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Why The Inflationists PROBABLY Have It Wrong, For Now

Many people are trying – with increasing desperation – to discern the future and plan correctly for the economic environment we’re most likely to find ourselves experiencing.

My continued bets have been that deflation will prevail, at least in the early years of the great collapse, and nothing has yet occurred that changes my view.

To further advance your personal understanding of the powerful forces (people) at work in the hidden halls of high finance, here is an excellent “scholarly” historical analysis of the inflation/deflation debate and how it might pertain to the US economy going forward.

The Politics of Deflation

I think the author, Vijay Boyapati, really “nails it” in the above article and his conclusion describes exactly what we are seeing and will continue to see for, perhaps, up to two decades – like Japan now and the US in the 1930’s and 1940’s.

Longer term, I believe that US politicians are likely to be less patient with the continuation of a painful and protracted deflation than Japanese politicians have been, so we’re somewhat less likely to experience deflation running out to – or beyond – 20 years as the Japanese have.

In the meantime, unless the political class wrests complete control of the ability to dictate monetary policy (money creation) from the banking class, controlled deflation will most likely be the policy pursued to correct the excesses of the (Greenspan) housing bubble and the other bubbles that led up to it.

(Background Note: To long-time observers, the US housing bubble is seen, essentially, as the terminal blow-off phase of the great 25 year inflation experiment initiated by “Reaganomics” in the early 1980’s. Its creator, Alan Greenspan, pursued this inflationary policy relentlessly until he, quite literally, “pricked his own bubble” with his remarkably well-timed retirement as Federal Reserve Chairman. Some might even call this global inflation experiment “Greenspan’s life’s work”. I call it “little more than a lot of hot air”. So much for Greenspan’s life’s work and Time Magazine’s 1997 “Man of the Year”. Reminds me of Barack Obama “winning” the Nobel Peace Prize, but I digress…)

Should we happen to see the political class gain control of monetary policy (most likely as a result of a powerful “in the streets” social revolution brought about by too much deflation and too much “fiscal austerity” for too long a time), then hyperinflation does become a VERY REAL threat. But probably not until then.

As we’ve seen, bankers are not suicidal (actually, they’re quite cowardly) and aren’t likely to deliberately pursue a policy of slitting their own wrists monetarily. They prefer to see ONLY the blood of others running in the streets – while they enjoy their afternoon tea and crumpets.

All holders of assets that depend upon inflation to drive further price expansion (read: speculation) should take note. Precious metals are included in this group and – despite some natural, intense price volatility due to panics – will probably continue to succumb to the powerful deflationary forces this time around, too, as they have in deflations of the past.

In this expected “slow, grinding deflation” environment, safe, boring assets can come out winners along with executing a long-term plan for the slow, deliberate accumulation of both real and financial assets at generational low prices. In a deflation, this is EXACTLY what the bankers, themselves, will be doing.

Of course, real and financial assets are the things that will benefit from the EVENTUAL RETURN of inflation once the deflation has fully played itself out. We’re nowhere near that point yet. Cash is still king.

Remember, baby-boomers and their heirs will be “net sellers” – liquidating virtually anything and everything they can – for the next 25 years.

Since subsequent generations are smaller, who will be buying and at what price? Sounds like an environment ripe for “yard sale” pricing to me.

Just my two cents (or 4 cents thanks to Greenspan…).

The Mythical Delusion: Free-Market America

This quick video clip should cure, once-and-for-all, the mythical delusion most Americans suffer under; that we have anything even remotely resembling a capitalistic, free-market system here – as is drummed into us all day long in the mainstream media and is – Gasp! – even taught in elite business schools. Great theory, though it’s never really been the case – at least not since any of us were alive.

For those who may not be familiar with what I’m saying, here’s a brief and concise reality-check:

Warren Buffet’s Massive Interest-Free Loan

Today’s dominant system, described in the video (and operating both here and abroad), is called “socialism for the already rich”. This system privatizes asset ownership and profits while it socializes ALL costs, risks, and losses.

Of course, socialized costs can include pollution, infrastructure development and maintenance, research and development, health-care/retirement costs, sales/income taxes, user fees, inflation, public finance costs, unemployment income, education & retraining, indigent support, homelessness, drug abuse/addiction, law enforcement & incarceration, etc.

