Juggling Dynamite

I caught Donald Trump on Larry King last night. He was telling people he is leery of the stock market here and would not be buying it. He was saying he would park cash in T-Bills or buy a house. Real estate prices have dropped a lot he pointed out.
I agree with the Donald's overall comments. So far US realty markets are down by 20 to 50% in many areas, and overall the stock market has dropped about 20%, so comparatively less. Generally speaking the higher asset prices are the greater the risk. Overall asset prices that have corrected more tend to present less risk to new capital than assets that have corrected less. That said this general statement is a very broad concept that needs much more fine tuning before we would call it an investment strategy. This brings me to the trouble with Donald and those like him.
Donald is rich so people swamp to listen to him. He is the “best in the world”. Just ask him. The Donald is a “real estate guy”, just as stockbrokers and mutual fund salespeople are “stock guys”. He is telling people to avoid the stock market and buy real estate, because THAT IS WHAT HE ALWAYS SAYS!
The Donald was touring the country the last several years promoting his books and real estate seminars teaching everyone how they too can lever themselves to wealth through real estate. He was in Toronto last fall promoting his newest Trump Condos and telling captivated audiences why $1500 a square foot was cheap, cheap for his luxury condos in Toronto.
The Donald is an incredible sales guy. But no one should ever confuse his comments as strategically timed or valuable advice. And let us not forget that the Donald has gone bust a couple of times as well. Perpetually bullish people can be interesting entertainment, but we must never download them as advising our investment approach.
As Washington scrambles this week to get its backstop-for-financials-plan in place, I am thinking attention will soon move away from the credit crunch a bit and back to the realization that North America and many other countries around the globe are now in a serious economic contraction. Several months ago, I said that the credit crunch was like beating the economy with a phone book. The marks may be slow to show, but the internal damage would be significant none the less. I am thinking that the next leg down in equity markets will probably come when the the economic contraction comes fuller into view over the weeks ahead. Time will reveal.
Here are some broader economy headlines that caught my eye this morning:
WSJ: Manhatten won't Avoid Property Crunch
WSJ: Property Conundrum
Emerging Markets saddled with a backlog of maturing debt
Bank of England expects gloomy economy worldwide.

Many years ago, when I realized how corrupt and self-serving the financial industry can be, I felt disheartened, disillusioned and thought about changing careers. At the time I had been working on the sell side of a major investment brokerage and I felt that my values had been sullied. About this time, the news was full of stories of scandal both in the business world and in the Catholic Church. From the coverage at the time, it seemed like all financial types were crooks and all Priests were pedophiles.
One day I ran into the Priest from my local parish. He is a man that I had always respected as liberal, smart and dedicated to serving his community. We got to talk and he asked me how things were going. I told him bad, I felt like I was in the wrong industry, and needed to change careers. I told him, “based on all the stories of abuse of trust in the news of late, it seems like both of our professions are hopelessly flawed.” Then Father Frank said something that changed my life. He looked at me and he said, “Do you not think that the world still needs trustworthy advisors doing this work?” “Well yes,” I said, “no doubt it does.” “Then go and be that,” he smiled.
These words reminded me that our human institutions will always be flawed, and there will always be a great need for honest, unbiased counsel. Over the past year and half since Juggling Dynamite was released, and I started writing the blog, I have heard from literally thousands of people all over the world. It has been truly over-whelming and completely unexpected. Most of them can never be clients of my money management firm, but all of them have questions. I spend probably a couple of hours each day, just answering emails and writing this blog to help shed some light. I now consider my profession my calling and my greatest honour to be of service.
One of the images that have stayed with me over the past few years is from the first Matrix movie. It is the scene where Neo wakes up in the grid of humans floating in liquid sacs and realizes that they are all connected in as living batteries to support the computers. He pulls the lines out of his arms and breaks free of the grid.
I have this same scene in mind sometimes when I think of how many people have increasingly come to support their financial institutions. I know this may seem like a weird connection. But if we think about all the fees and interest that workers have come to owe and pay every day to financial companies, you may see my point. If we think of how much of present GDP goes each day in debtor nations to support payments owed to their lenders, we see the point again.
Yes, I know we need a world financial system. I realize banks provide a necessary service and they should be paid for their service. I just want to see them (and their executives) make a little less and people keep a little more of their own.
So here is an aspect of that I want more people to consider. I am not sure how or if this applies to Americans, but I know it works in Canada. If you still owe a first mortgage on your home and you (or you and your spouse) also have savings in a Registered Retirement Savings Plan (RSP), that are at least the size of your mortgage, consider paying out your bank with funds from your RSP and hold your own mortgage. You will pay yourself the going rate on mortgages, which is higher than other fixed income and equities are paying at present. You will stop paying your investment broker fees on that portion of your retirement savings, and you will be channeling more of your own power into your grid rather than the financial industry.
Not too many people know about how to hold your own mortgage. Frankly, financial companies have no incentive to promote the idea since it cuts them out of revenue. But in many cases that I come across in emails and questions from my readers, it is an idea that will serve them well.
Here is a good summary of how it works. Given the low return, high volatility climate we currently have in world financial markets, holding your own mortgage and paying yourself going rates of 5 or 6% can be a no risk, smart, efficient for you, solution.

This morning markets around the world are roaring their hope-filled applause at the announcement that the US Government is trying to set up a place to swap in bad debts and get them off of bank balance sheets. If they can figure out a structure this weekend, and get it approved by Congress this could be the next necessary step to healing the credit crisis.
The other intervention announced yesterday is the farcical ban on short selling for the next 10 days. This is a ridiculous attempt to stop the natural correcting mechanisms of over-valued stock markets. Also see Big Picture article: SEC induced mother-of-all short covering rallies.
Notice there was no intervention to stop insane speculating on the up side over the past couple of years. Had there been some regulation on the upside we no doubt would not have arrived at the crisis now plaguing the world. But now that markets are trying to come back down to reasonable valuations, the authorities are stepping in to stop the evil speculators. This is a stop gap that will artificially inflate markets again temporarily only to exacerbate their declines again down the road.
China too is following western governments, desperately trying to stem broadening social unrest flowing from the 70% plunge in its stock market over the past year as little investors have been literally wiped out. But in typical fashion their government did nothing to stop the gambling and speculation that drove markets to bubble peaks. Now they are trying to force domestic funds to buy up Chinese shares. This too shall fail. So much for decoupling: Beware falling BRICS.
The first step to rehabilitation is to admit addiction and let the addicts experience bottom. Government must stop trying to prop up and enable crazy valuations that still persist.
Quick fix, artificial intervention in stock markets, will not solve the global economic slowdown. It will not undo the evaporation of real estate wealth that has slammed the western consumer this past couple of years. And notwithstanding a big bounce today, it will not recover loses that most investors have suffered week to date, or month to date and certainly not year to date.
Remember losses of 30%, require gains of 43% to recover, loses of 70% require gains of over 230% just to recover. When markets do finally make their bottom, and they will eventually, it will take years not days for people who hold on to recover their capital value. Let this market grind its way to a bottom without your capital.
The volume yesterday was weak and the breadth was horrid with thousands of stocks making new lows versus a handful of stocks making new highs. Buyers or holders here beware. This euphoria looks like distribution, where institutions that have been looking for a bounce to exit are selling into strength. It so far does not look like the start of the next bull market.
Beware of blind hope for a quick fix. It just doesn't work that way. And while we are at it, I might as well say it–everyone has to find out sooner or later– there is no tooth fairy either.