What Really Happened Last Week?

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Yes, but why was last week’s correction so pitiless?

Monday we put our finger on “passive investing.” That is an investing strategy that flows with the tides.

A rising market tide lifts all vessels — even the leaking, decrepit, unseaworthy hulks.

But when a strong gravity pulls the water the other way… all go down with it.

And it was an angry moon last week, exerting a mighty tug.

But passive investing may only tell a portion of last week’s harrowing tale.

We have clawed our way deeper into the facts — and deeper again — to arrive at a fuller explanation.

Details to follow. But here is your hint:

It implicates the Federal Reserve… despite our unshakeable faith in its infallibility.

First, today’s tidal reading…

Stocks Rise on a Surging Tide

We are pleased to report the water rose today. And high…

The Dow Jones rose 1,173 points — its second-highest (point) gain in history.

The S&P gained 127 points. And the Nasdaq, 334.

And so all three indexes have uncorrected. That is, they have all three emerged from correction.

But why?

Explains CNBC:

Stocks surged on Wednesday as major victories from former Vice President Joe Biden during Super Tuesday sparked a massive rally within the health care sector…

Tuesday’s primary results sent health care stocks flying. The S&P health care sector surged 5.8%, posting its best day since 2008. UnitedHealth and Centene jumped 10.7% and 15.6%, respectively. Shares of UnitedHealth had their biggest one-day gain since 2008.

Many investors have applauded Biden for his middle-of-the-road tact in contrast to the more progressive policies of Sanders and Sen. Elizabeth Warren.

Gold shed $6.10 today.

But the somber bond market merely shook its head… and sighed. 10-year Treasury yields remain under 1%.

But to proceed…

If passive investing does not fully explain last week’s fearsome correction… what does?

The Great Liquidity Flood

Our tale begins last September…

A main line ruptured deep within the financial plumbing. And liquidity ran dry in the critical “repo” market.

Pouring icy sweat, panicked, the Federal Reserve rushed in with the hoses… and let the valves out.

It emptied in so much liquidity over the next four months, it inflated its balance sheet $400 billion — a $1.2 trillion annualized rate.

Not even during the lunatic days of the financial crisis did it carry on at such a gait:


The stock market surged on the rising water, nearly perfectly, four months running:


And so the Federal Reserve inflated a bubble — a bubble within a greater bubble.

But here our tale gathers steam…

The Fed Closes the Hoses

In December, the Federal Reserve tightened the valves. And liquidity, formerly flowing in gushes, dwindled to a trickle.

And so the delirious stock market lost its energy… like an airplane that has lost its lift.

The thing went on momentum for a time. But nothing was pushing it along. And so it was vulnerable…

We introduced you to Mr. Graham Summers yesterday. In reminder, he is a senior market strategist at Phoenix Capital Research.

From whom:

From September 2019 to December 2019, the Fed provided some $100 billion in liquidity to the financial system every single month.

The Fed then stopped these policies on a dime in mid-December. From that point onward, the Fed’s balance sheet, which expands when the Fed is providing liquidity to the financial system, completely flatlined…

Lost amidst all the talk of the coronavirus and potential global economic contraction is the fact that the Fed’s balance sheet has been flat to down since early December. This tells us the Fed completely ended the aggressive liquidity pumps it was running from August through the end of the year…

You can see these developments in the chart below:


The “Pin” That Popped the Bubble

Then the coronavirus chewed through its leash… and ultimately through the ticker tape.

But it was merely the “pin” that punctured the bubble, says Summers:

Now, you can see the impact these policies had on the stock market in the chart below.

The Fed created this environment with its monetary policies. The fear of an economic slowdown due to the coronavirus was simply the “pin” that burst this mini-bubble.


What does Mr. Summers conclude?:

The big lesson here is this: The financial system is now completely addicted to Fed liquidity. The Fed can try to talk tough about withdrawing liquidity from the system, but at the end of the day, the market is going to force the Fed’s hands.

In turn, we conclude:

Passive investing — twinned with plateaued liquidity — conspired tp deal markets the swiftest, sharpest correction since 1928.

