My 1st Million At 33 – yes, you can do it too

As I have said well before the financial crisis hits back in 2006 on my blog, this game between the liars (housing speculators) and the cheaters (the bankers who totally expected to pass the AAA-rated toxic mortgage loans to Fannie Mae & Freddie Mac & other mortgage investors, but somehow got caught with a huge volume on their own book) will eventually bring down the US financial power through a hefty US dollar devaluation in the future. It is simply unavoidable mathematically speaking, and Fed governor Hoenig has finally echoed my view, declaring a fiscal urgency for policy changes.

I believe that $US dollar will probably be strong going towards 2011/2012 initially due to all the deleveraging, but then will start a gradually accelerated pace of slow grinding down towards 2015/2016, with an initial reckoning shock at around 2015/2016, or a faster pace of drop all the way towards 2020. I am projecting these dates based upon the PI cycle, which basically hit the US financial/housing sector peak date almost exactly back in 2/27/2007. US has completed the full 224 (=8.6 x 26) years of political cycle back in 2000 since declaring independence on 1776 according to Armstrong, and I believe that for the next 10 x 8.6 years = 86 years, the international influence of USA will be declining ( 10/26 is the shortest & closest to 1 – golden ratio of 0.618). This completes the total of 6 of 6 waves of 8.6 years grand cycle (6 x 6 x 8.6 = (26+10) x 8.6) as 309.6 years in total.

Martin Armstrong, the greatest economist in this decade, in my personal opinion, is still being jailed in prison for 10 years and counting. Just last week, he was still being punished within prison for possibly speaking out against big financial institutions, and/or helping out other inmates on legal issues. During the legal proceeding back in year 2000, he was denied his constitutional rights for a jury trial. No trials at all, but a judge who sent him into jail for 7 years for “contempt of the court”. That was not even a charge based on any kinds of finding or discovery. His rights were deprived because the judge claimed that as corporate officers, he was tried as corporate, and because corporates are not persons, and therefore corporates do not have any personal rights. In this country, the laws are whatever the judges say and interpret. Supreme court has recently passed that corporates can spend as much money for political lobbying and contribution because corporates should be treated as persons with rights to free speech for this purpose. Tell me if you can reason with this logic that corporates are not people as trials, and corporates are people for political donation. When the rights to justice and rights to free speech are determined and sized by how much money one can spend on lawyers, on radio/TV advertisement, we as individuals no longer have any rights, but are enslaved inside the economic and political machines.

In our lifetime and beyond, we will witness more and more political upheavals at all levels of government, including big changes in international political arena. US would be reaping its “karmic” consequences for destroying the savings of global savers in this process. We (or those who reside in USA) will be the very people who will rise up against the financial tyranny of the government through uncontrollable waves of US dollar devaluation and erosion of living standards, bringing the political upheavals, and undermining US international influences due to domestic political turmoils and discovery of shoddy financial transactions between big government and big financial oligopoly. The student protests from last week are only a start of a series of mass rising against established authorities that are going to continue for several years.

As they said, horns have been blown, and the Revolution has already started. I invite you to join the Campaign for Liberty, and Ron Paul’s fight against big government and big corporates.

Here is the article from Marketwatch.com, reporting consumer behavior is changing, putting credit card debt before mortgage. Why would anybody put the priority of unsecured debt over debt that is secured by the home & the roof over someone’s head? It is puzzling to all the bankers and people who only crunch out a meaningless FICO number.

The reason is extremely simple. Paying down minimum payment on credit cards will allow the continual usage of the credit cards to pay for food & bills. Paying down an up-side-down mortgage is throwing away good money. Besides, these stupid banks are still hoping for the impossible, for the housing prices to come back right away, and not willing to write off the loans. Or I should say the bankers just want to keep their jobs so that the bank will not be declared as insolvent, and overtaken by FDIC. In the meantime, the bankers continue to siphon off FDIC & US taxpayers’ money by paying big bonuses, and the unscrupulous housing speculators continue to enjoy totally free rent on the back of the entire financial system. Of course, it takes all the number crunching for FICO to realize this, and a gigantic financial losses for bankers to come to their common sense: no one in their own self-interest is going to pay down an under-water 100% or 125% LTV mortgage that is growing to 120% to 150% LTV mortgage.

By the way, if taxpayers don’t pay bonuses to AIG, and funnel all the bailout money to these bankers/fraudsters, we will lose all the top “talents” who are too greedy to even understand the above truth.

I thought that what happened in US since 2007 (and in Japan back in 1990) would have taught people some lessons. But human greed knows no bound. Either they don’t read news, or they’re too greedy. There are still booming undying bubbles in China, Taiwan, Canada, Australia.

