Tuesday, January 19, 2010

2010: The Best of Times or the Worst?

2010: The Best of Times or the Worst?

“It was the best of times. It was the worst of times.”
­ – Charles Dickens

Is the recession over? Are happy days really here again? Paraphrasing Dickens, my answer is, “For people who are prepared, 2010 will be the best of times. For many, 2010 will be the worst of times.”

The following are a few of my predictions and reasons behind them…

Prediction #1: The real estate market will crash again.


Pictured above is a graph of mortgage resets. In simple terms, a mortgage reset is when a mortgage comes due. In normal times, refinancing was a simple process…but these are not normal times. Some points of interest:

1. In September 2008, the mortgage resets hit $35 billion that month. That was the exact time the financial crisis hit. When people could not afford to refinance and began to default, the stock market and banking industry crashed.

2. The eye of the storm: In the summer of 2009 mortgage resets were low -- around $15 billion a month. This is when optimists began to see “green shoots” in the economy. The green shoots were the eye of the storm. In 2010, as I see it, the second half of the financial hurricane hits. By late 2011, the resets climb to nearly $40 billion a month. The storm will not end until 2012.

3. The first half of the storm was primarily due to subprime defaults. The second half of the storm will hit more solid homeowners. The question is, can they weather the storm? Will Mac Mansion foreclosures be next?

4. In America, there are over 40 million people who own more than two homes. Can they afford to carry and refinance two or more mortgages?

5. Since home values have gone down, many homeowners will find they owe more than their home(s) are worth. Will the bank be kind to them?

6. The time for using your home as an ATM is over. This is crushing retailers and retail real estate. Shopping centers are in trouble. Strip malls are empyting as shopkeepers close -- permanently. This will lead to the crash of the office, warehouse, and other commercial properties.

My prediction: Obviously these are the best of times if you are a buyer of distressed properties and the worst of times if you are a seller.

Other things I am watching for in 2010:

1. Will China crash? America’s crash has hit China in the gut. The Chinese are laying off millions of workers. Only massive government bailout is keeping the economy afloat. The Chinese boom will eventually go bust…but will it bust in 2010? Only time will tell.

2. When America stopped importing from China, China stopped importing from the rest of the world. This affects Asian countries as well as Australia, Brazil, and other suppliers of raw materials.

3. Fed Chairman Ben Bernanke is replacing toxic debt with new debt. By protecting his friends in the mega-banks, he is turning the U.S. into a zombie nation. The recession is over, but America is entering an era we will be calling The New Depression, a period when the rich become extremely rich but everyone else becomes poorer. Taxes will kill anyone working for a paycheck.

4. The U.S. dollar will grow weaker. If the dollar strengthens, we will have more unemployment because our goods become too expensive and we will export less.

5. The deficit will increase. The bailouts for the rich are killing the economy.


6. Israel may attack Iran. Israel will not tolerate Iran developing nuclear power, even if Iran claims it is for peaceful purposes. If there is an attack, oil prices will go through the roof.

7. Dead cat bounce. The current stock market rally will probably turn into a dead cat bounce. If the Dow drops below 6500, 5,000 may be the next stop.

The Best of Times

I know I sound painfully pessimistic. I know my predictions are bad news for most people. Yet, for others, bad news is good news.

The following are the bright spots for people who are prepared.

Prediction #2: Gold, silver, and oil will continue to be safe investments in 2010.

The following recaps the year-end prices of gold and silver:

2000 $ 273 $ 4.57
2001 $ 279 $ 4.57
2002 $ 348 $ 4.78
2003 $ 416 $ 5.92
2004 $ 438 $ 6.79
2005 $ 518 $ 8.80
2006 $ 638 $12.78
2007 $ 838 $14.77
2008 $ 882 $11.33
2009 $1100 (approx) $17.50 (approx)

In 2009, the Dow rose approximately 18%. Gold rose approximately 25%. Silver rose approximately 50%.

By the end of 2010, I predict gold will be at $1,775 an ounce, silver at $24 an ounce, and oil at $85 a barrel. If Israel attacks Iran, these predictions will be blown away.

Prediction #3: The next market to crash will be commercial real estate.

Cash flow positive real estate will be even more affordable. 2010 through 2012 will be a real estate buffet for those with cash and access to credit.

My Personal Investments

As I stated in 2002, “You have up to the year 2010 to become prepared.”

The following are things I have done to prepare myself:

1. I started The Rich Dad Company in 1997 because I saw this crisis coming. For the past three years, I have tightened internal controls and prepared for global expansion via a franchise distribution system. The company is debt free with strong income.

2. 2009 was my best real estate year to date. With the Fed handing out large sums of money and pension funds looking for projects to invest in, my real estate holding company has acquired tens of millions of dollars for acquisition of bankrupt properties and development projects. Development projects are affordable again, as labor, material, and land costs are low and the government is generous with 40-year, low interest, non-recourse loans. People still need a roof over their heads.

3. My oil development projects have done well. We drilled three wells and hit oil on two of them. Government tax breaks for oil exploration remain generous, even for dry holes. Even if the economy crashes, we will still burn oil.

4. I took 90% of my money out of the stock market in 2007. If the Fed raises interest rates, the stock market and real estate market will collapse.

