Posted by Eric Solis on October 20, 2009 under Stock Market | 
Long standing monetary and fiscal policy are the catalyst for the current commodity inflation and the bubble cycle that has been hop scotching from one market to the next since the mid 1990’s. And the “recovery” that market pundits will be promulgating will be the result of a financial bubble that will serve as a vacuum of wealth from Middle America into the pockets of the rich. This will not be a capitalistic bull market, but rather a hyper-inflationary re-pricing of financial assets. It will look and smell like a Bull, for a short time and then the devastating impact will be felt by working families all across the country. In fact we are in the early stages of it now.
This is why we MUST get every American into the market and out of fixed stored savings. ING has opened 6.6 million accounts on the promise of high interest rates. Bank of America 5.5 million accounts into Keep the Change on the same promise. People want to save; they are feeling the need and these institutions have figured that out. But, the supposed “high interest” they pay on these stored savings vehicles and the principal itself is becoming worth less and less with each passing day.
The media, MUST let go of the distraction about “costs” and the inefficiency of mutual funds and other means that make equity investing possible to the mass consumer. This is harming people not helping them. The cost is nothing compared to the harm of economic segregation. The message we should be telling Americans is that they CAN NOT afford to be out of the market. They MUST be in at all costs!!! The equity markets are by nature the only beast blood thirsty and wicked enough to combat the glutton minded fiscal and monetary policies of the past decades.
“Smart money” wants to keep the dumb money in stored savings vehicles, because this is non dilutive to the pyramid scheme that is being funded by our own Federal Reserve and government. Trillions of dollars are being pumped into the system in order to feed the beast. The beast begs to be fed in order to live (Fed and fed…interesting). So, Middle America MUST feed the beast too in order to fend off purchasing power poverty.
It is not a perfect solution and it is a “high cost” system using rich mans math. But when we compare what is happening to the purchasing power of stored savings, it is a MUST.
Posted by Eric Solis on under Saving and Investing |
I will buy your book and your RoR analysis. But, may I suggest that your rebuttal misses the point. I agree with you from a quantifiable and static approach of looking at rate of return. Clearly 10%-.15% is better than 10%-1.5% all things being equal. It does not take a lot of brain power to agree with that. But making RoR the central issue relating to costs and fees ignores the qualitative and dynamic issues that pertain to wealth accumulation and economic inclusion. Wealth accumulation is about core=commitments, vision=financial security, strategy=financial instrument and report=RoR.
In my view, the “percentage of assets under management” debate is absurd. It is a calculation for the rich, not main street. What is relevant is helping folks understand the concept of “marginal utility value” like electricity to stay warm versus the marginal value of operating an electric razor.
There is a real dollar cost of technology, legal, accounting, transfer, clearing and settlement and these systems are the gateway to economic prosperity and freedom for the middle and lower classes. Just as if they were starting a business, consumers must invest in the start up costs associated with building wealth.
The communistic view that one need not invest, but rather they are entitled to receive the best price is delusional and destructive (in my
opinion) to the long term financial health of our middle class. The issue is democratization through creating supply at market rates, which as a percentage of assets under management may look different than the traditional ratios. But if a person sticks with it long enough they too will be able to dictate the terms that they are willing to pay for the marginal value delivered over and above the fixed cost to maintain their account.
In closing here is an example:
$1 invested everyday for 67 years at 10% grows to $1,000,000 (est.). If the fee is $52 a year they will pay a total of $3,484 dollars over the
67 years. Yet, each and every year they paid 14% of the amount invested in fees. Is this smart?
The $52 is the utility value of saving and aught to be viewed as consumption in the early stages. But over time the ROI on the fees makes really good sense.
Posted by Eric Solis on under Stock Market |
Written June 2007
A Bear in Hibernation
First let me explain the general concept of a “bull market” versus a “bear market”. A bull market describes an overall market condition that is increasing in value and a bear market describes one that is decreasing in value.
Over the past several years, the U.S. stock markets have experienced a bull market that has driven prices to unprecedented levels. The Dow Jones Industrial Average has broken above 13,000 for the first time in history. This has created a lot of excitement amongst speculators who are buying stock in hopes of raking in oversized short term gains.
The purpose of this letter is to prepare you for what will inevitably come to pass. I am not a market timer, fortune teller or doom and gloomer. But I am a realist and a professional with 20 years experience in the financial markets and my goal is to impart to you what I have learned.
Here is what I want you to “bare” in mind (pun intended). The Bear will awaken and when he does he will devour those who have wandered off of the trail of good investment planning. The timing of when the bear will awaken is anybodies guess, but rest assured he will awaken. This means that the stock market could drop 20% or more and if you are not prepared you may be tempted to bail out and potentially lose money unnecessarily.
Be true to your vision and plans for the future and be committed to your goals. This will produce peace and abundance and less stress and fear as the markets fluctuate. For example, let’s say that your goal is to invest $10 a day. If the share value of your investment is $10, you will buy one share with your $10. If the share value drops to $8 you will buy 1.25 shares with the same $10. Your average cost in this example is now $8.88 instead of $9. If you keep buying as prices decline, you continually lower your average cost. This is called Dollar Cost Averaging and it is a highly effective antidote to “Bear Markets”.
