10 stock market myths

From today's Wall Street Journal

Ten Stock Market Myths That Just Won't Die

By BRETT ARENDS

The Dow Jones Industrial Average last week ended up pretty much where it had been a little more than a week earlier. A rousing 200-point rally on Wednesday mostly made up for the distressing 200-point selloff of the previous Friday.

The Dow plummeted nearly 800 points a few weeks ago -- and then just as dramatically rocketed back up again. The widely watched market indicator is down 7% from where it stood in April and up 59% from where it was at its 2009 nadir.

These kinds of stomach-churning swings are testing investors' nerves once again. You may already feel shattered from the events of 2008-2009. Since the Greek debt crisis in the spring, turmoil has been back in the markets.

At times like this, your broker or financial adviser may offer words of wisdom or advice. There are standard calming phrases you will hear over and over again. But how true are they? Here are 10 that need extra scrutiny.

1 "This is a good time to invest in the stock market."

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. "Certainly, sir -- step this way!"
2 "Stocks on average make you about 10% a year."

Stop right there. This is based on some past history -- stretching back to the 1800s -- and it's full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they're expensive, you do a lot worse.

3 "Our economists are forecasting..."

Hold it. Ask your broker if the firm's economist predicted the most recent recession -- and if so, when.

The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession." That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

4 "Investing in the stock market lets you participate in the growth of the economy."

Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

5 "If you want to earn higher returns, you have to take more risk."

This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for "risk," your broker probably thinks that's "volatility," which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

6 "The market's really cheap right now. The P/E is only about 13."

The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust.

Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap.

7 "You can't time the market."

This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about overall valuations.

If you invest in shares when they're cheap compared to cash flows and assets -- typically this happens when everyone else is gloomy -- you will usually do very well.

If you invest when shares are very expensive -- such as when everyone else is absurdly bullish -- you will probably do badly.

8 "We recommend a diversified portfolio of mutual funds."

If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that's good advice.

But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together.

9 "This is a stock picker's market."

What? Every market seems to be defined as a "stock picker's market," yet for most people the lion's share of investment returns -- for good or ill -- has typically come from the asset classes (see No. 8, above) they've chosen rather than the individual investments. And even if this does turn out to be a stock picker's market, what makes you think your broker is the stock picker in question?

10 "Stocks outperform over the long term."

Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: "In the long run we are all dead."

secret deal south at borders

#2 son and I were running errands when we stopped by Borders to see if they had any boxes for packing. He cleaned up with 20+ sturdy book boxes.

While waiting I noticed a very large and very nice coffee-table type book on China was on clearance. When I went to purchase it, I was offered a free Borders reward card. I said no thanks and then she mentioned that it came with $5 off my next purchase.

My quick-as-thunder mind kicked in and I asked, "You mean if I buy one of these first (pointing to some chocolates near the cash register) can I get a rewards card then use it to get $5 off the book today?" Her nod in the affirmative was notable for its absence of enthusiasm.

The book was practically a give away at $8.47 (including tax). I ended up paying a total of $3.69 for the book plus a Lindt chocolate was thrown into the deal.

Not bad: 56% off an already rock-bottom price including some very fine chocolate!

I couldn't wait to get back and tell Mrs. B. Needless to say, she was impressed with her man. Mrs. B. is a real coupon-clipping maven who makes any sales clerk regret showing up for work if she does not get the sale price plus multiple coupon discounts. No errors are allowed and it does not matter how long it takes, or how many people are involved, to straighten out a five-cent mistake.

With me, I'm being cheap. With her, it is a matter of principle.

Be blessed!
RB

snl on financial peace

Found here.

the crisis of credit visualized

This is the best explanation of the financial crisis that I've seen to date.


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

dogbert and systemic risk.

Found at Greg Mankiw's Blog: The Magic of Financial Engineering

One can diversify to reduce risk but there is also un-diversifiable risk (a.k.a., systemic risk).

the stock market: just how unusual is 2008?

Speaking of investments....You know your investment portfolio is in trouble when....

(cartoon found here)

Just how bad is the 2008 stock market?