This fearsome combination sent markets careening from record heights to correction in a mere six days.

But you can be sure the Federal Reserve is preparing to unfurl the hoses yet again…

Liquidity Running Dry Again in the Repo Market

It appears the repo market is entering another drought. And the major banks — primary dealers, so called — have reacquired a panting thirst.

They have requested $111.48 billion in overnight loans from the Federal Reserve.

But the Fed can only dole out $100 billion under existing arrangements.

“Oversubscribed” is the term.

That $111.48 billion comes on top of the $108.6 billion dealers requested the night before — again, oversubscribed.

The Federal Reserve had intended to suspend repo operations next month. But reports The Wall Street Journal, in predictable understatement:

Those plans could change amid the rapidly shifting economic and financial outlook. Some in the market are already wondering if the Fed will increase the size of its temporary operations to accommodate the high level of demand from banks.

We wager high those plans will change. 180 degrees.

Will it reinflate the stock market?

We have no answer. The market faces a mighty foe in a miniature virus.

But little surprises us these days.

Dangerously Low on “Dry Powder”

Meantime, the Federal Reserve squanders what little “dry powder” that remains.

Yesterday’s 50 basis point blast reduced the federal funds rate to between 1% and 1.25%.

Goldman Sachs projects another rate cut when the FOMC huddles in two weeks. And another in April (each 25 basis points).

If true, the Federal Reserve will be reduced to scraping powder off the floor. If recession swept in tomorrow… it could scarcely fire off a cannon.

And given the global economic outlook…

It will be unable to restock its magazines for years and years — and years.


Brian Maher
Managing editor, The Daily Reckoning

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Why Markets Plunged So Fast

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The market swung from record heights to “correction” within a mere six days.

Only once in history has it plunged so violently so swiftly. In 1928 that was — not long before the great gale of ’29 blew on through.

The market has since endured 25 “swift” corrections over 75 years.

These are not extended, orderly retreats. They are rather lightning hysterias packing ferocious wallop.

On average — the phrase is necessary — you can therefore expect one of these frantic corrections every three years.

Yet four of these 25 hair-raisers have shaken Wall Street since August 2015.

That is greater than once per year — again, if you take the average.

(We doff our cap to macroeconomic analyst “The Heisenberg” for supplying the data.)

We must conclude the market is increasingly vulnerable to these sudden and violent shakings.

But why? Why the greater frequency since 2015?

Today we seek to drive a light through the puzzle… and penetrate the mystery.

But first, how did battered markets open the fresh week?

Stocks Roar Back

Dow Jones futures swung dizzily in overnight trading Sunday — over 1,000 points peak to trough.

Greater volatility, that is, was likely on tap this week.

But like a careening drunk who grabs something sturdy on the way down… the stock market steadied itself today.

Steadied itself? It went bounding up the nearest tree…

The Dow Jones vaulted 1,294 points today, regaining a healthful chunk of last week’s losses.

The S&P recaptured 136 points; the Nasdaq, 385.

Market-maker Apple recovered 6% this morning. The “FAANG” stocks also climbed to their feet today.

The Return of the “Dip Buyers”

Thus the “dip buyers” peeked out from their bunkers today… and concluded it was safe to come out.

Explains Brent Schutte, chief investment strategist at Northwestern Mutual:

“The sell-off was so fierce last week that you do have some buy-the-dip investors emerging.”

We suppose the immediate prospects of rate cuts put some heart into them.

Markets presently give 100% odds of a March rate cut. And not a 25-basis point rate cut… but a thumping 50-basis points.

And an April rate cut? Those odds exceed 70%.

Yet the bond market dismissed entirely the promise of additional empty fireworks…

The 10-year Treasury yield once again plummeted to record depths today, to 1.065% — a sweet distance below its July 2016 low of 1.27%.

Gold, meantime, surged $22.30 today after last week’s savaging. Perhaps it is poised to reclaim its “safe haven” mantle.

But returning to our central question… why are corrections growing more violent?

A Likely Answer

We believe “passive investing” holds the answer — or much of the answer.

