Home Ownership: A Marketing Scam?

Here’s a very interesting video from TheStreet.com.  James Altucher asserts that owning a home isn’t the American Dream. It’s just a marketing scam perpetrated by Home Builders!

Check out this interesting 2 minute video. He makes some valid points.

It’s true, if you’re not paying cash, then you’re renting the money to buy a house, so you’re still technically a renter. However, home ownership has some advantages:

  • You can decorate your place any way you see fit.
  • You get tax breaks which in some situations might make the cost of owning lower than renting.
  • But most importantly, owning real assets (like real estate and gold) protects you against inflation. Of course, if you believe that inflation is and always will be 2% then you should just rent.
  • Even if there were no financial benefits, you still want to own your own home so you don’t have to worry in your old age. If you buy a house when you’re 35 and pay it off by the time you’re 65 and retired, you have one less thing to worry about paying.

The End of Cheap $1000 Gold?

Today’s guest post comes from Bruce, CEO of Superior Gold.

Last year I wrote an article for Living Off Dividends & Passive Income outlining 10 reasons why gold would break $1000. It was a conservative estimate at the time, which was achieved later in the year. Since then the Dow has touched 6400 points, many major U.S. banks have collapsed and the U.S. economy is searching for sound footing during a recession that may or may not be half way completed.

At the time of my article Gold was around $880 and some good people at LivingOffDividends.com made it seem as though I was predicting an imminent U.S. led invasion of China.

The president of Superior Gold Group thinks I should buy gold? Shocker.

– The Writer’s Coin

Alan Greenspan (Federal Reserve), Jim Cramer (Stock) and Ron Paul (Congressmen) have all recently recommended gold for diversity and protection.

When I invest, I only invest with the long-term in mind, so I’ll never drop any money into gold. It’s too volatile, simply because it relies on the economy and stock market to be in a slump.

– Erick Folgate

I would consider a Dow that swings from 13,000 to 6,500 in 14 months the definition of volatility, but then again I am no stock expert.

These guys have a right to their opinion and I have a right to mine. In the article I mentioned various reasons for Gold’s ascent and those reasons have only strengthened in the past year. Unlike the Wall Street Investment Bankers of now defunct financial powerhouses or Ponzi scheme Billionaires, as the president of the Superior Gold Group I actually have to look at many of my clients face to face. I have a vested interest in making the best analysis of the financial markets so that I can relay them to my clients and guide them into sound financial decisions. On to this year’s predictions:

Gold Prices in 2009

Clearly when you read the charts, government reports or listened to politicians it is clear that the United States and prominent economies around the world are searching for an end to their economic troubles. Gold is headed to $3,000….. or so the Gold bears would love for me to predict so that they can label me a Gold Bug or Gold Zealot ala Harry Dent and his 35,000 Dow projection. I am not in the projection business I am in the wealth protection business.

Any “expert” can make a prediction. At the Superior Gold Group we focus on understanding trends and making conservative projections that allow our clients to maintain a balanced and diversified portfolio that will never consist of 100% exposure of any one single asset class.

Wall Street trained financial planners never discuss physical gold/silver. Real Estate Brokers/Agents never discuss owning physical gold/silver. What they discuss is how this stock or this house will double in X time, but rarely discuss diversity. True diversity is the only way to protect your assets from turbulence and calamity in the markets.

We educate each of our clients on the importance of diversifying their portfolios. You would not believe the amount of American workers and investors that our company has had to console because their IRA and 401(k) are worth 40% less than it was just 18 months ago thanks to a severe deficiency of alternate investment forms.

Why Buy Gold in 2009?

One takes a position in Gold/Silver for many reasons. Just like any other investment, one size never fits all. We have recommended that our clients purchase Gold for wealth protection. Historically, the price of gold “does not change”. In reality, gold remains a constant price in relation to the currency it is compared to. In other words as the dollar gets weaker, the price of gold goes up. The inverse is true as well, but consider this; In 1932, the price of gold was roughly $20 for an ounce of gold. Today that same gold ounce sells for $925 (3/17/09). Gold is the hedge against inflation for your portfolio.

