The global financial crisis reeling investors, business owners and families is a financial storm and has been characterized “as the crisis that will change the course of history,” by Martin D Weiss, Ph.D, a leader in the field of economic forecasting.

Warren Buffett recently said about the current financial crisis… 

• In my adult lifetime, I don't think I've ever seen people as fearful economically as they are now."

• "The recession is going to get worse. I don't want to hold out false hopes that — by some magic bullet — that things will turn around in a couple months."

• "This really is an economic Pearl Harbor. That sounds melodramatic, but I've never used that phrase before. And this really is one."

Events Rocking the Markets

The US stock market took an 800 point plunge on Monday, October 6th, before pulling back to lesser losses, and overseas markets fell sharply as well.  Looks like the Bailout Package passed by Congress and signed by the President is not averting the financial panic as hoped for.

The current freeze by many banks has resulted in a dead stop of new loan fundings and credit lines for small business owners has dried up making it nearly impossible to expand much less make payroll or obtain working capital for inventory and other business expenses. 

Bloomberg reported, “Leveraged loan prices plunged to all-time lows…and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries.  Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.”

There are no commercial paper buyers. According to Bloomberg, “The market for commercial paper plummeted the most on record as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression.  Commercial paper outstanding tumbled $94.9 billion.”

The Fed announced on Tuesday that it will backstop the private short-term credit markets. But their efforts won’t even begin to solve the problem. (Fortunately, I have non-bank funding sources doing business as usual for commercial property loans and business loans including working capital loans, business equipment purchasing, et al.)

Unfortunately, the vicious financial cycles will continue:

• Falling home prices throughout most of the country (there are exceptions I call “Bargaintowns” where investors should be targeting) are forcing homeowners to abandon their homes…and fire sales on foreclosed homes are driving prices down even further.

• Consumers are falling behind on their credit cards…and credit card losses are forcing banks to choke the available credit for consumers.

For example, just yesterday, Bank of America — one of this country’s “strongest” banks — revealed that its earnings plunged 68% in the third quarter.  They had to cut their dividend in half. Why?

Because toxic loans in its portfolio are imploding. Because the bank is having to pay more than $8 billion to modify 400,000 troubled mortgages it bought in its acquisition of Countrywide. And because its customers defaulted on a staggering $1.24 billion in credit card debt in July, August and September alone!

• Wall Street panic is smashing Main Street business…and Main Street business, in turn, sows the seeds for more Wall Street panic.

Weiss predicts what we’ll see in the future:

• Astronomical unemployment rates (maybe 10% or more)
• Intense hardship for millions of Americans
• Devastating losses for investors in almost every asset class (Do you dare look at your next 401k statements?)
• Not just a recession but a deep depression and deflation (falling prices)

According to Weiss, the U.S. government bailout will only buy some time and buffer some pain.  Unfortunately, the bailout cannot force banks to make risky loans or force investors to buy sinking bonds.  It’s too little too late to avert a debt collapse.

Deeper Declines Are Still Ahead

While the FDIC has a list of only 117 troubled banks with assets of $78 billion, it does not include any of the large banks that have failed or been forced to merge this year. Weiss has an X List of 1.479 U.S. banks and 258 thrifts at risk of failure with total assets of $3.2 trillion, 41 times more than estimated by the FDIC.  This number alone shows the shock ahead for people expecting the new bailout law to bring about a real recovery.

For example, Citigroup is in danger.  TheStreet.com Ratings has just downgraded the Financial Strength Rating of Citi’s main banking unit from C- (fair) to D+ (weak).  Weiss Research finds that Citigroup’s global credit card portfolio – 185 million accounts with $201 billion – is in jeopardy with credit losses mounting.  And nearly every single category of consumer loans is suffering dramatic increases in delinquency rates.

FYI:  A previous post gave you a link to check on bank safety ratings at TheStreet.com.  I can also email you the Weiss Report with the "X" list of the Strongest and Weakest Banks and Thrifts in the U.S..

The bad debts that exist are much greater than the ones the bailout plan focuses on.  Here’s the list:

• At Fannie Mae, Freddie Mac, Ginnie Mae and other government agencies, $5.4 trillion in residential mortgages continue to rot.

• In addition to residential mortgages, there are $2.6 trillion in commercial mortgages.

