One guy is doom and gloom claiming the world will fall into a cataclysmic depression by the end of the month. The next guy is optimistic that the Fed/Dr. Bernanke have cured all economic ills so that we are on our merry way to perpetual prosperity and bliss.

Such hype sells well but serves nobody.

The truth is our economic ills were not cured by bailouts that transferred bad debt from the private sector to the public, and we’re not likely falling into the abyss next week but will trade our way to whatever eventual economic outcome is our destiny.

That is why I liked the following post from Zero Hedge as a breath of fresh air because it succinctly points out a few economic facts that everyone needs to know and understand. The long term implications are important.

No hype – just solid facts that I think all my readers would like to know about.

As you read this article please notice your thoughts and share them in the comments below. I really want to know…

It really doesn’t matter if you are a U.S. citizen, Japanese, European or beholden to any number of other country’s debt laden fiscal policies, governments trained by John Maynard Keynes are “kicking the can down the road” by going deep into debt rather than solving current financial problems. This has introduced unprecedented levels of risk and undermined citizens sense of financial security.

So what can you do to protect your own portfolio?

This is a sticky question because every reader’s financial situation is different so please do not take this post as personalized financial advice. Instead, it is a guideline pointing a direction where I will share three generalized principles to consider if you become concerned about your government’s fiscal health…

1. The first obvious answer is to move assets out of an unstable country into a safe haven currency. The reasons behind this strategy should be self-evident although deciding what currency/country qualifies as “safe-haven” isn’t as straightforward as it used to be.
2. Another alternative is to purchase positive cash flow real estate with low leverage, fixed rate, fully amortizing financing (30-60% debt to equity). The income producing real estate provides a real asset that will command revenue that adjusts to currency changes and the asset value will adjust over time as well. The fully amortizing, fixed rate financing locks in your highest cost of ownership creating positive operating leverage to inflation (but also deflation should that occur first) and the low leverage level and positive cash flow increases the odds you will survive the interim volatility and fluctuations long enough to emerge a winner in the end.
3. Gold and related assets (other precious metals and metals producer stocks). In a world where all countries are sacrificing their currency and the question changes from “which currency is best” to “which currency is least-worst” means gold emerges as a likely winner. Just be careful because it doesn’t mean gold can’t fall 50% between now and then. It is an incredibly volatile asset class and there is a solid possibility that we could experience tremendous asset deflation between now and the time inflation rears it’s ugly head. In other words, this is not the slam-dunk that many pundits preach… so walk carefully.

However, with that said, those are the three primary strategies for protecting your wealth in world gone mad with debt and funny financial games at the highest level of governance. The implied assumption is that inflation will be the long-term result, but beware because it is entirely possible for deflation to occur first prior to long-term inflation taking charge. This can cause tremendous volatility and should make you cautious.

You may notice that stocks are conspicuously absent from this list even though they are equity and can benefit from long-term inflation. The reason is complicated to explain in a blog post but in general results from various valuation models that cause stocks to perform poorly in the initial instability caused by inflation and rising interest rates. This is not just a theoretical consideration but in fact exists historically in the data whether you look at Weimar Republic style inflation or more manageable problems like the U.S. in the 60′s and 70′s – stocks tend to lag before they run.

In summary, if you share the concerns expressed by some of my other readers then those are the three primary strategies to consider to protect your wealth in times of extreme monetary adversity.

Most importantly, I would like to point out the name of the game during adversity is “he who loses least wins”. In other words, with all the volatility it is tempting to play it big but the downside risk is equally large.

With that said, there are a couple of strategies from that list that can protect your wealth regardless of the outcome. In other words, you don’t have to be a genius forecaster and predict the world economy to preserve your portfolio because a couple of the strategies are relatively safe bets either way. Heads you win – and tails you win as well.