The only truly “free”, dog-eat-dog, market remaining in America is the market for your labor and mine. Fact is, you are held personally responsible for BOTH your own survival as well as sustaining the increasing demands of the public and private interests you are forced to support, described above.

You must bear all the risks, but where is your just compensation? Oh that… well that’s been mostly “privatized”, somewhere upstream from you. As pointed out in the video, the only remaining cost of doing business for the truly wealthy is the cost of making the proportionally-minimal political contributions necessary to keep the whole dark scheme afloat.

For decades, American workers have been systematically pitted against third-world slave-labor “competitors” working (typically without protections or benefits) for pennies-an-hour in heavily polluting factories – kept well out of view of American consumers in far distant lands.

Ironically, most of these foreign factories are/were set up with our very own, American capital. In other words, your 401k (if you have one) invests directly in the destruction of your own job – or that of a family member, friend, or neighbor. Care to increase your 2011 contribution?

Meanwhile, the Fortune 500 companies who are driving most of this ongoing destruction of the U.S. economy, increasingly move themselves “off-shore” – to further detach themselves from the U.S. tax system. Yet, they still audaciously demand additional tax-breaks and subsidies from us, often under threats that might more accurately be viewed as theft or coercion. Breast-pocket politicians reliably fork over whatever the corporations demand in the name of “saving jobs”.

Our foreign-worker “competitors” (who are consistently able to out-compete us) sell the product of their labor to us in stores and shopping malls we mostly financed ourselves through special “state and local sales tax incentives”. So, to put it bluntly, they get our jobs and our money while they drive up our inescapable taxes, including our local sales and property taxes.

Numerous U.S. laws (including the tax laws) and trade treaties (GATT, NAFTA, others) are specifically written to promote and perpetuate this most unfair and inhumane “game”. The unspoken goal? The complete and total “third-worldization” of America. As evidenced by massive and persistent unemployment, homelessness, foreclosures, food-stamp use, and more, we’re well along that path now.

Until we collectively wake up to all that is going on around us, we will continue to pay for our own demise. It’s the price we pay for not paying attention and refusing to inform ourselves about what is REALLY going on in OUR community, our nation, and our world. As Forrest Gump would say, “Stupid is as stupid does”.

On a brighter note… Want to get really, really rich? You can still do it the old-fashioned way – buy yourself a government (using taxpayer money, of course)! Then, simply legislate the “common” wealth of society into your own “private” pocket. That’s how it’s done. A hidden takeover. Though you’re doing it right before their eyes, few will even know what you’re doing. They’re sound asleep.

Welcome to the New World Order!

An Interesting China Analysis By Jim Chanos (and a little more by me…)

Here’s a recent interview with Jim Chanos on the critical state of the Chinese economic picture. Chanos typically makes his money short-selling overpriced markets and he’s “all over” China like stink on a pig; has been for well over a year.

Chanos believes 2011 will be his big year to begin cashing in on his China shorts. Here’s his reasoning:

Should Chanos’ vision play out, global implications would include a massive spreading of deflation throughout commodities markets – since most are currently being supported mainly by Chinese demand and China-centric global speculation.

Therefore, major commodities-based economies such as Canada, Australia, New Zealand, most South American countries, and many others, would take a direct economic hit as well.

Obviously, a contracting/declining global economy hits energy demand, so OPEC would soon find itself to be awash in oil (again) and prices would quickly begin to adjust.

Wildcard! A new “global cooling” trend – should it continue – would add significant support to energy markets while dramatically increasing food prices due to hoarding and shortages.

As indicated by Chanos, many European countries – already in dire financial straits – would also be hit hard as they are heavy “net” exporters to China. In light of deepening “austerity”, local implications would be severe and Europe would become a social tinderbox. It seems unlikely to me that the Euro, and even the “EU” itself, would survive such a scenario.

U.S. financial interests would be hit indirectly (we’re not major exporters to China) by significant exposure to private and sovereign debt defaults emanating primarily from Europe. It’s hard to guess if there would be any willing “deep-pockets” buyers for new U.S. Treasury debt (other than the Fed itself) in such a “SHTF” marketplace. Could this imply QE3…QE27…QE243?

