Archive for June, 2012

Gold, Hyperinflation And Your Self Directed IRA

Monday, June 18th, 2012

Will or would gold hold up under a hyperinflation scenario?

This may sound like some sort of scifi, Ayn Rand scenario, but that’s what the people of the Weimar Republic of post WWI Germany thought and yet lived through. The people of Germany had to withstand price increases that doubled every 28 hours or 20 billion times over where they started. Then you’ll say “well that was a long time ago and we are more modern and sophisticated than they were”. Well if we are soooo sophisticated and advanced, then how did we get into the WORST recession and economic environment since the Great Depression? The answer is that we have not learned our lessons and in some ways we’ve forgotten the lessons of our ancestors.

What is hyperinflation?

Hyperinflation is defined by a 50% or more price increase in a single month. Hyperinflation generally has one root cause – too much money (i.e. the money supply greatly increases). This scenario typically occurs when a government engages in too much spending, creating deficits to such unsustainable levels that investors lose confidence in the government. Sounds a little familiar.

There have been 29 incidences of hyperinflation since 1919 (Weimar) which is about once every three years. So, this fact countermands the statement that we’ve moved beyond this problem. We have not. What actually ends up happening in the US is anyone’s guess, but the obvious strategy is that people should be considering hard assets such as precious metals and real estate.

What you should be doing with your self directed IRA

Given the simple fact that our government continues to spend, create deficits, print money  (i.e. put more money into circulation), it only seems to make sense to hedge your portfolio with metals and real the estate. The real question is not if you should do this, but how much of these asset classes you should be holding in your self directed IRA.

Disclaimer

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.

The US Outlook And Your Self Directed IRA

Sunday, June 17th, 2012

Despite the many negative macro economic factors that are negatively impacting the US and the US recovery, the US is in relatively better shape than other countries. This may sound contradictory to some of our prior blog postings, but its not when we compare the US to other countries. So, we thought we would highlight the outlook for the US and how this may impact your investment decisions with your self directed IRA.

Some of the positives are:

  • Cheap energy: Natural gas is at $2.30 per MMBtu. The helps make the generation of  electricity cheaper. Crude oil running around $82 per barrel. That is relatively cheap and helps keep oil based goods and services cheaper which is good for the economy.
  • IRAQ and Afghanistan are dwindling down. The helps reduce government spending and printing.
  • Bernanke will keep printing. We believe that there is a great benefit to banks to keep the interest rates low. We also believe that with the falling prices (deflationary), the Fed will continue to print  and keep rates low.
  • The dollar is stronger than its competition. Despite the fact that the Fed wants a weaker, cheaper dollar,  when compared to a weak Europe, unmanageable Japanese government debt and the Chinese money stimulus, the US Dollar is more attractive than most other currencies which has been drawing investors into the Dollar.
  • US stocks earnings are still positive.  P/E ratios are attractive when compared to the negative real return of government bonds. Predictions are that US corps will continue to show good ratios which will attract investors.
  • Weakness in Japan and China makes the US relatively more attractive. This is a complex topic, but China and Japan are seeing significant weakness and they are the kings of central bank planning and control which keeps markets out of balance.

How You Should Position Your Self Directed IRA

The crisis in Europe will cause a loss in confidence in the Euro. The dollar is likely to rise against the Euro (goods become more expensive for the Europeans to purchase from the US) which will be the most of any other currency. This will mean that the Europeans will be consuming less of US goods and services. The dollar will rise less against the Japanese yen and the Chinese renminbi, but rise it will.

Here some some specific ideas for self directed IRA investing:

