Posts Tagged ‘Debt’

The Economy: Is It Really Getting Better?


What We See

People are optimistic, The Dow remains above 10,000, inflation fears seem over-estimated, and the financial crisis seems isolated in places like Greece, California, and random long-expected lay-offs.

I just met with a manufacturer of fashion apparel and she was telling us how many designers who were previously afraid to launch their collections are now coming out of the woodwork with some very risky and ultra-modern designs. So we have throngs of risk-taking designers in the already cut-throat industry of fashion design. IS the economy picking up?

What We Get

Sometimes in science, and in economic models we can often assume what something is by what it’s missing. In this case: Fear. Is there caution? Absolutely. But the open-eyed cold-faced pessimism we saw in March of last year seems to have gone into a long winter hibernation. This is the problem. Fashion designers, manufacturers and central bankers are all sharing the same sense of false security.

Here are some reasons why:

  • The VIX (which tracks market volatility, otherwise known as the “Fear Index”) is touching all-time lows. This means people are discounting any chance of risk in the market.
  • Gold and Silver are slowly and quietly creeping up towards their all-time highs, a sign that financial security is again coming under question.
  • Commercial Real Estate, Rising Unemployment, Too Low Interest Rates, Government Irresponsibility, and High Stock Valuations are all playing a major role in the potential for another crisis.

Here are some insights from top banking insider and billionaire, Andy Beal:

When was the last time you prepared for any worst case scenario?

What We Do

One of the best and easiest lessons I ever learned in finance was as follows, bear with me:

Income (money that comes into your pocket) – Expenses (money that leaves your pocket) = Cash Flow (“my money”)

With this in mind there are 3 things you have to do:

1) Stop Spending! Buy used, buy less, buy what you need. This is a timeless and necessary action if you ever want to be happy financially. A used book on Amazon is rarely any different than a new one… but its far cheaper.

2) Get out of debt! There’s no good reason to spend 101% of your income(s). Start paying cash, pay off far more than your minimums, and stop paying someone else 15-30% for everything you buy.

Everyone knows the first two suggestions but few focus on this next one...

3) Make More! Don’t just mope and cry about how you now have money in the bank, but feel broke. Get out there and challenge yourself! Make some more sales calls, do things to get promoted, start your own business (YES in a recession). If you want to have anything significant in life, you’ve got to go get it. Be proactive and MAKE it happen!

No matter what happens, you will always be you, and there will be good times, and not so good times. Your job is to ensure that you and your family are protected and comfortable, both financially and emotionally, no matter what life brings!

The 3 Keys to Start-Up Survival


“There were 3 reasons why we survived: We had no money, we had no technology, we had no plan. Every dollar we used very carefully” Jack Ma, Founder of (read that again)

It forces you to be clever, to dissect problems instead of throwing cash at them, to innovate instead of imitating better-funded competitors. Embrace your lack of resources, your weaknesses! Every problem has a potential solution.

There is an inverse relationship between the amount of funding and the ultimate success of companies.

1) Write down the positives of whatever you’ve been viewing as a negative. No funding? Budget wisely. Set trends, not follow them.

2) Consider the negatives of the positives. Too much funding gives a false sense of security. Nothing is perfect so do whatever you can.

3) Look for dark horse models. Has anyone overcome worse circumstances to do what I want to do? Yes, of course. Every problem has a potential solution. Go find it!

The above is an executive summary of an article written by Tim Ferriss. As a first-time entrepreneur, I understand the facts above to be “self-evident”. Think if it this way. If big companies have the best people, and the most money, how is it that entrepreneurship and small business even have a chance in Corporate America?

The answer, of course, is that funding doesn’t always lock in your success. Yet I would clarify that money is the life-source of any organization; profit or non. You need capital, and lack thereof can send your company to bankruptcy faster than you can sign your supplier’s check.

Find a way to grow using only profits from existing sales without any outside funding and you’ve got it made!

Related articles: The 8 Pillars of Business Endurance

On the Trade Deficit

“Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience ‘reverse compounding’ as we pay ever-increasing amounts of interest on interest.”
– Warren Buffett

Postponing the Inevitable

Many investors, myself included, find it hard to believe that we are facing an enormous credit crunch of cataclysmic proportions. But although I’m generally an optimist, logic gets the best of me when I read from Bloomberg I read

“Executives at New York-based S&P, Moody’s and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt.”