In times like this that might just be about as good as it gets…

Please let me know your thoughts in the comments below or share any of your favorite strategies or resources I might have missed so the rest of us can benefit…

Below are some educational articles published in the last week that no investor should be without…

1. Forbes published a great synopsis of the government debt crisis both in the U.S. and abroad. This is a very likely catalyst for the problems building in the markets. Remember, CDS rates expanded prior to subprime blowing up in 2008 thus providing the first clues before everything came unwound. Now government CDS rates have begun to expand. Make sure you understand this stuff…
2. David Galland published a great interview with Andy Millerof the Miller Frishman Group providing the inside scoop on why the real estate decline is far from over. It explains the catalysts that could cause the next break and makes clear just how much downside risk remains in both commercial and residential real estate. If you invest in real estate or are considering an investment this is a must read. Even if you don’t invest in real estate you will want to know this stuff because its impact will likely affect all markets you do invest in…
3. The Pragmatic Capitalist blog published a brief, two paragraph piece explaining that Investor’s Business Daily market model has officially turned bearish as of last Friday. They have a solid record of market calls during all the volatility of recent years using a well-reasoned model so this is not something to dismiss without serious consideration.

I hope you find these insights helpful. I will continue to bring you the best of the web so that you can advance your financial intelligence to the next level and become a more consistently profitable investor. I hope these articles help…

To gain a greater understanding of the ongoing and ever-escalating bank bailout insanity read John Hussman’s recent post revealing the latest shenanigans snuck under the radar while everyone was out for the holidays. The title should be self-explanatory – “Timothy Geithner Meets Vladimir Lenin”. It is essential financial education for every American voter. 

I’ve made no secret that I dislike bank bailouts. It violates the very economic principles that made this country great, and it creates negative incentives that will hurt this country for decades to come.

As Vladimir Lenin stated, “The best way to destroy the capitalist system is to debauch the currency”. It appears Timothy Geithner was a student of this philosophy.

Educate yourself, write your Congressional representative and vote your conscience. Something seriously wrong is going on in Washington, and the beginning point is to educate yourself and establish a greater understanding.

As I uncover more quality educational content on these issues I will share it with you in these pages.

Hope this helps.

In fact, the recent stock market crash, real estate decline, and banking panic has left many people in the same position. And if the recent financial crisis wasn’t enough to take you down, it seems many people found their way to financial disaster through more traditional routes like divorce, overspending, medical bills, or bankruptcy. The reality is more people than ever face serious financial difficulty today.

Regardless of what caused your financial setback, your path to recovery and prosperity will require a common set of action steps. You may believe your situation is unique but many have walked this path before you. The road to financial recovery is well worn and the steps to come back after financial disaster are well proven. So let’s get started with the six step process that will help you recover from financial disaster…

Step 1 – Accept Your Situation: The starting point for financial recovery is to stop wallowing in your misery and accept reality. Yes, it is a bummer. Yes, you are likely the victim of somebody else’s wrongdoing. Yes, it is devastating – but most important of all – none of that matters now. What’s done is done and there is no turning back.

Resisting what is already a fact is futile so don’t waste your energy - accept reality. Living in the past only makes forward progress more difficult. Instead, accept the setback, let go of it, and commit to forward movement – not because it is the right thing to do, but because it is the best way to help yourself. As long as you waste your energy wallowing in your misery you will have that much less energy to dedicate to solving the very real challenges you face to move forward in life.

The best defense is a good offense so get out of defensive mode and get started on the road to recovery with a clear offensive strategy.

Step 2 - Take Inventory: The second step to financial recovery is to take inventory of your current situation. You must know what resources you have and what liabilities you face when developing your plan to come back from catastrophe. You have to know where you’re at now before you can develop a realistic plan to get where you want to go in the future.

It is no different than using a road map to plot your path to a destination. In order to plan the route to reach your goal you must first locate where you are now on the map. It is the same thing financially – you must define your starting point based on what is true today…

• What are your remaining assets?
• How much money do you owe?
• How much income do you bring in each month?
• How much do you spend?
• What is your credit score?
• Are they any long term implications to the financial disaster (alimony, health issues, I.R.S. liens) that must be included in your recovery plan?

