Prudential has a Great Point!

Prudential's Silitch today said that with bond yields so low a loss of investor interest could be a real possibility. More importantly he noted something I've believed for a while now and that i first heard from Peter Schiff; if interest rates are for any reason forced upward, whether in an effort to curb inflation or something else, the prices of real estate could take a major hit.
You see the fair market value on a piece of property consists of two major parts, the actual property value and then the amount of the interest on the loan. So say that the average single family home is worth $250,000; that is what people are willing to pay for that piece of property. That number is the total loan amount which is the price of the home plus the interest. Now if interest rates suddenly climbed from near zero to 5% or 10% the price that someone is willing to pay for that house will not necessarily change. Which means that the interest portion of the loan has increased so the value of the home must theoretically decrease to compensate.

Total Loan Amount = Interest + Home Price

Another thing to note is that even if property does begin to rise in price, it may be falling in value.
Price is a unit of measure using the US Dollar, while Value is measured against other assets.
The price may rise simply because they are printing so much currency, but when you measure the gains against those of gold or cotton or oil, etc you will find the actual value of the asset.

Japan follows suit

On September 19th the Bank of Japan announced that it will be following the lead of the ECB and the FED. You can see the "race to debase" as its being called. Governments around the world are all printing money in an effort stimulate their economies and increase growth. Having a currency of less value also means that your exports are more affordable to other nations with more valuable currency, but for those nation with more valued currency exports are more difficult to move out the door. So when some countries are beginning to devalue their currencies at a rapid pace, it forces others to print and devalue as well in an effort to keep competitive in the export markets.
What the governments dont understand about Keynesian style economics is that it never works. If you look back in history at every instance of this type of monetary behavior, they all end very badly.

Wait for QE4, its only a matter of time

Chairman Ben Bernanke of the Federal Reserve announced yesterday September 13th that the FED would put into action an open-ended plan to purchase $40 Billion dollars of Mortgage Backed Securities every month. Thats about $500 Billion a year. They will also hold interest rates at near zero until at least mid 2015.
What a shock! Just like I predicted.

Between the FED and the Government they've created such a situation where there is no easy way out. Theres only two real options; either they are to incompetent to realize that their "solutions" are only increasing the underlying problems, or they know and are just trying to hide the truth for as long as possible. Either way its not good. The only way we'll see a real recovery is they stop intervening and just let markets find their equilibrium. We have a very harsh reality to face, that is true, but the sooner we face it the sooner we can begin with a fresh slate and correct the real problems. The perverbial can is just being kicked further and further down the road with the government bailouts and the banking bailouts and QE1,2,3,4; but no matter how long the road stretches, theres a cliff at the end of it.

The government is in dire straits. They have no money and continue to fall farther and farther into debt with every day. but instead of making cut backs like a normal business, they continue to borrow and grow the government with more tax programs and bailouts and stimulus and wars. Ofcourse wall street is happy because the stock markets keep floating higher on the constant wave of money coming from Ben at the FED. But what the average Joe doesnt realize is that while their mutual fund moves up a couple points and their housing prices seem to regain a foothold its only because the FED is diluting the currency with Trillions of dollars. So their savings and retirement funds are being swept away.

Analogy:

If Ford Motors produces only one of a new model vehicle its going to be worth a lot. But if Ford produces 1 Trillion of the same model, you couldnt give one away. They'd be worthless because everyone would have a hundred of them in their back yard. Well its the same thing with Dollars. Right now having $50,000 is great, but when all those fresh trillions hit the markets that $50,000 wont buy a stamp. Thats what QE is doing to the public savings.

A Conspiracy of the Rich?

What is the number one reason that the rich get richer, the poor get poorer, and the middle class struggles with debt?

Its because financial education takes place in the home.
Parents pass down their understandings and financial habits to their children. Its funny how such an important part of our society is completely neglected in the public school system. Wouldn't a person of any occupation benefit from the knowledge of how to properly invest and ultimately create personal wealth? (my definition of wealth being that yearly passive income derived from investment is greater than yearly living expenses). Ofcourse it would be their own decision whether or not to follow through and adopt the principles learned. Wouldn't financial literacy on an individual level tend to produce a more wealthy and prosperous nation as a whole? Hence the riches of Babylon. Like in the story of Babylon it seems that our people have lost touch with the knowledge and labors that once created such an imperial state.

Would those people in position of power knowingly deprive others of such necessities?

It is hard to argue otherwise.
In 1902 John D. Rockefeller, one of the wealthiest buisness men on earth, with the combined efforts of some of America's wealthiest and most influential figures, founded the General Education Board. Donations from the Board helped to spawn the first widespread highschool systems for the southern states, and also to create higher education institutions across the nation. They also contributed large sums to medical and agricultural institutions and education in those fields. There are many who believe that the intentions of the board were to direct the education of America's youth rather than increase it. A paragraph from the book "The Creature from Jekyll Island" by G. Edward Griffin puts it well....

