Jittery markets and helpful government

By Brian Ochsner (baochsner@aol.com) Exactly as Ronald Reagan said, the nine scariest words a small business owner (or investor) can hear is: “I’m from the government, and I’m here to help.” Government ‘helps’ just like a 5-year-old helps his mom make breakfast: the actions may be well-intentioned, but the results aren’t that positive.

The Sarbanes-Oxley regulations for publicly-traded companies are Exhibit A. Next I would mention Fannie Mae and Freddie Mac’s involvement in lessening risk with mortgage lending, along with former Fed chair Alan Greenspan’s lowering of interest rates to all-time lows.

In the aftermath of corporate scandals with companies such as Enron and MCI/WorldCom, Congress felt they had to ‘do something’ to protect investors from unethical companies. But just like the little kid helping mom with a meal, the results were worse than the intentions.

It’s increased compliance costs for publicly-traded companies such as Berkshire Hathaway – Warren Buffet’s firm. In a recent CNBC interview, he mentioned the costs of auditing Berkshire’s 2006 financial statements totaled about $24 million. After Sarbanes-Oxley was signed into law, IPOs (Initial Public Offerings) for companies in the US dried up. A lot of companies went private or did their IPO on a foreign stock exchange where regulations weren’t as onerous.

The government’s ‘help’ in creating the real estate bubble came from Greenspan lowering interest rates to rock-bottom levels and encouraging Americans to take out interest-only loans – also known as ‘option ARMs’ (Adjustable Rate Mortgages). This allowed many homebuyers to finance a home they really shouldn’t have bought in the first place.

When these ARMs re-set after usually two or three years, the payments increased, which resulted in the higher rate of foreclosures in Colorado and around the country. After these risky loans were made, lenders were able to sell a good portion of them to Fannie Mae and Freddie Mac.

They bought the mortgages that were originated with other lenders, such as Washington Mutual and Wells Fargo to lessen the risk to mortgage lenders – especially those in the sub-prime (translated: high-risk borrower) market – and keep the real estate mania/bubble going.

Now Fed Chair Ben Bernanke is calling for Congress to rein in Fannie and Freddie from buying these risky mortgages. This action is too little and way too late. Kind of like closing the barn door when the horse is a mile away.

Government’s ‘help’ increased the value of real estate prices, and kept the economy going for awhile after the dot.com fallout of 2000. Now that the real estate/mortgage market bubble has popped, Wall Street is getting a little nervous. The Dow has gone down triple digits twice in the past two weeks.

The result of this government-sponsored ‘help’ is probably going to be a downturn in the economy over the next few years, maybe even a decade or so. The solution to these challenging times won’t be more government involvement. You should never ask the people that got you into the problem to get you out of it.

Unfortunately, I see more and more Americans looking to government instead of themselves to solve their financial and economic problems. So what do I suggest folks do to prepare themselves?

First of all, learn how to invest – namely, how to read financial statements: the Income Statement, Balance Sheet, and Statement of Cash flows. Look at financial and economic trends throughout history, especially over the past century, not just the past few years.

You could put your money with a financial planner or stock broker and forget about it, but I don’t think that’s a smart way to invest. Frankly, I think most of them are good salespeople, but not necessarily good investors. Their job is to get you – and keep you – in the stock market, not necessarily to maximize the returns on your money.

Next, learn about Austrian economics (not the Keynesian garbage that’s taught in almost all universities), the role of gold and silver as money. You also should learn how to sell and market, and preferably be in business for yourself. Job security is a myth nowadays with global competition for labor, American economic risk and company management risk. Not to mention what happens to jobs when companies are merged or acquired – they usually get cut.

Even with all these financial storm clouds brewing, there are still plenty of opportunities to get ahead financially. Turn off the TV, and take some time to invest in your own financial and economic education. As Louis Pasteur said, “Fortune favors the prepared mind.” This financial preparation will be very important for self-reliant Americans in the years to come.

An economic observer turns the page

By Brian Ochsner (baochsner@aol.com) I look back on 2006 with some satisfaction, some regret, and the realization that we live in a constantly and rapidly changing world. There’s a Chinese proverb that sums up what I see for 2007 and beyond: “May you live in interesting times.” This can be either a blessing or a curse. Which one it is depends on the preparation and actions you take to stay ahead of these trends.

One reason why some Americans are frustrated and confused about things is because they don’t understand the trends happening around them. The traditional ‘Mom and Pop’ retail shops are generally struggling… unless they know how to market well, and preferably on the Internet. They also see their dollars not going as far as they used to because of high inflation.

