The Online Investing AI Blog

As the effects of the government stimulus plan are seen, there are more and more signs that the recession is ending. The media is quick to pick up on any changes and report that the economy is recovering. This article at Yahoo Finances is all about the improving housing market. Yet I think that all the positive news is only one side of the story.

The other side is that the fundamentals have not really changed. Unemployment is high, and is rising. There is no evidence that it will improve. All of the improvements in the economy are from government spending: Cash for Clunkers, First Time Home Buyers Plan, etc. These measures are good at getting people who aren’t financially responsible to spend money. It is a short term improvement but will have a longer term negative effect.

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Investing, Success, US Economy america, cars, Cash for Clunkers, debt, deficit, economy, housing, spending

Recently, as the stock market soars, there has been a large amount of news about how well the economy is doing. They say that the housing market has hit bottom, and that the economy is recovering. However, this article by the Associated Press is about how unemployment is rising.

Regardless of what the newspapers say, it is important to look at the fundamentals that drive the economy. The government has created massive band-aids to prevent a depression, and they seem to have worked. But it is important to understand the difference between a recovery and a temporary band-aid.

What effect will the band-aid have?

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Money, US Economy bailout, CNN, debt, deficit, dollar, economy, foreclosure, housing, media, Money, Obama, spending, unemployment, USA Today

Lately there has been quite a bit of good news about the economy. The stock market is up. Housing sales volume is up. Corporate profits are up.

But I don’t think the economy will improve any time soon. The collapse in the housing market touched off the crisis, and I don’t think the housing market will get better soon. With rising unemployment, there are still way too many sellers. And, the majority of adjustable rate mortgages have yet to readjust. That will happen in the next two years. Therefore, over the next two years the housing market will be flooded with still more foreclosures.

What about another bailout?

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Money, US Economy crisis, economy, housing, Money, Obama, unemployment

Everyone seems to running around complaining about the economy and unemployment and lamenting the fall in the stock or housing markets. Let’s stop running for a second and ask an important question.

How did we get into this situation?

The markets did not suddenly decide to go down by themselves. They are simply going down after going up for a long, long time. Markets go up and markets go down. It’s part of the grand scheme of things.

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Investing, Money, Success, US Economy housing, Investing, markets, Money, news, sheep, Success

Everyone remembers how things were so cheap once upon a time. “I remember when ice cream only cost 15 cents a scoop.” How often have you heard that sort of comment? The surprising thing is that since inflation happens slowly, we don’t notice the effect until a large amount of time has passed.

One detail that most financial advisors fail to mention is that inflation will destroy your savings. Most financial advisors will tell you that if you can get 8% return on your savings, you can retire in 40 years. I wouldn’t really trust that they can help me get 8% per year return. But even if they could, it would not be enough to retire on.

Why? Because a scoop of ice cream will cost $1,000. Right now, many experts are predicting that we will go into a period of massive inflation. This is because America is printing more money than ever. The rate of inflation is directly related to the amount of money that we print. Therefore, inflation is likely to increase in the near future.

The need to print money is largely fueled by the massive budget deficit. America doesn’t have the money to pay, so it just prints more. The bigger the deficit, the more it prints. And, it looks like we’ll be printing at record rates for the next few years.

It’s important to be aware of inflation, because it directly affects our finances. In just a few years the cost of housing and gasoline doubled. The same thing will happen again. If we do not double our income in that time, we will become much poorer. And our savings will drop in value by half.

This is the eighth post in a series entitled Secrets the Financial Industry doesn’t Want you to Know.

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Investing, Money, US Economy financial advisors, financial planners, housing, inflation, Investing, prices, savings, stock market

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.

Investing, Money, US Economy 2009, bankruptcy, depression, economy, finances, housing, layoffs, Obama, recession, stock market

The media is full of stories about the global economic crisis. The point of most stories seems to be that the economy is going down in every country, and there’s nothing anyone can do to succeed. The truth of the matter is that when the economy is down and everybody’s running scared, it’s the easiest time to make a lot of money quickly.

How is this possible? Well, one simple way is to do the opposite of what everyone else is doing. Warren Buffett is buying stocks like crazy, and the market is down 40%. It’s true that the market may go down a lot more, but he doesn’t care because he doesn’t use his wealth to buy anything besides investments.

