ericinNE

The Fed May Get It Wrong, But Don't Let It Get to You

In as much as "freaking out' is never a useful response to any bad situation, a fifty year old saving for retirement at a normal age (62), who needs a 15% year-on-year return for the next 12 years (to have the kind of nestegg that can be seen as "insulating", i.e. me,) definitely has cause for concern. The odds of 15% (as a reasonable expectation) have become much less likely, and not just for the next few months. More likely not for the next 5 years. Depending on the depth and length of this current downtrend, the need for truly stellar returns in the remaining years after the recovery becomes more and more necessary, and at the same time less and less likely. As much as I would love for it not to "get to me," it does. Big time. I have no illusions about risk/reward ratios and the like, but lets face some facts, here.Those who have had the time to build their nestegg, and are now in conservative mode (already retired,) and those that have a much longer time horizon to recoup from this sort of protracted lower-return market (the young) are in a whole different world than the group you seem to be addressing this article to. It is exactly that "50ish" group that is going to have sweat this cycle the most. Having a significant portion of the current nestegg devalued to the tune of 15%-50% (their home) with no real expectation of recovering much of it by the time they retire doesn't improve the attitude much, either. The recommended defensive posture must, by definition, be more concerned with capital preservation, than with capital growth. And this deflection from capital growth is coming at the very time when the pursuit of that growth is at it's utmost: when reasonable-return expectations are at the low end of the reasonably-attainable spectrum. Unless, of course, you're starting with so much that 6% or 7% returns are within your reasonable-return framework.

Scenario: $280,000.00 starting balance (IRA's)
$ 8000.00 yearly contributions
15% return for 12 years (until age 62)
8% return thereafter
$1.73M nestegg @ age 62
$1.27M projected inflation value (based on last 12 years real inflation rate- per shadowstats.com)
$85912/yr. after-tax drawdown to age 90 (inflation adjusted, 25% tax rate assumed, and that's probably laughable.)

No doubt this should be able to provide a comfortable lifestyle, but by no means would I call it a wealthy lifestyle. Merely "insulated."

If the rate of year-on-year return drops to 10% for those first 12 years, the after-tax drawdown/yr. drops to $52,132. Enough to do some occasional traveling, eat normal food, and that's about it. Not what I had in mind for my retirement years. Ah, but what the hell. That comet will probably hit the "keyhole," and come 2029 it all won't matter, anyway.

Sellers' 'Hopeful Overvaluation' Dragging Out Housing Bust

As a R.E. investor for over 25 years, I can assure you that short sales have always been a lender scam. The only short sales lenders would even toy with considering were those properties that had a loan balance close to the market value of the property. Before the bust, lender's kept those properties going through the forclosure process that held any chance of being sold for more than the outstanding balance, and were listed at market value, not loan balance value. Post-bust, there is almost no incentive to short-sell, as the lending dollars that would be freed up by not having the forclosure on the books, are not being lent out anyway, due to so many fewer qualified borrowers, due to the tightened lending standards. Better for lenders to foreclose, collect on the mortgage insurance that was in place (on any loan w/ greater than 80% LTV,) and let the insurer deal with it. Dirty little fact not being talked about in all the subprime/CDO/everythin... debate. Smart lenders had their asses covered from the git-go on the high LTV loans. The write-downs any lender is taking is behind the structured investment products they hold (CDO's, etc.) Not the loss on the loan itself. Here's one for ya: Why hasn't the Fed demanded that all the mortgage insurance $ that get paid to these subprime lenders be applied to the foreclosure principle amount, and let the foreclosed-on owners finance just the remaining balance, if any? Because the lenders who didn't carry enough insuanace on the loans they made (because who cares if we have to foreclose, we'll just sell it for more than the outstanding balance and make mo' money, mo' money, mo' money!) would be in an even deeper hole. So we all get to watch as lots of properties come on the market at distressed prices, and suffer along with those who dug the hole, even though the vast majority of us had nothing to do with it. Gotta save those banks! Who else can keep creating the new money that keeps a debt driven economy afloat, if even for only a few more years.

5 Reasons Why the U.S. Dollar Will Weaken Further

Even w/ a projected upturn in the market for the second half of the year, the smart play will continue to be in the commodities/hard assets (GLD, SLV, USO, UNG/GAZ, DBA/DBC as examples.) SIMPLEd points out some things that are finally starting to get some wider-spread attention about the nature of our economy/money/monetary policy.

The attempt to bolster our economy by lower Fed rates is a losing proposition, in the end. The vast sums of investment by foreign investment sources is doomed to dry up, and be withrawn, as higher inflation (possibly hyper-inflation) and lower yields drive those investors into other markets/currencies that continue to value a strong currency in the long run, versus short term stimulus programs that artificially prop up markets.

Will be interesting to see if the summer run-up is followed by a precipitous selloff by the institutional investors.

Subprime is affecting many other foreign economies. But, their ability to offset the debilitating effects is greater than ours due to the overall lower impact, and truly organic growth. As the emerging market's standard of living improves, the developed world's will decline. Economic collapse is low probability, but a continual degrading of the US economy is high probability. Look forward to protracted dead cat bounces for the next few years., and a very hard slide (6000-8000 Dow) eventually.

The AMBAC Bailout Plan is Really About Banks Saving Their Own AAAsses

Make that Q4'08, there.

The AMBAC Bailout Plan is Really About Banks Saving Their Own AAAsses

Well, here's THEN what- The Fed will start easying rates up in Q4'07 (or Q1'09 at the latest.) The threat of Obamanomics will start to sink in, and a good lick of projected business investment will go in the shitter. All those short interest ETF's that were being held as hedge bets will start to run, and lots of dumping of longs will commence. The option guys will, of course, start putting hard, and drive the downtrend for awhile. Gold will run up even more, (after it's slight to moderate pullback from Q3'08,) and we'll all look back at the good times of up till then (now) with wistfull longing for the good ol' days. Seems familiar, already.

Don't Buy (Sell) The Bear

Now throw into the mix the very real possibility of just one of bond insurers going belly up behind the subprime paper. And if the fertilizer hits the ventilator before the gov't figures out that buying these guys up and covering that action @ $.50-.60 on the dollar is way cheaper than letting it happen, even just once, we could see a market slide that wipes out two generations worth of market increases.

Under The Radar News - Friday

Level playing fields are great and all, but given the somewhat suspect (moral/ethical) value sytems of many of the sovereign-wealth sources, I'd prefer the level playing field that favors the U.S. just a little more than of late. I don't really see the U.S. striving to instigate the tenets of tyranny, through economic manipulation, or any other means. But I do see that as a possible consequence of many near/mid/far east capital injection sources.