RICHDAD

The Rise and Fall of American Democracy

2010-11-21T05:29:00.000-08:00

Alexander Tytler (1747-1813) was a Scottish-born English lawyer and historian. Reportedly, Tytler was critical of democracies, pointing to the history of democracies such as Athens and its flaws, cycles, and ultimate failures. Although the authenticity of his following quote is often disputed, the words have eerie relevance today:A democracy is always temporary in nature; it simply cannot exist as a permanent form of government.A democracy will continue to exist up until the time voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by dictatorship.The average age of the world's greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:• From bondage to spiritual faith;• From spiritual faith to great courage;• From courage to liberty;• From liberty to abundance;• From abundance to complacency;• From complacency to apathy;• From apathy to dependence;• From dependence back to bondage.Tytler's Cycle and the U.S.In looking at American history, we can see Tytler's sequence in action. In 1620, the Pilgrims sailed to America to escape the religious bondage imposed by the Church of England. Their spiritual faith carried them to the new world.Because of their deep faith, the Pilgrims left England in spite of the high percentage of deaths incurred by earlier American settlements. For example, when Jamestown, Virginia, was founded in 1607, 70 of the 108 settlers died in the first year. The following winter only 60 of 500 new settlers lived. Between 1619 and 1622, the Virginia Company sent 3,600 more settlers to the colony, and over those three years 3,000 would die.In 1776, the Declaration of Independence was signed. From spiritual faith the new Americans were garnering great courage. By crafting the Declaration of Independence, the colonists knew they were essentially declaring war on the most powerful country in the world -- England.With the onset of the Revolutionary War, the colonists were moving from courage to liberty, following Tytler's sequence. By demanding their independence and being willing to fight for it, a new democracy was born. This new democracy grew rapidly for nearly 200 years.Then, in 1933, the U.S. was thrown into the Great Depression and elected Franklin Delano Roosevelt as president. Facing total economic collapse, Roosevelt took the U.S. dollar off the gold standard. At the same time, Germany, also in financial crisis, elected Adolf Hitler as its leader. World War II soon followed.In 1944, with WWII coming to an end, the Bretton Woods Agreement was signed by the world powers and the U.S. dollar, once again backed by gold, became the reserve currency of the world.After the war, America passed England, France, and Germany to become the new world power. Having entered the war late, the U.S. emerged as the creditor nation to the world. Our factories weren't bombed and the world owed us money. The U.S. grew rich financing the rebuilding of England, France, Germany, Italy, and Japan. The American democracy was transitioning from liberty to abundance -- maybe too much abundance.In 1971 President Nixon violated the Bretton Woods Agreement by taking the U.S. dollar off the gold standard because America was spending more than it was producing and the U.S. gold reserves were being depleted.In 1972 Nixon visited China to open the door for trade. What followed was the biggest economic boom in history -- a boom fueled by the U.S. borrowing money through the sale of bonds to China, one of the world's poorest countries at that time. The sale of these bonds financed a growing U.S. trade deficit. China produced low-cost goods, and we paid for them with money borrowed from the Chinese workers.American factory production, which had fueled the American boom after WWII, was "shipped" overseas along with high-paying American jobs. America was shifting from abundance to complacency. Rather than produce, we borrowed and printed money to maintain our standard of living.In 1976 America celebrated its 200th anniversary as a democracy. Rather than produce, we kept borrowing to finance social-welfare programs. Over the next three decades or so, America slid from complacency to apathy.In 2007 the subprime crisis reared its ugly head. And by 2010, unemployment increased to double-digits, even as the rich got richer. Once-affluent people walked away from homes they could no longer afford. The U.S. moved from apathy to dependence.Today we're dependent upon China to finance our debt as well as fill our stores with cheap products. At the same time, millions of Americans are becoming dependent upon the government to take care of them. If Tytler is correct, the American democracy is presently moving from dependence back to bondage.Filling the VoidHistory reminds us that dictators and despots arise during times of severe economic crisis. Some of the more infamous despots are Hitler, Stalin, Mao, and Napoleon. I find it interesting that the U.S. is now dependent upon Chairman Mao's creation, the People's Republic of China, for the things that we buy and the money that we borrow.To me, this is spooky, foreboding, and ominous. While the Chinese people, as a rule, are good people, my business dealings with Communist Chinese officials have left me disturbed and concerned about the rise of the Chinese Empire. As you know, China doesn't plan on becoming a democracy. With money, factories, a billion people to feed, and a massive military, could they put the free world into bondage?Although I don't like the way the Chinese do business, I continue to do business in China. I have to. They're the next world power. I cautiously believe that trade, business, and understanding offer better options for world peace and prosperity than isolationism. Now the Western world must seek to grow stronger financially as China continues to gain power. To do this, our schools need to offer more sophisticated financial education to children of all ages.This is not the time to be complacent or apathetic. This is the time to think globally. Putting up trade barriers would be disastrous. Instead, it's time our schools train students to be entrepreneurs who export to the world rather than employees looking for jobs that are being exported to low-wage countries.Please be clear. I don't fear the Chinese. I fear our own growing weakness. Only a weak people can be oppressed. Today, America has too many people looking to the government for financial salvation.In 1620 the Pilgrims fled the spiritual oppression of the Church of England. Today Americans may need to flee the financial oppression of our own government as our democracy dies. If we follow Tytler's cycle for democracy, our financial dependence will lead us to financial bondage.

What’s Worse Than a Depression?

2010-11-21T05:27:00.000-08:00

"Is the crisis over?"
"Is the economy recovering?"
These are questions I'm often asked. People who ask such questions are praying for a "V-shaped" recovery, hoping that the worst is over and that we're on our way to economic recovery.
Some experts say that we're in a "U-shaped" recovery, meaning the recovery will take longer, maybe another two to three years. Others fear a "W-shaped recovery," a double dip, which could result in another crash before full recovery. Some experts are calling for a zombie recovery similar to the Japanese economy's 20-year stagnation.
There's also a growing chorus of experts who are warning of our greatest fear, a depression either in the form of hyperinflation like the German Weimar Republic experienced in the 1920s, or a deflationary depression like the Great Depression.
A depression would be devastating, but could there be something worse than a depression?
The answer is, "Yes." There could be an economic collapse.

Near Miss
In 2008 my friend and author of The Dollar Crisis and The Corruption of Capitalism, Richard Duncan, called me and said, "The global credit card system almost shut down. Can you imagine what would've happened to the world economy if the credit card system failed? We came very close."
Richard is not an alarmist. He's a classically trained economist, a graduate of Vanderbilt University and Babson College, and a former advisor to both the IMF and the World Bank. He has access to information most of us don't. He's a reserved, clear-thinking, soft-spoken person. For over a year now, Richard's words have been ringing in my ears.
For me, the key word is system. For something to collapse, not all systems have to shut down. In most cases, just one system is enough. For example, the human body is a system of systems. If just one system, such as the cardiovascular system, shuts down, death follows. The same is true for an automobile. If the fuel system shuts down, the car is inoperable even though the other systems may all be in good order.
Many of us go about our days in blissful ignorance that an economic collapse could happen at any moment should one of our financial systems -- like the credit card system -- collapse. Our global economy is much more fragile than many of us realize.
Collapse
The world is made up of systems, systems often competing against one another. For instance, BP's latest gusher in the Gulf brought home the fragile relationship between the world's eco and economic systems. The environmentalists say capitalism is killing our oceans, air, land, and forests. Capitalists argue that they provide food, fuel, and building materials for a growing world.
Because the world is made up of systems in conflict, it's not only uncommon (but, rather, normal) to see systems collapse.
History is full of economic collapses from the Roman Empire to Weimar Germany to, most recently, Iceland. Economic collapses most often precede the collapse of empires.
In families, if the breadwinners lose their jobs, the family economy often collapses.
We should not be surprised when collapses happen. Rather, we should be surprised they don't happen more often.
As you may have already guessed, a minor collapse can create a ripple effect that may cause a domino effect of bigger crashes. This is why Greece was such a hot issue. If Greece failed, it might have taken the mighty German and French economies down. This would have caused an economic tsunami and collapsed the world economy.
Jared Diamond's Collapse is a great book for history buffs of collapses. Diamond traces the causes that led to the fall of civilizations such as the Maya, Easter Island, the Anasazi Indian tribe of Arizona and Utah, the environmental and economic collapse going on in Montana today, and more. The book reads like a murder mystery. It's easy to read, disturbing, frightening -- and hard to put down. Looking into the history of collapses, we see many parallels to today.
And, it seems to me, we know this intuitively. Our pop culture is becoming obsessed with apocalyptic stories. There are more and more movies about what would happen to our world after a collapse. The latest are 2012, The Road, and The Book of Eli. There is a new TV series titled The Colony that is created on the same theme. Even TV commercials are picking up on the post-apocalyptic world. Bridgestone tires runs a commercial about a rogue gang of dark and dangerous looking thugs stopping a car on a steep mountain road demanding, "Your Bridgestones or your life." The driver throws out a gorgeous, sexy, long-legged young woman, turns around and drives off with the thugs screaming, "Your life, not your wife!"
Judging History
So the question becomes, if the world's economic systems are so fragile, and if collapses are common in a world of competing systems, why are we not talking more about the possibility of collapse? Obviously our leaders don't want us talking or thinking about that. And they try hard to frame the discussion so we don't.
Most people would agree (including many historians) that the best way to anticipate the future is to study the past. But what if our version of history is wrong? What if our history is distorted to sell an agenda? After all, the word "history" is made up of two words: his and story.
Fed Chairman Ben Bernanke, the Princeton University scholar of the Great Depression, often says that the depression could have been averted if only the government had printed more money. That's his story, but that's not what history says.
After the crash of 1929, FDR was elected in 1933. He immediately took the U.S. off the gold standard through the Emergency Banking Act and introduced his New Deal. This allowed him to print more money and rack up huge amounts of national debt. At first it seemed that FDR's plan was working.
Yet in 1938 there was a "depression within the depression." Economic output collapsed and the unemployment rate rose from 14.3% to 19%, in the face of a year-over-year decline from the peak of 24.9% in 1933.
History proves Bernanke's claim (that FDR didn't print enough money) to be wrong. This is what Roosevelt's Secretary of the Treasury, Henry Morgenthau, wrote in his diary in May 1939: "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong, somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot."
World War II broke out in 1939 and many people credit that war with saving the economy. While the war did boost the recovery, it was the Bretton Woods Agreement, signed in 1944, that put the world back on the gold standard, which stabilized the global economy.
Back to the Future
In 1971 President Richard Nixon took the world off the gold standard. Here we are again on the edge of a new depression. After the last depression, America emerged as the richest creditor nation in the world. Because our homeland wasn't bombed like the European countries, we had factories exporting products to a world rebuilding from the war.
Today leaders like Ben Bernanke want to rewrite history. They want us to believe that spending and debt are the solution. They want us to buy their version of history and continue to get deeper and deeper into debt. They want us to trust that printing more money will pull us out of our great recession.
True history speaks a different story. It speaks of collapse when a nation or empire overextends itself. The true fear should not be a depression or a double-dip recession. It should be an economic collapse. You can only tip the system so many times before it falls completely apart.
Today America is the biggest debtor nation in the world. Our factories have moved overseas. Now we're net importers paying our bills and fighting two wars with counterfeit money as our leaders use the same accounting rules WorldCom and Enron used -- and as you know, those companies no longer exist.

Think the Gulf Spill Is Bad? Wait Until the Next Disaster

2010-09-18T06:41:00.000-07:00

Think the Gulf Spill Is Bad? Wait Until the Next Disaster

The world knows BP is a disaster, a monster of a disaster. BP's disaster makes Hurricane Katrina look like a rain shower.
Every time a TV news station shows oil gushing from a broken pipe -- one mile below the ocean's surface -- the world gets sick. Scenes of oil-soaked pelicans struggling for life both angers and saddens us. The financial losses endured by small businesses and fishermen cannot be imagined, let alone conveyed by the media interviews. BP is a disaster with a scope beyond comprehension.
I was in England when President Barack Obama blamed and criticized BP for this tragedy. His criticism sparked the anger of the British. Politicians wanted him to tone it down, to be more careful in his choice of words. British Prime Minister David Cameron told Obama not to "go after BP for the sake of it." Virgin's Richard Branson said he was "kicking a company while it was on its knees." Their concern was not for the environment or those suffering the ravages of this disaster. Their concern was for the pensioners who are counting on BP for a secure retirement.
On June 17, London's Daily Mail ran a headline screaming, "Obama Bullies BP into £13.5bn Fund for Oil Spill Victims... but British Pensioners will Pick Up the Bill." The British are angry with Obama for pressuring BP to suspend dividend payments and set aside $20 billion for the cleanup. Obama's strong-arm position has not only affected British pensioners, who own 40% of BP, but American pension funds, who own 39%, as well. In other words, the economic damage of the BP disaster goes far beyond the Gulf. The damage is spreading to pensions, pensioners, and portfolios all around the world.
An Atmosphere Changed
While in London, I decided to go to dinner at Canary Wharf, ground zero for the next BP. Only a few years ago, Canary Wharf was one of the centers of the financial universe. Condo prices were sky high, offices were packed, and high-paid bankers filled Canary Wharf with wealth and excitement. Today, Canary Wharf seems to be dying. It has lost its vibrancy. Many restaurants and offices were nearly empty and there were few lights to be seen in those once-high-priced condos.
And Canary Wharf's ‘BP' stands for Bomb Production. Canary Wharf is much like AIG, a factory for exotic financial products known as derivatives. The problem is that most people do not know what these murky and mysterious products are -- and that includes the people who make them or buy them. It's why Warren Buffett has called derivatives "financial weapons of mass destruction." That is how powerful they are. During World War II, a ship exploded while loading bombs for transport at Port Chicago, California. The explosion flattened everything for miles. It is said that the ship's anchor, which weighed tons, was found more than six miles away. Derivatives -- financial bombs -- have the same power if they accidently detonate inside a bank's balance sheet.
The subprime disaster was a result of financial bombs -- derivatives -- exploding in financial institutions such as AIG and Lehman Brothers, as well as banks and financial institutions throughout the world. After the bombs AIG manufactured exploded, AIG received $181 billion in taxpayer funding and immediately sent $11.9 billion to France's Société Générale, $11.8 billion to Deutsche Bank, and $8.5 billion to Barclays Bank of Britain. U.S. taxpayer money was going to bailout banks around the world. During the last three months of 2008, AIG was losing more than $27 million an hour. That is how powerful these derivatives can be. The problem I see is this: There are many more such bombs still sitting in balance sheets all over the world.
Financial Bombs All Over the World
Military bombs are classified by weight: 500-, 750-, and 1,000-pound bombs. Financial bombs have interesting labels such as CDO (collateralized debt obligations), ABS (asset backed securities), and CDS (credit default swaps). While they sound exotic and sophisticated, when put in everyday language, a CDO is simply debt sold as an asset. And CDS, or swaps, are simply a form of insurance.
Since the insurance industry is strictly regulated, and the bomb factories producing CDS did not want to comply with insurance industry regulations, they simply called them ‘swaps,' rather than insurance.
To make matters worse, rating agencies such as Moody's and S&P (and even Fed Chairman Alan Greenspan) blessed these financial bombs as safe, sound, and good for you. It was almost as good as the pope blessing these products. In 2007, the subprime boom busted, and we know what happened from there.
The problem is that approximately $700 trillion of these financial time bombs are still in the system. While people watch the BP disaster in the Gulf, few people are aware of the other BP, the financial bomb production that is still going on. If this derivative market begins to collapse, we will see another BP disaster.
Can't Clean Up the Next Disaster
Most of us know there is not enough money in the world to clean up the Gulf. The same is true with the $700 trillion derivatives market. If just 1% of the $700 trillion derivatives market goes bust, that is a $7 trillion disaster. The entire U.S. economy is only $14 trillion annually. A 10% failure, equating to $70 trillion, would probably bring down the world economy. As with the BP Gulf disaster, there is not enough money in the world to clean up the next BP disaster.
Could such a financial disaster happen? The answer is "Yes." In fact, just as President Obama pressured BP into doing the "right thing," he is also pressuring the financial markets to do the right thing. The president and our congressional leaders are pushing through financial reform legislation. My concern is that, if not handled delicately, it is this financial reform that will set off the derivative time bomb... the next BP.
Currently, derivatives are traded over-the-counter, also known as off-exchange trading. This means derivatives are uncontrolled, unregulated, and unsupervised. The proposed financial reform legislation is pushing to have derivatives traded through an exchange. This will bring greater transparency and control. My concern is, when this happens, the reform will reveal fraud and failures we do not yet know about today. It will be like turning on the light and watching the cockroaches (bankers) run for cover.
While it is commendable that President Obama holds the rich and powerful accountable, I wonder what the price will be.
How many BPs can we afford?

