Credit Cards and The Growing Consumer Debt Epidemic

Household debt has now exceeded the national debt of the USA – what does this mean, this means that the people who live in America, you and me, owe more money to companies (particularly banks) than the entire government does to other countries!!!!

This figure is incredible but how has debt spiraled so far out of control. The average American family owes more than $16,000 on credit cards, many only making minimum payments. With some credit cards charging exorbitant “loan shark” style interest of 39%, late payment fees, partial payment fees etc etc credit card companies are able to double their money annually! This is quite possibly the most rewarding part of thew whole financial system for banks. The majority of hedge funds do not produce mid to high double digit returns – for mainline banks this is a n incredible pipeline that they will continue to milk until America wakes up.

Minimum payments (around 4% on average) will require 15 or more years to pay off if no further charges are made to the card. This is with a more normal 19.98% apr.

With the Universal Default Clause your credit card company can change your interest at any time for almost any reason, your debt is too high with another company, you were late on your mortgage payment etc etc. This is one of the scariest and most open ended, open to abuse clauses in the American legal system as it exposes more than 1 billion card holders, yep 300 million Americans with an average of 3 cards each, to the whim of the card company. Should you choose to retaliate in any fashion they deem unfit to this injustice, there goes your FICO score.

Meanwhile whilst on the topic of FICO scores, this number has become more critical than ever before as now it holds the key to how high your charges on your mortgage will be. Fannie May et al will be charging higher fees and possibly require higher down payments from “sub prime” borrowers. This means anyone with a 680 or less is going to be dinged – i believe on a sliding scale.

Credit Cards and American Consumer Debt

Household debt has now exceeded the national debt of the USA – what does this mean, this means that the people who live in America, you and me, owe more money to companies (particularly banks) than the entire government does to other countries!!!!

This figure is incredible but how has debt spiralled so far out of control. The average American family owes more than $16,000 on credit cards, many only making minimum payments. With some credit cards charging exorbitant “loan shark” style interest of 39%, late payment fees, partial payment fees etc etc credit card companies are able to double their money annually! This is quite possibly the most rewarding part of thew whole financial system for banks. The majority of hedge funds do not produce mid to high double digit returns – for mainline banks this is a n incredible pipeline that they will continue to milk until America wakes up.

Minimum payments (around 4% on average) will require 15 or more years to pay off if no further charges are made to the card. This is with a more normal 19.98% apr.

With the Universal Default Clause your credit card company can change your interest at any time for almost any reason, your debt is too high with another company, you were late on your mortgage payment etc etc. This is one of the scariest and most open ended, open to abuse clauses in the American legal system as it exposes more than 1 billion card holders, yep 300
million Americans with an average of 3 cards each, to the whim of the card company. Should you choose to retaliate in any fashion they deem unfit to this injustice, there goes your FICO score.

Meanwhile whilst on the topic of FICO scores, this number has become more critical than ever before as now it holds the key to how high your charges on your mortgage will be. Fannie May et al will be charging higher fees and possibly require higher down payments from “sub prime” borrowers. This means anyone with a 680 or less is going to be dinged – i believe on a sliding scale.

Copyright Jonathan Rose 2007 – Creative Commons License

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Happiness – Materialism Vs. Spirituality

Happiness – Materialism Vs. Spirituality

There is no question that I am very materialistic, I am the first person to admit that I love nice things and spend fortunes purchasing them, be it a Brioni suits, Rolex Watches, Jewelry, Fast Cars, Nice Houses, Big Screen TV’s with separate speakers and amplifiers etc etc (By the way, a Level 3 Monster Power Cleaner is the best TV investment you will ever make, you cant believe the difference it will make to the picture quality) I am the first person in line to spend the money and boy did that paragraph just sound like it, don’t let that put you off though.

The conflict that has always raged in me between the lavish and the utilitarian in me has entered a new phase. Living in the center of the materialistic and “Look at me and what I have and please be jealous and suck up too me” universe, (Did I mention the Beckhams just moved to town) the nirvana of “selfishness,” “Beverly Hills” has been an eye opening experience. Whilst, as I previously mentioned, I “like” my material possessions as much as, if not more than anyone else (especially since loosing so much “paper wealth” in 2000-2001 (Tech stock crash) I became orientated towards bricks and mortar, tangible, physical assets one can see and hold and touch!!! Something to show for all the work) The denizens of Beverly Hills seem to “need” material possessions, buying them seems to give them a sense of self and worth, justifying and validating their existence. There is an entitlement which is quite unique, haughtiness to the women who have never personally achieved anything of any significance or benefit to the world other than marrying someone rich and spending their money! You have to love the nouveaux riche.