With many nations becoming unwilling or fiscally incapable of cooperating in global “bailout” schemes, a powerful new wave of protectionist/separatist/isolationist pressures would likely be unleashed – presenting increasing resistance to further globalization efforts as nations and entire regions begin to suffer acute internal stresses and national leaders fight viciously for political control and survival.

In the extreme, capital flows would be restricted if not entirely stopped in some (or many) countries and new international hostilities would likely appear, reversing decades of globalization efforts.

Consider this plausible scenario an “equal and opposite reaction” to many decades of intense globalist pressure and prima facie international cooperation that, on-the-whole, does not appear to have benefited local economies or permanently raised the living standards of large groups of people.

Question whether or not “globalization” is a natural evolutionary development and, if not, is it sustainable without devastating cost to both man and nature. Will “thinking global” finally lead us to buying local?

Overall, this grand scenario – kicked-off by a major slow-down in China – plays well with the long-wave deflationary theories I continue to support – as a massive overhang of globally-digitized “bubble-credit” continues to forcefully unwind in a somewhat unpredictable and virtually uncontrollable manner.

As I read it, we’re still relatively “early” in this grand deflationary cycle. The entire “game” has been delayed by the deceptive and massively harmful “inflationary meddling” of a global band of politicos and central banks acting in concert in pitifully vain attempts to circumvent laws of nature and physics; what goes up must come down.

In my book, Rule #1 is “In the end, gravity wins.” All other rules follow.

As most readers know, the vested financial interests have carried this “ploy” off by exponentially increasing sovereign (national) debts that have served PRIMARILY to bail themselves and their cronies (private interests) out of losing speculative gambles (which created the whole mess in the first place) with real “cash money” taken directly from “taxpayers” via the creation of massive new PERMANENT sovereign debts.

Perhaps not surprisingly, much of the money surreptitiously taken by these shadowy financial interests has found its way into precious metals and other tangible assets – which they now own free-and-clear. These sophisticated “interests” are well aware that tangible assets survive the abandonment and ultimate collapse of paper “intangibles” (i.e. stocks, bonds, fiat currencies). Employing strategies such as this at the proper time allow for the compounding and transfer of wealth across multiple generations.

Taxpayers, on the other hand, get nothing in return for this explosion in debt but the temporary “illusion” that their banking system and economy have been saved – plus a future darkened by having been saddled with the mountain of new debt. Diminished individual opportunity accompanied by far higher future costs. At some point, increased sovereign debt ultimately leads to severe social cutbacks, known to global banking elites as fiscal “austerity” programs.

Bear in mind that fiscal “austerity” serves ONLY to make more national revenue available to pay interest to international bankers on phantom debts created for countries already reeling under unsustainable debt loads. The undisclosed intent is to eventually bankrupt a country and to foreclose, with the bankers acquiring its “pledged” national assets for pennies on the dollar.

These reckless and grossly irresponsible acts carried out by national leaders – and the resulting fiscal austerity programs – will serve to multiply the eventual damage to “real” people by the future – albeit delayed – collapse of large sectors of both global and local economies.

Social safety nets will be systematically shredded and torn by the echoing political austerity mantra “We can simply no longer afford it”. Despite the intense suffering by people, perks for special interests and corporations are seldom affected since it is presumed, without question, that they hold the key to jobs, job creation, and a return to economic stability and growth.

The predictable result will be social unrest in any country adopting such an aggressive, punitive stance against its hungriest citizens. If you reside in an afflicted country, be watchful of early signs of social-pain-induced unrest near you and prepare yourself to deal with it however you must. Panics and shortages come to mind as hungry mobs take what they need wherever they can find it.

In this continuation of an age-old story; a few play, while most just pay. We’ll continue to pay…and pay…until we put a stop to it.

Meanwhile, NO job is safe, NO pension is safe, NO investment is safe. Assuming a deflationary environment exists, CASH continues to be KING until the storm passes.

Remember, depressions happen one household at a time. Why? Because, for an endless variety of reasons, depressions FORCE OTHER PEOPLE to hold tight to their money and this quickly travels through economies as the “multiplier effect” works to rapidly undermine households and vital small businesses through chain-reaction.

