The Real Secret to Your Future Investment Returns

I have spend a lot of my time in the last two years researching the web trying to find the holy grail for my nest egg to invest in. Yes. I know it is futile but I believed that some investments are better than others.

I totally discount managed funds when 70% or more of the population are investing in them using the same “buy and hold” method that only works part of the time – after a major stock market crash.

I believe that giving your money to faceless people for 40 years is just plain stupid too.

So what is the real secret to your investment returns?

It’s being able to understand what your government is doing across a wide range of things and then working how to invest in their favoured industries. What are the ones they are throwing your tax money at? And the ones they are getting into bed with and legislating to protect and help.

Recent history showed us that Reagan released the government hold on the economy and brought about an economic recovery. Clinton too decided to throw the towel in on National Health Care and do the Republican Congresses bidding and he too herald in an economic boom.

“In 1993,  the Democratic controlled congress passed a large tax increase with no republican support. Clinton signed OBRA-93 into law and the economy continued to be in recession and deficits increased. This helped launched the Republican Party to retake congress for the first time in 40 years. The Republicans, lead by Newt Gringwich, vowed to balance the budget. Balanced budget after balanced budget was sent to President Clinton’s desk, after 5 were rejected, finally the President relented and he passed a balanced budget.”

The problem is that Congress likes to tinker with the economy. That’s the problem. I’m not taking sides here. Both major parties are in the can for prompting the great housing boom. They allowed sub prime housing loans to proliferate and indeed Greenspan said he thought it was a good thing that people who would not normally qualify for a mortgage were able to get one.

“In 2004, Alan Greenspan gave his blessing to the sub-prime mortgage industry: ”American consumers might benefit if lenders provided greater mortgage product alternatives (read: no interest loans and adjustable rates) to the traditional fixed-rate mortgage.””

So when you see sustained low interest rates you know that entrepreneurs will find a way to use that cheap money and easy credit. That’s when you need to be ready to cash in on the coming boom.

You recall the sudden appearance of non bank lenders going house to house selling mortgages. You have to question things like that and why it was not done years ago.

I saw a program on the US Cable network about the sub prime mortgage meltdown. They interviewed a guy who was selling Mercedes cars and who thought he was at the top of his game. Then he noticed average Joe’s were coming in and buying fully optioned top-of-the-line Mercedes. He asked one guy what he did for a living.

You guessed it he sold sub prime mortgages door-to-door. He said he was making about $20,000 a month!

The Mercedes salesman gave up his auto sales job and joined the sub prime sales team. He became very successful very quickly and branched out to form his own company.

He began employing other people and was soon making about $5M a month personally in his company. The problem was he was so successful the banks he was dealing with could not take on the mortgage debts fast enough, or didn’t want to.

In order to keep growing he needed to find a way to get rid of the mortgages he was selling.

Then he got the bright idea of calling some Wall Street guys to see if he could sell the mortgages to them. He said the guys were reluctant at first and told him the mortgages would have to be substantial for them to get involve. He asked them if $500Mn a month was substantial?

Wall Street jumped at the chance to take these mortgages and on sell them. They knew they carried a high risk unless they could be packaged up and sold as sound investments. So they packaged them up with high quality mortgages, broke them up into tranches to which the ratings agencies willing gave them different ratings on each tranch, and then on sold them to their trusting clients.

Once again success bought its own problems. Too much cheap money being funnelled into sub prime mortgages by too many people wanting to make a fast buck and exploit the financially ignorant.

Before long all the Investment banks in Wall Street were in on the sub prime packaging into CDO’s and on selling them.

The problem was they were getting so many mortgages to package they were running out of clients to sell too. Then someone got the idea that if they could insure the CDOs against mortgage default they could market them to people who were not their clients.

This is where AIG came in and underwrote billions and billions of dollars worth of sub prime mortgages. We all know what happened the them.

All this started with cheap money from the FED and a well intentioned Congress passing laws to enable mortgage loans to be sold to people who could not normally afford them. A market was created where none should have existed for good economic reasons.