The Rise of the Mega-Rich

2010-04-28T19:18:00.000-07:00

The Rise of the Mega-Rich

The first decade of the 21st century is over. Many people find themselves off to a bad start. The new century began with the Y2K scare -- the threat of computers shutting down around the world. Then 9/11 came, followed by two long and expensive wars. The Nasdaq bubble and crash were followed by the real estate bubble then subprime crash, which led to the unprecedented printing of trillions of dollars in an attempt to prevent a global depression. The result is a lingering financial crisis that has expanded the gap between the haves and have-nots.

Most decades have their characters. In the 1960s, we had the hippies. By the 1970s the peace movement evolved into John Travolta and disco. In the 1980s, capitalists took center stage. Techies dominated the 1990s and suddenly geeks were cool.

The question is, what character will emerge to represent the first decade of the 21st century? Will it be the religious terrorists flying into tall buildings or the financial terrorists stealing our wealth from inside tall buildings? Will the first decade be known for Ponzi scheme notables such as Bernie Madoff and Allen Stanford… or Social Security and mutual funds? Could it be known for odd couples such as Barack and Hillary or John and Sarah? Or will the first decade be known as the era of celebrity philandering with confessions from the likes of Tiger Woods, Elliot Spitzer, and John Edwards? (All three should get together to co-author a book entitled “Family First”.)

The Century's Exciting Start

All in all, the first decade was an exciting start to the 21st century. What will the second decade bring? What new character will emerge if hippies, disco-ducks, techies, and philanderers are yesterday’s news?

I believe there will be two newsworthy groups to emerge between 2010 and 2020. One big group will be the Dumpies, so named because life leaves them down in the dumps. Many in this group are old hippies who flourished during the ‘60s and forgot to grow up. Not all Dumpies were hippies. Many Dumpies became Dumpies simply because, like dinosaurs, they failed to notice the weather changing. They simply followed in their parents’ footsteps, faithfully believing that all they had to do was go to school, get a job, buy a house, save money, retire on a company pension, collect Social Security, and live happily ever after at the country club. The formula worked for their parents -- the WWII generation – so why shouldn’t it work for them?

The problem is, the rules of money changed. In 1971 President Nixon took the world off the gold standard and in 1974 the predecessor to the 401(k) plan emerged. Suddenly savers were losers as inflation took off, debtors were winners, and people turned to gambling with real estate and in the stock market as the guarantee of a retirement check for life disappeared.

In the coming decade, I believe we will be hearing more and more stories of Dumpies -- well educated, hard-working, successful, prosperous people who will find themselves out of time, out of money, and dependent upon government or family support in their golden years.

The New, the Young, the Prosperous

The second group you will hear more about is the new, young, global mega-rich. They are internationally minded plutocrats who are the beneficiaries of globalization and the technical revolution. They are being pushed along by the fall of communism, the spread of economic globalization, and the impact of the internet as technology makes information and communication free or almost free. Most are 40 or younger today.

This rise of the new global mega-rich is happening as established institutions are falling. The fall runs the gamut from the music business and traditional media to the Detroit automakers who find themselves obsolete, outmaneuvered, and out-priced by entrepreneurs in Silicon Valley, Mumbai, Shanghai, and even Siberia.

We live in an era of unprecedented opportunity for the smartest, most persistent, and creative among us. Whole new businesses will emerge around breakthrough products as revolutionary technologies accelerate capitalism’s creative destruction of slower industries.

In this second decade, you will see the middle class of the West being hollowed out, creating the Dumpies of the world…modern dinosaurs of the evolutionary process. Both globalization and technology will have a punishing impact on those without intellect, luck, or chutzpah to profit from the changes. Machines, technology, and cheap labor in low-wage countries have pushed down wages in the West, aggravating the financial crisis for the obsolete and ill-informed.

Unprecedented Openness

We live in an age of unprecedented openness. As stated earlier, technology has made information and communication free or almost free. There is more opportunity than ever before…yet that opportunity is largely theoretical: In America social mobility will reverse as many in the middle class become Dumpies.

Between 1997 and 2001 the gap was as follows:

1. The top 1% earned 24% of earnings growth.
2. The top 10% earned 49% of earnings growth.
3. The bottom 50% earned 13% of growth.

Until 2008 none of this seemed to matter. The wonderful inventions, such as iphones, ipods, Twitter, Google, and Facebook kept us entertained like kids at Disneyland.

At the same time, the expanding bubble of debt created a surreal environment of monetary nirvana. You could buy what you wanted, max out your credit cards, and pay off the cards with a home equity loan, as Santa’s sleigh ride continued. Who cared if the bottom 50% were being left behind? Who cared if the top 10% earned 49% of earning’s growth? Who cared if 10% of the population got richer while 90% were left behind? We had toys, we were hip, we had designer bling from China that made us look rich, and we could buy the house of our dreams for no money down. What could be better?

As this financial crisis lingers on, the gap between the new plutocracy and the new Dumpies is becoming a pressing political issue. During the 1960s, the hippies dropped acid and dropped out. Today, as Dumpies, the largest demographic group (a.k.a. baby boomers, approximately 75 million strong…of which I am one) may wake up and drop back in. If they do, who knows where the political process, driven by their hippie values, will go? This is why the second decade of the 21st century will be more important than the first.

Financial education is an important objective for this next decade. We cannot allow the gap to grow bigger. We must have financial education in our schools. Money will not close the gap -- only financial education will. If we do nothing, who knows what creature will emerge as the mascot of the new decade?

To see the future, look to the past. Throughout history, political despots have emerged during times of economic crisis. Some famous characters are Mao, Stalin, Napoleon, and Milosevic.

In 1933, four years after the 1929 crash, two figures arose from the Depression. One was Adolf Hitler. The other was Franklin Delano Roosevelt. Many people believe Barack Obama is modeling himself after FDR. Which leads to the question: Who will play Hitler?

Doing the Dead Cat Bounce

2010-03-16T03:25:00.000-07:00

Dow 5,000 in 2010?

In my last column I predicted a “dead cat bounce” in the stock market and a possible Dow plunge to 5,000 this year. Obviously, many readers mocked my prediction.

But the dead cat bounce is very important, especially in today’s market.

Simply put, ‘a dead cat bounce’ looks like Diagram 1 below:

The market crashes, rebounds, and runs out of steam, then crashes again…unfortunately, and possibly, to a lower low.
When professional investors observe a ‘dead cat’ forming, many will begin to sell. If their selling leads to a panic, the stock market goes even lower.

Putting today’s numbers to the ‘dead cat’ diagram gives this topic more meaning.

In 2002, the Dow hit a low of 7,286.

In 2007, the Dow hit a high of 14,164

In 2009 the Dow fell and stopped at 6,547.

Dow 6,547 is where the market stopped falling and the dead cat bounce began. At 6,547 the market was oversold and buyers came rushing back in, looking for bargains. The Dow headed back up, and a bear market rally began.

On February 5, 2010 the Dow closed at 10,012.

What Does This Mean?

So the question is, “What do these numbers mean to me?” The answer to that question depends upon you. If you are a bullish person, you will be optimistic, reassured by these numbers, and looking forward to the Dow breaking 14,000 soon.
If you are bearish, you will be waiting for the dead cat to finally die and for a double dip recession to begin.

One of the theorists (and writers) I follow is Richard Russell, a wise sage who is in tune with markets and the madness of crowds. He has been in the business for about 50 years, so he has the wisdom and perspective of time. Lately, he has been writing about the ‘50% Rule’ of Dow Theory. I thought I would pass it on to you because it may assist you in seeing the future of the economy, even if --like me -- you do not trade in stocks.

The following is my interpretation of the ‘50% Rule’ using real numbers.

In 2002 the low of the Dow was 7,286.

In 2007 the Dow hit a high of 14,164.

The ‘50% Rule ‘number is 10,725…the halfway point between 7,286 and 14,164.

In 2007, when the market headed down and broke 10,725, professional traders who follow the Dow Theory ‘50% Rule’ knew what was going to happen next. On March 9, 2009, the crash stopped at Dow 6,547.

On that day, what I believe is a ‘dead cat bounce’ began as the market moved up.

On January 19, 2010, the Dow stalled at 10,725 and headed down again. This is spooky. The 50% rule came true.

The next interesting point is 7,286, the low of 2002, when the rally began. According to Russell, if the Dow holds at 7,286 and begins a rally, this might be a good time to buy. But if it fails to hold at 7,286 and slides past 6,547, then look out for dead cats dropping from the sky. Russell predicts that Dow 1,000, the number at which the Dow began its rally in the 1970s, may not be out of the question. If that happens, there will be millions of baby boomers joining the dead cats falling from the sky as their 401(k)s and IRAs implode.

Other Markets

This ‘50% Rule’ may apply to other markets such as gold, the hot commodity of this era.

In 1971 gold was $35 an ounce. I began buying gold in 1972 when I was a pilot in Vietnam, watching the Vietnamese panic when they knew the U.S. was not going to win the war.

Gold hit a peak of $850 an ounce in January of 1980.

Gold dropped to a low of $252 in July of 1999. Obviously, I bought a lot of gold in 1999. Gold was at an all-time low because Central Banks, such as the Fed and the Bank of England, were dumping gold in an attempt to protect the value of their counterfeit currencies.

According to the ‘50% Rule’ of Dow Theory, when the price of gold was passing $600 an ounce(halfway between $850 and $252), a rally in gold was on. When gold passed $600, mainstream financial experts began warning of a crash in the price of gold… stating that gold was in a bubble.

Today gold fluctuates between $1,000 and $1,200 an ounce.

Is Gold in a Bubble?

When you factor in inflation and devaluation of the U.S. dollar, $850 gold in 1980 is $2,500 an ounce in today’s dollars. In other words, gold might be at 50% at $1,200, which is the highest of highs. Could there be a run to $2,500?

Your personal answer to that question will depend upon how confident you are in Fed Chairman Ben Bernanke, President Obama, and Wall Street. If you have faith in our leaders of commerce, don’t buy gold. If you do not have faith in them, maybe you should buy gold or silver.

If the dead cat bounce dies and the Dow drops to 5,000 in 2010, as I predict, then the price of gold and silver may die with the dead cat of the Dow, as investors cling to cash. The next question you need to answer is, “If the Dow dies and the price of gold and silver drop, what should you invest in at the bottom…stocks, gold and silver, or cash?”

I know what I will do. I will buy more gold and silver. Why? The answer is because I trust gold and silver more than Central bankers, the Oval Office, and Wall Street. Gold and silver have been real money for thousands of years.

The Lost Decade

The people I am most concerned about are the average investors who have bought their financial planner’s advice of “Invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.”

Many investors are calling the past 10 years The Lost Decade. That means those who invested for the long term in stocks, bonds, mutual funds, and cash are long-term losers. Japan has been in a Lost Two Decades.

A ‘lost decade’ means:

1. Zero job creation.
2. Zero economic gains for the typical family. Home values are down and many families owe more on their home than the home is worth.
3. Zero gains in the stock market.

Over the next few months, it is important to watch both the Dow and gold. As I write, the Dow is around 10,000 and gold is at $1,000. If the Dow breaks 7,286, the 2002 low, and continues down below 6,547, the 2009 low, watch out below. If 6,547 is broken and gold passes $2,500 an ounce, you'll have even more to worry about.

2010: The Best of Times or the Worst?

2010-01-19T01:55:00.000-08:00

2010: The Best of Times or the Worst?

“It was the best of times. It was the worst of times.”
– Charles Dickens

Is the recession over? Are happy days really here again? Paraphrasing Dickens, my answer is, “For people who are prepared, 2010 will be the best of times. For many, 2010 will be the worst of times.”

The following are a few of my predictions and reasons behind them…

Prediction #1: The real estate market will crash again.

Pictured above is a graph of mortgage resets. In simple terms, a mortgage reset is when a mortgage comes due. In normal times, refinancing was a simple process…but these are not normal times. Some points of interest:

1. In September 2008, the mortgage resets hit $35 billion that month. That was the exact time the financial crisis hit. When people could not afford to refinance and began to default, the stock market and banking industry crashed.