The objective at this stage is to take an inventory of your current situation. You want to know everything that will effect your financial recovery plan so that you are ready for step 3.

Step 3: Define Your Goal: The third step in your financial recovery plan is define your objective or goal. You must determine where you want to go financially?

Staying with our road-map analogy this step is akin to locating your end destination on the map. Once you know where you are (step 2) and you know the end destination (step 3) it is simply a matter of plotting the course to get there (step 4). Setting your end destination is the same thing as setting a goal.

The “S.M.A.R.T.” goal setting system provides helpful guidelines:

• Specific: There must be a clear and definable end result. For example, “I want to make more money” is too vague and general, but “I want to have $10,000 per month residual income after taxes by January 5th, 2015″ is specific and points a clear direction.
• Measurable: You must have some way to measure your progress toward the goal. In the example above the measurement is dollars of residual income per month. I also encourage you to add interim goals along the way to break big goals into more realistic chunks. For example, how much residual income should you have one year from now? Three years? Five years?
• Attainable: There is a fine balance between setting a goal that stretches your ability while still remaining within reach. If you set the goal too easy then you’re not challenging yourself, and if you make it too hard then you’re setting yourself up for failure. A properly designed goal achieves that razor-edge balance that stretches your comfort zone without breaking out of reach.
• Realistic: If you’re deep in credit card debt and filing for bankruptcy it probably isn’t realistic to set a goal of becoming a millionaire in 12 months. Enough said?
• Timely: A goal without a deadline is just wishful thinking. You may want $10,000 per month residual income, but unless you include a date for this to occur by it does not qualify as a smart goal. It is just wishful thinking. Give yourself a deadline.

Step 4 – Develop Your Plan: Now that you have your goal for financial recovery and you’ve assessed where you are at today, the next step is to develop a plan that bridges the gap between where you are now and where you want to be. Staying with our map analogy, you need to figure out the most efficient path to get from point A to point B.

It is important to note that you must balance offensive and defensive strategy at this point to keep the process fun and fulfilling. For example, one mistake I often see people make when paying down debt is to do nothing but pay down debt. The problem is that’s not very fun or very rewarding for most people. One solution is to balance paying down debt with adding a little tax deferred retirement savings or other assets. The reason is to experience some emotional satisfaction so that you feel rewarded by the asset growth which increases your odds of staying with process long-term. We are not robots: our emotions are part of the process and must be honored.

Step 5 - Take Action: The fifth step – taking action – sounds obvious when reading but for some reason it eludes many people in practice. The reason it is important is because a plan for financial recovery is nothing more than wishful thinking until it is converted into action. Nothing happens until you take action. It is where the rubber meets the road. Action is the fuel that converts goals into tangible results. A lot of people dream about improving their financial situation but few take consistent action, and that makes all the difference. The ability to consistently and persistently direct meaningful action toward achieving a goal is what separates successful people from those who are not.

Step 6 – Correct And Adjust: As you take action the one result you can be certain of is you will learn from your experience – and mistakes. You will improve your skills and become more knowledgeable as you take action. That is why you should never try to perfect your plan from the beginning. Instead, just get started with a reasonably intelligent approach and correct course as you learn more.

The wise goal achiever knows that perfection is impossible but correction is desirable; therefore, he just gets started as best he can then adjusts along the way to achieve his goal more quickly and efficiently. Seldom (almost never) will your first plan be your best plan so don’t waste the effort trying. Starting immediately is more important because you will have plenty of time to correct course later.

That’s it – six simple steps that can help anyone turn the corner following a financial setback. Now that you know what to do maybe a financial coach might help you stay focused.

And if you have any other tips I left out please add them in the comments section below. What did I forget to discuss that might help someone recover from financial disaster? What other suggestions should be added? Please contribute to the discussion in the comments section below… 

At the risk of standing on my soapbox, I believe those who took the risks and benefited during the boom are the rightful owners of the losses when the bubble bursts – not the taxpayer – and it irks me to see it work the other way.