(chart found here)

This is a graphic of the Standard and Poor's stock index's annual returns, placing every year since 1825 in a column of returns from -50% to +60%. As you can see, it is a rough bell curve, with 45 of those 185 years falling in the +0-10% column. There are only 4 years each in the 40-50% and 50-60% return columns, and, through 2007, there were only two years in the -31-40% and -41-50% columns. You can see where 2008 to date falls (source).

ugandan water project

You can make a difference . . . .

The Ugandan Water Project is an organization set out to provide clean water for villages in Uganda. Through music, media, and any means necessary we hope to raise awareness and funds for these villages in Africa. We can't be reminded enough of how much need there really is in this land. In this busy and modern age it is so easy to forget how much we really have. So often we take the simple things for granted. This is a very practical way to truly change lives. For us it's such a small sacrifice to help others. Please consider giving in any way that you can. And be encouraged to pass the word along to any and everyone you know.

NEW CD RELEASED
A compilation of artists who have united for a single mission to provide clean drinking water throughout villages in Uganda. 100% of the proceeds from this creative compilation of worship music go directly to supporting The Ugandan Water Project.

Find it in the Amani Store.

Help change Uganda by donating to the project!

Donate online at PayPal

Mail donation to:
Isaiah Six
PO Box 10A
Lima, NY 14485


Video of First Water Tank


Found at: Isaiah Six.

Be blessed!
RB

christian investing during a financial meltdown

God is best known for eternal fire insurance, a market segment He dominates. Few people understand that God also offers a full range of financial advice and services with over 700 Bible verses referring to money or money management.

God has certain advantages which make His investment management preferred. Although unregulated and not subject to any minimum capital requirements, the Lord has more than adequate reserves. After all, He owns the cattle on a thousand hills (Psalm 50:10), all the earth and everything in it belongs to Him (Psalms 24:1;50:12). He spoke creation into existence (Genesis 1).

Unlike other investment or insurance companies, the ability of the Lord to fulfill His promises is never subject to systematic risk.

Today I’ll note just two of His less known, and certainly less utilized SIV’s. (No, a SIV is not a Structured Investment Vehicle, but a Scriptural Investment Verse.) These allow investors to leverage their initial financial investments with God to obtain even larger returns. From His prospectus:

Honor the LORD with your wealth
and with the firstfruits of all your produce;
then your barns will be filled with plenty,
and your vats will be bursting with wine.
~ Proverbs 3:9-10 (ESV)

Whoever is generous to the poor lends to the LORD,
and he will repay him for his deed.
~ Proverbs 19:17 (ESV)

You may be wondering if these investments are so good, why don’t more people use them? The Lord faces a lot of competition in markets other than eternal fire insurance. With fire insurance He is the only reliable provider, and couples the insurance with long-term retirement benefits.

I guess people don’t trust God too much unless there are no alternatives.

Be blessed.
RB

why do we save so little?

U.S. saving rates have always been low and now are the lowest they have ever been. We save the smallest percentage of any country.

Q: Why do Americans save so little?

A: Because we can.

Financial innovations in the past ten years allows Americans access to something their parents never dreamed of: The Home ATM.

The ease of home equity loans have allowed Americans to dip into, and deplete, what historically has been a major source of household wealth. That is the equity in their home (i.e., the value of their houses less the amount left on their mortgages). Prior to the last ten years home equity loans were not so easy to get.

The chart below helps show this. The blue bars are the amounts of money U.S. households have taken out of their homes (a negative saving) each year since 1991. You see it rise steeply until housing prices crashed in 2007. (When housing prices crash, there is a lot less equity to borrow against.)

Source: Calculated Risk: The Adjustment Process

What I find even more interesting is the red line. This is the amount withdrawn from the Home ATM as a percentage of disposable, or after-tax, income. (The vertical scale is on the right-hand side of the chart.) As you can see, a few years ago it was as high as 9% of income. This is why during those same years overall U.S. household saving rates were zero to negative. Although some people were saving, others were dissaving. That is, spending a lot of the wealth stored in the value of their homes. (Click here for U.S. saving rate chart.)

Hmmm.... A credit crunch is here. A recession is coming. Household savings are low. People are in debt up to their ears. All these things have never happened together.

2009 should be interesting.