What the hell does that mean? Is that another way of saying “We are not going to actually say that things are bad until people can realize they are bad”. (Sounds like the Cisco-pumpers in the late 90s to me).

I read further and the article states

“Homeowners may be delinquent on mortgage payments for at least three months before foreclosure proceedings begin, and the process can be delayed if a borrower files for bankruptcy or fights eviction. Even when lenders repossess a home, the value of the mortgage isn’t written down until the house is sold.”

Key words: Delinquent, Delayed and phrase “until the house is sold”.

Home Sales
Which raises the question. How have home sales been going? Apparently, not so good. Although housing sales have been picking up – a double edge sword – we do have record inventory and the most gullible group of home owners who still believe that this housing “slump” will be long gone come 2008.

But let me ask you. Which homeowners are the ones really eager to sell, the second-home “investors” or the poor couple with no recorded income, who bought a house because everyone else was? I’m not sure but it would seem that it’s the latter.

I have two reasons. For one, Speculators aren’t that stupid. They are the ones who get out as soon as they realize they’ve been had. They know how to get themselves out of the mess that the investors didn’t get into in the first place. Joe Sixpack on the other hand is the one who gets fried. He is the one who ends up mopping up the mess the speculating public left behind – and at a hefty price.

Secondly, besides for trying to make some money Joe Sixpack also needs a place to sleep. Thus, he is far more reluctant to sell than the well-to-do speculator across the street (all pun intended).

Mortgage Bonds
And when will the bondolders really get had?

“Bondholders see a loss only if the price of a house is lower than the loan used as collateral for debt securities.”

In other words, mortgage bonds are directly related to housing prices. When these houses fall, and along with them the collateral used to buy them, the whole house of cards comes crashing down (all pun intended once more).

“What they don’t understand about the rating process is that we don’t change our ratings on speculation about what’s going to happen.”

In otherwords what we have been telling you for ages – by time Wall Street tells you something you should know, its usually too late. For the record, S&P and Moody’s maintained their investment-grade ranking on Enron Corp until days before the Houston-based energy trader filed for bankruptcy.

Oh and if all this hasn’t freaked you out enough to realize that financial assets are in a rut, “National median home sale price is poised for its first annual drop since the Great Depression” Ouch!

The Butterfly Effect
“So,” the simple investor will ask “what does all this have to do with, say, the stock market?”. Well my curious friend, I would answer, you are obviously not familiar with the dynamics of leverage. As debt strategists at Barclays Capital reported “The worry is that this will be large enough to trigger margin calls which, in turn, will cause other liquidations and so on.”

As they say out in the country: “When one falls they all falls”.

La Baby Boomers

“I think some of the young people are starting to see the faults of the baby boomer generation and the mistakes of their parents. The cycle is only going to be broken with the true education of people in their teens and twenties and I think that’s slowly starting to turn around.”
– Mr. Young, a bankruptcy lawyer in Chattanooga for almost 30 years.

It seems that the generation of Baby Boomers had an excellent upbringing. Born between the years of 1945-1960, these children received a parenthood (from those, born 1920-1945, who were witnesses of one or more depressions as well as both world wars), that fed them with the knowledge of staying healthy (everyone has that grandparent who we all call a “health freak”), financial literacy (money managing, budgeting, saving) and a general respect to those who are due.

However , these boomers must have considered this education of little importance as they went on to live lives based on credit and consumption (both fiscal and edible) becoming the most debt laden generation in history. This was handed over to their children. Sayings like “Deficits don’t matter” and “Just eat!” taught the young ones that discipline is not necessary in a good life. Just live and enjoy! They brought up a generation of rebels who now as then oppose the War, who then as now have a hard time understanding the meanings of words like “depression” “deflation” and “credit contraction” (pronounced “Crunch”).

What we are about to witness, and this has been expressed by figures such as the Federal Reserve Chairmen of late, Chief Accountants, vintage Investors and economic sages the world over, is a shift of sentiment. A change in the in extremes with those that were born and lived through one of the greatest inflationary credit expansions in history. Realizing that rational policy does indeed exist they will revert from spenders to savers, from consumers to manufacturers, from a fiscal based economy to one of intrinsic value.

So we, Generation Next, continue to look at the older and less-wise, and wonder how long they believe the good times will roll. But listening to the good advise of the old-timers, the history that’s been around for centuries, we come to learn that these times do end and borrowing to live a better life today may not necessarily be fine in the long run.

But as John Keynes said “In the long run we’re all dead”.

