Tag Archives: bankruptcy

Can Trump Defuse the US Debt Bomb?

When I wrote about the US Debt Bomb back in August 2009, it was only(!) about $12 trillion. Since then it has grown to $19 trillion. If it’s difficult to comprehend such a large figure, consider it breaks down to $159,000 per taxpayer!

US Debt Keeps Growing

US Debt Keeps Growing

Unfortunately, this is only a small part of the country’s unfunded liabilities. When you add Medicare and Social Security, the total is about $100 trillion. Many people believe that this is too much for the country to pay off, and that we will never be able to pay it.

How did this happen?

As I have mentioned before, most of the politicians that have run this country for the last 50+ years have not been fiscally responsible. They treat budget spending the same way a teenager uses a credit card. Am I saying that they are bad people?

No. I am just saying that they do not have the skills or inclination to fix the budget problem. They don’t know how to manage money or a business. Even if they did promise to fix the problem, they would never be voted into office. They would have to make massive cuts to Social Security, Medicare, military spending and every other area that people are not willing to cut. The people who depend on all this excessive spending would have to vote for the politician, and they would never do it.

Enter Donald Trump. Although there are many things that are not great about Trump’s proposals, I think that he has the potential to fix problems like this. He’s not a politician. He has so much money and power that he doesn’t have to play politics. And, his confrontational personality seems to be the incompatible with the political process of trading favors.

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Markets go Up and Markets go Down

Although this may seem incredibly obvious, many people say that markets always go up. I remember during the real estate bubble that popped in 2008, agents were saying,

Real estate always goes up.

It’s pretty obvious now that is a lie. But it works for them. The clueless would-be investors that believed them bought up properties like there is no tomorrow. And for them, there wasn’t much of a tomorrow. Most of the properties went into foreclosure and were repurchased by more savvy investors.

Shanghai Composite Index

Shanghai Composite Index 2011 – 2016

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The Importance of New Skills

As the chaos in the economy continues, many people are looking to the government to help them. Companies ask the government for bailouts. Individuals receive benefits while they search for a new job. I see one small problem with these measures: they don’t address the root of the problem.

These companies and employees claim that their problems are caused by a bad economy. Have you even gone out in the rain? Blaming the economy is like blaming the rain for making us wet. What about an umbrella? Is the rain supposed to give us an umbrella?

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Is Connecticut Bankrupt?

This article on Yahoo finance really got my attention. It’s about how the state of Connecticut is about to run out of money. It’s interesting because many states are in dire financial straits, but most people are, as usual, blissfully unaware.

Recently I did some research about bonds, and was interested in purchasing some. I discovered that municipal funds are supposed to be among the safest bonds that you can buy! I thought, “Isn’t that funny. Many states and cities are going bankrupt, but people think these bonds are very safe.” It sounds like the same game the ratings companies have been playing for decades: give the bond a AAA rating even if it is risky.

Why are municipal bonds more risky in this financial environment?

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Are the Country’s Economic Problems too Big?

The current administration has made it very clear that it is committed to helping the economy as much as possible. The trillion dollar bailouts have had a measurable effect, and most people think that the recession is over. Although the short term effects of the stimulus have been realized, many people are wondering about what happens after the effects have worn off.

More Failed Banks

More Failed Banks

This article from Reuters describes nine bank failures that occurred in just one day. The government has successfully increased spending and prevented a depression in the short term, but what about the real health of the economy? As bank failures reach record highs, do we need to be concerned about whether the entire system will collapse?

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Is the Recession Over, or is the Global Depression just Starting?

Now that the recession appears to have abated and everyone is saying that we can relax, I think it’s time to reevaluate the situation. If you consider that the country’s financial situation has worsened significantly, it’s pretty clear that we are not out of the proverbial woods. The government spending of trillions of dollars may have stopped the recession, but it may also have set us up for a worldwide depression.

financial-crisisThink I am full of doom and gloom? Absolutely not. Both Matt and I are extreme optimists. But consider these facts: depressions happen on average once per lifetime, or every 80 years or so. It’s been 80 years since the last depression. The government is running budget deficits on a scale that has never been seen before, and has no way of paying back the money. The housing market has leveled off, but there is nothing to help it recover after the current first time house buyer’s stimulus wears off. The unemployment rate is getting higher, and there is nothing to slow that down. The US automakers have recovered for this month, but only because of $3 billion dollars of free money for (mostly American) clunkers. As soon as that stimulus effect wears off, the American car manufacturers will be in even worse shape than they were last month.

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Crocs, Boy Bands, And The Natural Formation Of Market Crashes

crocs
The current meme is that investment bubbles are unpredictable. These black swan events are random.

I agree that the exact timing of market crashes can’t be predicted, but there is nothing unnatural about a market crash, nor, as hard as this is to believe at our current point in economic history, is there anything unhealthy about a market crash.

The market crash seems to be hooked into psychological approaches to adoption and rejection of trends.

But a quick look at past bubble-bust tandems show a completely predictable pattern. They’re fads.

Look at the trajectory of Crocs–the ugly (at least to me) foam shoes.

At one time, they had a select following among boaters and water sport lovers. They were comfortable and tight-fitting. It was a following, kind of like those first few dotcom IPOs.

Then the shoes were kicked into mass consciousness. Everyone from Presidents to Rock Stars were wearing them. Just like everyone was investing in real estate a few years back.

Now, it appears that the Crocs company is declaring bankruptcy. Demand has plummeted and expenses have skyrocketed. Sound familiar?

The pattern of clothing fads follows almost exactly the trends of music fads, like boy bands. Cult following. Breakthrough album. World tour. Sophomore jinx album. And then, it’s onto the amusement park circuit.

