Wow, what a week!

If you are wondering why this week’s QnA is coming to you on Saturday, rather than the usual Friday…it’s because I had a week like this one: (This. Week. Is. Insane.)

But happily in a really, really good way!

It’s transition week here at Kung Fu Finance central—the Kung Fu Kids had camp last week, but start school officially on Thursday, Kung Fu Guy has been traveling so I’ve been single-parenting (to be fair, this often works the same in reverse…), and I’ve been working my fingers as fast as they can go to create something cool for you in the upcoming months that I dearly hope you will love.

Speaking of love, I love my home city of San Francisco, and having been up there twice in the past two days, the “Live from SF!” title fits today’s article.

From the stunning vistas (Golden Gate Bridge, Coit Tower, Ocean Beach, and much more) to the über-nice people to the many quirks that make SF so unique (such as Greg the Gay Sportscaster, “If they’re playing with balls, I’m alllll over it!”), I love my zany home city.

So what was I doing in SF this week?

Yesterday I ran some Kung Fu Finance-related errands, and today I drove up at the crack of dawn to see Alex Daley give an outstanding keynote speech at the San Francisco Money Show. (As a side note, I also ran into my trader friend Laurence, and had I been able to stay longer probably many more investor friends…yet another reason to go seek out these local events and conferences! Many, like the SF Money Show, are FREE!).

But enough about me…let’s move on to the real focus of today’s writing, YOU.

Those of you who have been following for a while and have recently either opened up an HAA account or purchased gold and silver on your own should be very happy this week!

Thanks to Ben Bernanke inferring that QE3 is coming soon (September) to a theatre near you, both metals made a strong showing, with 24-hour spot gold at $1670.70 and 24-hour spot silver at $30.82 as I write this.

That is up significantly from $1588.60 and $27.31 on July 16th, when the Hard Assets Alliance launched and when I received many questions and emails from you saying, “Kung Fu Girl! I did it! I bought my first gold and silver coins!”

Congratulations on taking action!   🙂

As you know, that’s one of the most important things you need to do to increase your learning (and earning), and I am so proud and happy for you!

Also this week we had a great discussion going on P2P lending (and last week on Lies, Damn Lies, and Statistics, too!). A few important tidbits came out in the P2P comments that I would like to share with you before jumping into this week’s questions:

1. It’s important to diversify your pool of loans among many different borrowers

2. You need to “be the bank” and think like a bank when qualifying borrowers for your loans

3. Lending Club got far more positive reviews than Prosper, mainly because pre-2008 Prosper took anyone with a pulse and many investors got clobbered…supposedly Prosper has improved tremendously since then and now rivals Lending Club

4. If you are an accredited investor you can call Lending Club and ask about their managed funds—unfortunately you must be accredited to participate, but Lending Club offers these funds and does all of the “qualify the borrower” work for you

5. (I digress for a minute, but many companies have these “secret” accredited investor funds that they are not allowed to advertise to “the masses” (which I agree is ridiculous, but I don’t make those rules), so if you’re interested and accredited you should call a company and ask…hint, hint, Casey Research, etc.)

6. Back to P2P…gains are considered ordinary income rather than capital gains or dividends, so that’s something to consider in your tax situation (although this might not make much of a difference next year).

7. Readers have averaged 7-9% returns while following these guidelines

8. Readers who have not followed these guidelines and who invested in only a few loans (or suffered through Prosper’s rocky early days) suffered many defaults, so once again, education is in order…make sure you know what you’re doing before diving off the deep end (but then have fun!).

I’m opening a P2P account with Lending Club myself. I love the idea of being a bankster (and providing money to those who need it)!

Now onto this week’s questions…

First, Christina asks,

Hi. I am hoping you could point me in the right direction. I am looking for the next step to take.

(Personal information deleted)

My understanding is that there is a global depression, fiat currency is at its death, the stock market never fully corrected and is completing a H&S pattern (but I don’t know what the market numbers need to be, to be corrected & I don’t know exactly what that means or which values are being evaluated), and that both the residential and commercial markets are about to tank, and then everything will be flat like japan for 10 yrs or so. Please correct me if that is wrong.

Hi Christina! Wow, that’s a lot to tackle, and that’s just your first question, but let me do my best.

Technically speaking, there is actually not a global “depression” right now, but that’s a picky discrepancy for economists to argue (the difference between a “depression” and a “recession”).

Personally, I like this definition: when your neighbor can’t find a job, it’s a “recession”, but when YOU can’t find a job, it’s a “depression”.

But I’m honestly not trying to be flippant or funny—it’s just that the terms are so misleading it drives me crazy.

Certainly, we are experiencing a huge global slowdown, and whether or not you call it a depression or a recession doesn’t really matter…to my mind it’s a “giant, debt-ridden lack-of-solvency mess”, with high unemployment, slowing growth around the world (check out this NYT article on China’s vast backlog of inventory), and staggering debt. It’s definitely not a recipe for wild growth and happy times, unfortunately (although the market distortions caused by all of this could be tremendous and profitable!).