As we have written before…

After the 2008 near-collapse, the water management team at the Federal Reserve inundated markets with oceans of liquidity.

The biblical-level flooding knocked down existing financial signposts. And “fundamentals” no longer seemed to matter.

The tide was rising — and all boats with it.

“Active” asset managers casting the water for losers hauled up empty nets.

Some 90% of all actively managed stock funds have underperformed their index during the last 10 years.

“Passively” managed funds — on the other hand — make no effort to pinpoint winners.

They instead track an overall index or asset category, not the individual components.

They are “passive” because they sit back on their oars… and let the flowing tide lift their boat.

Passive Investing Has Yielded Handsome Dividends

This strategy has yielded handsome dividends this past decade of generally rising waters. Tim Decker, president and CEO of ISI Financial Group, explains:

Passive management came into its own during the long bull market that started in late 2009, after the market had collapsed amid the financial crisis in 2007–08. Money had been flowing from active to passive vehicles in the preceding years, and investors — disillusioned by their losses in the crisis and the high fees they had paid — started turning to passive vehicles even more. That trend has continued to this day.

Passive investing has increased from 15% of funds in 2007 to perhaps half today.

Wall Street has poured into titanics like Facebook, Apple, Alphabet (Google), Netflix and Microsoft.

Their combined tonnage presently exceeds 10% of the stock market’s overall $34 trillion heft.

As long as the tides continue rising….all is peace.

But here is the risk:

When the tide recedes… that same handful of stocks can wash the market instantly out to sea.

For when they move, the market goes with them.

Panic selling begets panic selling. And none knows how far the waters might drop.

All Heading for the Exits at Once

Explains Jim Rickards:

In a bull market, the effect is to amplify the upside as indexers pile into hot stocks like Google and Apple. But a small sell-off can turn into a stampede as passive investors head for the exits all at once without regard to the fundamentals of a particular stock…

Or as analysts Lance Roberts and Michael Lebowitz of Real Inves‌tment Advice have it:

When the “herding” into ETFs begins to reverse, it will not be a slow and methodical process but rather a stampede with little regard to price, valuation or fundamental measures.

Importantly, as prices decline it will trigger margin calls, which will induce more indiscriminate selling… As investors are forced to dump positions… the lack of buyers will form a vacuum causing rapid price declines [that] leave investors helpless on the sidelines watching years of capital appreciation vanish in moments.

“Fast, Furious and Without Remorse”

These fellows remind us that investors hemorrhaged 29% of their capital over a three-week span in 2008 — and 44% over three months.

“This is what happens during a margin liquidation event,” they conclude.

“It is fast, furious and without remorse.”

Last week’s selling was fast… furious… and without remorse.

Microsoft plunged over 20% at one point last week, for example — as did Apple. Thus they were dragged into bear market regions, however briefly… defined as a 20% drop from their recent heights.

Facebook and Alphabet, meantime, posted double-digit losses.

And given their overall tug on markets… last week witnessed a thumping correction.

Why Should They Stop Now?

Again, only in 1928 did stocks plunge from record heights into correction in merely six days.

Goldman, in summary:

“Narrow bull markets eventually lead to large drawdowns.”

We do not know which direction the markets will take next. And we will hazard no prediction — as we have limited appetite for crow.

We will only say that deceased felines have been known to bounce.

But to our notion, passive investing at least partly explains these intensifying market spasms.

And we expect more of them.

Our concern is that the market may fall into spasm one day… and fail to come out.


Brian Maher
Managing editor, The Daily Reckoning

The post Why Markets Plunged So Fast appeared first on Daily Reckoning.

Your New Year’s Plan: Top 3 Lessons from 2018

This post Your New Year’s Plan: Top 3 Lessons from 2018 appeared first on Daily Reckoning.

Around this time of year, it’s a good idea to stop and look back, taking stock of all the incredible and difficult things that happened over the last 365 days.

The Internet is full of “Top 2018” lists that span the best books, movies, music, celebrity moments etc. to allow you to reflect on the past year.