So the decision to own gold is really simple. If you believe that the U.S. Economy is growing, real estate prices are stable and your retirement account is performing smoothly, DON’T BUY GOLD. However, if you like me and countless financial strategist have loudly predicted that economic recovery is years in the making, protect your Portfolio today by taking a position in Gold of at least 10% of your total exposure.

– Bruce Sands.

30 Year Mortgages At 4.85%!

Mortgage rates have hit record lows. You can get a 30 year fixed-rate mortgage for 4.85%. The 15 year is at 4.58%. I don’t think mortgages have ever been this cheap. According to Frank Nothaft, Freddie Mac chief economist, “The Federal Reserve’s announcement that it intends to purchase Treasury securities over the next six months caused bond yields to drop and mortgage rates followed.”

Meanwhile, home sales are up for the 2nd month in a row. Some people think this is a sign of a stabilizing of the housing market and higher prices are likely to follow.

So are home prices really bottoming out? Some of the things to consider are

  • Foreclosures made up a significant portion of all home sales.
  • Prices are still dropping.
  • There is significant inventory overhang in many markets
  • Banks haven’t listed a lot of foreclosed properties for sale yet, mainly to prevent this supply from further depressing prices
  • A large number of ARMs are adjusting next year. This might cause the whole cycle to repeat and prices to fall further.
  • It’s becoming more difficult to qualify for a home loan and the days of 100% or 105% financing are gone.

And if you think higher home prices are on the horizon, check out these real estate prices.

Mobs, Messiahs & Markets: Book Review

The publishers of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, were kind enough to send me a free copy to review.

I’m glad they did. It was an excellent read, similar in some respects to one of my all-time favorite investment books: Extraordinary Popular Delusions and the Madness of Crowds delves into human psychology and crowd behavior. Mobs, Messiahs & Markets is like a modern-day version with emphasis on investing and explores popular delusions like “real estate never goes down”, “stocks always go up”, “deficits don’t matter”, “you are either with us or against us”. When rational, intelligent human beings become part of a group, they are fine. However, as soon as they become part of a crowd, they lose all rationality and turn into blockheads! I found the book quite entertaining, with great wit and sarcasm to keep me amused.

The book talks about people who were determined to make the world a better place by making it conform to their delusions. People like Hitler for example! The authors also talk about how crowd think leads to wars and how wars are futile and never worth the cost. There’s also a complete chapter making fun of Thomas Freedman and his banal book “The World is Flat”. I never liked that book and apparently neither did the authors. There’s also a full chapter devoted to Alan Greenspan which was particularly eye-opening. It describes how his cowardice was responsible for the mess we’re in today. He exchanged his ideals when he went to Washington for fame and fortune. In his younger years, Greenspan apparently once said “In absence of the gold standard, there is no way to protect savings from the confiscation of inflation…The financial policy of the welfare state requires that there be no way for owners of wealth to protect themselves“. But once in Washington, he turned on the credit spigot and inflated the money supply 10-fold!

The end of the book explains how you should ignore the popular beliefs and learn to think for yourselves if you want to invest profitably. They also caution against buy and hold investing. There is no such thing as buy-and-hold, you are either long or short an investment. If you are in cash, then you are long currency and short stocks and vice-versa. In the current economic climate they encourage going long Gold and short the US Dollar, which they think will fail like all fiat currencies before it (there’s actually a pretty extensive list of defunct currencies on page 256). As they say, gold isn’t a typical investment but its more of a store of value. Since the value of the dollar is about to be destroyed, it makes sense to load up on gold.

Overall, it was a very interesting read. The first half was a little excessive in its mockery of public figures and events. But the later half more than made up for this by explaining how the government and various financial institutions swindle the common public. I plan on re-reading it for the sheer entertainment value alone!

