The Economy And What To Do?

What is your personal plan for your debt and use of cash? With today’s “interesting times” we are once again faced with the proverbial uncertainty of the markets, both in the real estate and stock and bond markets. Why has been addressed in a previous blog (April 07).

What are you thinking?

Are you thinking of reducing your debt load and using cash only for future purchases? Are you thinking a cycle is a cycle is a cycle? Are you experiencing paralysis by analysis? Are you thinking about your kids too?

Have you been maximizing your 401K, profit sharing plan and/or RRSP contributions to reduce your current tax load? You can contribute up to either 25% of your income or $44,000 which ever is less to your 401K. After your tax investments, what are you thinking about for your personal investments? Do you pay yourself first? Do you contribute 10% of your income towards your retirement savings? Do you work closely with a financial planner and accountant? Have you a plan for your retirement? When? Are you concerned if mortgage rates go up?

Is there such a thing as good debt or bad debt? To answer this question I have to say first that there are many different ways to hold one’s perspective about debt and that is what makes us who we are. There is no right or wrong, only how you feel at the end of the day and that your actions are validated by your thinking. Hopefully you are giving as much thought and more to this subject than you would be, for example, for your next vacation.

For example, if you freed up your mortgage, does that make financial sense. Well, that depends on who you are and how you think. For some, I would say that it is better to not pay off your mortgage and invest your money in investments that return a greater return than the cost of borrowed money. That is the logic of investments in the first place. But, with that comes the uncertainty and the risk which is easier to take if you are younger because you have more time to make up any loses and to align yourself with the information that over time, the stock market has out performed the bond market.

So, what to do? Again, it is anybody’s guess, however outside of the logic of financial opportunism is the need, for some, for their gut security of a known tangible investment, your home. Therefore, investing for your home is investing for your peace of mind and is not necessarily the best investment in terms of financial return which leads me to conclude that asset diversification, including your home, is what is really the best thing to do. If your home had an cash flow producing asset, a guest cottage or a rental unit, so much the better. Good luck!

You will need it because this market is also about the real estate market and its effect on credit. To put is simply, the US dollar has lost 30% of its value recently because of its trade deficit, which means the US is buying more than it is selling. Further, because of the US housing bubble has offset the currency loses (psychologically), few are aware of the seriousness of this dilemma. If the US reduces interest rates to further extend the status quo, then this will be at the expense of the value of the dollar and inflation, meaning a big time already unsustainable housing bubble will follow with inflation. If the US increases its prime-lending rate, this will prop up the value of the dollar, but force many over-extended mortgages, millions of Americans, to go bankrupt. This is the squeeze we are in because cash flow is becoming a problem both for individuals with mortgages and highly leveraged institutions holding “high risk mortages” that were packaged and repackaged over and over until they appeared to be a “less risky” basket of assets. Besides individuals, pension plans, insurance companies and even banks have bought into these financially engineered products, many of which have been determined to be worthless. Nobody really knows for certain the full extent of worthless securities and who owns them at this point in time (and the markets don’t like uncertainty). In addition, there still continues to be the possibility of a recession lead by a declining US housing market (more uncertainty).

I should be mentioned not to throw out the baby with the bath water, meaning at this time the liquidity crisis is not considered an economic crisis. There is still plenty of confidence in the US behemoth and although it lacks credit, it still has plenty of assets. However, the impact from the “liquidity crisis” is not over. For instance, the peak of the US sub-prime mortgage rate defaults is expected to occur sometime in April of 2008.

So what do you own?