Dear John: Either [letter-writer] M.B. is a financial adviser (and a commission-driven person) or has never invested in the financial markets. As someone who has been in the markets since 1993, I can tell you what they take away from you in a few months takes five years or so to get back. The markets give it to you and take it away … give it to you and take it away.
That's the cycle — the house (Wall Street) doesn't lose. And even though the Dow was at approximately 6,800 in 2008 and 2009 and now stands at 17,000 to 18,000, that doesn't mean you make two to three times on your investment — not even close. So tell MB to get his head out of his butt. J.B.
Dear J.B.: The risks are far greater than even you think.
With high-frequency computer trading that is driven by the slimmest of "news" events, the market can take away your profits faster than you can go to the bathroom and wash your hands. You could be locked out of trading by the time you flush. (I'm not encouraging investors to either skip hand-washing or flushing, just trying to put this in terms any coffee-loving person with money can understand.)
And since the markets are being rigged by the central banks and governments, there's no telling when those profits can go poof.
What I've been saying all along is this: There's a bubble. And if you think you can time the end of the bubble, then go for it. If you don't feel that lucky, don't play the game.
Dear John: I disagree with something you recently wrote: "And when rates do go up, housing prices will come down."
Isn't it true that this will not be so if the government makes it easy for new homeowners to get a mortgage for no money down, or an FHA loan with 3 percent down, just like they did before and caused the housing bubble?
More people will buy homes they cannot afford, which will increase housing prices before the crash. I think we have a few years for the build-up before the crash. S.C.
Dear S.C.: If the government does this … or if the FHA does that …
Yes, there are a lot of variables in the housing market. But generally speaking, Joe and Mary have X amount of dollars a month to spend on a house. If the cost of borrowing money — the interest rate — goes up, they will have to turn over more of that monthly budget to the bank. And they will have to make adjustments on the price of the house they buy.
An uncle could drop dead and leave them money. Or they could win the lottery. A lot of things could happen.
But rates up, prices down is something that will undoubtedly occur. Maybe not immediately, but eventually.
Dear John: Here's an interesting thought since the Federal Reserve is fighting talks of an audit. Could the Fed pass the stress test that all the other big banks have to pass?
If it fails, how could it build up its capital?
In my very simplistic model, the Fed can only use dollars to increase its capital. And if it tries to manipulate the dollar through inflation, it only will make things worse. Inflating the dollar would reduce the value of its balance sheet with all the Treasury debt it is holding from quantitative easing.
If Citi or JPMorgan goes under, it would be a calamity. If the Fed goes under … ? A.Z.
Dear A.Z. Let me start by asking you a question: If we landed a spaceship on Mars and discovered that it was made of chocolate pudding, would Bill Cosby decide to relocate there?
I think he would. What do you think?
I bring this up because this is as silly a question as yours.
The Fed's balance sheet — now $4.5 trillion — is the mess of all messes. And if it were audited like a bank or a corporation, it would fail.
But it doesn't have to follow the same rules. The Fed is currently making huge profits from a portfolio that was purchased with magic quantitative-easing money printed for the occasion. It turns over the magic profits made from this magic money to the US Treasury, which magically makes some of its debt disappear and proclaims the US is healing.
And when the time comes and interest rates rise, the Fed will not have to declare losses on the portfolio purchased with the magic money.
Everything will be fine until one day someone — perhaps Chinese investors, or nasty OPEC leaders — start questioning the solvency of the US, considering all the magic the Fed has been using.
At that point we'll notice that the country has stepped in a lot of chocolate pudding.
Dear John: It is truly sad that someone with your willingness to tell the truth to all who will listen isn't contagious.
It would do this country well if some of our politicians, starting with the president himself, would be so honest. I wish that more of those who make up our Congress would read your column. S.H.
Dear S.H.: The truth is like a virus in our society. As far as the economy goes, they want to stay clear. And even when the economy is wheezing and sneezing, they want to deny that there is sickness.
We've done this before and suffered a longer ailment because of it.
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