GDP is rising, stock prices have stopped falling, inflation has peaked and the world is good again…

My next interest rate class will be held on Wednesday, September 17th at 6pm. Seating is limited to 20 attendees and we are rapidly filling the room. I will have detailed forecasts for investments, interest rates and the economy. Please register as soon as possible.

Thursday’s news that U.S. GDP rose 3.3% (annual rate) in the 2nd quarter sent stocks soaring and experts back into hiding (again) wondering what happened to the recession of 2008. Could the worst of the housing and credit crises finally be over? Is this economic news the all clear so many have been waiting for? Will the Fed’s next move be to raise the overnight funds rate from its current level of 2.00%?

Anything is possible but unfortunately for the perma bulls who only see sunny skies no matter what the conditions this news is probably just another fake out among the many we have seen for the past two years. Bear markets are deadly and long lasting and don’t end until the majority have left the scene for safer terrain. The GDP strength was mostly an increase in exports and reduction in inventories with the gain in consumer spending (1.7%) coming from the $100 billion in rebate checks. U.S. import growth continues to decline and a U.S. rebound needs strong overseas demand from China and Europe and their economies should slow considerably in 2009. The U.S. consumer reminds me of the drug addict that says he is going to quit but asks for a couple more days before beginning the change. Inflation is clearly slowing and gold bulls who were telling us of impending inflation a few months ago now are wondering why the price of gold is declining if inflation is rising. We are in the very early stages of a major credit contraction and asset depreciation cycle that will not end because of hope and the fact that 99.99% of people have never witnessed this before. I continue to be amazed that both Presidential candidates act like this economic issue is something from another world and that the Fed? Treasury? are handling it so well they don’t need to comment. Why hasn’t anyone asked them about their opinion? We want to believe everything will be ok because if it isn’t then we will be afraid and fear is NOT something anyone chooses for a first option. Observing this period in economic history is like watching a slow moving hurricane destroy your town with you frozen and unable to do anything. The sad part is that we can do something to slow down the pain and suffering but it involves changing the way you think, believe and act with your money and investments. Thousands of real estate agents, mortgage brokers, investors and others remain in the business for the sole reason that they feel they can’t make the kind of money they have in the past in any other business. That is true but what makes them believe the past will be repeated again anytime soon? Memories are great but sometimes I wish we could wash them away because they hold us back from changing our paths to prepare for the future. It’s time to wake up to the fact the late 90’s and early 2000’s are not coming back anytime soon. This game of financial musical chairs is destroying wealth every day because these players all believe they will occupy the only chair remaining when the music stops. It’s no different than watching long only managers who keep buying all the way down in a bear market. At some point you throw all of your chips on the table (FNM & FRE) and hope that your last swing is a home run over the fences. You have better odds playing the state lottery….very sad. The greatest success stories in this country’s history have come from those that weren’t afraid to change and know that you can’t have a rainbow without a rainstorm.

The dollar

The British Pound continues its freefall as the world begins to understand England’s housing and credit problems will soon force the Bank of England to lower overnight interest rates. Our forecast in January of a 1.80 Pound before the end of the year seems likely and profits should be taken at that point. The dollar has become the “hot” currency in the past few weeks and should see continued strength for the remainder of the year more because of overseas weakness than U.S. economic strength.

Credit

Borrowing has been the fuel for every period of economic strength in the U.S. over the past 80 years and is the reason we believe the consumer will have a hard time continuing recent spending patterns. Bank capital has been decimated in the past 18 months and lending can only increase if banks are able to create profits that solidify their balance sheets. It will take many years of a positively sloped yield curve (short rates less than long rates) for banks to be able to even come close to the amount of lending that was done in the 2006-2007 period. Borrowers are still in a state of denial believing that 2009 will bring an increase in available credit. Next year they will look toward 2010 and so on….it reminds me of real estate agents who believe because prices are lower than they were last year that it represents a good buying opportunity. What if they are lower next year and the year after? We have been conditioned as a society to believe prices always rise and thus the rush to buy now. But what if prices began to fall year after year after year? How many years would it take to change our perceptions and buying behavior? We may find out sooner than you think. Today credit is gold and if you have a credit line of any kind protect it, nourish it and make sure you know the conditions that it can be terminated by the lender. Don’t assume anything as times have changed and you MUST change with them.