For folks looking for job security, well, they may be looking for a very long time. Ever since companies started downsizing in the ‘80s and outsourcing to foreign countries in the ‘90s, this trend has accelerated and will only continue. Not to mention changes in industries, combined with management risk in some companies, such as GM and Ford.

Douglas MacArthur said it best: “The only security a man has in this world is his ability to produce.” In today’s economy, you should learn sales, marketing, the ability to read financial statements, and to know what a good business looks like. If you have any (and preferably all) of these skills, you’ll have no problem getting employed, and should be able to start your own business. Best places to start learning these skills is by reading books from Robert Kiyosaki and Dan Kennedy – two of the best business and marketing minds I know.

One prediction I can make with certainty: In 2007 and beyond, big, dumb, slow companies will not be around for very long. If firms don’t adapt to business and economic conditions (and quickly), they won’t be in business.

Retail business is a maturing and slightly declining industry. Rising energy prices and overhead, time-crunched consumers, and less-than-knowledgeable employees are three big strikes against it. Having said that, I still believe that retail stores will still be around for a while.

But their days of dominance are done. So what businesses will be taking their place? Preferably ones that are Internet-based, have products or services that are in demand, and where customers buy them on a repeat basis. I can’t make a blanket recommendation, since everyone has different skills, abilities and personalities. One-to-one marketing and mass customization are two emerging trends that smart companies are utilizing. I’ll explain more about these trends in future posts.

2006 was a year where one of my commodity predictions was exactly true. This time a year ago, I took a stab at predicting the year-end prices of gold and silver. I wasn’t so close on silver, it was about $1/ounce higher than my prediction of $11.70/ounce, but my gold call was golden.

My gaze into the crystal ball had gold at $637.50/ounce (for proof, here’s the actual blog post, scroll down 2/3rds of the page). Here’s the December 29th screen shot from Kitco.com for Friday’s year-end close of New York gold:

SPOT MARKET IS CLOSED opens in 37 hrs. 32 mins. Dec 29, 2006 13:30 NY Time Bid/Ask 636.00 - 637.50 Low/High 636.00 - 637.50 Change +1.80 +0.28% 30daychg +1.00 +0.16% 1yearchg +120.60 +23.40%

I don’t know if I can repeat that again for 2007… if so, I’ll have a website with paying subscribers. I’ll tempt fate and call my shots again. For 2007 year-end, I’ll say silver will be at $18.40/ounce, and gold at $818.00/ounce. The reason I like commodities (and especially gold and silver) is because they’re great hedges against rising inflation that we’ll continue to see in the years ahead.

But my satisfaction with being right is tempered with sadness. An uncle of mine passed away Thursday night after 88 years on this earth. He became ill Christmas Eve and went to the hospital, where my dad and I visited him on Christmas Day, and said our goodbyes the day after.

Services will be in western Kansas on New Year’s Day. I’ll have a low-key (and pretty sober) New Year’s Eve, and a melancholy way to start 2007. You never like losing a friend or relative, but it’s a good reminder that our days on earth are numbered, and we need to make the most of them.

And it’s not just about using your talents to their utmost (which you should make every effort to do), or being financially successful. When you see someone on their deathbed surrounded by family members, your priorities and what you’ll be remembered for become very clear.

While I’ll still work hard at being a better copywriter and marketer, I’ll make sure that in 2007 I put enough time and effort to stay connected with friends and family.

I still believe it’s important to be flexible and adapt to changing business and economic conditions, I also believe you need to stay grounded in common sense, wisdom and Judeo-Christian principles. That’s a winning combination to navigate the interesting times of 2007 and beyond.

Best wishes to everyone for a Happy, Healthy and Prosperous New Year.

When deficits finally matter

By Brian Ochsner (baochsner@aol.com) While the financial press has been trumpeting the Dow hitting the 12,000 level, I’ve been doing some contrarian financial research. I’ve looked at the prices of certain key commodities and indices – namely, gold, silver, and the US Dollar Index.

I’ve heard well-respected commentators such as Larry Kudlow and Mike Rosen make solid cases about why budget deficits aren’t that important and won’t negatively affect the US economy. This is usually to support the case for continued confidence and investment in the US stock market. They’re correct, based on two big assumptions: 1) The rest of the world still has confidence in the US Dollar as a store of wealth, and 2) Foreign central banks will continue to lend us insane amounts of money (over $2 billion/day) to keep the credit party going.

