Market meltdown: What in the world is going on?

Following the financial news?

I don’t have a TV so I can only imagine the reporting. Markets going down, down, down. People getting worried. In private at least. On TV, I’m sure it’s Kool Aid as usual. Or maybe it’s finally getting through.

In any event:

The party is over – for the time being at least – and what a party it’s been.

Real estate loans. There was a time when house deals were all cash. Literally, “cash on the barrel head” after the builder drove in the last nail. No such thing as “spec” building in the sober old days.

Then came short term mortgages. Then the big post-WWII lending innovation. 30 year mortgages for everyone with a job. It made and makes a lot of sense.

What didn’t make sense and what was bound to end in tears were the “no-down- payment-no income-verification-no-valid-appraisal” loans of the recent and fast fading go-go years.

We are talking high insanity here. And to squirt a huge bunch of lighter fluid on the fire, low “teaser” rates were used to entice people into taking out loans that were way too big for them.

What were they thinking? “They” being Alan Greenspan former Fed chairman who actually encouraged this madness. He wisely retired a while back before this particular flock of chickens came home to roost.

“They” we thinking the marketplace needed more cash dumped onto it to further cover over years of monetary mismanagement.

First there was the Asian meltdown in the 90s. Fed solution? Throw cash on it.

Then there was the Y2K crash (which never happened.) Fed solution? Throw cash on it.

Then there was the dotcom crash. Fed solution? Throw cash on it. Then there was 9/11. Fed solution? Throw cash on it. The big “oops” in Iraq. Fed solution? Throw cash on it.

Get the picture?

The solution to every crisis in the US in the last ten years (longer really) has been print more money. Of course, the Fed doesn’t literally print and ship the money (though they did for Y2K.) They create money by stimulating credit. That’s how money gets created in our economy…through loans.

There’s just one catch to this brilliant plan: the loans have to make sense…because if they don’t, they don’t get paid back and the newly created money “disappears.”

What was once an asset on a lender’s books, turns into a zero and in the case of real estate, a liability. (If you take back a house, you’ve now got taxes, insurance and maintenance to pay.)

That’s why traditionally, people who loan on real estate used require down payments of 10% to 20%. And why income verification was such a big deal. And why appraisals were expected to be legitimate. Because if the buyer has no skin in the game, doesn’t have the income stability to make the payments, and the house it not really worth what it is appraised for, then the lender is going to eat it. Big time.

That’s what’s happening now and my guess is the worst is yet to come. The default rate is high, but the newer “adjusted” rates haven’t even kick in yet.

How could so many lenders behave so foolishly?

The buyers were dumb and encouraged to be dumb…by the loan brokers who made their money on closed deals whether they made sense or not…because the lenders knew they could “package” the loans and sell them to investment banks…who knew they could in turn sell the turkeys to investment managers.

And the investment managers? Ultimately, they’re just one step of sophistication above the people who took out these loans in the first place. They don’t want to have to think too hard and their main ambition in life is to get out of the office by 4:30 PM each day.

Well, they got their wish and now they’re choking on bad paper. Which means that when they need to go to the cookie jar for something, they can’t sell the “securitized” loans they bought and they have to sell something else.

There are a lot of guys in this boat. And they’re all selling stuff…stocks, junk bonds, developing market stuff, high flying currencies, anything they can to meet the shortfall.

Here’s the problem: everyone is selling and fewer and fewer people are buying. Thus prices of many things are heading down, down, down.

Prices have a long way to go (for the time being) and here’s why: they were inflated due to EZ credit terms.

Look, when money is being given away to everyone just for having a pulse, the money has to go somewhere. It makes its way into various markets in the form of people being willing and able to pay more. Lots of money chasing a finite amount of stuff and up go the prices. It’s Supply and Demand 101.

It works in reverse too. Thanks to some truly moronic and reckless lending a whole bunch of money just went up in smoke. Gone. Poof. And here’s the crazy thing. No one can tell you how much. Hundreds of billions? For sure. And now as money managers scramble to raise money by selling other assets, they’re driving those prices down further.

It’s simple physics. What was up is going down.

For example, last night I watched a single New Zealand dollar contract fall $3,000 in just a few hours. Normally a move of a few hundred dollars in a day is news. Nearly half the move took place in minutes. There simply were no buyers. The Australian dollar took a similar dive. (There’s money to be made right now shorting assets that were inflated by the EZ money game, but it’s not a game for beginners.)