The next four months are crucial

Labor Day always signifies the end of summer vacation and back to school or serious work. This year we have the added event of a presidential election without an incumbent president or vice-president as one of the candidates. Hopefully the public will force these two men to focus on deteriorating economic and credit conditions. The unemployment rate is sure to rise to well over 6% by the end of the year and a continued cut back in bank lending will make conditions difficult if not impossible for businesses that rely on credit for their everyday business operations. Counter trend stock rallies will continue to give false hope to those that only see the world the way that they need. Long-term interest rates will be held down by a declining inflation rate and the dollar will bring to this country badly needed investment dollars. Leverage is becoming a very dangerous word to investors that will find its costs exceed its rewards in most ventures.

The winners in the next 12 months will be those that lose the least and accumulate the most cash. It’s too early to go hunting for bargains yet but those opportunities will reward investors with patience, foresight and the willingness to embrace change as we enter a period not seen since the Great Depression.

The Fed, Treasury and federal government need to serve drinks at the party

My next interest rate class will be held on Wednesday, September 17th at 6pm. Seating is limited to 20 attendees and we are rapidly filling the room. I will have detailed forecasts for investments, interest rates and the economy. Please register as soon as possible.

The most famous quote from a Fed Chairman came not from Alan Greenspan but William McChesney Martin who served from 1951 until 1970. Early in his term he said “the job of the Federal Reserve was to take away the punch bowl just as the party gets going.” He was referring to the most powerful tool used to slow down a runaway economy and inflation rate: increasing overnight interest rates. For the past 40+ years the Fed has increased the overnight Fed Funds rate to slow the economy and decreased it to stimulate a stagnant economy. Former Chairman Paul Volcker used higher interest rates to stop runaway inflation in the late 70’s and early 80’s and Alan Greenspan lowered and raised short-term rates many times in his 18 years as Fed head to help smooth out perceived excesses in the business cycle. In the past year current Fed head Ben Bernanke has cut the overnight Fed Funds rate to its current level of 2.00% but it has had almost no impact on loan demand as borrowers find it difficult if not impossible to obtain credit. With the exception of a few large institutions, lack of capital due to massive mortgage losses has created this year’s motto for banks: “We can’t lend what we don’t have.” The Fed would have to lower short-term rates BELOW zero to create enough demand to make a difference but it’s doubtful banks would be interested in loaning $$ to corporations and individuals if they had to pay instead of receiving interest payments. If lower interest rates aren’t the cure, are we headed for another visit to the Great Depression?

Sending party invitations

When was the last time you sent invitations to an upcoming party and all invitees responded immediately? With traffic and the high price of gasoline (especially in LA), busy schedules, competition from other events and TV shows (the Olympics) you are lucky if you have 25% show up with most not bothering to RSVP. It’s worse for banks that would like to lend but are the equivalent of a party host that has no food or drinks to serve its guests. With loan demand beginning to fall and total Bank credit flat for the past six months the Fed and Treasury have precious little time before a DE-flation scare grips the country. Without government intervention the current de-leveraging of American debt will lead to asset price deflation which will then produce more debt destruction and the vicious circle will pick-up momentum that will be hard to break. A longer term solution is for the banks to take advantage of a positively sloped yield curve where short-term rates are lower than long-term rates. Currently the spread between the U.S. Treasury 2-year and 10-year is at 153 basis points (2.30%-3.83%) and should widen to over 200 bp before the end of this year. It will take years of borrowing at short-term rates and lending at long-term rates for banks to replenish their balance sheets. A more immediate solution is needed in the form of something similar to current SBA loans where the government is in 2nd position at higher LTV’s than would normally be allowed by banks. The government must find a way to increase the supply of lendable funds and that will increase the demand from potential borrowers that aren’t even considering possible purchase of business or individual assets due to a lack of confidence in the economy and their own financial situation. If you receive an invitation to a party with an incentive attached based on attendance, the odds of your attending increase dramatically. Instead of another stimulus bill from Congress we need to attack this vicious economic bear market from the supply side and force banks to lend even if the government must guarantee that banks will suffer no losses. It’s definitely not a free market solution but a couple of years of debt consolidation and asset value declines will have everyone wishing and hoping for a return to the good old days of inflation but by then it will be too late as the patient (U.S. economy) will be on life support.

The dollar

Life and the markets frequently move on a relative basis and the recent spike higher in the dollar has many confused but the answer is simply a matter of which country is suffering the least this year. One of my best bets for the year was a decline in the value of the British Pound versus the dollar. On August 8th the Pound broke through its major support of 1.9450 and plunged to its next support level of 1.85 and we should see a bounce back to the 1.90 level before resuming its downtrend to my forecasted level of 1.80 by the end of the year. The British economy is in the early stages of a major credit contraction that will see much lower short and long-term interest rates accompanied by lower asset prices.

