Money and Financial Business

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Yup, right on schedule, it's getting ugly out there (no matter what realtors on commission tell you)

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Ah, the smell of housing napalm in the morning...

Getting ugly out there now...

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Things fall apart. The center will not hold...

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A balance transfer offer from a credit card is a great way to either save some money or to make some money. For example if you have $1000 in debt with 18.99% APR interest rate, and you estimate that it will take you a year to pay off that debt, then over the course of the year you will pay $105.82 in interest (using this calculator). By transferring that balance to a credit card with a low rate (more details about this in a bit) say 3.99%, over the course of the same one year, you will end up paying only $21.74 in interest. In which case you save $84 in terms of interest paid. If your debt amount is higher, the savings can be higher as well.

If you are debt free and want to leverage the credit card offers, then you could accept a credit card offer with 0% APR and transfer the money to a high-yield online savings account and make some money. Last year, I made around $2,000 from credit card arbitrage, so this can be quite lucrative if you follow the rules of the game. Anyway, irrespective of whether you plan to pay off your debt or make money using credit card arbitrage, here are some things to look out for before jumping on that balance transfer offer.

What is the interest rate?
Obviously the first thing to look for is the interest rate. If your intention is to do credit card arbitrage, then you want a card that offers 0% APR. There is no argument about that. If on the other hand, you are looking to do a balance transfer to reduce the interest you are paying on your debt, then you must go for an offer that provides the lowest possible interest rate, even though it may not be zero. If you do not have any offers in the mail yet, you might be able to call one of the credit card companies for the cards you already own and request for an “introductory” low rate for transferring balances. Make sure that the credit card you are transferring balances to does not already have a balance since the payment you make each month will always apply to the balance with the lowest interest rate.

What is the balance transfer fee?
Most credit card companies today charge a balance transfer fee. In some cases they may waive the fee for the first balance transfer, which is great. More often than not though the fees are around 3% of the amount transferred with a maximum cap of ~$50 to $75. You need to watch out for these fees carefully since they can completely obliterate any benefits you were expecting from making the balance transfer. For example, if you plan on doing a credit card arbitrage, paying 3% in fees while earning 5% in interest may just not be worth it! If you are planning to pay off debt, if your original debt was at 18.99% APR, but the new offer is for 16.99% with a balance transfer fee of 3%, you may actually end up paying more! So, pay close attention to the balance transfer fees.

How long is the introductory rate valid?
Most introductory rates are valid from 3 months to 18 months. If it is 3 months, it is probably not worth it to pay the fees and transfer balance. The 18 month balance transfers are a very rare breed. 9 to 12 months is more of the norm. So if you have an offer in mail for a 3 – 6 month introductory period, I would suggest passing it up and continue to pay your balances on all your cards. Sooner or later, you will start to receive juicier offers with longer introductory period.

What is the interest rate after the introductory period runs out?
If you are looking for a credit card arbitrage, then this should not matter since you will either pay off the balance or roll over the amount when the introductory period ends. But if you are looking to use a balance transfer to pay off debt you need to pay particular attention to it. Again, let us use the same example as earlier – a debt of $1000 with 18.99% APR, but assume that it will take you 2 years to pay off that debt. Now with all numbers rounded up, you will end up paying around $209.69 in interest over the course of the two years (again, using this calculator). Now, suppose you transfer the balance to a card with 9.99% APR for 9 months and 26.99% APR after that. Also, let us assume that the balance transfer fee is 3%. In that case, over the course of 2 years you end up paying around $215 which is more than what you would pay without the balance transfer!

What is the minimum payment?
Ideally, it is better for your credit score if you can always pay a little more than the minimum payment. So, irrespective of whether it is a credit card arbitrage or whether you are paying off debt, you need to be able to make a little more than the minimum payment. In the worst case, even if you can't make additional payments, you should always make at least the minimum payment before the due date in order to ensure than you introductory rate stays valid. Different credit card companies charge have different percentages for calculating the minimum payment usually in the range of 2 – 4%. So if you are transferring the balance from a company that computed the minimum payment as 2% of the balance to a company that computes the minimum payment as 4% of the balance, your monthly required payment doubles. If you have a very tight budget, make sure you have taken this into consideration.

Is there any requirement to qualify for the introductory rate?
There have been some credit card companies that offer an exceptional low APR with low balance transfer fees for a long term etc, but they come with a trap. You are usually required to make at least one purchase (sometimes three) using that card each month. The catch here is that, purchases are charged a higher interest rate than the balance transfer, and any time you make a payment, it will apply first to the amount at lowest interest rate (in this case the balance transfer offer). The trap here is that, if you forget and make a large purchase, you will end up paying a huge amount of interest on that purchase. Or, if you forget to make any purchases, your introductory APR is no longer valid and your interest jumps up quite dramatically. I personally stay away from such trap cards, but know of several people who have played the arbitrage game with such cards for years. So, it is up to you to decide if this is a biggie or not.