Be blessed.
RB
(a.k.a. Prof. Sunshine)

a confession

Confession: I facilitate a local presentation of Dave Ramsey's Financial Peace University. Last week the lesson was on credit cards, why you shouldn't use them, how you fall in traps, stay away from them, etc.

I had a credit card bill due Friday. It had a good sized balance since I used it when I traveled in late August. Besides, I get cash rewards! I got busy last week and forgot to pay it. Substantial late penalty, completely wiping any "cash rewards."

click on picture to enlarge if you cannot read the red sign

Yeah, they know what they are doing. They have a plan.

Yeah, hypocrisy is a strength of mine.

Be blessed.
RB

aig bailout hurts who?

Last month, AIG's board of directors entered into an agreement with the Federal Reserve Bank of New York to obtain $85 billion via a two-year credit facility that requires AIG to pay a 2% one-time commitment fee, 8.5% interest on undrawn capital and, on drawn capital, the London interbank offered rate plus 8.5%.

The federal government is getting a 79.9% stake in AIG from the deal.

The interest charges currently add up to $1 billion monthly.

~ Wall Street Journal (October 15, 2008, p. C2)

This is a bailout? The Fed gave AIG an offer they couldn't refuse:

Go broke and get nothing or we'll loan you $85 billion and you keep 20% of your company.

This was not a bailout. It was a buy out. A gun to the head buy out. No one else could come up with that much cash immediately. The government will likely make money on this deal. They're collecting 8.5% interest on the money not borrowed by AIG and about 12% on what is borrowed.

If I were an AIG shareholder, I'd be upset.

I'm a taxpayer, so I'm not.

Be blessed!
RB

dobson lost his focus

Dr. James Dobson comments on the current economic crisis and presents portions of his interview with the late Larry Burkett, who makes some dire financial predictions in a discussion of his book The Coming Economic Earthquake

A friend forwarded me a link from Focus on the Family. Dr. Dobson's broadcasts on Monday and Tuesday of this week were about the recent economic meltdown. He played portions of a 1992 broadcast with Larry Burkett which warned that government budget deficits would result in a future economic meltdown.

I think the world of the late Larry Burkett. He was the pioneer in applying Biblical principles to personal finances. I've used his materials; I admire his ministry; he helped millions of people.

Although in 1992 Burkett did predict an economic meltdown, he did not predict the current meltdown.

The cause of the current crisis has absolutely nothing to do with government deficits. The causes of past financial crises, the October 1987 stock market crash, the S&L crisis in the late 1980's, the Japanese banking crisis of the 1990's had zero to do with government deficits. (Sure they might have caused increased deficits, but that would be getting the casual relationship backwards.) Japan's government had budget surpluses before their banking crisis!

Larry Burkette died some time ago so he didn't make the false connection between deficits and the current crisis. Dobson did. This is not an easy or obvious topic. No one expects him to know about financial crises. Dobson was completely outside his depth; speaking about things where he is incredibly ignorant. Being on radio made it embarrassingly ignorant.

People trust Dr. Dobson because of his core competencies. When he speaks on other topics, his loyal listeners extend their trust to him. Dobson has a responsibility to his listeners. He failed in this responsibility. He mislead people who trusted him.

Maybe Dr. Dobson needs to again focus on the family.

you may want to reread thursday's post

I edited (i.e., rewrote) Thursday's "Mr. Answer Man" post. I hope it is now clearer as to what I was trying to accomplish.

Be blessed.
RB

bird & fortune on the credit crunch.

Another satirical skit from Brits John Bird and John Fortune.

Note: The City refers to the financial district in London. Punters are people who place bets; sometimes slang for customers.

Bird and Fortune video on the credit crunch

mr. answer man and the financial faqs

No, that is not the name of a rock band.

Today I’m here to answer frequently asked questions (FAQs). Many people seek advice, knowledge and insight from me concerning financial matters. I am a professor of economics who never took a course on financial markets and I am quite often able to play Dave Ramsey DVD’s at 57 Market on Tuesday nights. Despite these credentials, I receive no fees or payments for my advice. Therefore such advice is not only completely unbiased but also unencumbered by any knowledge of how real financial markets actually work.

Let the questions begin.

Q: Before the current meltdown, what was your advice to folks with some savings looking to invest?

