Archive for May, 2012

What The Purchasing Manager Index Means To Your Self Directed IRA

Thursday, May 31st, 2012

The Chicago PMI dropped to 52.7 in May. This reading has dropped over the last three months. The index is at its lowest level since September 2009.

Readings above 50 suggest the economy is still expanding. However, as a general rule three straight monthly declines directly correspond to the onset of each of the last seven national recessions. This correlation usually translates into a recession within the next six-to-eight months.

This index is one of several indicators that have come out this month that shows a slowdown, predicts recessionary times. A recession will slow demand and cause contractions. This ultimately leads to loss of purchasing power over time, decreased spending. The likely result will be more printing or other government intervention. Meaning they are not going to get the deficit under control and there is a good chance of pushing more cheap money into the system.

Most investors will hedge against inflationary pressures and the market risk with hard assets such as precious metals. So, those of with a self directed IRA should check your allocations of metals. Those of you without a self directed IRA — Get One Today!

Self Directed IRA Real Estate Trends

Monday, May 28th, 2012

Real estate has and continues to be a key holding in a large percentage of self directed IRAs. We saw the activity level high in pre-2008 and now, we see that level coming back, but for different reasons. Below we will look at a couple of key metrics to give you an idea as to what is happening with investment and rental properties.

Apartment Absorption Rates

One of the key trends to watch and follow Apartment Absorption vs. Home ownership. The trend has been and is away from home ownership to apartment living. The following chart from Marcus & Millichap clearly shows this trend.

What we see is that there is a strong trend away from home ownership and into the apartment life. The importance of this trend is that as a current or potential real estate investor with your self directed IRA, the need for rental property is increasing. The psychology of people is shifting from home ownership to being a renter. The financial and economic drivers are pushing people to become renters. The bottom line is holding real estate in your self directed IRA could be profitable and wise.

Vacancy Rates

Vacancy rates across the country were at 5.2% at the end of 2011. That is a 40 basis point (0.40% – 5.6% to 5.2%) decline. That is very significant. Below is another graphic from Marcus & Millichap. Without diving into specifics, what you see are steep declines in vacancy rates across most of the major US Cities. This is just further support for increasing rental demands.

So, what does this tell you about holding rental or investment real estate in your self directed IRA? Our analysis says that the demand for rental property has been increasing and will continue to increase as more foreclosures are disposed. This will be compounded by the fact that the economy is and will continue to grow very slow which puts pressures on wages. This motivates and maintains renters.

Given the predicted slow economy, potential global recession, your portfolio needs to have a good compliment of tangible assets such as real estate and precious metals. This is why we continue to believe that now is still a good time to hold real estate in your self directed IRA.

The information provided is for educational purposes only and are not a solicitation or offering of an investment, investment advice, or tax advice. You should consult with your tax, legal or financial advisor to determine the suitability of any investments made with a self directed IRA account.

Check Your Self Directed IRA – There May Be A 100% Chance of a Global Recession

Monday, May 28th, 2012

This past week on CNBC, economist Marc Faber stated that he believes that there is a 100% chance of a global recession over the next 12 months.

“I think we could have a global recession either in Q4 or early 2013.”

When asked what were the odds, Faber replied, “100%.”

Faber’s bearish market calls have been followed closely since 1987 when he warned his clients to cash out before Black Monday. If you want to know more about Marc Faber, he is the author of the Gloom, Boom, Doom report.

Faber points out that while many, maybe too many, people remained focused on Greece, Europe, et. al., they may be missing more critical, global slowdowns in place like China and India. Faber goes on to note that the HSBC Flash Purchasing Managers Index, slipped to 48.7 in May from 49.3 in April. That marks the seventh straight month that the index has been below 50, a level which indicates economic activity is contracting. Faber also noted the fact that stocks that are linked to wealthy consumers are showing weakness. Faber states:

“That suggests to me the economy is likely to weaken and the huge asset run is likely to come to an end with significant asset deflation.”

Faber goes on to state that he believes that we are looking to see a global recession as earlier as Q4 2012. Faber states:

“I think we could have a global recession either in Q4 or early 2013.” When asked what were the odds, Faber replied, “100%.”

When asked about what assets to allocate in your portfolio he recommends Cash (US Dollars) and Gold.

We understand the tendency to be biased by only looking for information that supports our beliefs and the desired outcome, but, by the same token you can’t fall into the normalcy bias trap. Here is a good description of normalcy bias:

The normalcy bias refers to an extreme mental state people enter when facing a disaster. It causes people to underestimate the both the possibility of a disaster occurring and also its possible effects. This often results in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of the government to include the populace in its disaster preparations. The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred that it never will occur. It also results in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.