What are the default policies?
There are two things you need to be aware of here – the default rate, and the universal default policy. Default rate is the rate that applies if you do not meet the conditions for the introductory offer (eg. missed making the minimum payment before the due date). Universal default policy means that the credit card company can jack up the rates, even if you missed a payment on some other credit card, by an entirely different company! If you are doing a credit card arbitrage, then hopefully you have the money tucked away in a safe online account with relatively easy access. In that case, the default rate does not matter so much, but you may still want to avoid a card with the universal default clause, if your credit card arbitrage involves more than one card. If you are paying back debt, then you should pick a card with the lowest default rate that does not have the universal default clause.

If used properly, balance transfers are a great way to save or make some money. But the credit card companies have devised a ton of traps to make sure they can stay in business. If you plan to use the balance transfers to get out of debt faster or to make some money via arbitrage, make sure you know all the terms and be prepared for gotchas. Watching out for the items on the list above should be your first step. But do not stop at that. Keep reading on this topic and be prepared for whatever the credit card companies throw at you next!

A colleague, Bruce Blonigen, and his co-author Alyson Ma say there's little evidence to support the view that "China extracts rents and technology from foreign competitors, thus allowing it to grow even faster and longer than most would have imagined possible." China has managed to attract considerable foreign investment, but that investment has only had a moderate impact on technology transfer and the sophistication of Chinese firms:

Will China soon be making not only cheaper, but also better, products than everyone else?, by Bruce Blonigen and Alyson C. Ma, Vox EU: The opening of China and its breathtaking ascendancy to major-player status in world markets has led to significant hand-wringing by the rest of the world on many fronts. The huge outflow of cheap unskilled-labour-intensive products from China and its ramifications for wages and welfare in both developed and other less-developed countries has been a primary concern.

Recently, new hand-wringing concerns have been raised by various commentators. As it turns out, the composition of China’s exports is much closer to that of OECD countries than its level of per-capita income would suggest.[1] This has substantial implications not only for China’s ability to sustain its growth, but also for real wages of all workers in developed countries, not just unskilled ones.

A significant factor behind this surprising export sophistication by China may be the role of industrial policy to promote technologically-advanced industries. While it is well known that the Chinese government has historically had preferential tax treatment and free trade zones for foreign firms, it also often negotiates technology transfer arrangements with foreign firms. These are either through restrictions that limit FDI to joint venturing with a domestic partner or simply offering quid pro quo arrangements of technology transfer from the foreign firm to domestic ones in exchange for the foreign firm’s ability to sell to the huge Chinese market.[2]

A prime example of how this may be successful is a case in the auto industry. The Chinese government has always required foreign automakers to partner with domestic producers. Shanghai Automotive (a Chinese-owned firm) recently announced plans to start up its own factory to produce a luxury sedan after jointly producing autos in China with General Motors and Volkswagen for many years.[3]

The X-factor in all of this is China’s large and growing domestic market. It may be precisely the pivotal factor allowing China the leverage to wring out important and significant technology transfer concessions from foreign firms. China’s predecessors (such as Japan, Korea, and Taiwan) did not have this same advantage when pursuing their own industrial policies for growth in previous decades. Thus, one wonders if the upcoming growth of China will make the previous Asian miracles look pedestrian.

While the scenario we have just laid out is plausible, recent evidence suggests otherwise. China’s ability to gain technology from foreign firms and develop its own productive sophistication has actually not been that significant.

First, while China’s range of exported products overlaps more with OECD countries than other less-developed countries, China sells these more-sophisticated products at a very large discount relative to competitors.[4] This suggests that they are breaking into these “sophisticated” categories with relatively low-quality offerings. Interestingly, the Chinese discount in these products relative to OECD countries has been growing over time, not diminishing.

Second, if one looks at firm-level productivity data, foreign-owned firms in China are currently nine times more productive than their Chinese-owned counterparts! Growth-accounting exercises suggest that foreign firms are responsible for 20% of China’s GDP and 40% of its recent growth using only 3% of its labour force.[5] These numbers highlight a significant vulnerability of China, particularly if there is little technological improvement taking place due to foreign presence. Foreign firms could ultimately switch to even lower-cost countries, taking their sophistication and productivity with them.

Even more direct evidence on Chinese-owned firms’ ability to “catch up” with foreign-owned firms can be found by analysing China’s trade statistics, which actually keep track of exports by various types of enterprises in the Chinese economy. These data provide a number of interesting patterns. First, the share of Chinese exports accounted for by foreign firms has been increasing significantly over this period, particularly in sophisticated goods that are exported to OECD countries, even though the level of foreign investment as a percent of the Chinese economy has stayed roughly the same.[6]

Second, from 1997 to 2005 the patterns for relative quality (or sophistication) changes between foreign-owned and Chinese-owned firms proxied by the export price (unit value) gap between the two firm types are not in China’s favour. The export price gap between foreign-owned and Chinese-owned firms has grown over this period as well, suggesting that the relative sophistication of products from Chinese-owned firms has been actually falling. Further analysis, however, finds that a significant reason for this is the rapid increase in sophistication of products being exported by foreign-owned firms. In other words, foreign-owned firms are dramatically increasing the sophistication of the products they export over this period. After accounting for this continual introduction of higher quality goods by foreign firms, one finds that Chinese-owned firms are closing the price gap by about 12% within three years time. Thus, there is evidence of some modest “technology transfer” occurring, but nothing dramatic.[7]

There are also a few other pieces of evidence from the analysis of Chinese trade data that argue against any effective role for Chinese industrial policy in these areas. First, price/quality gaps do not close at all for sectors targeted by the Chinese government for foreign investment encouragement or for ones where foreign firms are restricted to have a domestic partner. Second, price/quality gaps do not close more in high-technology sectors that are supposedly being targeted by the Chinese government.