As traders, we can draw a few lessons from this.

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Is 2009 the Start of the Next Depression?

It’s quite surprising that the most popular post we’ve had to date is about the possibility of a depression in 2009. I wrote that post at the end of last year, when this whole economic crisis is just getting started. Since then, the economy has steadily deteriorated. I wonder if more and more people are getting the idea that we could have another depression in the near future.

Notice that the title of today’s post is about the next depression. Many so-called financial experts on TV say, “I have never seen anything like this. We’re in uncharted waters.” This just means that they are clueless. There is nothing uncharted about depressions. In fact, a depression happens, on average, once every 80 years. There is no question that we will have another depression. The question is, will it be this year, or in another year?

Over the last few days, the stock market has rallied in a big way. Does this mean that the financial crisis is over? Absolutely not. There is nothing but bad financial news these days. And, the effects of layoffs, the falling stock market and bankrupt businesses is just beginning to have its effect. Besides that, it’s pretty obvious that the housing market will continue to fall quickly.

The chart of a stock or financial market index is nothing more than the sum of human emotion over time. Many people who think that they are financially educated, and have gone to college or sport MBAs believe that the price of the stock depends on fundamental values such as PE ratios. Although these fundamentals have some bearing on the stock price, there are other factors that are far more important. The most powerful factor that contributes to the valuation of the stock is human emotion.

Imagine a train going downhill, and the brakes are broken. How can you possibly stop it? It has so much momentum, and it’s so heavy, it is hard to imagine how much force is required to get it to stop. Our economy is quite similar. It has already generated so much momentum that it will continue to go down.

Is Obama going to be able to save us? Personally speaking, I don’t think so. However, the good news is that every individual has the power to save themselves. Each person can choose to drift along the river of financial loss, or take control of their ship and improve their financial future.

If you think this economy is all bad news, then consider this: in every economy, there are ways of making money. Here’s a recent post about some ideas about how to profit in the current falling economy.

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Now Could Be a Good Time to Purchase Assets

According to the news, everything about this economy is bad. Layoffs, the stock market, and foreclosures dominate the headlines. However, there is one potential bright side of this economic situation: lower prices for assets.

Many people wanted to buy a house over the last few years, only to discover that prices were sky high. Right now, I don’t think it’s a good idea to buy any property, but in a few months its possible that the economy will start to turn around. Maybe it will take a year or more. I don’t know when it will happen, but it’s safe to say that when it does happen, it could be a great opportunity to purchase a house or income property. Prices have come down significantly off their highs, and they will continue to fall. By the time the economy starts to recover property prices could be down 50% percent or more.

This represents a wonderful opportunity for people who want to buy a great house in a great area. Just last year, for many people houses were just too expensive and they could not buy. If housing prices continue to fall for the next months. it could become possible for many people to buy.

Another asset that could be good to buy is stocks. Warren Buffett is making significant purchases right now, as most value investors are. There’s no guarantee that the stock market will not continue to go down, but it’s also possible that in a few years it will reach new highs. A down market like this one is a wonderful opportunity for people who love to buy stocks cheap.

What about cars? Most people cannot buy a car now, because they only buy cars on credit. But what about people who pay cash? Now is the best time to buy a car in perhaps decades. Many dealers are faced with the prospect of bankruptcy, and the same is true for the US automakers. Anyone who has the money to buy a car, or can arrange credit, is in a very powerful bargaining position.

A wise man once said,

It’s not what happens to us that determines our future. It’s what we do with what happens that’s important.

Everybody is facing the same tough economy. The question is whether we can find a way to make it work for us or simply be dragged down with everyone else.

This is the seventh post in a series about how the falling economy can be used to help your financial situation. For more information, you might want to read the previous article in this series. It’s called A Volatile Economy is Great for Traders.

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Kaizen and the Japanese Automakers

Recently there has been a lot of news about the big three American automakers going bankrupt. The CEOs of the American automakers show up in Washington, go before Congress, and ask for billions of dollars. Their argument is that if they go bankrupt, its bad for American workers.

It’s true that nobody wants the American automakers to go bankrupt. But it’s also true that the CEOs are responsible for making the company succeed, not for asking the government for a handout. The CEOs, like most people, blame the credit markets, the economy, the stock market, the weather, and anything else they can think of.

What about the Japanese automakers? Do they go to Congress asking for money? No. It’s true that they are not making as much money as before, and in Toyota’s case, losing money for the first time in 70 years. However, they don’t go before any Congress asking for money, because they are not on the brink of bankruptcy.

The Miracle of Small Steps

How is this possible? Are the Japanese smarter than Americans? Do they have better technology? Do they have more business schools? I suggest the answer to these questions is no. But they do employ one strategy that has made a big difference: Kaizen.

Kaizen is the ancient Asian philosophy of tiny, incremental improvement. Kaizen is the idea that if you take a small step every day, you can travel across the world. This idea is quite different from the way Americans think. Americans love revolutions and revolutionary ideas.

There’s nothing wrong with revolutionary ideas. Yet, they have their limitations. For day-to-day business and year-to-year competition, small, incremental, kaizen improvements work great. A powerful reason that Japanese automakers have come to dominate the auto industry is through the strategy of kaizen.

What’s great about kaizen is that we can use it in our lives too. We can take a small step towards anywhere that we want to go. Maybe it’s eating an apple to improve our health. Or, it could be taking the stairs instead of the elevator. What about reading for 20 minutes instead of watching TV?

Each small step leads to another. These steps develop into our habits. What seems like a small, inconsequential action can lead us to where we want to go. The question is, are we willing to take that first small step?

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