A Bubble of Liquidity
By Yours Truly

Last December we wrote an article on the concept of financial “Bubbles”. We explained simply what they are:

A state of booming economic activity (as in a stock market) that often ends in a sudden collapse”

We’ve seen many bubbles come and go throughout the centuries. But they never cease to amaze me. Not the bubble itself, but the general sentiment that generates one.

Rock Bottom. In order to create a bubble you must first create an image, a promise, a vision that has thus far been unfruitful. Investors see its future risky and complicated. This is reserved for keen contrarian investors who look for unloved, undervalued opportunities.
Think stocks and financial risk in 1980.

Phase #1. The Denial Stage. Next the buying begins but only for very few. Many have no idea of what is being bought or what gains have been made, nor are they interested in asking why. No news, No hype, No record highs. Just consistent, gradual gains. The way many value investors like it.
Think stocks in the early 80s, with the Dow breaking properly over 1000 only few had been able to buy below that.

Phase #2. The Speculative Stage. Word has already begun to leak out. Word on the street shows life and a simmer of hope presents itself. A few daring institutions and small investors buy in small quantities, while newspapers show “dodgy” ads on the back page advertising the next “Secret To Millions”. All said, the wave comes and goes, few buy in but later sell disappointed by its false promises and record highs come into view and then disappear again. For the most part the “general public” sits on the sidelines.
Think Stocks after the Crash of 87′ when anyone who held anything of the sort was easily convincing themselves that the end of equities had truly come.

Phase #3. The Bubble. The third wave of speculators begin to buy in. Usually institutions interested in making a quick buck off of an easy trade. But before long, speculative margin traders, smaller institutions, momentum investors and every Tom, Dick and Harry is on-board.
Think Tech Stocks in 1997-98 when even sharp declines in the Dow could not waver the people’s optimism.

Phase #4. Euphoric Blow-off. Speculation becomes most rampant and the wave attains full strength, easily convincing any rationale or emotion that the laws of economics have become secondary and that good things do last forever.
Think Cisco even after the Dow was in trouble when shareholders were still buying in at over 100 times earnings.

The Pop. Like a raging tidal wave the trend has drawn every last sucker into the fold, it then begins to give. Easily at first, the in jolts and finally with the ultimate crash that sends every man, woman and child running for cover – with or without their positions.
Think the day when the falsies of man came crumbling down together with the stock of their first love, Enron.

Let us adjust this to nowadays. I remember that in late 2005 Steve Forbes wrote in an editorial regarding the housing market that bubbles can only occur when people are not aware that its a bubble. Well we indeed did see housing prices rise for about another year before finally showing any sign of a slowdown.

So where are we? Where aren’t we looking that many should be. In my humble opinion the answer is simple: Money. The greatest investor of our time is known for his famous saying “Be Fearful when other are Greedy and Greedy when others are Fearful”. We live in times when the average man is definitely greedy. Market-Beating Returns, Day Trading, Speculation, Inflation and a fine lack of an understanding in the concept of an o’ so important word: Risk.

Many analysts in the stock market, even after the sell-off last month now see no chance of a major crash, nor do economists see any chance of a recession.

But let me tell you, It’s far more probable than Ben Bernanke and Henry Paulson are telling you, and they know it. The United States and most of the world now faces a Credit Crunch that many have not seen probably since the Great Depression. Few nations will be saved.

We live in a bubble of credit, in an age laden in debt – Public as well as private, held up by a bubble of liquidity and easy money, supported by a group of baseless appeasing bureaucrats and heading into a deflationary cycle (credit deflation) that will either make the nation’s currency worthless (through monetary inflation of its supply) or its inhabitants broke (through defaulted loans and strengthening qualifications for re instituting new ones).

We live in a world of misleading promises and uncompromising leverage and vulnerability. Investors have purchased stocks that trade for 20 times their earnings, the unemployed bought homes with exotic mortgages they could never afford and credit cards and paper IOUs have replaced the currency of exchange.

We live in a bubble of credit, in an age laden in debt – Public as well as private, held up by a bubble of liquidity and easy money, supported by a group of baseless appeasing bureaucrats and heading into a deflationary cycle (credit deflation) that will either make the nation’s currency worthless (through monetary inflation of its supply) or its inhabitants broke (through defaulted loans and strengthening qualifications for re instituting new ones).

We live in a world of misleading promises and uncompromising leverage and vulnerability. Investors have purchased stocks that trade for 20 times their earnings, the unemployed bought homes with exotic mortgages they could never afford and credit cards and paper IOUs have replaced the currency of exchange.

