The 21st Century Way to Wealth...Take Care

By Benjamin Franklin and Dr Agon Fly A large percentage of Americans during the colonial period were self employed farmers, merchants, craftsmen, tradesman, shopkeepers, and so on. Employees were less common than partners and permanent employees even rarer. Because of that, the following admonitions of Father Abraham address the working class who were also responsible for their own success and livelihood. Today, the self reliance and independent spirit of those early Americans lives on in the tens of thousands of small businesses that create 90% of America's jobs and in the drive and commitment of American workers employed by our larger corporations. The commentary shows that Father Abraham's words are just as meaningful today as they were then. Father Abraham speaks: And again, Keep thy shop, and thy shop will keep thee; Each of us has a "shop" to keep. Your shop may be an actual shop or it may be a cubicle, or it could be the corner office. It may be the janitor's closet or the cab of a truck. It may be as the center on a football team or as the fifth grade teacher at St. Cecelia's Elementary school. Whatever your sphere of influence and responsibility, that's your "shop." As long as you take care of your shop you can reliably expect to be able to take care of yourself. There are, of course, external influences that can wreck your ‘shop' regardless of how careful you are. That's always been the case and always will be. When it happens to an American, however, we just find another shop. And again, if you would have your business done, go; if not, send. And again, he that by the plough would thrive, Himself must either hold or drive. And again, the eye of a master will do more work than both his hands. Self reliance is a hallmark of Americans. Father Abraham recognized this and cautioned his audience that you can't delegate your personal success. Individual success relies on individual effort; you are the master and your attention is essential to your success. Your mastery may be at the plow or as the head of the team. Success will elude you, however, if you delegate what only you can do; the business will not get done and the field will not get plowed. And again, want of care does us more damage than want of knowledge. There are three types of knowledge you must access when it comes to your work and your personal economy: knowing about something that could be done, knowing how to do what could be done, and knowing whether or not to take action. A ‘want of care' means you didn't evaluate the ‘whether-or-not' aspect of knowing. There's also a second way to look at this axiom from Father Abraham. We've all met people with great intelligence who have achieved only moderate success because they relied on knowhow alone, and other more average folks who met with great success by working diligently. This proves the axiom. Lacking knowledge - not knowhow - is not as much an impediment as is lacking careful attention to both the initial decision and the ensuing action. Father Abraham is quickly becoming my hero.

The full subprime letter from Hayman’s Kyle Bass

The full subprime letter from Hayman’s Kyle Bass

Hayman Capital 2626 Cole Avenue, Suite 200

Dallas, TX 75204
July 30th, 2007

Dear Investors,
Over the past few months, we have seen the exacerbation of the Subprime problem accelerate at a precipitous pace. Wait a minute…I thought the Subprime problem was neatly contained in a nice little box of risk that the Fed had put it in? After many meetings and conversations with the various leaders of brokerage firms and asset managers, I don’t think the Subprime problem is as contained as many would like for you to believe. To understand the massive ripple effects of the Subprime problem, you have to look deeply into who owns the eventual risk and furthermore, how it will affect their behavior going forward.