It is apparent that most participants recognize the value of housing investment in protecting assets against inflation. It has been the preferred financial instrument, especially in Asian culture, to buy real estate because
1. It won’t go to zero, because it’s “real” estate, and you will always have it.
2. It pays out dividends in the form of rent.
3. It always “goes up” in the long term.

My colleague asked me whether I know how much real estate has gone up since 50 to 60 years ago. He told me it’s tens of thousands of percents. Well, but one must recognize the fact that since 1930, $US has depreciated 94% in buying power, according to government official statistics (and probably worse if using unofficial figures). The primary reason that real estate goes up in the long term is because of general inflation. Since a couple of decades ago, another factor that helps real estate price is that the financing costs/interest rates have been going down. However, over the long term, the average real estate prices cannot exceed inflation rate by too much and/or for too long. Why? If real estate simply returns 1% more every year than the general inflation, after 100 years, real estate price will be 270% higher than the general wages. After 200 years, real estate price will be 732% higher than the general wages. Well, the economic law of supply and demand will always balance things out. Eventually, either people cannot afford homes anymore, and younger generation stops forming families, resulting in reduction or stagnation in population, and therefore reducing demands for homes, or the home prices will simply FALL behind the general inflation rate. And I can bet you that it will happen before real estate prices are 732% higher than the general inflation rate. In fact, both Japan and Taiwan are already showing such signs of either declining population or stagnant growth. If you have so much money that you don’t need to worry about future, housing, employment, etc, and you have all the leisure time in the world, won’t you tend to have children? On the other hand, the opposite extreme scenario would probably be true also. So if the population is declining, who is going to fill up the existing housing space, not to mention that builders will always build more. Imagining a hypothetical scenario, where for every grand kid, he or she is inheriting at least 2 homes from both sides of the grandparents, and/or parents, and/or any unmarried relatives who have passed away, now won’t the housing and/or rent price go down because there are extra supplies versus demands? Of course, before long, economic law of supply and demand will kick in, and population would have increased.

What I’m trying to point out is that it is simply IMPOSSIBLE for housing prices to stay higher than inflation rates for too long. Those that bet on housing prices will increase 10% above inflation rate every year are simply delusional.

Very infrequently I come across some articles that are so well written that I feel obliged to recommend them to people. And I found it at Irvine Housing Blog. IrvineRenter, the owner of the blog has written a couple of excellent articles that should be must-read for every home buyer.

On “Valuation of Lots and Raw Land”, IrvineRenter explained in details how the valuation of an investment in raw land would work out. To sum it up, land investment works like a call option on the housing market.

On “Loan Assumption is the Appreciation of the Twenty-Teens“, IrvineRenter gave his best advice (and I concur too) that the best bet in building your home equity is probably by buying with an assumable AND fixed-rate loan. Unfortunately, as far as I know, the only assumable loans these days are FHA loans, which have higher fees in general. Why is that? A good deal to the borrowers is always a bad deal to the lenders. The scarcity of such loans automatically tells you that assumable loans are not good for lenders.

And at last, on “Fundamental Valuation of Houses – Part 1“, IrvineRenter explained in details about the math of home ownership cost. His article almost acts like a companion manual to my online java housing cost calculator. All of the factors that he has mentioned, I have included them in my online housing calculator, plus commute cost difference. But just one caveat, garbage in, garbage out. My calculator is only as good as the validity of your input assumption. If your assumption on the housing parameters such as rent/housing inflation or tax rate, are inaccurate, then the results will be inaccurate as well.

So what’s the buying strategy for the housing market? In case you missed it, it’s using assumable fixed rate loan. On a longer term, I believe that the mortgage rates will be going up. Contrary to all the unscrupulous realtors, the best time to buy real estate is when the mortgage rates are at the highest, not when they’re at the lowest. Lower mortgage rates always cause the housing valuation to expand, while higher mortgage rates will rein in the price. Assuming a forward picture of higher than normal inflation, and mortgage rates trending higher, the inflation force may arrest and balance out the decline caused by higher mortgage rates. Nominal housing prices may stagnate for a decade or even two decades, but inflation-adjusted price will continue to decline. Such picture does not bode well for many participants. The renters will see their rents going up due to general inflation. The new home buyers may still see price declining if the nominal prices have not reached bottom. Worse yet, if the equivalent ownership cost of their home is higher than prevailing rent, then they’re effectively speaking draining any potential savings that they could have built without buying a home. In such picture, the only potential remedy would be to have an assumable fixed-rate loan, so that one could recover the price benefits between future higher mortgage rates and the current lower mortgage rates.