That’s why it’s called a “deflationary cycle” and, in order to be stopped, a cycle must generally be allowed to fully play itself out.

The sooner we learn to stand back and allow this to happen (See: Iceland Exits Recession), the less damage we’ll all sustain in our lives and the better off we’ll all be in the end.

The unfortunate fact is, there is simply no way to avoid the pain. Scary as it seems, we MUST all step up and face the lashings. Just be sure to remember who brought us here.

Gulf of Mexico: Full-Scale, Unabated Environmental Shock and Awe

As I was telling a good friend last night, it’s very hard for me to even write this post due to how profoundly sad this whole debacle makes me feel. I am quite sure many readers feel the same way.

Helplessly watching environmental destruction occur on a scale never before seen by mankind is overwhelming to say the least. But that emotion is merely personal while the potential impact of what we’re all witnessing is very public – on a massively catastrophic scale.

To fully illustrate how dramatic the ultimate impact of this unmitigated disaster might become, I am assembling a list of links that, when read together, are sure to have a profound impact on your view and knowledge of what’s happening “behind the news” and, for many, will probably bring this issue much closer to home.

I implore you to PLEASE take the time to go through ALL of the following links and to read and fully absorb the message from each one while developing an impression of the truly unimaginable scale of what we’re facing.

1. The oil leak is MUCH LARGER than anyone (BP and “official” government sources) is reporting. In fact, the leak source BP is attempting to stop is MOST LIKELY NOT the main leak, merely an offshoot “riser pipe”, as opposed to the main wellhead as is proposed here:

(Note: “Top Kill” effort didn’t work as per recent reports)

Gulf Spill May Far Exceed Official Estimates

Flow Group Estimates Leak At 12,000 – 19,000 Barrels/Day


As a point of reference, the Exxon Valdez disaster in Alaska spilled approximately 250,000 barrels of oil (which is 11,000,000 gallons) in total. This undersea gusher is apparently capable of sending that much crude oil into the Gulf of Mexico every few days.

Some oil industry experts and scientists are stating publicly that it’s conceivable this flow may continue for years – or even in perpetuity. At this point, no one knows.

2. Due to natural hemispheric ocean currents originating in the Gulf of Mexico, crude oil must eventually enter the Gulf Stream and the Atlantic Ocean:

Oil Enters Loop Current

Real-Time Ocean Forecast (Atlantic)

3. Crude oil, by itself, carries very serious contact, airborne, and consumption (seafood) health risks, even in small quantities. The full extent of the damage may take years to fully manifest among acutely, as well as chronically, exposed populations:

Crude Oil Carries Critical Airborne Health Risk

Crude Oil: Potential Hazard to Life and Living Organisms

Question: How will you ever know if the seafood you’re about to eat is toxic? Best answer: You won’t, so don’t eat it. Stick with animals that live on land and eat grasses and grains.

4. Poisonous chemical dispersants are being insidiously used to mask the visual (surface) scale of the catastrophe while exponentially compounding the overall scale, penetration, and breadth of the potential environmental and human damage:

BP Is Using Highly Toxic Chemical Dispersants Which Magnify The Health Risks

Oil Spill In The Ocean Brings “Death From Top To Bottom”

5. Russian scientific theory suggests that the spill may cause wide-scale human and ecological disaster for the entire eastern U.S. (and NOT just coastal areas!):

Russian Scientists Fear The Worst For Eastern US

6. Hurricanes can magnify and widely disperse the toxic damage:

Gulf Oil Spill: Brace For Hurricane Season

NOAA Expects Busy 2010 Hurricane Season

7. For good reason, local fears and emotions run high:

Unlike Obama, Lousiana Representative Shows Real Emotion

So there you have it. If this vivid presentation of gross negligence and mismanagement of a pressing crisis isn’t enough to turn our attention immediately toward embracing clean energy alternatives to our filthy and deadly global oil addiction, we’re reckless, hopeless, and deserving of the fate that comes our way. God help us.