"The purpose of the foundation (the General Education Board) was to use the power of money, not to raise the level of education in America, as was widely believed at the time, but to influence the direction of that education... The object was to use the classroom to teach attitudes that encourage people to be passive and submissive to their rulers. The goal was-and is-to create citizens who were educated enough for productive work under supervision but not enough to question authority or seek to rise above their class. True education was to be restricted to the sons and daughters of the elite. For the rest,, it would be better to productive skilled workers with no particular aspirations other than to enjoy life."

Also, an excerpt from a letter written by the General Education Board....

"In our dreams, we have limitless resources and the people yield themselves with perfect docility to our molding hands. The present education conventions fade from their minds, and unhampered by tradition, we work our own good will upon a grateful and responsive rural folk. We shall not try to make these people or any of their children into philosophers or men of learning, or men of science. We have not to raise up from among them authors, editors, poets or men of letters. We shall not search for embryo great artists, painters, musicians nor lawyers, doctors, preachers, politicians, statesmen, of whom we have an ample supply…The task we set before ourselves is very simple as well as a very beautiful one, to train these people as we find them to a perfectly ideal life just where they are. So we will organize our children and teach them to do in a perfect way the things their fathers and mothers are doing in an imperfect way, in the homes, in the shops and on the farm."

Apparently the education and thought process that seperate the poor and middle classes from the upper class are strictly on a need-to-know basis.

Mike Maloney explains it all...

The Miracle of Fractional Reserve Banking

In the US we use a system called fractional reserve banking. The average reserve rate is about 10%, so based on this figure when you deposit money into your bank they are allowed to retain 10% of that money and lend the other 90% to someone who wants a loan. So you never actually have the amount of money in your account that it says you do, though you can withdraw it at any time; they'll simply steal it from someone else's account. By these standards every dollar deposited has the ability to create 10 dollars. Say you deposit $100 into your checking account. The bank will keep $10 and lend out $90 to someone else, but you will still have your $100, so now there is $190 in existence. Then that person deposits the $90 and their bank lends out $81, so now there is $271 in existence. Do you see where this is headed?

Now, imagine the newly created Trillions of dollars falling down into the hands of the public and the banking system; being magnified by 5 to 10 times. That is how the savings of millions will be destroyed over the next few years. But Bernanke and other Central Bankers will continue with unlimited Bond-buying because they have absolutely no choice. They would rather kick the can down the road than face the music.

Facts about the Federal Reserve

This is a picture of the United States Federal Reserve Bank. The US Federal Reserve Bank (FED) is actually not a government entity. It is a private Corporation with share holders who are paid by law 6% dividends per year. It is owned by the richest and most powerful banks and people in the world. It has been given, by congress, the authority to create US currency out of thin air and thus control the flow of capital and rates of interest in the nation. The Federal Reserve has a zero balance in its check book. It has no "reserves" of any kind. So it is not Federal and it has no Reserves. Heres how it all works... The United States has what we call a Treasury, every country has some sort of institution just like it though they are called by different names. The Treasury controls the finances for the nation. They give the government the money they need to fund the different sectors like the military, congress or any government sponsored programs, etc. Think of our country as a business; we produce things, and purchase things and invest in things, and the overall goal is to turn a profit at the end of each year. As citizens we all work our jobs and own our property and we pay taxes on those things to the government every year. the IRS monitors all of these things to ensure we're paying properly. So those taxes are given back to the Treasury so they may be lent back out accordingly. Because we, as a nation, are producing a deficit every year we have no money to fund the government sectors and programs necessary to keep our country operating. So thats when the Treasury turns to the Federal Reserve and says "we need money to keep things afloat or we'll go bankrupt". So the Treasury produces an IOU called a Bond that promises to pay back the borrowed amount plus interest over a 30 year period and gives it to the FED. The FED then writes the Treasury a check, from their zero balance checking account, for the amount of the IOU and hands it over. The Treasury then prints that money and puts it into circulation, this is called "Quantitative Easing". It took 200 years to go from the first US Dollar printed to $825 Billion in existance. Then the crisis of 2008 occurred and it took about 2 years to go from that $825 Billion to $2.4 Trillion, thats an expansion of nearly 3 times. And there are another estimated 3 or $4 Trillion created that were not reported. Heres a chart of the reported Currency supply courtesy of GOLDSILVER.com

This chart depicts what is called the "base money" supply, or M1. Inflation is properly defined as the expansion of the currency supply, and rising prices are just the symptom of the actual monetary inflation. There is always a lag in time between the inflation of the currency supply and the rises prices felt by consumers, so it is possible to look into the future in this way by studying the charts. Perhaps now you can better understand the severity of the previous news headline i posted about.