Conclusions

It is easy to spin a story that the unique form of governance in China, as well as its huge market potential, allow it to extract rents and technology from foreign competitors, thus allowing it to grow even faster and longer than most would have imagined possible. The evidence, however, indicates otherwise. It does not suggest that there have been strong technology spillovers from foreign to domestic firms in China to date. China’s industrial policies may have been successful in attracting foreign investment, but not necessarily in increasing the sophistication of its own firms through technology transfer. For example, although the Lifan Group (a Chinese-owned firm) will begin exporting midsize sedans, it is doing so by purchasing ready-made plants from Brazil.[8]

Of course, there is more work that can and will be done to explore these issues. For example, the available evidence has mainly looked for possible spillovers with the same industry (or product) line (i.e., horizontal), whereas there may be significant technology transfer vertically from foreign-owned firms to Chinese-owned input suppliers (and vice versa). In the end though, it seems unlikely that government policies will be able to substantially enhance technology spillovers that would naturally occur and, of course, there is always the possibility that they could get in the way as well.

Footnotes

1 For example, see Dani Rodrik, What’s So Special About China’s Exports?, NBER Working Paper No. 11947 (2006).

2 Rosen, Daniel H. Behind the Open Door: Foreign Enterprises in the Chinese Marketplace. Washington, DC: Institute for International Economics. (1999).

3 Chinese Partner of G.M. and VW to Offer its Own Cars, New York Times, p. C3. (April 11, 2006)

4 Peter K. Schott K, The Relative Sophistication of Chinese Exports, NBER Working Paper No. 12173; also see his see recent Vox column.

5 Whalley, John, and Xian Xin. China’s FDI and Non-FDI Economies and the Sustainability of Future High Chinese Growth, NBER Working Paper No. 12249 (2006).

6 Bruce A. Blonigen and Alyson C. Ma, Please Pass the Catch-up: The Relative Performance of Chinese and Foreign Firms in Chinese Exports, 1997-2005, NBER Working Paper No. 13376 (2007)

7 A couple other recent studies of firm-level data in China find limited evidence of technology transfer as well: Hale, Galina, and Cheryl Long. What Determines Technological Spillovers of Foreign Direct Investment: Evidence from China. Federal Reserve Bank of San Francisco Working Paper. (2006), and Chen, Huiya, and Deborah L. Swenson. Multinational and the Creation of Chinese Trade Linkages. NBER Working Paper No. 13271. (2007)

8 Feenstra, Robert C. and Alan M. Taylor. International Economics. Worth Publisher, forthcoming

La gran compañía energética se desmarca de sus competidoras con esta nueva medida anunciada en el nuevo convenio colectivo que acaba de firmar. Sorprende sobre todo, porque va contracorriente de lo que está pasando en otros sectores.

El nuevo acuerdo establece una jornada intensiva todo el año para 9.000 empleados en España que se extenderá desde las 7:30 horas de la mañana hasta las 15:30 de la tarde, con una horquilla de entrada y salida al trabajo de unos 20 minutos.
Con esta medida, Iberdrola no sólo quiere mejorar la productividad, uno de los grandes males de las empresas españolas sino mejorar el problema de la conciliación familiar y laboral. Aunque parezca increíble Iberdrola calcula que con la jornada intensiva eliminará horas muertas de los empleados y calcula que la productividad de sus empleados aumentará al año en 500.000 horas. Para áreas de negocio críticas, que necesiten personal activo por la tarde a modo de guardia, se establecerán turnos.

En un alarde de innovación y conciliación laboral la empresa ha anunciado que en el nuevo convenio existirán otras medidas de conciliación laboral y familiar: posibilidad de jornada reducida de cinco horas diarias sin disminución de salario durante un año tras la incorporación por baja maternal, ampliación de ocho a diez años de la edad de los hijos menores que dan derecho a la reducción de jornada por guarda legal.

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A classic growth scare appears to have commenced, warns CLSA’s Christopher Wood in a “flash edition” of his Greed & Fear client newsletter. Oil, copper, gold and Baltic freight rates are all showing initial signs of topping out, he notes. But the catalysts are growing evidence of a US slowdown and the related rising risk of financial accidents,...

The most amazing statistic you never heard, according to Ken Fisher, chief executive of Fisher Investments and Fisher Wealth Management, is the year-to-date daily correlation between ups and downs in the global stock market versus spreads between the yen and the euro: 93 per cent, or “beyond eye-popping”,...

