosure: long AUY and silver bullion.

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May 31

Option ARM Defaults Looming On the Horizon

Posted by Kristjan Velbri | Posted in Finance, Personal Finance | Posted on 31-05-2009

The financial media would have us believe that the economy is about to recover and things will sooner, rather than later, return to normal. Aided with billions of taxpayers’ money, the banks seem to be doing fine, that is, of course, if you consider a profit made by changing accounting rules ‘doing fine’. The markets have recovered some 35% since the lows reached in March this year. The politicians assure us that now that the stimulus money is entering the economy, things will return to normal and the happy days are back. But they are not telling the whole story.

Even though the leading indicators have turned up and there is talk about a recovery, there are mortgages worth billions of dollars that will be reset in the coming years. Remember the subprime crisis? Well, this thing is even bigger than that. I am talking about option ARMs (Adjustable Rate Mortgage). First, in the name of clarity, here is an explanation of the term:

The loan carries and adjustable interest rate, and this rate can adjust as often as every month. If the borrower is paying only the minimum payment, then he or she isn’t even paying enough to cover that month’s interest on the loan. What happens then? The unpaid interest that has accrued is added to the loan principal. The principal can actually grow larger, and as interest due is calculated on the loan principal, the interest due will increase, as well. Interest rates are currently near all-time lows and are sure to increase. A buyer who continues to make minimum payments on an option ARM will find that the principal on the loan is actually increasing over time! This is known as negative amortization.

In a negative amortization situation, only bad things can happen. The lender can require refinancing under certain conditions stated in the loan agreement. The buyer may find himself unable to pay the loan and may have to default. And the lender could find himself holding a note that is worth far more than the house that it represents.

The option ARM is a loan that is best suited to investors and homeowners who only intend to keep the home for a short time. It is not a good choice for anyone who may be using it to buy more home than he or she can afford. Unfortunately, that describes a lot of buyers who are taking out this type of loan. Anyone who is considering a home purchase should be very careful if this type of loan is offered, as it could leave you both bankrupt and homeless.[source]

Resets and defaults:

All of these loans are scheduled to reset over the next few years if they are still outstanding (ie – have not defaulted). Unfortunately, most of these homeowners cannot qualify for traditional 15 or 30 year mortgages. That’s too bad since today’s mortgage rates are below 5% in some parts of the country. The bottom line is that many of these option ARMs are going to default, especially given that home prices continue to slump – down a record 19% in the 1Q alone.[source]

For these loans, resetting will mean a sudden, large increase in montly mortgage payments. Given ever-rising unemployment, wage cuts and a drop in consumer spending, it’s difficult to see why many of those mortgages will go into foreclosure. The problem with option ARMs is that these were not only written out to people with no income or to finance houses that were on the other side of the road, so to speak. These mortgages were written out to ninjas (people with No Income No Job and no Assets) and middle-class people alike. Here is a good example of a typical option ARM mortgage from California (visit the Dr. Housing Bubble link below to get the full story). Below is a chart of option ARM resets.

Massive option ARM defaults on the way

  1. Defaults will start picking up pace in the second half of 2009. Resets at $2 to $4 B a month.
  2. More defaults as resets near $8 billion a month throughout 2010.
  3. Resets over $10 billion a month! Street riots in 2011?
  4. Resets fall but there is still a lot of pain as even more houses come on the market. Resets at around $6 to $8 billion per month throughout first half of 2012.

In March, the home mortgage foreclosure rate surged to 46% from a year ago, hitting a record high. Home prices dropped a record 19% in the first quarter of 2009, while 5.4 million Americans are delinquent on their mortgages or already in foreclosure. All in all, 20 million American households are now underwater, as their their mortgage loans are larger than the price of their homes.

The current recession started when the housing bubble burst. Lehman went under, many were bought and many received a bailout from the taxpayers. But the preceding crisis was mostly focused on subprime mortgages. This is way bigger than that! Actually, if you consider not only option ARMs, but also Alt-A mortgages and unsecuritized ARMs, the situation is much, much worse. (Alt-As are loans to the folks who are a small step up from subprime. Unsecuritized loans are a 50-50 proposition; either the borrowers were good enough that they weren’t thrown into the CDS pool, or they were so risky no one would insure them. (source)

Mortgages - Credit Suisse

Take a few minutes to figure this chart out, as it will determine the policy of the White House, the FED, the Treasrury and foreign debt holders for years to come. This will also have major implications for the stock markets as the green shoots will turn out to be nothing but an illusion.

If you would like to read a more detailed article about the mother of all bombs that is the continuing mortgages crisis, here is an article by Doctor Housing Bubble. You might also want to read what a foreclosure actually looks like. You’ve probably heard about foreclosures happening all over America, but these stories don’t get told in detail. This one did.

In addition to that, old-fashioned loans are going bad as well: Troubled Bank Loans Hit a Record High

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