Attitude towards debt

Debt is a subject that attracts an incredible amount of interest around the internet. Why? Because it’s a subject that is emotional for most of us and you can debate it in so many ways. Some like Adam Baker from the excellent ManvsDebt have mastered the subject and I personally never get tired of reading about it. Why?

As much as we would like to avoid debt, chances are that you when you buy a car, a house or other items, you are financing part of it through debt. You might have a love-hate relationship with it or you might love the possibilities offered by debt like Mike from TheFinancialBlogger. He is one of many who strongly believes in using debt for investments among other things.

Anytime that you hear about margin investing, it usually involves borrowing money at a rate in order to make a superior return through investments. The logic is sound in principle. The S&P500 generally returns about 5-10% or so per year on average and if an investor can borrow money at a lower rate, it seems like a winning proposition doesn’t it? Of course. That is unless you suffer a crash like we had very recently. That can wipe out your entire equity very quickly.

As discussed yesterday, I recently read the most Berkshire annual letter and Warren Buffet discussed his opinion towards debt and his dislike for it in general. He compared investing to being in a car race and while going as fast as possible is important, the critical aspect of course is to actually finish the race. Living with high levels of debt can have fatal consequences as we experienced with both companies that went bankrupt (Lehman Brothers, Bear Sterns, etc) but also with millions of ordinary people who lost everything they had because of the overuse of debt.

There is no doubt that the most recent credit crisis gave us a number of examples of the importance of liquidity. Buffet, who has always been very conservative was able to make great investments and loans to companies such as Goldman Sachs that desperately needed cash. How good was it? That is what happened on a much smaller scale to millions of regular people all around the world.

It’s certainly interesting to see how some investors start using leverage in a very conservative way. As that goes well, they tend to increase the leverage seeing the opportunity to do even more. That trend often continues a bit too long. So how do you stop? It’s not clear to me.

While I am not as keen to borrow as some others, I still could see investing on margin as a possible way to increase my net worth at some point down the road but not for now and not in the near future either. I would have to be significantly better off than I am right now. How much more? Difficult to say. But I would want to make sure that I could sustain a 30-40% stock market crash. It can and it will happen again. If that happened again, would I be comfortable with my situation? Not right now I guess.

What about you?

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Disposed Towards Revolt?

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Most Americans who see the upheaval occurring in the Middle East and in other places overseas probably think it won't (or can't) happen here. But as I noted almost three years ago in "Not Too Hard," one thing that leaves people feeling favorably disposed towards revolt is significant inequality. In "Losing Our Way," New York Times columnist Bob Herbert makes it clear that we have plenty of that:

There is plenty of economic activity in the U.S., and plenty of wealth. But like greedy children, the folks at the top are seizing virtually all the marbles. Income and wealth inequality in the U.S. have reached stages that would make the third world blush. As the Economic Policy Institute has reported, the richest 10 percent of Americans received an unconscionable 100 percent of the average income growth in the years 2000 to 2007, the most recent extended period of economic expansion.

Americans behave as if this is somehow normal or acceptable. It shouldn’t be, and didn’t used to be. Through much of the post-World War II era, income distribution was far more equitable, with the top 10 percent of families accounting for just a third of average income growth, and the bottom 90 percent receiving two-thirds. That seems like ancient history now.

The current maldistribution of wealth is also scandalous. In 2009, the richest 5 percent claimed 63.5 percent of the nation’s wealth. The overwhelming majority, the bottom 80 percent, collectively held just 12.8 percent.

This inequality, in which an enormous segment of the population struggles while the fortunate few ride the gravy train, is a world-class recipe for social unrest. Downward mobility is an ever-shortening fuse leading to profound consequences.

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Russian Warning Issued Over "Controlled" Comet Headed Towards Earth !

Sparking the fears of Minister Serdyukov, he says in this report, is that based upon the new orbit calculations for Comet Elenin, it appears in “all likelihood” that this celestial object is under some type of “intelligent control” and will approach our Earth “much closer” than originally thought this coming fall season.

Most ominous in Minister Serdyukov’s report is his assertion that Comet Elenin appears to be in “direct contact” with the mysterious Jupiter-sized planet discovered beyond the orbit of Pluto that is, also, headed inbound towards our Sun.

Interesting to note about Comet Elenin is that even though the American space agency NASA has said “Because of the possibility that the comet's orbit slightly deviate from, there is no guarantee that Earth will be missed”, they have, also, in contradiction, stated that “…Comet Elenin will come nowhere near the Earth. At its closest (on 10 September 2011) it will be more than 25 million km from our planet.”

To the identity of those extraterrestrial forces controlling Comet Elenin our world had been forewarned about by the former Canadian Defense Minister, Paul Hellyer, who stated about them: “Decades ago, visitors from other planets warned us about where we were headed and offered to help. But instead we, or at least some of us, interpreted their visits as a threat, and decided to shoot first and ask questions after.”

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