2. The eye of the storm: In the summer of 2009 mortgage resets were low -- around $15 billion a month. This is when optimists began to see “green shoots” in the economy. The green shoots were the eye of the storm. In 2010, as I see it, the second half of the financial hurricane hits. By late 2011, the resets climb to nearly $40 billion a month. The storm will not end until 2012.

3. The first half of the storm was primarily due to subprime defaults. The second half of the storm will hit more solid homeowners. The question is, can they weather the storm? Will Mac Mansion foreclosures be next?

4. In America, there are over 40 million people who own more than two homes. Can they afford to carry and refinance two or more mortgages?

5. Since home values have gone down, many homeowners will find they owe more than their home(s) are worth. Will the bank be kind to them?

6. The time for using your home as an ATM is over. This is crushing retailers and retail real estate. Shopping centers are in trouble. Strip malls are empyting as shopkeepers close -- permanently. This will lead to the crash of the office, warehouse, and other commercial properties.

My prediction: Obviously these are the best of times if you are a buyer of distressed properties and the worst of times if you are a seller.

Other things I am watching for in 2010:

1. Will China crash? America’s crash has hit China in the gut. The Chinese are laying off millions of workers. Only massive government bailout is keeping the economy afloat. The Chinese boom will eventually go bust…but will it bust in 2010? Only time will tell.

2. When America stopped importing from China, China stopped importing from the rest of the world. This affects Asian countries as well as Australia, Brazil, and other suppliers of raw materials.

3. Fed Chairman Ben Bernanke is replacing toxic debt with new debt. By protecting his friends in the mega-banks, he is turning the U.S. into a zombie nation. The recession is over, but America is entering an era we will be calling The New Depression, a period when the rich become extremely rich but everyone else becomes poorer. Taxes will kill anyone working for a paycheck.

4. The U.S. dollar will grow weaker. If the dollar strengthens, we will have more unemployment because our goods become too expensive and we will export less.

5. The deficit will increase. The bailouts for the rich are killing the economy.

6. Israel may attack Iran. Israel will not tolerate Iran developing nuclear power, even if Iran claims it is for peaceful purposes. If there is an attack, oil prices will go through the roof.

7. Dead cat bounce. The current stock market rally will probably turn into a dead cat bounce. If the Dow drops below 6500, 5,000 may be the next stop.

The Best of Times

I know I sound painfully pessimistic. I know my predictions are bad news for most people. Yet, for others, bad news is good news.

The following are the bright spots for people who are prepared.

Prediction #2: Gold, silver, and oil will continue to be safe investments in 2010.

The following recaps the year-end prices of gold and silver:

YEAR GOLD SILVER
2000 $ 273 $ 4.57
2001 $ 279 $ 4.57
2002 $ 348 $ 4.78
2003 $ 416 $ 5.92
2004 $ 438 $ 6.79
2005 $ 518 $ 8.80
2006 $ 638 $12.78
2007 $ 838 $14.77
2008 $ 882 $11.33
2009 $1100 (approx) $17.50 (approx)

In 2009, the Dow rose approximately 18%. Gold rose approximately 25%. Silver rose approximately 50%.

By the end of 2010, I predict gold will be at $1,775 an ounce, silver at $24 an ounce, and oil at $85 a barrel. If Israel attacks Iran, these predictions will be blown away.

Prediction #3: The next market to crash will be commercial real estate.

Cash flow positive real estate will be even more affordable. 2010 through 2012 will be a real estate buffet for those with cash and access to credit.

My Personal Investments

As I stated in 2002, “You have up to the year 2010 to become prepared.”

The following are things I have done to prepare myself:

1. I started The Rich Dad Company in 1997 because I saw this crisis coming. For the past three years, I have tightened internal controls and prepared for global expansion via a franchise distribution system. The company is debt free with strong income.

2. 2009 was my best real estate year to date. With the Fed handing out large sums of money and pension funds looking for projects to invest in, my real estate holding company has acquired tens of millions of dollars for acquisition of bankrupt properties and development projects. Development projects are affordable again, as labor, material, and land costs are low and the government is generous with 40-year, low interest, non-recourse loans. People still need a roof over their heads.

3. My oil development projects have done well. We drilled three wells and hit oil on two of them. Government tax breaks for oil exploration remain generous, even for dry holes. Even if the economy crashes, we will still burn oil.

4. I took 90% of my money out of the stock market in 2007. If the Fed raises interest rates, the stock market and real estate market will collapse.

5. I loaded up on gold and silver between 1996 and 2004.

6. With the Fed printing trillions of dollars, cash is trash and savers are losers. As soon as I have excess cash I invest in oil, real estate, gold, and silver.

7. In a zero-interest-rate environment, debtors are winners…but only if you have good debt…debt that’s paid by tenants.

In Conclusion

A few years ago, Japan was ‘King of the Financial World.’ Japan’s economy was the world’s second largest economy -- till the bubble burst in 1990. Japan’s budget went into deficit in 1993. Since then, the deficit has averaged 5.4 percent of GDP per year. As a result, Japanese government debt is now 200 percentof GDP today. The U.S. is following Japan, and China will follow the U.S.

We will not see much inflation because the Fed is not able to print enough money to replace the losses from the burst of the credit bubble. Also, factories have too much excess capacity due to lack of demand, which means prices for consumer goods will remain low and unemployment will remain high. Instead, we will see inflation in gold, silver, oil, some stocks, some real estate sectors, and food -- not because values are going up but because the dollar is going down.

Welcome to The New Depression. And may these times be the best of times for you.

The Biggest Scam Ever

2010-01-17T20:41:00.000-08:00

The Biggest Scam Ever

On the cover of the October 19, 2009 issue of "Time" magazine ran this headline: "Why It's Time to Retire the 401(k)." The cover picture was ominous, showing a 401(k) sinking like the Titanic.

I recommend reading this entire article, especially if you do have a 401(k). My concern is that the flaws of this retirement plan will grow into personal tragedies as the first of approximately 75 million baby boomers retire, leading to the biggest stock market crash in history.

But in spite of the apparent problems with the 401(k) plan, the darlings of financial media continue to tout its benefits. The same month "Time" ran its article, "More" magazine's financial guru, Jean Chatzky, wrote an article about using low-interest savings to pay off high-interest credit cards. In the article she states, "There's no better guaranteed return on your money (except, perhaps, a 401(k) match)."

Countering Jean's wisdom of "no better guaranteed return," the "Time" article stated, "At the end of 1998, the average 401(k) balance was $47,004. By the end of 2008, the average balance was down to $45,519." If that is a great guaranteed return, I'm glad I don't have a 401(k). The "Time" article pointed out that $100 in 1998, after inflation, was worth about $73 in 2008, a loss of $27 after ten years. So whom do you believe..."Time" or "More" magazine?

If you are unsure as to whom (and what) to believe, the "Time" article made two more statements worth considering. They are:

1. "The older you are the riskier a 401(k) gets."

2. "Forty-four percent of all Americans are in danger of going broke in their post-work years."

Now, I can hear some of you saying, "But the stock market is going back up. Green shoots are appearing. Everything is fine. The crash was just a correction." For those optimists among you: I wish that all of your dreams come true and you live happily ever after.

I do not criticize the 401(k) plans just to criticize. I write because I am concerned. Let's say "Time" magazine's estimates are correct. Let's say 44 percent of all Americans will go bankrupt after retirement. For approximately 75 million baby-boomers preparing to retire, that means 33.8 million of them will go bust once they stop working. To me, this is disturbing.

While many think the financial crisis is over, I believe the worst is yet to come. In spite of the green shoots in the stock market, the fundamentals of the U.S. government are worsening. I doubt Social Security can afford the avalanche of retiring baby boomers. The Social Security fund is empty, underfunded by approximately $10 trillion. For the first time in 35 years, Social Security will not pay a cost of living increase. And Medicare is projected to face a shortfall as well, of between $65 and $85 trillion.

In 2009, interest payments on our national debt are about $380 billion, which is $1 billion a day in interest. At the same time, the national debt is projected to climb to $20 trillion by 2012, which means the U.S. will have to borrow money just to make the interest payments.

I know the Federal Reserve Bank can continue to print more and more money...but city and state governments cannot. This means your city and state taxes will have to go up. If you think your property taxes are high now, just wait five years. I predict that, even if your home's value does not go up, property tax rates will, and higher taxes will do wonders for property values. This means people counting on their home as their biggest asset may be disappointed.

In 1913, when the Fed was created, and in 1971, when President Richard Nixon took the U.S. off the gold standard, the ultra rich were allowed to siphon off our wealth -- via our own money, the very thing we work hard for and do our best to save. In other words, with every dollar the Fed prints, our wealth is being drained via increased taxes, debt, inflation, and savings.

A Cash Heist

There are four expenses that keep the poor and middle class struggling financially. They are:

1. Taxes -- both apparent and hidden

2. Debt -- mortgages, credit cards, and student loans.

3. Inflation -- rising food and fuel costs

4. Retirement plans -- 401(k) and savings

It is via these four expenses that the rich get richer. In other words, all four of these expenses are a cash heists, the ways the rich use the government to get into our pockets, draining us of our wealth.

The Silver Lining

The silver lining of all this: With a more sophisticated financial education, rather than have taxes, debt, inflation, and retirement accounts as drains on a person's wealth, a person can convert those government-sponsored expenses into elements that work in one's favor. By using the same rules of money the rich use, those four expenses will make you richer. In other words, taxes, debt, inflation, and not needing a retirement plan can make you richer if you use different rules of money. As stated earlier, in 1971 Nixon changed the rules -- and so should you.

In closing, the 401(k) has a few good points...but not good enough, in my opinion, given the financial challenges that lie ahead.

How the Financial Crisis Was Built Into the System

2009-11-06T02:02:00.000-08:00

How the Financial Crisis Was Built Into the System

How did we get into the current financial mess? Great question.

Turmoil in the Making

In 1910, seven men held a secret meeting on Jekyll Island off the coast of Georgia. It's estimated that those seven men represented one-sixth of the world's wealth. Six were Americans representing J.P. Morgan, John D. Rockefeller, and the U.S. government. One was a European representing the Rothschilds and Warburgs.

In 1913, the U.S. Federal Reserve Bank was created as a direct result of that secret meeting. Interestingly, the U.S. Federal Reserve Bank isn't federal, there are no reserves, and it's not a bank. Those seven men, some American and some European, created this new entity, commonly referred to as the Fed, to take control of the banking system and the money supply of the United States.

In 1944, a meeting in Bretton Woods, N.H., led to the creation of the International Monetary Fund and the World Bank. While the stated purposes for the two new organizations initially sounded admirable, the IMF and the World Bank were created to do to the world what the Federal Reserve Bank does to the United States.

In 1971, President Richard Nixon signed an executive order declaring that the United States no longer had to redeem its paper dollars for gold. With that, the first phase of the takeover of the world banking system and money supply was complete.

In 2008, the world is in economic turmoil. The rich are getting richer, but most people are becoming poorer. Much of this turmoil is directly related to those meetings that took place decades ago. In other words, much of this turmoil is by design.

Power and Domination

Some people say these events are part of a grand conspiracy, and that might well be. Some people say they represent the struggle between capitalists, communists and socialists, and that might be, too.

I personally don't participate in the debate over a possible global conspiracy; it's a waste of time. To me, the wider struggle is for power and domination. And while this struggle has done a lot of good — and a lot of bad — I just want to know how to avoid becoming its victim. I see no reason to be a mouse trying to stop a herd of elephants from fighting.

Currently, many people are suffering due to high oil price, the slowdown in the economy, loss of jobs, declines in home values, increased bankruptcies and businesses closings, savings being wiped out, the plummeting stock market, and rising inflation. These realities are all direct results of this financial power struggle, and millions of people are its victims today.

An Extreme Example

I was in South Africa in July of this year. During my television and radio interviews there, I was often asked my opinion on the world economy. Speaking bluntly, I said that South Africans had a better opportunity of comprehending the global turmoil because they're neighbors to Zimbabwe, a country run by Robert Mugabe.

In my interviews, I said, "What Mugabe has done to Zimbabwe, the Federal Reserve Bank and the IMF are doing to the world." Obviously, my statements disturbed many of the journalists. I did my best to comfort them and assure them I was not an anarchist. I explained, as best I could, that Zimbabwe was an extreme example of an out of control power struggle.

After they were assured I was only using Zimbabwe to illustrate my point, I said, "If you want to understand the world economy, take a refugee from Zimbabwe to lunch." I advised them to ask the refugee these questions:

1. How fast did the economy turn?

2. When did you know that you were in financial trouble?

3. When did you finally decide to leave Zimbabwe?

4. If you could do things differently, what would you have done?

Three Approaches to a Crumbling Economy

I spoke to three young couples from Zimbabwe while I was in South Africa. Two couples were recent refugees now living in South Africa, and one couple still lives in Zimbabwe. All three couples had interesting stories to tell.

One couple said that they would have quit their jobs earlier. Instead, they hung on, hoping the economy would change. Then, virtually overnight, the value of the Zimbabwean dollar dropped and inflation went through the roof. Even though they received pay raises, the couple couldn't survive and soon depleted their savings. They left Zimbabwe by car with almost nothing. If they could've done something differently, they told me, they would have started a business in Zimbabwe and began exporting products to South Africa, so that they would have had South African currency and a bank account there before they fled.

The second couple that fled the country said they saved money and paid off their house and other debts even as the Zimbabwean dollar fell in value. Looking back, they say they would've saved nothing and gotten deeply in debt in Zimbabwe, allowing them to pay off their debt with the cheaper dollars. Instead, they fled after they lost their jobs, leaving behind their house and owning $200,000 in nearly worthless Zimbabwean dollars.

The third couple still lives in Zimbabwe. When they saw the writing on the wall, they set up a business in South Africa and, with the profits, began acquiring tangible assets in Zimbabwe. Often, they'll buy an asset in Zimbabwe and pay the seller in South African currency. They believe that once Mugabe is gone and order is restored, they'll be in a strong financial position.

Many Problems, Few Solutions

There are three major problems with the events of 1913, 1944, and 1971. The first is that the Fed, the World Bank, and the IMF are allowed to create money out of nothing. This is the primary cause of global inflation. Global inflation devalues our work and our savings by raising the prices of necessities.