Another good example is the housing market. Living in Los Angeles, prices have more than doubled in the last five years. But now the market has come way down, it’s easy to buy a house for less than most people thought possible. You can buy a condo that was selling for several hundred thousand dollars just a few years ago for $100,000-$150,000 now. And as the market goes down it will become easier and easier to buy a house.

Another major benefit of this economy is interest rates. The Fed has pushed rates down to multi-decade lows. So that means anyone with good credit can buy a house at discount prices, and pay for it at a low interest rate over the next 10, 20 or 30 years. The financially savvy ones will pay it off in 10 years or less, or they will use the money that would have gone to paying off their house for wise investments.

The cliché says, each cloud has a silver lining. If you look, you can find the silver lining in any economy as well.

Investing, Money, Success, US Economy economy, housing, interest rates, investments, markets, stock market

It’s Matt, here…

Take your prozac or any other non-prescription depression remedy (I like M&Ms) folks, George is about to depress you.

But have heart, I’m here to tell you why everything is going to be alright, and maybe even better.

George is going to tell you that the housing market and the stock market are in Le Crappier.

But, there are a few reasons why an investor should not be too depressed with this info.
First. Smart investors make money when the market goes up… and more when the market goes down. And it’s not just by shorting investments, which can be another source of returns in a bad, choppy market. You’re about to pass by some great deals!

Second. Joseph Schumpeter lives! Schumpeter’s theory of creative destruction will improve the market over time. It may suck now, but as long as bureaucratic fingers are left out of it, we’ll have a smarter market and smarter consumers.

Third. Housing prices are falling and that should help new home buyers. And clean up some unrealistic pricing.

Fourth. Fear breeds fear. We have to remember that the more you fear, the more there is to fear. That’s the market in the nutshell. Let’s keep this in mind: negative reactions should produce constructive action. If you burn your hand on a stove, you don’t give up lighting fires, you just learn to be more careful.

Fifth. People are incredibly inventive and innovative. In fact, we’re designing investment systems that will make money for you no matter what way the market is heading.

Now, I didn’t say all of this will be easy or without pain, but just like an athlete training, we should all expect some hard workouts before the Singularity.

Ok. Go ahead. Read George’s post.

If you dare…

Investing, Online Investing AI, US Economy AI, housing, innovation, Investing, market, schumpeter

Today’s big news is that Fannie Mae and Freddie Mac stocks are crashing down. Fannie Mae and Freddie Mac are the largest lenders of home mortgages in the country. As home owners fail to pay their mortgages, lenders lose money.

As I write this, Fannie Mae is down 30% today. The image below is the stock price over the last year. It went from 70 to 7. That is a loss of 90%.

This stock chart teaches many lessons. The most obvious is that the future is not difficult to predict. The US housing market has been in trouble for years. It is common knowledge that lenders were selling loans that they knew their customers could not pay. That is why they gave them teaser rates that would readjust after a year or two. And, the customer knew they couldn’t pay as well, but they didn’t care. The consequences of not being able to pay their mortgage were in the distant future, and the pleasure of having a new house were in the present.

Another lesson is the lag in the chart. It has been clear that the US housing market has been in a bubble for years, but it the above stock only went down in the last year. Why did it take so long to see the results? Because the stock is a representation of the value of a company in the near term future. It does not represent the value of the company in 6 months, a year, or more.

For the executive team of most public companies, their top concern is hitting their numbers for the next quarter. This means they want to make their sales and profit projections for the next three months. Three months! This causes most public companies to make their decisions based on what will generate the greatest short term profit.

The catch is that what is good in the short term is often detrimental in the long term. This applies to both large companies and individuals. We all know that the apple is better to eat for our bodies in the long term, but we usually choose the chocolate because it tastes much better now! Its the same story for the home owner that leaves their future problems unsolved because they can get a new house now.

And, there is a final, more powerful and interesting lesson to be learned. I believe that the US housing market problems are just beginning. Things are going to get much worse for our economy, before they get better. More lenders will either declare bankruptcy or be saved by the US government. But the government is only spending the taxpayers’ money, so this merely pushes the problem further into the future. More people will fail to make their house payments.

The lessons of both history and the future are available for all to see. The question is, who will see the lesson and learn.

US Economy economy, housing, lenders, stock market, stocks, US Economy