World’s Highest Paid Advisor: ‘Financial Tsunami Is Upon Us’
Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend). I talked about him in my November 21 post where I discussed gold as a hedge and investment. Back then, Schultz said that gold will advance past the thousand dollar mark in 2008. Earlier today in his MarketWatch commentary, Peter Brimelow said that Schultz’s latest newsletter issue is “absolutely apocalyptical.” Schultz warned, “A financial tsunami is upon us,” which he attributes to lax credit and complications from the derivatives craze. MarketWatch’s Brimelow says:
Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.
Bank run from “It’s A Wonderful Life”
Sound terrifying? According to Brimelow, Schultz’s advice for protecting one’s self from the coming financial storm and vulnerable U.S. banking system included, most urgently, closing out time deposits and buying non-U.S. government bonds. Regarding the future of the U.S. dollar, Schultz warned:
…the second biggest danger is owning U.S. dollars in any form, (it) has crashed and going much lower … use dollar rallies to exit dollars or sell short … This is not a time to seek profits, but to protect what U have … Portfolio diversification is essential in troubled times.
Brimelow noted Schultz’s favored currencies are, “In order of preference: Swiss Franc, Australian dollar, Euro, and Canadian dollar.”
On the topic of gold, Schultz recommended that:
Exposure to gold shares and bullion should be a minimum of 35-45% of your total portfolio, with at least 10% in physical gold bullion and coins, and/or very rare coins…
The public is still not in the gold market. They will be in 2008 as the derivatives and credit crises bring down more financial institutions (amid recession) and eyes will be opened, via pain. While Rome burns, gold will smash through its old unadjusted-for-inflation $850 high on the way to $1,600, & who knows how far beyond …
Wow. Apocalyptical indeed. By the way, Brimelow noted that Harry Schultz is up 21.42% over the past year according to the Hulbert Financial Digest, versus 7.51% for the dividend-reinvested Dow Jones Wilshire 5000. Looking back over five years, Schultz is up 34.38% annualized versus 12.85% for the Dow Jones Wilshire 5000.
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December 13th, 2007 at 7:36 pm
Financial Tsunami is a new expression to me but I think I got the meaning of that.
As a tsunami we need to evaluate each of its parts as the origin the intensity and the impact to other areas.
The real estate seems to e the main cause of this burst bubble. When I look to this market as an investment stuff I notice it must be a sustainable investment at all time to avoid create any kind of a crisis.
As a sustainable investment a house that was built at a value of 100k must be valued at 120k, 150k and 180k and continue the series along time. And it sounds very good if the series overpass the inflation indexes and the increases at the average personal income.
At this point we can see the first mistake. To make the evolution series feasible we need always to create new buyers for those houses. Those buyers should come to the market from outside the real estate area.
The financial market created those buyers. But in the recent years they used some rotten artifacts as the ARM model to create them.
Now we can not analyze any past statistics to evaluate the term of this crisis. We need to pay attention to the fact that the population is increasing with a lowest rates than any other real estate crisis in the last 50 years. So the potential buyer will not be made as easy it was made in the past.
We need to solve the equation of how to create potential buyer before evaluate the term of this recent crisis!
The extension of the crisis is another problem to be analyzed.
To analyze it I use to evaluate the richness generation. I think the profits among companies are generated by the richness creation.
I think that among all we produce there are some items that do not contribute a lot to the richness accumulation. Among GDP we can find a lot of productions’ items that has a very short life. This is the case of almost all foods. We produce it and destroy it in a very short term.
Due to that the humankind does not accumulate any richness. If we look into balance sheets we can find only the inventories to be consumed in a short term of this kind of product. But if we compare the balance sheets of a two consecutive years we will notice that we are accumulating almost none new richness due to this kind of production.
And here is where the secret of profits lives. We can see it clearly if we sum all the balance sheets around the world. To be clearest, we need to sum all those balance sheets of people, government and other institutions that do not use to make them. All we need is to see the ENTIRE earth as the assets of this consolidated balance sheet.
Now, it’s easy to evaluate profits. We must need to create a new valuable asset at the balance sheet’s right and add it to the left as profits.