The Greatest “Bait and Switch” of ALL TIME
I recently spent some time with a senior executive in the structured product marketing group (Collateralized Debt Obligations, Collateralized Loan Obligations, Etc.) of one of the largest brokerage firms in the world. I was in Roses, Spain attending a wedding for a good friend of mine who thought it would be an appropriate time to put the two of us together (given our shared interests in the structured credit markets). This individual proceeded to tell me how and why the Subprime Mezzanine CDO business existed. Subprime Mezzanine CDOs are 10-20X levered vehicles that contain only the BBB and BBB- tranches of Subprime debt. He told me that the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to “mark up” these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt. Interestingly enough, these buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the US in USD, 2) petrodollar recyclers. These two pools of excess capital are US dollar denominated and have had a virtually insatiable demand for US dollar denominated debt…until now. They have had orders on the various desks of Wall St. to buy any US debt rated “AAA” by the rating agencies in the US. How do BBB and BBB-tranches become AAA? Through the alchemy of Mezzanine-CDOs. With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches – thus allowing them to be rated AAA. Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets… This will go down as one of the biggest financial illusions the world has EVER seen. These institutions have these investments marked at PAR or 100 cents on the dollar for the most part. Now that the underlying collateral has begun to be downgraded, it is only a matter of time (weeks, days, or maybe just hours) before the ratings agencies (or what is left of them) downgrade the actual tranches of these various CDO structures. When they are downgraded, these foreign buyers will most likely have to sell them due to the fact that they are only permitted to own “super-senior” risk in the US. I predict that these tranches of mezzanine CDOs will fetch bids of around 10 cents on the dollar. The ensuing HORROR SHOW will be worth the price of admission and some popcorn. Consequently, when I hear people like Kudlow on CNBC tell their viewers that the Subprime problem is “contained”, I can hardly bear to watch.

The Moral Hazard of HOT Potatoes
The key reason the Subprime problem exists as it does today has to do with the wanton disassociation of risk inherent in the machine that churns out Subprime loans. Unlike the S&L crisis of the 1980s, the mortgage lenders of today aren’t taking their own balance sheet risk when underwriting loans. These brokers get paid for quantity REGARDLESS of quality. The balance sheet risk is transferred through three entities in less than 90 days from origination. The originator will originate ANYTHING he can sell to a whole loan buyer to pass the hot potato on. Whole loan buyers are simply the aggregators of loans at the Wall St. firms that aggregate, package, tranche, and sell as quickly as they possibly can to the clueless buyer. This transference of risk is the crux of the Subprime situation. Just think about it…if you were a 20-something making mortgage loans in California using someone else’s balance sheet and being paid per loan (with no lookback to performance of the loan), how many dubious loans would you underwrite?

Buyers are now BEWARE
During and after the rout these investors are about to shoulder, how excited do you think they are going to be to purchase the next “AAA” rated piece of structured finance paper?!!?!?!? These same investors and global pools of liquidity have been funding the Leveraged Buyout (LBO) boom by purchasing the debt that funds the Collateralized Loan Obligations (CLOs) which in turn, buy 60%+ of the LBO debt used to finance these transactions. I also recently spent some time with one of the largest CLO issuers in the world. They had just returned from Japan where they were marketing a new CLO in order to be one of the buyers for new LBO debt. Needless to say, their marketing efforts fell on deaf ears. They were told by the Japanese investors that they have lost confidence in the ratings agencies (you think?) and that in an election year there is too much uncertainty. They basically said, “No more.” If there is not a CLO bid from Asian and Central European banks, where do you think the $290 billion in announced LBOs will go to sell their debt? I actually have no idea how to answer that question myself. We have seen the bank-loan index drop from 100.5 to 90.5 in 5 short weeks, and a widening in investment grade as well as non investment grade credit. In the immediate absence of liquidity, there will be many casualties of levered funds and firms. There will be a “re-pricing” of risk on a global scale that will mean more credit funds being carried out the door feet first.

Latest Casualties
Just today, the latest firm to suffer the wrath of too much leverage and mis-priced risk was Sowood Capital. What is truly remarkable about this particular situation is the fact that Jeff Larson, the former manager of the $30 billion Harvard Endowment, is the principal Manager at this firm. Sowood was renowned as being a “best-in-class” fund. If the former manager of the Harvard endowment managed to lose 57% of his fund (more than $1.7 billion in losses) in just 30 days, how are the “other” credit funds out there doing? How are they calculating Value-at-Risk? This afternoon, brokerage firms were sending collateral calls to other funds positioned similarly to Sowood. They joined the ranks of the two Bear Stearns funds managed by Cioffi, Australia’s Basis Capital, Absolute Capital, and Macquarie Fortress Funds as well investments by Korea’s Woori Bank, and London’s Caliber Fund by liquidating and eventually returning what is left to investors. Not to mention the downfall of the poster child of the levered “positive carry” industry, United Capital Market’s Horizon Fund – managed by John Devaney, owner of the aptly titled 142ft yacht, the Postive Carry (which is incidentally now for sale, all enquiries can be directed to http://www.iyc.com/featured_yachts.cfm?mn=1).

