Sage Advice from the Financial Wizard

By Author Tex Norton         

If your house was on fire, would you grab a bucket of gasoline and throw it on the fire in an attempt to quench that fire? Of course not. But that is exactly what your government is doing with our economy.

First they provided way too much money (liquidity) thanks to Alan Greenspan running the printing presses and lowering the interest rates to an absurdly low 1% and then keeping the interest rate at that low level. The extra liquidity was then misappropriated to unwise investments. First the Dot.Com stock market bubble and then the real estate bubble occurred. Now that both those bubbles have been popped, the “hot” money has rushed into the commodity markets and bond markets and are now causing still more bubbles. Since excess liquidity and way-too-low interest rates caused these problems, our “astute” government officials have decided that “more of the same” will cure the problem. Right! Let’s just throw more gasoline on that fire.

Recent events made the MSM (main-stream media) headlines: Last year, there was the collapse of Bear Stearns and it’s subsequent “bail-out”– ultimately by the taxpayer. Relatively high-profile IndyMac failed, too, but there was the good ole FDIC to bail-out the depositors. Abbott and Costello (aka Bernanke and Paulson – now Geithner) then agreed to bail-out Fannie Mae and Freddie Mac with the taxpayer holding the ultimate bag (Welcome to Socialism – American style.) Then we got Lehman Brothers filing Chapter 11 bankruptcy–Shock!–What, no bail-out? Then we got Bank of America buying none other than the Bull (S**t) itself – Merrill Lynch – while not first having taken the time to digest their prior mistake – Countrywide Financial. What you haven’t yet seen in prominent print is that the FDIC, too, now has its hand out for short-term (right!) back-up. (They’ve already bailed-out 98 banks in 2009.)

Why should you care?

Well, for one thing, your entire financial solvency is at stake. Reason enough?

I won’t bore you with the facts such as all this started in 1913 when the Federal Reserve was created (coincidentally the IRS also.) FDR created Fannie Mae in 1938 and later Freddie Mac was created in 1970; both known as GSEs meaning Government-Sponsored Enterprises. The point is that it has always been the Federal Government that has set up the conditions that ultimately make the headlines. Most recently, one Alan Bubbles Greenspan acted so irresponsibly as Chairman of the Federal Reserve that he created and crashed the stock market bubble in 2000 and then created the real estate bubble that has recently popped. He did it with unlimited credit and ridiculously low interest rates.

So guess what current “fix” is being proposed to solve all our ills? You got it–unlimited credit–more gasoline on that fire, please. Do you understand that all those sub-prime worthless pieces of toxic paper are actually being accepted by the Federal Reserve as viable collateral in exchange for Treasury securities? Translation: You as a taxpayer are being forced to accept worthless collateral in exchange for your hard-earned savings.

When the FED creates excess credit (money), they create inflation. Then, because of all those extra dollars sloshing around, the prices of bread and oil rise. But then we’re told we’re supposed to get angry at the “greedy” baker and oil company. That is politics 101. That’s how it works. That is how the government steals from you while pointing the finger at others.

Theoretically, the solution is to demand that the politicians act responsibly with fiscal restraint. What are the chances of that happening on any meaningful scale? Slim and none, and Slim is out of the country as I write. By actual statistics, over half of the American public now receive some sort of financial income from the U.S. Government and they’re not about to bite the hand that feeds them. Forty percent of those employed work for government at some level. So what’s a mother to do?

You do what rational people have always done. You take responsibility for your own financial security and arrange your finances such that you at least protect what you’ve already accumulated. Many of you attended one of the Personal Financial Planning classes I taught from the 1970s to the 1990s. Recall that I admonished you to pay attention to how the money game was being played. You didn’t have to “like” the rules of that game, but you did have to play according to those rules. Well, nothing has changed. You still have to pay attention to what the politicians are doing to you and try to protect yourself accordingly. How?

First, accept the fact that Pax Americana is over. The United States is rapidly becoming a has-been empire. Don’t shoot the messenger–I’m just the reporter. That is a fact. Sorry. Remember Argentina over the decades? The constant ups-and-downs? That is what the USA is rapidly becoming. A third world banana republic. You can only play the “deficits don’t matter” game for a limited time. Then economic reality comes in to bite you. The process of ignoring economic reality can continue for quite some time, as you’ve noticed, but sooner or later, economic reality will crash the Ponzi scheme perpetuated by our government. I believe that “time” is close at hand; hence this message to all of you.

I don’t care what your political preference is–it doesn’t make any difference. None of the crooks will be voted out. None of the “elected” will bite-the-bullet and act responsibly. They will do what all politicians always do–pander for votes. They will promise “free benefits” of whatever kind and in as great a quantity as necessary to garner the votes they need to be (re)elected. That is the moral hazard we face. Those are the rules. Period.