This week, I’m looking forward to the top trends and predictions for 2019, and how you can position yourself to make it your best year yet.

There’s no way to know for certain what will happen in the new year. As we know from previous experience, things can drastically change overnight. But there are a few trends we will probably see carrying over from 2018.

1) Embrace The Tech

I for one am very excited to see what technology advancements 2019 brings. For some, technology spells doom as robots threaten to replace workers and cut jobs. But for entrepreneurs, technology promises to address problems and make running a business easier than ever.

As an entrepreneur, using the wide array of tools out there to help you improve or create your business is one of the best ways to excel in 2019. Make it a part of your New Year’s resolutions to incorporate further learning and tech adoption into your financial plan.

2) President Trump’s Economic Outlook

2018 was a year for some major economic growth in the U.S., largely due to Trump’s tax cuts, consumer confidence, and companies re-investing in their business.

According to many economists, the economy is expected to slow down, and as financial conditions tighten, the impact of the tax cuts passed will fade.

Some economists are expecting more than a slowdown and are saying there’s a 50% chance of a recession by 2020.

Again, we can’t know for sure what will happen, and things are always liable to drastic change. That’s why maintaining a strong financial knowledge base will be the best way to navigate the coming year. Don’t wait around until the government implements new financial policies. Take charge of your financial plan now and position yourself for a great year.

3) Debt Will Increase To An All-time High

Debt has been on the rise for years. 2018 was a record high for consumer credit card debt, and I have a feeling the problem is only going to get worse.

According to nerdwallet.com, “Credit card balances carried from month to month continue to inch up, reaching $420.22 billion in late 2018, according to NerdWallet’s annual analysis of U.S. household debt. That’s an increase of about 5% over last year. And for Americans carrying that debt, the impact is significant.”

Today, it’s easier than ever to make money running your own business or investing in assets, but it’s also easier to get into debt. Still, bad debt is not inevitable. There’s no reason you shouldn’t be able to get out and stay out of debt. Remember the two rules of staying out of bad debt: Don’t swipe the small stuff and credit keeps charging.

Go into 2019 with open eyes regarding your spending habits and debt. Are you carrying over debt from last year? What’s your plan to pay it off? Do you have a clean slate? What steps will you take to avoid bad debt? Ask yourself these questions and get your plan together early.

What does this mean for you?

Instead of wringing your hands in fear or sitting back comfortably because you think everything will go your way, take 2019 into your own hands. Start crafting a strong financial plan that can sustain you no matter what happens.

Start by identifying what you hope to achieve. I find the act of physically writing down my goals is the best way to make my dreams a reality. Putting my vision on paper gets it out in the open. Once it’s written down, I’m committed to it.

As we all know, it’s all too easy to fall off the wagon with our New Year’s resolutions. That’s why you have to set up goals that in turn set you up for success. Setting SMART goals with the new year approaching is more important than ever. Remember, SMART goals are: Specific, Measurable, Attainable, Realistic, and Timely.

When your goal meets these five characteristics, it becomes much easier for you to stick to them. And remember, every goal should be working you towards a greater vision of where you want to be.

Another way to make sticking to your goals easier is by getting others involved. Whether it’s your spouse, your kids, your friends, or a mentor, you can find a partner to help keep you dedicated to your goals. We all know it’s easier to go to the gym when we have a friend going with us. The same holds true for true freedom in your finances.

With your goals in mind, you can start making a list of what you’ll need to attain them. Maybe you need increased understanding of real estate. Maybe you need to understand how to invest for cash flow. By knowing where you are, and where you want to go, it should quickly become apparent the things you must learn to get there. Increasing your financial education is the first step.

Why I’m optimistic for 2019…

This year for many people was full of ups and downs. The presence of disruptive technology led to extensive job cuts, not to mention a still recovering economy, political turmoil, higher interest rates, and more.

But despite a less-than-ideal landscape, the people coming out of 2018 on top are the ones who have a strong base of financial education.

It was confirmed this year that financial education is more important than ever. With every twist and turn, every “impossible” act, every astounding technology that revolutionized the market, only those with a deeper financial understanding, and the right mindset, came out ahead.

