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The Rainmaker Investor Report is written by Alejandro Reyes. Alejandro began his career at Morgan Stanley working as a Financial Advisor for the Private Client Group in 2000. His career evolved as he became a mortgage banker in the mid 2000’s as the housing market surged. At his apex, Mr. Reyes... More
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  • Free Lunch

    Now I want to talk about sandwiches. Not regular sandwiches, but the ones that decide how you are going to retire one day. So you ask what kind of sandwich that could be, and I tell you about your sandwich portfolio.

    You see, if you have a big box broker, or even an independent advisor, they undoubtedly have sold you more than one sandwich investment. Let me tell you how it works.

    When a mutual fund company, or an annuity company or anyone for that matter, wants to sell you stuff, they start with buying your salesman financial advisor a sandwich. That advisor gets ushered into a conference room where there are at least 4 different types of sandwiches, and maybe even different kinds of chips are served.

    They sit for an hour, eating this sandwich, listening to the sales rep pitch the fund. The advisor's eyes glass over, except for the few extra sandwiches floating around during the meeting that you are keeping your eye on for later.

    Depending on how much commission the thing pays how appropriate the investment is for the client, it might even be a nice steak dinner. But let's just focus on what the majority of your portfolio is made up of. I can bet green money that at least 50% of your portfolio was sold to your advisor over a free sandwich.

    Now it is not a crime to bribe convince your salesmen advisor with sandwiches, but the performance of these investments is what I want to talk about. I am sure you can think of a few mutual funds in your possession that were sandwich buys.

    Folks, Wall Street was built on free sandwiches. You can actually tell how dangerous the thing is for you by how nice the sandwich is. If it is steak dinner, you can expect to lose a bunch of money.

    If it is just a run of the mill sandwich, you can just add a year or two to your retirement date and that should suffice.

    Well the reason for all this talk about food is that the Hedge Fund performance figures are out and it is starting to look like they have been eating a bunch of sandwiches lately.

    The entire hedge fund universe is not anywhere close to performing as well as the S&P, and that is before the 2% upfront and 20% of profits. So the point here is that maybe 2% and 20% was the old normal, and we have entered the NEW normal where lower returns and lower fees are appropriate.

    I still say that unless your separately managed fund does not eclipse the benchmark they are chasing for at least a 5 year average, it makes no sense to own said sandwich fund. . Hedge fund investors are just rich mutual fund investors anyway. These investors are hungry for Alpha.

    Which brings me back to sandwiches again. Your portfolio is like a sandwich. Think about it. You are piecing together components. Bread, meat, cheese, vegetables, dressing. They are just like stocks, bonds, etf's, cash and insurance.

    Just think about this: if you were making sandwiches to sell from a food cart, and you were making sandwiches to eat at halftime of the football game, which sandwich would YOU want to eat? Probably the handmade halftime sandwich. Why? Because you made it for yourself. Probably put a little extra meat on it. Exactly as much mayo as you like. You probably even sorted through the loaf for the two best pieces of bread.

    Folks, if you want to eat sandwiches, make your own. Because when you buy one from a big box deli (mutual funds/ hedge funds), they are not made the same. Same goes for your portfolio. Your advisor does not make your sandwich like he would make his own sandwich at halftime. He makes it like you are a customer of his food truck.

    As good as he makes you feel, do you think your sandwich and his are comparable? Not even close. So as we go over performance for the year, look through your investments and tell me how many sandwich picks you have? How have they done? How many are you going to keep? Next time you are with your advisor, bust their chops a little.

    As we move into 2013, sandwich picks are going to become more and more prevalent. Shiny brochures and slick bullet points are the tell.

    As soon as you see glossy anything, run for the hills. It is a high margin sandwich with flimsy meat and wilting vegetables. Think about what is in that sandwich, and what we could do to replicate it at home. Because any and all "good ideas" are going to get roasted this year as everyone who manages money pulls every available napkin out of the stack to keep the kitchen open.

    A closing comment: that sandwich was bought and paid for a long time ago. The only thing that is left is your investment. Let it go. More clearly: make sure you want to be invested in every single security in your possesion. Because the reality is: there is no such thing as Free Lunch. Thanks for taking the time to catch up on my thinking and reading The Rainmaker Investor Report.

    Mar 16 2:16 PM | Link | Comment!
  • Rosetta Stone: Deciphering Bernanke's Rhetoric

    With all this hype over the recent stock and housing market gains I want to discuss the macroeconomic background we have to invest around. I would like to discuss deflation and its effect on debtors.

    Most analysts do not even concede we are in deflation, so I figured I would reproduce Mr. Bernanke's famous Deflation Speech from Nov 21, 2002 with my own commentary in the seam so we can see if we have deflation or not. And if we do, which assets are good to own, and which ones are not. I skipped the top part where he glad hands and introduces himself, and go right to the meat of the issue:

    Deflation: Its Causes and Effects Deflation is defined as a general decline in prices, with emphasis on the word "general."

    At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.

    The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.

    Been there, done that, got the T-Shirt.

    However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."

    Deflation of sufficient magnitude may result in nominal interest rate declining to zero. Interest rates are at zero, therefore we have sufficient magnitude of deflation. Case in point.

    Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.

    The real interest rate paid by borrowers equals the expected rate of deflation, however large that may be. Translation: we don't know how screwed you are yet, but it's a bunch.

    Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value.

    When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.4 The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.

    The greatest burden is on households who have accumulated substantial debt. Hello? Even if Debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling, they must still repay the principal in dollars of increasing (PERHAPS RAPIDLY INCREASING) real value. Does this sound like something you want to do? Now about how Japan has encountered deflation induced, ever increasing real value of debts. This paper was written 11 years ago, and they had ever increasing debts then! Now, they are 11 years worse. Please tell me you are getting it now.

    Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5

    When the short term rates hit zero, they pull the next lever which is…

    Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.

    Maybe he will recommend making Treasury purchases out on the curve to suppress rates soon.

    Preventing Deflation As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place. Beyond this commonsense injunction, however, there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation.

    Smoke 'em if you got 'em.

    First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.6 Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.

    If rates are at zero, doesn't that mean that the economy has fallen far enough into deflationary territory?

    Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks. We will support the banks because we need them to operate on our behalf.

    As long as we don't make them sell everything at once, we can help them "earn" their way out of trouble as long as things are orderly…

    As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.7

    We have stuff we can try, but we don't know if it will work.

    So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

    Bingo. Buy Treasuries out on the Curve. He wouldn't recommend buying Agency securities next, would he?

    Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

    Oops. Looks like all these things haven't worked either.

    Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.10 Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.11 For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.

    Isn't this Operation Twist?

    To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the non-bank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15

    Cash for trash securities exchange program paragraph.

    The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16

    US Government debt should have been written first, but it is conveniently added second like it is some second hand option.

    I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

    Strong Dollar lip service paragraph.

    Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

    When it gets bad enough, we'll devalue the dollar whilst you are sleeping one evening. It won't hurt a bit, we swear.

    Fiscal Policy Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.18

    I wonder what happens when you get a tax increase? And with over 50 million people on food stamps, they are going to have a hard time "rebalancing their portfolios by using extra cash" to do what? Stay alive? Yes, stay alive.

    Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

    Oh, they add the food stamp money in here. Sorry for getting ahead of you Mr. B. Oh and, isn't increases in transfers from the government sound a little like the backbone of Obamacare?

    Japan The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.

    11 years later plus the 10 years before that and they are still in Deflation. That is 21 years. We are 5 years into our downturn. Do you want to buy houses now?

    First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.

    We have a large overhang of government debt.

    Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.

    Japan is different because they have politicians making decisions. Nothing like here in the US…

    In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.

    Conclusion Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.19

    I know this is long, but I just wanted to force feed you the Bernanke Playbook so we can decipher the rhetoric. Since we know he has done every single operation on this list, we know we are in deflation.

    In the top section, he mentions who is affected most by deflation. Borrowers who have accumulated substantial debt. And paying back the debt in dollars of increasing value? Does that sound like fun? No.

    So I hear everyone on earth say "Don't fight the Fed". Ok, I agree. Fed says don't own long levered assets that fall in price. What does everyone else say? Buy long levered illiquid assets on credit. I thought we weren't fighting the Fed?

    Then everyone says, buy homes. What do I say? Do not buy homes. If you have concluded reading the above 4000 words, and your takeaway is that buying homes is a good idea, then God bless you. I just want to show you the basis for my argument.

    This document was written 11 years ago. He is playing every card in the deck, IN ORDER of appearance on the list.

    Now here is where I want to walk to the end of the block with you. My theory is that the advent of high frequency trading has destroyed the wealth building mechanism that he discusses.

    If you could just pour cash into the market, and everything goes up, then everyone gets free money. But with high frequency trading the market does not just have to go up.

    In fact, there is more money to be made, tossing it back and forth. What happens instead is something like 2 big kids throwing the ball back and forth to each other, just out of the reach of the little brother who keeps jumping for the ball.

    Big brother #1 is the banks, and big brother #2 is the hedge funds. If you don't know who the little brother is yet, then you have other problems.

    So if we think about which assets will take money, in order they are: government bonds, agency bonds, corporate bonds. Then, when the Fed gives free money to the banks so they can buy securities, stocks should be beneficiaries.

    But since we know that HFT is alive and well, 'MO money just means 'MO problems.

    Securities that will do poorly in deflation are mortgaged property of any stripe. It is because it is illiquid and has high carrying costs. You don't need to keep the heat on in your GE stock today.

    I bet Stephen Schwarzman has like 15000 investment bankers with shovels protecting their assets in the rental market.

    The final takeaway is that there is not enough dollars "in circulation" which is important to differentiate.

    More money in the system is not more money in YOUR system.

    If you look at your finances in a different way you may understand it better. Instead of calculating total dollars in or out of your balance sheet, why not break your expenses into 3 buckets.

    First bucket is taxes. Payroll taxes, income taxes, sales tax, property tax, tax on your utility bill, tax on your cell phone. Tax.

    Next bucket is interest expense. Interest on your mortgage. Interest on your school loans. Interest on your car note. Interest.

    Finally there is your bucket. Every dollar you make pays the first 2 buckets first. The remainder is for you to keep. Folks, you can't affect the tax bucket unless you decide not to make any money.

    That means the only bucket you have any control over is the interest expense bucket. Please do not fill your interest expense bucket and leave yourself out in the cold.

    Pay yourself first is the coined phrase. I am here to actually help you protect yourself from debt imprisonment. It ruins lives.

    So to tie up a long winded soapbox session, I want you to know that the best advice I can give is for you to sit tight on new real estate purchases, and take appropriate steps to pay down debt in an aggressive fashion.

    There are no losses when you pay off debt. It is a 100% guaranteed return. It's not like: hey buy Apple, it is going to go up. That is opinion. This is a fact.

    Corporations are de-levering and cutting expense, but you are supposed to be taking on debt. Give me a break. Do not follow the crowd on this one. I will always be here, every day, rolling up my sleeves, to keep you ahead of the crowd. Thank you for your time to read The Rainmaker Investor Report.

    Alejandro Reyes

    Mar 13 11:00 AM | Link | Comment!
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