A recent article by Robert Kiyosaki entitled Preparing for the Worst caught my eye. After all, isn’t this sound financial advice for all of us? That’s why we Fools have things like emergency funds.
The article, however, wasn’t about wills, life insurance, or anything like that (which is what I was expecting based on the title), but rather a list of reasons why Kiyosaki thinks that “The worst is yet to come” in the stock market. Unfortunately, however, Kiyosaki doesn’t tell us how to go about preparing for it.
I’ll have to admit that while some of his reasoning as to why we may have more tough times ahead in the market (and I don’t profess to know one way or the other the way the market’s headed over the short or even intermediate term)Â seems plausible on the surface, I think he misses the mark in a few places.
1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.
Government’s hand has been a very heavy one in the economy lately. Everything from bailouts of companies like AIG and GM to the Cash for Clunkers program is evidence of this. Maniplating the stock market? I’m not so sure. Manipulating the economy (which has an impact on the stock market)? Absolutely. I wish the manipulation were related only to the stock market and not to the economy as a whole, because I fear that the long-term ramififications of many of the government’s recent actions may place an unnecessary drag on the economy for a long time to come.
2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.
While each of the above entities certainly had a hand in creating the mess, laying this problem solely at the feet of financial istitutions is a bit like blaming McDonald’s and Burger King for America’s growing obesity problem. We gladly borrowed all that money and took out loans for all kinds of stuff despite a lot of good financial advice that’s readily available to us that urged us not to take on too much debt (you know, at places like this Fool.com outfit I keep hearing about) just like we gladly and willingly wolf down Big Macs and Whoppers despite all of the information out there telling us we should be eating broccoli instead.
3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.
That demographic changes will alter the economic landscape isn’t exactly new, but I’m not so sure that I follow this logic. Yes, baby boomers had good earning power and spent money on lots of ’stuff’ — but what are earnings? After all, they’re something someone is willing to pay these boomers for their work — and while there are exceptions, each and every one of these boomers was hired, and paid, because his or her employer at least had the perception that the value of the work they were receiving was at least as great or greater than the value of the money they were paying.
If we are to fear the economic impact of retiring baby boomers, I think its the loss of their productivity, not the loss of their consumption, that we should be most concerned about.
4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.
I agree that this is one of the greatest economic challenges that will be faced within the next generation. No matter what one’s individual views are as to how to best handle this impending problem, I believe the decisions we ultimately make here will have a large impact on our economy and financial well-being for a very long time to come. My only fault with Kiyosaki here is that he never gets to the “Preparing” part that was in the article’s title.
5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire.
I couldn’t disagree with Kiyosaki more. Sure, lots of money flowing into and out of the market can sometimes cause some pretty big short-term changes in overall stock prices. In the long-term, however, I firmly believe that stocks are ultimately valued by the amount of money they return (or are expected to return) to their shareholders. Sure, short-term irrational ‘blips’, some lasting several years, can, do, and will happen — but 401(k) plans are most definately not a Ponzi scheme.
My differences from Kiyosaki aside, I do still like the title of the article. After all, if nothing else, the recent housing and credit crisis, our struggling economy, and the looming pension, Medicare, Social Security, and other obligations faced by private companies and the government alike tell us that we should, indeed, do our best to be financially prepared for tough times — whenever and however they should strike.
As far as what to do to prepare, well, there are some blue tabs at the top of your screen right now that, if you click on them, have a lot of information and ideas as to how to go about doing exactly that.
Regards,
Russell (a.k.a. TMFEldrehad)
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Is the worst over?
~ Robert Kiyosaki ~
“Is the crisis over?” is a question I am often asked. “Is the economy coming back?”
My reply is, “I don’t think so. I would prepare for the worst.”
Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.
The stock market has been going up since March 9, 2009. Talk of “green shoots” fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:
1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.
Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking… and I don’t blame them. A global panic would be ugly and dangerous.
2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.
Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.
In the 1980s, our government’s hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.
While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, “Sometimes the cure is worse than the disease.” I say the government stimulus cure is killing us frogs.
3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.
The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.
4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.
