Behind the Scenes

Such a Pretty Debt

I can’t help it. I’m hooked on HGTV’s hit show, Income Property, where debt-enslaved Canadian homeowners renovate their homes to attract renters, in order to ease the burden of their self-imposed gigantic mortgages. Enter Scott McGillivray. I DARE YOU to resist his charms.

Oh Canada

Oh Canada

Scott’s renovation talents make these dumpy frumpy spaces shine like the top of the Crysler Building. At the reveal, shocked homeowners routinely gasp and clutch their hearts, “Honey, we are SO moving down here! Screw the renters!”

He is in fact, so good looking and persuasive that I almost forget…He is convincing these homeowners to take on even MORE debt to get the rental income. These are not financially stable folks. No, they are desperate homeowners looking to offset their monthly payment.

To one couple Scott coos, “You see, spending $58,000 on your basement will reduce your monthly mortgage payment to only $1700″. In this case, the rental income was $1500 per month. But let’s let’s look at those numbers, shall we?

Additional Debt : $58,000
Cost of the Debt (monthly), at 5%: $950
Incoming rent (monthly): $1500
Maintenance (monthly): $250
Net income (monthly): $300

Okay, now let’s assume that the mortgage is actually an ARM, rolls over… and SURPRISE the rate jumps up to 12%

Additional Debt : $58,000
Cost of the Debt (monthly), at 12%: $1290
Incoming rent (monthly): $1500
Maintenance (monthly): $250
Net income (monthly): negative $40

Ouch. The lesson here is simple. If you take out a loan to make your house rent-able, you better find out what kind of mortgage you are talking about. If it’s an ARM,  there is the possibility of the interest eating up all of the rental income, and then some.

20 Predictions for 2009 – How right or wrong were we?

the-world-2009

It’s that time of year, which means Jill and Dan crack open a bottle of wine, look back on our outlandish predictions for 2009, and have a good laugh. We’re not too proud to tell you when we’re wrong. But were we right on the crucial stuff? You decide. Let’s recap…

1. By the end of 2009, inflation will be a big problem.
WRONG. Inflation is rearing it’s head but it’s not a “big problem” yet.

2. The U.S. government will behave like deficits don’t matter and spend like an Atlanta Housewife who just caught her husband cheating.
RIGHT. 100% right, so correct it offends EVEN US.

3. Gold, silver, and agriculture commodities will be the best performing asset classes, not guaranteed stellar returns, but will perform better than others. Got corn?
RIGHT. Gold and silver rocked our world. Gold is up 30%, silver is up 40% year over year. Corn is flat for the year. Watch out, agriculture is next.

4. Commercial real estate will implode and create a derivatives storm that makes sub-prime debacle look like a gentle sprinkle.
RIGHT. Comm real estate is imploding, but the government’s stop-gaps have held back the flood that will be seen in the next quarter or two.

5. The greatest bubble of all time, US treasury bonds, will begin to deflate, wreaking havoc globally. Grannies, sell your bonds and buy gold.
RIGHT. Jill’s message to Grannies was ridiculously right. Bonds were at 140, now they are at 115, falling 20%, (btw they have a long way to go). Grannies that sold their bonds and bought gold they would be up 30% and avoided losing 20%. Gold-loving Grannies would be up 60% over their other, less savvy Granny friends clutching their bonds for dear life.

6. Real unemployment (not government reported) will hit levels not seen since the Great Depression. Repeat the daily mantra “I love my job, I am grateful for my job…”
RIGHT. Night quite great depression levels yet, but on real terms unemployment is at 22% and will be 35% before the bottom is in. Check out shadowstats.com for more.

7. The U.S. dollar will hold its strength through the first quarter, but by year’s end will crumble and lose its status as the world’s reserve currency.
RIGHT ON!!! Is Dan a SAGE? Even a dead cat thrown from a plane at 10,000 feet will bounce a couple feet. Expect the next leg down to be brutal. The Grannie with gold will (again) be is pristine shape.

8. The love affair with President Obama will be over by summer as the reality sets in that the government cannot solve our financial problems. Not his fault. At least he still looks good in a bathing suit.
RIGHT. The most unpopular president one year after being elected. But he still looks good in a bathing suit, and his wife dresses well.

9. End the age of “American Consumerism”. Begin the age of “American Frugality and Savings”.
WRONG. The American frog continues to simmer slowly, although frugality is now chic.

10. The emerging markets will begin to re-emerge as they end their addiction to the U.S. Consumer.
RIGHT. Brazil, Russia, China…you name it -  they are on fire and have outperformed the U.S. China is becoming less U.S.-centric, as long as they can kick the dollar we still love them.

11. Two large U.S. Cities will declare bankruptcy.
WRONG. No one has officially declared it, but many U.S. cities are out of money. Watch for the bailouts in 2010.