And the scariest part of the whole is place is that very few actually seem to have any “real” money, the house is on a 10 year interest only loan (in essence they rent) the car (for car, read Bentley or Porsche) is leased for $2000 a month or more, the credit cards are always maxed out and they have to keep working as they cant afford to retire!!! Many of the husbands work from 6am till 10pm and often spend Saturday in the office (I think they are hiding from their wives personally) just to pay the bills and try and keep ahead of the tide of debt and expenses of their lavish lifestyles. Not to mention the plastic surgery money to try and look young and be something your not! But no one seems happy, they want talk to another human being in the elevator, they don’t smile, they complain bitterly about anything and everything any time they can get anyone to listen! So many people says “money buys happiness” come and shadow one of these people for a week and see that it doesn’t.

So why is it I ask myself that all my happiest and most fulfilling moments come from those breathtaking moments on top of a mountain with my wife and dogs, walking on a beach with a beautiful sunset. How come these spiritual moments awaken my senses and fulfill me in a fashion that no material possessions can. Meanwhile when I walk on the beach with these same “Beverly Hills Wives” in the same time and circumstance, are they complaining about the sand damaging their Manolo Blahnik and their pedicure getting ruined and wondering if the can catch “something” (read disease) from walking on the beach.

So why do I still live here, I am in the process of leaving and heading back to the east coast where old money, class and sophistication rule the day. I will probably make land fall in Denver on route for some skiing and relaxation enroute and to try and reset my balance and sense of self. Leave my repulsion for materialism at 13,000 feet and then head back to Greenwich, CT, Manhattan, NY or even Boston, Ma.

Copyright Jonathan Rose 2007 – Creative Commons License

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50 Basis Points

With the fed cutting 50 basis points today we have to wonder what the long term effects will be.

1. The dollar has taken a quick response and devalued further.
2. Gold is rising in value letting everyone know that the dollar is getting worth less daily. It seems only yesterday that gold sat at $350 instead of the mid to high 700’s.
3. Countrywide may survive too by slight of hand and balance sheet

Does this mean the real estate problems are resolved? Not at all, now they will get dragged out for longer with no true bottom of the market in sight, everyone will still be shy of CMO’s, ABS’s etc so lending will be lax, but interest rates will be lower for those that can refinance. All the subprime borrowers will still not be able to obtain their refinance. Therefore we should still enter a recession, just a few months later!

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Everybody wants to be an instant millionaire these days! Here’s a fairly easy way to achieve it in far less time than you would imagine!

Everybody wants to be an instant millionaire these days! Here’s a fairly easy way to achieve it in far less time than you would imagine!

Guess what, you don’t have to be a football player, a “pop idol” or win the lottery to become a millionaire, you can just do it the old fashion way (saving).

The answer to this myth of how to get rich quick is that you can’t, everything in life requires hard work, dedication and nothing comes easily. I am fortunate enough to know many millionaires and several billionaires and every one of their overnight successes was preceded by at least 5 years of hard work and graft (and in many cases 10-20)! However you can increase your net worth and therefore directly affect your ability to create greater returns form existing investments as well as to accrue wealth faster.

How do you do this, it is very simple, if you want to become a millionaire, write a $1 million whole life insurance policy. This will require some effort on your part, nothing in life worth having is easy. If you get a borrowing/ cash value rider then you can borrow, often upto 90% of the policy cash value. The principal appreciates tax free. Once you have used up your tax free allowance into IRA and pension funds this is the next place you should look to put some money so it can at least grow tax free.

What doors will such a policy open for you and why will it increase the probability of you becoming rich!

If you go to any major banking/ investment institution they will have a varied range of financial products. Many of these offerings though are limited to high net worth individuals and accredited investors. Derivatives, Notes, Structured Products, Hedge Funds and other vehicles for generating double digit annual returns (sometimes with capital protection) are considered speculative or are only available to experienced investors with “suitable experience” to make such investment. A $1,000,000 whole life policy will provide you with access to many of these deals.

Why is the gulf between rich and poor widening?

For exactly the reasons mentioned above, the wealthier you are, not only do you have greater investable assets but you have access to better asset classes. Banks such as Merrill Lynch, UBS, Deutsche Bank regular issue complex derivative products that have double digit returns with capital protection through the utilization of options, hedging etc. A money market CD offer 5% per annum whilst a “sophisticated investor will have access to a principal protect barrier note with 210-230% the upside and 100% principal protection based upon the Deutsche Bank Currency Returns Index (Bloomberg Ticker: DBCRUSI Index). Sound complex, well it is, the brightest minds in the world are constantly trying to figure out new ways to make rich people richer and with a million dollar net worth you will have access to such products. As a result a $10,000 account can earn as much as a $43,000 Cd over a 5 years. Now do the maths and use the whole $43,000 and you will see what i am getting at! (its over 100k) The other huge factor this accumulation of wealth is compounding, were interest in accreted!