And if you cannot find such loan, make sure you put the least amount of down payment, and borrow as much as you can for 30 years fixed. Forget about adjustable ARM. The only way to short the bond markets and US dollar simultaneously and safely without margin calls is to borrow against your real estate holding.

Because I haven’t been blogging often, some of my friends & relatives have been going through the insider track via phoning me or emailing me directly. I have been spending an extraordinary amount of time on watching over stocks and my own portfolio. This year will be “the year” that I will either break or make my net worth (although I am inclined to think that both may happen due to heightened volatility in the sequence that I just described). Given the relative importance of a couple of hundred dollars from blogging versus my own portfolio, it is quite an obvious choice for me to decide on where to spend my time on. I apologize to the faithful supporters/readers of this site, who have not been able to get more top-quality content here. The best way is to subscribe your email, so that if there is any update, you could get an email alert.

Here is some recap (the original quesitons are in “blue”):
(written on 1/4/2010:)
Question: If $US dollar depreciates, gold may only go up in terms of $US dollar, but may not necessarily go up for non-US holders. Isn’t that right?
My answer:
Yes, what you said is entirely plausible.

What I believe will happen is that $USD will actually appreciate first. This will result in gold prices at new high in non-USD first, to catch up with the new high in $USD that has already happened. (Actually, this statement has ALREADY been fulfilled, except in Australian currency.)

I believe it’s possible that $USD will appreciate towards mid-2011. Then there will be a depreciation of $USD towards 2015/2016. Regardless, my belief is that there will be an international government bond market crisis, which will be the trigger for the final height of gold in all currencies. This crisis either comes in 2010/2011, or 2015/2016 I believe, or both. It may be a multi-stage crisis.

Again, this is all just my own personal forecast/belief.

For non-$US holders like you, there is obviously a possibility that your gain will be much less (or turning into even a loss) relative to US dollar holders. I only watch gold price in $USD mostly, but I do occasionally check gold price in Yen, Euro, Australian, Canadian currencies. The (bull) market will always be in different phases for different currencies, producing different magnitudes of gains. Last time, gold reached new high in Euro (but reached new high in $US first), it went on and gained some 60% I think. This time, gold is much more overbought, and so I think it may take a little more time before it takes the next zoom-up again.

Regardless, I’m not in this market for a single day or a single month or a single year. You can trade in & out all you want, but 2% or 3% differences in prices are absolutely no concern to me. Not even 10%. The reasons is that
1. I don’t have time,
2. Most market timers will end up under-perform.

The bottom line is always that you should ONLY put in as much as you can emotionally handle. Keeping your emotion in check is so much more important than hitting a jackpot, because without being emotionally stable, you simply canNOT be successful in this. Your emotions will end up costing you. So it’s far better to just simply put in the “right” amount (that you can handle), instead of buying/selling a big amount at the absolutely right time. Such mythically successful person that always get everything right simply never exists. If you cannot handle the swings, I suggest you sell some. The goal is to be successful financially, but you cannot reach that goal without being emotionally composed.

Also, every person has a different investing style. So you will need to somehow adopt all the information, and fit them into your own style. You cannot follow someone blindly, and expect that it’s going to be gain automatically. Make sure you find your own style, your own “right” amount, and your own “right timing”.

Question (written on 2/11/10): I don’t quite understand what’s the benefit of actually owning physical gold instead of the paper gold. Is it to prevent the possibility of bank going bankrupt and getting nothing? Assuming the bank will not go bankrupt, holding paper gold has the advantage of not worrying about stealing and can be exchanged easily at the bank.  If the large banks go bankrupt, the money saving in banks are probably gone too.
My answer:
Many different scenarios can happen:
1. The bank/government refuse to give your paper gold back, unless it’s at the “official” but much lower price that you could fetch at black market.
2. The bank/government pass laws to over-tax any profits/transactions on paper gold, so that there is no motivation to own paper gold for any existing paper gold owners or future paper gold owners.
3. The bank goes bankrupt, and you only get part of your savings back.
4. The bank/government refuse to give your paper gold back out-right. You simply cannot “withdraw”.
5. The bank claims that part of the paper gold is lost and unrecoverable, and somehow the paper gold is not insured by the government.
6. The bank/government only allows you to SELL out from paper gold to paper. But either legally or decreed by bank that no BUY can be allowed.

Bottomline, when the bad money (paper or paper gold) drives out good money (physical gold), the good money WILL disappear from the market (except in the black market). This phrase came from Roman empire I believe. The “bad money” are the coins that have very little silver/gold. The people gradually found out, and everybody hoards the “good money” or the older coins that have much more silver/gold. At the end, the bad money drives out all the good money, because everybody will only spend the bad money, but not the good money.