A: Very standard stuff: 1) diversify your portfolio between different types of stocks and bonds, 2) if one was over 50, totally investing in stocks was considered aggressive; 3) use indexed mutual funds in different categories of stocks and bonds.

Q: What does aggressive mean in terms of investing?

A: Risky. Highly aggressive means a taking a roll of the dice.

Q: How did these people do who sought the standard advice?

A: Not very well. People tended to take only parts of the standard advice. For example, a couple in their late 50’s put all their money into stocks, going for better returns, rather than mix in some bonds to diversify. They did use indexed mutual funds to diversify among stocks but otherwise felt comfortable pursuing a more aggressive strategy. Then this year the stock market tanked.

Q: What was their reaction?

A: It was my fault.

Q: Do people who are in their 20’s or early 30’s seek advice?

A: Yes, but they tend to totally ignore me. Last year a young man sought my advice. This guy knew nothing absolutely nothing about investing, markets, or anything. I doubt he had ever read anything more sophisticated than Newsweek. He listened politely, thanked me for my advice and then told me, “I feel very comfortable in my ability to judge which companies to invest in.” He sunk his money into a couple of Chinese companies. Within six months the Chinese stock market fell 70%.

Now I don’t mind if people do not take my advice. I even prefer they don’t ask for it in the first place.

Q: What can we learn from these examples?

A: Feeling comfortable is of the utmost importance.

Q: Are you being sarcastic?

A: Yes... No... Well sort of... Sarcasm is the lowest form of humor. I'm shooting somewhat higher. The rest of this post is a ham-fisted attempt at satire. Maybe tongue-in-cheek could describe it? Good satire is like sarcasm only with style and wit, like the Bird & Fortune skit. Bad satire makes the author look like a "I think I'm so much smarter than you but really I'm nowhere near as witty as I think I am" little snot.

Sarcasm, and even the best satire, is often difficult to convey in writing. The tone of voice, facial expression, and body language which help people detect sarcasm or satire is absent.

I'm not that good a writer but I hope I'm achieving more than mere sarcasm.

Q: And what level of achievement might that be?

A: I'm trying to be a smart aleck.

Q: Didn't your mother repeatably tell you that no one likes a smart aleck?

A: Yes. However, I ignored her sage wisdom and now I have no friends.

Let's get back to how to feel comfortable....

Q: So, feeling comfortable is of the utmost importance. Has this conclusion affected how you handle your personal investments?

A: Absolutely. I feel comfortable ignoring the tons of research showing indexed funds beat the returns of the vast majority of funds actively managed by professionals, professionals with teams of highly paid experts whose whole lives are devoted to picking stock winners. I feel comfortable moving around funds, not to pick winners, but to time changes in broad market trends. But then it is easy for me to feel comfortable: I have both a Ph.D., and more importantly, a subscription to the Wall Street Journal.

Q: What is your personal investment strategy?

A: The usual cliché is to “buy low and sell high.” However, I take a very old, often utilized contrarian approach thereby finding opportunities which escape those who follow the conventional wisdom. This approach also allows me to cope and feel comfortable with market volatility.

If one part of the stock market goes down and I lose a lot, I sell so I don’t lose anymore. I then reinvest in parts of the market that have been doing well, parts that have already risen. This contrarian strategy of “sell low and buy high” makes me feel comfortable in that I know I won’t lose anymore in the declining sector and instead I am going with a proven winner. I can then wait until the market goes back up to get back in, feeling comfortable that I have bought quality investments.

I also feel comfortable knowing that I am not being a passive investor. I feel in control rather than a victim of impersonal market forces.

There has been much research showing that over the past one-hundred years this contrarian, sell-low-buy-high approach consistently yields quite stable, although negative, returns. Stable returns are very important since volatility, or instability in the market, makes people feel uncomfortable.

Q: Wouldn’t putting money in a federally insured bank account be stable with better returns?

A: There are pros and cons, and therefore trade-offs that need to be made with any investment decision. On the minus side, returns (interest rates) on bank accounts are very, very low. On the plus side, the returns are positive. This is a difficult trade-off.

However, bank accounts make you a safe, namby-pamby passive investor rather than an aggressive investor. No opportunity for using the brains God gave you. No chance of losing but no chance of lucking out, scoring a big gain.