U.S. interest rates

As discussed above the Fed must keep the yield curve positive for a very long time to give its member banks every opportunity to make badly needed profits to help repair their balance sheets. I have written for months that inflation is not the problem but a lagging indicator and that the Fed will NOT even consider raising short-term rates as so many of the “experts” have told us is necessary to fight inflation. They must help the Treasury and Congress to find a way to lower long-term mortgage rates and when Fannie and Freddie are finally put out their misery with a government takeover we will see mortgage spreads narrow as the uncertainty that is holding back the lending market disappears and the financial markets begin to clearly understand the government’s role as a guarantor for mortgages and future lending. Hopefully the twins will be split into new entities with the bad and toxic loans moved into a separate facility so they can begin new lending (with full government guarantees) for home and apartment buyers at tighter rate spreads to U.S. treasuries. High mortgage rates and declining real estate prices are a certain recipe for DEFLATION and the country doesn’t have a clue how bad this would be because 99% of people have not lived through this and since we only see life from our own experiences their complacency is not a surprise.

Inflation

Recent wholesale and retail measures of inflation are bringing about comparisons from the 1970’s with forecasts of double digit inflation and a stagnant economy. Inflation is a lagging indicator that always peaks at the end of an economic boom and this year is no exception. The 10-year Treasury rate has fallen 30 basis points in the past 4 weeks with the inflation component now at 2.20% which is the low for the past 5 years. It is clear that world wide investors do NOT fear an increase in U.S. inflation expectations. Someone is going to be very wrong and my bet is that investors have it right.

The next 90 days

With most of the country focused on the presidential election world financial markets will be watching the action in the lending markets. How much longer will the government allow Fannie and Freddie to sink as the sharks circle? The uncertainty from markets is driving mortgage spreads higher and higher and that benefits only those betting on their survival but NOT the borrowers and isn’t that why Fannie and Freddie exist? The government must take a much more active role or it will face sky rocketing unemployment, lower consumer spending and a bigger problem in 2009 than it has ever experienced. Good luck to the next President that will inherit a mess not seen since the Roosevelt days of the 1930’s.

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DE-flation is coming, are you ready????

My next interest rate class will be held on Wednesday, September 17th at 6pm. Seating is limited and advance reservations are required.

Do you remember a couple of months ago when the “experts” were telling us to prepare for a bout of 1970’s stagflation? In Sunday’s Wall St. Journal supplement (published in hundreds of newspapers) there was an article written for the beginning investor titled: “How to handle the inflation monster.” Why is the fear always an increase in inflation? Since we only see the future from our past experiences, expectations are always centered around an increase in inflation because it has been the most frequent visitor to the U.S. economy in the past 30+ years. The last serious bout of DE-flation took place over 70 years ago. Thursday we will see a high July CPI (inflation) rate and it should give inflation forecasters confidence that they are on the right track for the remainder of the year. But inflation is a last part of the business cycle and shows prices that were charged but due to a lack of demand are now falling rapidly (oil, grains, etc.). Prices are set by demand (buyers) and supply (sellers) and Economics 101 teaches us that price rises bring increased supply and less demand and that is what we are now seeing in the U.S. as miles driven each month is now declining for the first time in many years. Demand for real estate and other investments that profited in the past decade were fueled by low borrowing rates and easy access to credit by lenders. Whenever the economy showed any signs of slowing down the Fed lowered short-term interest rates which sparked demand for investments that responded the best to leveraged buyers. As many are about to find out this year this is no ordinary business cycle but most are wishing it was because they only know one way to make $$$ and that is by using cheap credit and hold on as prices soon recover. But what if the first dip is a ledge and prices decline to another new low? What if prices don’t recover like they always have? What if history doesn’t repeat because our own experiences don’t encompass enough history? Have you considered the alternative of deflation where investors pull back from buying because they expect prices to be lower next year and the year after? Because you can’t sell short real estate there aren’t any buyers that can create short covering rallies (similar to the stock, bond and commodity markets) The common reason given by real estate agents today for purchase of a house is “the price is cheaper than it was last year” but that doesn’t mean it couldn’t be cheaper next year and the year after. Most of America has been conditioned that real estate prices go up and that buying a house creates much needed tax deductions (so do losses). Within the next 12 months we will enter the first solid period of price deflation since the Great Depression and lower interest rates might not be able stop the fall. The most important indicator of future inflation expectations is not found through polls of consumers or economists but through market action. The inflation component of the 10-year rests at 2.23%, a level not seen since February 5th of this year when the 10-year was trading at 3.57% and only 5 basis points away from the low reached in 2007 of 2.18%. The last time we were lower would be in 2003 when we saw a sub 2% reading and the market was focused on a 1% Fed funds rate triggering the last part of the debt/mortgage bubble. The Fed watches this market closely and must be very pleased with the recent reduction in long-term inflation expectations and gives them more reasons not to even consider raising short-term rates anytime this year or next despite so many forecasters call for a change in current Fed policy.

