Financial Judo Explained

I’m pretty sure that I caught the flu a few weeks ago, so I’ve neglected this blog since mid-February. But I’m back on my feet and I did my first interview to discuss Financial Judo and other personal finance issues. Jason Burack of Wall Street for Main Street invited me on his show to discuss the book and problems I see in the economy. With Janet Yellen’s Fed failing to raise interest rates again on March 16th, even “economic experts” like Steve Liesman are starting to see that the Fed Empress has no monetary policy clothes.

Now that I am better, stay tuned for my weekly posts on personal finance, the stock market and the economy. And be sure to add your comments!

Fraud and the Seven Stages of Grief

grief1

During my careers as a fraud investigator and financial counselor, I’ve made an observation.  Whether it’s a victim of a financial fraud or a client with massive debt, both individuals go through the Seven Stages of Grief. These stages are typically felt when losing a loved one to a terminal illness, but I also have seen people go through them when victimized by a con-man or battling bankruptcy.  The feelings of shock and denial are most pronounced, and these feelings typically contribute to the fraud’s progression.  Let’s take a look at a few historic examples to illustrate my point:

  1. In 2000, a man named Harry Markopolous warned the Securities and Exchange Commission (SEC) that well-respected money manager Bernie Madoff was running a Ponzi scheme.  He made several more warnings, but the SEC ignored him. Madoff’s scheme finally collapsed in 2008.
  2. David Walsh, an Irish journalist, made countless claims over a decade that Lance Armstrong used performance enhancing drugs to win the Tour De France seven times.  Armstrong went on the offensive, ridiculing Walsh and anyone else who opposed his narrative. Armstrong eventually admitted to Oprah and the world that he cheated during all of his races.
  3. Retired FBI Agent John O’Neil fought a ten year battle with the bureau over Usama Bin Ladin, but he couldn’t convince his superiors to take the terrorist threat seriously.  He left the FBI to become head of security at the World Trade Center and ultimately lost his life on 9/11. O’Neil’s story still teaches us the ultimate consequence of shock and denial.

As bad as these events were, they pale in comparison to the one that’s coming.  The biggest fraud taking place right now is being conducted by the Federal Reserve. Just like Markopolos, Walsh and O’Neil, several brave heroes are trying to warn the American public of an impending economic collapse. It should come as no surprise that they’re usually confronted with shock and denial.  The most outspoken hero is a man named Peter Schiff, and as you can expect, he receives the most ridicule and disdain by the mainstream news media.

Even an armchair student of history can see that humanity repeats the same mistakes over and over, and it is largely due to the first two steps in the Stages of Grief. America’s Greater Depression ahead is eventually going to leave many citizens angry and depressed, but we will all eventually reach acceptance. My hope is that we can help people reach that final stage before it’s too late.

A Sobering Admission: Richard Fisher’s CNBC Interview

Screen Shot 2016-01-10 at 2.17.07 PMOn Tuesday, January 5th, former Dallas Federal Reserve President Richard Fisher appeared on CNBC, and the admissions he made were both refreshing and shocking. Fisher’s candor was the best CNBC footage since Jim Cramer’s 2007 on-air meltdown. Fisher admitted that the artificial gains in the stock market can be attributed to quantitative easing and 0% interest rates. “We frontloaded a tremendous market rally,” Fisher said proudly. This was a rare piece of truth coming from a former member of an organization that typically lies with impunity.

Fisher’s statements left his CNBC interviewers surprised, especially his comments about the “overpriced” stock market. Fisher tried to defend himself saying he didn’t vote for QE3, but that’s like Rob Schneider saying he didn’t make a third Deuce Bigalow movie.  As anyone who has seen Male/European Gigolo can attest, the damage had already been done.  Like Bernanke, Fisher rode off into the sunset and will not be blamed for the economic devastation that lies ahead.  He now works for Barclays, and he serves on the boards of PepsiCo and AT&T.

The main takeaway from Richard Fisher’s ten year term with the Fed is that even he could not resist the temptation to tinker with the U.S. monetary system.  In February 2015, Steve Matthews wrote, “As an interest-rate setter, Fisher has been an überhawk, the kind of policymaker who worries about inflation and asset-price bubbles even when neither is evident. That concern guided his consistent calls—and dissents at the Federal Open Market Committee—for a withdrawal of Fed stimulus as soon as possible.” It’s sad when even the ‘überhawk’ thinks QE is perfectly fine.