There’s a great phrase from the book Atlas Shrugged: “Check your premises.” Based on recent statements from foreign central bankers, respected financial analysts, and price movements in the metals markets, I think Larry and Mike may want to recheck their premises. I believe we’re close to the day when these deficits finally matter.

Investing and economics can be complex and confusing issues at times. I’ll give a simple explanation why foreigner’s confidence in, along with the value of the greenback is declining. The US is carrying a huge debt load, and is buying more goods from foreigners than foreigners are buying from the US.

Think of our country as a business: U.S.A., Inc. I’ll use round numbers to make this explanation easy to understand. Let’s say U.S.A., Inc. makes $1 million of gross revenue a year (also known as GDP), but carries about $700,000 of debt on its books (the level of stated national debt). It also has future obligations to pay in the next 15-30 years of about $5 million (Social Security, Medicare, military and government pensions).

And – there’s no guarantee that the gross revenue of this business will increase, or even stay the same. Today, our national GDP is about $12 trillion. The level of stated national debt is about $8.2 billion. According to a report from Professor Laurence Kotlikoff issued through the St. Louis branch of the Federal Reserve, the United States will go technically bankrupt very soon, if we’re not there already.

That’s because of “ballooning budget deficits, and a pensions and welfare time bomb,” according to Kotlikoff, with future obligations of over $65 trillion. This financial problem can’t be pinned on one party or administration. While Democrats are the usual suspects for growing bigger government, Republicans in the past six years deserve an equal share of the blame for this bloating bureaucracy.

This is why more Americans need to be financially and economically literate. That’s to navigate what could be turbulent financial waters ahead. If you haven’t done so already, check out the Mises Institute -- a great resource to learn about Austrian economics. It’ll give you a much better understanding of economics, government policy, and how they affect you and our country.

The Daily Reckoning is where I’ve also learned about the Austrian school of economic thought since 2000. It’s a well-written, entertaining and educational daily e-zine. And for the best weekly webcast on financial issues, check out the Financial Sense Newshour with Jim Puplava and John Loeffler.

What I’ve written may be shocking, and you may not agree with or like this analysis. Believe me, I don’t enjoy being the prophet of future financial pain. However, success in investing – and in life – requires you to look at the way things are, and not how you wish they were.

The reasons I’ve given (which I think are sound) are why I believe we’re at the point where deficits finally matter. Take some time to examine your financial and investing philosophy, and see why you believe what you believe. Checking your premises now could help you avoid financial disaster later.

Economic normalcy headed for a tumble?

'May you live in interesting times.' - A Chinese blessing or curse By Brian Ochsner (baochsner@aol.com)

I’ve taken a good look and carefully analyzed American and international economic trends, and have a vision of what I think will happen in America’s economic future. What you’ll read in the next few minutes may be very different from past ‘normal’ financial and economic conditions. As an American, this may be a huge paradigm shift and a different type of ‘normal’ you’ll have to adjust to in the future. That’s why I’ve coined this post “The New Normal.”

Here are several financial and economic trends that I see over the next decade or two, and what you may need to prepare for them:

First, I see the transfer of economic power from West to East. The US is too heavily laden with debt, and has shipped off a good chunk of its manufacturing base. Europe has stagnated due to socialist economic policies in Germany, France and other countries, and faces the same challenge that American workers do: Competition with workers from China and India who will do the same jobs for 10-20 percent of the dollar of a European or American employee.

Some people believe that it’s their birthright as an American to have a high-paying job, high standard of living, and two SUVs in their garage fueled with cheap, plentiful gasoline. I grew up on a Kansas farm and ranch, and loved driving tractors, trucks and big cars that sucked down gasoline like I guzzle iced tea on a 100-degree day. Unfortunately, I don’t envision the return to these good old energy days, which leads to my next point.

I see the end of cheap petroleum-based energy sources in America and around the world. The concept of Peak Oil – where worldwide supplies of easily accessible crude are declining instead of increasing – may be closer than Americans think. Increased demand from China and India and a declining US dollar are two main reasons for higher prices at the pump. We also have a US Congress that has refused to allow drilling for new oil and gas sources off-shore, in the Arctic National Wildlife Refuge (ANWR), or anywhere else – at least until recently.

The American economy is heavily dependent on the free flow of affordable oil and gas. If – and probably when – oil and gas prices continue to go higher, the US will need to develop a “Plan B” for our national energy policy. Industries that are heavily dependent on fossil fuels, such as production agriculture, long-haul trucking will have to adjust accordingly.