For example, when gas prices soared, many people said that the price of oil was going up. In reality, the main cause of the high price of oil is the decreasing value of the dollar. The Fed, the World Bank, and the IMF, like Zimbabwe, are mass-producing funny money, thereby increasing prices and devaluing our quality of life.

The second problem is that our economic crises are getting bigger. In the 1970s, the Fed faced and solved million-dollar crises. In the 1980s, it was billion-dollar crises. Today, we have trillion-dollar crises. Unfortunately, these bigger crises mean more funny money entering the system.

Apocalypse Soon

The third problem is that in 1913, the Fed only protected the large commercial banks such as Bank of America. After 1944, the Fed, the World Bank, and the IMF began bailing out Third World nations such as Tanzania and Mexico. Then, in 2008, the Fed began bailing out investment banks such as Bear Sterns, and its role in the Fannie Mae and Freddie Mac debacle is well known. By 2020, the biggest of bailout of all will probably occur: Social Security and Medicare, which will cost at least a $100 trillion.

Even if we find more oil and produce more food, prices will continue to rise because the value of the dollar will continue to decline. The dollar has lost over 90 percent of its value since the Fed was created. The U.S. dollar will continue to decline because of those seven men on Jekyll Island in 1910.

Granted, the funny-money system has done a lot of good — it has improved the world and made a lot of people rich. But it's also done a lot of bad. I believe somewhere between today and 2020, the system will break. We're on the eve of financial destruction, and that's why it's in gold I trust. I'd rather be a victor than a victim.

Taking Steps to Prepare for the Worst

2009-10-07T19:41:00.000-07:00

Taking Steps to Prepare for the Worst

In Sunday school I was taught the parable of the pharaoh of Egypt and his dream of seven fat cows being eaten by seven skinny cows. Deeply disturbed, the pharaoh sought the interpretation of his dream. A young slave boy interpreted the dream to mean Egypt would have seven years of plenty to be followed by seven years of famine. The message: Prepare for the lean years during the years of plenty. The pharaoh prepared Egypt for the lean years and led it into an era of prosperity.

My rich dad used the story of the three little pigs to make a similar point. As you know, one pig built his house out of straw, the other of sticks. Once the first two pigs finished their houses they began to party, taunting and laughing at the third pig who was taking longer, building his house of bricks. After the house of bricks was finished, a big bad wolf appeared and blew down the houses of straw and sticks. If not for the shelter of the house of bricks, the first two pigs would have been pork dinner.

In 2007 a big bad wolf known as the ‘subprime crisis' blew down financial houses made of straw and sticks, houses known as Lehman Brothers, Bear Stearns, AIG, Merrill Lynch, Washington Mutual, Fannie Mae, and Countrywide -- as well as the homes and businesses of people who built their lives on straw and sticks.

Lessons of the Pharaoh

Last month's column was about reasons why people should prepare for the worst. This article is about how to prepare for the worst. Preparation begins with understanding the lessons of the pharaoh and the three little pigs: Prepare for the worst even when times are good.

For me, it was not easy to follow these lessons, especially during the boom years. It was tough preparing for bad times while my friends were enjoying the good times. It was tough not to climb the corporate ladder seeking higher pay and job security or chasing financial fads such as flipping real estate, day trading stocks, gambling on dotcom companies, investing in mutual funds, or using my home as an ATM to pay off my credit cards. Today, many of my fellow baby boomers who enjoyed the boom years are concerned about survival in the lean years.

In 1973, returning from the Vietnam War, I found my dad, in his fifties and in the prime of his life, unemployed. Although a highly educated, honest, hard-working man -- and former superintendent of education for the state of Hawaii and Republican Party candidate for Lt. governor of the state - he was sitting at home, looking for work. My dad's situation, combined with my experience of the war, was my wake-up call. I knew something was wrong, but I did not know what was wrong.

The stories of the pharaoh and the three little pigs danced in my head. I knew I had to prepare, but for what I did not know. I just knew I could not follow my dad's advice, which was to fly for the airlines or go back to school and get my PhD. My instincts, sharpened by the war, knew his advice was not right for me. I decided to follow in my rich dad's footsteps, not my poor dad's.

One Path to Take

The following are some of the steps I took to prepare for the worst. I do not recommend my path; I will simply state why I did what I did and what benefits were gained.

1. I became an entrepreneur, not an employee. This was a tough choice. I did not have the skills, experience, or financial backing to support me through the lean years and my mistakes...and there were many lean years and mistakes. Many of the businesses I started failed.

Thirty-six years later, I own a number of businesses and employ hundreds of people all over the world. Some of the benefits: A) I make more money and pay less in taxes because I provide jobs, and that is what this economy needs -- more jobs. When President Obama speaks about raising taxes on the rich, he speaks about high-income employees and small business owners, not entrepreneurs who build big businesses. As you know today, many big businesses are doing better as small businesses crumble. B) I can start new businesses as the economy changes and new opportunities appear. C) I can start businesses in different countries when new opportunities appear. D) I am not afraid of losing my job. E) My income goes up as my business grows.

The good news is that it is easier to be an entrepreneur today. The Web and new technology offer more opportunities to reach a world market at a lower price. Today a person can start a business at home and reach the world market.

2. I invest for cash flow, not capital gains. Most people invest for capital gains. These are the people who have lost a lot of money or are afraid of losing more money. When a person says, "My house has appreciated in value" or "The stock market is going up," they are investing for capital gains. Investing for capital gains is like building a house of straw or sticks.

In 1973 I took a real estate course to learn how to invest for cash flow. Even though the real estate market crashed in 2007, my rental properties continue to produce cash flow. Even though banks are not lending money to many homeowners, the government continues to loan millions, via the FHA, to investors who provide housing. This means we receive tax breaks and use debt -- other people's money -- to increase income.

The good news is, when prices crash, cash flow investments become more affordable. For example, stocks such as Johnson & Johnson, a company that pays a steady dividend (cash flow), become more affordable. If you want to start your real estate career, now is the time to invest for cash flow.

3. I invest for inflation. In 1971 President Nixon took the world off the gold standard, which means the world's central banks can print as much money as they want. I was in Vietnam in 1972 and saw what happens when people do not trust paper money. Rather than try to live below my means and save money, I invest in gold, silver, and oil -- commodities that go up in price as the government prints more money.

When investing for inflation, I am not investing for cash flow. In this case, I am investing to protect my wealth from the predatory practices of the Federal Reserve Bank, the U.S. Treasury, and the ultra rich manipulating the world economy.
China does not trust the U.S. dollar. Today China is using U.S. dollars to buy commodities such as oil, copper, gold, and silver. The good news is silver is still inexpensive. In 2007 gold was approximately 50 times more expensive than silver. In 2009 the gap is 70 times -- which means silver is a bargain.

Silver is used in the electronics industry and is consumed daily; stock piles of silver are dwindling. On top of that, for the first time in modern history, there is more gold in the world than silver. In other words, silver is more valuable than gold. The good news is, at less than $20 an ounce, almost anyone can afford to start preparing for the worst and building their own house of silver.

In conclusion: My mom and dad lived through the last depression. They knew lean years. The baby boom generation is about to have their fat cows eaten by skinny cows. The good news is, if you can thrive when times are bad, these are the best of times.

The Root of All Evil

2009-09-21T02:53:00.000-07:00

Current Reading

Online Exclusive Chapter – The Four Main Causes of Negative Emotions, #4

Read a sample from the book

The Root of All Evil

Is the love of money the root of all evil? Or, is it the ignorance of money?

What did you learn about money in school? Have you ever wondered why our school systems do not teach us much—if anything—about money? Is the lack of financial education in our schools simply an oversight by our educational leaders? Or is it part of a larger conspiracy? Regardless, whether we are rich or poor, educated or uneducated, child or adult, retired or working, we all use money. Like it or not, money has a tremendous impact on our lives in today's world.

Changing the Rules of Money

In 1971, President Richard Nixon changed the rules of money: Without the approval of Congress, he severed the U.S. dollar's relationship with gold. He made this unilateral decision during a quietly held two-day meeting on Minot Island in Maine, without consulting his State Department or the international monetary system.

President Nixon changed the rules because foreign countries being paid in U.S. dollars grew skeptical because the U.S. Treasury was printing more and more money to cover our debts, and they began exchanging their dollars directly for gold in earnest, depleting most of the U.S. gold reserves. The vault was being emptied because the government was importing more than it was exporting and because of the costly Vietnam War. As our economy grew, we were also importing more and more oil.

Preparing for the Worst

2009-08-27T01:54:00.000-07:00

Preparing for the Worst

"Is the crisis over?" is a question I am often asked. "Is the economy coming back?"
My reply is, "I don't think so. I would prepare for the worst."

Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.

The stock market has been going up since March 9, 2009. Talk of "green shoots" fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:

1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.

Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking... and I don't blame them. A global panic would be ugly and dangerous.

2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.

Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.

In the 1980s, our government's hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.

While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, "Sometimes the cure is worse than the disease." I say the government stimulus cure is killing us frogs.

3. Old frogs don't hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years -- their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.

The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.

4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it's my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare...Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.

5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they're concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.

The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.

The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker's money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares ¬-- and pay their pound of flesh.

Demographics show that we are entering a battle between young and old. I call it the "Age War." The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.

This war is not coming...it is upon us now. This is one of many reasons why I remain cautious and say, "The worst is yet to come."

Investors: Don't Be Average

2009-07-11T03:44:00.000-07:00

Investors: Don't Be Average

I am often asked, "What advice do you have for the average investor?" My reply is, "Don't be average."

Most of us know of the 80/20 rule. That rule is a good rule for averages. And in the world of money, the rule is 90/10. This means 90 percent of the people make 10 percent of the money and 10 percent of the people make 90 percent of the money.

This 90/10 rule holds true in almost anything financial. Take the game of golf, for example. Ten percent of the professional golfers make 90 percent of the money.

Taking the ratio to the next level, the top 10 percent of professional golfers make 90 percent of the money. Just look at Tiger Woods. When you compare his winnings plus endorsements, he is in a league unto himself.

Last year, my wife Kim was invited to play in a pro-am as part of a professional Tour event in New York. (No, they did not invite me...) Kim is pretty good and was the only woman in a field of around 300 golfers. I was a proud husband as she confidently walked alone to the women's tee. Without hesitation, she placed her ball on the tee, took a clean back swing, and swung her club.

She out-drove two of the men in her five-some. Bruce Vaughn, the professional golfer in the group, rushed up to congratulate her. The men amateurs were also complimentary. I could tell they were relived to have a much better than average "woman golfer" in their group. Kim hits her drives longer than most men, myself included.

Tough Way to Earn a Living

The tournament was the first time I got to see the real life of a professional golfer. It is a tough life. It is not the glamour I thought it was. If a professional did not make the cut, they simply moved on to the next tournament in some faraway city...and teed up again. They do not stay for the tournament. They pay for their own transportation, lodging, food, and fees. They are on the road, away from their families for months at a time. Even those who make the cut and play on the weekend have no guarantee of enough earnings to offset expenses. It's a tough way to earn a living.

Like professional golfers, who live and die by the ‘money list,' money is how I keep score. It's my score card, my report card as an investor. It's how I tell how well -- or how poorly -- I'm doing. My rich dad said, ‘Making money is my game.' It's my game, too. And that's why I have so much respect for professional golfers... their livelihood depends upon how well they play the game -- as professionals.

In the world of golf there are average and professional golfers. The same is true with investors. The problem with being an average golfer or investor is that average people rarely make any money. Many average investors are in financial trouble today because they are simply that: average. They never turned pro.

When the financial crisis began in 2007, the professional investors were already out (or getting out) of the market. The average investors did as they were told, which is to invest for the long-term, hanging on tight as the Dow plunged from 14,000 to below 7,000, a 50 percent loss in value. Many real estate flippers and homeowners enjoyed the same wild ride.

Tragedy of the Average Investor

The tragedy is that many amateur investors are still clinging to their losses. They hope the market will bounce back. Amateurs are still following the advice of "invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds." Or they continue to believe "your home is your biggest investment." That is subprime advice for subprime investors.

It seems to me that more people keep track of their golf scores than keep track of their money... their ‘financial' scores. That's why they're amateurs... in the money game.

Even after the crash, the same subprime financial advice continues to be dished out in magazines, newspapers, and on television. Subprime advice continues to flow from real estate and stock market professionals who are not professional investors. They are professional sales people. They live on commissions -- not ROI, the returns on their investments. If they do not sell, they do not eat.

If you're going to turn pro, you will need to upgrade your financial advice. Why continue to invest for the long term while the market is crashing? Why continue to diversify when diversification did not protect investors from the crash?

In 1974, as I was leaving the Marine Corps, I decided I wanted to become an entrepreneur and investor. In other words, I did not want a job with a 401(k). That meant I had to become street smart, rather than school smart. It meant I needed a different set of life skills and better financial mentors if I were to survive on the street.
Just like the life of the pro golfers, there were long stretches of losses, no wins, no money or security.

In early 1985, things got so bad that Kim and I were temporarily homeless. I still remember leaving her in San Diego with only $2 for the week, while I traveled to Australia to put a deal together. Somehow we survived the year. In December of 1985 we finally made $1,500 after a year's worth of losses. That year was a great qualifying school. Today, even in this tough economy, our investments continue to grow. This crisis is a good time for professionals and a bad time for amateurs.

Not Good Enough

Years ago, I asked my rich dad, "What is the difference between a professional and an amateur?" His reply was, "Professionals know their best is not good enough. They always want to do better." He paused before continuing and said, "When someone says, ‘I'll do my best' or ‘I'll give it my best shot' or ‘I'll try,' they've already lost. Those are not words of a winner."

In the world of ‘the best,' your best is never good enough. If you're going to be a winner in life, you have to constantly go beyond your best. Most people are happy being average. Most are happy being faceless in a sea of faces. That's why 10 percent always win 90 percent of the rewards. I get up every day, grateful for what I have accomplished, yet looking forward to doing better. I want do better than my (previous) best everyday. It's not about the money anymore. I have enough money. I just love the game of making money.

Today I give most of my money away...but I will not give up the game of money. I play the game because the game is always better than me...and my best will never be good enough. I continue to work hard to become better at a game I love.

I once read a book on golf that said, "People say amateurs play for the love of the game and professionals play for money. That is not true. Amateurs are amateurs because they do not love the game enough. When it is cold and rainy, a professional golfer will play. The amateur will not. When they are sick, the professional will play. The amateur stays in bed. When they are losing, the professional will practice harder and enter more tournaments. The amateur will quit and take up tennis."