5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they’re concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.
The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.
The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker’s money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares ¬– and pay their pound of flesh.
Demographics show that we are entering a battle between young and old. I call it the “Age War.” The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.
This war is not coming…it is upon us now. This is one of many reasons why I remain cautious and say, “The worst is yet to come.”
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Preparing for the Worst
 - By Roosevelt Cooper -
As we enter the 2nd year of the US Financial Economic Crisis that started in August of 2007 with the sub-prime lending meltdown, the impact on the economy and the average American has been devastating. Economy.com is predicting that by the end of 2008 over 2.8 million US households will either be in foreclosure, be forced to give their house over to their lender and move out or sell their home for an amount lower than their actual mortgage balance.
And Federal Reserve Chairman Ben Bernanke said that mortgage defaults wouldn’t harm the US economy!
So far besides foreclosures being at an all time high, we’ve had the collapse of practically every sub-prime lender out there including New Century Financial, which was the largest subprime leanding company in the United States. Even regular lenders like American Home Mortgage and Countrywide Financial Corporation were effected. AHM filed bankruptcy and CFC narrowly avoided it with a last minute loan.
If you brought a home in the last year or so, take a look at your property value. There’s a good chance it is lower than what your mortgage balance is. And to think all of the financial experts bashed Robert Kiyosaki ten years ago when he said your personal residence was a liability not an asset back in 1997 in his best selling book Rich Dad Poor Dad
We also saw the collapse of many of the largest companies in the world in the financial sector. In March of 2008, Bear Sterns, one of the largest investment banks in the world was forced to sell itself to JP Morgan and Chase for a fraction of what it traded for prior to its collapse. The source? Investing in a wide variety of high risk investments, many of which was tied to the sub prime lending crisis.
In September of 2008, the Federal Housing Finance Agency announced that it was taking over Fannie May and Freddie Mac. This was done because there were huge concerns that due to the two companies’ exposure to the mortgage market, increasing loan defaults could result in the companies failing to meet its obligations and commitments. Merrill Lynch was forced to sell to Bank of America due to its massive losses from the subprime lending market. Lehman Brothers was forced to file bankruptcy due to is losses from the mortgage crisis.
Then it was announced in the same month that AIG – American International Group, which was the 18th largest company in the world was at serious risk of going out of business as well. Despite the fact that most of the companies’ business units were healthy, one business unit that invested in debt security derivatives gone bad due to the subprime meltdown threatened to bankrupt the entire company. The company was saved by an emergency federal loan bailout in exchange for a huge stake in the company to the US government.
So what lessons can we as average investors can learn from this crisis? Here are 5 lessons for you.
1. Only buy a house you can afford. Robert Kiyosaki is right. A house is not an asset unless it is making you money. If you are not collecting more rent than you are paying in mortgage, (chances are in your personal residence you aren’t collecting any rent at all), your house is a liability. There is no guarantee a house will always appreciate in value, as we have all learned the hard way from this crisis.
2. There is no such thing as a guaranteed retirement. If your company files for bankruptcy you can kiss your pension goodbye. Think it can’t happen to you? Do a search for an article written in Time Magazine called The Great Retirement Ripoff What would you do if your pension check bounced? Are you prepared to have to go back to work in your 60’s, 70’s, or even 80’s?
3. Be wary of 401K plans. 6 months ago AIG traded for $43 a share. Today it trades for $2 a share. Your 401K plan mutual funds are investing in companies like AIG. If a market correction occurs, you can see your portfolio take a nosedive. In addition, although many companies offer to match your investment in a 401K plan up to a certain amount, their “match” is in the form of company stock. Imagine how all the poor souls at AIG whose 401K plans are loaded with $2 a share company stock are feeling right now.
4. There’s no such thing as a “safe secure job.” Many of the largest companies in the world are laying off people by the thousands. At my 2nd to last job literally a few months after I left, my entire business unit was laid off. At my last job again a few months after I left, my entire business unit was once again laid off.