How Geithner’s Plan Will Cost The Taxpayer (Yet Again)

Tim Geithner is just another Wall Street lackey. His plan to bail out the bank through taxpayer-guaranteed private buyouts of toxic assets is yet another stupid idea. Called the “Public-Private Investment Program”, its going to spend between $500 Billion and $1 Trillion on toxic purchases (euphemistically called “assets”).

Ceny Uygur from The Young Turks, does a great job at explaining the latest plan and why it is terrible for the American taxpayer.



Which idea is dumber?

Buying $300 Billion of Treasuries or up to $1 Trillion in Toxic Assets?

How To Invest In Gold

The first question you’re probably asking is whether gold is a good investment to begin with. Take a look at the performance of gold prices over the past 5 years versus the stock market.

gold_prices_vs_dow_jones_5_years

[Updated on June 2011] As you can see, gold is up more than 250% since 2005, while the Dow Jones Industrial Index is up about 15% for the same period.  In fact, gold has been the best performing investment for the past decade.

Of course, the best time to buy gold was few years ago, but its still not too late.

The Federal Reserve is doing its best to devalue the US Dollar (buying $600 Billion in US Treasuries will do that). As the dollar, and other currencies continue to drop in value, gold prices will continue to rise.

So how does one invest in gold?

It isn’t difficult and there are 3 main ways:

  1. I like buying gold coins. You can choose between collectible and bullion gold coins.  As the price of gold has increased, the spreads on the collectible coins have increased as well. Check out this list of my favorite gold coins. You can also buy gold bars, but the coins are more interesting and are likely to appreciate more as gold awareness increases.
  2. You can also buy the Gold ETF (GLD).
  3. You can also buy the Gold Miners ETF (GDX). I’ve also invested in this. Gold doesn’t offer any yield, so I periodically sell covered calls against this position to generate some income. Since gold stocks are incredibly volatile, the calls haven’t expired in the money yet. (which means they expire worthless and I get the keep the premium).

So whats your favorite gold investment?

The End Of Credit?

Yesterday I got a call from American Express.  I was curtly informed that my True Earnings American Express Cash Rebate Credit Card limit was reduced 90%.  It isn’t a really big deal because I don’t need that sort of limit. I’ve never used more than 40% of the limit anyway. But I was still pissed. It’s very useful when traveling and I enjoy the cash rebate I get with the card.  I’ve been putting my tuition on it and then paying the balance off, which allows me to get some free cash.  Some of the benefits include:

  • 3% cash back for gasoline purchases
  • 3% cash back for restaurant purchases/dining out
  • 2% cash back for travel
  • 1% cash back for everything else, including Costco purchases
  • I guess Amex decided they weren’t making any money on my account so they basically told me my credit limit was now $2,500.  Since my revolving balance is close to that amount every month,  my ratio of available credit to debt ratio will look like its over 80% which will hurt my credit score.

    Apparently this isn’t an isolated incident. Smart money just had an article about credit card companies reducing credit limits on numerous borrowers, sometimes with the current balance exceeding the new limit.

    While the fees, frozen accounts and default interest rates resulting from credit-line cuts can sting your finances, they can do some serious long-term damage to your credit score. Your credit utilization ratio — the total amount of debt you owe in relation to the amount of credit available to you — accounts for roughly 30% of your score. A credit line cut has the potential to decrease your score by 50 points or more if you don’t have much other available credit, says Craig Watts, spokesman for FICO, the company that calculates and issues the credit score that most lenders use.

    One of my friends just graduated from USC’s Marshall School of Business. Last year he told me that a visiting professor announced in class that consumer lending was going to dry up and people would no longer be able to get credit.  His advice was to get it while they still could!

    Seems like that day has now arrived. Regardless of your credit, skittish credit card companies are reducing credit limits. How do they expect to make any money if they’re not lending money?