Not aggressive? No control? Conclusion: No cojones.

Bank accounts are for sissies.

Q: Any suggestions for particular investments given the current market?

A: If you want to feel comfortable, buy gold. Gold has a high price. I was listening to a talk show on AM radio, when during a commercial break Pat Boone was paid to say that now is the best time to buy gold. Gold is the perfect investment trifecta: gold fits the contrarian investment strategy, gold dealers sponsor right-wing nut case radio, and gold is endorsed by Pat Boone.

Q: Thank you RB?

A: You’re welcome. Be blessed.

a 21st century run on the bank.

Remember the run on the bank scene in It’s a Wonderful Life? That was a dramatization, with a happy ending, of what happened 75 years ago. However, 75 years ago the happy ending didn't always happen in real life.

Two weeks ago another run almost happened. Before I go on, you may want to refresh your classic-film-scene memory:



The Bailey Building & Loan was not strictly speaking a bank, but it was a middleman between depositors and borrowers. That is what banks and other financial firms generally do. A modern version of this is a Money Market Fund (MMF). With MMF accounts, people deposit cash with an investment company who then buys short-term government bonds and corporate debt. (This deposit is NOT to be confused with a type of deposit with banks. Those are just bank accounts with a deceptive name to make you think it is a MMF account.)

MMFs are an important source of funding for corporations. (Like in the Home Depot example from yesterday’s post.) Two weeks ago there was the beginning of a run on these accounts, accounts that held over 3 trillion dollars.

What happened? Just like in the movie scene, depositors were afraid of losing their money: money that was backed by short-term corporate debt, also known as commercial paper. Going back to yesterday’s post, the price of this debt was falling due to fears of AIG failing and credit swaps in general possibly failing. So, MMF assets were approaching the point where they were worth less than the value of their deposits, to where they did not have the means to back all the deposits. In the case of one fund, it did “break the buck,” meaning a dollar of deposits being worth less than a dollar.

If you had a deposit in a MMF, what would you do? If you were on the ball, you’d try to get your money out while you could. You'd want to be first in line too! Just like in the movie scene above. To pay off deposits, the MMF would have to sell their commercial paper. Who would buy it? The other MMF’s are in the same situation. With everyone selling and no one buying, commercial paper prices will crash. MMF deposits would be paid back at less than a dollar, if at all.

Let’s reimagine the scene from It’s a Wonderful Life. Do you think even Jimmy Stewart would be able convince people to keep their money on deposit if they knew that Joe's house, the Kennedy house, and Mrs. Macklin's house, houses that their money was in, had been hit by a tornado and there was no insurance?

That is why after the AIG deal two weeks ago, the federal government insured MMF accounts for a year. They weren’t bailing out anyone so much as they were stopping a 21st Century run, a present day panic.

What if our government hadn't decided to "bail out" the MMFs with federal guarantees? MMFs are a major source of short-term corporate financing. If that financing dries up, we are back to the big fat hairy recession scenario mentioned yesterday.

humpty dumpty goes to wall street.

I recently received one of those chain emails. It started out, “I'm against the $85,000,000,000.00 bailout of AIG. Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.” It went on to claim that that would give over $400,000 to every American over 18. Sound good? Why bailout the fat cats? What about the common people who are really struggling? Wouldn’t that do more for the economy?

OK. Before we go on, let me ask a few questions.

#1. Do you know what a “credit default swap” is? (Also known as a CDS.) Did you know that there is 62 trillion dollars worth of these special financial contracts out there? Do you have any idea how much $62 trillion is? There are over 31 million seconds in a year. A trillion is a million million. So 62 trillion is how many ticks of a clock there are in 2 million years.

That is a big number.

The value of credit swaps is 15 times larger that the total stock market value of all U.S. corporations. If you added up all the incomes of the over 300 million Americans for a year, it would still be well less than a fourth of $62 trillion. If you added up all the incomes for a year of all the nearly 7 billion people on the planet earth, it would still be less than $62 trillion.

#2. Do you have any idea as to the consequences of a major failure in this market? What would happen if people lose confidence in the value of the credit swap contracts?