While the masses were panicking over every setback, those on the path to freedom kept their eyes on the long journey ahead, never wavering or allowing the day-to-day challenges to deter them.

Education breeds confidence. And in these ever-changing times, confidence is more important than ever.

Anything can happen in 2019. To the glass-half-empty folks out there, that might be a little scary. But to the rest of us, that’s great news. Anything can happen, like getting out of debt, starting your business, quitting your job as an employee and making the shift to business owner and investor, purchasing your first asset, and so much more. If you haven’t started the journey to complete independence, 2019 is your time. You just have to take it.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

The post Your New Year’s Plan: Top 3 Lessons from 2018 appeared first on Daily Reckoning.

Brace Yourselves: A Crash Is Coming

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I know we are in the midst of a joyous time of year, but that doesn’t mean the world has stopped turning. And the start of 2019 brings us to a critical moment. We’re on the brink of the third wave crash.

Let’s take a gander at recent history: First, there was the 1980’s savings and loan crisis. Then, in 1987, the stock market crashed, and the Dow Jones index lost 23% of its value. The next major event was the dotcom bubble and subsequent crash from 1999 to 2000. And the most recent event was the global financial crisis in 2007-08, which was triggered by the subprime mortgage crisis and collapse of the U.S. housing bubble. I’m leaving out a few smaller ones in between, but those are the true highlights (or lowlights, really) of the crash cycle in the past forty years.

Essentially, the economic cycle is longest period of tranquility took place during the 1990s when the economy went an entire decade without a down cycle. That was a rare—and glorious—decade.

As you can see, it’s been 10 years since the last major event—if history repeats itself, we’re due for a crash. And soon. That is if we’re not already seeing the needle headed toward the bubble.

Let’s examine the evidence: Both the Dow Jones Industrial Average and the S&P 500 are up for their worst December performance since 1931, when stocks were battered during the Great Depression.

December is typically a very positive month for markets. The Dow has only fallen during 25 Decembers going back to 1931.

The S&P 500 averages a 1.6 percent gain for December, making it typically the best month for the market, according to the Stock Trader’s Almanac.

Bitcoin, the highly volatile cryptocurrency, has created a complete frenzy in recent weeks. Last year at this time, Bitcoin saw a 1600% increase in value. That being said, Bitcoin’s bubble literally popped and millennials, like generations before them, just got a painful lesson about speculation. Also, in the news there’s talk of housing bubbles and auto loan bubbles forming left and right.

Do you know what bubbles always do? Pop!

Preparing for The Pop

I’m not trying to end the year on a note of doom and gloom. We don’t know when this bubble will burst, but we can certainly start preparing for it. How? It all comes down to financial education.

You see, it all begins with understanding that money doesn’t make you rich. Your financial IQ is what makes you rich. I guarantee that if you give the same $100,000 to a person with a low financial IQ and a person with a high financial IQ, you’ll see an immense difference in how they spend and grow that same money.

Central to the difference between those with low and high financial IQs is a simple but profound literacy: the ability to understand a financial statement—an income statement and balance sheet.

balance sheet

Strangely, accounting classes teach how to read an income statement and balance sheet separately. But, it’s actually the understanding of the relationship between them that’s crucial. After all, how can you tell what an asset or liability really is without the income column or the expense column? Understanding the relationship between the two allows you to easily see the direction of your cash flow so you can effortlessly determine if something is making you money or not.

Bottom line: If something is making money, it’s an asset. If not, it’s a liability. The reason most people with low financial IQs suffer money-wise is that they purchase liabilities and mistakenly list them under the asset column.

Cash Flow is the Only Way to Go

It’s this simple insight that explains why those with a low financial IQ are still poor even when they make a six-figure income. They have no clue how to move their money into assets that make them more money. And cash flow is king.

Because financial subjects have a way of turning unnecessarily complicated, let’s keep the concepts simple and use diagrams for added clarity. If you can understand the following diagrams, you have a better chance of acquiring great wealth.