Here’s my simple rule about money that will keep you out of trouble:

“Easy money is always followed by hard money.”

It works for investing. It works for business. When times are flush, save and always keep an eye on the exit. If it’s easy to sell something today, you can guarantee some day it will be hard to sell. Don’t confuse flush times with an inherent “genius” on your part and don’t be the last one standing when the music stops.

Something no one is talking about because few understand it: all this madness is driving the US dollar up. Yes, UP…for now.

Why? Because money is being taken off the table all over the world and shipped back to the ultimate lender of last resort, the US Treasury. Thus, the price of treasuries is going up and the rates they’re paying is going down. To buy treasuries you need dollars. Can’t buy them with Euros or New Zealand dollars.

Here’s another odd piece of unspoken reality. For all its recent poor-mouthing, the US has a ton of money. Recently $20.7 TRILLION dollars in the hands of mutual funds, private pension funds, state and local pension funds and life insurers.

This amount is close to FOUR TIMES the amount of the entire world’s official foreign currency reserves. These are the guys who move the markets. When they start moving money around, the earth rumbles.

And right about now treasuries are looking good to these fellows and all that money that’s been propping up the Euro and the Peso and the New Zealand dollar et. al. is coming home. So don’t be surprised if for a while at least the US dollar keeps moving up as the price of everything else moves down.

OK. So what, right? How does this effect the bootstrap entrepreneur?

Well as my favorite money man Warren Buffett likes to say: “When the tide goes out, you find out who’s been swimming naked.”

Retracements, such as the kind we’re in, are good news for real entrepreneurs (assuming they haven’t hocked themselves up to their eyeballs to pay for toys.)

Here’s why:

1. Selling gets harder and since most business owners are sales and marketing whimps, those who understand the art of selling get the playing field all to themselves.

2. Employees, vendors, suppliers, owners of all kinds of assets etc. come down off their high horses and suddenly get a lot easier to deal with.

And as our $20.7 TRILLION dollar stash indicates, the economy of the good old US of A isn’t going away in the forseeable future and money is not going to disappear entirely – even if it may seem that way for a while.

“Easy money always becomes hard money.” The second part of this is that: “Hard money takes the weak players off the playing field (often in stretchers.)” Frankly, there’s nothing more annoying to a real entrepreneur than some twit with a pile of easy money driving the prices of everything up and stinking up the market place with his noise.

I don’t know where the bottom is to this thing will be. “Clever” financial innovations have a nasty way of turning into brief, but potent nightmares. And never have financial people been more “clever” than they have been in recent years.

The thing to remember is there is money to be made in ALL markets and many, many, many businesses actually thrive and expand in downturns. It’s all a matter of perspective.

I don’t have a TV because if I did, I’d watch it. Staying away from the nonsense on TV allows you to think clearly and do real research. No one ever learned anything deep from watching TV I can assure you of that.

The best investment in good times and the best investment in bad times has always been the same thing: a smart, well run business that’s in touch with marketing reality.

The only thing that keeps most people from enjoying the fruit of own their own successful business is a lack of knowledge. Plenty of people are willing to work hard and they do – for other people. But hard work without an entrepreneur’s insight and know-how is a prescription for being on an endless treadmill.

So how do you get off the treadmill and profit whether times are good or bad?

You invest in your most important asset: Yourself.

You develop the most valuable real estate you own: The space between your ears.

Internet marketing is still the best shot that the little guy has to get traction and escape consensus mediocrity and live life on his or her own terms.

Cost of entry is lower than any other business I know and the upside is enormous. Even more important is that as you find your way in the business, it’s very forgiving. You never have to “bet the farm” on an Internet idea, nor should you. If something isn’t working, you find out right away and can either fix it or move on to something better. Very important these days when you don’t want to get “locked in” to a losing proposition.

As many readers know, I’ve been teaching online marketing since 1993 and web marketing since 1994. In fact, I organized and sponsored the first seminar on the subject of web marketing ever held.

I’ve been in the field continuously ever since and have been consistently among the leaders to first test and try new things long before they became popular: e-mail marketing, banner ads, pay-per-click advertising, Internet audio and video. I’ve introduced thousands of people to the business over the years and many of today’s self-proclaimed “geniuses” got their foundation in the business from me.

This summer I had the hunch that Internet marketers needed something different. I felt the now-popular guru routine of “give me $10K, $15K etc. for my secrets” wasn’t doing people trying to learn any good and rather than curse the darkness, I decided to light a candle.

