Monthly Archives: April 2011

Inflation and the End of QE2

QE2 will end June 30.  The economy is barely growing despite low interest rates, stimulus spending, and quantitative easing.  The side effect of the Fed’s policies has been the excess money going into commodities.  The price of silver has skyrocketed.  Other commodities have also rallied because of the speculation in which investors expect continued weakness in the dollar and future inflation.  The end of QE2 may result in a pull back in commodity prices.

Real estate is still slumping and will continue.  Automobiles cost about the same as they did some years ago, we’re paying about the very same for airline travel that we did 10 years ago, and computers are becoming more affordable.  (Keith Springer) For many items not tied directly to commodities, the list goes on.  Nonetheless, it does not really feel like that because food and energy are much higher. The Fed eliminates food and energy from the inflation index, but the problem is, we all eat and drive. 

There seems to be no problems associated with the supply of oil and the Saudis have claimed to reduce production.  This implies that much of the rising prices has been due to speculation.  According to Yahoo! Daily Ticker, only about 1% of oil futures trades involve actual delivery.  The rest is form speculators attempting to profit from price volatility.  Prices may continue to rise in the very short term, however, there will be downward pressure in the intermediate term.

There may eventually be a QE3.  However, it will likely come later because of rising inflation.  If we were to go into a new recession or renewed slump in the economy, QE3 may be the only tool the Fed has because interest rates are already at zero.  A worsening economy always results in a government feeling the need to do something.  With our budget problems and the limitations of the Fed, there are fewer options.

QE2 did not lower interest rates which was the Fed’s intent.  Instead, it pushed up asset prices in equities, commodities, and emerging markets.

Bill Gross, the world’s most prolific bond investor, believes that government spending is out of control.  He has sold his positions in treasuries and is now short treasuries.  That being said, the smart money betting against treasuries should be a warning.

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Corporation vs. LLC – Tax Benefits of Each

Determining the best entity for your business is a complex but important decision that you will make.


Corporations and LLC’s offer liability protection. Without Liability Protection, anytime you interact with another person, there is a risk. From a liability standpoint, think of an LLC or Corporation as insurance for your personal assets. By operating as a Sole Proprietor or Partnership, you are personally liable for all business debts. You are also potentially liable for any lawsuits that may arise. Sole Proprietors and Partnerships also must pay self-employment tax on the net income of the business.

LLC’s are the simplest to form.  They do not have formalities and record keeping requirements that Corporations have.  For tax purposes, the financial data passes through to your personal return.  You generally owe self-employment on your net income up to $106,800 for 2010.  However, you can elect to be taxed as an S-Corporation.

S-Corporations offer the opportunity to save on self-employment taxes after paying a reasonable salary.  Like a C Corp, Payroll taxes must be paid for salaries and wages.  However, there is no payroll tax on the extra income your company makes. 

As a business owner, you cannot abuse this benefit.  You cannot take an artificially low salary with the sole intent of avoiding payroll taxes – hence the term reasonable salary. 

The main drawback for an S Corporation is the lack of easy operation. There are differences in formalities and record keeping requirements.  For example, you must have shareholders and stock  – as well as a board of directors and officers.

C-Corporations are similar in structure to an S-Corporation.  The tax on salaries and wages is essentially the same.  This entity type can save money for high income earners.  For example, if you (personally) are in the highest income tax bracket, you can leave a portion of your profit inside the C-Corporation.  This saves tax dollars because the first $50,000 in corporate profits is taxed at the 15% rate.  By splitting the income, you may be able to stay out of the top tax brackets.

The main drawbacks with a C-Corporation are the same as those of an S-Corporation.  They lack ease of use, they have a more complex structure and are more formal, they require more maintenance, and they both require having to file another tax return.


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The Complete Tax Code is Over 60,000 Pages!

Since it’s time to celebrate the last day of tax season, here is a video and some facts regarding income taxes:

Facts for 2010:

  • Tax code is over 60,000 pages
  • About 45% of households will not pay federal taxes this year
  • $431 billion is spent annually complying with the tax code
  • Top 400 earners will pay an average of 17%
  • More people work in the tax industry than Wal-Mart, UPS, McDonalds, IBM & Citigroup combined

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Fraud in the Loan Modification Industry

“All those people who did unconscionable things to people with the subprime and predatory lending…they’re making their living now in these mortgage modification scams,” says Shanna Smith, CEO of the National Fair Housing Alliance (NFHA), a consortium of more than 220 private, nonā€profit fair housing organizations. The following findings were mentioned in the video below regarding ‘fraudsters’:

  • 55% required an upfront fee to start work
  • 43% guaranteed or promised they could secure a loan modification before reviewing documents
  • 24% advised or encouraged homeowners to stop making their mortgage payments or to stop contacting their lenders
  • 12% discouraged homeowners from seeking free help from government-approved housing counseling agencies

Source: Yahoo! Daily Ticker

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Shadow Inventory Keeps Las Vegas Real Estate Market Weak

In an article by Keith Jurow for Minyanville, he writes, “[In Clark County, an] additional 32,000+ properties had been placed into default by the banks but had not yet been foreclosed. That is a total of more than 65,000 properties which are almost certainly going to be thrown onto the market as either foreclosures or short sales — 18.1% of all properties with first liens.” (source:

Keith Jurow of Minyanville also states that many of the bank owned properties are not listed on the MLS, which reflects that there is a much larger inventory than what it seems.  The only floor that supports the current price level is cash buyers.  There will be many more foreclosures in the years to come because of underwater homeowners and high unemployment.

