The Fed is meeting again today and tomorrow. To mark this diminishingly historic occasion, I have composed the following ditty. Ahem...


Thank you. Thank you.

As the Fed disappears behind the curtain yet again, ‘O we of little faith’ are bracing for yet another quarter percent drop in interest rates. Soon it will be official: You will likely see more appreciation on kitsch from the Franklin Mint than anything that comes out of the U.S. Mint. My friends all laughed when I plunked down 100 smackers for my Mystical Dreamcatcher Pocketwatch, but who’s laughing now?!

For those of you who didn’t have foresight enough to invest in chilling likenesses of dead royalty and zirconium encrusted daggers, allow me to predict what the Fed is planning to do. Just let me look into my Dragon of Lore Crystal Ball (a steal at 5 payments of only $39.99!)...

As we can see, it’s all business as usual at the Federal Reserve. But before I go off to polish my collection of Elvis Head Silver Dollars, I leave the Fed with three bits of advice:

1. These are tough, confusing times, and I do in fact sympathize with anyone tasked with sorting this out, but your methods have proven to be the financial equivalent of bloodletting for the ailing economy. Try something new for once, PLEEEEEEEASE!
2. We know the banks own you (literally), but at least pretend that you have the interest of the American people in mind. You know, we love a good circus act. And if you piss us off, then...
3. Don’t stiff the pizza boy: He knows where you live.

Labels: Bernanke, Fed, finance, inflation, recession, stagflation

For those who haven’t already seen the headlines in the local paper, Bear Stearns agreed this weekend to be acquired by JP Morgan for $236 million or about $2 a share, a sharp contrast to its 52 week high of $159. In addition, on Sunday the mortgage-bond fund Carlyle Capital decided to close up shop. Many people believe that this is only the beginning of the financial melt down. How will the Fed respond to these recent events at their meeting today?

The Fed will likely lower the key interest rates yet again, anywhere between .5 to a full point. Most traders will welcome as large a rate drop as Bernanke will give after the hammering the markets took this past week, but people who have their savings held in dollars might have other thoughts.

I know that I’ve been pounding this point home a lot lately, but the Fed is destroying the value of the dollar. I can’t imagine that it will be much longer before any foreign countries buying up U.S. treasuries start to think twice. What will happen then? The U.S. is funding its enormous debt by issuing more debt, and if that option gets reduced or eliminated there will be serious consequences. The options come down to printing more money (and further deflating the dollar) or default, and neither scenario would end well.

I’ve said it over and over again, but if you aren’t already diversifying out of the dollar, do it now. It is ok to keep some savings in dollars, but people really need to start looking at a basket of currencies. EverBank offers a product called a foreign currency CD which will pay interest on your money and also allow you to easily diversify into other currencies. They even offer various baskets of currencies to aid with diversification. EverBank also offers silver and gold CD’s, which is a simple way to diversify into the precious metals market.

Labels: Bernanke, economy, Fed

To add more salt to the wound which is the real estate market, Federal Reserve Chairman Ben Bernanke is now proposing drastic measures be taken by mortgage lenders. His outlook on the future of the real estate market, if the decline is left unchecked, is very grim, but he wasn’t without ideas on how to curb the carnage.

Bernanke’s brilliant idea is to have mortgage lenders write down some of the principal owed by borrowers who are struggling to pay their mortgage payments. His reasoning is that if people have negative equity in their homes, then they have no incentive to keep paying the mortgage. If mortgage lenders were to write down some of the principal owed to make it more in line with the actual home value, then less people would default on their loans.

Previous talk of principal write-downs has gone nowhere, and for good reason. The thing is, Bernanke and those politicians who support his approach aren’t the ones who stand to lose money here. They are asking the mortgage lenders and the investors in mortgage securities, who have already taken a beating, to suck it up some more. Naturally, this idea isn’t going to sound all that appealing to them, but Bernanke and friends sure look good to the people. I know that if I owned a house with negative equity, then I would love a nice, easy fix to that problem at no cost to myself. Who wouldn’t? But if I were the one with money to lose, this type of deal would make me uneasy, and the fact that the government would be making me out to be the bad guy wouldn’t sit too well with me.

Who’s to say that these people are actually going to continue paying? Are they just guessing that the reason people aren’t paying is because of the negative equity? Bernanke was quoted by Bloomberg as saying, the “recent surge” in delinquencies has been “closely linked” to the slide of home equity. My thought is that they are using past information that suggests that people with equity in their home pay their mortgages at a better rate. Here is a potential problem: in the past, people with equity have been able to refinance and pull money out if they got into trouble, but that opportunity no longer exists unconditionally. Sure, if you have 20 percent equity, then you can probably refinance, but I don’t think that lenders would even contemplate a write down of that extent.