Despite the fact that oil interests will fight us tooth-and-nail every inch of the way, it’s abundantly clear that mankind must quickly turn a major corner AWAY from oil and petrochemicals before we completely do ourselves in. Mother Nature sends a stern warning now and again – but there’s no guarantee she can save us from ourselves if we fail to heed her lessons.

May we all wake up soon and, for once, begin using our intellect to respect and repair the Earth that so generously hosts us.

U.S. “Health” Care On The Gurney

Over the past year many people have asked my opinion of the healthcare debate occurring in our country. My response has continued to be that any so-called reform we see emanate out of Washington, DC will only serve the interests of the largest players in the healthcare “delivery” business and will completely miss the mark of reducing costs or fundamentally improving the health of Americans. Bottom line? It will do more harm than good.

With legislation passing, let the centralization begin in earnest – decimating any hopes of increased access, increased supply, increased competition, increased freedom of choice, and, sadly, improved health of Americans. These would be all the primary ingredients needed to let healthcare costs begin to fall. The opposite is most likely to occur now (perpetuating the mess we have now compliments of the AMA/FDA monopoly).

And the price? It will be higher than ever. Hang on to your wallet with both hands because the IRS will now be collecting your health “insurance” premiums. Any vestige of a “market” that existed in the healthcare racket prior to the enactment of this legislation has now broken completely free from ANY market pricing constraints since the government will be “collecting” the revenues and serving the limitless demands and greed of the healthcare industry by force of law.

The government will be “collecting” the revenues and serving the limitless demands and greed of the health care industry by force of law.

– David

This morning, I came across an article which addresses the question far better than I ever could yet summarizes my opinion so eloquently and completely that I thought I’d better link it to my site for visitors to see. I may add to this post later but, for now, please find the time to read this most-excellent opinion piece.

Healthcare Dictatorship: A Crime Against America

Is Your IRA/401k About To Go To Jail?

If you’re not already aware of it, you might benefit from knowing about this conversation that has been occurring – actually, for more than a year now:

401k/IRA Screw Job Coming?

Many thanks are due to Karl Denninger for keeping this important topic alive. It’s one that’s not always easy to track due to the sensitivity of the subject. It holds real potential for, shall I say, powerfully “motivating” and agitating the masses who are diligently participating in these plans (mainly because they focus on the perceived income tax benefit and don’t know any better options exist). The outcome of such a powerful agitation might not be pretty.

As if lack of access to money “saved” inside qualified plans (think: forced use of credit cards), frequently oppressive commission and fee structures, market losses, stiff penalties, missed opportunities, lack of any additional benefits and uses for the money, legitimate concerns about higher future taxation, and a boatload of other uncertainty weren’t already enough, this potential development just gives us one more reason to legitimately fear the restrictions and dictates of government-controlled “qualified” plans.

Such fears may ultimately become justified if government feels cornered (due to over-commitment, ongoing fiscal mismanagement, exponentially-increasing public debt, unaffordable entitlement programs, falling tax revenues, depression, etc.) and decides to play its trump card – suddenly changing the rules about whose money a qualified plan really is. Will we live to see this day? Personally, I think the odds overwhelmingly favor the house.

Maybe the real agenda is (has always been?) to have qualified plans morph into “self-funded” Social Security “benefits” – since SS appears to be (my opinion again) actuarially inaccurate, unfunded, and fiscally reeling? This plan would certainly do it. Scrap the old SS program (but of course, not the FICA taxes) and begin anew with the trillions that are conveniently waiting, trapped inside QP’s.

“To each according to his contribution – minus the considerable cost of government redistribution and waste.”

– David

All the rest of the money contributed to SS by the millions of workers in previous generations (ours included)? Long gone. Nothing but a sticky drawer full of IOU’s left in its place. My understanding of it is that it’s a “pay-as-you-go program”. Do the math and I think you’ll agree that this cannot end well for our country. That’s why this conversation is being had now and it’s obvious why any debate must be held “in committee” – far removed from the light of day.

My advice? Save generously for your future but DO IT IN THINGS YOU CAN CONTROL TO THE GREATEST DEGREE POSSIBLE. In this crazy day and age, a little well-reasoned paranoia is actually a sign of enhanced mental health. The crazy are held out as the sane and the sane are held out as the deranged. It’s all gone topsy-turvy.