#3. Do you know what the so-called “bail out" of AIG really involved? Do you know what the money was going for or what was trying to be accomplished? What would have happened if AIG went into bankruptcy?

I doubt if one out of a hundred Americans could answer the above questions. I also doubt if very many members of Congress have a clue. I must admit, my own understanding of these questions is not the greatest.

Credit Swap? A credit swap is essentially an insurance contract protecting owners of debt against default. If someone owes you money, this is like you paying someone to guarantee the debt will be paid. You pay someone a little to assume the risk of default or nonpayment. Credit swaps are generally between corporations. For example, Home Depot wants to borrow $10 million for 90 days. IBM loans them the money. However, IBM may pay a little to AIG to guarantee that Home Depot will pay. If Home Depot defaults, doesn’t pay IBM, then AIG will pay $10 million to IBM and then try to collect from Home Depot.

AIG was a fairly big player in the swaps market. They guaranteed a lot of bonds, including a good chunk of debt backed by home mortgages. AIG was losing a lot of money on the mortgage backed debt. The fear was if AIG went into bankruptcy, the insurance on debt would disappear, for all debt, not just the housing-backed stuff. The debt would become riskier and worth less to firms.

Cut to the Chase. I won’t try to explain the following in any detail. Two weeks ago credit markets were starting to seize up; not working at all. Firms were trying to sell the debt, the IOUs they were holding, no one was buying. Prices dropped, losses mounted. Other firms, even healthy strong companies, were finding it hard to borrow. No one was lending. It looked like the beginning of a world-wide financial meltdown the like of which has never been seen before. One participant in the Lehman Bros. and AIG negotiations that week said we were “at the edge of the abyss.”

You might be thinking, “Poor babies. Why should I care about the fat cats? What does it have to do with me?” To go back to our example, what if Home Depot can’t borrow money to pay workers or suppliers? What if companies supplying Home Depot are having trouble getting paid? Do you really think they will just keep on making shipments, keep on producing, keep on hiring people? What if this is a general problem not limited to Home Depot? A financial market breakdown will lead to a severe economic breakdown. Layoffs, declines in income, a big fat hairy recession that could last a long time. These results are guaranteed with a financial meltdown.

The bail-out was to keep AIG in business, not to rescue AIG stockholders. The bailout’s conditions, the conditions on the loan to AIG, were so severe that the U.S. government actually had a good chanced of ultimately making a profit on the deal. AIG accepted because had no choice if they wanted to avoid bankruptcy.

AIG needed to stay in business because the alternative was an extremely high chance of international financial collapse, a fall into the abyss. The breakdown of the credit swaps market would lead to a breakdown of credit markets in general. Once you get the meltdown, the collapse, it is really difficult to put things back. Humpty Dumpty goes to Wall Street.

Is this the We Deserve It America Dividend you want?

Now put out your thumb and index finger. Have them separated by about an inch.

This is how big a piece of the current financial crisis AIG represents. It is far more complicated than what I described. The AIG story is just one little piece of a much, much bigger puzzle. We’re not even getting close to the cause, but merely one of the many possible results of a much bigger problem.

coupon clipping

According to an article in today's Wall Street Journal (p. D2), the U.S. Department of Agriculture forecasts that food prices "...would rise between 4.5% and 5.5% this year, adding about $350 to a typical household's expenses." Clipping coupons might be one strategy for coping with rising grocery bills. Near the end of the article there is a nice table comparing online coupon sites.

"The Best Sites for Coupon Clipping"
The Wall Street Journal
As the price of food keeps going up, it's getting harder for my family to justify the extra cost of buying organic and brand-name products over generic ones. So we tested some Web-based services that promise easy access to discount coupons.
» Full Story in The Wall Street Journal

As a bonus, here is a link to a related blog post, "Save on Groceries and Eating Out" at Great Prices Here (May 17th).

Be blessed!
RB

gazelle intensity

Dave Ramsey talks about having gazelle intensity to get out of debt. Check out this video:



Intensity isn't enough. You need a plan.

preview on wednesday night

Financial Peace University
Preview Session: Wednesday January 30th at 7 p.m.
Classes: Wednesdays, 7 to 9 p.m., starting February 6th
57 Market, Potsdam (College LIFE Center)