I understand the logic that allowing the failures would create more public pain than preventing them, but I disagree with that logic. The government can’t spend its way to prosperity, and it makes no financial sense to try and solve a problem caused by excessive credit and leverage by creating more credit and leverage and transferring that burden to the public sector.

The alternative is to allow a normal and healthy economic response that includes asset values declining to realistic valuations that are supported by the underlying fundamentals – not by government intervention and easy money policies. If failures occur along the way then so be it – that is the natural result of taking excessive risks and poor management. New companies will rise up to replace them.

Let me be clear – this asset deflation will not end until asset values decline to the point that their cash flows support valuations. This is basic investing and economics. Any governmental attempt to re-inflate values by incurring debt on behalf of the taxpayer is a waste of your money. It is merely transferring value from you (who never benefited from the speculative excesses) to bank bondholders and corporate shareholders. It is economically foolish and morally wrong.

My concern is the banking establishment has demonstrated way too much government connection by passing legislation favorable to its needs (at taxpayer expense) during this crisis. Our government representatives running the Treasury and Federal Reserve Banks appear to be unduly influenced with many coming directly from Wall Street firms (i.e. Government Sachs)

But who cares what I think? I’m just a small fish in the big pond of life. Let’s see what some people with credentials far greater than mine have to say on this subject…

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” Thomas Jefferson

Whoa! That is one powerfully relevant quote from one of our founding fathers. Hmmm, maybe there is some problem with banking influence in government. Here is another interesting quote… 

“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”  George Washington

Hmmm, it appears these issues were well understood by the earliest American politicians. They warned us, yet we stepped into the muck anyway. Let’s see what some of the great economic minds of history have to say about bailing out the banks and corporations while putting our currency at risk…

“Lenin is said to have declared the best way to destroy the capitalistic system was to debauch the currency… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose.”  John Maynard Keynes

Wow! Did I hear that right? The father of Keynesian economics espousing sound money practices. Can anyone say “quantitative easing”? Has anyone looked at the growth of the Federal Reserve balance sheet and examined the quality of the assets?

“With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” Frederic Bastiat

No surprises there, but thank you for the history lesson, Frederic. It appears our government is attempting to follow a well worn path. Since the creation of the Federal Reserve system the resulting currency inflation has destroyed 90% of the purchasing power of the dollar not once – but twice. In the 200 years prior to the Federal Reserve system there was no persistent inflation. The results are undeniable. I wonder how the captains of industry view our banking system?

“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford

Enough said?

Again, I deeply dislike the government bailout of the banks and major corporations. It is the wrong path to travel and is taking us into dangerous territory. Learn more on this subject and maybe you can be part of the revolution Henry Ford talked about.

…but who cares what I think.

http://www.foxbusiness.com/video-search/m/22033358/rogers-how-china-s-surviving.htm#q=jim+rogers

Jim Rogers takes Fox Business News to task and makes mincemeat out of the reporter. What I liked about this interview is how it shows the clear separation between how financial experts view the government bailout policy and how the media is spinning the whole process. The two viewpoints are as different as night and day. During the interview Jim makes a couple of points worth noting:

• You can’t spend your way to prosperity.
• Our national debt is a bad thing, and growing it further is a really bad thing.
• The banks we are trying to bail out are already dead so the primary affect of the bailout is to protect bondholders and investors at taxpayer expense. That violates economic principles, is immoral, and is bad business.

I could go on and on but Jim Rogers says it more succinctly and with greater entertainment value than I can. He speaks clearly for all of us who are deeply frustrated by the government’s response to the global economic crisis.

I hope you enjoy this quick interview.

This article by Michael Lewitt is particularly interesting because it ties together a lot of loose ends we have discussed in previous posts on the global financial crisis.

• It brings in the D-process as discussed a couple weeks back in the Barrons article with Ray Dalio.
• It discusses the essential requirement of debt liquidation prior to concluding this difficult period – an essential point agreed to by all authors in this series.
• It discusses the long-term dangers of our government’s policy response to increase their own balance sheet while corporations and private citizens are reducing their balance sheets.
• It adds the increasing expectation for a meltdown in Eastern Europe.
• And it adds a pending Obama budget crisis to top things off – icing on the cake, so to speak.
• Plus there are many more interesting tidbits including a fascinating quote from the Economist magazine.

