December 2008 Jimmy Walker once said that voters always get the politicians they deserve; and so we did. Obama’s new programs create additional government bureaucracies staffed by thousands of employees that will initiate and supervise uncounted new regulations that will make doing business much more difficult and less profitable. And you can bet that when he says “we’re all going to have to sacrifice”, he means we are going to pay higher taxes! None of these changes will take place in 2008, but many new tax rate increases on both business and individuals will be put in place. These could be made retroactive to January 1, 2009. The point is, that if you want to take advantage of the current tax rates and benefits, you’d better do it before year’s end. After that they could be gone forever.
November 2008 Thank heaven I bought houses instead of stocks. The stock market roller coaster continues to set new records. Two and one half Trillion dollars was lost in the stock market in the second week of October! It lost 20% of its value. This is more money than has been lost in the housing market in the past 3 years. We can all agree that the credit crisis started with home mortgages, but how did it create the current financial panic? Congress in its usual flurry of poorly thought out emergency legislation laid the groundwork. First it mandated that lenders would make loans to poorly qualified borrowers, and that FNMA and Freddie Mac would buy them. Lenders created a slurry of unconventional loans that enabled millions of people to buy houses who had never owned homes before. Hidden away in loan terms were escalator clauses that automatically increased interest rates after the initial period. To raise money with which to buy loans, FNMA and Freddie Mac re-packaged and re-sold these loans into the stock market as mortgage-backed securities.
October 2008 In 1933 America was reeling from a stock market crash that had robbed speculators of their hopes and fortunes. Banks were failing right and left. The Wagner Act had been passed to give labor unions expanded powers. The Smoot-Hawley Tariff had been passed to limit foreign import competition. In the face of economic slow down, income tax rates had been doubled. Against this backdrop of events, the country turned to a glib politician who promised a New Deal for everyone; at the expense of the money-grubbing rich. Although the prior President, Hoover, who had presided over the stock market crash was blamed for the depression, Roosevelt’s socialist economic policies turned it into the “Great Depression”; which lasted up to the start of WWII. At its height, unemployment reached 25% of American workers.
September 2008 They couldn’t adapt! I dredge this lead-line up every few years when the markets change to make the point that nature takes no prisoners; nor do financial markets. One of the primary reasons that humans are at the top of the food chain is that they are among nature’s most adaptable species. When the forests changed to grasslands, our ancestors climbed down from the trees and learned to walk erect so as to be better able to see their enemies and their prey. When he couldn’t find meat, homo sapiens learned to survive on vegetables, fruits, and nuts. When the ice age froze the North, survivors moved South. When their habitat became too limited, humans explored the earth to find new lands and opportunities. Those who adapted to the new realities prospered. Those who refused to adapt didn’t survive.
August 2008 In just a few more months we’re going to have a different congress, a different President, and a different way of dealing with our budget problems. In a best case scenario, even if Congress doesn’t increase capital gains taxes and income taxes, many of the tax breaks we’ve enjoyed for the past 10 years are going to expire unless renewed. The dollar is under attack on all sides and the country continues to sink deeper and deeper into debt; even as politicians are promising to bail out the distressed housing, the mortgage and banking industries. America is in trouble! If China ever stops rolling over existing debt or stops buying new U.S. Treasury Bonds, we won’t have enough money to repay them what we already owe.
July 2008 I recently spent three weeks in Europe where I got a first hand look at the financial troubles of America from the perspective of those who take our dollar in trade for Euros. When the Euro was first introduced, it traded at about 87 cents to the dollar; thus, the U.S. dollar would buy about 115 Euros. I recently paid $1.68 per Euro. That’s a 193% change in the exchange rate over that period. Saying it differently, in the European Common Market, which represents about 20 modern countries, the dollar will buy only 52 cents worth of food, lodging, transportation, etc. compared to what it would have bought just a few years ago.
June 2008 I’ve been pondering the fundamental changes that have been taking place in the housing market; and ways that someone without a lot of money and the need to generate income can respond to them. The market is slumping despite being propped up by governmental fiddling of interest rates and mortgage terms to provide relief to current homeowners. But, amid all the furor of the coming elections and the slowing economy, little thought has been given to those in the “equity” businesses. This is the term that my pal Jack Griffin has given to those who fix up, buy, sell, and finance houses. With their markets shrinking, even with lower interest rates, they need to seriously consider their alternatives, if they expect to survive until things improve.
May 2008 This newsletter usually addresses the trials and tribulations of the little guy who is either starting, or in the midst, of the long journey to the top of the financial heap. But this month’s letter will be different. It is aimed squarely at those who have “arrived” and who are looking for alternative investments that, while not providing the thrill ride that housing has over the past few years, will provide a steady, safe, reliable income stream and capital preservation.
April 2008 Every kid knows how seesaws work. One end goes down when the other goes up. When a heftier kid gets on one end, it doesn’t work as well until another kid who weighs as much gets on the other end, or two kids get on the other end, or the heavier kid moves up toward the center, or the lighter kid moves backward to equalize the weight differential. If adjustments aren’t made, nobody has much fun. The housing market works like a seesaw, but in a more complex manner.
March 2008 I come from a long line of mid-Western farmers who made a good living long before government price supports and corporate farms made farmers little more than government dependents. Without an organized farm commodity futures market, farmers were held captive by the seasons. They planted in the Spring, cultivated in the summer, and harvested both their crops and their money in the Fall. In the winter, when there was little to do, they tended to livestock, mended harnesses, and maintained their equipment and property. Entrepreneurs are much like early farmers.