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)
More here:
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.”
See the original post here:
Preparing for the Worst
President Barack Obama’s comments, made with new Treasury Secretary Timothy Geithner at his side, came in swift response to a New York Times report, which reported employees of the New York financial world garnered an estimated $18.4 billion in bonuses last year. The figure, from the New York state comptroller, drew prominent news coverage.
“Outrageous.”
That’s President Barack Obama’s one-word reaction to a report that Wall Street employees got more than $18 billion in bonuses last year.
Said Obama: “That is the height of irresponsibility. It is shameful.”
The president said he and new Treasury Secretary Timothy Geithner will have direct conversations with corporate leaders to make the point.
Obama said there is a time for corporate leaders to make profits and get paid bonuses but now is “not that time.”
“Outrageous” is precisely the word. The same people who two months ago came to Congress with hats in hand and took a boatload of taxpayer money are now doling out billions in “bonuses”? Bonuses? Aren’t you supposed to get a bonus when you do something well?
More:
Obama slams outrageous Wall Street bonuses
~ Marcus De La O
There was something missing from the $700 billion taxpayer funded bailout that was signed into law. It seems impossible, I know. Congress spent several days making sure nothing was left out, including money for Puerto Rican rum makers, race track owners, wooden arrow manufacturers, and of course, the always under-funded wool researchers.
It was painful to see the very people who caused the mess taking charge of fixing it. If it made you mad, it should have. The bailout amounts to over $2,300 from every American’s pocket, and there are no guarantees that it will work. Most of us would have preferred to stick it to the man and let those greedy Wall Street villains go bankrupt.
If you watch TV or read the paper, you’ve heard that the problem was caused by our government loosening lending standards. This is a symptom of a larger problem, one that needs to be fixed now. The real cause of this disaster is not on Wall Street. It is much closer to home.
Imagine if our children were forced to take money management classes starting in the third grade. Forced! Forced to take classes in money management? Why not? They are forced to take algebra. How many of us use that in the average day? They are forced to take biology, foreign language, health, and geometry. Sex education may soon be forced upon our children as well. Money management, however, is not even an elective.
When offered an amazing loan to buy a house with little or none of your own money, a properly educated young adult might say “no thank you.†When tempted to run up the VISA debt to get that new plasma screen, the ghost from classroom past would say “No.†Every year a new batch high school graduates take to the street with no financial education. This is the real cause of the financial crisis.
Instead of a couple thousand regulators teaching banks how to lend, let’s teach a couple hundred million Americans how to borrow. Rather than showing us how to spend our money, our government should show us how to save it. Our children need to come out of high school knowing that managing their money is just as important as earning it.
Our government has let us down in this area for a long time and missed another chance. Financial education should be required in all public and private schools. Over the past few weeks, we did not hear one of our leaders speak about the importance of teaching money management to our children. Not Bush, Obama, McCain, Pelosi, Cox, Bernanke, Dodd, or Frank. None of them. Yet what is on every adult’s mind every day? How to manage your money.
For the government, a financially literate public is a dangerous thing. Americans would have no use for bailouts, and fewer of us would need welfare or Social Security. Unfortunately, our government prefers that we remain reliant on them for as much as possible. Unless we insist that our schools offer financial education, it will never happen.
Since this is not likely to happen, there are some fun and educational books you and your children can read. “The Richest Man in Babylon†by George Clason is fun and easy for kids to read. “Rich Dad, Poor Dad†by Robert T. Kiyosaki is great for teenagers and adults. Let’s teach our kids money management from an early age. This is how we can all “stick it to the man.â€
Here is the original:
Government bailouts and school children
By SCOTT MAYEROWITZ
ABC NEWS Business Unit
Is your head spinning these days trying follow what is going on with the economy?
Subprime. Collateralized Debt Obligations. Liquidity.
Every day it seems as if these words — which nobody you knew was using just a few months ago — are being thrown around.
The stock market is down. Government officials are scrambling to find ways to help the economy. And a lot of people are talking about a recession.
So what does it all mean? And how did this all begin, especially when just a few years ago the economy was booming thanks to the red-hot real estate market?
Well, that’s where the problem starts.
A combination of low interest rates and aggressive new lending practices in the late 1990s and early 2000s led to a buying frenzy.
Many banks were enticing first-time home buyers into the market with pitches of “historically low interest rates” and “no down payment required.”
In June 2003, the Federal Reserve had lowered its key Fed Funds interest rate to just 1 percent. Mortgage rates were of course higher, but were still considered a relative bargain.
Banks had also changed the way they made loans, opening up the American dream of homeownership to a whole new group of people who had always considered themselves renters.
The Mortgage Boom
With rising home values, almost everyone believed they could get rich just by buying a home. And pretty much everyone — even those with terrible credit histories — could get a home loan.
