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Wednesday, February 28, 2007

Like a Thief in the Night: Ready for Recession?

Yesterday the US stock market plunged by about 3%, jittered by the panic the night before in China, where the Shanghai Index plunged nearly 10%. Like a thief in the night, fortunes for some people evaporated quickly. I think we'll recover from this sell-off, but there are many factors in place that could eventually lead to a much bigger cause of panic, resulting in massive stock market tumult and a plunging dollar. To the unwise, it will come as a thief in the night.

Already some of the winds of recession are in their air. Subprime lenders, companies that provide mortgages to people with poor credit ratings, plummeted suddenly in recent weeks. I foolishly thought I had called the bottom of one "well managed" company that I had made money on before, Novastar Financial (NFI), but it went from being viewed as a solid dividend machine with huge profit potential to a trainwreck in one day, and has dropped over 50% from what I thought was a bottom. Hilarious! Great learning experience - only had a little. But the growing wave of mortgage defaults that are destroying it and other subprime lenders may well represent the tip of an iceberg that is going to affect many other parts of the market. Financial writer Chuck Butler has this to say:
Have you seen all the negative news stories regarding the subprime mortgage loan problems? Aye-Caramba... This is getting U-G-L-Y! These subprime loans aren't getting hit with the ugly stick... Oh-no, it's more like the whole ugly forest! Again, here I am talking about my friend John Mauldin... But John did a great job explaining it all in his Feb 17 letter... I'll give you some excerpts...

First of all... Generally, subprime mortgages are for borrowers with credit scores under 620. Credit scores range from about 300 to about 900, with most consumers landing in the 600s and 700s. Someone who is habitually late in paying bills, and especially someone who falls behind on debts by 30 or 60 or 90 days or more, will suffer from a plummeting credit score. If it falls below 620, that consumer is in subprime territory. Subprime loans have higher rates than equivalent prime loans.

OK... Now that I've explained a subprime mortgage, here are the excerpts from John's 2/17 letter... "A decade ago sub-prime mortgages were a mere $35 billion. Today they are one-fourth of all mortgages, about $665 billion. Somewhere in the neighborhood of $1 trillion in adjustable-rate mortgages is eligible to be reset in the next two years, sharply increasing payments and lowering the discretionary spending ability of those homeowners."

I know, I know, you're wondering what this has to do with the threat of a recession... Well, grasshopper, it's quite simple really... Mortgage Equity Withdrawals (MEW's) have been fueling this economy... John tells us that "MEW's accounted for over 2% of last year's GDP growth [JL: I think that puts it at about 2/3 of 2006 growth]."

Uh-oh... That looks scary... If MEW's accounted for a majority of Consumer Spending and that ability of those consumers to withdraw is going to be sharply lowered, guess what that does to an economy?

I'm not trying to be Gloom & Doom here... I just want to bring this to your attention, in hopes that you make the moves in your investment portfolio to protect you from a potential recession, which cannot be good for the dollar, eh?
We may have a great 2007 in the stock market - it's possible. But we could also see some sudden changes that wipe out fortunes. Are you prepared? Are you getting out of debt, living frugally, and working hard to save? Are you building up a healthy food storage? And are you putting some of your savings in forms that will retain their value or even increase in value if the economy and the dollar tanks? Hey, it's no secret that I'm a big precious metals buff. I think this is a great time to be invested in the metals themselves (using an exchange traded fund for a 401k, or owning physical metal itself, protected in a safe place), in select mining stocks, in energy, and in other areas that can do well even if the dollar drops sharply.

Metals and mining stocks (gold, silver, uranium, etc.) dropped sharply yesterday, lowered by the whole market. But I think the smart money will see this as a buying opportunity and move in, while others flee. With our massive inflationary engines running at full speed, printing up billions of fiat dollars that are being dumped into Iraq, China, and elsewhere, the eventual fate of the dollar is certain.

Did you realize that the minimum wage in the early 1970s was actually over $9 in 2007 dollars?? Our money today is worth much less than it was a few decades ago - you've been slowly robbed by a whole gang of elected thieves in the night. While you think Congress has been looking out for the little guy by raising the minimum wage, they have been grossly lowering the real minimum wage and everybody's wage in effect by devaluing the dollar through reckless inflationary spending. And the dollar right now, as weak as it has become, is far stronger than it should be, solely because of the great blessing of China and other nations buying tons of US treasuries and the petrodollar of the Middle East. Once they get spooked about the dollar and sell off their treasuries, or use their money to buy other stuff (California, for instance), then the flood of dollars on the market could cause a massive drop. It could come suddenly. And when it does, gold and silver will see massive increases in price. I really think you should add some to your portfolio, and get your kids collecting some cheap 90% silver coins now - while they are incredibly cheap. There's another story there, the story of massive market manipulation that has suppressed prices of precious metals - an amazing gifts, if understood properly. But the gig will be up one day when market realities are more firmly in place.

But far more important than financial preparation is spiritual preparation. Get your lives in order. Learn to follow the guidance of the Lord in your daily life, and prepare to able to help your family, your ward, and your neighbors when the crises of the future strike as a thief in the night.

14 comments:

East of Eden said...

Brilliant!

In this week's US NEWS & WORLD REPORT (3/5/07) on page 54 there is a great article (A House Unsold, The Dream Dims by Alex Markles) on defalts on home mortgages and how this is impacting the ecnonomy. According to the article the forclosure rate is expected to rise to 1 in 200 this year. And with the flood of homes on the market we all pay the price in lower home values, and higher costs in mortgages.