  1. Precious Metals In Your Self Directed IRA- A rising dollar is bad for commodities because they become more expensive. This would generally mean that gold would be negatively impacted. However, because of the ongoing printing in the US, Europe and China, we think that this will outweigh the downward pressures on gold from the strengthening dollar. We are still recommending that you continue to hold some precious metals in your self directed IRA. Consult your financial advisor as to an appropriate allocation of metals.
  2. Real Estate In Your Self Directed IRA – The real estate market looks to continue to stabilize. There are some potential shocks still looming out there. However, a strengthening dollar is likely to have the effect of making real estate hold prices and in some markets, you may see price increases. We believe that we are still in for tough times ahead and that people are not going to see significant increases in their earnings power, nor are they going to be making home purchases due to the banks lending standards. This still bodes well for rental real estate being held in your self directed IRA, and we recommend that people continue to look for good rental opportunities for their self directed IRA.
  3. Trust Deeds In Your Self Directed IRA – There will continue to be pressure on working people due to their purchasing power degrading. Real estate prices may stabilize, but are not likely to see enough price appreciation to help people under water. There will continue to be private lending opportunities for holding deeds of trust in your self directed IRA. We recommend that you continue to look for the right type of borrower. You will find people under some stress, but have a job with a regular paycheck. These are great opportunities for your self directed IRA.

Disclaimer

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.

The Self Directed IRA Update

Thursday, June 14th, 2012

We hate to continue being such a doom and gloom type with the blog, but here we are half way through June and the economic news is not getting better – its getting worse.

  • Greece – Greece is clearly heading for a breakup and even withdrawal from the European Union. Greece can’t even borrow money. They are starting to see large withdrawal of cash from banks and ATMs. Its happening. They are heading south and its not going to be pretty.
  • Spain – Spain is at 25% unemployment. Spain is providing billions into their major banks to prevent a collapse.
  • Northern Europe  – not doing much better. They have debt that is north of 200% of GDP.
  • China – Just dropped their interest rate. They have seen quarter over quarter declines in GDP – even their highly manipulated and suspect numbers.
  • Major currency trader George Soros is moving more of his portfolio into Gold.
  • The US – The jobs numbers are not improving. Deflation is rearing its head. These are clear signs that QE3 is coming

These are just some of the basic highlights of what is happening nationally and globally. The overall picture that we see is one of a slowing and degrading economy across the globe.

What these events likely mean for you and your self directed IRA:

  • We are likely to see some deflationary effects short term. We are already seeing falling gas, and food prices mostly due to a decrease in demand.
  • The stock market is likely to show a large sell off between now and the end of the year.
  • The Fed is going to step in with the latest version of QE.

What to do with your self directed IRA

  • Make sure that you have some gold and silver as your overall portfolio.
  • Continue looking for those good real estate investment opportunities. Real estate may not be zooming, but it is nearing bottoms, and if the economy really tanks, rental properties will be very hot as people will be losing homes and they will need rental housing.
  • Look for other non wall Street investment opportunities in the energy sector through private placements
  • Look into a peer to peer lending opportunity by finding credible, reliable, credit worthy individuals needing loans

Disclaimer

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.

How Demographics Impact Your Self Directed IRA

Sunday, June 10th, 2012

One of the things that people fall into when looking to the future is normalcy bias. We wrote about this problem a few blogs back. The basic issue is that we think things will continue to go on the same in the future as they did in the past. This is especially true when we look at the economy.

One of the issues when looking at the economy and how and where to invest in the future is demographics. Most people fail to step back and look at the big picture of where will spending and consumption occur.

Consumer Spending

First of all, we know that consumer spending accounts for 70% of GDP.  This is important to understand because every country and economy has a breakdown by age. There tends to be larger groups within that age breakdown. Depending how large these groups are will dictate how and what goods and services are consumed.

Spending Life Cycle

Depending on your age, your consumption of goods and services vary.  Here are some rough examples:

  • < 25: More on education, entertainment
  • 30s: Starter homes, children, vacations, shopping, some health care.
  • 40s: More expensive homes, higher end cars, investing, more health care.
  • 50s: Retirement homes, reduced spending on children, and vehicles,  more on health care, more savings
  • 60s: mostly savings, not much in the way of consumer goods, more health care

So, you get the idea. Your needs and spending habits change as your age.

Current US Demographics

As many of you already know, the baby boom generation is by far the largest portion of our population. This generation is in their 50s and 60s. Because of this, you will naturally see an overall decline in the consumption of goods and services.

What does this all mean?

Its this reduced consumption factor that will continue to drag the economy. The people with the most money that represented the bulk of consumer spending are spending less. This has been enhanced with the recession. This pattern is not going to change itself. Its a way of our life and economy.