There are some alternatives available, such as corn-based ethanol for gasoline and oil trapped in shale rock, primarily in Colorado and Utah. However, they’re not very energy-efficient, and won’t be available in large enough quantities to make a difference in the US energy supply for at least 5-10 years.

Third, I see the decline of the US dollar as the world’s reserve currency, where almost all of today’s transactions for crude oil and other commodities are done in greenbacks. Countries such as Russia, China and Sweden are diversifying their currency reserves out of the US Dollar, because they don’t like the high amounts of debt on America’s balance sheet due to large trade and federal budget deficits.

Some people – including Senators Chuck Schumer and Lindsay Graham – have said that the Chinese need to revalue their currency to a more ‘fair’ level, and the sooner the better. The senators and other Americans should be careful what they wish for. Current currency valuations allow Americans to import and buy plenty of cheap Chinese goods. If – and probably when – the Chinese currency strengthens against the US dollar, this will make these goods more expensive, reduce American consumer’s purchasing power and slow down a consumption-driven US economy.

Even if the Chinese yuan and US dollar were even in purchasing power, this wouldn’t make up the disparity in wages between what American and Chinese workers are paid. Most S&P 500 corporations are multi-national and not just American anymore. If these companies can make more profits due to cheaper labor and/or better currency valuations in another country, they’ll do it. That’s why I’m skeptical that America’s manufacturing base will come back anytime soon.

This leads me to another point, the decline of the safe, secure, high-paying American job. Our public and private education systems are based on the 20th Century Industrial Age, where students were taught to be good employees in what were new urban factories. Today we’re in the Information Age, where companies are in transition quicker, jobs are less stable, and your own security is based more and more on your ability to produce.

The US economy has transitioned from a manufacturing economy in the '70s and '80s, to a service economy in the '90s, now to a hybrid service/financial economy in the 2000s. A good number of jobs and wealth have been created in real estate, namely in construction, and with mortgage and real estate brokers. Americans seem to have forgotten that a country can only prosper financially when you make and sell a sufficient amount of goods to other nations, along with your own.

Thus I also see investors making a shift from financial paper assets to tangible assets, with the exclusion of real estate. This is because financial ‘assets’ (such as bonds and mortgages) have made it cheap for homeowners to borrow and buy bigger homes – known as ‘Garage Mahals’ and ‘McMansions.’

Because of America’s declining balance sheet, long-term interest rates on 10-year Treasury notes (which a lot of mortgage loans are based upon) are almost certain to increase. Quite a few homeowners will be shocked to discover that their home is their biggest liability, not their biggest asset. The lending sector can find creative ways to keep house payments lower. Specifically the new 40 and 50 year fixed-rate mortgages you hear advertised.

I believe that gold and silver will be excellent hedges against inflation and solid wealth preservers for the next 10-20 years, and my opinion is based on the analysis of economic and financial experts that are more experienced and savvy than I am -- folks such as Richard Russell (www.DowTheoryLetters.com), Jim Rogers (www.JimRogers.com), Robert Kiyosaki (http://finance.yahoo.com/columnist/article/richricher/2987), Marc Faber (www.GloomBoomDoom.com), and the best Austrian economist you’ve never heard of, Kurt Richebacher (www.Richebacher.com).

More Americans need to be financially and economically literate. They need to understand how to invest wisely, and how to sell and market so they can create income sources other than working for somebody else. You can still try to locate the almost-mythical “safe, secure job” to attain financial security. However, you may be looking for it for the rest of your life.

The best and simplest place to learn financial literacy is to read the best-selling book Rich Dad, Poor Dad -- or listen to the audio version (http://tinyurl.com/ndj5t). I’d also recommend playing a fun board game called Cashflow 101 (http://tinyurl.com/oepz8). It’s similar to Monopoly, and a very realistic game that shows you how certain financial decisions affect your financial condition.

Once you’ve learned the basics of financial literacy, then you’re better able to be economically literate. I recommend you read several websites daily to learn economic issues from an Austrian economic perspective:

www.DailyReckoning.com www.321Gold.com www.InvestmentRarities.com www.FinancialSense.com

We’re coming upon some very ‘interesting’ economic and financial times. If you understand the economic conditions, learn how they’ll affect you, and take action to protect and profit from them, you’ll be in good financial shape. If you stick with the old paradigms that don’t work anymore, well… you’re on your own.

Having said that, I still believe that Americans should hold fast to Judeo-Christian values and ethics, while making these prudent adjustments to changing economic times. In closing, I’ll leave you with the quote from the wise sage in the Indiana Jones movie Raiders of the Lost Ark, which is my advice to you: “Choose, but choose wisely.”