I have recently discovered the insightful writings of someone with whom I have not had the pleasure to speak or meet in person. Howard Marks is the Chairman of Oaktree Capital Management and he recently sent a letter to his clients entitled, “It’s All Good”. Mr. Marks had a most astute observation with regard to the recent investing environment:

“…investors’ recurring acceptance that it’s different this time – or that cycles are no more – is exemplary of a willing suspension of disbelief that springs from glee over how well things are going (on the part of people who’re in the market) or rationalization of the reasons to throw off caution and get on board (from those who have been watching from the sidelines as prices moved higher and others made money). In this way, the bullish swing of the investment cycle tends to cause skepticism and risk tolerance to evaporate. Faith, credence and open-mindedness all tend to move up – at just the time skepticism, discrimination and circumspection become the qualities that are most needed.”

Credit Markets and Where we are today in SubprimeLast week, I spent some time in the “Inland Empire” of California on a diligence trip to survey the actual damage. As many of you already know, 55% of all Subprime loans were made in California and Florida. The inland empire of California can be described as the central valley that extends from the southern part of the state all the way to the northern part of the state at least 1-hour inland from the coast. Let me start by saying it is MUCH WORSE than even I thought it could be. I met with various mortgage lenders, originators, economists, and capital markets professionals. The overriding theme that I got from them was that “Everyone committed fraud and everyone is responsible for the problem”. They told me that they believe that 90% of all Subprime loans that were made contained some kind of fraud. Either borrowers lied about their incomes or mortgage brokers fudged numbers on the applications to make them pass muster with the needed ratios in order to get loans approved. They also said that of the borrower frauds, 50% of applicants overstated their income by MORE THAN 50%!!! As Kindleberger put so well in his book, Manias, Panics, and Crashes:

The implosion of an asset price bubble always leads to the discovery of frauds and swindles. The supply of corruption increases in a pro-cyclical way much like the supply of credit. Soon after a recession appears likely the loans to firms that were fueling their growth with credit declines as the lenders become more cautious about the indebtedness of individual borrowers and their total credit exposure. In the absence of more credit, the fraud sprouts from the woodwork like mushrooms in a soggy forest.

In California today, home prices are down between 25%-40% in the central valley. From San Bernadino to Stockton, home prices are in free-fall and their physical condition is actually worse than their price decline. The borrowers are locked out of the financing market and there is no logical buyer for these homes outside of the original borrower. The foreclosure wave will hit these neighborhoods like the Asian Tsunami. If you plug in 15% depreciation in housing prices and 50% loss severities into our Subprime model, the capital structure is wiped out all the way to the “AA” tranches.In the Subprime Credit Strategies Funds, we continue to hold our initial positions and have not taken any profits yet. In Hayman, we are short credit in the US (both Subprime RMBS and corporate credit) and long non-US equities and debt. We are short US consumer based equities, preferreds, and debt. I think the world is going to begin to
decouple from the US and realize that currency appreciation coupled with the globe’s best growth is an attractive alternative to fraudulent ratings, US dollar depreciation, and financial inventions used to export risk.Sincerely,
J. Kyle Bass
Managing Partner

Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:

1. The first four men (the poorest) would pay nothing.
2. The fifth would pay $1.
3. The sixth would pay $3.
4. The seventh would pay $7.
5. The eighth would pay $12.
6. The ninth would pay $18.
7. The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers, he said, ‘I’m going to reduce the cost of your daily beer by $20. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:

1. The fifth man, like the first four, now paid nothing (100% savings).
2. The sixth now paid $2 instead of $3 (33%savings).
3. The seventh now pay $5 instead of $7 (28%savings).
4. The eighth now paid $9 instead of $12 (25% savings).
5. The ninth now paid $14 instead of $18 (22% savings).
6. The tenth now paid $49 instead of $59 (16% savings).
7. Each of the six was better off than before.
8. And the first four continued to drink for free.