There are many rumors that most of the big international banks/investment brokerages are shorting gold/silver when the customers go to buy paper gold/silver. A recent lawsuit against Morgan Stanley proved that was exactly the case at least for Morgan Stanley. Morgan Stanley simply took the money intended for silver, held a short position in silver against customers, and charge phantom “storage fee” every year.

If you simply substitute US dollar for gold in the above sentences, and just focus on some of the countries in Latin America as an example, several such things have happened exactly just like above.

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Please note that I’m short-term bullish on US dollar as indicated above. This can easily translate into bearish resolution in US & global stock markets, and intermediate correction in gold in $US dollar, and also mining stocks. Although I do not rule out the possibility of $US and gold rising together.

Few technical indicators give a clear picture on the movement of stocks. Unfortunately, all indicators are often too late by the time when the markets have made their initial move. The more averaging the indicator does, the later it will give you a signal, but the signal becomes more reliable. The vice versa is also true. The less averaging you do, the earlier the buy/sell signal comes, but it becomes less reliable. MACD is one of the signals that does a pretty good trade-off between reliability and opportunities (although I must say that it is often too late to do anything about it).

Here are the daily, weekly, and monthly MACD on SPY which clearly illustrate the current trends, and my personal take on markets going forward:

On the daily MACD chart: The fast EMA has just crossed the slow EMA. I project a short-term rally that will not break the recent high at ˙˙5.14 at around mid-March to mid-April timeframe.

On the weekly MACD chart: This is the most dreadful chart. The fast EMA has crossed the slow EMA for a little while. On a weekly basis, it almost mean that SPY will NOT make any headway. In fact, most likely SPY will have to give back a sizable portion of the gain since the rally started in March 2009. I project that in between late April to late July, it is best to stand on the sideline, or even go short.

On the monthly MACD chart: the fast EMA has crossed the slow EMA by some margin. I believe that it is basically saying that for people who project a Dow going to $4000 in a great depression scenario are very likely to be dead wrong. Quite likely, the March low was the absolute low for this bear market. However, in no ways, it gives a total green light on buying the stocks. I think long term wise, markets will continue to trade in a big sideway. The sideway range will be rather big, making most perma-bulls and most perma-bears to continue in their steadfast belief.

In my projection, stock markets may make a lower high in about March timeframe. My advice is to sell and get out.

Despite my general bearishness, I want to emphasize that this is NOT 1929 great depression, when deflation ruled the days. In fact, at the next intermediate long of stock market probably 8 to 18 months from now, that low (which should be 20%+ lower than the current prices) should be bought. The longer term picture for financial markets is still
1. (long/intermediate term) Bonds go down.
2. Inflation goes up.
3. Stock goes up nominally, but possibly goes down if adjusted by inflation.
4. Cash will be “trash”.
5. Housing markets most likely stay flat AFTER it reaches another new low, EVEN with general inflation going up.
6. US dollar will go down, but not YET.
7. Commodity will be very volatile with upward bias.

The next big time bomb should be around mid-April to late June. Prepare to see the fireworks (and make sure your portfolio is not used as part of the fire powder). In the meantime before next big inflation comes, deflation & deleveraging will continue to put a lid on asset prices. Have patience.

Here is an interesting article detailing on how the “club” of financial institutions may be profiting while all of us suffer.

When Enron and WorldCom debacle happened, the people who were responsible went to jail. When financial & mortgage (CDS, SIV, etc.) markets collapsed, NO ONE is even investigated. We are talking about trillions of dollars, and our government officials didn’t even put anybody through legal proceedings. Oh, sorry, I forgot! There is one. The whistleblower for the case on UBS collusion with tens of thousands of multi-millionaires to evade US tax got 3 years and 4 months of jail time, while ALL others at UBS and all the multi-millionaires got a free pass. Can you believe this? The rule of laws in this country are controlled by the “ruling elites” who are the bankers, lawyers, and government officials. Where is the justice for the common people? There is something seriously wrong in this country. After all, the whistleblower Bradley Birkenfeld helped US to recover $780 million dollars from UBS. For that, he got 40 months of prison time. Now, let’s see who else is going to mess around with the “big guys”.

When all the money is coming from future generations instead of our pockets, nobody is paying much attention. Yeah, just put it on our national credit cards. US is running at a rate of about $130 billion every month (average rate from July 1st to Dec 31st), which is about the entire net worth of one Berkshire Hathaway or Intel company. Who is going to foot the bill when it is due? It will be everyone of us.