As I’ve written before, when it comes to money, control is 99% of everything. If I were to have complete control of every aspect of your money, who really owns it? Think about that the next time you look at your 401k statement and prepare to make another contribution. Think long and hard. Is a present tax-deduction really worth a complete and potentially permanent loss of control?

And since many of you will be seeing your accountant soon, ask if – in light of all that’s happening in the world around us – he/she thinks there’s a good chance taxes will go up in the future. Depending upon their answer (and your well-reasoned judgment) you may determine that a tax paid now may be the least costly tax you’ll ever pay again. Food for thought, at a bare minimum.

4 Deaths, 3 Estate Planning Mistakes

What would you want to leave behind for your family? If your choices were A) a contentious mess, or B) a well-coordinated estate plan, you would choose option B, right? All too many of us end up with option A. In fact, a recent national survey discovered that only 44% of Americans have a simple Will, much less a well-coordinated estate plan.

This is a story of four best friends from school: Charlie, Keith, Mike, and Stu. Each of them lived very successful lives, but their deaths brought very different outcomes.

Charlie was the first of the friends to pass away. His death was quite a shock to everyone because he died in a car accident at a young age. Unfortunately, Charlie never got around to planning his estate and died without a Will. So, not only did his assets have to go through the court process called “probate,” his assets also passed by “intestacy,” which is a fixed formula set by the state legislature for those dying without an estate plan. Charlie was unmarried but had a long-term partner. Unfortunately, the state’s formula did not take that into consideration. So, all of Charlie’s assets went to his blood relatives and none went to the person who mattered most to him, his long-term partner.

Keith learned from Charlie’s mistake. Shortly after Charlie’s death, he went to an attorney and created an estate plan. However, he stuck the plan in a drawer for the many years since it was created and forgot about it. When Keith passed away, he had not updated his estate plan in almost twenty years. While his plan avoided intestacy, it did not reflect his current relationships and intentions, meaning that his estate was not distributed as he wanted at his death. Keith, who had been married to Linda for more than a decade, would want everything to go to her. However, Linda was shocked to discover that his outdated estate plan left everything, including the house they had shared for years, to his former girlfriend from 18 years ago, Betty.

Mike learned from both Charlie’s and Keith’s mistakes. Not only did he put an estate plan in place, he made sure that he kept it updated with his current dispositive wishes. However, he forgot to think about beneficiary designations. Like many of us, the majority of Mike’s wealth was controlled by beneficiary designations. Mike had been with the same employer since graduation. The beneficiary designation on his retirement plan listed his mother; at that time, he was unmarried and had no children. His designation sent the bulk of his wealth to his mother, who was in a nursing home. Not only did it deprive his wife and children of money they desperately needed, it ended up reimbursing the state Medicaid agency for paying for his mother’s nursing home care.

When Stu died, he had seen the personal and financial tragedies that could occur with improper planning. Stu went to an attorney who focused his practice in estate planning. The attorney prepared a well-coordinated estate plan that considered all of Stu’s assets, including those controlled by beneficiary designation. Stu did his part, too. He made sure to follow up with the attorney periodically and whenever there were significant changes in his life. While Stu’s family was saddened by his passing, their grief was not compounded by poor planning.

The four friends each had the best of intentions, to provide for their loved ones after their passing. However, only Stu had an updated, well-coordinated estate plan and only Stu achieved the goal of caring for his loved ones who were left behind.

Maritess T. BottThis post was contributed by Maritess T. Bott. Ms. Bott is an Estate Planning Attorney based in the Chicagoland area. She is a member of the American Academy of Estate Planning Attorneys and has been engaged in the practice of law for the last 13 years. For more information, call Maritess at (847) 818-9084, email mbott “at” bottestateplanning.com, or check out her website at www.bottestateplanning.com.


Roller CoasterWhen I look at the graph you’re about to see, I can’t help but think back to my last roller-coaster ride. I can literally hear the “clickity-clickity” of the ratchet mechanism slapping beneath the cars, preventing us from slipping backwards as we’re propelled relentlessly forward in a steep and seemingly unstoppable ascent. I remember thinking that even time seemed to hang in the balance as I anticipate the excitement that surely lies ahead.