If I remember correctly, didn't Pres. Hinkley ward about home equity loans a few confrences ago?

Anonymous said...

And what is the best solution? Why give away 10% of your money to a billion-dollar corporation instead of your own savings account!!!

Connor said...

Great post!

Casual Mormon said...

This is quite a wake-up call, Jeff. Thanks for this post.

Solomon said...

A few thoughts:
markets fluctuate. The sky is not falling.
Anyone who bought a house over the last 5 years with the expectation to get rich quick deserves the mess they have made. Historically, real estate provides a 0% return, why would today be any different?
Who cares about the stock market? Invest your money in other things. In yourself, in creative ventures, in something aside from the gamble of the stock market. Do something with it where you are actively involved in making it grow! Write a self published book, invest in a local independent company or film, do something besides shoveling it into the pockets of Wall Street barons who they could not possibly care less about you. Publicly traded companies are the most heartless and least charitable entities in existence, why would you consider supporting them? If you have money in a company that has adversely affected the livelihood of american families (GM, etc), you are just as culpable in spite of what the spirit of capitalism dictates.
President Hinckley has been warning about mortgages in general for years and years. If you can't afford a home, don't let a bank convince you otherwise.
Rant over.

Roy said...

Yay for not having any assets or savings! I knew I came to grad school for a good reason.

Solomon said...

Save/invest in a credit union. Or be creative with your money. You can do better than the market.
A mortgage is not an asset.
Grad school (like life) is for education, not accumulation of wealth.

roberto said...

Can you give us some suggestiosn of precious metals ETFs we could look into?

Mormanity said...

I often share investing ideas over on my secular "Sanity Defense" blog. No matter how good I make a stock sound, don't trust me. Do your own investigation. It's your money!

Silver investors can use a new ETF just created last year under the ticker SLV to invest in silver. There are a couple for gold, but I use GLD. Both are backed by purchases of the actual metal. Both are less secure than owning the actual metal (securely!), if you are worried about a total meltdown of society (or hackers or an electronic/nuclear disaster wiping out electronic assets). But if you have a 401k that lets you pick actual stocks and mutual funds, these ETFs are good opportunities for the patient investor.

Many individual investors lose money because they buy things that everybody is getting, when the price is the highest, and then they panic when their is a pullback and sell at a loss. Buy things that aren't super popular but have strong fundamentals, and sell when everybody is raving about what a great investment it is.

Precious metals are still in the less popular area for individual investors. Hardly any indivudual investors have any, and very few brokers recommend metals or metal stocks. Hedge funds move in and out of them, it is true, but there is a huge amount of money on the sidelines even when the hedges funds are momentarily invested in them.

Mormanity said...

Saving in a credit union is a good idea - much better than not saving. But you'll get interest rates that are less than the real inflation rate, so you'll lose money every year. The dollar today has lost 97% of its value in the past century, with the really rapid losses occuring in recent decades. Cash is good, but it can lose value rapidly. Have at least some of your wealth in something that will maintain or increase in value. That's the idea behind investing in stocks. Historically, stocks have been a great investment with significant returns. Times may change, though.

Food storage is one of the smartest investments! But do get some precious metals. Drop into your local coin shop and get a few cheap silver dollars, silver halves, and silver quarters. Cheap as you can - just go for the junk silver - that's my opinion.

Anonymous said...

As I thought about your comments and the fact that we are quickly creating a "global economy", it made me think of this quote by Elder Neal A. Maxwell in his book Meek and Lowly (p. 53). In it he stated the following:

"Before the millennial time when the arrogancy of the proud will cease, the Gentiles will be in a circumstance of 'great pride, unto boasting, and unto great swelling, envyings, strifes, malice, persecutions, and murders, and all manner of iniquities.' (Helaman 13:22.) The gigantic, global collapse that is yet to come will not be that of a failing stock market, but the fall of hardened mind-sets and collective pride when it all finally tumbles. Nephi testified: 'It came to pass that I saw and bear record, that the great and spacious building was the pride of the world; and it fell, and the fall thereof was exceedingly great. And the angel of the Lord spake unto me again, saying: Thus shall be the destruction of all nations, kindreds, tongues, and people, that shall fight against the twelve apostles of the Lamb.' (1 Nephi 11:36.)”

Anonymous said...

anon@11:59, Is that before or after the global nuclear apocalypse McConkie assured us would come?

Anonymous said...

China dumping its treasuries is not going to happen unless something like China invading Taiwan and the U.S. intervening happens and even then, why would China want to destroy the value of the thing it holds? It would destroy its own economy, as well as the world economy.

This market bashing is puzzling too. Look at the average return of the market over the past 80 years and tell me that over the long run it's a bad idea. Buying individual stocks is risky, but an index fund or ETF, not so much.

And finally, gold? At a 30 year high and we should buy?

Mormanity said...

You need to remember the value of the dollar when you consider gold. The gold high of around $800 in the early 1980s is something like $1500 in today's dollars - and we're at less than half that value. Massive inflation of the dollar by printing of fiat currency at incredible rates, propped up only by huge foreign investing in the dollar, cannot persist without even greater devaluation of the dollar and a natural increase in the price of gold - just based on currency issues alone. Add to that the potential for China and other nations to turn to gold as a means of protecting their wealth rather than the US dollar, and you're likely to see the $500 to $700 range of gold that we've had recently is a true gift, compared to what it will be in five years. Well, this is a prediction that will take time to bear out, but do some research into what's going on (kitco.com is one place to start) and I think you'll see that some gold and especially silver in your 401k and other retirement savings is an awfully smart thing.