If you can accept my above conclusions as being an accurate summary of our current circumstances, then you can more-easily make the needed adjustments to your financial affairs. You must accept the reality that it will get worse–much worse–before we hit bottom. We’re going to continue to loose jobs. Companies will increasingly go out-of-business. Financial firms will continue to get bailed-out by the Fed. Bread and oil will continue to cost more. Foreclosures will continue to accelerate. The dollar will continue to go down in the exchange ratio with other currencies. These are simply the facts as they currently exist. So I ask again: “What’s a mother to do?”

This has already become a long article for what I originally envisioned would be a quick summary. Rather than go on for pages and pages of detail, I’m just going to summarize in “bullet” fashion what I think you should consider doing to try to protect yourself. I’m not going to name-names because, although I’m no-longer controlled by the SEC regulations restricting what I can and cannot tell you, I’m not willing to open-myself to more bureaucratic interference in my life. I’ll talk generalities but you’ll get the idea. Hopefully you can then Google the answers to my suggestions. Here is how I see our current situation:

1. Don’t trust the FDIC/FSLIC to bail you out of a failed bank or savings-and-loan. Do your homework and only deposit funds in those financial institutions that have reasonably high ratings. Then, NEVER have more than the FDIC limit of $100,000 (now $250,000 until 2014) on deposit at any single one of those “better” banks.

2. Get out of the dollar to whatever extent you can and still be able to pay your bills. The dollar is collapsing. All currencies today are fiat currencies and their intrinsic value is ZERO–even the Swiss Franc although it is one of the least-flaky if that makes any sense. There are relatively stronger currencies out there. Exchange some of your dollars for those currencies. There are on-line organizations that make this very easy and very cost efficient to do. And there are insured accounts available in this category. Find something you like and with which you feel comfortable. But DO get some of your money out of dollars and into relatively-stronger foreign currencies.

3. Get out of debt. Pay off all your debts including your house, if possible. Yes, on-going inflation might make it profitable to keep these loans outstanding (paying off later with less-valuable dollars) but under the current circumstances, I believe the risk is too high (we could just as easily fall into a “deflation” where it would then cost you more expensive dollars to pay off those existing loans.)

4. Buy gold. I mean physical gold in the form of bullion coin as well as gold stocks and ETFs (Exchange-Traded Funds) that specialize in gold and other precious metals. Also buy 1964-and-earlier U.S. silver coins known as “junk” silver. Precious metals may go down in absolute value at any given time but they ALWAYS maintain some value as opposed to ZERO for all the fiat currency in existence–think Zimbabwe.

5. Buy commodities. Yes I said above that there is a bubble developing in commodities, but the commodity bubble has a long way to go before it pops (at least in my considered judgment.) You don’t have to buy futures contracts. You simply buy an ETF that specializes in commodities. Think of it as an index of commodities. You buy an ETF in exactly the same way as you buy a stock and you get shares of the ETF accordingly. Don’t overlook water. Water could become the next “oil” in terms of value. Potable water is becoming extremely scarce in a world of greatly-increasing population. Many water-plays exist that make good investment sense.

6. Buy energy. Yes, there is our currently-primary source crude oil which you can buy in the form of oil stocks, ETFs and limited partnerships. But I’m really referring to overall energy; not just oil. Forget Ethanol–it’s a joke. You NEVER waste food to create a negative-return energy source– that was just another example of stupid government interference with reality. I personally think geothermal is very promising and there are several companies in northern CA that are doing extremely well in this area. Wind is also gaining favor. It’s expensive, but there is a corridor in the USA that seems to warrant windmills. T. Boone Pickins didn’t become a billionaire by being stupid. Nuclear energy will probably be the most successful solution to our energy needs and Thorium, rather than Uranium, seems to be the better choice to make this happen safely.

7. Get out of stocks, per se. By that I mean the run-of-the-mill stocks in your portfolio. Accept the fact that the stock market is going to continue going down and almost all stocks will be hit accordingly. I’ve personally owned Phillip Morris forever and will continue to hold it because no matter what happens, people will still smoke and PM will still pay a dividend (I just sold MO because of the new taxes imposed by the US Govt. but I held the spin-offs of Kraft and PM International). But that’s an exception. Other than very specific commodity-, gold- or energy stocks, get out of everything else–or suffer the on-going downturn.

8. Get a significant sum of cash out of the bank and keep it handy. Yes, you’ll loose some interest you’d otherwise earn. The term significant is subjective and is a different number for each person. Think of what your spending needs are and then plan accordingly for what you might need. I’m talking small denominations–not Franklins. This is for the possibility of a bank “Holiday” when no physical cash will be available and all the ATMs are empty – oh yes it can happen again!

I wrote the above “off the top of my head” so I’m sure I’ve overlooked important subjects and probably could have organized the presentation more efficiently. However, my intent was to get your attention and hopefully inspire you to take action while you still can. Once a financial wizard, always a financial wizard – sorry – can’t help it.

Regards, Tex

This entry was posted on Tuesday, October 6th, 2009 at 12:39 pm and is filed under Authors, Economics, Politics, Tex Norton. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.