Through my colorful imagination, I can literally still feel the jarring push of the cold machinery against my back, along with the heavy, lifeless thunks and vibrations jolting up through the thinly-padded steel seat.

Today, I can’t help but feel a bit of the same familiar “butterflies” in the pit of my stomach as I ponder the possibilities on this graph – along with the heavy implications the down-side may hold for all of us. Perhaps you’ll share my sentiments.

This is a graph of the sharp “bear market rally” that occurred in 1929-1930 overlain with the current stock market rally that began in early March, 2009. Of course, all credit goes to www.papereconomy.com for the creation of the graph and making it available on their site. Click the graph for a clear, full-size view.

Bounce Graph
As alert passengers strapped securely into our vehicle knowing that the arrival of the future is unstoppable, many of us sense that things are about to change in a VERY, VERY DRAMATIC MANOR.

In any battle against gravity – whether physical or financial – we know that up merely precedes down as immutable cycles play themselves out in realtime. We just cannot know EXACTLY WHEN the driving forces will reverse and the new trajectory will begin. Change is life’s only certainty. Certainty of degree or timing is not often a part of that.

As I said above, no one knows precisely when a top will be reached but to be safe, be sure your belts are snugged, your belongings are secured, and PREPARE YOURSELF for whatever lies ahead.

ONLY A FOOL would ever risk more than he can afford to lose. Within your own portfolio, be absolutely sure you know where that limit is.

No Parachute: Real Estate Markets Still In Freefall

Many people want to believe (hope?) that we are experiencing a rebound in housing. In my opinion, this thinking is premature by at least 3 to 4 years, perhaps even a decade or more.

Below is a link to a chart from the www.ritholtz.com blog (an excellent blog that should be on your financial reading list) that helps substantiate my thinking.

Click the link to see a large version of the chart which was constructed by a Ritholtz reader, Steve Barry, using long-term Case-Schiller real estate data:


Remember, all markets tend to “over-correct” and swing well beyond the mean to extremes in both directions. My interpretation of this chart shows the long-term mean in the area of 110.

Given the severity of the current recession/depression, I think we’re most likely to overshoot to the 90 area. Though we’re likely to see some bumps along the way (believe it or not, we’re actually in one right now), that would imply that we still have quite a ways to go on the downside before an ultimate bottom can be reached in housing. Commercial real estate is following a similar, albeit delayed, trajectory.

This persistent, slow-motion collapse can’t help but continue having an overwhelming impact on jobs, credit, governments, the global economy, and, of course, the financial markets.

At the risk of stating the obvious, the weight of the evidence continues to confirm that we’re experiencing a long-wave, once-in-a-generation deflation (massive systemic credit shrinkage). These are NOT to be confused with “normal” business cycles. Think hurricane versus rainshower.

In general, despite frantic efforts to appear otherwise, governments have proven repeatedly to be impotent in the face of deflation – which is why they fear it like the black plague and attempt to inflate like madmen to forestall it. It never works.

As an immutable and powerful force of nature, deflation must work itself out on its own terms to correct the institutionalized excesses, malinvestment, and malfeasance that have been compounding exponentially throughout the previous decades. Just as it’s futile to attempt to turn the ocean tide, you can’t turn back the long-wave cycle.

View debt deflation as a natural, curative cleansing process and invest accordingly.

Above all, stay safe.

Surprise! Another Stealth Yet Serious 401(k) Hazard

Note to readers: Participants in 401(k) plans face numerous challenges to building a safe, dependable, fully-integrated, and efficient retirement program for themselves. The unfortunate fact is that many – if not most – plan participants use the 401(k) as their primary (or sole) vehicle for savings and investment. In my opinion, they do this at their own peril as they unwittingly increase the odds of a less-than-optimal outcome at retirement – for a variety of reasons, some you’re about to read.

This article mentions 401(k) plans but the points made and questions raised may pertain equally to IRA’s, Roth plans, SIMPLE plans, SEP plans, 403(b) plans, 457 plans, and other similar retirement plans created and controlled by government regulations. Always consult your own documents and advisors to be certain of what you have and do not have.