12. The federal government will be forced to bailout California.
WASH. California, as well as other states are being bailed out by the federal government in unemployment, but the dominoes are beginning to fall. California is not going down without a fight, they are paying their bills in I.O.U’s.

13. People will start growing their own food and replacing their lawns with veggie gardens.
RIGHT. Not only are they growing their own food, but the chicken coop industry is on fire. Cock-a-dooldle-do y’all.

14. Entertainment, and the business of being a celebrity will be going strong.
RIGHT. Hello, Avatar, New Moon, and Jersey Shore.

15. Therapists will be replaced by neighbors and friends.
WRONG, we’re not there yet. Insurance is still paying.

16. Couples will increasingly avoid divorce to save money.
RIGHT, actually we are wrong. They are avoiding divorce because they can’t afford it with homes under water and negative assets.

17. A re-emergence of cheap but brainy entertainment, like playing chess and playing instruments with real people.
WRONG. We’re not there yet. But we can dream, can’t we?

18. People will view visiting the doctor as an unnecessary expense and take steps to control their own health.
WRONG. For the same reasons as #15. We don’t know, actually. We live near Seattle and everyone’s head is still up Microsoft’s ass. Doctors are still thriving here. But we wonder what 2010 will look like.

19. Plastic Surgeons will be offering services discounted 80%, which will attract patients from overseas.
WASH. Prices on Botox, Juvederm and other injectables have indeed gone down to attract more patients. However, the big ticket surgeries are still expensive due to hospital fees, etc. When the dollar really tanks, more than the 12-17% decline we saw this year, we’ll see this happen.

20. Most services (like manicures, haircuts, lessons, and education) will get cheaper, in relation to everything else.
WASH. Some of these services are getting cheaper, but inflation this year has caused some to raise their prices.

Trash to Chic: Reinvent a Thrift Shop Chandelier

Murano Glass disc chandeliers are all the rage in high-end modern homes. I’ve been drooling over them for years, which is why I was thrilled to find one on eBay, only to be outbid during the last 5 seconds by a sniper. After shouting obscenities at my computer screen and picking myself up off the floor, I decided to stop feeling sorry for myself and set out to make one  by recycling and revamping a thrift shop chandelier.  I picked up the chandelier frame for Goodwill for $3.99, after literally tripping on it. It was on the floor, dirty and discarded. I even saw a lady even run over it with her cart. Rescuing and completely transforming this sad light fixture was a fun process and I hope my video will inspire others to do the same.

Vistosi-equation

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Reinvent a thrift shop chandelier with lucite discs from Jill Keto on Vimeo.

For this project you will need:

-One horribly dated late 80’s chandelier frame from Goodwill, Craigslist, curbside, or dumpster. Make sure it is cylindrical in shape and has hooks going all the way around.

-4″ diameter x 1/8″ thick lucite/aka plexiglass/aka plastic/aka acrylic glass discs, which can be found here. Buy, at a minimum, 2 discs for every hook on your chandelier frame. If you want to really fill it in, you should double that number and hang the rest off of the frame with invisible fishing line.

-Nail polish. The cheap, drugstore variety. SinfulColors is available for $1.99 per bottle, and the colors are luminous and have incredible depth. (Side note: nail enamel is one of the highest quality paints that exists, which makes it perfect for any DIY project where you need a permanent, glossy paint job on a smallish surface area). Auto paint is also awesome, but stick to slightly sparkly nail polish for this project. Have fun with the colors you choose. There are no limits.

-20g stainless steel jump rings, about 1/2″ in diamter which you can buy or make yourself by wrapping wire around a tube of lip gloss (or anything else 1/2″ in diameter and cylindrical) into a coil, and cut the coil into individual circles (jump rings) with wire cutters.

GET OUT NOW!!!

With all of this talk of the recession being over, that the market has bottomed, and green shoots (better to call them weeds) sprouting, it would be easy to sit back and “hope” your investments are finally safe. However, we are no where near the end of this fiasco yet. Those green shoots will be mowed down, Round-Upped, yanked out of the ground, and sent off to the eco-friendly yard waste composting center near you.

We have been given a gift. A recovery of 50% of the losses that occurred last fall through early spring (which I predicted last November here) is something we should be grateful for. But your personal theme song right now, should be Steve Miller Band’s, “Take The Money And Run”.

The market has peaked, as I have said many times before, this is a TEMPORARY RALLY. The market is getting ready for a crash of historic proportions. I am predicting that the DOW will fall under 5000. I think it will hit 4358 before it retraces. Why? Because there is a perfect storm brewing, including some of the following ingredients:

-Insider selling in May and June are at record levels. The insiders have used the bear market rally to dump their own holdings, make their profits, and let the sheeple to get completely screwed. Will you be one of them?