Why are the baby boomers so wealth and why will the next generation be poorer?
What happened to home equity and property value as Americas saving method for retirement?

This is a fascinating question and the answers are inextricably linked. During the 50-70’s people were encouraged to adopt the American dream and buy their own home. At the time people were paying capital and interest so with every payment they reduced the principal owed on the house and built their equity value. The property appreciated as it almost does over any 25 year period and the home owner was left with what had essentially been a tax deductible savings account containing a considerable and valuable asset.

Copyright Jonathan Rose 2007 – Creative Commons License

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Diesel Vrs Hybrid Vrs Petrol Cars – The great deception

I love to hear people talking about hybrids and buying them at many thousands of extra dollars! But do these people really understand what they are doing.

a) MPG from EPA. To calculate the fuel economy of a vehicle in the US to the best of my knowledge the EPA uses a rolling road and essentially eradicated the factors of wind resistance/ aerodynamics,
vehicle weight, tire width etc. This give highly inaccurate figures. This system is reputedly being changed during 2008 to give fuel economy figures that come in line with European and Japanese testing methods. I am certain that you will see a dramatic fall in the quoted average fuel economy of all cars, but hybrid in particular! The battery weighs a lot!!!!

b) Cost of ownership. Do you know what it costs to replace the battery on a hybrid car (if you keep you car 7-8 years then lease it don’t buy it) if you are buying a used car then it is a ticking time bomb as you could end up paying as much or more than the value of the car to replace the battery.

c) Disposing of the battery. Batteries are a combination of acids, lead and other toxic material, review a short article on what it takes to dispose of batteries and how dangerous they are and you will get the idea here.

d) Diesel. Diesel engines are not what they used to be, blutech and other technologies produce engines that have significantly lower emissions than older petrol cars and also get far better fuel economy. With fewer moving parts they are a lot cheaper to maintain and have longer service intervals (this is one of the biggest revenue centers for car manufacturers so they don’t want this)

e) California. California is seem as the progressive state, yet in this arena it is archaic, by pushing hybrids harder and harder (with access to hov (high occupancy vehicle) lane and free parking downtown they have created a boon for Toyota in particular with its prius and other hybrid manufacturers.)

f) Celebrity endorsement. Celebrities have been seen turning up to all kind of event in Prius’ to show their concern for the environment! However check the license plate and you will invariably see a LCS tag which means they hired it and don’t own it!!!!

g) Alternative. Greenland has gone hydrogen, Brazil is using biodiesel. UK uses gas. Whilst these are the technology of the future American car manufacturer and oil companies have a strangle hold on the economy and political decision makers. Don’t expect to see these technologies until oil starts to dry up, (they love gouging you at the pump.) or significant pressure is applied. Gas stations would have to carry these alternate fuels and have supply system and infrastructure in place which will involve considerable expense and therefore loss of profit to all important shareholders!

h) Electric cars. Have you seen how an electric power station generates power (baring solar etc) they spew coal or nuclear waste out to generate the electricity, I rather use the diesel thanks!!!!

So what am I saying with all this, don’t buy a Hybrid, the Europeans have it right, get yourself a state of the art diesel for the next car and save the environment and you pocket with significantly reduced expense!

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Credit Card Credit Crisis

It is only a few month since I was discussing the impact of credit card and consumer debt on the economy and that everyone saying American Express etc would not be impacted by the sub prime meltdown was crazy. If you aren’t paying your mortgage and are establishing bad credit , why would you pay your credit card bill. If you are going to go bankrupt as a method to protect any money you do have, why not throw the cards in it.

It is unfortunate too reflect that Greenspan’s reduction of interest rates was so extreme to recover the markets in 2001-2003 that another bubble came about. No one believed interest rate would rise ever again and they would never have to pay more interest on their principal. This short term-ism is rife throughout society and is probably one of the most significant parts of this crisis. America demands instant gratification.

Bankers looking for short term gains, their year end bonuses more critical to their lives than the long term business profitability. This is why renumeration is so important and has to be reviewed more carefully. The requirements placed on CEO’s for short term stock market gains are compounded by the fact that businesses take time to change and may not necessarily benefit from the constant demands of shareholders for faster and faster growth.

This always brings me back to the anomally that is Google. With its valuation climbing past $200bn with only $4.23bn of profit on about $10bn in revenue. The price has taken into account all possible growth for the next 5-10 years. Brin and Schmit should be selling stock like crazy and investing in someone like Microsoft with a similar company valuation but over $50bn in revenue.

