Monetarists, Keynesians and Common-Sensians

This is simplistic but it makes you think.

Canada's economy is run by a central bank called the Bank of Canada.

The Bank of Canada is run by economists.

Most economists today use one of two theories to avoid a great depression in Canada:

Keynesians say that a slump in the economy can be solved by spending more money: reduce interest rates and cut taxes.

Monetarists say that a slump can be solved by spending more money: print more money so people feel they have more to spend.

If an individual thought that he could avoid financial trouble by spending more money would you consider that to be the act of a sane person?

"The encouragement of mere consumption is no benefit to commerce, for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone furnishes those means. Thus it is the aim of good government to stimulate production, of bad government to encourage consumption." Jean Baptist Say, 1803

fortnightly email topics

24 newletters: feel free tp suggest more topics

You and your planner
- How to avoid a planner who makes himself wealthy at your expense
- When to fire your planner
- Why investment advisors don't want you to save your money
- Is your accountant a good retirement advisor?
- What is bias in financial advice?

Savings
- Canada is spending its way to a recession. What you can do to save yourself.
- How the difference between savings and investment can mean the difference between being able to retire or not
- Why your portfolio is probably riskier than Warren Buffet's
- How to use the equity in your home to build up savings
- Start your savings plan using money that you don't even know you have
- For grandparents only - the perpetual motion savings plan

debt
- How to avoid the credit conspiracy
- Why the bank doesn't want you to know about your mortgage
- How to outsmart your mortgage banker
- How to avoid the 5 common credit card traps
- Car lease mysteries revealed.

Big purchases
- Pay for your car, not your car dealer's lavish lifestyle
- How to pay for your daughters wedding without going bankrupt
- Your 9 month plan to pay for baby expenses
- The smart way to pay for that home theatre system
- The 5 biggest mistakes in cottage ownership

$120,000 in your pocket is what happens when you stop borrowing to pay for your cars.

You pay $250 a month for your car. That's $3,000 per year. You will be paying for cars as long as you live, say another 40 years. 40 years of paying $3,000 per year is $120.000. Whooo-eee.

That's $120,000 you're paying Ford Auto Finance in your lifetime. That's a lot of money on a one way street to the finance co that you will never see again.

What if you owned the finance company?
What if you paid that same amount to a finance company that was owned not by Ford but by YOU? Then you would still be paying $120,000 for your cars. But when you own the finance company , your company would earn the $120,000, not Ford Finance, . And since you owned the leasing company, those earnings would go to - you guessed it - YOU!

Conclusion- if you set up your own Finance Company:
You would still be paying the same for your cars $120,000
Your company, not Ford Finance, would be the lender
Since you own the lender, you would own the earnings.

So the only question is ... how much are you willing to pay for set up your own bank in order to make $120,000 in the next 40 years?

To learn more, log in to to www.findoutmorenow.com and use my special 4 digit pass-code AH24. Do it now, it's costing you $120,000 not to do it!

Why is Warren Buffet Holding $43B in Cash?

Berkshire Hathaway's 2005 asset allocation:

50% cash, 50% stock, up from 0%:100% 10 years ago

If Warren Buffet's not buying Stocks or Real Estate, why should you?

"My hope was to make several multi-billion
dollar acquisitions that would add new and significant
streams of earnings to the many we already have," Buffett
confessed in this year's letter to Berkshire shareholders.
"But I struck out. Additionally, I found very few
attractive securities to buy..." (from report to shareholders)


Warren Buffet, the best investor in the western world
has been saving not investing for the last 10 years.
You should too.


Berskshire holds more in cash than in stocks.

Back in 1994, cash was a nearly invisible asset class on
Berkshire's balance sheet, while equity investments
were equivalent to 128% of book value. But cash has
been piling up ever since, as the relative size of Berkshire's
stock investments has steadily decreased. In 2005,
for the very first time, Berkshire's cash exceeded the
stated value of its equity holdings. With the benefit
of hindsight, we see that Buffett was prudent to reduce
his equity allocation into the booming stock market of
the late 1990s, and was equally prudent to increase his
cash allocation as share prices fell from the 2000 peak.