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Saying he could no longer stand idly by while a vital part of American culture is lost forever, activist and Broadway producer Mel Brooks has founded a private nonprofit organization dedicated to preserving the word "schmuck"

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"If I were a younger man, I would write a history of human stupidity; and I would climb to the top of Mount McCabe and lie down on my back with my history for a pillow; and I would take from the ground some of the blue-white poison that makes statues of men; and I would make a statue of myself, lying on my back, grinning horribly, and thumbing my nose at You Know Who." Vonnegut Tattoos: So it Goes. (Also there: Connect the dots)

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Cooking is something that I know very little about. In fact 'very little' is an overstatement. If it's not a microwave or a barbecue, I am pretty clueless. That's why I was pretty happy to read a post today by our sister site, Diethack.

In his post, Harry explains the basics surrounding the differing styles of cooking. He includes everything from steaming to poaching. Here are his comments on grilling and broiling:

• Try remove the maximum amount of grease possible from the meat you are going to cook. Fats that drip on the hot heating element or charcoal produce cancer causing emissions.
  


• It is very difficult to remove all the fats from your meat. In this case just wrap your meat in aluminum foil before grilling.
  


• If you don't appreciate red meat, cut the meat in thin slices. They will be thoroughly and homogeneously cooked faster.
  


• A good marinade will give a good flavor to your food. Use lemon juice, herbs and spices and allow your meat to marinate for at least 2 hours.


• If you are grilling chicken, it is best to remove its skin.
  


• Never leave your food unattended when grilling or broiling. The food cooks so fast that it can be ruined quickly by burning it.
  


• Always do grilling in open spaces or in well ventilated areas.
  


• Always keep a fire extinguisher nearby in case things get out of control.
  

If you are making an honest attempt at healthier cooking and want to know more, check out How to Actually Cook Food by Harry at Diethack.

New chief executives used to enjoy a relatively lengthy honeymoon period. These days, judging from the experience at BHP Billiton (for Rio Tinto), Carlsberg (going after Scottish & Newcastle) and Rio Tinto itself (which successfully bid for Alcan), newly anointed bosses are spending the wedding night poring over plans to woo someone else,...

With my bankruptcy filing coming along, I’m starting to think of how I’m going to attack the debt that is underneath my business. It’s not a small amount by any means. Most of the original creditors are gone, replaced and or hired by collection agencies. The exception being the 0% credit cards at citibank that I negotiated earlier in the year. I have been continuing to pay those monthly amounts and it’s nice to know that the payments going out are going 100% to the principle.

My Strategy 

I’m already beginning to get settlement offers from most of the debts I owe on the business side of things. They are mostly in the 70-80% range, and all but a few are still well outside what I can afford at the time being.

My biggest concern is the IRS. In my estimates I have about 6K in back taxes from 2006 to them, and another 5-6K thus far this year. The good thing about the IRS that I’ve discovered thus far is a.) they are very slow and b.) they are very willing to work with you when you call them. I already settled 2005 with them and found them shockingly easy to negotiate with. So, working out a payment plan with them will be my first step on reducing the business side of my debt fiasco. I hope to start discussions with them at the beginning of next year, once I have a better handle on what my business income is looking like.

The other debts I think I’m going to attack via the famous “snowball” method. Since they are nearly all in collections, and with the limited amount of funds (currently none) that I have to offer as a settlement, this seems like the best strategy. I know it will make me feel good to start settling some of these, with the smallest debt being just under $200, I think I should start there.

The Speed of The Attack 

The speed at which I attack the business debts is going to vary depending on how the business is doing. If my Project A really shoots up and starts making some cash, I’ll be able to settle some of the smaller amounts right away. If things stay at the level the business is at right now…I can probably only save maybe $500-$1000 a month toward a settlement fund. But, it’s a start.

Is it possible to buy an income trust for no money down and still own it free and clear in less than 7.5 years?

While browsing the Standard & Poors and DBRS rating pages looking for income trusts with strong stability ratings, I came across the power utility trust, Boralex Power Income Fund, which is rated SR-2(stable) and STA-2(low) respectively. You won’t find the typical income trust suspects. The fund doles out distribution using internal cash flow without eroding balance sheet (debt/equity = 0.30) or diluting share count. They own 10 power stations in Quebec and the state of New York:

• 7 hydroelectric power stations (51% of total output)
• 2 wood residue (33%)
• 1 natural gas-fired cogeneration plant (16%)

These power stations have amazing longevity with a couple dating back prior to the First World War. Furthermore, each station has power purchase agreements ranging anywhere between 20 and 40 years. As long as water continues to flow on rivers and population continues to grow, Boralex will continue to electrify investors’ bank accounts. Isn’t this a simple antidote in an investment landscape whipsawed by assets-backed commercial papers and recession chatters?

The strong stability does come with a handicap, however; the trust has virtually no growth prospect, which is why a cheap entry price is so paramount. The trust traditionally trades between $9 and $10, and despite hovering around $9 recently, the 10% yield was simply not up to snuff to justify the lackluster growth. Not being deterred, I shelved the trust onto my watch list just in case bargain surfaces.

Lo and behold, the trust has since been constantly banging at my door screaming, “new 52-week low!” Even the Financial Webrings forum is picking up on the story.