-The healthcare plan will bring unaffordable costs to businesses, which will force bankruptcy, worsening unemployment.

-The Commercial CDO bomb is set to explode soon.  This one is 4 times the size of the supbrime debacle. See my article on derivatives if you don’t know why this is such a big deal.

-A new wave of ARM rollovers will be coming due this fall creating an even larger increase in foreclosures that will not begin to abate until 2011.

When the bomb hits this fall, it will likely hit global stocks as well. I love you China, but I fear for your stocks in the short term. I’m keeping some of my long term plays in Chinese and precious metals and resource stocks, but liquidating anything that is too risky to lose.

Where should your money be right not? Stay liquid and keep your powder dry: short term insured cash investments (CD’s), short term treasurys that are highly liquid. Don’t tie anything up that you can’t access quickly. You should have 10-20% (or more if you are comfortable with that) in silver and gold.

If you are trying to sell real estate right now, hit the bid, lower your price and MOVE IT NOW while people are still feeling the effects of the green weeds and OBAMA! euphoria, and willing/able to buy houses. Because after the crash, real estate is going to get ugly and the buyers will dry up. I don’t care if you have to have a freaking open house every day, with freshly baked cookies and champagne, just do it and dump it. (And for heaven’s sake, please keep anyone under the age of 8 away from the champagne).

Deep breath…AHHHHH. I feel better now. You’ve been warned.

Too Little, Too Late For Derivatives Oversight

by Jill Keto and Daniel Keto

As the Obama administration sets out to reform the over-the-counter (OTC) derivatives market, Wall Street is scrambling to protect its own profits and put a preemptive kibosh on any regulation that could reduce the lucrative transaction fees or expose criminal wrong-doing.

But no matter how many regulators gain oversight in the derivative markets, how successful the government is at putting in place rules to cage the beast, derivatives are a problem of breathtaking scale that cannot be cleaned up with a quick government fix.

It is currently estimated that there are $684 trillion in outstanding derivatives and another $800 trillion in “shadow” or off-balance-sheet derivatives (which are impossible to calculate because they are not reported), totaling well over $1.4 quadrillion.

This is roughly 27 times the global GDP at $55T, and 7 times aggregate global asset values (of stocks, real estate and private business) at $200T. Obviously, this total amount is not at risk, but the derivatives are based ultimately on underlying asset values or assumptions that if off by even 5%, could create a loss that well exceeds global GDP, and if off by 18% would wipe out global asset values.

Creating oversight now is like mandating that a sprinkler system be installed while the house is burning down, then asking the arsonist if he will choose, and then install the sprinklers. I question what good, if any, will come of the new derivatives regulations at the eleventh hour after the damage has been done, and enlisting the help of the same entities that caused the problem in the first place.

The spectacular scale of the unwinding of the derivatives market, the likes of which we have only seen the beginning, will dwarf the sub prime debacle. The sub-prime mortgage problem was a mere $850 billion. The much larger issue is ahead of us: The $3T commercial real estate CDO problem, followed by the Option ARM and Prime CDO bombs, estimated at $8T. Like a pyramid flipped upside down, balancing on its tip, sits the value of real assets. If the value of those real assets decline even slightly, the remaining portion of the pyramid (leverage) crashes down. This unravelling will take years from which to recover. It is pure fantasy that government oversight at this time will change this.

Surely if AIG was too big to fail, the other financial entities dealing in derivatives will also need rescuing. This will require an unending source of government funds in mammoth proportions as the Federal Reserve continues to buy defaulted derivatives. Since the central banks, including the U.S. Federal Reserve, are not accountable to any government, they are able to swap currency and quality assets for the toxic waste sitting on the books of the public banks.  The toxic waste then disappears onto the Fed’s balance sheet, booked at the price for which they were purchased. However, the purchase price is entirely arbitrary, since there is no market for these derivative products, and determined by the banks themselves. Since there is no visibility as to exactly what the Fed has on its balance sheet, nor whom it purchased those toxic assets from, those bad assets will just sit and fester outside of the inquisitive eyes of the public or any government body.

The toxic asset values are in the trillions.  The BIS now estimates that total derivative banking losses will exceed $4.1 trillion.  This is very conservative, and based on past underestimations, this number will likely surpass $10 trillion over the next year.  The Fed has run out of assets to swap, so their only option is to purchase those assets with currency they print.  If the bad assets were $100 billion, the system could afford this without a major impact on inflation.  However, with the amounts now in the multiple trillions, the impact of “saving” the banks and monetizing all these bad assets will devastate the U.S. economy, and possibly destroy the U.S. dollar.  The Fed is basically forcing the taxpayer, those holding U.S. Treasuries and U.S. dollars, and Joe Public to pay for this.  Once again, the banks will succeed in privatizing profits and socializing losses.