"What Charlie and I would like is a little action now,"
Buffett writes in his annual letter. "We don't enjoy sitting
on $43 billion of cash equivalents that are earning paltry
returns. Instead, we yearn to buy more fractional interests
similar to those we now own or — better still — more large
businesses outright. We will do either, however, only when
purchases can be made at prices that offer us the prospect
of a reasonable return on our investment."

Warren Buffett boasted in Berkshire Hathaway's 1990
annual report, "Lethargy bordering on sloth remains the
cornerstone of our investment style: This year we neither
bought nor sold a share of five of our six major holdings.
The exception was Wells Fargo...We welcomed the (Wells
Fargo) decline, because it allowed us to pick up many more
shares at the new, panic prices...The most common cause of
low prices is pessimism - sometimes pervasive, sometimes
specific to a company or industry. We want to do business
in such an environment, not because we like pessimism but
because we like the prices it produces. It's optimism that
is the enemy of the rational buyer."

Buffett's aversion to optimism may also explain why he is
not dabbling in the real estate market either.


Buffet's not buying real estate either

"Notice that Buffett is not investing in real estate,"
observes Susan Walker, in an insightful article for Fox
News, "an all-too-tempting alternative for regular folks
who have some money they would like to invest but who don't
trust the stock markets. In fact, as the most recent issue
of 'The Elliott Wave Financial Forecast' points out, many
people are 'now captivated by the concept of easy wealth
through real estate...According to the National Association
of Realtors, a stunning 25 percent of the 7.7 million homes
sold in 2004 were purchased strictly as investments.'"

Perhaps Buffett has observed sometime during his lifetime
that real estate prices – like stock prices – do not always
go up. Perhaps too, he has noticed that real estate prices
are already falling in some parts of the country.

"Total U.S. home sales dropped dramatically by 9.7 percent
from December 2004 to January 2005 (before revisions),"
Walker notes, "even as median sales prices on new U.S.
homes plunged 13% from $229,700 to $199,400. That decline
in the median sales price was the largest one-month fall in
the history of the data, which goes back to 1963."

"So here's the most under-asked question of the year,"
Walker concludes, "If Warren Buffet isn't putting Berkshire
Hathaway's money in stocks [or in real estate], can this be
a good time for anyone else to do it?"
(from the daily reckoning newletter Apr 2005)


Nor does Buffet borrow

"We are not interested in incurring any significant debt at Berkshire
for acquisitions or operating purposes. Conventional business
wisdom, of course, would argue that we are being too conservative
and that there are added profits that could be safely earned if we
injected moderate leverage into our balance sheet. Maybe so.

But many of Berkshire’s hundreds of thousands of investors have
a large portion of their net worth in our stock (among them, it
should be emphasized, a large number of our board and key managers)
and a disaster for the company would be a disaster for them....
To these and other constituencies we have promised total security,
whatever comes: financial panics, stock-exchange closures (an
extended one occurred in 1914) or even domestic nuclear, chemical
or biological attacks.

Whatever occurs, Berkshire will have the net worth, the earnings
streams and the liquidity to handle the problem with ease. Any other
approach is dangerous. Over the years, a number of very smart people
have learned the hard way that a long string of impressive numbers
multiplied by a single zero always equals zero. That is not an equation
whose effects I would like to experience personally, and I would like
even less to be responsible for imposing its penalties upon others. "
(2005 shareholders report, Berkshire Hathaway)

Conclusion:
1. Pay off your house
2. Put your money into savings

Augusto Hidalgo is a financial advisor licensed in the Province of Ontario.
He helps clients build tax free savings plans using their current debt payments.