When it will implode nobody knows, but when it does, and implode it shall, those that doubted the very laws of nature that created their fortunes will grasp the sincerity of its force when it follows through on those very laws.

What to do:

Rule #1 – Minimize Debt. Before investing another dime use all monies to pay back as much of your credit cards and mortgage as possible.
Rule #2 – Cut back on spending. Don’t buy things you can’t afford with money you don’t yet have.
Rule #3 – Just Save. Many markets are far too risky to be buying into right now (yes, even in the long-term). Keep holdings in safe, hard assets and in short-term treasuries.

And remember… in Credit Crunches every extra dollar that has been produced in vain will ultimately be sucked dry.

Quotes of the Day

“They’ll be eligible for Medicare just three years later and when those boomers start retiring en masse, then that will be a tsunami of spending that could swamp our ship of state if we don’t get serious”.
– U.S. Comptroller General, David Walker.

The article is a must read for every American.

“Those who cannot remember the past are condemned to repeat it”.
– Late 20th Century author, George Santayana


Average Debt Levels by State

The average amount of household credit card debt and interest rates by state. This data is being retrieved from actual credit card owners using TrackCards.

State Average Balance Average APR
Alabama $7,655.00 18.99%
Alaska Not Available N/A
Arizona $15,663.65 17.41%
Arkansas $6,429.58 17.79%
California $4,811.14 15.4%
Colorado $7,410.87 19.58%
Connecticut $6,238.23 21.5%
Delaware $5,679.70 19.33%
Florida $5,484.09 22.42%
Georgia $3,860.83 10.91%
Hawaii $6,196.91 14.63%
Idaho $5,999.85 22.84%
Illinois $6,795.68 20.02%
Indiana $9,002.76 26.2%
Iowa $8,260.44 24.87%
Kansas $7,280.53 17.18%
Kentucky $9,926.26 24%
Louisiana $5,919.48 13.62%
Maine $9,012.09 18.01%
Maryland $5,169.46 13.29%
Massachusetts $6,888.51 18.79%
Michigan $7,430.20 18.23%
Minnesota $8,002.98 21.51%
Mississippi $9,229.88 24.44%
Missouri $3,883.68 18.34%
Montana $7,180.53 22.02%
Nebraska Not Available N/A
Nevada $8,820.09 24.2%
New Hampshire $5,802.32 15.44%
New Jersey $2,351.86 19.11%
New Mexico $7,280.49 14.01%
New York $1,803.39 25.97%
North Carolina $8,832.55 26.99%
North Dakota Not Available N/A
Ohio $6,943.20 16.8%
Oklahoma $6,935.44 19.96%
Oregon $4,460.34 11.37%
Pennsylvania $885.17 14.84%
Rhode Island $6,988.23 18.28%
South Carolina $4,146.44 22.46%
South Dakota Not Available N/A
Tennessee $7,820.47 22.59%
Texas $2,083.98 19.99%
Utah $9,010.79 25.46%
Vermont $3,238.78 21.4%
Virginia $6,277.74 20.21%
Washington $4,030.73 9.78%
West Virginia Not Available N/A
Wisconsin $7,303.95 19.88%
Wyoming $8,205.78 17.54%

Quick Stats

Live Stats: TrackCards is monitoring $1,753,423.53 of debt.

The figures below refer to United States data only.

Average Credit Card Debt
$4,917.50 – up 1.04% from Jan.

Average Interest Rate
17.15% – up .65% from Jan.

Average Debt by State
Low – Pennsylvania at $885.17
High – Arizona at $15,663.65

Average Interest Rate by State
Low – Washington at 9.78%
High – North Carolina at 26.99%

Link can be found at
Interesting Stuff!

Many speculate as to what was the true cause of the Great Depression. They say it was the Stock Market but I found found this:

“In the 1920s, in the U.S. the widespread use of the home mortgage and credit purchases of automobiles and furniture boosted spending but created consumer debt. People who were deeply in debt when a price deflation occurred were in serious trouble—even if they kept their jobs—and risked default. They drastically cut current spending to keep up time payments, thus lowering demand for new products.

“Furthermore the debts grew, because prices and incomes fell 20–50%, but the debts remained at the same dollar amount. With future profits looking poor, capital investment slowed or completely ceased. In the face of bad loans and worsening future prospects, banks became more conservative in lending. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.”

Did you notice how, suddenly, everything got all gloomy and dark?