With the bias as our premise, we should note that over the past few weeks we have cited numerous statistics, and facts along with supporting experts all of which point to the fact that we are looking at a recession on a global scale. Many of these same experts and opinions all point to hedging your self directed ira portfolio with precious metals.

So, you look at your self directed IRA and the price of gold and silver and you feel uneasy because of the recent sell off on metals. Go back and read our post from May 27, 2012. Your concerns about metals are unfounded. Now is the time to be a contrarian and look beyond the noise generated by the masses. Now is the time to assess your self directed IRA and determine if and how much of precious metals to place into your self directed ira.

The information provided is for educational purposes only and are not a solicitation or offering of an investment, investment advice, or tax advice. You should consult with your tax, legal or financial advisor to determine the suitability of any investments made with a self directed IRA account.

Precious Metals In Your Self Directed IRA – An Update

Sunday, May 27th, 2012

We know that people are concerned about precious metals investing in their self directed IRA due to the recent selloff in metals and commodities in general. Its easy to get concerned when you see corrections all the way day to mid 1500s for gold. But, you have to ask yourself why would gold suddenly just fall out of favor? We know the markets can be volatile, but the economy just does not take sudden turns, for the better, in just a matter of days. In fact, it takes months and years for noticable changes in the economy to be measurable and noticable. So, this sudden proclamation that gold is over, seems without sound basis and fact.

Let’s take a look at some basic global, economic fundamentals in order to make some sound decisions about precious metals in your self directed IRA.

  • The European Crisis continues. We can’t tell you how many times the media is on again and off again about what is happening in Europe. the situation has not gotten better since the first of the year, but all of the sudden, Greece and Spain are back in the news with the same problems that we say 6 months ago. These countries have serious, massive debt and deficit issue with a culture that is married to government care taking and support of its people. This attitude does not change in a month or two. It takes multiple years or even a generation. They are not going to make this problem go away anytime soon. They will continue to print money and prop up the system before they let everything crash. These countries have and are seeing shrinking consumer demand, lower imports, lower spending. This is going to aggravate the deficits and put more pressure to print.
  • Gold prices continue to hold at record highs. We know gold can be volatile and unnerving, but if you look at it in the context of where it was and has been it still relatively high. Let’s look at the gold mining stock Barrick Gold Corp. (ABX). This stock currently boasts a profit margin of over 30%, better than twice that of IBM and almost ten times that of Walmart. While ABX sells for just 1.6 times its book value, IBM sells for 10X. This has no logical basis or rationale. The point here is that the price of gold is still relatively high, and attractive for metal mining companies to the point that they are still very profitable, yet, the market has magically decided that profits and balance sheets are out the window.
  • Central banks continue to print. The Europeans are meeting, again,  in another attempt to fix the unfixable. The current consensus is that they will have to accelerate, not decelerate the money printing. The same is true here in the US, where a fiscal cliff is coming (see prior blog) due to the trifecta of the expiring Bush tax cuts, mandated cuts in government spending from the last debt-ceiling debacle and the new debacle soon to begin as the latest debt ceiling is approached. The problems in important economies such as China and Japan are as bad, and maybe even worse. We should mention that China is showing some serious cracks in their economic shell (we’ll cover that topic later).
  • Debts are still at all time historic highs! We’ve commented on this a couple of times in the last week or two. Total debt for the US, Europe and other countries has not changed. No one came in from another, fiscally sound, well run planet, and gifted the countries of  earth Trillions of whatever to get rid of their debt. Its still there!  to get an idea of the debt problem, look a recent article written by Standard & Poor’s titled,The Credit Overhang: Is a $46 Trillion Perfect Storm Brewing?

“Our study of corporate and bank balance sheets indicates that the bank loan and debt capital markets will need to finance an estimated $43 trillion to $46 trillion wall of corporate borrowings between 2012 and 2016 in the U.S., the eurozone, the U.K., China, and Japan (including both rated and unrated debt, and excluding securitized loans). This amount comprises outstanding debt of $30 trillion that will require refinancing (of which Standard & Poor’s rates about $4 trillion), plus $13 trillion to $16 trillion in incremental commercial debt financing over the next five years that we estimate companies will need to spur growth.”

So the point here, optimistically, is that corporations around the world are likely to see, at best, mediocre growth due to their voracious need for infusion of new capital to refinance debt. A more concerning impact is where will these companies and institutions be able to get such massive amounts of new capital in this economic environment? The answer is they are probably not going to be able to do this, hence the reason for very moderate growth over the next 3-5 years.