As a result there was a massive leverage of credit that lead to a trickle down of wealth to fund managers and the like investing your money in some of these high risk, high return investments. It worked for a while and everyone was happy.

Sub Prime will never be the money train it was. CDOs are all but dead as a wealth creator for those in the financial loop or as a trickle down investment return for your nest egg.

The secret to your future investment returns is what Congress and the FED are likely to do next. For instance right now renewable energy is all the rage and “Cap and Trade“. Renewable energy has not been proven to be economically viable and needs massive government assistance to keep it going.

Regardless of what you thing about nuclear energy, financing wind farms that clutter the landscape and massive solar collectors eating up the deserts makes no long economic sense.

Hyperion Power Generation is a company that aims to provide clean, safe and affordable power using small modular nuclear reactors. These completely sealed reactors have no moving parts and are designed to be buried in the ground below meters of concrete and will supply up to 20,000 homes with clean electricity for several years before having to be “topped up” with nuclear fuel.

It seems to me just like the government forced money into sub prime mortgages it will do a similar thing to green technology regardless of it’s economic viability. So provided the money remains cheap it may make good sense to look for “investment opportunities in renewal energy projects sanctioned and financially backed by government.

The secret is to chose the companies the government favours, sort of like a Fanny and Freddie of the renewal energy industry. There needs to be a direct connection between Congress or the Senate and the companies. That incestuous relationship will be vital for good investment returns.

You won’t need to worry about how you can capitalize on this. Many money smart guys people will start marketing investments that will take advantage of the government bias. Then lobby Congress for even more support for the schemes to bolster their investment returns. You just need to be ready to invest but control that investment.

The beauty of the American system is you can find out this information through your Congress or freedom of information. Often it is published for all to see because Congress sees no wrong in meddling in the economy at that level.

Find the companies that are the chosen few or the anointed ones and invest even 10-20% of your money in them through one of the smart money people mentioned earlier, and you could be on a winner. It is almost guaranteed. General Electric looks like a great candidate to me.

Be prepared to get out if the next government changes regardless of how well the investment seems to be going. Governments have a habit of shutting off the money tap and removing their support based on whim, political expediency and payback.

So the real secret to your future investment returns is to Follow the FED and Congress  and don’t get caught out again.

2 Responses to “The Real Secret to Your Future Investment Returns”

  1. Paul says:

    Interesting article David, how about re hashing it with an Australian perspective, I need a few tips!
    Paul

  2. admin says:

    Paul,

    Thanks for support my block with your comment.

    It’s much harder to do for Australia I think because we are not the open book society the US is. We see a worts and all view of the US. In Australia we are kept in the dark much of the time.

    Do you know what is going on the Future Fund – Really?
    Do you know what is going on with the Mortgage Backed Securities Wayne Swan initiated?
    Do you know what is going on with the billions put aside for the Banks in case the property market could not refinance their overseas short term loans?

    It’s like our government is acting as the US banks did with the CDOs. They set up off-balance sheet entities to sell the CDOs so they did not appear on the P&L. When it all imploded they could not hide it anymore.

    The government is setting up funds outside of the government accounts in a similar way as far as I can tell. What is it $60Bn in the Future Fund, $8Bn in the Mortgage Fund and possible $26Bn or more in the Bank/Property Fund?

    The only thing I know is the Treasury is telling Mr Rudd and Mr Swan to keep spending the stimulus package. To me the shear weight of borrowed money sloshing around in the system will have unintended consequences and unknown outcomes.

    It’s all about “Whim-onomics” now. You cannot invest for the long term when your government can change it’s mind in 24 hours and commit to spend more than the GNP before they go to lunch. At the same time the banks who control most of the superannuation funds are likely busily setting up algorithmic trading platforms to maybe trade (not invest) your money in a seriously speculative stock market.
    If Goldman Sachs can report a $3Bn profit in a quarter supposedly doing just that what do you think the rest of them are going to do?

    Regards,

    David Bates

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