Fiat currency is at death’s door. I absolutely agree with this. It’s a matter of timing, however…as Doug Casey is fond of saying, “just because it is inevitable doesn’t mean it is imminent”.

The U.S. stock market (using the MSCI index) was 2% higher earlier this week than it was at the peak in 2007, including reinvested dividends.

However if you exclude dividends, no major market, including the U.S., is above its peak from 2007.

The New York Times had an article on this yesterday, including this great graphic that shows worldwide equity markets and their performance since 2007:

NYT World Stock Indices

Chart courtesy of New York Times-- Click for full-size graphic

As far as the head and shoulders’ pattern, I hesitate to go there for a few reasons:

1. I am by no means a “technical analysis expert”

2. Even if I were, I’m not sure which market or index you are referring to…the S&P 500 index?

3. Technical analysis is as much art as it is science

4. It sounds like you are still learning about technical analysis and even about what happened to the markets in general (e.g. what the numbers need to be to be “corrected”, etc.).

Don’t get me wrong, I do believe technical analysis can be very helpful and is a useful tool in your investing arsenal. But I think it’s more important to first grasp the fundamentals (the best technical analysts that I know also have an outstanding grasp of the long-term fundamentals for any asset class, and then use technical charts to help them time and fine-tune their trades and forecast long-term trends moving and/or changing direction).

Real Estate

Regarding the residential and commercial markets tanking, I assume you’re referring to real estate. This sounds a bit doom and gloom to me, but then again I live in Palo Alto, CA, where there are currently 50 multiple offers being made in some cases on homes.

It’s true that there is still a shadow inventory of homes and it is more difficult for borrowers to qualify for a loan to buy a home. And to top it off, Reuters ran an article last week on trouble brewing with FHA loans:

“Fitch Ratings sees a growing divergence between 90-day past due delinquency patterns for guaranteed and nonguaranteed loans as a potentially troubling signal of future losses. This may eventually force the FHA to look for opportunities to put back some defaulted loans to the banks, particularly if the agency’s funding status worsens and U.S. home prices fail to rebound quickly.”

I certainly don’t see residential real estate prices skyrocketing anytime soon. (That’s an understatement, and also that’s with the exception of the Bay Area, California, which seems to pride itself on being the exception to every rule!)

Especially when interest rates rise, which I expect to happen at some point in the not-too-distant future, that will put more downward pressure on housing prices, and unemployment is still high in most areas.

Residential real estate is highly localized though, so things may be vastly different in your neck of the woods (just look at crazy old Palo Alto!).

Commercial real estate is another beast entirely, and I will need to get some data on that for you as I haven’t looked at it recently (for 6 months or so).

Regarding “everything will be flat like Japan for ten years or so”, that is certainly possible, although I hope not.

Unfortunately, no one has a crystal ball and so no one knows exactly what will happen. Much of our economy now is politicized (almost all of it, actually), and much therefore depends on the whims of our politicians who tend to consistently opt for “kicking the can down the road” and “whatever they can do or say to get re-elected”.

Sadly, that doesn’t bode well for our economic future…but hopefully I’m wrong!

Is this a time for holding cash and how much is a good first goal? Or where can I find that information?

I do think it is important to hold some cash, always. The trick of course is always “how much” and “in what form” and is highly personal to your unique situation.

If you don’t have ANY cash (not even an emergency fund) then that should be your very first goal.

As far as to how much to put into it, either 6- or 12- months’ worth…again it depends on your personal situation, how secure you feel your income is, etc…it’s highly personal (and again with my disclaimer: “I am not a registered investment advisor and cannot legally give personal advice…”). But in general, that’s a good rule of thumb.

Plus, I like to have cash on hand to take advantage of so-called distortions in the market (e.g. when stocks drop and you actually have cash available, rather than panicking looking at your statement you can actually cheerfully buy more at the much discounted price!). I was able to do that in 2009 because I had cash available, and what an opportunity!

It’s a fallacy to believe that you absolutely must be “fully invested at all times”. You need to balance your investments (which are hopefully beating inflation at least…) with your need for cash (which loses value every day, but is equally necessary in your portfolio).

How much gold/silver? Or am I so far behind that its time to go all in on the metals?

Again, this is highly personalized. I definitely do NOT advise anyone to “go all in” on the metals, even though I do believe they have a strong place in your portfolio.

But today, you are buying them after a 10+ year bull market, and they are no longer “cheap” by any means.

I do believe they have farther to go…but what if I’m wrong?

I wouldn’t want to risk everything I own on that assumption…then I couldn’t sleep at night (a big factor for me!). ☺

It is difficult to read some of these newsletters that are so pro-gold and pro-silver and that quote these “price targets”: Silver will be $250 before this is over! Gold will be $5000, and perhaps $25,000 if we return to a gold standard!