Many of these cash investors come from out of town.  People from other states, India, and Canada all are buying in Las Vegas.  This includes big purchases in commercial real estate.  According the Las Vegas Sun, “International investors are swooping into Las Vegas and purchasing distressed commercial real estate, many times blowing away much lower offers from domestic buyers.” 

In February, sales volume was at a five year high according to dqnews.  This was from distressed sales and it’s still not enough to make up for the pipeline of foreclosures that will eventually be dumped on the market.

Tighter lending standards also place an added burden on buyers.  Financing is now more expensive in relation to the purchase price of a property.  This further depressing prices and gives cash buyers an even bigger advantage.  Cash buyers can act quicker, banks are more apt to sell to them, and the escrow process is less painful. 

On a square foot basis, prices in Las Vegas are back to 1995 levels ($70 per square foot).  Although valuation currently looks attractive, it is still likely for prices to fall further.  According to the Dept of Numbers, prices have been falling each month for the last five years.  Catching a falling knife in investing is a dangerous practice. 

Low interest rates, on the other hand, offer opportunity for those with a long-term time horizon.  If interest rates were to rise significantly, the cost of buying may be more expensive than waiting for prices to drop a few thousand dollars more. 

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FROM vs. TO in Financial Freedom

The Financial Philosopher blog had an interesting post in reference to the two different types of freedom.

“Freedom from” is described as a “negative freedom and it is based in fear because it is sought as relief from uncertainty or from restrictions placed on the individual by society (other people) and/or institutions (e.g. government, financial creditors). The pursuit of freedom from can paradoxically reduce or remove one’s freedom.”

“Freedom to” is “the healthy form of freedom because it is the form where the individual obtains the capacity to be creative, to act as the authentic self. When one obtains the means to be authentic, they are enabled to reach the highest form of productivity because their actions are purposeful and meaningful; thus the actions are self-feeding and self-radiating; therefore, the individual is happy by virtue of doing — they are free because they are acting as the authentic self, not because of a certain or pre-defined amount of financial capacity.”

The author believes that you can’t accomplish “freedom to” until you have accomplished “freedom from.”  You can read the full post here:

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Mortgage Paperwork Nightmares

In the video below, banks have used fake documents and fake signatures to process mortgage documents. People were hired to act as officers of large banks (for only $10 per hour!). The main problem here is homeowners are fighting back which will slow down the process and delay the market correction.

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John Mauldin: We will get through the Next Financial Crisis One Way or Another

“We generally only accept change in the face of necessity and we only see necessity in the face of a crisis,” says Mauldin. “The odds are we’ll have to have a crisis” that might lead to a long-lasting recession.” ( We do have choices to fix our debt problems. However, the longer we wait, the fewer (and more painful) choices we will have. Structural problems with income taxes and Medicare will need to be dealt with. In the long run, trends that can’t continue won’t. The videos below show Mauldin’s view that taking action now will eliminate or reduce the severity of the next crisis.

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Dent Sees more Deflation in Housing due to Demographics

“Unfortunately, the halcyon years of real estate will not return, no matter how much stimulus is pumped into the economy, says Harry Dent founder of HS Dent. Demographics and debt can no longer support it, he argues.” (



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Stocks Rise Despite Negativity

Last week featured plenty of negative news but the financial markets still went higher.  Rising oil prices, problems in the Middle East, Japan, falling home prices, and sovereign debt problems couldn’t stop the financial markets from going up.  Walmart’s CEO has said that consumers should expect higher prices because of the surge in commodity prices.

The Federal Government faces a shutdown if no new budget is passed.  The entire debate is over a drop in the bucket; about $30 Billion when our budget deficit is over a trillion dollars.  David Walker referred to as “arguing about the bar tab on the Titanic.”

According to the Case-Shiller Home Price Index, home prices have returned to their 2003 levels.  Home prices fell 3.06 % (year over year) in January.  With high unemployment, high inventories, and the coming foreclosures, prices will remain depressed for some time and likely to drop even further.

In other finance news this week, real wages continue to fall and have not improved in over a decade.  Wages have generally been falling since the recession began in 2007 and remains the current trend.  This, combined with commodity inflation, is a big problem and will negatively impact consumer spending. 

Josh Brown of the Reformed Broker believes there will be no QE3 and that the economy should be able to pick up the slack when QE2 ends.  In an interview on CNBC, it was noted that banks are still not lending to the most important part of our economy – small business.  Brown sees commodities prices going lower which should help consumers.       

Stimulus vs. Austerity

The never-ending debate over stimulus vs. austerity wages on.  This week, Paul Krugman fired back at those who often refer to the depression in 1921 as validation that austerity and a “hands off” approach by the government is always best.  Although I generally disagree with Krugman’s magnitude of stimulus (he continues to claim that government stimulus and spending is too small), he brings up a great point that the depression in 1921 is far different from the Great Depression and the situation we are in right now.  The depression in 1921 did not take place because of a credit bubble and was rather ordinary.  Like a typical recession, this one was a function of the normal business cycle and had a v-shaped recovery.  A recession/depression brought on by a credit crisis is different because the deleveraging phase usually takes years to get through.  Instead of spending money, people will save and pay down debt instead.  This is why historians are wrong in assuming that governments doing nothing will lead to a fast and painless recovery similar to 1921.

In the current environment, consumers are paying down debt while the government is adding debt.  This trend cannot continue without serious consequences, but that is a discussion for a different day.  We will eventually have to get our fiscal house in order, preferably before the bond market forces it.

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