Not wanting to pass up a good opportunity, I raided half a position on Friday at $6.60. You ready for this? With its annual distribution at 90 cents, the trust is yielding a generous 13.64%! Not only that, most of the distribution is in the forms of return of capital and dividend, and with only a ninth in income, the distribution is practically tax-free. Even with no distribution increases, the trust’s compounded return will still eclipse the broader market. In case you’re curious, I mortgaged my water dams with a margin loan, but this is more lucrative than buying a Vancouver property with no money down. Just for fun, I calculated it’d take 7.5 years to wave farewell to the mortgage without forking a single dime. That’s assuming a marginal tax rate of 30%, and a tax-deductible 6.25% interests from Interactive Brokers.

So why is the trust being punished? The answer likely lies in the unfavourable hydrology in the 3rd quarter. Hydrology is fickle science. Due to unusually low water level, their hydroelectric segment generated 22.8% less than historical average, even though that’s only for one quarter. It was only a year ago when the water current was exceptionally strong, while year-to-date, the segment is down only 6%.

In my opinion, investors are unjustly extrapolating this poor quarter well into future return.

The water dams look the same, smell the same, sound the same, and feel the same as yesterday, a week ago, a month ago, 10 years ago and will likely remain the same decades into the future. The only difference is they’re 40% cheaper than the 52-week high. Moreover, these hydroelectric stations represent only half the eggs in the basket. The other half is humming along just fine; the 2 wood-residue thermal power stations and a natural gas-fired cogeneration plant have revenues steaming 7.5% and 20.0% higher respectively.

Having said that, there is no free lunch here. The production isn’t guaranteed, and we don’t know if the 2011 income trust tax ruling will choke cash flow. In my opinion though, as long as the trust is held outside of RRSP, the after-tax distribution shouldn’t change much, but I won’t go into the math here. Since power trusts are generally considered stable and boring, coupled with Boralex’s conservative balance sheet and high ratings from S&P and DBRS, I feel the distribution is safe, and the higher yield offers a margin of safety in a rare event of a distribution cut.

Today we are going to have an interview with Mr. John Rubino, author of  How to Profit from the Coming Real Estate Bust: Money-Making Strategies for the End of the Housing Bubble and owner of the website Dollar Collapse.  I’ve been in touch with Mr. Rubino for well over a year on a weekly basis.  You may think that a title such as the above is almost stating the obvious in today’s market but you will be surprised that John published his book in 2003.  During this time, finding a contrarian viewpoint was limited especially one that warned about the issues facing the dollar, housing, and the credit markets.  Three for three isn’t bad in my book.  Even four years ago, I was examining issues regarding the new debt markets and how housing was suddenly disconnecting from economic and fundamental indicators.  John’s book was an excellent read and provided a clear picture of where we would be heading.  Amazingly, you’ll find that with certain REOs prices are going back to 2003 price levels.  We are happy to have Mr. Rubino on the site today to provide insight into the current economy.

Welcome officially to Dr. Housing Bubble John.  In your book, you talk about the housing market having a global impact.  What implications does a global housing market have on our nation’s economy?

Thanks for having me on, Doctor. Love your site.

Today everything is connected. For the past decade American consumers have been borrowing against their homes to buy foreign cars and TVs and clothes and toys. So China and India have boomed, while we’ve gone ever deeper into debt. In other words, the rest of the world’s prosperity has been a direct result of Americans’ living beyond our means.

Now we can’t borrow against our homes any more because, after a long stretch of unrealistic price increases (as readers of your “Real Homes of Genius” series are aware), prices are falling off a cliff. U.S. banks are stuck with hundreds of billions in debt that will never be repaid and have pulled way back on their lending. American consumers are maxing out their credit cards to pay their mortgages, and as this source of funds runs out they’re defaulting on their mortgages and/or declaring bankruptcy.

This affects the global economy in two ways. First, American consumers will buy far less stuff from overseas, so we’ll see the massive trade surpluses of China and Japan melt away, along with many jobs and much tax revenue.

Second, because our trading partners have accumulated trillions of U.S. dollars—which is what we give them in return for all the nice stuff they sell us—they lose when the dollar falls. They understand this and are desperately trying to swap those dollars for stronger currencies and real assets, which is pushing the dollar down even further. This process is gathering steam and will culminate in a “death spiral” for the dollar and most other paper currencies. It’s going to get very very ugly on a global scale.

You published your book in 2003, during the height of the housing boom.  Why did you decide to publish the book during this time?

Like so much of life, the book happened through a series of coincidences. My agent was having lunch with someone from a major publishing house who mentioned that he wished he had a book in the pipeline on how to profit from the ongoing real estate boom. My agent asked me if I’d be interested in doing such a book and I replied that the other side of the story—the coming bust—was a lot more interesting. To her credit, she got it right away and we put together a proposal that the far-seeing folks at Rodale bought, on the condition that I get them a manuscript right away, since they feared that the bubble could burst at any time. So I banged out the book in three months and they brought it out a few months later. As it turned out we were waaayyy early. The bubble kept expanding for two more years, and home prices and consumer debt have reached surreal levels. Which is why the bust now under way will be so huge and long-lived.