It matters little if the game is golf, tennis, or money. Ten percent of the people will always make 90 percent of the money. When the markets began crashing in 2007, the money did not disappear. Ninety percent of the money went to 10 percent of the investors.

A financial crisis is a great time for professional investors and a horrible time for average ones. If you're going to invest, don't be average. It's time to turn pro... or take up tennis.

Why the Cheap Will Never Get Rich

2009-04-08T06:52:00.000-07:00

Why the Cheap Will Never Get Rich

The other day a friend of mine approached me excitedly, saying, "I found the house of my dreams. It's in foreclosure and the bank will sell it to me for a great price."
"How good is the price?" I asked.
"Just before the real estate market crashed, the seller was asking $780,000 for the property. Today, I can buy it from the bank for $215,000. What do you think?" she asked.
"How would I know?" I replied. "All you've given me is the price."
"Yes!" she squealed. "Now my husband and I can afford it."
"Only cheap people buy on price," I replied. "Just because something is cheap doesn't mean it's worth the cost."
I then explained to her one of my most basic money principles: I buy value. I will pay more for value. If I don't like the price, I simply pass. If the seller wants to sell, he will come back with a better price. I let him tell me what he will accept. I know some people love to haggle; personally, I don't. If a person wants to sell, they will sell. If I feel what I am buying is of value, I'll pay the price. Value rather than price has made me rich.
Against my advice, my friend sought financing for her "dream" home.
Fortunately, the bank turned her down. The house was on a busy street in a deteriorating neighborhood. The high school four blocks away was one of the most dangerous schools in the city. Her son and daughter would either have to go to private school or take karate lessons. She is now looking for a cheaper house to buy and has asked her father, who is retired, for help with the down payment. If her past is a crystal ball to her future, she will likely always be cheap and poor, even though she is a good, kind, educated, hard-working person.
My Point of View
What follows are some thoughts on why my friend will probably never get ahead financially -- especially in this market.
1. She and her husband have college degrees but zero financial education. Even worse, neither plans to attend any investment classes. Choosing to remain financially uneducated has caused them to miss out on the greatest bull and bear markets in history. As my rich dad often said, "What you don't know keeps you poor."
2. She is too emotional. In the world of money and investing, you must learn to control your emotions. When you think about it, three of our biggest financial decisions in life are made at times of peak emotional excitement: deciding to get married, buying a home, and having kids.
My dad often said, "High emotions, low intelligence." To be rich, you need to see the good and the bad, the short- and long-term consequences of your decisions. Obviously, this is easier said than done, but it's key to building wealth.
3. She doesn't know the difference between advice from rich people and advice from sales people. Most people get their financial advice from the latter -- people who profit even if you lose. One reason why financial education is so important is because it helps you know the difference between good and bad advice.
As the current crisis demonstrates, our schools teach very little about money management. Millions of people are living in fear because they followed conventional wisdom: Go to school, get a job, work hard, save money, buy a house, get out of debt, and invest for the long term in a well-diversified portfolio of mutual funds. Many people who followed this financial prescription are not sleeping at night. They need a new plan. Had they sought out a little financial education, they might not be entangled in this mess.
A Thank You to Jon Stewart
Speaking of finance experts, I personally want to thank Jon Stewart of 'The Daily Show' for taking on Jim Cramer and CNBC. Jon Stewart did an incredible job of representing the millions of people all over the world who have lost their savings in the market. He was right in saying he thought it "disingenuous" to advise people to invest for the long term through their retirement plans while knowing full well that traders could steal Americans' retirement money by trading in and out of the market. Most traders like Cramer realize that investing in mutual funds for the long term is financial suicide. Cramer should have spoken up, but we all know why CNBC won't let him tell the truth. If he did, the station's advertisers would leave.
While I applaud Cramer for going on 'The Daily Show' and facing the music, I'm afraid he was marginalized by Stewart -- certainly outgunned -- and he has lost his credibility. He may pay an even bigger price if the SEC decides to dig deeper.
Jim Cramer is a very smart man. I watch his show. I just do not follow his advice.
In closing, I will say what I have said for years: We need financial education in our schools. Without it, we cannot tell the good advice from the bad.

Predator's Ball: Cashing In Without Getting Fleeced

2009-02-18T05:58:00.000-08:00

Predator's Ball: Cashing In Without Getting Fleeced

This will be a politically incorrect article. It may seem unkind, insensitive, and cruel given the fact that so many people are hurting financially. Many have lost their jobs, homes, retirement security, and hope. Yet -- ¬¬if you can see beyond today and let intelligence, not emotion, rule the day -- now is the time to position yourself for riches.

You see, the biggest predator's ball in history is in its planning stages and invitations are being sent out. For about a year now, friends and associates have been inviting me to join their investment pools. One friend has over a billion dollars in cash sitting on the sidelines. Last night, another friend said that a large bank had invited him to bid on their portfolio of foreclosures. The minimum price: $30 million in cash. He estimated that for that price we could acquire over a billion in distressed properties. For $1 million, I could buy a ticket to the party. I passed on the deal, saying the price was out of my league.

Many people got into trouble when times were good. For example, some of my family's friends placed all their money with a financial planner during the boom years, believing the standard sales pitch that the market goes up an average of 8 percent a year -- even though it doesn't. For over 20 years, I encouraged them to learn about investing rather than blindly turn over their money to a stranger. Today, they have lost over 45 percent of their portfolio in the last two years. They are not rich people. Now they want to know what to do.

Two Types of Predator's Balls

My point is this: There are two types of predator's balls. There are balls when times are good. My family's friends were victims of this type of exploitation -- when predators get you excited about rising markets.

For example, when real estate was soaring in price, predators known as flippers emerged and began selling houses to people at sky-high prices -- many of whom had no business buying a home.

There are also predator's balls for bad times. These take advantage of the exploitations that occurred during the good times. I like the bad-times predator's balls the best because deals are plentiful, people are humble, prices are low, and opportunities abound. I hope this party lasts for at least five years. I am investing more today than I was two years ago.

The Best of Times -- the Worst of Times

In 1859, Charles Dickens wrote in 'A Tale of Two Cities':

"It was the best of times, it was the worst of times; it was the age of wisdom; it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair ..."

For millions of people this is the dead of winter. If any of you who are reading this article are going through tough financial straits, I offer you this article and passage as encouragement to keep going -- to make the worst of times your best of times.

As the economy worsens, I am seeing a new predator's ball emerging - one for suckers. This is the ball for gold and silver. If you have been watching television lately, you will have seen ads advising people to send in their old gold jewelry for cash.
Only suckers would do that... but as you know, a sucker is born every minute. I also see ads advertising 100-percent-pure 24-carat gold-plated coins for $29.95. Obviously, the key words are gold-plated. Only a moron would invest in a gold-plated coin. The only way that person can sell that gold-plated coin is by finding another moron -- which I'm sure can be done, especially as the gold and silver markets pick up steam.

A Sign of Bad Business

In Phoenix, a businessman who was convicted on fraud charges recently opened up a new gold coin shop. He had been banned from being in the gold and silver business for ten years. His timing was good because his ten years were up and now he is sending invitations to his party. Invitations are expensive. He has prime retail space, marketing expenses related to advertising heavily on radio and television, half-page ads in newspapers, major yellow page ads, and a slick Web site. This is how predators send out invitations. Any time an investment company has to spend heavily on advertising, it's probably a bad business in which to invest. You may recall that many mutual fund and real estate companies were sending out plenty of invitations during the last stock and real estate predator's balls.

I believe that gold and silver are good investments -- but their prices are at all-time highs, which means it is time to be cautious, not foolish. Today, I hear financial experts on television advising people to buy gold. These are the same guys who were recommending stocks and mutual funds less than two years ago. So be very careful as the gold and silver markets begin their next climb. I am still buying gold and silver but I did most of my buying when gold was at $300 an ounce in 2000 and 2001.

Many gold and silver experts will recommend you buy numismatic coins -- rare and old coins. If you are not a rare coin expert, I'd encourage you to stay away from them. New investors often pay too much for rare coins that are not really rare. If you are new to gold or silver, I recommend you buy as close as possible to the international spot price of the metals, watching out for premiums and commissions per coin. Buy bars or blanks, rather than coins, if premiums are too high. Watch out for scams. If the person you are buying from makes you uneasy, run. Take delivery when you hand over your money. Keep coins or bars in a bank or safe.

A good book I recommend is 'Investing In Gold and Silver' by Mike Maloney. He is one of my personal advisors on the subject, and his book is worth its price in gold.

In closing, I'll leave you with this thought: Remember that when one predator's ball ends, another is starting. If you plan on attending, be sure you are a predator, not the main course.

Paying a High Price for Bad Advice

2009-01-13T17:27:00.000-08:00

Paying a High Price for Bad Advice

At this time of financial crisis, people are seeking good, relevant advice. But this can be hard to find.
The following is typical of a question you would see in a financial publication -- and its less-than helpful answer:Q: What can someone whose 401(k) is down do to rebuild their retirement savings?
A: For anyone who is at least five years from retirement, there is probably time for their investments to right themselves.
Resist the urge to take money out of a 401(k) or to stop making contributions to it. Research has shown that dollar-cost averaging -- investing at given intervals -- pays off well in times of crisis.
Check whether the wild market swings have thrown off your asset allocation -- the specific mix of stocks and bonds that makes sense for an individual's financial goals and risk tolerance. If so, then rebalance it by selling shares that are overvalued and buying those that are below optimal levels. Focus on low cost....
Blah, blah, blah.
How naive do the so-called financial experts think people are? Well, obviously, many people are that naive because millions keep listening to the same old advice again and again.
The Same Old Story
So what is wrong with those giving the advice and those following it? Now that the markets have crashed and trillions have been lost, these so-called experts continue on like mindless parrots, saying over and over again, "Polly wants you to invest in a well-diversified portfolio of mutual funds."
Don't they know the market has changed? Don't they know the global economy is contracting, not expanding? Don't they know their advice is bad regardless of whether the market is expanding or contracting? Doesn't the general public realize that most financial "experts" are not professional investors? They're either sales people or journalists -- people who earn money via commissions or a paycheck. And even the people running our biggest investment banks -- or what use to be investment banks -- are compensated via commissions or a paycheck. They are not investors. They are employees working for banks.
So my advice is, be very careful whom you take financial advice from -- and that includes me. My guidance, after all, does not work for 80 percent of the people. My suggestions are not right for those who work for a paycheck or for commissions, nor do they work for those who save money in the bank or a retirement account.
The Right Advice for the Right Audience
My advice is for people who are entrepreneurs or professional investors. I have had a "real" job for only four years of my life, which means I only collected a traditional paycheck for that very short period of time. I do not have a retirement account. If my businesses or my investments are not profitable, then I don't eat. And I like to eat.
I chose to live my life this way because this financial lifestyle keeps me honest. It also keeps me wary and very suspicious of financial experts who offer inane advice. I personally cannot live on such advice. My businesses and investments need to be profitable monthly and pay me monthly, regardless of whether the economy is expanding or contracting.
I don't live in some fairytale world with the hope that the markets will right themselves in five years. I don't keep putting money into a losing venture such as a retirement plan filled with stocks, bonds, and mutual funds. I do not live on false promises. I cannot afford to live on bad advice.
Some Serious Questions
My questions to financial journalists and others who are doling out poor counsel: "What if your advice is wrong in five years? What happens if the markets don't come back? What happens if the markets just stay flat or crash even further? What happens if the markets recover and then crash when the person following your advice is in their late eighties?"
My advice for those seeking financial advice: Look for investments that pay you monthly or quarterly, regardless of whether the markets are up or down or whether the economy is expanding or contracting. Stop listening to those pseudo financial experts with crystal balls and journalism degrees.
The following are tidbits of information to keep in mind as you consider your financial options:
1. I learned my investment philosophy at the age of nine by playing Monopoly. In the game, if I had one green house, I was paid $8. If I had two green houses, then I was paid $16.
I began playing Monopoly for real when I was 26 years old. Today my wife and I have approximately 1,400 little green houses -- each paying us monthly. You do not have to be a rocket scientist or have a Harvard degree to play Monopoly for real. Today's depressed real estate market is the best time to start buying little green houses, even if credit is tight.
In 1987 the stock market crashed. That crash was followed by the crash of the Savings and Loan industry. Those two crashes led to the crash of the real estate market. The economy stayed down from 1987 to 1995. Even though my wife and I were strapped for cash and bankers did not want to lend to small investors, we found ways of putting deals together by using seller financing and creative financing, or simply taking over properties that the bank did not want on its books.
Most financial experts discourage people from doing what I do. They often say that it is risky -- and it certainly can be. But, in my opinion, following their advice of putting money into a savings account and investing in a 401(K) is even riskier in this volatile economy.
2. Today, as the economy is contracting, cash is king. Yet because the Federal Reserve is printing trillions of Monopoly dollars in order to stop deflation, in a few years we could see a hyperinflationary period. Hyperinflation will wipe out the value of a saver's holdings and eventually destroy most mutual funds as the government begins to raise interest rates in an attempt to stem inflation. In a hyperinflationary period, gold and silver will be king.
3. I am not actually recommending gold, silver, or real estate. Assets do not make you rich. Assets can make you poor if you are not careful. In 1980 gold and silver hit all-time highs, gold hitting $800 an ounce and silver $50 an ounce. So the suckers jumped in and were slaughtered. The same thing happened with real estate in 2004.
If you do not know what you are doing, no asset can make you rich. Ultimately, what makes you rich is your financial intelligence. Your greatest asset is your brain -- so take care of it and protect it from bad advice.