The good news for those using the DailyIRA dollar cost averaging system is that it allows you to put money away every day that the stock market is open, . You can start with as little as $1 and you can adjust your contributions up or down with the click of a button.
Think of it this way, seeing a bear on a hike in the woods can add to the excitement IF you have the right equipment to defend yourself. But if you are not prepared and have no plan to protect yourself, you are asking for trouble. The same principle applies to investing. So have a plan and stick to it.
Posted by Eric Solis on under Housing and Mortgage |
The Sub prime Scapegoat
Written October 2006
Keep in mind that it was not long ago that we read about Fannie Mae and Freddie Mac. These are the harbingers for bad policy and the hand writing on the wall for what is coming. The $500,000 tax exemption was the jet fuel that hurled our housing market into debt bubble serfdom.
When the “dotcom” bubble burst, prices of anything that even looked or smelled like a dotcom company dropped in value 30% almost over night. Worse, pure play “dot-coms” dropped 70%+ or went out of business. The driver of this sort of “sell off” is that if a company is connected in anyway shape or form to projections that created the inflated values, then it needed to be “market to the market” through a re-valuation of current business expectations. This process is to be applauded, because it immediately allowed the market to re-set valuations and investors that took risks in pursuit of above market returns paid the price through a loss of capital. It is through this process that capitalism works.
Now, let’s look at the real estate market and what has transpired and how it is NOT playing by those rules. If you have been reading the newspapers you see headlines like “Real Estate Market Drops first time in 15 Years.” These stories go on to report that the market has dropped 1 to 3%. This my friends is a joke. A 3% decline is not even a correction, let alone a bear market. The stock market moves that much in an hour when major news hits the wire. The fact is that the housing market has experience far more damage than listings or closing prices reflect, but because it is such a slow market, prices take a long time to reflect value adjustments.
But, rest assure if your house was listed on the NYSE and it could be re-valued in real time on a day to day basis, it would be down substantially more than what the media is quoting. If we were to take into consideration your mortgage and your ability to pay your mortgage, this may even hurt value further, based on the risk of default that you represent.
The interesting thing here is that ignorance is not bliss. Markets are “markets” regardless of how efficient they are and they will have their way. Look at Eastern European countries, Japan, South America or other economies where markets have not been allowed to fail via control, manipulation or excess financial engineering. The result has always been the same…economic collapse. Just because one wishes it were not so, or that one becomes unwilling to accept the reality of a loss, does not change reality. As the old saying goes “wishing it so does not make it so.”
It is possible that people who are buying houses today thinking that they are getting a good deal, may be in fact paying a huge premium over what the house would be worth if it were market to the market.. When you are buying into a market that is rising prices adjust quickly upward because of the greed factor. But, when prices are falling they move very slowly because of denial. This dynamic creates a window for smart money to unload in what can be disguised as a “buyers market”. In the stock market there is an old adage “you don’t want to try and catch a falling knife”.
If you look at the behavior of the real estate market over the past several years, it makes the dotcom bubble look like child’s play. This debacle to my thinking will become the single most catastrophic economic event in the history of the financial world. Bigger then the stock market crash of 1929, bigger than World War II (in economic terms), bigger then the oil embargo of the 1970’s, bigger than the 1987 stock market crash and bigger then Enron, Worldcom and all of the other scandals combined.
And it is not just Sub-Prime that is the issue. This is going to touch every aspect of the housing market. Valuations have gotten so far out of line with income that it is frightening. In the same period where the housing market doubled, personal incomes rose single digits. The mantra that people buy a “mortgage payment” not a house is going to come back to haunt millions of people all across the nation. The message that the American public was sold was that the price you paid did not matter, so long as you could afford the payment (a strategy borrowed from the auto industry. “What payment can you afford on this lease?”) This propaganda is poison to sound decision making and will come with a steep price to pay for society.
Here is something to think about. When the stock market crashed in 1929, the primary cause was people buying on what is called “margin”. Buying on margin is the act of buying stock with borrowed money. For example, let’s assume you could buy $1000 dollars worth of stock and all you would needed to “put down” was $100 dollars. In this case, if the stock went up 10%, you would make $100 and thereby double your money. Conversely, if the market dropped 10%, then you would lose 100% of your money.
When the market crashed 1929, it fell 30% within a week. This wiped out all of the equity for those who were buying on 10% margin. So, after the crash, all of the bankers and regulators got together and raised the margin requirement to 50%. This meant that a an investor would have to put up $50 for every $100 dollar of stock they wanted to buy and the stock would have to drop 50% before all of their equity would be lost.
But they DID NOT apply the same rules to the housing market. Many folks to day have been able t buy a house with zero down. And a large percentage of home buyers have put 10% or 20% down. That means that a 20% decline in the housing market could wipe out all of the equity of millions of home owners.