Cash flow patterns

cash flow pattern

An asset is something that puts money in your pocket. This is the cash-flow pattern of an asset:

A liability is something that takes money out of your pocket. This is the cash-flow pattern of a liability:

cash flow pattern

The Confusing Part

Now, confusion can happen because accepted methods of accounting allow for the listing of both assets and liabilities under the asset column.

To explain this, look at this diagram:

cash flow pattern

In this diagram, we have a $100,000 house where someone has put $20,000 cash down and now has an $80,000 mortgage. Confusing indeed! How do you know if this house is an asset or a liability? Is the house an asset just because it is listed under the asset column?

The answer is, of course, no. In order to know for sure, you would need to refer to the income statement to see if it was an asset or a liability.

To illustrate this, let’s look at a diagram that depicts the house as a liability:

cash flow pattern

You can tell it is a liability because it’s only line items are under the expense column. Nothing is in the income column.

Next, let’s look at a diagram with the addition of a line that reads “rental income” and “net rental income”—the key word being “net.” Do you see how that addition to the financial statement changes that house from a liability to an asset?

cash flow pattern

Put simply, if the rental income of the house, minus the expenses of the house, equal positive net rental income, then the house is an asset. If not, it’s a liability.

Did you find this lesson profound? It’s essentially the basis for building all great wealth. Going back to my earlier comment, a person with a high financial IQ and $100,000 would be able to know how to invest it in assets that are true assets—ones that put more money back in the pocket each month. The person with the low financial IQ would spend that same money on liabilities but wouldn’t be able to diagnose what was wrong. Instead, they would try and work harder to make more money—a vicious cycle we call the Rat Race.

Back to The Bubble

Understanding the relationship between the income statement and the balance sheet allows you to quickly understand if an investment is an asset or a liability—and this understanding will allow you to make the right investment every time. While you can’t control how the economy behaves or when this unavoidable bubble will occur, you can absolutely control your ongoing education and financial prowess to minimize its impact.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

The post Brace Yourselves: A Crash Is Coming appeared first on Daily Reckoning.

The 7 Stages of a Financial Bubble

This post The 7 Stages of a Financial Bubble appeared first on Daily Reckoning.

“Is there a real estate bubble?” That’s the question I’m asked repeatedly. When I reply honestly, “I hope so,” the person asking me will sometimes get angry.

“You want the market to crash?” asked one young man incredulously, at an event where I was a featured speaker.

“Yes,” I replied. “I love market crashes.”

Apparently not wanting to hear the rest of my explanation, he stomped off muttering something like “moron.”

I’ve covered this subject of booms, busts, and bubbles before in my columns and books, but since the world seems to be on the brink of so many different booms and busts, I think it’s a good time to revisit it.

Over the years, I have read several books on the subject of booms and busts. Almost all of them cover the Tulip Mania in Holland, the South Seas Bubble, and, of course, the Great Depression. One of the better books, Can It Happen Again?, was written in 1982 by Nobel Laureate Hyman Minsky. In this book, he described the seven stages of a financial bubble. They are:

Stage 1: A Financial Shock Wave

A crisis begins when a financial disturbance alters the current economic status quo. It could be a war, low interest rates, or new technology, as was the case in the dot-com boom.

Stage 2: Acceleration

Not all financial shocks turn into booms. What’s required is fuel to get the fire going.

After 9/11, I believe the fuel in the real estate market was a panic as the stock market crashed and interest rates fell. Billions of dollars flooded into the system from banks and the stock market, and the biggest real estate boom in history took place.

Stage 3: Euphoria

We have all missed booms. A wise investor knows to wait for the next boom, rather than jump in if they’ve missed the current one. But when acceleration turns to euphoria, the greater fools rush in.

By 2003, every fool was getting into real estate. The housing market became the hot topic for discussion at parties. “Flipping” became the buzzword at PTA meetings. Homes became ATM machines as credit-card debtors took long-term loans to pay off short-term debt.