All by themselves, the recent broad-based market melt-downs have underscored the fact that YOU DO NOT REALLY OWN YOUR 401(k) PLAN BALANCE until you’ve liquidated it and, even then, you own just a part of it.

“Your” plan is continuously held hostage by a wide variety of potentially restrictive institutional and governmental forces that EACH HOLD A HIGHER LEGAL CLAIM ON YOUR MONEY THAN YOU DO. As long as you participate in their plan, THEY hold the controls and write the rules and YOU are “subject” to play by them.

And, even if you should choose to quit their game, you will be required to pay a 10% penalty to the “keepers” (that is, unless you are over age 59 and 1/2 or you learn how to use the sophisticated loophole that enables you to quit without penalty). The threat of this 10% penalty seems to be a powerful enough incentive to keep most people in the game over the long-haul.

While this unfortunate lack of control will never change, it’s nearly inevitable that – in addition to capricious market forces – the rules, restrictions, penalties, and income tax rates that impact retirement plans will continue to change – just as they have so frequently in the past.

FACT: The unpredictability of change is one of the most serious risks you “volunteer” to take on as a participant in any government/institutionally-sponsored retirement plan.

A valid question to ask about a 401(k) might be; “Whose money is it?” As the old saying reminds us, possession is 9/10th’s of the law and, in the case of a 401(k), the money is held by a trustee and/or other type of plan administrator, not you.

Other serious questions a participant needs to investigate for him/herself BEFORE investing too heavily in such a plan might be:

– Are the REAL RISKS AND UNCERTAINTIES inherent in these types of retirement plans worth the widely-touted but uncertain “benefit” of tax-savings?

– Is there really a current income tax savings since I must completely surrender all access to the money either way – unless I pay the tax?

– Are future income tax rates MORE LIKELY to be lower or higher when I want or need to withdraw my funds?

– What other rules might have changed by the time I retire that may place more restrictions on my funds or, otherwise, not be to my benefit?

– What if I defer my income tax now at, say, the 25% federal tax bracket and, simply due to my success, retire in a much higher tax bracket? Wouldn’t I have made a costly and unrecoverable mistake?

– With all the government bailouts, entitlement obligations, wars, monumental stimulus/spending plans, and myriad other forms of bureaucratic bloating, is there even a “snowflake’s chance in hell” that future income tax rates will be lower than they are right now?

– What impact could utilizing more favorable long-term capital gains tax rates have on my accumulation vs. simply “deferring” into potentially less favorable future income tax rates?

– How might the disallowance of a “step-up in basis upon death” on any 401(k) funds that were left for my heirs negatively impact their inheritance?

– I read that, in the past, if a retirement plan’s distributions grew too large (by government definition) – either due to heavy contributions or large market gains – certain distributions could be hit with an additional 15% excise tax or surcharge on top of the normal income taxes due. Is this really true? If so, couldn’t it happen again?

– Is it paranoia to think that my retirement plan could be confiscated by the government?

…which is, surprisingly, open for discussion as verified here:

Dems Target Private Retirement Accounts

– What else could I do with this same money and would any other options offer similar or even more benefits with fewer potential risks, costs, and loss of control?

As you can see, there’s much to consider. And, obviously, though it’s seldom disclosed, there’s much uncertainty and “extra baggage” accompanying participation in any of these government plans. Ultimately, when you consider that your retirement plan may be a larger lifetime investment than your home – for many, the very largest asset they’ll ever acquire – these questions are worthy of VERY SERIOUS deliberation.

And finally, here’s a link to an interesting article from the Wall Street Journal that illustrates yet another “surprise!” layer of complexity and potential illiquidity that can blindside you with regard to “your” holdings. Just when we thought we’d seen it all! Be sure to take a minute or two to read this:

401(k)’s Hit By Withdrawal Freezes

In an era rife with “full disclosure” mandates, why don’t retirement plans come with a long list of government warnings and precautions? As in all aspects of life; buyer beware. It pays to be an educated consumer.

Footnote: There are other private, non-governmental options you may wish to consider. Though they’re not perfect, you can invariably retain a much greater measure of control over future variables as well as preserving ready-access to your money. This is an area we consult in so please feel free to call or write if you have questions in this regard.