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HOW MUCH IS YOUR HOUSE, RETIREMENT FUND OR OTHER MARKET INVESTMENTS REALLY WORTH? THE AWFUL TRUTH OF WHAT ACTUALLY HAPPENED IN 2008.

Wednesday, October 28, 2015 12:57

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When the Fed made the announcement that they wanted $700billion to bail out the banks following the collapse of Lehman Brothers, there was fury and outrage from the general public. “They’re loading Wall Street’s gambling debts onto the tax-payer” was the cry from main street.

But that simple analysis failed to account for the fact that the huge bubble in asset prices, including Real Estate, was funded from cheap credit supplied by savers from Countries such as China.

If asset prices had been allowed to crash back down to realistic levels, many small savers from across the world would have been wiped out. Retirement accounts would have crashed with it, investment portfolios would have halved and desperate corporations would have had to liquidate property and assets for a fraction of their previously over-rated value.

This would have had direct security implications for many western nations as cash-rich enemies of the West would have bought up very cheap strategic assets that would enhance their influence over the future of our people.

There would also have been heightened tensions leading to civil unrest and outbreaks of conflict against the West as we would have been perceived as robbers who had stolen the savings of poorer nations.

So America had little choice but to adopt TARP, ZIRP and QE as a means of forestalling such cataclysmic events. The UK, Japan, the EU and belatedly China herself have had to go along with this.

Readers should note that world leaders only ever intended that this should be a stop-gap measure to buy time to heal our financial system so we could return to “normal”.

But what we have today is abnormal.

All the interventions have been about protecting asset valuations, which means preventing deflation. The idea is simple: Boost inflation until these fairytale asset values are under-girded by real-life market demand.

But that’s impossible without a massive increase in wages and salaries, so people can afford to pay for those assets. That hasn’t happened because of huge global competition in the labour market which has driven down wages or reduced hours worked.

Quantitative Easing has added about $70trillion globally to the available pool of credit since 2008. This printed money has been used to buy Government and Corporate bonds to prevent high interest rates from decimating Government coffers leading to Sovereign default and massive civil unrest.

The global level of debt is now so great, that a relatively minor event could crash the entire financial system in a matter of hours. So the efforts of world leaders is concentrated on prevention while they search for a cure. So zero or negative interest rates for savers and investors will continue, as will QE.

So where does this leave you and your wealth?

You might want a stiff brandy before reading this next bit…

Let’s start with your house.

Let’s say your Realtor has valued your property at $500,000.

But you do a little research and discover that the median income of everyone who lives on your street in similar houses is $60,000.

For more than 100 years, house valuations were typically based on a solid foundation of 3-4 times average annual earnings.

When the market correction comes, as surely as gravity always wins, your actual house valuation is a maximum of $240,000.

That’s 60 percent below the hyped price.

Now let’s take a look at your retirement fund, college fund or other investment vehicle.

Let’s say your latest statement boasts a valuation of $100,000 across a broad spectrum of commodities and corporate assets.

Your broker confidently predicts a cash-out value of $100,000 of all your investments.

This assumes these investments are growing organically with increasing sales, expanding infrastructure, hiring and output.

But here’s the night-marish truth. A huge number of local and international companies are shrinking: sales, infrastructure, hiring and output are all down….

But get this: their profits are up, their valuations are up, yet they’re dwindling in size.

How do we explain this contradiction?

Owners buying their own stock using borrowed funds, huge price-to-earning multiples and all manner of alchemic accounting.

The fundamentals that kept investors informed and safe have been grossly undermined.

This means if you, and a few thousand other investors, decided to cash in on the same day; your $100,000 portfolio would cash out at closer to $30,000.

About 70 percent below the hyped price.

Okay, that’s the bad news. Unpleasant but true. Do your own investigation if you doubt the truth of all this.

But the good news is that a solution has been found. But the West is going to pay dearly for this solution in terms of many of the freedoms and rights we have enjoyed [email protected]

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