But once outside the restaurant, the men began to compare their savings. ‘I only got a dollar out of the $20,’declared the sixth man. He pointed to the tenth man,’ but he got $10!’‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I!’‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’The nine men surrounded the tenth and beat him up.The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.Professor of Economics, University of Georgia

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

The Infinite Banking Concept

Wealth Transfer in America

In 2007 the personal savings rate was negative for the first time since the Great Depression. Americans are now spending more than they are making. How is that possible? The previous 10 years saw record breaking growth in both the stock and real estate markets, yet most households need the incomes from both parents to make ends meet. This has changed the fabric of our lifestyle. We are spending less time with our kids and more time at our jobs. The value of family and community has diminished. Why? Well, the answer is that most of us are trying to keep pace with the neighbors. We measure success by what we have. This leads to ever increasing family expenditures. C. Northcote Parkinson observed that “a luxury once enjoyed becomes a necessity.” So, must we go backward in order to go forward? No. The problem is not what you buy but how you buy it. Did you know that roughly one-third of every disposable dollar goes to pay the interest on financed expenses? The amount is staggering! We are bombarded by financial institutions with offers to finance practically everything. They clearly understand the economic power of financing and therefore encourage us to do it at every turn. Just the fact that the banks mail us vast amounts of credit card applications tells you what? They must be making A LOT of money. With their pockets full don't expect any changes.
So, if the banks won't change then what can you do? Well, you must seek to put yourself in control of your money. Therefore, you must treat yourself like a banker and create your own system of banking. The only way to avoid the transfer of interest and the opportunity costs that accompany it is to put yourself in a position where you have the choice to use your money or someone else's. This means that you must save enough until you can choose to pay cash or finance. If you pay cash you should pay yourself back. As long as you borrow money from others you will be forced to transfer some of your wealth away. Doing this will allow you to regain control and take charge of your financial future. Ask yourself this question: “If you had your own banking system how would you view borrow money from the local bank?” Borrowing from yourself and paying it back means that you get every penny back. Interest charges are gone forever. Not only do you recapture the interest that you were previously sending to various financial institutions but you also recapture the principal. By transferring the financing from the local bank to your personal banking system the cost of your purchases are significantly reduced.
You may be wondering what the difference is between a local bank and your personal baking system. Well, the condensed answer is that the local banks are federally chartered institutions that require vast amount of time and capital to start. But banking itself is merely a way of transferring wealth from savers to borrowers. What exactly is banking?

What additional advantages would you enjoy by becoming your own banker?
Purchase a car and increase your wealth by doing it.
How many cars have you owned over your lifetime? How much have you spent on those cars? How did you factor in the interest paid? What about the lost opportunity cost on those dollars? Did you pay cash, finance or lease? No matter how you bought the car you unknowingly transferred some of your money away. How?

1. If you financed your purchase then there's the obvious wealth transfer in the form of interest payments to the bank.
2. If you paid cash then your wealth is being transferred because that money is no longer earning interest for you.

What about your credit cards, student loans, home loans, business equipment, etc.? How much money do you think you transfer away to the financial institutions every year in the form of interest payments and finance charges? What would those dollars be worth today had you been able to keep them? You may be asking yourself is this even possible? The answer is: ABSOLUTELY! We can show you a process whereby you can recapture every penny of your principal and interest, regardless of the cost…just like a bank does! You’ll earn interest on that recaptured money as well and through the Velocity of Money Multiplier Effect your wealth will increase much faster than if you had not borrowed it. Get your own customized analysis to see how you create wealth from Personal Banking.

It's about the banking process, not a financial product.