Here’s what I’ve come up with:

It might be just what you’ve been looking for.

– Ken McCarthy

P.S. For over 25 years I’ve been sharing the simple but powerful things that matter in business with my clients.

If you’d like direction for your business that will work today, tomorrow and twenty years from now, visit us at the System Club.

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9 Responses to Market meltdown: What in the world is going on?

  1. Duncan MacIntyre August 16, 2007 at 3:42 pm #

    Great post Ken, although I’m not sure I agree with you about the ton of money, ton of paper yes, but what ultimately is paper worth if and when things go horribly wrong?

    Look at Zimbabwe with its 10,000% inflation this year alone or Germany in the 1920s with its wheelbarrows of ever more worthless money to pay for even a loaf of bread.

    Not a fair comparison perhaps, but printing ever increasing amounts of money to get out of a mess may well come home to roost someday.

    Although the problem started in the housing market, its reach has gone a lot further.

    Here’s a copy of a recent letter to the UK’s Financial Times from a cosmetic surgeon.

    “Sir, “Payback time” (August 9) was a great article on the US subprime fraud and inadequate credit checks. The blindness of the companies involved is baffling because by 2006 everyone in southern California knew that “financing” meant free money.

    Having just moved west, I was chief of plastic surgery in a cosmetic surgery centre, most of whose working-class patients financed their operations via a company owned by doctors (I was not one of them). Women with incomes of $18,000 a year were being given $10,000 loans.

    But at least the doctors’ finance company did stricter checks than the local mortgage companies and car dealerships – perhaps because you can’t repossess cosmetic surgery.

    For example, I saw two women friends who wanted cosmetic surgery, but the routine computer finance credit check showed their social security cards and drivers’ licences were forged.

    They objected to this being detected, saying the documents were newly bought – $45 each – from street vendors. In the past week using these documents they had financed two new cars and a home.

    They were refused financing by the surgical centre but were so sure there had been a mistake that they returned the next day with two new sets of forged documents. They were not only surprised but outraged that financing was still declined.

    The surgery centre, where I no longer work, could not pay its bills by January 2007. I was just surprised that the mortgage companies lasted as long as they did.

    J.E. Morgan,

    Los Angeles, CA 90048, US”

    Although it’s quite amusing, it makes a very serious point.

  2. F. Janssen August 16, 2007 at 5:39 pm #

    Thanks Ken for sharing your thougths. Didn’t understand why the $ went up, now I do.

  3. Ken McCarthy August 16, 2007 at 5:53 pm #

    The good thing about money is it always has to go somewhere. Our job is to be where it’s headed when it arrives 🙂

  4. Gabe Turri August 16, 2007 at 8:16 pm #

    Thanks Ken!

    I wish everyone would read “The Way The World Works” by Jude Wanniski.

    Our “great” Alan Greenspan has more to do with our current fiscal and economic turmoil than people realize. Mr. “Let’s flood the market” Greenspan’s policies have more to do with our current oil prices than any war the U.S. could ever have fought.

    Deflation has been a huge concern by sober minds since 1998. The chickens are certainly coming home to roost.

  5. Ken McCarthy August 18, 2007 at 6:06 am #

    And the Fed continues its antics.

    A big, unscheduled rate cut today. Throwing more money at the problem. Helping the profligate, punishing

    Some day, and knowing when is the trillion dollar question, rates cuts won’t help any more. They’ll be like pushing on a string.

    My guess though is that the party is going to resume – until it stops for real.

  6. Jim August 26, 2007 at 12:02 am #

    Superb article on the subject:

    Central bank impotence and market liquidity
    By Henry C K Liu

    See also

    A Safety Net for the Whales

  7. Doug Ouverson August 31, 2007 at 3:58 pm #

    Great article!

  8. Harris September 3, 2007 at 11:11 am #


    I have learnt to buy undervalued properties and have contacted with people at real estate investor association who lended their cash ,which helped me not to even raise capital for my Cash from Real Estates ventures which went successfully ahead.

  9. Mark Dolson March 31, 2008 at 2:34 am #


    It’s been a few months since this blog was posted. The fed has only been increasing the silliness.

    A major investment firm has collapsed, more and more $$$ is being thrown at the problem by president, and two of the presidential candidates are talking about bringing Alan Greenspan back if they are elected.

    I am not wanting to get “political” here, but I respect your point of view and was eondering what your thoughts are about the last few months?



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