• There are another $20.4 trillion in consumer and corporate debts that are all subject to the same kind of surging delinquency rates we saw in subprime mortgages.

• There is $182 trillion in derivatives.  The nation’s three largest banks – Citibank, JPMorgan Chase and Bank of America – are exposed to far more credit risk on their derivatives than they have in capital.  (The 60 Minutes episode that aired Sunday, October 5th on the derivatives market was very eye opening.)

• The money committed so far by the government is huge but is still too small to cope with tens of trillions of bad debts and bets in a sinking economy:

• $200 billion for Fannie and Freddie   
• $85 billion for AIG   
• $25 billion for the auto industry
• $700 billion for the Wall St bailout
• $150 billion tacked on the bailout plan for pork and tax cuts
• Hundreds of billions in emergency loans from the Fed

• The government commitments outlined above exceed $1.5 trillion.  This is new debt on top of the 2009 federal deficit of $482 billion projected by the Office of Management and Budget (OMB)

• The only way the government can try to raise that much money is by borrowing it.  This will create huge upward pressure on the interest rates that consumers, corporations and local governments have to pay for mortgages and loans.

Why Deflation is Likely

America is addicted to debt.  Without debt, U.S. consumers, corporations, local governments and, ultimately, even the Fed must cut spending drastically, driving down demand.  And without demand, most prices for goods and services are bound to plummet.

That’s deflation. Just watch what the credit markets do.  As long as they continue to contract, they’re telling you that we will experience a deflation.

That means further declines in some markets that were big winners including foreign currencies, foreign stock markets and industrial commodities.

How To Position Yourself for Safety and Profit

Weiss recommends the following steps:

• Have most of your money in cash in ultra-safe places where you have immediate access any time like a bank with a high safety rating.  (Check the safety rating of your bank using the link I gave you earlier in this post).  You can also put your money in 3-month T-bills bought directly from the Treasury or a Treasury-only money market fund.

• Get out of vulnerable stocks, whether at a profit or loss.

• Profit from falling markets by buying inverse investments specifically designed for falling markets like inverse ETFs or short position options.

I would add some additional options to consider in view of current conditions.  These include:

• Use non-bank funding sources for commercial property financing
  

Obtaining commercial real estate loans is much more difficult now if you don’t have the right sources.  Banks will really “cherry pick” the loan requests if they will continue to make commercial loans at all. For real estate investors and developers, as well as business owners, non-bank funding sources will be the key to getting financing for your projects and I have non-bank funding sources still ready, willing and able to fund your projects.  

• Seek cash flow solutions for your business immediately

Business owners who don't want to be out of business soon, need cash flow solutions to either expand or maintain their business. They can also depend on my non-bank funding sources for capital including SBA-insured loans for high leverage and favorable loan terms as well as stated income loans.

On my website, I have a box on the homepage titled Business Loans and Cash Flow Solutions.  This section highlights a number of resources to help you including:

• Commercial property purchase for owner-users with just 10% down
• Start up capital for a new business
• Working capital for equipment purchases and other business operations
• Cash advance secured by your monthly credit card sales   
• Commercial lines of credit secured by accounts receivable, inventory or your commercial building
• Business debt restructuring – avoid bankruptcy and create repayment programs that fit your budget   
• Build corporate credit – have access to $200,000 or more in business cash credit   
• Sell your note – get cash how for your business or real estate note
• Credit restoration to boost your scores

• Real estate investors should target specific types of property

I think investing in two types of income-producing commercial properties will be your safest investment, namely multifamily or apartment buildings and self-storage facilities.  Why?

3 big benefits: Monthly cash flow, increasing demand and built-in appreciation.

Unfortunately, as more people lose their homes to foreclosure or simply walk away from a home that is worth less than the balance of their mortgage, they will be renters again.  In addition, they will need a place to store their belongings as they downsize from a home to an apartment.  

For more help on real estate investing go to my website by clicking on the links: how to invest in commercial property and how to raise the down payment money.

Don't Sink When You Can Swim

Now is the time to take action.  Conditions will not get better.  It will get worse before it gets better because a lot more bad debt and bad habits will need to be purged.  However, you can position yourself first for safety and then for profitable opportunities.

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[tags]money, finance, real estate, bailout[tags/]

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