The Fed to the rescue?

From 1987 to 2005 U.S. financial markets were in love with its Fed Chairman (Greenspan) because it wanted to believe (like the Wizard of Oz) that everything would always be ok and if it wasn’t the Fed Maestro would find a solution. For the most part the country suffered only a few bouts of declining activity accompanied by low inflation and good job growth. But the price paid for the stability was an enormous growth in credit and now we have entered a long period of de-leveraging as credit is contracting and that is always DE-flationary. It is often said that it takes good buying activity for a stock to rise and an absence of these buyers will send a stock gradually lower. Credit is the fuel that moves economic activity forward and we are in the very early stages of a credit tightening that began in the residential mortgage market but has now spread to the commercial real estate and corporate markets. My theme for this year has been that lenders can’t lend what they don’t have and bank balance sheets have been crushed by writedowns of various mortgage securities. It will take many years (not months) of repair before these banks can even think of increasing their credit availability to corporate and individual customers. The current Fed funds rate of 2% has done little to increase bank credit and a move to 0.00% would probably have no effect and frighten the financial markets into a fear that the most powerful central bank in the world was impotent. The good news is that the current Fed head is probably the most knowledgeable person in the world about DE-flation and credit contractions and has spent his entire adult life studying the rarely seen economic disease. Isn’t it amazing how the universe gives us exactly what we need after it creates the event which scares us the most? The bad news is there is no quick fix and the solution may take many years (not one or two). Ben Bernanke can’t force banks to lend what they don’t have but he can make it easy for them to make $$$ by keeping the yield curve steep (2 years less than 10 years) and asking Congress to pass legislation giving banks tax credits and guarantees to loan $$. This won’t happen this year but look for it in the next administration. The BIG question is how many of you are brave enough to see we have entered a new era that demands change and the willingness to stand alone instead of losing in company as so many are doing now in the real estate business.

Three swings and the bases are loaded

In this year’s first issue on January 7th I offered three surprises for big profit in 2008. The first was that the commercial real estate market would enter a period of decline with sales becoming impossible due to a continued freezing of the mortgage market. Let’s call this a triple with only the multi-family market (apartments) having access to financing through Fannie Mae and Freddie Mac. In states with low unemployment and a high concentration of natural resources (Texas, Louisiana, Arkansas) outstanding opportunities now exist for those seeking high cash flow with some appreciation. The second best bet was for the British Pound to fall from its January level of 1.97. Last week’s dramatic action in the dollar sent the pound below 1.92 on Friday as traders began to realize what we have been forecasting all year. The British economy is crumbling with declining home prices, soft consumer spending and interest rates that will soon be lowered by the Bank of England. This represents a double as the Pound should continue its decline to the projected 1.80 level later this year. Finally my third call represents a single but has the most potential for the future and that is for a widening U.S. yield curve. The 2year/10 year spread was 108 basis points on the day of the letter and today is trading at 143 bp showing a 35 bp profit but having the potential for another 100-150 bp in the next 12-18 months as investors realize a Fed tightening would only limit banks profitability thus sending short-term rates lower. The reason the curve has not widened more during the first half of this year comes from investor bets on the long end of the Treasury curve in a flight to safety and a lowering of previously mentioned inflationary expectations. The bases are loaded for the EWW and the next year should see all three forecasts reaching home plate.

The U.S. stock market, Japanese Yen and the twins

It’s been awhile since we discussed this long standing relationship know as the “yen carry” trade where traders borrow yen at 1% and then sell the currency using the proceeds for other international investments. There hasn’t been much mention in the press lately but the yen’s weakness and recent break through of the “key” 108.50 level should give the US stock market enough support to mount a decent sized counter trend rally over the next couple of months. The stock market has absorbed an enormous amount of bad news from financial firms in the last few months and sees to discounting the next wave of writedowns and charge-offs. It is likely Fannie and Freddie will be taken over by the federal government with common shareholders wiped out or severely diluted but everyone in Washington agrees they must stay in the business of providing mortgages even if their costs go up and lending requirements tighten. We are headed for a retail bank lending model and to many it will seem like we are going backwards at least 30 years but sometimes the only way to move forward is to begin a new journey with a few steps back.