We need to pay attention that credit to people or companies will not be registered as profits at left side. And we can do more than that. We need to eliminate all the credit and the correspondent debt as we do in one single balance sheet!
The mortgage credit we create is only a leverage tool to develop the real estate market. The value we create is not the buyer property. The buyer has an asset equivalent to his debt. The buyer just expects the future valuation of his asset will make him some money. The real winner is the builder and related companies. They will account all the richness generated of that operation as initial profits.
This forgotten equation clearly shows us the difference of a production item as considered in GDP and a richness asset that can create profits for the companies.
If we produce an item as rice or beans that has a short term life we can see that we add it and subtract it as soon as possible from the balance sheets. So it does not create sustainable profits to the consolidated balance sheet.
We can see this consolidated balance sheet as the sum of average balance sheet of the society. So if we do not create any richness to the huge balance we are not creating profits at the average balance.
With the short term life items we can see that we can transfer profits from the balance sheet of someone to another one, but we are not creating richness at the average company’s balance sheet.
So if we look to assets and classify them by the expected balance sheet’s lifetime we can notice that we are producing a lot of items but not creating richness or profits.
Let’s analyze a microcomputer. Nowadays we are producing close to 150M per year, but we are depreciating close to it each New Year. So we are only creating profits if the average price of the new computer is high or if the volume of the new items is greater than the depreciated items.
Now let’s look to the real estate area.
The new buildings use to convert rural areas to urban areas with a very huge increased price and with no depreciation along time. The building itself is a creation too but has a depreciation time of 25 years.
What I am trying to show is that the impact of the real estate inside the average profits of the companies is so much greater than all other things we produce.
If we explore better this simplified forgotten equation we can see clearly that we will get a huge impact of the real estate at the companies’ average profits. We can not see it now because we are just at the beginning of the real estate problems.
But, at this moment we can use some historical statistics. We can see the moments where there exist huge real estate evolutions the company’s profits use to soar. This is a very recent case.
The moment we see the real estate market going down is the moment to expect bad profits from companies. I think this moment has arrived.
At the moment companies start to fire employees due to earnings we are going to see more troubles ahead to the market. The real estate prices will plunge faster and the social troubles will arise.
So if you are in doubt about the direction of the entire market, let’s pay some attention to the real estate moment. It does not stopping its downturn. This direction will be transmitted to the rest of market as companies’ profits.
This forgotten equation was very simplified here but it can show us a lot of concatenated problems that will arise in the near future. We do not need to wait for past statistics and its consequences to make up our minds. This forgotten equation permits us to evaluate the short term clearly.
I think the real magnitude of the tsunami is the sum of the fact that it will be difficult to create new buyers for the real estate market at the volume we were creating recently, and the fact that this market will influence directly the companies’ profits. Those two factors together can show us how big the tsunami is.
December 14th, 2007 at 6:33 pm
Cleber, thanks for the comments.
“So if you are in doubt about the direction of the entire market, let’s pay some attention to the real estate moment. It does not stopping its downturn.”
I agree. However, a number of analysts and other “experts” keep trying to call the bottom for housing. In addition, others continue to argue that the housing crisis can still be contained, avoiding an economic recession in the United States. Time will tell…
“I think the real magnitude of the tsunami is the sum of the fact that it will be difficult to create new buyers for the real estate market at the volume we were creating recently.”
I agree with you again. However, the Realtors probably wouldn’t. They place their hopes on Generation Y and the remaining members of Generation X who didn’t buy homes during the boom, in conjunction with strong economic performance. Here lies the problem. Studies show a number of these individuals still reside at the bottom of the “totem pole” in the workplace. That massive exodus of Baby Boomers from the workforce we all heard about for the last couple of years? Still hasn’t happened (I question if it ever will).
Now, we all know real estate doesn’t perform well during a recession. In fact, during the Great Depression, home values declined by around 70%. Getting back to Generation X and Y, Realtors are depending on this demographic to purchase homes. If a recession hits, in all likelihood these guys and girls will be trying to save their jobs. What’s that old saying in the workplace during bad times? “Last one in, first one out.” Buying a home will be the last thing on their minds…