How the Financial Crisis Was Built Into the System

2008-11-27T02:33:00.000-08:00

How did we get into the current financial mess? Great question.
Turmoil in the Making
In 1910, seven men held a secret meeting on Jekyll Island off the coast of Georgia. It's estimated that those seven men represented one-sixth of the world's wealth. Six were Americans representing J.P. Morgan, John D. Rockefeller, and the U.S. government. One was a European representing the Rothschilds and Warburgs.
In 1913, the U.S. Federal Reserve Bank was created as a direct result of that secret meeting. Interestingly, the U.S. Federal Reserve Bank isn't federal, there are no reserves, and it's not a bank. Those seven men, some American and some European, created this new entity, commonly referred to as the Fed, to take control of the banking system and the money supply of the United States.
In 1944, a meeting in Bretton Woods, N.H., led to the creation of the International Monetary Fund and the World Bank. While the stated purposes for the two new organizations initially sounded admirable, the IMF and the World Bank were created to do to the world what the Federal Reserve Bank does to the United States.
In 1971, President Richard Nixon signed an executive order declaring that the United States no longer had to redeem its paper dollars for gold. With that, the first phase of the takeover of the world banking system and money supply was complete.
In 2008, the world is in economic turmoil. The rich are getting richer, but most people are becoming poorer. Much of this turmoil is directly related to those meetings that took place decades ago. In other words, much of this turmoil is by design.
Power and Domination
Some people say these events are part of a grand conspiracy, and that might well be. Some people say they represent the struggle between capitalists, communists and socialists, and that might be, too.
I personally don't participate in the debate over a possible global conspiracy; it's a waste of time. To me, the wider struggle is for power and domination. And while this struggle has done a lot of good — and a lot of bad — I just want to know how to avoid becoming its victim. I see no reason to be a mouse trying to stop a herd of elephants from fighting.
Currently, many people are suffering due to high oil price, the slowdown in the economy, loss of jobs, declines in home values, increased bankruptcies and businesses closings, savings being wiped out, the plummeting stock market, and rising inflation. These realities are all direct results of this financial power struggle, and millions of people are its victims today.
An Extreme Example
I was in South Africa in July of this year. During my television and radio interviews there, I was often asked my opinion on the world economy. Speaking bluntly, I said that South Africans had a better opportunity of comprehending the global turmoil because they're neighbors to Zimbabwe, a country run by Robert Mugabe.
In my interviews, I said, "What Mugabe has done to Zimbabwe, the Federal Reserve Bank and the IMF are doing to the world." Obviously, my statements disturbed many of the journalists. I did my best to comfort them and assure them I was not an anarchist. I explained, as best I could, that Zimbabwe was an extreme example of an out of control power struggle.
After they were assured I was only using Zimbabwe to illustrate my point, I said, "If you want to understand the world economy, take a refugee from Zimbabwe to lunch." I advised them to ask the refugee these questions:
1. How fast did the economy turn?
2. When did you know that you were in financial trouble?
3. When did you finally decide to leave Zimbabwe?
4. If you could do things differently, what would you have done?
Three Approaches to a Crumbling Economy
I spoke to three young couples from Zimbabwe while I was in South Africa. Two couples were recent refugees now living in South Africa, and one couple still lives in Zimbabwe. All three couples had interesting stories to tell.
One couple said that they would have quit their jobs earlier. Instead, they hung on, hoping the economy would change. Then, virtually overnight, the value of the Zimbabwean dollar dropped and inflation went through the roof. Even though they received pay raises, the couple couldn't survive and soon depleted their savings. They left Zimbabwe by car with almost nothing. If they could've done something differently, they told me, they would have started a business in Zimbabwe and began exporting products to South Africa, so that they would have had South African currency and a bank account there before they fled.
The second couple that fled the country said they saved money and paid off their house and other debts even as the Zimbabwean dollar fell in value. Looking back, they say they would've saved nothing and gotten deeply in debt in Zimbabwe, allowing them to pay off their debt with the cheaper dollars. Instead, they fled after they lost their jobs, leaving behind their house and owning $200,000 in nearly worthless Zimbabwean dollars.
The third couple still lives in Zimbabwe. When they saw the writing on the wall, they set up a business in South Africa and, with the profits, began acquiring tangible assets in Zimbabwe. Often, they'll buy an asset in Zimbabwe and pay the seller in South African currency. They believe that once Mugabe is gone and order is restored, they'll be in a strong financial position.
Many Problems, Few Solutions
There are three major problems with the events of 1913, 1944, and 1971. The first is that the Fed, the World Bank, and the IMF are allowed to create money out of nothing. This is the primary cause of global inflation. Global inflation devalues our work and our savings by raising the prices of necessities.
For example, when gas prices soared, many people said that the price of oil was going up. In reality, the main cause of the high price of oil is the decreasing value of the dollar. The Fed, the World Bank, and the IMF, like Zimbabwe, are mass-producing funny money, thereby increasing prices and devaluing our quality of life.
The second problem is that our economic crises are getting bigger. In the 1970s, the Fed faced and solved million-dollar crises. In the 1980s, it was billion-dollar crises. Today, we have trillion-dollar crises. Unfortunately, these bigger crises mean more funny money entering the system.
Apocalypse Soon
The third problem is that in 1913, the Fed only protected the large commercial banks such as Bank of America. After 1944, the Fed, the World Bank, and the IMF began bailing out Third World nations such as Tanzania and Mexico. Then, in 2008, the Fed began bailing out investment banks such as Bear Sterns, and its role in the Fannie Mae and Freddie Mac debacle is well known. By 2020, the biggest of bailout of all will probably occur: Social Security and Medicare, which will cost at least a $100 trillion.
Even if we find more oil and produce more food, prices will continue to rise because the value of the dollar will continue to decline. The dollar has lost over 90 percent of its value since the Fed was created. The U.S. dollar will continue to decline because of those seven men on Jekyll Island in 1910.
Granted, the funny-money system has done a lot of good — it has improved the world and made a lot of people rich. But it's also done a lot of bad. I believe somewhere between today and 2020, the system will break. We're on the eve of financial destruction, and that's why it's in gold I trust. I'd rather be a victor than a victim.

As Capitalism Crumbles, U.S. Taxpayers Pick Up the Pieces

2008-09-24T06:30:00.000-07:00

As Capitalism Crumbles, U.S. Taxpayers Pick Up the Pieces

As we all know, the world changed drastically on Sept. 11, 2001, when the twin towers of the World Trade Center fell.
This year, on the eve of Sept. 11, the twin towers of Fannie Mae and Freddie Mac crumbled. Then, on Sept. 15, Lehman Brothers and Merrill Lynch disappeared. Actually, that was a triple-tower collapse if you count AIG.
In a few years, the biggest pair of towers will collapse: Social Security and Medicare. Even today, they're looking shaky. How many ground zeros can we as people, a nation, and a world withstand before we admit something is very wrong with our global financial systems? What will it take to wake us up?
Government Can't Fix It
Personally, I believe the biggest it's a problem that so many Americans are looking to this year's presidential candidates, Barack Obama and John McCain, to save our financial system. How did we become so financially weak that we surrender our economic independence to politicians? Where does it say in the Constitution that the government should solve our financial problems?
And why have so many people throughout the world come to expect financial life-support from their political leaders? It seems most people will vote for anyone who promises a chicken in every pot and a guaranteed mortgage payment.
We're in the midst of a problem neither candidate can solve: A lack of comprehensive financial education in our school systems. What else explains the economic blunders committed by our political and financial leaders? Or why so many consumers are in debt up to their eyeballs? Or why millions of people expect a quick government fix of some kind?
Under Water
A few months ago, a friend of mine from Hawaii asked me if I wanted to buy his new powerboat with twin motors. Apparently, in late 2007, he purchased it brand new for approximately $85,000. His plan was to refinance his house when it appreciated in value and use the difference to pay for the boat.
Failing to obtain new financing, he called to ask me if I would buy the boat from him -- just take over the payments and it was mine. I passed, and the bank eventually repossessed his boat. Later, his wife called to tell me he's now having problems making his mortgage payments. Apparently, my friend planned to pay for his house the same way he planned on paying for the boat, by refinancing his debt.
I mention this story because it illustrates the problem Obama or McCain face: Limited financial education and diminished financial common sense. Apparently, my and the nation's business leaders all went to same school of finance.
A Cynical Aside
If you want to know why the towers of American capitalism are crumbling, I recommend reading "The Creature from Jekyll Island" by G. Edward Griffin. It's not an easy book to find, but once you start reading it's to put down. In fact, in many ways it's a murder mystery about the financial "murder" of the middle class.
A very important lesson in the book is how political leaders use financial spin to deceive the public. The very, very rich use the system to legally steal from the rest of us by appealing to our sense of patriotism. When our leaders say, "We're bailing out Fannie Mae and Freddie Mac because we want to protect the American people," they really mean "We're saving our rich friends."
All the bankers and politicians have to do is wave the red, white, and blue, play a few bars of "Yankee Doodle," and the masses get teary-eyed and pledge greater allegiance to legalized robbery. Yes, it's true that ignorance is bliss -- but ignorance is also expensive, and it cost us our freedom.
Freedom at Peril
A bailout can be different things. First, printing more money is a kind of bailout that leads to higher inflation. Rather than protecting people, it makes life for the poor and middle class more expensive. The other kind of bailout is protection for our rich and incompetent friends. If you or I fail at business, we fail. If we cheat and fail, we go to jail. But if you're rich and politically connected, your incompetence may be protected by a government bailout.
As a former Marine and a Vietnam War veteran, it saddens me to see some of the freedoms I thought I went to war to protect being stolen from us by bankers and politicians. Unfortunately, few Americans know the difference between the words "nationalize" and "socialize." Socialize means we turn more of our personal powers over to Big Brother, not free enterprise. It means we as a people grow weaker and need a higher power -- the same power that got us into this mess -- to protect us.
In short, when the towers of Fannie, Freddie, Merrill, Lehman, and AIG came crashing down, more came down than just money. What we're losing is the very freedom this country was founded on, and what most of the world yearns for.

When Pessimism Prevails, It's Time to Get Rich

2008-07-23T08:05:00.000-07:00

When Pessimism Prevails, It's Time to Get Rich

If you're serious about getting rich, now is the time. We've entered a period of mass-produced pessimism, when bad news is everywhere, and the best time to invest is when optimists become pessimists.
The Weird Turn Pro
Journalist Hunter S. Thompson used to say, "When the going gets weird, the weird turn pro." That's true in investing, too: At the height of every market boom, the weird turn into professional investors. In 2000, millions of people became professional day traders or investors in dotcom companies. Mutual funds had a record net inflow of $309 billion that year, too.
In an earlier column, I stated that it was time to sell all nonperforming real estate. My market indicator? A checkout girl at the local supermarket, who handed me her real estate agent card. She was quitting her job to become a real estate professional.
As a bull market turns into a bear market, the new pros turn into optimists, hoping and praying the bear market will become a bull and save them. But as the market remains bearish, the optimists become pessimists, quit the profession, and return to their day jobs. This is when the real professional investors re-enter the market. That's what's happening now.
Pessimism vs. Realism
In 1987, the United States experienced one of the biggest stock market crashes in history. The savings and loan industry was wiped out. Real estate crashed and a federal bailout entity known as the Resolution Trust Corporation, or the RTC, was formed. The RTC took from the financially foolish and gave to the financially smart.
Right on schedule 20 years later, Dow Industrials and Transports struck their last highs together in July 2007. Since then, nothing but bad news has emerged. In August 2007 a new word surfaced in the world's vocabulary: subprime. That October, I appeared on a number of television shows and was asked when the market would turn and head back up. My reply was, "This is a bad one. The worst is yet to come."
Many of the optimistic TV hosts got angry with me, asking me why I was so pessimistic. I told them, "The difference between an optimist and a pessimist is that a pessimist is a realist. I'm just being realistic."
As we all know, things only got worse in early 2008, with the demise of Bear Stearns and the Federal Reserve stepping in to save investment bankers. In February, many of those optimistic TV (and print) reporters became pessimists -- and when journalists become pessimists, the public follows. By March, mutual funds had a net outflow of $45 billion as investors fled the market.
Surviving the Bad Times
Back in 1987, as savings and loans closed and investors' stock and real estate portfolios were wiped out, my wife, Kim, and I were living in Portland, Ore. Many people were depressed and hiding from the truth. The following year, I said to Kim, "Now is the time for you to begin investing."
In 1989, she purchased a two-bedroom, one-bathroom house for $45,000, putting $5,000 down and earning $25 a month in positive cash flow. Today, she owns over 1,400 units and -- because more people are renting than buying -- she earns hundreds of thousands a year in positive cash flow.
The period from 1987 to 1995 was a rough one, even for the rich. In his book "The Art of the Comeback," my friend Donald Trump writes about being a billion dollars down at the time. Rather than give up, he kept on fighting to survive. He and I often talk about how that period was great for character development.
Two-Year Warning
I believe we're through the worst of the current bust. I know there will be more aftershocks, and the news will continue to be pessimistic for at least two more years, possibly until the summer of 2010.
But the upside to this is that it gives us at least two years to do our market research and find the next big stock or real estate bargain. Before buying, I strongly suggest you study, read books, and take courses on your asset of choice. If your choice is stocks, take a course on stocks or options. If it's real estate, take a course on real estate. Now is the time to learn; not only will you know more than the average person and be in a good position when the market turns, but you'll also meet people with a similar mindset.
You have about two years to get into position. Opportunities this big don't come along often, so this is your time to get rich.
Climbing Bulls, Flying Bears
Am I optimistic for the long-term? Absolutely not. I still believe we're due for the mother of all market crashes, and that the U.S. economy is running on borrowed time -- and I do mean borrowed. I think most baby boomers are in serious financial trouble, and that oil will climb above $200 a barrel. Inflation will also increase, causing more pain for the poor and middle class.
The Fed is flooding the market with nearly a trillion dollars of liquidity, which is why I believe gold under $1,200 an ounce and silver under $30 an ounce are bargains. Gold and silver should peak and decline before 2020, completing two 20-year cycles. My exit is to sell silver around 2015. I plan to hold onto gold, income-producing real estate, oil wells, and stocks.
Most of us know the bull climbs slowly up the stairs, but the bear jumps out the window. I believe the bull is still climbing the stairs, and the bear hasn't jumped yet. But rest assured that it will.

Peace Through Prosperity

2008-07-02T08:15:00.000-07:00

Peace Through Prosperity

In 1972, I was flying a helicopter just south of the DMZ (the demilitarized zone), a line that separated North and South Vietnam. On that mission, my aircraft was not configured as a gunship.

Instead, my assignment that day was not to fight, but to observe the battle below and report what I saw. Unfortunately, what I saw was tragic. The North Vietnamese kicked our butts. Not only did we lose a number of aircraft, but many men lost their lives.

Tough Questions Unanswered

Back in the pilots' ready-room aboard an aircraft carrier, the debriefing began. Most of us were shaken and our spirits were low. Seeing fellow pilots shot down and men dying leave memories that can never be forgotten.