Mortgage companies advertised repeatedly, wooing people to borrow more money. Financial planners, tired of explaining to their clients why their retirement plans had lost money, jumped ship to become mortgage brokers. During this euphoric period, amateurs believed they were real estate geniuses. They would tell anyone who would listen about how much money they had made and how smart they were.

Stage 4: Financial Distress

Insiders sell to outsiders. The greater fools are now streaming into the trap. The last fools are the ones who stood on the sidelines for years, watching the prices go up, terrified of jumping in. Finally, the euphoria and stories of friends and neighbors making a killing in the market gets to them. The latecomers, skeptics, amateurs, and the timid are finally overcome by greed and rush into the trap, cash in hand.

It’s not long before reality and distress sets in. The greater fools realize that they’re in trouble. Terror sets in, and they begin to sell. They begin to hate the asset they once loved, regardless of whether it’s a stock, bond, mutual fund, real estate, or precious metals.

Stage 5: The Market Reverses, and the Boom Turns into a Bust

The amateurs begin to realize that prices don’t always go up. They may notice that the professionals have sold and are no longer buying. Buyers turn into sellers, and prices begin to drop, causing banks to tighten up.

Minsky refers to this period as “discredit.” My rich dad said, “This is when God reminds you that you’re not as smart as you thought you were.” The easy money is gone, and losses start to accelerate. In real estate, the greater fool realizes he owes more on his property than it’s worth. He’s upside down financially.

Stage 6: The Panic Begins

Amateurs now hate their asset. They start to dump it as prices fall and banks stop lending. The panic accelerates. The boom is now officially a bust. At this time, controls might be installed to slow the fall, as is often the case with the stock market. If the tumble continues, people begin looking for a lender of last resort to save us all. Often, this is the central bank.

The good news is that at this stage, the professional investors wake up from their slumber and get excited again. They’re like a hibernating bear waking after a long sleep and finding a row of garbage cans, filled with expensive food and champagne from the party the night before, positioned right outside their den.

Stage 7: The White Knight Rides in

Occasionally, the bust really explodes, and the government must step in—as it did in the 1990s after the real estate bust when it set up an agency known as the Resolution Trust Corporation, often referred to as the RTC.

As it often seems, when the government does anything, incompetence is at its peak. The RTC began selling billions of dollars of unbelievable real estate for pennies on the dollar. These government bureaucrats had no idea what real estate is worth.

In 1991, my wife Kim and I moved to Phoenix, AZ, and began buying all the properties we could. Not only did the government not want anything to do with real estate, amateur investors and the greater fools hated real estate and wanted out.

People were actually calling us and offering to pay us money to take their property off their hands. Kim and I made so much money during this period of time we were able to retire by 1994.

The Best Time to Buy

Take market crashes. I love them because that’s the best time to buy—finding true value is a lot easier during such periods. And since so many people are selling, they’re more willing to negotiate and make you a better deal. Although a crash is the best time to buy, the market’s high pessimism also makes it a tough time to do so.

I remember buying gold at $275 an ounce in the late 1990s. Although I knew it was a great value at that price, the so-called experts were calling gold a “dog” and advised that everyone should be in high-tech and dot-com stocks.

Today, with gold above $1200 an ounce, those same experts are now recommending gold as a percentage of a well-diversified portfolio. Talk about expensive advice.

My point is that this current period is a tough time to buy or sell. Real estate is high, interest rates are high—and climbing, the stock market is a roller coaster, the U.S. dollar is low, gold is high, and there’s a lot of money looking for a home.

So, the lesson is: Now, more than ever, it’s important to focus on value, not price. When prices are low, finding value is easy.

When prices are high, value is a lot harder to find—which means you need to be smarter, more cautious, and resist your knee-jerk reactions. A final word from Warren Buffett: “It’s only when the tide goes out that you learn who’s been swimming naked.”

Now you know why I say, “I love market crashes.”

Although my wife and I continue to invest, we’re more like hibernating bears waiting for the party to end. As Warren Buffett says, “We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”

So instead of asking, “Is it a bubble?” it’s more financially intelligent to ask, “What stage of the bubble are we in?” Then, decide if you should be fearful, greedy, or hibernating.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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