I know when you read that it’s tempting to “go all in”, but please realize that the people making those claims have exactly ZERO idea if that will actually come to pass or not. And most of them in their own portfolios do not own 100% gold and silver and nothing else (although I’m sure a few of the most devout do).

But the question is really what YOU think about gold and silver, and do you understand why the price has risen over the past 10 years and why the price might (gasp) go down again one day? If you understand that (and I can do an article on “When To Sell Your Gold”, because believe me, there will come a time!), then you can make an informed decision about the right amount for you.

One final note on this (just to beat this horse dead…sorry!)…if you ever feel you are “so far behind” that you’ve “missed the boat”, etc., I put forth that is exactly the wrong time to buy. At that point, you are buying an asset after it has already risen tremendously (and true, it may still have further to go), but that’s a classic feeling you have when you are buying at the top…that feeling of not wanting to miss the boat or having missed out. It’s better to wait at that point for the “next big thing” to come along, because there is always a new “next big thing” a-coming.

Are we cycling into inflation or deflation? I really have no idea what’s been going on in the world.

Ah, that’s the question of this decade. Even the most well-known and famous economists argue about this, and to be honest, I think it could go either way at this point, although I do believe that eventually we are going to see rampant inflation.

However, we could have a big deflation first…it all depends on what happens in Europe, and on the world’s confidence in the U.S. dollar…and no one can predict that.

But IF the Fed unleashes QE3 in September and IF the banks actually start to lend all of the money they are currently sitting on then we will see some big inflation.

But what really confuses me is that people seem to think everything is all roses and the depression is over but the info I am finding online seems to say the opposite or am I just looking in the wrong places? People seem to think the housing crisis is over and housing is 100k more with no comps to support it, like the housing market is 2005. Is this legit? Or simply the banks don’t care bc of all the printing?

You must live in the Bay Area! ☺ But you bring up a great point…Doug Casey recently went on a road-trip cross-country and was surprised at how “normal” everything seemed on the surface, when what’s simmering below the surface is so horrific.

He had trouble finding hotel rooms in some cities (and this is a guy for whom money is no object…), restaurants were full, plenty of people were out traveling…on the surface everything seems fine, although we notice higher gas prices and food prices (worst drought since the 1930’s!).

So people who aren’t interested in the economy or in managing their money and who are still employed think, “hmm, well things aren’t so bad, and the stock market is back up almost to where it was 5 years ago…”.

Which I find terrifying, but there you have it…many people would rather just ignore the issue and pretend everything will be “OK”.

As far as no housing comps go and whether that’s legit, it goes back to the fact that real estate is HIGHLY local, and here in the Bay Area there are a lot of people with a lot of money. There are multiple all-cash offers on $2 million homes, so the banks don’t even come into play—no loan is needed.

Banks do definitely “care” (except when it’s not their money—see the FHA article above) and have increased the strictness of their loan requirements.

On a side note, I read on the resilient community in Chile. Do you think that is an environment that is friendly towards special needs and the elderly? At least more so than the US?

You know, I really can’t say. I did go to Chile and visited Simon’s resilient community in person back in February this year and found it stunningly beautiful.

However, I’m not sure I would say it’s “friendly to the elderly” (it is very hilly and we did a lot of strenuous hiking and climbing) and I am not sure about special needs. It is close to a hospital in Talca, but I do not know the extent of their medical care. If you are a Sovereign Man Confidential member they have a great discussion group where you can ask all kinds of questions like that, and you can also find out more information on Chile and other countries from International Man.

I really hope you can clarify these things for me. I really don’t have anyone to ask.
Thank you for your time,
Christina

No problem Christina! I hope I answered your questions…you are asking all of the right questions but unfortunately these are the questions that all of us have.

(I would love it if some genius would just tell me already whether we are going to have inflation or deflation, and exactly WHEN, and whether the stock market will be higher or lower at the end of the year, and more!).

But anyone who says they can tell you those things (with certainty anyway) is a big. fat. liar.   🙂

But YOU can think for yourself and start to build your own personal war chest to weather any storm that may come…and we will help you here at Kung Fu Finance! You are most certainly not alone and I welcome you to our community—you can always ask here!

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I received many, many more questions and will tackle more next week…what to do as a young 23-year-old with no debt and $10,000 to invest, is it better to save cash to buy gold or buy silver and then change it to gold, when to sell gold, stay away from retirement investments?, how to get into real estate if you’re low on cash, why does the market go up when QE3 is announced, the petrodollar, 3D printers…I will answer them next week!

But right now I’ll let you get back to your Saturday night…and maybe even catch a little Saturday Night Live!

Have a GREAT weekend, and thank you very much for being a part of our Kung Fu Finance community! Together we will figure all of this out.

To your financial success,

— Kung Fu Girl