Are you looking for a magic pill to cure your financial woes? Well, this isn't it. If you're looking for a get-rich-quick product then you'll have to keep searching. What we teach is a process to systematically turn the tables on the traditional financial institutions. Conventional financial planning would dictate that in order to build wealth you need to:

1. Achieve higher rates of return
2. Spend less on your current lifestyle to save more and
3. Maximize your contribution to your company's qualified retirement plan

The first question that most financial advisors will ask you is “how much money do you currently have?" The next question is usually, “where is it?" Once they know where your money is they will usually start telling you about how their products are better. Very few advisors will spend time talking with you about the money transfer problems that erode your wealth. After all, it's much easier to sell someone a product and go on your way because anything more than that takes more time and energy. To illustrate the point that products are not as important as the process let us assume that we're going to send you to play in the Master Tournament, golf's most prestigious event. We have two things to offer you but you can choose only one. You can have the clubs of any golfer who's ever played the game or who can have their ability. Which one would you choose? Of course you would want their ability, or swing. This is what we're teaching people with the Perpetual Banking Concept. Unnecessary wealth transfers are the fundamental problem. The process that we teach solves this problem and eliminates the staggering cost of financing. Learn how to use financing as a tool!

Tax free 401k? Now you can get your tax deferred growth to come out tax free. Proper retirement planning is crucial. How would you like to have 33% of your nest egg taken away at the time that you need it most? What if your current savings isn't enough to sustain you and your spouse through retirement? Who will take care of you during your final years? Most qualified retirement plans do two things:

1. They defer the tax and,
2. The tax calculation.

Which one of these two things are you looking for? Well, since most of us are smart shoppers, we decide that it's best not to pay our taxes today and defer them until some date in the future. You're undoubtedly looking for the tax deferred growth. I have two questions for you. What tax bracket will you be in when you retire? What deductions will you have when you take the money? If you're like most people you'll be in the highest tax bracket and you'll have the least deductions when you retire. What does that mean? Well, it means that the IRS will be taking more of your money at retirement. What if you could change that? What if you could still get the tax deferred growth during your accumulation years but have the money come out tax free during the distribution years? That means that you get to keep every cent and the IRS can't touch it. Check with us to see how well you’ve planned for retirement.

Enjoy a tax free income stream that will last longer than you will.

One of the greatest benefits of becoming your own banker is the creation of a tax free income stream. Wouldn't it be great if that income stream continued to grow while you spend it down? And at the time of your passing, wouldn't you like to pass your nest egg on to your family and children tax free? Definitely! When you learn and apply the process that we teach not only do you have a wealth building machine for yourself but you can create a legacy that you can leave for future generations.

Who is in control of your money and financial destiny? Is it the government, your employer or financial advisor who is steering your ship?

Are you in control of your financial destiny or are you relying on someone else to get you through? Do you expect the government to provide you with Social Security and Medicare benefits? Maybe you feel your employer's defined benefit plan will be enough to take care of you and your family. Or do you feel that your financial adviser has your financial future well in hand? Who's in control and who makes the rules? Does the government guarantee your Social Security and Medicare? Absolutely not! They can change the rules whenever they desire. Social Security is sorely under-funded. In 1950 there were 16 workers paying in to the system for every 1 worker receiving Social Security Benefits. In 2004 there were 3 workers paying in to the system for every one worker receiving benefits. And soon that ratio will drop to 2:1. But that's just part of the problem. People are living longer these days with a greater life expectancy. The longer they live the longer that the government must pay those benefits. Federal Reserve Chairman Ben Bernanke stated that unless Social Security and Medicare are revamped, the massive burden from retiring baby boomers will place major strains on the nation's budget and the economy. Betting your future on your employer is extremely risky too. Defined benefit plans are in extreme danger and you may end up losing a substantial chunk of your retirement benefits. And how good is your financial advisor? If you don't take control and seek the financial education that's necessary then your financial destiny is left to the discretion and experience of your advisor. Unfortunately, most financial professionals will only talk to you about their products. Very few will spend time discussing money transfer problems because it takes more time and energy. It's much easier for them to sell you a product and then go on their way. We focus on educating our clients about the process and the benefits of eliminating unnecessary wealth transfers. Click here to find out how we can help you eliminate wealth transfers in your life.

