For some time now, I have been warning my friends and loved ones of the impending US crisis. In Henny Penny style, since early 2007, I've been running to and fro warning anyone that I care about that the economy is in serious, deep trouble that has ramifications not just for brokers and rich people, but for them personally. My warnings, unusually pessimistic, ran the usual gamut: "Your aren't going to be able to sell your home.", "Credit cards, adjustable rate mortgages, and other variable rates are going to escalate", "Gas is going to go up and up.". "The stock market is going to crash". Many were skeptical of what I was saying, as they found far too many stories from business news sources that there was no recession, that that the world economy would prop us up, that business was doing great.
In the last two weeks, those stories have evaporated, leaving only news about how bad things for us are going to get. Mortgage companies and realtors have dropped like flies. Relative to traditional foreclosures, huge numbers of people that bought overpriced homes are now classified by whether they're giving up their home because they can't afford them, or giving up their home because they no longer make financial sense. This is going to kill off mortgage insurance companies. The Fed has repeatedly dropped the interest rates that it can control, causing a serious reduction in the value of the US dollar (which you and I use to buy imported food and products from places like China). Today's latest bad news is that the Bear Stearns investment company went from 'Everything is great' on Monday, to 'Problems? No problems here' on Wednesday, to '$10,000 bought on Monday is worth $284 on Friday' on March 14'. These days, economists have to go back to the 1930s for comparisons.
This problem is so large, so disastrous, that you can probably sympathize with a deer seeing oncoming headlights. The danger and fear is large, leaving movement in any direction as feeling too dangerous. Most of us know what happens to a deer when it continues to stand in the middle of the road because every direction seems too risky. They become dead meat.
Included below are a list of things that you may be able to do to help get yourself out of the way of this oncoming mess. Not all of these ideas will apply to all people; what makes sense for you, may not make any sense for someone else. These suggestions assume that up till now, you've done nothing to protect yourself.
Get out of the stock market today, but do not take money out of IRAs. The DOW is on the verge of dropping 30% or more, from 12,000 to 8,000 or less. Almost anything you sell today, you will be able to buy back in two years for less than you sell it for today. If you can't leave the stock market, then move to the companies that sell basic consumer needs. The more basic and the cheaper the need, the better. A company that sells dishes is better than a company that sells dishwashers. A company that sells underwear is better than one that sells designer jeans.
Save every possible dollar. Very few people are going to be able to borrow money over the next three+ years. Avoiding unnecessary purchases today will leave you with cash that you may need for tomorrow's necessities.
Get accounts at multiple banks, and split your cash between them. The FDIC currently preparing for the failure of dozens of banks. Though you'll eventually get your money back if your bank happens to be one of the failures, it will take time. By spreading your money across three or more banks, you'll still have cash while you wait for the FDIC to compensate you.
If you pay with online banking, put together a list of account numbers, phone numbers and addresses for companies so that you can contact them if your bank fails.
Make sure you know who owns your mortgage/equity loan/car loan, etc. Many large loans were sold by companies you borrowed money from to third parties. These third parties will not care if your payment is late if nobody bothered to tell you that the company you have been sending your check to for the last two months is now out of business.
Buy a second, but used, vehicle with good gas mileage if your current vehicles are not fuel efficient. Gasoline may get up to six dollars a gallon by this winter. A $2,000 car that gets 28MPG, driven 1,000 miles each month will save you $120 each month over a vehicle that currently gets 18 MPG.
Pay off all variable rate loans that you have, if you can do so. Once those are gone, start on fixed rate loans. The reason to do this is to minimize your risk of deflation. Common agreement is that in the short term, we'll see inflation (which makes existing fixed rate loans cheaper and variable rate loans much more expensive), but deflation in the long term (which will makes existing fixed rate loans more expensive, but variable rate loans less expensive).
Do not expect to sell your home for at least four years. Few people are going to be able to get a loan until at least 2012, which is when last of the big pile Alt-A loans re-adjusts. Financial companies won't be able to make new loans until they choke down all of that old debt. As such, the only way you'll get rid of any property you own today is to let the bank foreclose on it (which is becoming increasingly popular).
Insulate your home. Insulate your attic. Have the inside of your walls insulated. Insulate the walls of your cellar. Get insulated windows. The better you insulate your home, the less money you will need to spend buying energy that will continue to skyrocket in cost.
Be very careful to keep your job. First off, most companies realize they are in either a recession or a depression, depending upon the market they are in. These companies are much more likely to let current employees go, than they are to take the risk on new employees. Furthermore, the unemployment numbers, which don't look good on the surface, look even worse then you look under the surface. There is huge number of people that are not included in unemployment because they were unable to find a job before their unemployment benefits ran out.
Good luck, all
©2005,2006 James Blackwell -- "Life is the stuff that didn't kill you"
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