5. You MUST have a Plan B. If you get laid off tomorrow and it takes 6 months to a year to find a job paying what you make right now, how long can you make it before you are out on the street? If your 401K takes a huge dip right before you are expected to retire, what are you going to do? If your pension gets wiped out how are you going to survive?
Hopefully you have learned these lessons and are doing something about them. Otherwise as the saying goes…”those who fail to learn the lessons from history are due to repeat them.”
If you lost your job, your 401K plan crashed or your pension check disappeared do you currently have the financial wherewithal to survive? If not, you need a Plan B. You need a business that can produce for you up front immediate income, leveraged income that is based on the efforts of others, not yourself and residual income that continues to come in based on work done years ago. To learn more about such a business visit http://www.createthelifestyle.info today and get started on your Plan B!
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Lessons Learned From the US Financial Economic Crisis
SEARCH ENGINE KEYWORD RESULTS :
Last night I happened to catch an episode of “Larry King Live” which included a feature on the current housing crisis along with a panel of participants including Robert Kiyosaki, author of ‘Rich Dad Poor Dad’, and Donald Trump.
While the stats by now are known to most people – The Shiller Home Price Index was down 15.5% for April ‘08 vs April ‘07, and over 1 Million foreclosures have been filed with many many more expected, the real overarching questions were a) is this a good time to sell and if you have to sell then what can you do to sell, b) what do you do if you are a homeowner facing foreclosure, and c) is this a good time in terms of opportunities to buy and invest?
The unanimous consent amongst the parties was pretty much as follows
a) This is not a good time to sell obviously and if you do not have to sell then you shouldn’t. If you do have to sell then you can sell if you price your property appropriately. This means first of all IGNORE what other homes are listed for, the only thing that matters is what homes have actually SOLD for recently as a valuation bench mark. If you must absolutely sell then discount your home 20% below current market value and you will find that it sells very rapidly. The bottom line is that it is not that there are no buyers, it all boils down to the numbers.
At our business we have been working diligently for the past 2 years, communicating to our sellers that the one thing that is more important than anything else in determining whether or not a listing will sell is price. We have some listings that have lingered without activity for a year where sellers simply refuse to face the realities of the market, and then other listings that are selling in a week, because in those cases the sellers are realistic and follow our advise. The Sarasota real estate market is what it is and if you ignore market realities then you simply will not sell.
b) If you are a home owner in trouble the resounding agreement was that the very worst thing you can do is ignore the lender when you get your notice. Lenders do not want to own your home, and they are willing to work out loans with home owners and today you have a lot of leverage as a owner in renegotiating your loan. The only predicament today is unfortunately that lenders will not discuss your loan until you are at least a couple of months late. Once you are late however you will find that you have the ability to get the lender to agree to work with you so you do not lose your home.
In our business we are working with a lot of short sales and I do see many lenders making amazing concessions. Some lenders are of course better than others. The worst unfortunately in terms of communicating is Countrywide and it is well possible that Countrywide’s own internal upheaval is contributing to this. Hopefully once the acquisition by Bank of America is finalized this will change.
c) Is this the time to buy? The panelist were in full agreement that we are either at or very near the bottom of the market. And yes, this is a great time to buy, as the best time to buy in any market is when prices are down and everyone is selling.
That being said, the days of real estate as a get rich quick scheme is over. You have to know what you are doing. Just because something is a foreclosure or bank owned property and priced at a seemingly amazing price does not mean that it is a great investment.
I tend to agree. If you are looking to buy a home as your residence then definitely now is the time to strike. Sellers are super motivated and there are a lot of opportunities to snap up a property that simply was unheard of in the past. And 5 years from now your property will certainly be worth more than you are paying today. If you are an investor then you need to understand how to evaluate a property as an investment. If you buy something in hopes of a quick flip then you will get most likely hurt. This is not the time to flip properties.
Overall I felt this was a very informative segment with a lot of optimistic view points. I would love to hear your views on the aforementioned 3 points, particularly with respect to the Sarasota Real Estate Market.
All the best…
Thomas Heimann, President & CEO
Bravo Real Estate Solutions
http://www.bravobrokers.com/
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Housing Market Crisis Opportunity?