If rate of return is important, what is the return on tax free?

Most financial professionals would have us believe that rate of return is the most important factor for growing your investments. Therefore, their primary focus is on the products and “where you have your money." We disagree with this philosophy. By becoming your own banker and eliminating the staggering costs of traditional financing you can dramatically increase your wealth building potential. To illustrate this point let’s assume that I am the greatest financial planner in the world and I can get you a 100% return on your investment every single year for the next 20 years (See chart below). Comparing the growth in a tax free account and a taxable account is staggering. We’ve used tax rates of 0%, 17% and 27% respectively for 3 fictional clients. Many people are in higher tax brackets! Now, I have performed equally well for each of these 3 clients. What’s the difference? Will getting a higher rate of return solve the problem? Absolutely not! The bigger issue is the tax paid on those gains. So, which one client would you prefer to be? Of course you'd want the tax free plan. Contact us to find out what the effective rate of return on your investments is!

Pensions are in deep trouble, how safe are you?

44 million Americans are covered by traditional pension plans. Are you one of them? Currently there are about 30,000 defined benefit plans that are under funded to the tune of $450 billion. According to government estimates, in 2005, so many large U.S. companies grossly mismanaged their pension funds that their total deficit reached a record $353.7 billion and smaller companies ran up a total pension deficit of $100 billion. Jim Lange, the author of a bestselling book entitled “Retire Secure! Pay Taxes Later: The Key to Making Your Money Last as Long as You Do," states that “you, and only you, are responsible for funding your retirement. You can no longer depend on your employer and it's hardly worth mentioning that Social Security isn't going to get you very far. As corporate icons like GM, Verizon, IBM, Sears, Lockheed Martin, Motorola, Circuit City and Hewlett Packard declare pension freezes, Americans need to reevaluate their retirement plans." The band-aids that the government has put in place are too-little too-late. The Pension Benefit Guarantee Corporation, which is funded by U.S. taxpayers, is charged with bailing out employers who renege on their promises. In 2000 the PGBC had a $9.7 billion surplus. Six years later they had an insurmountable deficit of $28 billion. The Pension Protection Acts of 2006 and 2007 do not do enough to address the severity and time sensitivity of this crisis. People will need to rely more on themselves rather than the government or their employer. Contact us to get back in control of your financial future.

Grow your nest egg predictably year after year no matter what happens to the stock, bond or real estate markets.

What would it look like if you could have a guarantee? Guarantees provide security and give us peace of mind. Well, if could get a guaranteed rate of return without subjecting your nest egg to the volatility of the stock, bond and real estate markets wouldn't you want it? Our financial markets are subject to increased volatility these days due to global integration and technology advancements that have led to lightning quick communication. Events worldwide impact our markets immediately and vice versa. Whether it's an economic boom in China, the Hurricane Katrina disaster in the Gulf Coast or an OPEC decision to slow oil production, our local and national markets can be subject to immediate spikes and slides. Once again, who is in control of your financial destiny? With pensions, Social Security and Medicare in disarray; an ever increasing national deficit making the U.S. the world's largest debtor; and countries such as China beginning to pull money out of the U.S. to put towards building their own economy, how safe do you feel your nest egg is? This is where the Infinite Banking System comes in. If you're interested in maximizing your opportunities and limiting market and tax liabilities then it's worthwhile to find out more about becoming your own banker from one of our financial strategists.
Contact us now!

Housing Meltdown

What would you do if you lost your home equity?

How would you feel if you had an extra $50,000-$100,000 in liquid cash just in case you lost your job, or became disabled?

What if there was a way to participate in the upside of the housing market, and never lose your home’s value?

What if you could also participate in the upside of the stock market, but never lose your account’s value?

Who do you have in your corner protecting you from these losses?