The important news this week

Interest rates are moving less to economic stats and more on perceptions of liquidity and changes in inflationary expectations. Thursday’s CPI figure is old news and the markets are focused on the future not the past. Retail sales on Wednesday should show the consumer is spending a greater percentage of their incomes (they have no savings) on gasoline but with price declines coming in a few weeks this may produce a rebound in the fall. Thursday and Friday the Minneapolis and Chicago Fed Presidents speak on the economy but the real messages come from Fed head Bernanke and the other Fed Governors. The 10-year is locked in a 3.80-4.12% trading range with recent declines limited by the “key” 3.92% level. The best plays remain the ones mentioned earlier with the yield curve offering the best risk/reward opportunity.

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The next bull market: Government regulation, intervention and tax increases

Every day I receive e-mails from readers asking if it is the right time to buy real estate, stocks, commodities, the dollar, etc. Patience is thin as everyone is afraid of missing the next bull market. No need to panic as the next growth area for the U.S. economy is one that is familiar to all…government spending and jobs.  Many of those hurt economically by the mortgage/real estate debacle have been urging Congress for more government assistance and being an election year Congress is responding.  There is a very old expression that states: “Be careful of what you ask for…” and I will add “because you might get in spades.” Today’s employment report showed more of the same with a decline of 51,000 jobs for July but the two sectors that are most supported by the government rose with health care (+32,900) and state and local governments (+28,000) proving that they are the best counter cyclical industries. The unemployment rate rose to 5.7% and is a sure bet to climb well over 6% and close to 7% before the end of the year. The best news is that the BLS (Bureau of Labor Statistics) birth/death model only contributed a phantom 4M jobs to the July number. In the last 12 months the private sector has eliminated 535M jobs but that is after an upward adjustment of 853M from the b/d model so we really lost 1.344MM jobs. Temporary jobs continue to show employers seeing no light at the end of the tunnel with a drop of 29M and most disturbing is the fact that the younger generation now entering the work force is finding it difficult to find their first job. The unemployment rate for 16-19 year olds averaged 19.0% in the past three months while the rate for 20-24 year olds rose to 10.2%. Finally the number of people who are working part-time because they can’t find full time employment rose 308M and is now at the highest level since 1994. Job stats are a lagging indicator and because we are only in the fifth inning of this economic decline (and it’s a doubleheader) I expect an increase in government spending on unemployment benefits and retraining programs (for those coming out of the real estate industry).

Recession: Why does it matter?

Thursday’s report of a 1.9% increase in 2nd quarter GDP shows that the economy is showing resilience to the credit and mortgage crises but sharp increases in exports and defense spending along with a temporary uptick from the receipt of stimulus checks covers up an underlying weakness at the consumer level. Fourth quarter 2007 GDP was revised from +.6% to -.2% and thus gives the recession experts (NBER) fuel to begin talk that a recession began late last year. Does it really matter to anyone except academics when a recession started or the fact the economy is slowly slipping into a deflationary contraction that we haven’t seen since the early 1930’s? The federal government is showing it does not need an official recession designation before opening the money spigots to assist the newly unemployed and those that have maxed out their credit cards. Credit creation is the fuel that enables any economy to grow and we have begun to see from weekly Fed stats that real estate loans are being extinguished faster than borrower and lenders can agree on new loans. We have seen the carnage in the residential market the past year and now we will soon witness the devastating effect the lack of credit availability will have on the commercial real estate market. Unless you own a multi-family building being financed by Freddie or Fannie cap rates will soon begin a climb to levels where sellers disappear and buyers can’t find financing. Government programs will be necessary to incentivize banks to make loans even though they lack the capital (reserves) needed to fund the transactions. The theme of the past year has been for banks and lenders to obtain capital through sales of common stock but with share prices plunging not many hedge funds, sovereign wealth funds and wealthy individuals want to violate the cardinal rule of investing: NEVER add to a losing position. It has also not helped that many of these lenders have created a huge credibility problem by telling shareholders months ago that the worst was over which was nothing more than wishful thinking and praying for their job security. The capital raising business is built on credibility and it will take years to recover what has been lost this year.