    But more importantly, what good is your credit if you can’t borrow any money?  Do you think this might drive people to max out their credit cards while they still have available balances and then default on them?

     

    Get $25 cashback on credit card signup

    Buying Our National Debt

    I got this email from Randy Johnson, author of the best book I’ve ever read on the topic of real estate mortages. If you own a home or are thinking of ever buying a home, you need to get How to Save Thousands of Dollars on Your Home Mortgage. It’ll probably be the best $12 you’ve ever spent. Buy it. Even if you have an MBA in finance from a top tier school. 😉

    Up until about 30 years ago the American people always funded most of our own national debt. We went into World War II with a national debt of less than $100 billion, maybe $500 billion dollars adjusted for inflation. We came out of the war with about $300 billion, a piddling amount by today’s number as today the National Debt stands at about $11 trillion.

    When we embarked on WWII, how did we finance the expenditures necessary to build all those battleships, airplanes, and tanks and pay for the soldiers and sailors to man them? We sure as heck didn’t sell Government Bonds to the Germans and the Japanese. Europe that wasn’t under Nazi control was worse off than we were. We financed the war ourselves.

    Ordinary Americans put the money they saved into Savings Bonds, and that is what financed the war effort. But, to be truthful, we were on a wartime economy and, as I here put on my old-timer hat, it was a lot different world than young people are willing to acknowledge today. Can you imagine your teen- ager’s reaction to having the whole family being rationed four gallons of gas per week?

    Consumerism came in a distant second place to building war materiel. And there was rationing. We only got limited access to gasoline, tires, and metals, all of which had a higher military priority than civilian use. See http://en.wikipedia.org/wiki/Rationing

    Even food was rationed. Remember the old economic trade-off “guns versus butter.” It was real. Butter was rationed which mean that the civilian population turned to margarine, and not the “I can’t believe it’s not butter” type. This was a white globule of hydrogenated vegetable fat. It came in a bag with a little yellow button that you broke and then kneaded into the mixture to make it look like butter. The problem was that it still tasted a lot like hydrogenated vegetable oil. Each family got a little bit of beef and a little bacon every week. And we saved bacon fat and it was used in the manufacture of explosives.

    It was time for Rosie the Riveter as the overwhelming majority of American men and women supported the war effort. We all looked at the sacrifices we made as small in comparison to the millions of soldiers, sailors and marines who were risking their lives to win the war on the battlefield.

    What did kids do? For openers we saved paper and took to what we would refer to today as recycling centers. We cut out both ends of “tin cans,” stomped them flat and saved them to turn into collection centers to be made into steel to help the war effort.

    But we all helped financially too. We had little coupon books and when we saved a nickel or a dime, we bought stamps that went into books. I forget the numbers but it seems to me that if you saved $37.50, you took it to the bank or Post Office and traded it for a War Bond with a value of $50 some years hence. The $12.50 was interest.

    As to marketing of the War Bonds, I have a dim recollection of Bing Crosby singing a song Buy Bonds. We didn’t need much encouragement. We all wanted to win the war.

    All of which brings me to 2009. I don’t see much difference between 1942 and 2009. We are in the middle of a crisis that to my mind is every bit as dangerous to American families as was World War II. No, except for Iraq and Afghanistan, no one is shooting at our troops, but economic events are very serious, perhaps even more so than in 1942. Back then we had the most important economy in the world, and while we are still the leader in GDP, citizens of other countries are much more effective in their ability to compete successfully for Americans’ jobs.

    Ever since 1946 we have had a society based upon consumption. We used to save and then buy. But for the last 45 years or so our consumption has been financed by the extension of great gobs of credit. We used to balance the Federal budget and much of the debt stayed at home, but recently the debt was ultimately bought by someone in China or Japan or Europe. I think China holds over $1 trillion of our bonds.