ECB plans Unlimited Bond-Buying

Mario Draghi from the European Central Bank announced on September the 5th that the new plan to help the economic woes in Europe is the purchase an unlimited amount of Bonds and soverign debt. What this means is that the ECB will print an unlimited amount of money until things get better. This will dilute and destroy the wealth of all the people who have savings in the Euro and transfer the wealth to the holders of real assets like land, real estate, commodities, and ofcourse precious metals. You can expect a similar statement to be released by the Federal Reserve probably within the next few weeks, but certainly by years end. Bernanke will have to do it in a more round-a-bout way though, because a bold statement like that from the US will send massive shockwaves throughout the market. So what he'll probably say is something like "well, if we keep the purchase amount open-ended it will allow us to react more quickly and efficiently to the nations economic needs." but what he's really doing is setting it up so that once that initial announcement is made they wont have to tell us everytime they purchase bonds.

My 2010 position in Silver Wheaton brought gains of 100%, give or take a few dollars. I also had a small position in Premium Exploration which i thought had great potential as a gold exploration company. Their properties seemed to be extremely valuable but I sold my position at the end of the year for just a slight gain, which turned out to be a bit soon. Over the following weeks the stock did a major run up in price which would have been nice, but now it sits just about where i sold. The reason i sold my positions at the end of the year was so that i could switch from paper precious metals investments to physical metals investments. My research throughout the year taught me alot about the nature of our crisis as compared to other crisis's suffered by the US and other nations throughout history. I learned about the transfer in wealth from cash to tangible assets like gold and silver. So at the beginning of the 2011 year i purchased a 100oz bar of
.999 fine silver for $30 an ounce and paid $100 for shipping and insurance. In 2010 I started with $1600 which i doubled to just about $3200 by december. I then purchased the bar for $3100 and later two small 1oz bars for just under $100 with shipping.
Less than 3 months after my purchase silver was riding $50oz. Thats a gain of 62%.
During these summer months the price of silver has been beatin back by a combination of massive commercial shorts, in an effort to supress the price, and the natural summertime selloff which happens nearly on cue every year. Notoriously the fall and spring months are best for precious metals while the summer is usually the slowest.
I do expect that by years end we'll be back up near the $50 price range.

Late June, 2011

God its been a long time since i've been here. Its quite interesting to read over my postings from almost 2 years ago. I find it invigorating and motivating to see how passionate i was about investing and expanding my knowledge. I'm happy to report that some of my thoughts were on the money, and that my early research was in the right direction. Though i can say i was wrong about some things. So here i am nearly 2 years later in front of my computer sharing my thoughts about investing.

What i've learned since my last post is this... investing is alot like the game of poker. Why do you think so many of the same people reach the finals table every year? because their the luckiest people on earth? No, its because its a game of skill.

There are thousands of people out there on tv or in magazines that give their opinion everyday. Most of them couldnt be more wrong. Its like a doctor telling a cancer patient that they must start chemo and radiation as soon as possible, without understanding that chemo and radiation are actually proven not to work. Almost every doctor in the country responds to cancer with that same advice, because thats what they grew up knowing and thats what they learned in school, and thats what rakes in billions of dollars every year. Its those people out there getting ridiculed on tv for saying something against the grain. For the most part, those are the people who have an actualy understanding.

Something I learned when i was young is that most people dont really know whats going on.

" the reason the rich get richer, the poor get poorer and the middle class just struggles with debt is because financial education takes place at home, not in school." Robert Kiyosaki

How true! and i wonder why the very essence of financial success has never entered the public classroom? What is it that seperates the rich and the poor and middle class? its the understanding of investing! I told this to some friends of mine over a drink at the local bar and they seemed extremely interested in what i was saying (i mean who doesnt want to have money). About 2 weeks later one of them approached me, very excitedly, and said that he had taken me seriously and he had begun investing. He said "ya i've started a roth IRA, and im going to start putting in a $100 a month and hopefully double my contributions every year". I should have told him it was a horrible idea; maybe i will when i see him next. That is not investing. The point of investing is that at the end of the year you've generated income with minimal personal involvement.

"when your yearly income derived from investments is enough to cover your yearly living expenses with some left over for growth, you are wealthy."

Anyway, the point of the story is that saving us currency at this point is like saving an ice cube for later. The rate of inflation of the currency supply is only escalating. It took 200 years for the US to create $825 Billion in paper money;known as the currency supply. Since 2009 the currency supply has increased to over $3 trillion.
Thats and expansion of nearly 4 times. Below i've posted a video which shows the calculations of some austrian economists who have actually figured out mathematically the "point of no return" in the case of a failing economy.
As you'll see, we're well past "the point of no return". There are really only 2 options for us now and neither have the best interests of the "savers" in mind.
However, for those that are prepared and educated, this will be an extremely profitable time.

The Point of No Return: Part 1

The Point of No Return: Part 2