Early this year in May, the Fed Chairman Ben Bernanke stated that the subprime collapse would be contained and spillover was highly unlikely.  Clearly this isn’t the case.  Why do you think the Fed got it wrong and what are the long-term implications of a housing market with little or no subprime?

At history’s big turning points the people in charge are always clueless. Generally they’re just too close to the trees to see the forest—and of course their paychecks depend on the status quo, which colors their perception just a bit.

This time around, the financial mainstream bought into some amazingly wrongheaded ideas, like “debt doesn’t matter,” “the government can be trusted to maintain the value of the dollar,” and “in any event, the value of the dollar really isn’t important.” Ben Bernanke still seems to believe that last one, based on his recent Congressional testimony when he answered one of Ron Paul’s brilliant questions with the opinion that if someone lives in the U.S. and buys domestically produced goods with dollars, a falling dollar shouldn’t matter much. It looks like we’ll have to replace this whole generation of public officials and bank executives before rationality returns to the markets.

As for a market with no subprime, one of the drivers of this bubble was banks’ willingness—with government encouragement—to lend to anyone with a pulse. This created a lot of new demand for low-end houses, which allowed existing homeowners to sell for a good price and move up to mid-range houses, which allowed those owners to step up to McMansions, etc. Take away subprime demand and the whole thing grinds to a halt. People can’t buy because they can’t sell.

Many of the things you talk about in your book have come true; the housing decline, the issues in the credit markets, and a declining dollar.  One of your chapters focuses on the two pink gargantuan elephants in the room that no one seems to be talking about, Freddie Mac and Fannie Mae.  In light of what is happening, what impact will the current housing market have on these two giants?

Good timing. Just last week Fannie Mae announced a huge loss due to the declining value of it mortgage portfolio. Fannie and Freddie never should have existed in the first place, since the government has no business in the housing market. Now we’re seeing the inevitable result: They’ve issued guarantees on literally trillions of dollars of mortgage-backed bonds, and they don’t have the capital to make good on those claims. One or both will be bankrupt within a couple of years. And because they’ve historically been the main buyer of mortgages that banks originated—which gave the banks cash to make more loans—banks will pull back even further on their mortgage lending. The result: Home prices in yesterday’s hottest markets will keep falling for years. Yesterday’s million dollar Orange County bungalow will go for $200,000 or so in 2010.

What do you say to those that say that talking about the housing market in a negative light creates a self-fulfilling prophecy?

It’s flattering to think that you and I have the power to affect a $20 trillion industry. But the reality is that prices got too high, debt burdens got to heavy, and lending standards got too loose. By 2004 a crash had become unavoidable, and now there’s nothing the press can do about it one way or the other.

It has always been the case that bulls make money, bears make money, and hogs get slaughtered.  Many readers on this site are concerned about preserving their wealth.  What recommendations would you have for someone looking to prosper through this market downturn?

First, sell your house for whatever you can get. It’s going a lot lower, especially if you live in one of yesterday’s hot markets. Use the proceeds to pay off variable rate debt. Avoid any investment that depends on a stable dollar. Long term bonds, because they pay you the same number of dollars each year, will decline in value as the dollar falls. Bank and brokerage houses, because they’re owed massive amounts of dollars, will get creamed. They’re nowhere near their bottoms, despite the last few weeks’ carnage. If you’re financially experienced, consider shorting the market by buying put options on the big stock indexes like the SPY or QQQQ. And of course buy gold and silver. As forms of money that can’t be printed in infinite quantities by desperate governments, they’ll rise in value as the dollar tanks.

Foreign stocks and bonds are the real question mark. Since they’re denominated in currencies that are going up against the dollar at the moment, they’ve been doing well in dollar terms. But I’m worried that 1) when the U.S. stock market tanks, it will pull down the world’s other markets, and 2) foreign countries can’t tolerate the impact a rising currency will have on their economies, so they’ll start pushing down the value of their currencies. This is called “competitive devaluation” and it will devastate the value of most paper currencies. So…foreign stock and bond funds are, at best, short-term trading plays rather than long term investments.

What’s your take on the tens of thousands of Real Homes of Genius in high priced metro areas?

Down 80% by 2010.

You also talk about the dollar’s decline and it is clear that in the past few years, the dollar has depreciated compared to other major currencies.  How can a worker paid in US dollars, protect their purchasing power throughout the next few years?

A currency crisis makes everything uncertain, including most jobs. So besides investing to avoid dollar exposure as I discuss above, Americans should be paying off debt and building up their families’ balance sheets. Live smaller now, prepare for hard times, and if they don’t happen you’ll at least have the peace of mind that comes from not owing anyone anything.

There has been an argument that we are now entering a gold, oil, and commodities bubble.  With gold over $800 an ounce, oil near $100 a barrel and the price of other commodities soaring it seems like another bubble.  Is this argument valid or is there an economically fundamental reason for these record high prices?

Bubbles are more than just rising prices. They’re also characterized by:

1) Time-tested business practices being replaced with “innovations” that look like scams to reasonable eyes. In the housing bubble, for instance, zero-down, adjustable rate mortgages replaced the old 20% down 30-year fixed.

2) Regular people making fortunes doing things that experts normally find difficult. Daytraders in the 1990s and condo flippers in 2005, for instance.

In gold and oil we see neither of those things. In fact, most people still have no idea what gold is or why it’s going up, and their understanding of oil ends at the gas pump. When the person cutting your hair starts telling you about the emerging oil Brazilian oil company or Tanzanian gold miner you’ve got to buy, then it’s a bubble.

In the short run though, we could easily see a nasty correction in commodities. If the U.S. banking system implodes, which it might when Fannie, Citi, Merrill and all the rest finally come clean about their derivatives losses, we could see fear of inflation replaced by fear of a 1930s style deflationary crash. That would be bad for gold and oil. But then the world’s governments will panic and shift their printing presses into high gear, and the tidal wave of paper will cause chaos, which might be good for commodities. Welcome to the 21^st century, Doctor!

We’d like to thank Mr. John Rubino for his time and expertise.  Please make sure to visit his site Dollar Collapse and read his books,  How to Profit from the Coming Real Estate Bust: Money-Making Strategies for the End of the Housing Bubble and The Coming Collapse of the Dollar.  There is no sense in complaining about reality if you are not willing to do something about it.  Educate and empower yourself for the coming years.

 

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Global financial stocks have been oversold, both in absolute terms and relative to the rest of the market, says Ian Scott, a strategist at Lehman Brothers, in the FT's View of the Day column."Since the first subprimerelated problems began to hit the equity market in February this year, global financial stocks have dropped 14 per cent while non-financials have risen 8.5 per cent,"...

Here at the 'Festival Of Frugality' we have a marker as well. This is the 100^th week that we have been posting bloggers favorite posts on frugality. The 1^st Festival of Frugality was on December 13^th, 2005 and it had 13 entries. No unlucky numbers obviously as 10 of the 13 bloggers are still blogging today!

I will post the entries to today’s FoF, but will also include that bloggers first post. This is a chance to see if they have changed over the months or years and what they thought was the most important idea to them when they started their blog.

The first link with be their first post (if I got this wrong, let me know) and the second link with be their current submission for FoF 100.

The Wastrel Show - Your Health: Most Valuable Asset!

What Works for Us - Save $$ - Use Employee Purchase Programs

Philaahzophy - A Bathroom Full Of Cash - Top 5 Tips For Saving

Cheap healthy Good - Defending the Devil: The Semi-Cheap, Kind-of-Healthy Goodness of Rachael Ray (that was a funny picture)

Redomestication - My #1 Tip To Stop Impulse Buying

Investing Lessons - Simple Frugality – Conservation

Economics Blog - Tips for Frugal Spending

The Financial Blogger - 5 Tricks To Save Money On Christmas Gifts

My Good Cents - The Coupon Game

Frugal Journey - 10 Fun and Frugal Hobbies

MoneyNing - My Chick-Fil-A Cow is Turning a Profit

Rather Be Shopping - Frugal or Cheap? - When To Spend The Extra Money

Blueprint for Financial Prosperity (found it after 258 pages!) - Giving Subscriptions as Gifts

Stop the Ride - An Ounce of Prevention

Free Money Finance - Save on Heating Costs by Checking/Cleaning Your Dryer Exhaust Vent

Philby’s Finance - Top Tip: Buy One Quality Thing vs. Buying Hundreds of Disposable Things

Free From Broke - Loose Change Gets Us Free Meals On Vacation

At Home with Kris - Frugal Living - a job or a ministry?

Opinion Mom - Frugal Fridays: Resale Shops

My Two Dollars - Create A Shopping List To Stop You From Buying Anything.

The Digerati Life - 15 Cleverly Cheap Ways To Watch Your Hygiene


I would like to thank Paid Twice for hosting last week and Rather Be Shopping blog for hosting next week. For more info on the Festival of Frugality you can go to the FoF site.

Typepad featured weblog!

Grow-a-brain was picked as Typepad’s Featured Blog on November 10th, and appeared on their home page for the whole day! Thank you Typepad

6.5 Reasons Why You Shouldn’t Blog. No. 3: Your ideas are not focused.

…Another mega site that will keep you clicking for hours…

From “Kierkegaard luvz Candi”: Growabrain - Adam Savage reads this. I read this. You should read this

From Todd Carpenter ‘s Rembex: What makes a blogger “influential”?

Here is what people were saying about Grow-a-Brain Since February 2003

Need to be up to speed from the moment you rise? Sign up for FT Alphaville's 6AM Cut.This morning briefing note is published right at the beginning of the European working day. Designed for busy readers on the move, our email service provides a quick and accessible digest of key financial news and analysis from the FT and other sources....

For nearly as long as I have been blogging, I have kicked around the idea of conducting a book discussion with AFM readers. I’m not talking about doing a book club like Trent’s doing but rather a discussion about a particular book that we pick out, purchase (or borrow from the library), and read.

Before I mention the book I’d like to discuss, I’d like to gauge your interest. Would you be interested in such a thing? If you are too busy to read a book right now, we could put it off until January, after the holidays are over.

For bloggers who are interested, I would even consider allowing different blogs to host a chapter (kind of like what we did with last year’s Bogleheads’ October Project).

If you guys think this is lame, I could go back to doing regular book reviews but their kind of boring. I’m tired of boring.

Here’s a question from a recent Ask Annie column:

Dear Annie: My boss, who is also a longtime mentor and friend, will be retiring at the end of the year, and he’s trying to help me position myself to take over his job. He’s been telling me that, if I want to keep moving up, I have to do a better job of self-promotion — that is, I have to try harder to make sure that higher-ups in the company are aware of my accomplishments. The trouble is, I was raised not to blow my own horn, and it’s very hard for me to boast about what I’ve done, especially when other team members deserve some of the credit. Do you have any suggestions? — Mr. Modesty

What’s your advice? You can read Annie’s response here.

My thoughts:

I have always had a problem with self-promotion, which does seem like bragging. My parents taught me not to brag. Self-promotion also seems to run counter to my Christian values (read Colossians 3:22-24).

That said, I don’t think there is anything wrong with getting in front of management and showing them your capabilities. I also think there’s nothing wrong with networking and making yourself a resource for when things need to get done.

Overall I agree with Annie’s advice but it doesn’t make me any more comfortable with bragging.

Zecco is a online stock broker offering free online stock trades. That’s right, free. As Zecco says, the price war is over and you won. You can make up to 10 free stock trades every month as long as you maintain a $2,500 minimum account balance, and after that you only pay just $4.50 per trade.

The ten free trades per month, which should be plenty for the typical person, are great for investors considering ETFs. FiveCentNickel has the answer if you’re wondering how a company like Zecco, offering free trades, can make money.

Zecco is trying to re-think the industry with a dedication to a minimalist business model that cuts out the fat like big, expensive TV commercials and wall-to-wall online advertising. Instead, they are focusing on beefing up the important things like market data, tools, news, opinions and insight.

The US mortgage crisis is “deeper” and “scarier” than anyone expected, Tony James, president of Blackstone, said Monday, as shares in the US private equity group slid on news that its Q3 revenues had fallen sharply below expectations. Blackstone was hit hard by market turmoil, posting a net loss of $113m that reflected both its disappointing revenues,...

Shares in E-Trade, the online broker that has seen its expansion into the mortgage market backfire, plunged nearly 59% on Monday and cut the company’s market value to $1.5bn, amid fears its dependence on uninsured deposits could force a fire-sale of its assets. Investors were shaken by a note from a Citigroup analyst,...

IBM unveiled its biggest acquisition on Monday with the $5bn cash purchase of software maker Cognos. The deal marks Big Blue’s response to the rapid consolidation of the business intelligence software market, triggered by Oracle’s recent purchase of Hyperion and SAP’s agreement to buy Business Objects....

Comcast has issued a press release claiming that they're helping to solve crimes with something called "Police Blotter On Demand" a trial program launched in the Philadelphia area.

The program shows suveillance video of recent crimes as well as video profiles of bank robbers and missing persons from the Philadelphia Police Department's "Most Wanted" list.

"This Comcast offering gives us a new and effective way to take advantage of technology to reach the public," said FBI Special Agent in Charge Jody Weis. "Police Blotter allows the public to study the surveillance photos and learn important details about the criminals and crimes. We believe the ability to pause and rewind for closer review could help viewers make important connections and associations they might otherwise miss."

Well, that's weird, but cool. FBI Harnesses Power of on Demand From Comcast to Track Criminals, Find Missing Persons, Make Communities Safer (Press Release) [CNNMoney] (Photo:opishposh)

Porsche on Monday revealed it earned three times as much money from trading derivatives as it did from selling cars, prompting accusations it was acting more like a hedge fund. The German luxury sports carmaker said €3.6bn ($5.2bn) of its €5.86bn pre-tax profit in the year to July was from share options....

Consumer Reports wanted to know if leaf blowers were really worth the money and ear damage, so they marked off a parts of lawn, filled it with leaves and had the ultimate man vs. blower showdown.

Anyone who has ever had to rake a lawn can immediately tell you who won, but it's still a cute video. They've also got some fall cleanup tips.

Man Vs. Machine [Consumer Reports]

The BOJ kept its benchmark lending rate at  0.5% with an 8-1 vote.  Note that the Japanese economy grew a bit faster than I had expected, and as usual, I worry about the fine balance that Japan must maintain due to its export-based economy.  I am very closely watching the Yen and Japanese consumer spending / inflation data which is not concerning me quite yet.  However, the carry trade is at a critical juncture and the recent slide in the Aussie and Kiwi are potential warning signs.   If you like international finance, it’s an interesting time to watch the currencies and associated treasury yields in Japan, Australia and New Zealand.  While US bond markets are important, I strongly suggest that it’s imperative that we look to these three countries right now.

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I have a phone interview for a job in Edmonton ... it's for a Marketing Specialist position. I didn't think I'd get an interview, as I'm not really qualified ... and I don't really want to move away at this point in my life ... but I'm still going to do the interview and see what happens.