Marketing Summary - New World Financial

New World Financial

MESSAGE: (Unique Selling Proposition): Turn your debt into savings

MARKET:
Psychographic Market:
People who want: more savings, guaranteed values for retirement, GICs, Bonds to maturity, creditor protection,
People who don't want: dependence on social security, bank debt, erosion of retirement funds, taxes, probate, to build equity in their houses,
Peole who fear: a housing crash, a stock market crash, the government changing social security and OHIP.
People who pay for information, who respond to direct mail,
People who read or are affiliates advertiser in : the richebacher report (Kurt Richebacher, the daily reckoning (Bonner,Wiggin), on the money trail (AB Jacobs), the Bank Note (Nelson Nash). (what are the Canadian equivalents?), Warren Buffet's shareholders reports, the millionnaire next door.


Demographic Market:
Depends on sub-agent running a NWF Franchise. For me: executive mba grads, filipinos retiring in the philippines. 45 year old male head of family, 2 kids, homeowner, pays credit card balances fully, alredy has a financial advisor.

Marketing Technology

Today I have my Marketing Manager hat on. The tools available are incredible. I just tested a web based voice mail broadcast system yesterday.

I had sent 30 letters introducing the Infinite Banking concept to clients, and I wanted to send them a reminder to look out for the letter in the mail, and to read it when they got it.

So I got online looked up "voicemail broadcast" and got exactly what I was looking for. Setup took 20 minutes.

I called an 800 number, dictated my voicemail, reviewed and approved it.

Then on the site I ran a test, uploaded the list of telephone numbers, and scheduled the voicemail to be broadcast around the time I expect the mail to hit my customers' mailboxes.

Time taken : 40 minutes Cost $3.60 for 30 voicemails. Convenience: Priceless

The Richebacher Report

Contrarian ex-Dresdner Bank Chairman Kurt Richebacher bets against the US economy... here is some of the copy selling his report. Pretty good "fear" copy by Addison Wiggins ("Financial Reckoning Day" author






The plunging line shows how much money we're saving right now.

The soaring line shows how much more we're paying just toward the interest on our rapidly mounting debts. Make note, that's just the charges on the borrowed money. Not the payment on the borrowed money itself.

It's like the claws of a gaping trap, getting ready to snap down on the average overexposed American. And when it does, expect financial disaster.

Here's the big problem...

The powers that be say that this trend of overspending and under-saving is all part of the recovery ahead. Washington's new favorite economist, Ben Bernanke, even talks about the dangers of a "savings glut" in other countries.

All while old Fed favorite Alan Greenspan has just kept on urging us to spend, spend, spend. Even if we have to borrow to do it. He's like a heroin dealer, pushing loose money and feeding the American addiction to credit until many of us have no choice but to keep on borrowing more, just to survive.

Thanks to years of imprudent interest rate manipulations by the Federal Reserve, the entire house of cards underpinning the U.S. economy cannot but HELP to fall apart. And it's almost guaranteed to happen, now, very soon.

It's that simple.

See, loads of easy money and open credit are terrific when an economy is soaring. Credit can help a business expand. It lets you invest in the future. It even lets you enjoy life a little better on the way up, making it possible to bank on riches yet to come. And our fellow Americans have been lapping up the opportunity, loading up on new cars, newer and bigger houses and lifestyles they couldn't normally afford.

The trouble is, the moment all that excess credit is withdrawn, everything falls apart!

House prices fall, stocks fall, U.S. bonds fall, the dollar falls, everything falls. Because liquidity is sucked out of the system. Nobody has money to spend. So there's no demand for the assets that only those with lots of credit and easy money can typically afford.

At this very moment, this is the gravest danger facing the American economy. Worse than terrorism. Worse than waning energy supplies or energy war. Worse than petty Washington infighting or scandals.

With our credit-driven economy so out of control, this could spell the end to the American economic experiment itself. Very quickly and with disastrous results, for all but the investors who were smart enough to protect themselves as early as possible.

Take a gander at this...


The Canadian numbers are better, but not by much. Canadian Savings are at 1.6% of income. What to do, what to do.