5. I loaded up on gold and silver between 1996 and 2004.

6. With the Fed printing trillions of dollars, cash is trash and savers are losers. As soon as I have excess cash I invest in oil, real estate, gold, and silver.

7. In a zero-interest-rate environment, debtors are winners…but only if you have good debt…debt that’s paid by tenants.

In Conclusion

A few years ago, Japan was ‘King of the Financial World.’ Japan’s economy was the world’s second largest economy -- till the bubble burst in 1990. Japan’s budget went into deficit in 1993. Since then, the deficit has averaged 5.4 percent of GDP per year. As a result, Japanese government debt is now 200 percentof GDP today. The U.S. is following Japan, and China will follow the U.S.

We will not see much inflation because the Fed is not able to print enough money to replace the losses from the burst of the credit bubble. Also, factories have too much excess capacity due to lack of demand, which means prices for consumer goods will remain low and unemployment will remain high. Instead, we will see inflation in gold, silver, oil, some stocks, some real estate sectors, and food -- not because values are going up but because the dollar is going down.

Welcome to The New Depression. And may these times be the best of times for you.

Sunday, January 17, 2010

The Biggest Scam Ever

The Biggest Scam Ever

On the cover of the October 19, 2009 issue of "Time" magazine ran this headline: "Why It's Time to Retire the 401(k)." The cover picture was ominous, showing a 401(k) sinking like the Titanic.

I recommend reading this entire article, especially if you do have a 401(k). My concern is that the flaws of this retirement plan will grow into personal tragedies as the first of approximately 75 million baby boomers retire, leading to the biggest stock market crash in history.

But in spite of the apparent problems with the 401(k) plan, the darlings of financial media continue to tout its benefits. The same month "Time" ran its article, "More" magazine's financial guru, Jean Chatzky, wrote an article about using low-interest savings to pay off high-interest credit cards. In the article she states, "There's no better guaranteed return on your money (except, perhaps, a 401(k) match)."

Countering Jean's wisdom of "no better guaranteed return," the "Time" article stated, "At the end of 1998, the average 401(k) balance was $47,004. By the end of 2008, the average balance was down to $45,519." If that is a great guaranteed return, I'm glad I don't have a 401(k). The "Time" article pointed out that $100 in 1998, after inflation, was worth about $73 in 2008, a loss of $27 after ten years. So whom do you believe..."Time" or "More" magazine?

If you are unsure as to whom (and what) to believe, the "Time" article made two more statements worth considering. They are:

1. "The older you are the riskier a 401(k) gets."

2. "Forty-four percent of all Americans are in danger of going broke in their post-work years."

Now, I can hear some of you saying, "But the stock market is going back up. Green shoots are appearing. Everything is fine. The crash was just a correction." For those optimists among you: I wish that all of your dreams come true and you live happily ever after.

I do not criticize the 401(k) plans just to criticize. I write because I am concerned. Let's say "Time" magazine's estimates are correct. Let's say 44 percent of all Americans will go bankrupt after retirement. For approximately 75 million baby-boomers preparing to retire, that means 33.8 million of them will go bust once they stop working. To me, this is disturbing.

While many think the financial crisis is over, I believe the worst is yet to come. In spite of the green shoots in the stock market, the fundamentals of the U.S. government are worsening. I doubt Social Security can afford the avalanche of retiring baby boomers. The Social Security fund is empty, underfunded by approximately $10 trillion. For the first time in 35 years, Social Security will not pay a cost of living increase. And Medicare is projected to face a shortfall as well, of between $65 and $85 trillion.

In 2009, interest payments on our national debt are about $380 billion, which is $1 billion a day in interest. At the same time, the national debt is projected to climb to $20 trillion by 2012, which means the U.S. will have to borrow money just to make the interest payments.

I know the Federal Reserve Bank can continue to print more and more money...but city and state governments cannot. This means your city and state taxes will have to go up. If you think your property taxes are high now, just wait five years. I predict that, even if your home's value does not go up, property tax rates will, and higher taxes will do wonders for property values. This means people counting on their home as their biggest asset may be disappointed.

In 1913, when the Fed was created, and in 1971, when President Richard Nixon took the U.S. off the gold standard, the ultra rich were allowed to siphon off our wealth -- via our own money, the very thing we work hard for and do our best to save. In other words, with every dollar the Fed prints, our wealth is being drained via increased taxes, debt, inflation, and savings.

A Cash Heist

There are four expenses that keep the poor and middle class struggling financially. They are:

1. Taxes -- both apparent and hidden

2. Debt -- mortgages, credit cards, and student loans.

3. Inflation -- rising food and fuel costs

4. Retirement plans -- 401(k) and savings

It is via these four expenses that the rich get richer. In other words, all four of these expenses are a cash heists, the ways the rich use the government to get into our pockets, draining us of our wealth.

The Silver Lining

The silver lining of all this: With a more sophisticated financial education, rather than have taxes, debt, inflation, and retirement accounts as drains on a person's wealth, a person can convert those government-sponsored expenses into elements that work in one's favor. By using the same rules of money the rich use, those four expenses will make you richer. In other words, taxes, debt, inflation, and not needing a retirement plan can make you richer if you use different rules of money. As stated earlier, in 1971 Nixon changed the rules -- and so should you.

In closing, the 401(k) has a few good points...but not good enough, in my opinion, given the financial challenges that lie ahead.