Its because of this reduced spending and fear on the part of the consumer that the Fed has spent trillions of dollars with little noticeable improvements. Some would argue that the spending has prevented or avoided more dire circumstances, and some of that may be true. But it could also be argued that we are delaying the inevitable slow down by engaging in massive currency manipulation.

No matter how much money is printed or manipulated, its not going to change the basic demographics and spending patterns. In fact, it could be argued that more intervention may be doing more harm than good because the government will not allow the natural market forces to work in an orderly manner.

How does this impact my Self Directed IRA?

As we wrote on the prior article, we believe the Fed will be compelled to continue stepping in with currency manipulation to help bolster the economy. Spending patterns and demographics support the notion that consumer spending is not likely to ever come back to where it was. These disconnects will continue cause our economy to see very slow growth, with people losing pace with inflation thereby losing earnings power.

This is ultimately going to push politics and the government to do more not less. Do more means spending, printing. More spending and printing means that you need to be positioning your self directed IRA into metals and real estate.

Disclaimer

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.

Potential Fed Moves And Your Self Directed IRA

Sunday, June 10th, 2012

This week Ben Bernanke was in front of congress being asked if he was going to be engaging in QE3 or some other form of intervention. In true political avoidance tactics, Bernanke basically replied by stating that the Fed stood at the ready should conditions warrant. He pointed out that the Fed still does have a number of tools at its disposal.

So, the markets clearly saw this as a clear indication that the Fed would not be engaging in its usual money manipulations in the short term. However, how long will this last? There is likely to be pressure from continued government spending and movements into the US dollar.

Government spending - There has been little sign to show that the government will make any drastic changes in their operations, mind set, and therefore spending. Its not likely that the mandatory tax increases and spending cuts that are looming in January will take full effect. It is likely that the government will engage in a lot of political rhetoric and the media will hype the pending fiscal cliff. This in turn will have negative effects on the markets, which may force the Fed’s hand to take action. Additionally, if the government’s spending is not curbed, companies that are buying the treasury bonds, in the absence of the Fed buying these bonds, will reach a point where they won’t continue doing so without bidding up interest rates. At that point, you are likely to see more Fed intervention under whatever program name they decide.

Movement into the dollar – despite the fact that the dollar is very worthless, its still perceived to be better than the alternative currencies out there. This has the effect of strengthening the dollar which will eventually lead to an increase in the dollars value relative to other currencies. The downside to this is that this makes exports more expensive which dampens exports and has a negative impact on the economy. At some point, there is likely to be pressure to cheapen the dollar (currency manipulation) and the Fed is likely to be forced to take action.

So what will the options be?

We believe that the only options will be, ultimately, for the Fed to continue its intervention programs. It has no choice. The government and the Fed have shown time and again that they are committed to protecting the banks and preventing deflation. They have also shown that they have no interest or intention for allowing the former free markets to balance themselves out. So, printing, easing, etc. it is.

Timing

Timing is hard to say. We believe that we will see some type of intervention over the next 6 months. The Europeans are in a very bad place. There are already calls for the US to step in and and assist in some way. The current low interest environment has not had the desired results – meaning no one is borrowing. Jobs are not coming back. Consumer spending is not recovering. Housing is not recovering. There is a presidential election going on. There will be definite pressure building sooner rather than later. It is most likley that the Fed will be foreced to make some move over the next 6 months or less.

What does this mean for my self directed IRA?

It seems likely that more currency manipulation will be forthcoming over the next several months. We should note that gold has held fairly well through all of this especially in comparison to other commodities. Imagine what could happen if all of those treasury investors decided to even put a small percentage of their holdings into metals?

The average baby boomer cannot make a decent rate of return on their earnings. They are being forced to invest in more risky assets just to get some earnings. Many may have to consider metals as a safe haven for wealth preservation. Some are looking at real estate for investment income. This is sometimes in the form of actual property ownership or in other cases deeds of trusts or other lending arrangements.

The point here is that there is nothing new on the horizon that would suggest that the nations and the US specifically, has figured anything out other than to continue manipulating currency. In the end you likely need to have some portion of your retirement portfolio held in a self directed IRA.

Disclaimer

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.