So, let’s wrap this up. What does all of this mean to you and holding precious metals in your self directed ira? It means EVERYTHING!

  1. We are looking at a national and global economic environment in which the major central banks of the world (including the USA) are printing money and stand at the ready to print more when needed;
  2. We have debt of corporations and countries at all  time highs with little ability to refinance that debt without default, or government assistance;
  3. You have metals and stocks being ignored and incorrectly valued relative to other assets classes;
  4. You have the world continuing to be in turmoil without any real solutions.

Bottom line we are still faced with incredible global economic problems, and uncertainty. We have central banks printing money at will. Holding precious metals in your self directed ira seems to be a very important component of your portfolio.

The information provided is for educational purposes only and are not a solicitation or offering of an investment, investment advice, or tax advice. You should consult with your tax, legal or financial advisor to determine the suitability of any investments made with a self directed IRA account.

Roadblocks That Are Preventing A Economic Recovery And How To Position A Self Directed IRA

Friday, May 18th, 2012

As we continue to see the bogus numbers coming out of Washington, and the political rhetoric that comes from the President’s reelection, we thought we would look at what stands in the way of a solid recovery, and compare that to what the government is actually doing.

Issue 1 – The National Debt

We are currently running a debt rate of 360% of GDP. This means that we are spending way more than we generate in the total economy which also means that we are not saving anything. This debt level is more the 100 points higher than the high water mark of 1928. So, on relative terms we have way more debt than we did prior to the great depression.

We all know that you cannot continue to maintain such massive amounts of debt without some negative impact. The current projections show that the government debt will continue to increase in 2012 and 2013.

Why is this important? Because at some point, the government has to continue printing money and attempting to borrow to pay for this debt. This eventually reaches a point where the government cannot borrow anymore. This in turn leads to a crisis where the government has to cut back drastically, miss payments, tax more, etc. It becomes very severe austerity.

Issue 2 – Worldwide debt

There is a lot of attention and focus on Europe and their financial crisis. This is because their debt situation is worse than the US debt crisis. Currently, we have about $55 trillion in debt and we have $15 trillion of GDP or a debt ratio of about 360. In the 17 countries that are in the euro, they have about $68 trillion of dollar-equivalent debt and only $14 trillion of GDP, so Europe is even more heavily indebted.

Why does this matter? Because the Europeans will and are implementing austerity measures. This is leading to a shrinking economy and social unrest. Countries in this shape of not consumers and great trading partners which means that we are not exchanging our goods and services with them. This leads to economic contraction in the US.

Issue 3 – Printing Money

When the government engages in quantitative easing (a/k/a printing money), it injects more liquidity into the system. One of the effects of this is that its shifts the demand curve for goods and services because there is more money in the system. This causes the price for goods and services to increase. So, the average Joe or Jane Lunch Bucket is seeing a 2% annual increase in wages during QE2, but because of printing, prices went up 4%.

So, in reality the regular person is getting worse off because price increases, due to printing or QE, is eroding their purchasing power. Therefore, people start cutting back on spending. Consumer spending is 2/3 of the spending, so reductions in this component leads to slower economic growth and actual shrinking of GDP.

What’s ironic about this printing of money is that you have the President out running around demonizing the wealthy, saying the he is for the little guy, but the reality is that his economic policies (and Bernake), actually makes the wealth gap larger and hurts the average American. So, the average American is getting worse off due to a loss of purchasing power as a result of money printing. This will only lead to economic slowing or contraction.

Issue 4 – The Required Solution May Be Too Hard

If the money printing is going to be turned off, the government is going to have to:

  1. Get social security and medicare under control
  2. Get the tax system under control

These are two big drivers of the government debt and obligation. The willpower that may be required to correct this may b a very tall order and not feasible. If these two issues do not get addressed, then we are looking at some very difficult economic conditions.

How does this impact my Self Directed IRA?

As we’ve discussed in previous blog posts, we firmly believe that every retirement portfolio needs to be properly balanced with some assets that deal with real estate, precious metals, or other tangible assets that are out of the direct manipulation and control of Wall Street and the Federal government.

With the current national and global debt issues, current and pending austerity, and total lack of political action and willpower, it only makes sense to have a self directed IRA with loans, metals, real estate, private stock, etc. The interesting thing about assets such as real estate, private stock, small business, etc., is that they become desirable in both good and bad times.

The information provided is for educational purposes only and are not a solicitation or offering of an investment, investment advice, or tax advice. You should consult with your tax, legal or financial advisor to determine the suitability of any investments made with a self directed IRA account.