Once the debriefing was over, my commanding officer asked if there were any questions. Raising my hand, I asked, "Sir, why do their Vietnamese fight harder than our Vietnamese?"

Without waiting for his reply, I continued, "We have the most powerful military on earth. We have B-52 bombers pounding the enemy with 1,000-pound bombs. We have fighter jets dropping napalm on them. We have tanks. We have Navy battleships with 16-inch guns pounding them. We have squadrons of Army and Marine Corps helicopters armed with rockets and machine guns providing close air support. The North Vietnamese don't have much, and yet they keep coming and keep fighting."

There was a long silence in the room. I suspect some of my fellow pilots had similar thoughts. Being Marine helicopter pilots, we had a bird's eye view of the war that few others had.

"We're the richest nation on earth," I continued, "North Vietnam is one of the poorest. We give the South Vietnamese the best military support in the world, yet they're losing."

The silence continued. My original question -- "Why do their Vietnamese fight harder than our Vietnamese?" -- was never answered.

Fighting Not to Lose

Back in 1972, we all knew the Vietnam War was over. We knew the U.S. was looking for a way out. We were no longer fighting to win -- we were fighting not to lose. That made it made it almost impossible to keep fighting.

You may notice similarities with what's going on in Iraq and Afghanistan today. There are three lessons from 1972 I believe are relevant to the world today. They are:

How powerful the human spirit is.
Flying over the North Vietnamese in 1972, I was stunned at how fiercely they fought. We had all the modern weapons, but we couldn't beat them. Their spirit was unstoppable.
Today, when I hear fellow Americans complaining about their own lack of money, or how they can't afford to invest, or how middle-class America is having a tough time, I'm reminded of the North Vietnamese soldiers taking on the richest country in the world. If you've lost your spirit, even living in the richest country in the world can't help you become rich.
It's tough to negotiate from a position of weakness.
It was only after the U.S. recognized we had lost the Vietnam War that we agreed to sit down at the so-called "peace table." Today, as the wars in Iraq and Afghanistan still rage, we're doing the exact same thing. In war or in business, it's disastrous to negotiate from a position of weakness.

Don't let someone else run your life.
During Vietnam, defense secretary Robert McNamara and President Lyndon Johnson called the shots from Washington rather than listening to the men on the front lines. In Iraq and Afghanistan, we have the same problem.
President Bush, Vice President Cheney, and former defense secretary Rumsfeld, all men without combat experience, are calling the shots from Washington. They're not listening to their generals with Vietnam experience, generals such as Colin Powell. It appears that our leaders place little or no value on experience.

The Spirit to Succeed

The same sort of misguided leadership occurs in the world of investing. Today, there are millions of workers who put trillions of dollars in the hands of mutual fund companies even though many of these companies have horrible track records.

Many fund managers can't even beat the S&P Index. Yet, in spite of their poor investment record, many of these managers are paid billions of dollars in bonuses -- bonuses paid for with the sweat and toil and hopes and dreams of workers.

Personally, I would rather manage my own money than let strangers control it and my future.

In 1972, I saw many young soldiers lose their lives due to incompetent leadership in Washington. Today, millions of workers' retirements are at risk due to incompetent leadership on Wall Street.

But I also witnessed the power of the human spirit while flying over Vietnam -- a spirit stronger than the mightiest military power in the world, and one that beat the richest country in the world.

Today, I see the same spirit in the world of global business. America is still the richest country in the world, but countries like China and India are coming on strong. It's estimated that China holds nearly a trillion dollars of America's debt, which is more than enough to destroy our economy.

Play to Win

Financially, there are three classes of people. The rich are those who play to win. The middle class plays not to lose.

For the middle class, financial security is more important than financial opportunity. Ironically, today there's far more financial opportunity than financial security, yet the middle class still seeks security.

The third group, of course, is the poor, who often work very hard yet have lost the spirit to compete in the world of money. Without spirit, it's tough to win financially, even in the richest country in the world.

I resigned from the Marine Corps and flying in 1974, even though I loved them both. I quit because I no longer wanted to fight for peace. Instead, I believe we can build a more sustainable peace by working for prosperity. Instead of playing games of winners and losers militarily, why not work for solutions in which all sides win financially? After all, in business, it makes no sense to kill your customers.

In closing, I believe that as the scarcity of oil increases, so will the fighting. To me, scarcity in a world of abundance means opportunities for solutions. As the saying goes, "An eye for an eye makes us all blind." Instead, I ask we work for peace and prosperity -- for all sides.

Learning from the Best

2008-07-01T08:21:00.000-07:00

Learning from the Best

Now that our book, Why We Want You to Be Rich, is out, I can tell you what working with Donald Trump has been like.

Millions of people know "the Donald" as the tough guy who says, "You're fired" at the end of The Apprentice. I've been asked often if he's that gruff in real life. The answer is yes. My experience with Donald is that he's being real whether he's on camera or off. He never pretends to be Donald Trump. He is Donald Trump.

Obviously, co-authoring a book with him has been a milestone for me -- as an author and as a businessman. Appearing on Larry King Live, The Big Idea with Donny Deutsch, The Today Show, The Early Show, and CNBC with Donald gave me more credibility in the business world.

An Unofficial Apprenticeship

Yet I gained more than just recognition and credibility. I also became a better businessman and a better person just from working with Donald over the years.

Here are a few of the ways that knowing Donald has enriched my life:

1. I got tougher.

I know many people don't like Donald because he comes across as a tough guy. That's their problem. In spending time with him, I realized that I wasn't as successful as I could be simply because I wasn't tough enough.

As a businessman, I often didn't say what I wanted to say because I was afraid of hurting someone's feelings, or of having my feelings hurt. Instead of being forthright, I would be polite. Because of my association with Donald, I took back control of my business in 2005 and 2006 and fired people who should have been let go a long time ago.

The employees I got rid of weren't bad people, they were just the wrong people for my company. Today, business is thriving and people are happier.

2. I became kinder and more respectful.

One of my problems is that I'm very impatient and get angry too quickly. I believe Donald can be the same. Yet I saw him be patient, kind, and respectful in many situations that would have caused me to lose my patience.

When I asked him about this trait, he simply said, "One of the most important lessons my parents taught me was to treat all people with respect, even if I'm angry with them." Today, in my dealings with people, I do my best to treat all people with respect -- especially if I'm angry at them. Although I haven't always been successful, I believe I've become a little kinder as a result.

3. I got richer.

My wife, Kim, and I have more than enough money. We consider ourselves rich. When we entered Donald's world, however, we saw a whole new level of rich.

There's a difference between being a millionaire and a billionaire. The Trump lifestyle -- the penthouse, mansion, limos, and 727 -- gave me a firsthand glimpse into his world, and I began to understand why he constantly talks about thinking big.

Just being around him, I began to think bigger and richer. I set my sights on becoming a billionaire and began redesigning my business to become a billion-dollar business. Today, I constantly remind my staff that my job is to make them millionaires -- and their job is to make me a billionaire.

4. I became less petty.

One day, during a meeting in Donald's office, I was complaining about someone we were doing business with. I didn't like the way we were being treated. When I asked Donald about this person and voiced my concerns, he simply said, "Don't be so petty. Sometimes you have to do business with people you don't like. It doesn't mean you have to be like them or like them."

From that, I learned to think bigger and, more important, to know the difference between paying attention to details and being petty.

5. I was reminded of the value of collaboration and partnership, as well as the value of loyalty.

I saw this repeatedly as we developed the concept for our book, discovered our shared concerns and our passion for teaching, and shared the stage for dozens of media interviews.

Getting on Larry King Live and The Today Show is easy for Donald, but in booking a few of these interviews he insisted that we get equal billing. And when a show host mispronounced my name, Donald jumped in to correct him on national television. These simple acts spoke volumes.

History in the Making

About the same time our book was released, a new book about Andrew Carnegie, the richest man in the world at the start of the 20th century, was also published. The timing is ironic. I believe that when history looks back at the start of the 21st century, Bill Gates, Warren Buffett, and Donald Trump will be seen as the Carnegies of the era.

Many historians view Carnegie as a ruthless man, and I know that many people also see these three in the same light. Yet if you study Carnegie's life, you find that he was extremely generous, and donated billions of dollars in support of building libraries and preserving world peace.

He even envisioned the League of Peace, a precursor to President Wilson's League of Nations. I trust that history will allow a space for the good that Gates, Buffett, and Trump have done, and not simply resent them for their wealth.

Donald and I got together to write our book as teachers, not just as rich men. We're both concerned about the lack of financial education in our schools. In the process of writing it, I not only became a richer person, I believe I also become a better human being. And for this, I feel privileged to have seen a side of Donald Trump that not many people see.

Keeping Your Business Ideas Fresh

2008-07-01T08:05:00.000-07:00

Keeping Your Business Ideas Fresh

Sometimes life just isn't fair.

When I was growing up in the 1960s, my parents said to me, "Listen to your elders. You need to learn to respect their wisdom. Someday when you're older, young people will listen to you." So I listened to my parents and grew up respecting the wisdom of those older than I was.

But that notion has been turned upside down: Nowadays, people my age need to listen to and respect the wisdom of people who are younger than we are.

Ideas from an Earlier Age

In business, success often depends upon the relative age of your ideas. And today, people of all ages are in trouble because their ideas aren't just old, they're obsolete.

One example of an old idea is that of the traditional job. Jobs are a centuries-old concept created during the industrial revolution. Despite the reality that we're now deep in the Information Age, many people are studying for, or working at, or clinging to the Industrial Age idea of a safe, secure job.

Now people aren't just losing their jobs -- their jobs are migrating to foreign countries or disappearing altogether. As Alan Blinder, an economist and former vice chairman of the Board of Governors of the Federal Reserve System, says, "A new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk of being shipped out of this country in the next decade or two." That's double the number of U.S. workers in manufacturing today.

In spite of such alarming figures, our schools still program kids to look for jobs. Advising people to go to school to learn to be an employee is as obsolete as advising young people to become peasants and work for a landlord. People need to be trained to be investors and entrepreneurs, not employees.

Obsolete Every 18 Months

My point is this: In a rapidly changing world, nothing is more dangerous than an idea whose time has come and gone. Just look at how Amazon.com has changed the world of brick-and-mortar booksellers such as Borders and Barnes & Noble, or how Skype is tearing down monster corporations like AT&T, or how Napster shot a torpedo into the record industry. Where do you think the people who work for those Industrial Age employers will be in 10 years?

As I said, people aren't losing their jobs -- jobs and companies are disappearing. I'm glad I listened to my rich dad and became an entrepreneur rather than the employee my poor dad wanted me to be.

Most people today realize that knowledge is doubling every 18 months. Does that mean that we now become obsolete every 18 months? Maybe so. Personally, it makes me feel like I need to assign an expiration date to my ideas, and update them regularly.

Many people my age are in serious financial trouble because they have old, Industrial Age ideas that they never update -- wanting job security, counting on a pension for life, relying on Social Security and Medicare -- while attempting to survive in the Information Age.

That's a mistake. Much of my company's revenue comes from the web, even though I remain a technophobe. My company survives because I've learned to respect the ideas of people younger than me, and recognize when my wisdom is obsolete.

Timeless Business Ideas

Although many business ideas go out of date every day, there are some that are timeless and essential regardless of the era we're in. Here are a few:

• Be passionate about your products and what your brand stands for. Brands die if the leader's passion dies, or if the leader's passion is simply to make money.

• Build a community. Good entrepreneurs are community builders, actively involved with their communities and dedicated to the community's well being. If you're dedicated to your community, it will be dedicated to you.

• Communicate clearly. Speak in the language of your customers. Don't attempt to baffle them with jargon in an attempt to appear smarter than they are.

• Tell it like it is, and don't be a phony. In business, there are too many people who will say anything to get their hands on your money.

• Be human. Don't be afraid to say, "I don't know" or "Can you help me?" If you're a good leader, people will be more than happy to help you build your business.

Now more than ever, we all need to be careful about whom we listen to. Just because someone is older than you no longer means they're wiser. Their ideas may have been good yesterday, but tomorrow they might be obsolete.

Fear Can Cost You Money

2008-06-20T07:30:00.000-07:00

Fear Can Cost You Money

Wall Street recently paid out billions in bonuses to its employees. Those bonuses came from investors who believe investing is risky. In other words, there's a giant industry built around investor fears. The more fear, the bigger the bonuses.

A recent Time magazine article called "How Americans Are Living Dangerously" makes a number of good points on this reality. I'll look at a few of them.

Illusory Control

We misjudge risk if we feel we have some control over it, even if it's an illusory sense of control. The article uses the example of people who drive rather than fly.

Even though the risks of death are higher driving than flying, many people would rather drive simply because they feel they have more control driving. The facts are that only a few hundred people die a year flying and 44,000 are killed a year driving. After Sept. 11, 2001, many people took to the roads rather than the skies. Not surprisingly, between October and December 2001, there were a 1,000 more deaths.

Today, many people feel they have more control if they have money in savings. Thus the saying, "Safe as money in the bank." But the fact is that savers are the biggest losers of all.

Between 1996 and 2006, the purchasing power of the dollar dropped by 50 percent compared to gold. In 1996, gold was approximately $275 an ounce; by 2006 it was over $600 an ounce. In 1996, oil was approximately $10 a barrel ; in 2006 it was over $60 dollars a barrel. Compare the price of real estate in your area between the same 10 years and you'll notice that the purchasing power of your dollar has slipped.

The point is, in spite of the facts, many people feel safer with money in the bank because they feel they have more control over it. They don't have control over the price of gold, oil, or real estate, so they think investing in these assets is risky.

The Biggest Risks of All

The second point the Time article makes is that when we're afraid, we tend to ignore the statistics and listen to our emotions. As I mentioned above, you're over 500 times more likely to die in a car than in an airplane. Yet cars are not the biggest of all killers.

Of the 2.5 million deaths annually in the United States, the No. 1 killer is heart disease. In 2003, there were 685,089 deaths due to heart attack. Auto accidents caused 44,000 deaths. Only 17,732 deaths by murder and 1 death by shark attack occurred in the same year.

Despite these statistics, more people are afraid of sharks and murderers than driving up to a fast food restaurant and saying, "Super-size it." French fries kill more people than guns and sharks, yet nobody's afraid of french fries.

The same is true in the investment world. Since many people believe investing is risky, they go for the second-riskiest investment, mutual funds. As my rich dad used to say, "Mutual funds are like french fries. They may fill you up, but they aren't good for you in the long run."