This isn’t your typical economic cycle

Bear markets take much longer than first anticipated and the process is grueling because people only see the future from their own experiences. Real estate agents, investors, mortgage brokers, etc. made more money than they ever dreamed possible in the past decade and those memories are what is holding them back from making necessary and dramatic changes in their careers. Believing that history will repeat creates the mistaken thought that they alone will find the last chair in the grown-up version of musical chairs. This is why patience is so important at this point of the cycle because our need to get back in the game that paid us so well creates beliefs that we will catch the handle of the falling knife when in reality 99% of the players will be cut badly by the blade. For residential mortgage brokers the game will change dramatically with a “retail” model taking over so banks can have complete control over the underwriting and pricing and develop badly needed client relationships and deposits. The federal government will be involved at a much greater level than ever before with new regulations setting the business back at least 25 years. A normal credit contraction is caused by an increase in short-term rates (by the Fed) and long-term rates (by the market due to inflationary expectations). This time really is different as the Fed has realized quickly with an overnight rate of 2% NOT stimulating loan demand because banks can’t lend what they don’t have. Long-term mortgage rates have risen not because of a rise in inflation expectations (currently 2.31% for 10 years) but a lack of available capital and a dramatic shift in underwriting standards. This will not change even though too many people are hoping and praying because they want to make the $$$ they did a couple of years ago. The really smart RE money has liquidated (Sam Zell, etc.) and is sitting on cash not even expecting any opportunities for the next couple of years. Government intervention will eventually slow the rate of descent for the U.S. economy but we have entered a “Halibut” (my favorite fish) kind of market where we sit on the bottom for many years with out going lower but definitely not going higher. Will the U.S. suffer the same fate as Japan which suffered through 15 years (1989-2004) of slow drift with deflation? Maybe, but remember the Japanese had two major differences when they entered their contraction: a high savings rate and trade surplus. I am not as worried about our trade balance as I am about this country’s lack of savings. There has been an elephant in the room for the past decade and everyone looked the other way but now the room has shrunken and everything in it appears larger.

A couple of stories that I recently mentioned in my nightly newsletter that show this time is very different. From Lake Tahoe we find a casino that has eliminated blackjack and all other table games leaving only slot machines in an effort to cut overhead. From the depths of the Florida housing depression many counties are seeing a record for houses on the market. Hernando County’s supply of housing versus average monthly sales equals 136 months or 11+ years. Citrus County holds a record that should never be broken with a 508 month or 42 year supply of homes. For those realtors that have never mentioned those magic words: “It’s not a good time to buy” Citrus County might be a good place to start. I would urge extreme patience for anyone looking to purchase in any of these Florida counties.

The Fed

Tuesday is the next FOMC meeting and no change is expected from everyone but attention will be focused on the accompanying statement at 11:15am. It is highly doubtful the Fed will change policy this year as the level of current rates is less important than the availability of credit to individuals and businesses. The recent rise in the inflation rate will be mentioned in their statement but Fed head Bernanke is an expert on the Great Depression and is well aware inflation is a late state development of the business cycle and is sure to fall soon with the continuing drop in credit. Their biggest problem is how to start a fire (economy) with the normal matchsticks when the logs are wet from the recent downpour on the economy. Japan has proven that increasing the money supply when no one wants to borrow is NOT inflationary and Ben must be up late at night wondering what it will take to jump start business investment when fear levels exceed the willingness to take risk in an economy that is sure to see an increase in government involvement and taxation. There is no easy answer but believing that the recent past will repeat is a business strategy built on hope and that is one of the reasons the unemployment rate is sure to soar over the next 12 months.

Where to put your hard earned $$$

Most people are heavily indebt and the next year will be about survival more than finding a place for investments. The return of capital is now the most important criteria for investing instead of return on capital that has been the focus of the past decade. Many are looking forward based on their past much like a dog that is fed every day at 4pm but now his owner no longer appears but the dog still goes to his bowl looking for his food every day at 4pm. It takes months for the dog’s behavior to change and it will take years for the average homeowner, consumer, investors to realize we have entered a new era where credit is much more difficult to obtain and the highest incomes do not come from the areas (real estate) that led the pack in the past 8 years. Those that will survive will be the most willing to change and use their skills in new professions with the growth in government employment leading the list.

For those with investable funds a bet on a widening yield curve offers the lowest risk with the highest reward potential as the Fed must allow the banks every opportunity to strengthen their balance sheets by borrowing at the Fed Funds rate (2%) and lending at the long-term Treasury rate (4%). It will take years but once banks create profits they can again begin lending and that will be the beginning of the end for the worst US economic contraction in over 75 years.