Financial and credit markets are in crisis. What to do???

Market News & Commentary by Chris McLaughlin, September 29, 2008
http://www.shortsalesriches.com/welcome.html

Financial and credit markets are in crisis. Congress failed to pass the Administration's bailout today. Fear, panic, and calamity overcame investors as many threw in the towel after the US House of Representatives gave a stunning rebuke to the Bush Administration as well as Congressional leadership. The Dow Jones Industrial Average plunged 777.68, nearly 7%, and the S&P 500 dropped 8.79%.

Investors were wondering what bank was going to be next after Citigroup announced that it would scoop up Wachovia for just $1 a share (Wachovia shares plunged over 81% today). But Citigroup is not necessarily getting the bank for cheap--it must write down much of Wachovia's $312 billion loan portfolio.

So let's take a deep breath. All within a month Fannie Mae, Freddie Mac and AIG are owned by the government. Washington Mutual is gone, bought on the cheap by JP Morgan. Lehman Brothers is history. Bear Stearns was already history. Wachovia's shareholders have been wiped out and are now Citigroup shareholders for pennies on the dollar. Brand names that Americans recognize are gone. All within a month. Wow.

What's next? You can see that regional banks are under intense pressure. Banks like Fifth Third dropped '43% today, First Federal Financial dropped 25% and KeyCorp plunged 33%. "Who's next?" is now the topic of conversation across the nation.

If you're trying to get a sense about the level of anxiety about economic activity, just look at energy prices. Crude oil dropped $10 a barrel today as many believe that with the slowing economy so too will there be less gasoline and oil used. Crude oil has dropped over 20% in just the past two weeks.

Now, on to our Realtor and investor education section...

Now that the stock market is in utter chaos, typically investors look again to "hard assets" like gold and housing to invest in. Many of you reading this are either investors or realtors ... so let's take the approach of understanding how to best advise clients to get into real estate versus gold.

On September 17th, gold recorded the largest ever advance as it soared $120 within a 24-hour period. Just a few months ago, gold reached a record-breaking $1,000 plus per ounce for a short period of time. Considered by many to be "Gods Money," gold has enjoyed a long and illustrious career as a "hedge" during periods of rapidly escalating inflation or other economic uncertainty but does it deserve the reputation? Should you run to liquidate holdings and buy gold bullion? Most of all...how does it compare to real estate when the going gets tough?

To answer these - and maybe a few other burning questions - today we will spend a little time discussing real estate and gold as a hedge during uncertain economic times. Every portfolio has room for both but use these facts when deciding what percentages to allocate to each:

Fact #1: Real Estate as an Index. The Gold Standard is long gone. Whatever your opinion of removing the dollar from the gold standard, the fact is the dollar is a fiat currency without a gold backing. That has been - and remains - the current state of affairs. The fiat - or paper currency - has not been backed by gold for decades and despite the occasional lone voice crying in the wilderness, little serious attention has been given to restoring the currency to a gold-backed standard.

During a period of time when many doom-and-gloom types are calling for a complete collapse of the dollar, savvy real estate investors may well turn to the Weimar Republic as a working example of what happens after a currency collapses: Germany turned to real estate (rather than gold) holdings as the foundational index for the newly created currency!

Fact #2: Shelter is a Primal Need. As any student of psychology or human behavior knows, during times of uncertainty, people tend to seek out the most basic needs of food, clothing and shelter. Although gold is an item of intrinsic value, it does not compare to that of shelter. The worse the economy - the more people return to the values of home and hearth.

In fact, much of the value of gold is due to its ability to be used as a unit of exchange for food, clothing and shelter during times of need. On the other hand, if you own real estate - ie, shelter, land able to grow food, water and other essentials then you have the most sought after commodity of all.

Fact #3: Gold can - and has - dropped significantly in the past. Like all recent investments, gold has seen highs and lows. Real estate has experienced 20 percent drops in price but so has gold. Looking back at the late 70's and early 80's, gold momentarily reached a high of $845 per oz only to steadily decline for the next 20 years when it finally bottomed out at approximately $250 per oz...NOT adjusted for inflation!

On the other hand, while real estate also experienced a sharp price increase during the late 70's and early 80's it then remained stagnant for approximately a decade - barely keeping pace with inflation (but still managing to hang on). Those who held gold rather than real estate - lost.

Remember, those who don't learn from history are doomed to repeat it. Learn the lesson from Weimar Germany, the United States in the late 70's and early 80's and even man himself...men steal gold but go to war for land.

So let's get this straight. Mom and Pop don't have much money anymore, but what little money they do have is now losing money and now banks aren't safe. Credit has tightened beyond all recognition and the thought of getting a loan that isn't government backed is laughable.

But it is the single biggest gift many of us will ever be given in our lifetime! Wherever the public runs one way, I say run the other. And I have made a lot of money because of it. It is time to buy foreclosures and start understanding how short sales can build major wealth. It is time to get excited about being a Realtor or real estate investor again!

So we're going to do it again tomorrow night (Tuesday). We're hosting a Webinar (you need a computer and a phone to participate). Last week's webinar was nearly sold out, so if you're interested in learning how to make money in this market jump on this now and register while we still have openings:

https://www2.gotomeeting.com/register/759612505

The webinar will be both Nathan and I discussing how you can turn this crazy market into the biggest opportunity in a lifetime. It begins at 9 PM ET (6 PM PST) so that our friends on the West Coast can join us, too. Sorry if you're East Coast you might have to stay up a little late but the fr.ee content is well worth it!

So remember ... in this market, you can now buy low, and not only sell high, but sell fast. And that means less risk, less holding costs, and money in the bank. But you have to do more than read this and agree ... you need to take action, too.

See you at the top!