Writing off the principal to even it with the home’s value (100% LTV) still probably wouldn’t allow homeowners with negative equity to refinance. How far do they want the lenders to go with this write-off? If people don’t have the ability to refinance, will having the negative equity removed really make that much difference? I’m sure that it will have some effect on the amount of people paying their mortgage and avoiding foreclosure, but will those savings be enough to offset the additional costs to the lenders? That is the question that they will have to analyze for themselves.

Even if this plan could work the way Bernanke suggests, I don’t think that the lenders and investors will be able to come together to enact something like this. I just don’t see it happening, but if it does somehow come together, it will certainly be interesting to see how things turn out. Will it keep more people in their homes, helping the overall housing market? Or will it lead a mass fire sale of homes by people who now think that they can get out from under their house?

A proposal like this even being mentioned is an ominous sign for the real estate market. Investors who regularly read my blog know that I am very into cash flow real estate, especially right now. If I can’t see the income before I buy it, then I’m not interested; it’s that simple. I’m sure that there is money to be made in other non-cash flow properties, but with the way things are going right now, that is just more risk than I’m willing to take.

Labels: Bernanke, cash flow, housing bubble, real estate

During a news conference yesterday, President Bush said that the country was not recession bound. It appears that everything is going to be okay, and we all can sleep better at night without fear of the scary recession monster.

I don’t know about you, but I’m just not getting that warm and fuzzy feeling. If you believe President Bush, and you feel good about the country’s economic future, then more power to you. I just don’t think I’m ready to drink that Kool-Aid quite yet.

I look at the economy and I still see major issues. Mr. Bush says that the economic stimulus package will be more than enough to fix what ails us, but I look at it and think “what a waste of tax payer money.” Of that $168 billion how much will actually end up back in the economy? 1/2? 1/3 or less? No one can know for certain, but I have a feeling it will not be nearly as much as the Bush clan is projecting.

What I do know is that inflation is running rampant, and it appears that the Fed isn’t going to do anything to slow it down for awhile. Even if Bush and Bernanke pull out all the stops to ward off recession, with what will we ultimately be left? Recession is a natural thing, it happens every once in awhile, and whether or not we want to, we are going to have to face it eventually. If we keep delaying it and delaying it, once it eventually comes it will only come harder. It would be great if we could avoid recession forever, but that only happens in Fantasy Land, and it is high time for President Bush and Bernanke to come back to reality. I know Bush is just trying to delay the recession until after the elections, but come on, man... your legacy is already ruined, and you’re only making it worse.

Meanwhile, investment-wise it pretty much comes down to this: If you believe that Bush and Bernanke have this thing under control, then you want to buy up dollar assets. If you don’t believe Bush and Bernanke are going to pull off a miracle, and are just setting us up for a harder fall, then you want to get out of the dollar.

Labels: Bernanke, Bush, economic stimulus, economy, inflation

Federal Reserve chairman Ben Bernanke has shown once again that he could care less about the consequences of inflation. In his latest address, Bernanke made it pretty clear that at the next Fed meeting (March 18th) he is planning to lower interest rates once again. Did he not get all the reports that were released this month about ramped inflation, or does he just not care?

Every month it seems inflation is getting worse and worse, and the economy despite all the rate cuts, is continuing its downward spiral. Newsflash to Bernanke: The rate cut thing isn’t working. Well, it is certainly working to increase inflation, and devalue the dollar, but it isn’t helping the economy like he hoped. Rather than admit defeat, Bernanke is making what he must think is a valiant stand, but rather than glory all he is likely to see is stagflation and a bunch of ticked-off retired folks.

To all of the retirees out there, I offer you my sincerest apologies. It appears that your retirement money is not going to go as far as you probably planned. You can thank Alan Greenspan, and now Bernanke for that little favor. I wonder how many parents are going to have to move in with their children because they can no longer afford retirement? It would be an interesting irony considering how children are now moving out later and later in life. To all of the entrepreneurs out there, can I suggest starting a business catering to in-law additions or design? Just an idea I thought I’d share to help fill a need in this soon to be emerging market, compliments of Mr. Bernanke of course.

If you have yet to retire, hopefully you have enough time to conquer this inflation problem within your retirement portfolio. My suggestions are to diversify out of the dollar and make sure that you have exposure to gold and silver. Gold makes me nervous right now, seeing how high its price has gone, but at this point I would feel much better owning gold than dollars. Whatever you choose to invest in, make sure that you are taking inflation into account in your retirement need projections, and you had better be expecting more than 2 or 3 percent.

Labels: Bernanke, economy, inflation, stagflation