Many got adjustable-rate mortgages with low, introductory teaser rates that made their mortgage payments affordable. Those rates would eventually reset to higher ones, but many owners planned to sell first or refinance.
Even high-risk borrowers — if they made their mortgage payments on time and built up a good credit history — could refinance into a more traditional fixed-rate mortgage before their interest rates reset.
And since the home would undoubtedly be worth more than it was just a few years ago, the banks were willing to lend out more money because the collateral for a loan — the house — would theoretically be worth even more in a year or two.
How Wall Street Profited
To facilitate some of these new loans to riskier borrowers, lenders and those on Wall Street came up with new ways to package them up and sell them off to big pension funds, private equity firms, mutual funds, foreign investors and any other investors looking to profit from the housing boom.
Gone were the good old days when everything was simpler, where a local bank manager who knew a borrower for years would issue a mortgage.
The idea behind these investments, known as collateralized debt obligations — or CDOs — is that by grouping hundreds or thousands of mortgages together the risk of loss because of nonpayment is significantly reduced.
In one group of mortgages — say 1,000 homes — 40 or so might not be paying on time. But the profits you make off the other 960 mortgages will offset any losses you suffer from those 40 bad loans.
So what was once considered an undesirable mortgage to somebody with poor credit — a so-called subprime borrower — was now deemed a safe investment. Wall Street rating agencies gave the investments their blessings, and investors started buying them thinking there was little risk and high reward to buying these mortgages.
But then things changed.
As adjustable mortgages started to reset to higher rates, more people started to default on their loans, making investors uncomfortable.
Two things started to happen. First, banks and other lenders started to tighten their lending standards, realizing that they had been too liberal in who they lent money to.
Second, the value of these investments started to fall as more people defaulted. Many banks and investment firms had these investments on their books as assets. They had taken out various loans using these assets as collateral. But as these bundles of loans declined in value, the banks decided to make fewer loans.
Simply put, lenders became more cautious. Not only were they lending out less money for mortgages, they were lending out less money for pretty much everything else.
So if a manufacturing company needed to borrow $10 million to add a second assembly line to grow its business, it now found fewer banks willing to lend it the cash. The same held true for large corporations that wanted to borrow money to buy out other companies.
Starting in September 2007, the Federal Reserve has tried to make it more affordable for individuals, banks and companies to borrow by lowering interest rates, which also makes it easier for banks themselves to borrow money directly from the Fed.
But there have been many bumps along the way.
Just last week, investors started to question the health of Wall Street brokerage firm Bear Stearns and pulled their money out of investments there. As everybody pulled their money out at the same time, the investment bank collapsed.
Home Prices
While all of this has been occurring on Wall Street, home prices across the country have been falling.
It started with the rise in foreclosures, which created a surplus of homes on the market.
Further compounding the situation, lenders have now tightened the standards of who can borrow money to buy a home. So there are more homes now available for purchase and fewer people who can buy them. That causes prices to fall.
Real estate agents suffered. So did mortgage lenders, real estate appraisers and everybody else involved with the sale of a house.
Developers stopped building new homes because the demand was no longer there and they couldn’t get the same price for their products.
But it didn’t end there. The home improvement industry also suffered. With homes worth less, homeowners no longer have as large home equity lines and can’t afford to put in that new deck or buy that new refrigerator.
Additionally, since fewer people were buying homes, there was less renovating. So that meant decreased sales of paint, new sofas or whatever else people typically buy when moving into a new house.
Recession Watch
So that’s the housing market and the world of Wall Street. But why are we now talking about a full-scale recession hitting all parts of the economy?
It all comes down to consumer confidence.
Americans have much of their savings and their sense of wealth tied up in their homes.
When home prices start to fall, that feeling of wealth disappears. Whether they are really worse off today than than they were a month ago doesn’t matter. What matters is that they feel poorer, which in turn leads them to spend less.
While many economists believe that we are already in a recession, the official determination of when a recession begins and ends comes from a committee of the National Bureau of Economic Research called the Business Cycle Dating Committee.
The group’s definition of a recession is: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”
The widely held maxim of “two quarters of negative growth” is not a requirement for a recession, but that is often the easiest attribute to see when a recession occurs.
Falling wages are not always part of a recession, and inflation-adjusted income has not fallen substantially during five of the past nine recessions.
This was true during the most recent recession in 2001, when fast growth in productivity and declines in the price of imports, especially oil, raised purchasing power while employment was falling.
It has been almost seven years since the last U.S. recession, which was from March to November 2001. Before then, there was a recession from July 1990 to March 1991, and a previous one beginning in July 1981 and ending in November 1982.
Read more from the original source:
ECON 101: Credit Crunch for Dummies