Housing Meltdown
Why home prices could drop 25% more on average before the market finally hits bottom

So, you think the housing bust is bad? Prepare for worse to come. BusinessWeek says national home prices could plummet an additional 25% over the next two or three years. The charts and tables on the following slides tell the story of why prices could fall so much and what the fallout might be.

Room to Fall
Starting in 2000, home prices soared far above their long-term trend. They've only just started to return to normal. This chart shows the history of home prices adjusted for inflation going back to 1890, compiled by Yale University economist Robert Shiller. The black line is BusinessWeek's calculation of the long-term trend growth rate: just 0.4% a year after inflation.

Coast To Coast
A 20% decline in home prices would wipe out all of the home equity of two-thirds of all people who bought houses in the last year, Zillow.com estimates. The bars show the percentage of recent buyers in each market whose home equity would be wiped out by a further 20% price decline.

Optimism
These regional pie charts show the results of a December survey of 1,509 homeowners asking whether they thought their home's value had risen or fallen over the past year. The survey was conducted by Harris Interactive for Zillow.com. Beneath each pie chart is Zillow.com's estimate of the actual change in house prices for the region over the past year.

Why Housing Prices Won’t Plunge ... And Why They Will
In the war of words over the outlook for housing, both the optimists and the pessimists have plenty of ammunition. If home prices really fall an additional 25%, Washington's rescue program is likely to seem seriously inadequate. So far the Bush Administration is pushing two main ideas: FHASecure, which offers new mortgages to certain well-qualified borrowers, and Hope Now, a private-sector program to streamline the modification of unaffordable loans. But FHASecure isn't open to people who are underwater on their mortgages—in other words, those who most need help. And the Hope Now alliance doesn't seem to be coping successfully with the mounting backlog of loan delinquencies. The other big Washington initiative, to crack down on loose lending practices, could be ineffective and even counterproductive, because it's making loan funding less available right when it's needed most.

The next big reform ideas may hark back to President Franklin D. Roosevelt. Many of the housing market's props today—including Fannie Mae and the Federal Housing Administration—were launched during the 1930s. If things get bad enough, say some analysts, it could raise interest in renewing another innovation of the Depression years, the Home Owners' Loan Corp., which lent money directly to hard-pressed borrowers to prevent foreclosure. If enough banks get into trouble, Congress might even create something roughly parallel to the 1980s-era Resolution Trust Corp., which cleared up the savings and loan crisis by shutting down weak thrifts, thus wiping out the investments of the owners, and then selling off their assets to the highest bidders. And with homeownership no longer seeming like such a sure thing, national housing policy could become more evenhanded toward renters. Congress is weighing the creation of a National Affordable Housing Trust Fund that would build, rehabilitate, and preserve 1.5 million units of housing for the lowest-income families over the next 10 years. The national homeownership rate has already fallen about one percentage point from its peak, to 68.2% in last year's third quarter. However things unfold, the changes are likely to be wrenching. The bigger the boom, the harder the fall.

Checklist For A Housing Bust
Okay, you're convinced that tough times are ahead for housing. What should you do? Here are some ideas that could ease the pain.
· re-position your home equity now, while you can, in a safe, liquid, side fund!!
· equity management could increase your net spendable income by as much as 50%

Call us now @ 512-864-7979 to learn how!!!

Largest Expense is Still Housing

Based on the new Consumer Expenditure Survey, housing’s share of average spending increased over a full percentage point from 32.7% to 33.8%, making it the continued king of cash flow consideration for the average consumer.

Not only is it the largest expense, but in prior consumer surveys the consumer feels they have the least 'control' over their housing related expenses. Energy costs, property taxes, home owners insurance, mortgage interest, all tend to create a feeling that housing expenses are totally outside their control... which is an accurate statement for most house owners. Their options are to sell the house and rent, or to consider more closely monitoring their housing related expenses, controlling the things they can control, letting the rest go. That's a form of liability management, just helping people consider what they can, and clarifying for them what they can't.