I hope you enjoy this third installment in our Best of The Web series focused on the global financial crisis. This article by Michael Lewitt is a little longer read than usual, but it is all high quality content. As always, my goal is to provide you with that next level of financial education that you won’t get from your broker or the mainstream press, and I think you will find this article fits the bill.

Next week we will get back into wealth building with a focus on building our own prosperous economy within the ruins of the current business climate. I hope you enjoy, and please spread the word.

Related Posts:

• Ray Dalio in Barrons on the economic crises.
• Jim Rogers on the global financial crisis.

Last week you were introduced to Jimmy Rogers thoughts, today it is John Hussman, and later this week I will send you one last post about the global financial crisis to complete this three part series.

Why am I devoting three blog posts in a row to the global financial crisis? Because it is critically important to your wealth and financial future and I want to help you understand what is going on. So much nonsense is written by unqualified authors who really don’t “get it”. The three authors I am directing you to “got it” well before it occurred and they are on top of it right now. Their thoughts are worth knowing.

This information is also very timely because after months of confusion the high quality writers are finally wrapping their heads around the problem to provide worthwhile insights – and the result isn’t pretty.

First let me clarify a statement I made last week in the “Jimmy Rogers” post that confused a few readers but sets the tone for these next two posts. I stated that our government’s misguided policy response to the economic crisis effectively exchanged a bad case of the flu for early stage cancer. This idea centers around the government’s plan to cure bad debt and excessive leverage in the private sector by exchanging it for horrific debt and excessive leverage in the public sector. I believe this is a terribly misguided policy that has serious intermediate and long-term implications for our country. It is creating horrible long-term risks, economic distortions, and debt burdens that aren’t justified by the questionable reward it may produce. (IMHO)

In short it is very bad business, and it is something you must understand because it has serious investment implications for your future – and your children’s and grandchildren’s future.

Consistent with this line of thinking, the second article to bring to your attention in this three part series is by John Hussman of Hussman Funds. John is a rare combination of Ph.D economist, successful money manager, and a very good writer to boot. He offers a weekly newsletter that is always an interesting read for us investment junkies and is usually educational also.

In the article I’m recommending linked here you can skip the top half if you are tight on time and begin reading six paragraphs from the bottom beginning with “The misguided policy response…” and ending where his “Market Climate” section begins. In these six paragraphs he discusses the investment and social implications of the government bailout packages with unusual clarity for a trained economist. It is education you won’t find in the mainstream media, and it is a very brief read at just six paragraphs.

In addition, if you have an extra few minutes his associate Willian Hester just published today a fascinating examination of market valuations during previous recessions that brings valuable perspective to everyone’s rants about the stock market being “undervalued” right now. There are many ways to look at market valuation and Bill shares a few less common but important variations.

I hope you enjoy these articles as part of our Best Of The Web series where I bring you the best educational content to try and move you to the next level of financial intelligence so that your investment profits become more consistent and secure. If you find what I am doing helpful please spread the word.

In the next issue we will conclude our three part series on the global financial crisis with some outstanding analysis by Michael Lewitt as published by John Mauldin. 

Related Posts:

• Jim Rogers on the Global Financial Crisis
• Ray Dalio on the Current Economic Crisis

In a recent interview on CNBC Jim delivers a rant about our government’s handling of the global financial crisis that speaks my mind clearly. I believe the government is exchanging a bad case of the flu for early stage terminal cancer through their mishandling of the crisis and Jimmy seems to share that viewpoint. The implications of government policy pave a clear direction for future investment strategy once the immediate recession completes its ugly path.

The link to the interview published on Businessweek.com is here.

This is yet another installment in our Best Of The Web series where I offer high quality financial education found elsewhere on the web that helps you grow to the next level of financial intelligence where investment profits are more consistent and reliable.

I hope you enjoy this interview.