I covered the Fisher interview, along with many other topics, in episode 37 of Kennedy Financial, so please check it out if you would like to learn more.

The Fed & The Challenger

Scott Nations bet.001After the failure to launch in September, I took to Twitter to challenge Fed faithful and Peter Schiff naysayer Scott Nations.  Schiff and Nations got into a heated argument in July over whether the Fed would raise interest rates in 2015.  Nations found it absurd that Schiff could suggest that not only would the Fed not raise rates, but QE4 was still on the table.  Nations asserted that Schiff made “outlandish predictions.”

I reminded Nations that viewers like me had not forgotten what he said, and there would be no rate hike in 2015.  To prove my certainty, I bet him one ounce American Silver Eagle.  Nations, not understanding the value of real money, agreed instead to make a $50 donation to the winner’s favorite charity.  Naturally, I selected a 501(c)(3) called the Ludwig Von Mises Institute.

When December arrived, the Fed shocked me by actually doing the right thing for the first time in nine years and raising the funds rate a quarter point.  But Janet Yellen instructed the public “I think it’s important not to overblow the significance of this first move.  It’s only 25 basis points. Monetary policy remains accommodative.”  Although I lost my public Twitter battle with Nations, it became clear that the Fed and Yellen were not proud or confident in their first step.

With the dawn of 2016, the Fed will need to add more rate hikes to prove that the U.S. economy can withdraw from its long-term artificial monetary stimulus.  I believe that after such a prolonged binge on this financial heroine that our zombie financial markets will come crashing back down to Earth before ever reaching their destination.  Like the Challenger space shuttle tragedy, the liftoff for Yellen and the Fed may have received applause and awe, but these sentiments will be turning to shock when their monetary policy blows up in mid-flight.

It takes character to admit when one is wrong, and I am happy to do that here.  Now that the Fed has finally made a move, the world will get to witness the full consequence of Keynesian monetary policy.  By the Fed’s second or third meeting of 2016, it should be clear that the U.S. economy can’t handle increasing rates anymore than the Challenger could handle frozen O-rings.  My $50 bet with Scott Nations was a small price to pay for admission to this upcoming spectacle.

“Money without financial intelligence is money soon gone.”

Sallie Mar

I work with a divorced mother of two who is eligible to retire, but she continues to show up to her job every day.  “Why don’t you retire,” I’ve asked her on several occasions.  “Because my kids need me to pay for college,” she retorts.  This obligation for baby boomers seems to be pervasive.  My colleague usually goes on to explain that she would rather pay for her kids now than when they are drop-outs living at home.  What she doesn’t realize though is this may happen anyway because there are plenty of graduates living with Mom and Dad.  According to Zero Hedge, “Back in 1999, a quarter of all 25-year-olds lived with their parents.  By 2013 this number doubled, and currently half of young adults live in their parents’ home.”

I’ve said it many times but apparently not enough.  This was once a time when a young person could work their way through college and graduate without any loans.  Now parents and students are both working only to be encumbered with a student loan once junior moves back home.  According to  Anthony P. Carnevale, director of the Georgetown University Center on Education and the Workforce, “Today, almost every college student works, but you can’t work your way through college anymore.  Even if you work, you have to take out loans and take on debt.”  This is the typical result of a government that sets out to make college “more affordable.”

For those lucky enough to have parents who properly saved for their college education, disaster can still strike.  Kim, a college student from Atlanta, gained national prominence when she admitted to liquidating her $90,000 college fund before reaching her senior year. “It’s not my fault.  Maybe [my parents] should have taught me to budget or something. They never sat me down and had a real serious talk about it.”  When the host suggested that Kim get a part-time job, Kim replied, “That’s embarrassing.  I know [my parents are] trying to teach me a lesson and blah blah blah and character building but, like, I hope they realize [working part-time] could have such a negative effect on my grades and as a person.” I’m not making this up dear reader!

As Robert Kiyosaki wrote in his acclaimed book Rich Dad, Poor Dad, “Money without financial intelligence is money soon gone.”

Millennials are in Trouble

Millennials
Today, Jessica Dickler asked the question “Are millennials financially doomed?”   Unfortunately, the answer is yes.  Many millennials are underemployed, paying massive student loans and some are trying to support a parent at the same time.  As a result of the poor job market and burdensome financial obligations, many millennials are postponing major life decisions like marriage, kids and a house.