One interesting consideration of the CES study is the expenses are considered interest only for all expenses, so principal does not show up as an expense to the consumer, yet they do feel it in their overall cash flow. As you can see from the chart, the level of pain is relatively higher for the lower income earners, but still makes up over 30% for the high income earner. This trend is actually pushing home ownership rates in the US down, and putting more pressure on rents, as the median rent in the US jumped 6% in 2006 after stay relatively flat for many years. If that increases, selling and renting becomes less attractive as well.

When you consider the emotional impact of the lost equity, you can see why consumers want more guidance if their real wealth declines, even if it is simply letting them know that things will be ok. The forthcoming mortgage resets in the first quarter of this year will continue to put upward pressure on housing related expenses and further challenge savings ability of the typical consumer.

Will We Repeat Our Mistakes?

We have to continue to wonder how the psychological impact of the housing market will impact the economy. When you look at real wealth, it is slowly decreasing. What has the greater impact for most people, loss of wealth or loss of cash flow?

We think about consumer confidence as something we can measure on the whole, but like the saying 'all real estate is local', all 'consumer confidence is personal.' What really strikes at the heart of the consumer is cash flow, with wealth a more distant second. Most consumers make their most important decisions based on short term cash flow considerations, and less often do they think in terms of long term wealth. If their house loses $50,000 in value, that is a real impact to their wealth that is fundamentally more painful that a loss of $500 a month from an ARM reset, but if you look to your personal confidence, most will agree that $500 a month has a far greater impact on your outlook, spending, and general willingness to take action. The FED is worried about consumer confidence because worried consumer reduce spending, and that creates new pressures on our economy.

Much of our wealth, and our cash flow of the recent years has come from Mortgage Equity Withdrawals (MEW), and in the last measured third quarter of 2007 there was a 55% drop in loans that removed equity at the closing (meaning cash out loans), and for many even with the lowered federal interest rates we'll see some increase in housing payments, meaning less disposable income.

Consumers tend to remove equity from their house in one of two ways: selling the house or refinancing the house. Selling the house has been tracked most often to higher savings - the lump sum can be positioned in what is a one time decision for the client, whereas cash out and home equity lines take greater discipline and financial stewardship, these smaller lump sums are more quickly consumed for goods versus savings. As house prices drop, real estate sales have slowed this exchange of wealth from capital gains of real estate appreciation. Stricter lending guidelines have made it more difficult for consumers to reposition wealth already in the house, putting greater pressure on spending behavior.

We are seeing signs of life in the mortgage refinance side of the housing equation. Consumers see news on the lower interest rates from the Fed. The MBA refinancing index moved back above 4000 for the first time since March of 2004... that's a 20% jump in applications, and in just 5 weeks we see a doubling of prior loan activity. We again may see some behavioral shifts in the way the consumer views savings that comes from cash flow, cash out, or property sales as they need to think about their own liquidity.

The main reason the Fed needs to lower rates (as the real impact on housing may not help the economy for some time), is the consumers increasing reliance on credit card debts (rising) and mortgage lending (decreasing)... as mortgages tighten, consumers fall back on credit and that creates a debt sprial that can be devastating... this is again a problem of behavior (overspending), or too much month at the end of their money.

Many believe 2010 is when we can expect to see housing back in full swing again, but right now there is a real opportunity to capitalize on current rate trends, and congressional politics. To imagine that I might refinance a $700k mortgage to an FHA loan, or that the government may offer tax free bonds for pools of bail out money to consumers, is pretty hard to imagine... but they are trying to avoid a bigger calamity, and many believe interest rates have no where to go but down for the next 6 months - making the 5,000 ARM resets per day all the more exciting for you and your consumer as LIBOR and PRIME become more and more attractive, and we set ourselves up again for consumers refinancing into short term lower interest rates... When will the Fed be able to tighten again if we bail ourselves out with cheap money? This time around, let's see if we can save more, spend less, and better manage our own liquidity.