If we do not voice our concerns, and take a stand for liberty and justice, we will all lose it, if not one by one. Prison statistics show this clearly. US has 5% of the world population, but has 25% of the all the jailed population in the world. Ranked #1 in the incarceration rate in the world. Higher than Russia and China. You have to wonder whether our cops are better, or US citizens are more immoral, or just maybe some innocents are jailed unnecessarily.

Year 2009 for me personally was an amazing comeback year, and totally beyond my wildest imagination.

I don’t know how many people out there can say this, but my net worth luckily almost recovered to the stock market peak of 2007. Without counting the 35+% loss in my home valuation, I’m just a couple of percentage point down from the peak. Counting the home paper losses, I’m still higher than the end of 2007. Throughout last year, there were numerous financial advisers cold-calling me to promise a retirement make-up plan. Unfortunately, most financial advisers know very little about stock markets. When the stock markets don’t behave like 2008, they are simply stunned without words. And of course, they dare to claim all the credits for the upturn of the year 2009 too.

Throughout 2009, I have positioned myself as short in the general market, and long in natural resource stocks. Most of my shorts were done through naked shorting the option markets at a higher strike prices. I phased in those shorts gradually, and before they turned into a big disaster, I have realized that the markets were not going my way at all. I probably have lost more than $30K in shorts through a notional shorting value of about $400K+, but the loss is not very significant in the grand scheme of everything. Even today, I still hold some short positions. And I plan to increase my short positions again as the year progresses.

What saved my portfolio & net worth throughout 2009 is my steadfast investing in natural resource stocks (more in mining sectors). I increased my original stake somewhat. I still hold almost 40% in cash, waiting for a pullback that never materialize. Year 2010 will be volatile for sure. I should have plenty of opportunities to put my money into work. My portfolio will not be wrecked with this high percentage of cash. Return OF capital is much more important than return ON capital.

Looking forward, I have the plan to get fully vested probably this year. The climatic fall should be behind us (or at least in the sectors that I invest). It’s possible that there is another big leg down, but that will definitely be a buying opportunity in my opinion. The long term pictures on bonds/cash are terrible. There will not be many places to hide.

Best luck to everyone,

Frugal at 1stMillionAt33.com

P.S. Just making sure that everyone gets this: I do NOT (and will NOT) invest in the general stock market, but only specific sectors. Such strategy has a particularly high risk, and it will not correlate with the general indexes. But it is the strategy that I have chosen, and I do NOT want to correlate to the general stock markets.

As the new year begins, the stock market again continues the rally that doesn’t seem to ever end, enough to convince most participants that the bear market has ended, missing the “bargain” of the century back in March of 2009. But all good things come to an end, especially the ones that are just too good to be true.

Before that happens, new highs will be in store first. The last Christmas shopping season has been exceedingly good for most retailers as far as I could see. Most stores simply ran out of popular items to sell, and heavy discounts are basically non-existent. For that reason, I think the stock market rally can very well last into late March in 2010 before any significant pullback. And of course, that is going to kill any remaining bears in the stock markets. Although I seriously doubt that S&P 500 can rise to 1200, the markets can always stay irrationally bullish than the shorts can stay solvent. Above 1200 level, I think it should be a very good opportunity to initiate short positions, assuming such bears are still alive.

Regardless, I expect downside volatility to return to the stock markets as soon as the 2nd week of January, or as late as June of 2010. I would prefer to stay on the sideline when such events happen, instead of milking out the last 5 to 10% of the remaining gain.

Energy stocks along with emerging stock markets will most likely take a cue from the general stock market indexes, correlating with extra magnification both on the upside and downside. Gold & mining stocks which have enjoyed an exceedingly good year in 2009 may or may not correlate again in 2010. Cash is always one of the viable option, although most bulls are too greedy to even consider a 1% interest-yielding account.

Bond markets on the other hand will most likely have some indigestion mid-year if not sooner. At the current pace of US debt issuance, US deficit will probably end at about 14 trillion dollars near the end of 2010. That is quite a lot of money, considering that the total worldwide stock market capitalization is only about $50 trillion dollars (see graph below). So how in the world will US pay back the debt that it owes, if the debt continues to increase at such pace? The short answer is that it simply cannot and won’t. The end game is definitely ahead of us, not behind us. When the crisis hits, and economic confidence is shattered, the rout in global bond markets will transmit its shock waves many times over to other asset classes, in such a short breath-taking period that most people cannot act to save themselves financially. However, this may still be years away, but no longer decades away.

For now, let us pace ourselves gradually. The majority of the people who made it through is often the people who lose the least, not the extremely “lucky” or smart people who gain the most. Trying to be too smart when you’re not can easily back-fire on you.