Good thing I know!!!

this made me cry today

Be Trustworthy

This may be a minor point that Mr. Buffett was trying to make, but he told a simple story that affected me greatly. He told of the Founder of the Nebraska Furniture Mart, one of his companies, and how she came from a poor Jewish family and couldn't read, write or speak English. She was had survived the Holocaust, spent 16 years bringing her family to the U.S. (at $50 per person), and grew the Nebraska Furniture Mart from a $500 initial investment to do $350 Million annually from a single location in Omaha.

Update: A friend of hers told Warren at one point that the way she evaluated people was simple: She simply asked herself, "Would they hide me?" What a great way to judge your instincts about whether to trust someone or not.

More from Minsky

US Consumer Spending: America the “Ponzi unit”

America has become what Hyman Minsky calls a “Ponzi unit.” In other words, there sometimes comes a point where an economic unit has to rely upon asset sales to satisfy its interest payments and debt repayment. That’s America!

The writings of Hyman P. Minksy, particularly his 1986 book, ‘Stabilizing and Unstable Economy,’ ...identify three distinct income-debt relations for economic units: hedge, speculative and Ponzi finance:

1) Hedge-financing units can fulfill all of their contractual payment obligations by their cash flow.

2) Speculative units can meet the interest bill on their liabilities from their income, but are unable to repay the principal out of cash flow from operations. They need to roll over their liabilities.

3) Ponzi units are unable to fulfill repayment of principal and to pay the interest due on outstanding debts by their cash flow from operations. They depend on borrowing or selling assets even to meet their interest bill.

It is a reasonable conclusion that the U.S. economy and its financial system on the whole have become one huge Ponzi financing unit.”]

Financial Reckoning Day

Financial Reckoning Day Bonner & WIggin, 2003, is a post Internet Bubble book written by the folks that deliver the Daily Reckoning e-newsletter. It says that rampant consumerism in the US will result in a slow soft depression.

Here are some of the quotes that I liked from the book:

"We may not know how the world works, but we are immodest enough to think we can know how it does not work. The stock market is not, for example, a simple mechanism like an ATM machine, where you merely tap in the right numbers to get cash when you need it.

Instead, the investment markets - like life itself - are always complicated, ofen perverse, and occasionally absurd.

But that does not mean that they are completely random; thougth unexpected, life's surprises may not always be undeserved. Delusions have consequences. And sooner or later, the reckoning day comes and bils must be paid.

In this sense, the investment markets are not mechanistic at all, but judgmental. As we will see, they reward virtue and punish sin."

"...as Keynes once noted, the market can stay irrational longer thatn an investor or a business can stay solvent." (on the fall of LCTM a firm led by nobel prize winners Merton and Scholes)

"Minsky's financial instability hypothesis sets out to show how capitalism is inherently unstable.... Minsky refers to Keynes concept of a 'veil of money" between real assets and the ultimate owner of the wealth. Assets are often mortgaged, financed, leveraged, or otherwise encumbered. This veil of money gets thicker as financial life becomes more complex and makes it harder to see who is actually getting richer who is not. When house prices rise, for example, it seems that the homeowner should be the beneficiary. But homwowners now own much less of their homes than they did a few years ago.

Fannie Mae (eds note: in Canada the CMHC), banks, and other intermediaries have a strong stake in home values. In recent years, Fannie Mae has worn a veil of money as sticky as flypaper. The hapless homeowners hardly had a chance. They got stuck almost immediately. How they are hopelessly glued and cannot get away.

Instead of coming up with innovative new ways to make people rich, America's financial intermediaries - notably Wall Street and Fannie Mae, came up with ways to make them poor.

"The financial instability hypothesis" Minsky explains, "is a theory of the impact of debt on system behavior and also incorporates the manner in which debt is validated. In contrast to the orthodox Quantity Theory of money, the financial instability hypothesis takes banking seriously as a profit-seeking activity. Banks seek profits by financing activity and bankers,, like all entrepreeneurs in a capitalist economy, are aware that innovation assures profits. Thus bankers, whether they be brokers or dealers, are merchants of debt who strive to innovate in the assets they acquire and the liabilities they market"