Which brings us full circle, analysts are all telling you:

1) Bank stocks look cheap, buy them now!!!

I say don’t bother, they still haven’t priced in the full extent of the crash yet as no one realizes how bad it will be.

2) Credit card company stock has been adversely affected by the housing crisis and is unfairly impacted.

I think not, they are the next to topple in the house of cards. This also has a very bad knock on impact to GM and Ford who really are a credit company now more than a car manufacturer. Expect Ford to weather the storm better on strong European sales, bt neither will be doing well in the medium term.

3) Flight to gold for safety

I think not, $800 plus is unsustainable long term and whilst you might see $900-1000 in short term hysteria, long term expect somewhere around $500.

4) Oil at over $100 a barrel.

I think this is price gouging, whilst supply is not indefinite, $65-70 per barrel is a real figure. The answer is to force manufacturer’s to sell fuel efficient diesels in the US and the work on hydrogen powered cars and a distribution network that will allow them to become popular and utilitarian!

Overall expect a global depression of epic 1929 proportions, position yourself to weather a storm. Also ho0pe that Bernanke doesn’t continue with his insanity and hope that the cutting has stopped, even a 1% interest rate cannot shore up the economies current messes at some point we have to turn into the storm and ride through it, perpetually running in front of the wave means it grows larger and larger making it scarier and scarier to turn into it and get through to the balmy waters on the other side.

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Diamonds Are A Girls Best Friend – Or Are They

I regularly end up having conversations with people who oooh and ahhh over diamonds, possibly the best marketed commodity on the planet. People have connotations of rarity and value when they look at diamonds and one cannot but applaud DeBeers (the cartel that makes Microsoft’s anti competitive litigation with Netscape look like small children throwing rocks in the middle of a war zone) for having achieved this highly deceptive position within the precious stone marketplace.

Rubys are the rarest of the precious stones with Emerald and Sapphires close behind, Diamonds are actually one of the more common stones (resulting in DeBeers billion dollar vaults of stones) they have just been marketed well over the past century, to the point where one wouldn’t give a different stone for an engagement!

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Comment e-mailed to me

Regarding your marveling at DeBeers marketing, I have to marvel even more at the psychology inside the brain of the recipients of those diamonds (women). To them, especially the 20-30 somethings, the truest expression of the love of their fiance is to buy them something worth the down payment on a house that serves no useful purpose except that one can cut your way out of a phone booth with it if trapped inside….too bad their are no phone booths anymore thanks to cell phones ! Would the money for a diamond not be better spent on the beginnings of a retirement portfolio ?

Food for thought…..diamonds are the ultimate form of nature sequestering carbon…cant burn em to release their carbon content.

Diamonds Are A Girls Best Friend – Or Are They

I regularly end up having conversations with people who oooh and ahhh over diamonds, possibly the best marketed commodity on the planet. People have connotations of rarity and value when they look at diamonds and one cannot but applaud DeBeers (the cartel that makes Microsoft’s anti competitive litigation with Netscape look like small children throwing rocks in the middle of a war zone) for having achieved this highly deceptive position within the precious stone marketplace.

Rubys are the rarest of the precious stones with Emerald and Sapphires close behind, Diamonds are actually one of the more common stones (resulting in DeBeers billion dollar vaults of stones) they have just been marketed well over the past century, to the point where one wouldn’t give a different stone for an engagement!

Copyright Jonathan Rose 2007 – Creative Commons License

This work is licensed under a
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Comment e-mailed to me

Regarding your marveling at DeBeers marketing, I have to marvel even more at the psychology inside the brain of the recipients of those diamonds (women). To them, especially the 20-30 somethings, the truest expression of the love of their fiance is to buy them something worth the down payment on a house that serves no useful purpose except that one can cut your way out of a phone booth with it if trapped inside….too bad their are no phone booths anymore thanks to cell phones ! Would the money for a diamond not be better spent on the beginnings of a retirement portfolio ?

Food for thought…..diamonds are the ultimate form of nature sequestering carbon…cant burn em to release their carbon content.

Saving Plan

I was asked last week about how to save money in the current economic situation and where to invest.

My answers surprised them, as I am a staunch property supporter……… Don’t buy anything yet – the bottom isn’t even close, I returned to my old adage that when we see rents covering the mortgage payments and all associated costs and the property is entirely self cash flowing, buy, but until then look for some solid mutual fund performance (American/ Global Growth and Income funds, Franklin Templeton etc) but try holding them somewhere different. Inside a Variable Life Insurance Policy. Why…… Tax free growth, long term disability riders, easy borrowing and the immediate net worth it provides you will all come in handy when the housing market is full of bargains!

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