When it comes to retirement, millennials feel even more unprepared.  According to Dickler, “Nearly two-thirds of millennials surveyed by T. Rowe Price earlier this year said they believe they’re more likely to win the lottery than to receive any money from Social Security.”  Millennials know they can’t depend on the social security Ponzi scheme, but that doesn’t mean they’re actually saving for retirement.  According to a survey conducted by Bankrate in January of this year, Eighteen percent of adults between the ages of 18 and 29 report that they have too much student loan debt to consider saving for retirement.

When it comes to finding a job to pay for anything, millennials are not too optimistic.  A January 2015 Monster.com study found, “…the recession made it difficult for younger workers to find full-time work, and as a result, the majority of them are feeling pessimistic or uncertain about their employment future. Only 45 percent of young workers say they feel optimistic about their future employment. The report also found that young workers have been settling for contract, part-time or temporary work while they search for full-time jobs.”

Before you go to bed tonight, say a prayer for the millennials.  They’re going to have a tough time in the Greater Depression ahead.

 

 

It’s NOT Different This Time

Episode 21.001CNBC still thinks it is “different this time.”  In a post by Diana Olick entitled Frothy, yes, but don’t call it a housing bubble, she writes “This is not, however, a “housing bubble,” because by definition, an economic bubble eventually bursts, and home prices are very unlikely to fall.”  Olick continues, “…even if the Federal Reserve hikes its lending rate, mortgage rates are unlikely to jump dramatically.”  Well neither part is true, so please erase the last two sentences from your memory.

You see, homeownership is at it’s lowest level since 1967 because average Americans can only afford to rent something small.  They would probably love to have a single family home with a yard for the kids, but exorbitant home prices keep these families in apartments instead.  Interest rates need to go up so they can place downward pressure on home prices.  This will cause the monthly payment on a 30 year mortgage to eventually become more affordable for the nation’s renters.

Another thing to note is that a fair portion of purchasers are only in the market as an investment opportunity.  Olick admits this writing, “About one-third of buyers today are not using any financing, which suggests still strong investor demand.”  Many investors are jumping into the housing market because they’re temporarily able to cash flow these overpriced properties.  The profits landlords are making seem attractive in the short run since the stock market is already rolling over and saving has become obsolete.  These investors will be disappointed in the long-run though because tenants will eventually be able to afford their own place for an even lower monthly payment.

Once these landlords realize that their property is empty, then they’ll try to unload their property at fire sale prices.  The whole scene will turn into a vicious cycle, ultimately resulting in the pendulum swinging to the highest homeownership rate in U.S. history.  When measured in terms of precious metals, these homes will represent a tremendous value for the gold and silver bugs.

It may sound like the bursting of the second housing bubble will lead to economic prosperity, but that certainly won’t be the case.  Increased rates are going to stifle the economy in ways not seen since the Great Depression.  What’s worse is that these increases probably won’t keep up with the real cost of living, so prices will continue to rise on everyday items while jobs dry up.  This stagnation of rising prices in a worsening economy will be too painful for the Fed to ignore.  Most likey, the Fed will announce successive rounds of quantitative easing that will make the first three look modest.  Before anyone even realizes, the Fed could take the country into a hyper-inflationary depression (which I think is very likely) and unleash the Greater Depression ahead.

Pay No Attention to the Fed Chairman Behind the Curtain

Episode 20.001

Tomorrow at 2pm, the Fed could announce that interest rates will be raised for the first time in almost seven years.  Steve Liesman, a CNBC correspondent known for praising for the Fed, published an article this morning stating, “For the first time in the five-year history of the CNBC Fed Survey, a plurality of respondents forecast that the central bank will raise rates at the current meeting.”

I’ll put my name on it.  The Fed will not raise interest rates tomorrow or ever without pricking the world’s largest financial bubble.  So what do I know that Steve Liesman and 49% of economists do not?  First, I know that our government officials always make the wrong decision.  Raising rates would be the right thing to do because it would finally add discipline to a market that is an economic basket case.  Since modern American leaders always take the easy road, we can be sure that Janet Yellin will hold rates at zero.

Secondly, the Fed knows that raising rates tomorrow would send the market into a tailspin, which would immediately require a reversal of the meager increase at the next meeting.  This would only serve to reduce the Fed’s already minuscule credibility, especially when it would be forced to immediately announce QE4.  Even according to a CNBC poll, most respondents think that a rate hike will come after tomorrow.  The greatest error about this poll is not the 37% who think that rates will rise tomorrow, but the survey did not include “QE4 will come first” as an answer option.

So there it is.  I put my name on it.  Herm Edwards would be proud.