John C. Bogle, founder of the Vanguard Funds, states in his book The Battle for the Soul of Capitalism, "When we have strong managers, weak directors, and passive owners, it's only a matter of time until the looting begins." Bogle has spoken out this way because the mutual funds industry is legally looting money from investors.

To put it another way, since most people think investing is risky and full of sharks, they've turned their money over to some of the biggest sharks in the world -- the managers of mutual funds.

True Expertise Counts

One of the reasons people think investing is risky is because there's an entire industry that wants you to believe so. Trading on your fears is very profitable.

This leads to point number three in the Time piece. The magazine quotes the findings of a study in which a panel of 20 communications and finance experts were asked about the risk of human-to-human transmission of avian (bird) flu. These experts said the risk was 60 percent. When the same question was asked of medical experts, their answer was 10 percent.

The point is that you need to be critical of experts. Is the person you seek advice from able to give you a credible answer?

Qualified and Unqualified Advice

There are three experts who are often not qualified to give you sound investment advice. They are:

Non-investors
I'm always surprised by the number of people who take investment advice from non-investors -- people such as friends, family, and co-workers. A few years ago, I found a spectacular little condominium for sale for $50,000 in Phoenix, Ariz. All I had to do was put down $6,000 and assume the loan.
At the time, it was worth about $95,000. Today the units in the same complex sell for $195,000. Best of all, the monthly rent at the time was approximately $1,000 a month and today rents are around $1,500.
A friend from Portland, Ore., asked if I would let her purchase it. My wife, Kim, and I agreed, thinking at the time that this unit would be a great start for our friend. A few months went by and we asked her how the purchase was coming along. She said, "Oh, I forgot to tell you. I didn't buy the unit." When we asked her why, she said, "My neighbor Marge said it was too risky."
"How many investment properties does Marge own?"
"None."
Clearly, taking advice from someone who doesn't know what they're talking about is the real risk.
Perceived experts, such as financial planners or stock or real estate brokers
Most people take financial advice from salespeople, not rich people. Most stockbrokers are not rich nor do they invest in what they sell. The numbers are even worse for real estate brokers.
Investors themselves
I've shown several great investments to an investor friend of mine. To this date, he hasn't purchased anything I've recommended. That's because he can always find something wrong with the investment. Instead of looking at what's good about them, he looks for what's wrong and then talks himself out of taking action.
This is one reason why I invest as part of a team, so that I can consult with other investors rather than talk myself out of great deals.

The Time article made it clear that fear is normal. We all experience fear; I admit that I've let it hold me back. I probably would've been a lot richer a lot sooner if I flew more and drove less.

The important thing to remember is to pay attention to what we worry about -- and what we should be worrying about.

Reading, Writing, and Resisting Debt

2008-06-18T07:22:00.000-07:00

Reading, Writing, and Resisting Debt

When I was young, people lived from paycheck to paycheck. Today, it seems like they live from credit card payment to credit card payment.

Most of us know that millions of People are deeply mired in credit card debt. Many financial experts have said repeatedly, "Get out your scissors and cut up your credit cards." While this may sound like good advice, to me it seems like a painful, short-sighted answer to a more complex problem.

That problem is a lack of financial education. Why don't we teach kids about money in school? Rich or poor, smart or not-so-smart, we all use money. Yet, while there are a few schools beginning to offer some financial education, it seems that most educators believe money isn't a subject worthy of the hallowed halls of our learning institutions.

A History of Credit

When I was a kid, there were no credit cards. Instead, retailers offered layaway plans. My mom would go to a store, such as a furniture outlet, choose the sofa she wanted, and put it on layaway. That meant she put a little money down to hold the sofa, and every payday she'd pay a little toward the purchase. When the sofa was paid for in full, she would bring it home.

At that time, stores also offered "buy now, pay later" plans. This meant my mom could buy the sofa, sign a payment agreement, and take the sofa home that day.

Today, while a few stores still offer such plans or even variations of them, most people simply put their purchases on a credit card. But credit has been a part of American life even before there were credit cards.

A Growth Industry

There are many reasons why credit cards have grown in popularity, including these:

• Wall Street has turned debt into an asset.

Today, your friendly banker issues you a credit card. He then sells your debt to a Wall Street firm, which collects your monthly payments at high interest rates -- which is why it's an asset to them.

The minute a Wall Street firm purchases your debt, your bank no longer has it on its financial statement, which then allows the bank to look for more credit card customers. That's one reason why you get so many credit card offers.

• The purchasing power of the dollar has dropped.

If you've followed these columns, you know that in 1971, President Nixon converted the U.S. dollar from money to a currency. That means the U.S. and other governments can print money faster than you can earn it -- or save it.

In terms of purchasing power, if you earned $50,000 in 1996, you would have to earn $100,000 in 2006 just to stay even. Many people aren't earning more even though prices are rising, so they make up the difference by using their credit cards for everyday purchases.

• When wages go up, so do taxes.

Because the purchasing power of the dollar has dropped, many people work harder, ask for raises, or take on extra work (or a second job) to earn more money. And when they earn more money, they move into higher tax brackets.

Today, the alternative minimum tax (AMT) -- first levied in 1970 as a tax against the rich -- is penalizing the middle class. In many ways, the AMT is a form of double taxation. Many working people are now making more money but taking home less because they pay a higher percentage of taxes.

• The cost of retirement has gone up.

When I was young, many people worked for a company with a pension plan that covered them for as long as they lived. If they didn't have a pension plan, they could count on Social Security and Medicare.

That's all changed. Today, millions of workers need to be able to afford their day-to-day living as well as put enough money aside for when they can no longer work.

I Love Credit Cards

Clearly, cutting up credit cards won't address these economic changes or solve America's debt problem.

In the real world, credit cards are essential. It would be extremely difficult to rent a car or make hotel and airline reservations without a credit card. It would also be tough to pick up the tab at a business lunch or shop online without a credit card.

Personally, I love my credit cards because of the financial freedom they allow me, and my life would come to a grinding halt without them.

Fight Debt with Debt

Whenever anyone asks me how to solve the credit card problem, I tell them to fight fire with fire -- and debt with debt. The way I solve my increasing needs for cash is to go deeper into debt -- good debt, not bad debt.

For example, I use debt -- which is essentially tax-free money -- to invest in real estate, which in turn increases my cash flow. Not only do I not pay taxes on my debt, I could also pay no taxes (or very little in taxes) on the income from the debt. Hence I earn more but pay less in taxes.

Obviously, in order to do this you need to know how to use debt wisely and responsibly, and must be able to find great investments that increase cash flow.

The Root of the Problem

Most financial experts will scoff at my "fight debt with debt" approach. They'll say my advice is based on flawed logic, and it may well be -- for most people. But I ask you to step back and take a look at the world of finance. As I stated earlier, Wall Street is able to take your debt and turn it into their asset. That's what financially smart people do, and it's one example of why rich people get richer.

Unfortunately, most people take bad debt and turn it into horrible debt. This is especially true of poor people and people with bad credit, who have access to only the worst forms of debt and pay the highest interest rates on it.

But their problem isn't credit cards -- it's a lack of financial know-how. And at the root of that lack of knowledge is our school system and its archaic curriculum, which is out of touch with the way people really live.

Clearly, advising people to cut up their credit cards won't solve the problem of excessive credit card debt. A pair of scissors won't make anyone financially smarter, but some financial education just might.

Educate Yourself into Riches

2008-06-11T17:37:00.000-07:00

Many of Wall Street's elite firms were being required to pay tens of millions of dollars in fines to investors, according to media reports. The penalties are for alleged bad investment advice, courtesy of New York State Attorney General Eliot Spitzer.
This brings me to one of my favorite quotes from famed investor Warren Buffett goes: "Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway."
I have been highly critical of the standard financial planning advice -- "work hard, save money, get out of debt, invest for the long term, and diversify" -- for a long time. Such guidance is often more a financial advisor's (subway rider's) sales pitch than a solid investment guide.
But while I think it's courageous that Spitzer slaps millions in fines on a few Wall Street firms for their bad investment guidance, I believe the investors who accepted that unsound advice have some responsibility, too. Isn't knowing the difference between good and bad advice part of knowing what you're doing?
The Difference Between Investing and Shopping
The problem is, most investors don't know how bad the standard investment advice is. This mantra of "work hard, save money, get out of debt, invest for the long term, and diversify" is followed by millions of investors -- who lost $7 trillion to $9 trillion between 2000 and 2004. Many are still following this bad advice today.
Not only did millions of investors lose trillions of dollars, many also missed the boom in real estate, oil, gas, and previous metals. Furthermore, despite investors' huge losses, Wall Street paid out some of its biggest bonuses in history.
However, investors should realize it's "buyer beware." Investing is different from shopping. If I go to Sears and don't like the tool or shirt I purchased, I can generally get my money back. When we go shopping, we expect value for our money. But when we invest, we do so in the hopes of making more money -- and knowing that we risk making losses. What would happen to the financial industry if brokers were sued every time a client lost money? The wheels of world commerce would grind to a halt.
My point is: The world is filled with honest people handing out bad advice. An example of honest bad investment advice is the standard one of "work hard, save money, get out of debt, invest for the long term, and diversify".
The world is also filled with biased advice, which is why people say, "Never ask an insurance broker if you need insurance, or a mutual-fund sales person if they recommend mutual funds." Furthermore, there are many crooks and con artists as well, who intentionally promote dishonest ventures.
Spotting the Difference
So while it's imperative that we have the Securities and Exchange Commission and a brave Attorney General such as Spitzer to enforce the rules, we, as individual investors, still need to be vigilant and personally responsible for the advice we receive and what we do with our money.
In my opinion, that means each of us needs to be responsible for our own financial education so we can tell the difference between good advice, biased advice, and crooked advice. If you can educate yourself to know the differences between those three types of advice, getting rich is easy.
Or, if you take investing advice from a subway rider, don't be surprised if you wind up on the subway.

Throwing Good Money After Bad

2008-06-05T23:49:00.000-07:00

Throwing Good Money After Bad

All booms eventually go bust.
We all remember the stock market crash of 2000, and most of us remember the real estate crash after the implementation of the 1986 Tax Reform Act. Today, many people are anticipating another real estate crash.
Unfortunately, despite our understanding of booms and inevitable busts, it's always near the top of a boom that "dumb money" buys in. Currently, this has set the scene for a potential market bust of which few people are aware. I'll describe it today's column, and advise how best to prepare in my next column.
Express-Lane Inspiration
About a year ago, I wrote warning readers that the real estate boom was over. How did I forecast the end of the boom? I got my hot tip from the cashier at my local Safeway supermarket.
While she was tallying the cost of my apples, broccoli, and steaks, she handed me her new real estate agent's card and invited me to call her for my next real estate investment. Moments later, I was home writing that column. As my rich dad used to say, "When dumb money chases smart money, the party's over." Needless to say, many real estate agents and investors wrote me nasty notes.
I'm not a hundred-percent certain where things are going today. Most economists are forecasting a strong economy, but economists worry me more than newly minted real estate agents. Most seem to be happy that inflation is in check; when I hear that inflation is in check, I begin to think about deflation, and as most of us know, deflation is much, much, worse than inflation.
An Inconvenient Truth
In the simplest terms, inflation occurs when there' too much money in the system. On the flip side, deflation occurs when there are too few dollars in circulation. When that happens, prices start to fall. For example, in inflationary times, prices of houses go up. In deflationary times, prices of houses come down. If prices of houses begin to drop too fast right now, it could be 1986 all over again.
I wrote a colum years ago about how I love debt and my credit cards. The trouble is that most people do. Today, you can qualify for a loan to buy a house simply if you're alive and breathing.
The strong economy we've been experiencing for years has thus been built on dumb money -- in addition to smart money -- borrowing more and more. Even the U.S. government has had a field day borrowing money to do such things as fight a war and attempt to rebuild Iraq and Afghanistan rather than rebuild our country. And the inconvenient truth about debt is that it has to be paid back.
A Certain Ratio
For the next two years, I'm cautioning people to watch their ratios between good debt and bad debt, and keep liquid reserves such as cash, gold, or silver.
Good debt is debt that makes you rich. An example of good debt is the debt on the apartment houses I own. That debt is good only as long as there are tenants to pay my mortgages. If tenants stop paying their rent, my good debt turns into bad debt.
Most people don't have good debt -- all they have is bad debt. Bad debt is debt that makes you poorer. I count the mortgage on my home as bad debt, because I'm the one paying on it. Other forms of bad debt are car payments, credit card balances, or other consumer loans.
On our home, my wife, Kim, and I keep a 25 percent debt-to-equity ratio. In other words, our debt is 25 percent of the home's value. Unfortunately, many people have an 80 percent or higher debt-to-equity ratio. That means the debt on their home is 80 percent and their equity is only 20 percent.
On our investment properties, we carry a higher debt-to-equity ratio. To protect ourselves, we have cash reserves to cover the expenses of the properties. For example, in case all the tenants leave and no one is left to pay the mortgage and expenses, we have separate funds for each property, with enough liquidity -- i.e. cash, stocks, and bonds -- to carry the building for a year. Unfortunately, the dumb-money crowd has no reserve funds for their properties.
Where Deflation Does Its Damage
In a deflationary market, the value of your home can drop. If the value drops, the bank may call in your loan. Even if you've never missed a payment, and even if you're ahead on the payment schedule, the bank can call in your loan if they feel the value of the property is lower than the loan amount.
For example, say you buy a house for $100,000 and put 20 percent down and borrow $80,000. If the market deflates and the value of your home drops to $70,000 (because everyone else is selling their homes to get out of debt), the lender may ask you to pay the $80,000 you owe immediately.
If such deflation happens, cash will become king. There will be half-price sales on BMWs, expensive restaurants will close, and people will be out of work. And anybody who caters to people with dumb money will be in trouble. As I said before, deflation is much worse than inflation.
Smart Money, Bad Times
The good news is that during deflationary times, smart money reenters the market, so crashes are great for smart people with smart money. Instead of listening to the optimistic economists, then, you should eliminate bad debt and improve your debt-to-equity ratios on good debt.
Most important, study; if you want to be smart, you need to learn. I'll discuss what you should study in the second part of this column. For now, be aware that if deflation comes and there's a recession, it won't have much effect on the poor. Instead, it'll punish middle-class people who think they're rich because their houses and stocks have gone up in value.
I'll explain more in a couple of weeks.