    Frankly, I do not believe that it is healthy to depend upon the largess of others to finance that debt any more than families who depend on someone else to finance their excess consumption. Quite bluntly, the counter-parties may not want to continue to do so. The sooner we wean ourselves from the teat of foreign largess, the better off this country will be.

    We need to adopt a mentality that is based upon a higher national savings rate, which has indeed spiked in the last few months. But my feeling is that it may be more a knee-jerk, fear-based reaction to the crisis that rather than a newly found sense of financial responsibility.

    What better way to restore America’s fiscal health and the American family’s financial well being than to have American citizens finance the necessary increase in the national debt. We can’t do it a nickel and dime at a time, inflation being what it is, but we can sure have teenagers save a few dollars every week, and when they get $37.50 then go buy a $50 Series EE Savings Bond. Who would you rather have a buy that bond, your kid or some Chinese government official?

    You see what I mean. I want to get along with China and I hope that they continue to be our trading partner, but I would rather have us keep our debt between the American Government and the American citizens.

    What would happen if we all adopted a policy of buying T-bills? What if our Government tried MARKETING the concept? Heck, we can sell almost anything fattening to our citizens. Why don’t we try marketing something that is good for them, and the rest of us too. I think that if Madison Avenue got involved in this project, they could instill a lot of Patriotic Pride into buying T-Bonds.

    As to buying the Bonds or Bills themselves, you can buy them through your stockbroker or it can actually be done online at http://www.savingsbond s.gov/indiv/myaccount/myaccount_treasurydirect.htm

    Seriously, as a measure of your Patriotic commitment, why not go online right now, open an account, and buy some T-bills. I did it and I can tell you it really feels good, better than a trip to the mall.

    Housing Sector Update

    Straight from NYU finance professor Nouriel Roubini’s blog (the RGE monitor), here is the latest update on the housing sector:

    The fourth year of housing recession – and the worst housing recession since the Great Depression – is well on course.

    Total housing starts have plunged from the 2.3 million seasonally adjusted annual rate (SAAR) peak of January 2006 all the way to the 466 thousand SAAR of January 2009 (the last data point available), an all time low for the time series that started in January 1959. Single-family starts built for sale are down 81% from their Q1 2006 peak (since seasonally adjusted data is not available, we performed our own seasonal adjustment).

    On the demand side, new single-family home sales are down 76% from their July 2005 peak. Both demand and supply of homes are therefore still falling very sharply which does not bode well for inventories. Inventories are the mortal enemy of prices for any goods-producing sector, including housing.

    The sharp and unprecedented fall of starts might not have reached a bottom yet. In this economy-wide recession, weakness on the demand side of housing is bound to persist and we believe that supply will have to fall further, given the great wave of foreclosures that is adding to the excess of supply in the market.

    We believe that home prices will not bottom out until the middle of 2010. Our target is a 38% peak to trough (so far prices have fallen over 27% from the peak) but given the worsening conditions on the real side of the economy, we see a meaningful chance for over-correction that would bring prices down 44% from the peak reached in the first half of 2006 (Case-Shiller is the reference index for these predictions.)

    Thats a pretty dismal outlook! The condo that I was living in last year that went into foreclosure is on the market, listed for close to what it was worth in 2002-end. And there’s a chance prices may fall further still.

    Property prices in many cities have reached very attractive valuations. But it doesn’t mean they’ve found a bottom. Prices typically over-correct on the downside and drop until they become ridiculously cheap. Just check out the deals you can buy for under $5,000!.

    Jim Rogers: How To Get Out of This Mess

    A lot of people think Jim Rogers is an alarmist with strange ideas. However, he is a very rich alarmist who sold his Manhattan home at the peak and moved to Asia.

    Check out this great video where he explains the mistakes of the 30s which he sees repeated again now.

    One of my favorite books is Adventure Capitalist: The Ultimate Road Trip, which chronicles his road trip around the world. I strongly recommend it.

    Check out Part 2 of the interview:

    Part 3: