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Remembering Mao

January 31, 2004

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He didn't mince words, did he?

Posted by manystrom at 12:06 PM | Comments (8)

Lancaster Predictions 2004 - The Lull Before the Storm

January 22, 2004

Relative stability reigns throughout the year.

Bush and Blair become media heroes and are seen to be "saving the world" from a number of ills from AIDS to terrorism to SARS and financial crises. Bush of course is re-elected as there is no meaningful opposition that isn't already sold out to the money power that already own Bush.

The country creeps towards martial law quietly with the population barely perceiving something is terminally wrong.

Patriot Acts I and II are used more and more for non-terrorist related crimes and freedoms are eroded in front of our very eyes and hardly anyone says a word, and if they do they can't be heard through the corporate owned media!

China's satellite state, North Korea, is held up as the poster child of nuclear proliferation and instability - conveniently posing as a huge threat requiring a massively expensive defense shield around the United States.

China revalues the Yuan (up against the dollar) and takes a hit in exports to the US. Taiwan is dangled infront of China as a tasty morsel the US is prepared to offer up in trade talks to try to continue the phony economic miracle.

Europe's economy struggles even more as their exports get more expensive.

The US dollar stabilizes at around 80 through the election.

Consumer prices deflate a little more but hold reasonably steady.

Gold rises to $450 by year end, with some spikes up and down.

Oil continues to move upwards ending the year at close to $40 per barrel.

Interest rates rise towards the end of the year, but not massively.

Real estate drops a little in value as consumers' ability to service more debt and pay ever higher asset prices finally starts to really slow by the end of the 2nd quarter.

Whiffs of deflation start to fill the air into the 3rd quarter and the talking heads start to waffle and cannot explain what is going on or why.

As we roll through the election the veneer starts to come off the whole facade covering the reality of the economy, however the illusion is strong enough to carry us through the Bush re-election. Not one talking head ever mentions Fraction Reserve Banking, Usury, Fiat Currency or Sound Money - - the American population remain blissfully ignorant amidst the biggest meltdown of a global financial system in the history of this Universe!

Upon the conclusion of the election we start to accelerate towards the inevitable collapse of our monetary system and all of the necessary, but very painful, adjustments in our lives that comes with it.

I'm not sure when the big crash will come. I could be and probably will be wrong about most of what I've said in terms of timing, the crash could come before the election, it could come after a massive dirty bomb or biological attack (or some other kind of disaster that could cover the reality of our failed system), all I know is that crash it will and sooner rather than later.

There it is. I'm no clairvoyant or seer, I just say what I see. I've changed by opinion on inflation, I think we'll see a deflationary depression - I've changed my opinion on many things over time and reserve the right to change them again going forward. These are just my opinions right now, they are bound to change as our situation evolves.

I'm still Long Gold and Long Short - although I now think that a Deflationary Depression will cause gold to eventually go down along with everything else - just not as much in relative terms. Gold will remain the ultimate store of value, and food and protection will remain the ultimate security during a depression!

Hold on for the ride, it isn't going to be pretty, but it is necessary.

Vaya con Dios!

Rich

Posted by rlancaster at 11:11 PM | Comments (29)

Nystrom - Unsustainable Illusions - 2004 Predictions

January 19, 2004

Background
Economists and the press are overwhelmingly bullish on prospects for 2004. All sixty (60!) economists poled by Business Week magazine have called for stellar growth this year. Alan Greenspan has claimed victory in his battle against the bubble, and has managed to get both the economy and the stock market moving higher. Global markets are at 2-1/2 year highs, and last year’s 3Q GDP weighed in at over 8%. The Conference Board projects growth to hit 5.7% this year, making 2004 the best year yet in the last 20. To top it off, Saddam Hussein is safely behind bars, and happy days are here again. Apparently.

But recent growth is artificial and unsustainable. It is like a shivering camper, taking his remaining supply of kindling, newspaper, and even the gasoline from his car, and dumping it onto the glowing coals of his dying campfire. Of course the fire burns hot, but it is merely an illusion. Mesmerized by the fire, the camper might even say, “This is the brightest campfire I have seen in 20 years!” It will keep him warm for a few moments, but of course it is unsustainable. And when such a fire goes out and all his resources have been consumed, there is nothing left to start a new one. Not even the gas in the car remains to get him home in the morning.

This is the story of the current economy of illusion. Low interest rates have encouraged consumers to borrow against their homes and on their credit cards in order to continue on their unsustainable consumption binge. Now that the euphoria of the holiday season is over, bankruptcies and delinquencies are at all time highs. Like a societal fractal, undisciplined and overburdened consumers are simply mirror images of their government, which today is over $7 trillion in debt. Massive tax cuts have helped juice the economy in the short run, but have wreaked havoc on the national balance sheet. In three years, the government made a $700 billion swing from a record surplus in 2000 to a record deficit today, and like a common pauper, needs to borrow over $2 billion per day just to keep operations going.

Worse news is that America is hemorrhaging both jobs and investment. Jobs form the foundation of current economic strength, and investment is what ensures growth in the future. China has widened its lead over the U.S. and the rest of the world as the most preferred location for foreign direct investment. China now ranks first in the world in FDI, having surpassed the U.S. in 2002. Between 2001 and 2002, FDI in the U.S. fell from $124 Billion to a mere $44 billion, while FDI in China climbed to $53 billion. The number of manufacturing jobs in the US has fallen for 41 straight months. When you see headlines that say American manufacturing is recovering, it simply means that jobs are being lost at a slower pace, not that jobs are returning.

As we are mesmerized by the misleading headlines of the booming economy, remember this: Jobs are moving overseas. Not just manufacturing jobs, but management, service and even knowledge jobs. The unemployment rate in the U.S. is an illusion, maintained at an artificially low level by a very simple trick: Not counting people who have been unemployed for over 26 weeks. Those poor, discouraged workers – they must not be trying hard enough. As the joke goes, “There are plenty of jobs in America. Look at me, I have three of them.” It would be funny, if it weren’t so grim.

Last year was good year for the stock markets. The second great depression has been postponed, but not averted. Deflation is still knocking at the door. How does deflation happen? Deflation is a monetary phenomenon, and describes a reduction in the money supply. Imagine for a moment a poor soul who owes Chase Manhattan bank $10,000 on a credit card. Since losing his good job at IBM (it moved to India), he hasn’t been able to keep up on the payments, but not willing to sacrifice either his pride or his good credit rating, he’s been using his Citibank card to pay off the Chase card. By making the minimum payments, he’s barely reduced the principal with Chase, but has managed to rack up another $5,000 with Citibank. This is not an uncommon tale. Funny how accounting works, because both Chase and Citibank view these sums as *assets* on their balance sheets. Lets get this straight: Two multibillion-dollar corporations are relying on an unlucky, unemployed worker (and millions like him, with no prospects for new jobs), who are swapping paper back and forth between banks. There is no value created here, it is only accounting trickery. When the unemployed debtor finally declares bankruptcy, the ‘assets’ of the bankers disappear. Viola, deflation. Deflating assets caused by defaults domino through the economy. With bankrupt consumers unable to secure credit (it is suddenly too risky to lend), they have no ‘money’ to spend, so demand dries up, and prices fall further. The deflationary spiral deepens.

How long before it starts in earnest? I have a shelf full of books from the late 1970’s when pessimism ran high, claiming that fiat currency and the ‘massive’ U.S. budget deficit would spell doom for U.S. economy. Today with the debt 10 times higher, and increased risks on every front, no one seems to be the least bit worried. How long can unsustainable activity be sustained? By definition, not forever. If you have ever thrown a sheet of newspaper onto a campfire, you know that it ignites quickly and burns brightly for a few moments, but it goes dark just as fast. In 2004, the effects of monetary stimulus will dry up, causing a sharp reversal of fortunes. A sudden return to reality sparked by a ‘surprise’ event could be in the offing.

Surprise!
Last year, I began my list with a prediction of war. A year ago, it was the U.S. attacking Iraq. This year, I will not go so far as to predict a full-blown war, but hostilities are definitely in the air across the Taiwan Strait, and these heightened tensions are likely to have disruptive effects on world markets. Presidential elections in democratic Taiwan are coming up on March 20th and the incumbent is also offering up a referendum, requesting that China remove over 500 missiles pointed at the island. Of course such a referendum will pass – who wants missiles pointed at them? But China views such activities as ‘splittist’ (although Taiwan has never been under communist China rule), and has vowed to ‘protect the homeland at all costs.’ Explicitly, they have stated that they are willing to sacrifice their prospects for the 2008 Olympics, as well as the past decade of economic growth to maintain a unified China.

The U.S. is involved because of its pledge to defend Taiwan in case of attack by the mainland. However, China is very important to the U.S., because China is one of the main purchasers of U.S. Treasury securities. That is, they are one of the main countries sustaining our unsustainable consumption binge. And the US is very important to China also. Why? Because the U.S. is consuming Chinese products, keeping its factories humming. Additionally, a huge portion of Chinese wealth is tied up in dollar-based assets.

As we move closer to the election, cross-strait tensions will increase. Nervous investors will flock to gold. What happens next is anyone’s guess. The last time tensions boiled over in 2000 (also over Taiwan elections) the Chinese lobbed a missile over Taiwan and the U.S. sent warships to the Strait. This time, all three players have drawn their lines in the sand. Taiwan is intent on holding the referendum. China is intent on blocking any Taiwanese steps toward independence. The U.S. intent on defending Taiwan, but China wants the U.S. to stay out of its ‘domestic affairs.’

Recent rises in commodity prices, including oil and gold, can be traced back to the booming economy in China, and its tremendous appetite for resources. But the growth in China is being driven by massive amounts of FDI pouring into the country. This is leading to overcapacity in every industry, and a bust is sure to follow. Any signs of ‘uncivilized’ behavior by China would cause investors to flee, and markets to collapse – not only China’s booming asset markets, but worldwide commodity prices as well, including oil and gold.

An unsustainable situation cannot be sustained forever. Whether it is China or another event, this year or next, something will expose the massive vulnerabilities in U.S. economy. Whatever the event, it will merely be the trigger, not the cause, that starts the collapse of the U.S. economy in earnest.

Predictions
The predictions for the year: Batton down the hatches, its going to be a rough year: The bubble in China will pop. The Dow, SPX and Nasdaq will streak lower and break their 2002 lows. After a brief rise in gold and decline in the dollar, rapid reversals will occur, sending gold on a downward spiral, and the dollar will show perplexing strength. Deflation will show its face for all to see. Economic disruption will cause recession, and the economy will contract in 2004. As a result of the economic disruptions, President Bush will lose in a landslide to the democratic ticket of John Kerry and Wesley Clark.

Happy New Year.
Michael Nystrom

Posted by manystrom at 03:14 PM | Comments (27)

Real Estate 21st Century Style

January 16, 2004


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Currently my business is centered on finding people in pre-foreclosure. I "buy" their house to prevent the foreclosure, then either sell it to a new buyer or lease it back to the current owner for 1-3 years until their financial status is better. When I say I "buy" their house, in reality I get control of the property through a land trust, then find my new buyer without actually transferring title to myself. When I get the new buyer, the old buyer sells it to me, then 30 seconds later I sell it to the buyer I found in what is called a "dual close." That way I have no out-of-pocket costs. Of course the new buyer buys the property for 20-30k more than I "paid" for it. At this point, I have several such deals in the pipeline, but nothing has come out the other end yet (I haven't been doing this very long). However, I know several people who do this full-time, and they are raking it in!

Right now in the greater Portland area, there are about 100 foreclosures a week. I believe we have the highest rate in the country. Every month, 50,000 people in this area are late making their mortgage payment. For the clients I have met, the most common cause is job loss. These people typically get a house where they need two incomes to afford them, and when one of them loses their job, they are screwed. I see people who have borrowed 125% of the value of their home, and others who have their home financed at over 10% (presumably because they routinely overextend themselves so their credit is shot). In my first deal, I have a house in Oregon City where the owners managed to borrow 230k on a house maybe worth 160k. This was possible because the bank just did a drive-by appraisal. The bank that holds the second mortgage of 50k will probably lose most of it. I see this all the time.

Since I was laid off from my job in March, I have been collecting unemployment insurance as I get my business going. I receive $1070 a month in rental income from my two rental units (I own a tri-plex). With this as my financial situation, I am pre-qualified for a 100%, non-owner-occupied loan at 7.8% interest rate. True I have excellent credit, but the fact that I can get this type of loan with no real income is a bit scary.

Nonetheless, given that the high-tech industry has collapsed, and I will not be able to get a web programming job in the foreseeable future (and probably never again), I think this is the best business for me to be in. Basically, I'm going to take the money and run. I ultimately want to invest the cash in small apartment buildings where I can realize a steady income. I want to ultimately buy several of these in many different parts of the country, with the idea that when things get bad they don't always get uniformly bad (for instance, Portland is really suffering right now, but there are parts of the country that are doing better). To buy commercial property you need 20% down, which I hope will shelter me from significant downturns in the housing market. I also want to own a home outright (so I don't have to worry about payments), and of course clear my debt. I don't know if your predictions will come true, but I have been through enough already to know that I need to plan for disaster, just in case.

"Short the bank" refers to a technique real estate investors use to get a better price for a property. In a foreclosure auction, liens (i.e. mortgages) are paid in the order in which they are applied. So, for instance, the money paid for a house at auction is given to the holder of the first lien. Whatever is left over is paid to the second lien holder; whatever is left over from that is paid to the third lien holder, etc. (if property taxes are owed, they are always paid first). Because a property never sells at auction for its full value, and the lien holders know this, they are usually willing to deal. You approach the bank and offer them less money for their lien than the amount of the mortgage. The offer you give them depends on what position they hold.

Real world example: Lets say you have a house worth about $150,000 that is mortgaged at 100% (I see this all the time). Suppose they have a 100k first mortgage and a 50k second. I am virtually guaranteed to be able to "short" the second by a substantial amount. That second lien holder will usually take about 5k for that 50k mortgage. Therefore, I have just created 45k in equity. And, because the first and second lien holders are almost never the same bank, I can sometimes even short the first, say take them down to 80k-90k (they are in a stronger position, so you can't discount as much). If the property is in bad shape, all the better, because they know they will not get much for it at auction. So, when I approach the bank, I show them pictures of all the bad things about the house. Banks make their money by making loans, not by holding on to distressed houses.

This technique was actually invented by Fannie Mae, and is a common practice in the home loan industry. However, in most cases only a new buyer can short the bank. The homeowner cannot. There are exceptions to some of this. For instance, VA loans usually cannot be shorted more than 5% of value. And, some lenders won't deal at all (but most will).

When I approach a client, I need their full cooperation to do this, because the banks want financial info from the client to ensure the client does not have the means to pay their mortgage. Usually this is not a problem, because the client is against a wall and has no alternatives. I tell them that I will buy their house for the cost of all liens held against the property, but that I have to specify a dollar amount on the purchase and sale contract that I show the bank. So, I write down a very low number for the purchase price. If I am not embarrassed by the offer, it is too high. For the above house, I would offer something like $72,500. Of course the bank won't take that, but it starts the negotiating process.

Notice that when you are dealing in real estate you are dealing with expensive things (houses), so even a measly 5% can translate into thousands of dollars. I am expecting my deals to average about $15,000 apiece (though I suspect this is a very conservative estimate; probably by half). How many deals do I have to do in a year, at 15k apiece, to make a good living? Keep in mind that I have been doing this for six weeks, and I currently have four people under contract and potentially four more ready to sign. I know I am going to make money at this, but as yet nothing has come out the other end of the pipeline.

If I find a deal that I do not want to do for whatever reason, I can "wholesale" the property. Basically, I can go to my real estate club and sell my contract for 1-3k to another investor. Or, in "lease-backs" (where I buy the house and lease it back to the current occupants), I can refer that property to CCN for a flat $1800 referral fee. How many of those do I have to do to make a good living? Also, keep in mind that after I get a signed contract I immediately begin marketing the property. Since I am getting it at a significant discount, I can afford to price it cheap to sell it fast. In most cases, I never have to actually buy the house. The out-of-pocket on these deals is the $10 I give the homeowner when I sign the contract (money has to change hands for the contract to be legal) plus the marketing cost. Currently, I spend about $500/month on direct mail, plus miscellaneous office expenses.

When I sell a house, I can also be creative. I can do a lease-to-own, where the buyer gives me 3% down as a security deposit, and pays rent with the understanding that they will buy the house from me at a set price in 1-3 years. Because that 3% down is a deposit, it is not taxable income (until it is actually applied to the purchase). Also, because the tenant is intending to buy the property, and they put a substantial amount down as a deposit, they are virtually guaranteed to be good tenants.

Posted by manystrom at 11:00 PM | Comments (136)

Full Moon - January 7th

January 07, 2004

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Posted by manystrom at 09:48 PM | Comments (86)

Gold All Comers Invitational

January 06, 2004

With gold at a 14 year high and the dollar crumbling, its a great time to own the yellow metal! Share your favorite gold stocks, mutual funds, tips, opinions and any other ways you see to profit off the rise in gold. Your tips will be seen by thousands of readers each day! Go Gold! Power to the POG!!!

Posted by manystrom at 10:58 PM | Comments (137)
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