12.03.07 Consumer Credit Crunching

The End of Consumer Credit As We Know It, by Peter Schiff on the SafeHaven site. Highly recommended read. Mr. Schiff is sometimes a voice crying in the wilderness on our favorite financial news channel. His article points out the fallacy of going further and further into debt in the expectation that rising prices and inflation will always bail out the debtor.
...In regard to that, I read a book some time ago by another one of that financial channel's more favored contributors, The Last Chance Millionaire by Douglas R. Andrew. I am certainly not trying to disparage Mr. Andrew, who could buy and sell me many times over I am sure. I read the book mainly to get a viewpoint that differs starkly from my own. Mr. Andrew is a proponent of borrowing as much as you can on your house. Not only that, but he believes that you should also buy a second home, say that vacation home you want to retire to, and borrow as much on that as you can, too. He says that every time he notices that he is paying his mortgage down, he refinances so he can owe as much as possible. In his defense, he doesn't use the proceeds he gets out of the refinancing for consumption. Rather, he invests it elsewhere in the expectation that he can get higher rates of returns on his investments than he is paying out in mortgage payments, and get the tax deductions on the mortgage interest at the same time.
...That is a strategy that has worked out well for him and and its many other practitioners over the past several years. But I think its day may be coming to an end, as both the markets and real estate head into increasingly turbulent waters. Foreclosures are cropping up all over the country in record numbers, and that number will increase next year. Nothing goes up forever in a straight line, not even real estate. Most investments end up reverting to the mean, but when human nature takes over in the inevitable corrections, they tend to overcorrect for a time in the process.
...The Trouble With Being A Guru. Ric Edelman is another financial advisor with the same theory as Mr. Andrew regarding real estate. Mr. Edelman has consistently advocated against paying off one's mortgage for much the same reasons as Mr. Andrew.
...I first came across Mr. Edelman years ago through his book The Truth About Money (I bought it for a dollar at a used book shop.) The book contains a wealth of excellent insights and recommendations. And once again, I am not attacking Mr. Edelman. He has made more money over the years than I ever will, I am sure. And I generally respect people who are willing to put their opinion out there for all the world to see. It is much easier to sit on the sidelines with the benefit of 20/20 hindsight and criticize someone after the fact. But there was some advice in that book, besides the home mortgage advice, that I felt would eventually hurt people who believed it. Specifically, his advice on 401k accounts was not to diversify, but instead to put 100% of all one's contribution into the most aggressive mutual fund offered by your employer. His reasoning was that the employer match gave you an edge and a cushion against downturns. You would have to lose quite a bit of money before you actually started losing your capital and not just the company match. And that the periodic market downturns provided you with the opportunity to dollar cost average into the funds, a strategy that has indeed proved generally profitable over the years.
...I have wondered in the intervening years how the people who actually followed that advice feel about it now. They would have been pouring their retirement savings into tech heavy mutual funds at the very peak of the Nasdaq bubble. Those funds, now several years later, still have only recovered about half of their value, and in my opinion, will probably never get back to where they were in 2000. Now, in his latest book The Lies About Money, Mr. Edelman has come full circle and now ridicules and attacks the mutual fund industry that he defended in the prior years. Everybody has the right to change his or her mind. I have many times, and will undoubtedly do so many times again. It is a reminder that we all ultimately are responsible for our own decisions, good or bad, and we will live with the consequences. For the gurus, however, there will always be another book and they will always be the expert.
...On the other hand, Mr. Schiff points out that the person in his article, who originally bought her home for $105,000, after refinancing five times, owes $600,000 on the mortgage now after making house payments for 22 years. He wonders how the system could have ever gotten to the place where people who earn $60,000 a year could be granted $500,000 loans.
...The Bible says that the borrower is servant to the lender. Many folks are starting to realize that now, and many more will over the next year. Those ARM mortgages we hear so much about? More of them are resetting next year than did this year. There is no bottom in sight in the real estate markets, despite what you hear to the contrary.
...I know people who live decently on very small incomes because they avoid all debt at all cost. They don't have all the latest gadgets and McMansions, but they are much better positioned to ride out the things that are coming on our nation, and at a lot lower stress level.
...When your bank gives you less than 1% interest on your savings, and then your government compounds that insult by taxing you on the interest you were paid, they are intentionally discouraging you from saving and encouraging you to spend. That does not mean, though, that it is in your best interest to do so.
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Christian Leaders Betray Christ For World Peace, by Paul Proctor, NewsWithViews.com.
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When The Food Runs Out..If you've ever lived in an area that gets seasonal hurricanes, you've seen how fast supplies can fly off the shelves. In these days of just-in-time inventory controls and efficient transportation, most supermarkets have less than a week's worth of food on hand if the supply were suddenly curtailed for any reason. Stocking food ahead has always been a prudent policy throughout our nation's history. And in these inflationary times, even qualifies as a good investment. When is the last time your grocery bill went down?
...Famine is going to be a significant part of the end times scenario. Many parts of the world are experiencing drought and famine now. In our own country, the USDA projects that the 2007-8 wheat harvest will be the lowest in 59 years. And in pursuit of the almighty buck, an increasing percentage of our farmland, and more specifically corn production, is being converted from food production to crops for ethanol production.
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