That is because I now reveal that this positive level of saving only persisted until 1987, the year that the horrid Alan Greenspan befouled the Federal Reserve and started creating money and credit like it was going out of style.

By 1993, only six years later, he had so devalued the dollar so much that prices were progressively higher, so that people were only able to save 5.8% of income. And since then, thirteen years later, it has gotten so progressively bad that not only are people now saving nothing, zero, zip, zilch, squat, but they have to constantly go deeper and deeper into debt! Every month! The actual number that should make scream bloody murder was that savings have hit a new low; a minus 0.9% of income!

Does THIS sound like the behavior of a rational, educated people who should be trusted with nuclear weapons? Of course not! No wonder the world hates and fears us! Well, maybe it’s because we routinely kill so many of them, but it’s worth thinking about!


We did it! Now What? Investor Sentiment looks back with CNN:

Dow: Then and now
January 14, 2000
October 3, 2006

S&P 500
eBay share price
Microsoft share price
General Electric
Proctor & Gamble
Fed funds rate
GDP growth
2000: 3.7%2001: 0.8%
2005: 3.2%2006E: 3.4%
National median home price
30-year mortgage rate
Average U.S. credit card debt per household
Real median household income
Warren Buffett’s net worth
$26 billion
$42 billion

Now something here is shocking. Full House baby! All prices went up! So stocks (mostly the defensive), are at the same level. Real Estate – almost double. Gold – Doubled. Gas – Double. Oil – Double.

Now our money. Went nowhere! Our money stayed the same! The Interest Rates and the Median Household Income hasn’t increased at all.

But so something else has. DEBT. Average Household Debt rose about 30%. Which brings me to only one conclusion which economists have been claiming for months:

It’s not our money. That household debt is not including that which may come from an inevitable decline in housing. Worse over, we have taken debt out of our homes and put it back into, stocks (the “safest” secutrity in the world) and goods and services (why GDP is doing so well).

If the Dow declined, everything else rose and then the Dow came up again, I don’t know about you but something says we’ve all been playing the same game, with lots of money in the middle… but it’s about time to show your cards.

Optical Illusion Part II

As we mentioned in the last segment, the way the financial markets are acting right now, I would assume it’s highly reasonable to be playing it safe.

Let’s return back to one of the most famous money-making-strategies “Buy Low, Sell High”. Easier said than done! How do you know what’s a high and what’s a low?

This is where I believe Investor Sentiment can be applied. If only 1% of the people are responsible for more than 43% of the money in our system (and that number keeps increasing), than its obvious that you ain’t going to become wealthy following the crowd.

So how does one become wealthy, or well-off as they say? Let’s begin by the things that they watch out for most:

Debt! (The four letter word that’s worst than all others). Trying to make money while you’re stuck with a mortgage and a cabinet full of indebted credit cards is like building a mansion on quick sand. When it falls through you and your accumulated wealth will both be six feet under. It’s not for no good reason (double negative) that debt is known as the pill of financial suicide.

Speculation! During the charging stock bulls of the late 90s, we not only saw a surge in stock prices, P/E ratios and positive sentiment, but also a sharp decline in human intelligence. People would buy stocks because they liked the ticker symbol or simply because of the fact that the stock had a “dotcom” after it. Investors buy companies not stock symbols. Solid growing and financially stable companies that make money instead of lose it. Good Investing is just knowing the best place to store your money.

The Odds. Here is something most people don’t consider that often. Margin of Safety. Are the odds with you or against you on your investment? It’s the science behind diversifying. If you have your hand in many pots you’re gonna win something. But it’s slightly deeper than that. “Better to win every time than to win the lottery once a lifetime.”

Day Trading! Actually you can, but only if you’re so good that you can rip a daily profit after taxes, trading costs and don’t forget inflation.

Inflation. If you have $100 in the bank, and kept it in the bank for a year, and inflation was calculated at 3%, then you actually lost 3%! That means that in the next year’s terms you would have approximately 97.09 left! Say hello to Mr. Inflation.

Your Broker. Do you know why the whole floor of the NYSE bursts into a simultaneous cheering at the closing of the bell? That’s because whether you made or lost, the traders made their money.

The Seasons. Everything has its time. Good times become bad, to good again. It’s Life. Live with it and learn from it. The Contrarian (refer to top of Blog) can predict the future based on what people are doing. Maybe after housing prices decline and the Dow goes nowhere over the next few years they’ll understand…and of course maybe not.