Financial Crisis Questions and Answers

By: Money_and_Markets

Martin Weiss writes: I sincerely hope you’ve been following the lively conversation on my personal blog lately.

It’s a must, especially if you’re looking for ideas on how to turn lemons into lemonade in these bewildering markets!

Today, I want to take the time to answer some specific questions you’ve been asking — to help you preserve and grow your wealth as this crisis continues to intensify. Forgive me if I can’t get to yours. Here are the key topics …

Falling Real Estate, Rising Rates Q. Is this a good time to buy a house or can real estate prices be expected to sink further? Suppose interest rates surge. Then how am I going to get a cheap mortgage?

A. Real estate values could fall further, but most interest rates could rise sharply. So if you feel you must buy a home … if you can find a property selling for half its peak value (or less) … and if you can’t pay 100 percent cash … then there is one advantage of buying now: This could be one of the last opportunities in many years to get a fixed mortgage at such low rates.

Q. Are Ginnie Mae funds safe?

A. Long-term Ginnie Mae funds could suffer a big price decline as interest rates rise. Short-term Ginnie Mae’s don’t involve that price risk. But still for maximum safety, I recommend short-term Treasury bills. (See also my answer to the next question.)

HSBC and Bank Safety

Q. I bank with HSBC, both here and in Panama. I know that HSBC has a horrendous leverage due to derivatives, but nowhere can I find a rating on them. Should I be seeking a safer bank?

A. HSBC America is rated D+ (”weak”), but we do not have a rating on other HSBC companies. In any case, the safest place for your money is a Treasury-only money market fund or 13-week Treasury bills bought directly at www.TreasuryDirect.gov. You will still need a local bank for transfers and other business. But with the overwhelming bulk of your money in Treasuries, you can sleep nights.

Q. I heard about a list of weakest and strongest banks you maintain. Can you tell me where to find it?

Click here for the weakest banks, and click here for the strongest banks.

Stuck in Annuities Q. What should I do with my remaining annuity that is the only retirement income I have? It has the harshest early withdrawal fees. Actually there is very little income on these annuities since they’ve lost almost half their value. What say you?

A. Although I hate early withdrawal penalties, getting out is the cleanest solution; and with the recent market rally, your proceeds shouldn’t be quite as disappointing as they might have been two months ago. Another alternative: Keep the annuity, but hedge against some of your downside risk with an inverse ETF. That way, when the bear market resumes, even if your annuity continues to sink, your inverse ETF should go up.

Bond Market Disaster Q. Suppose no one wants to buy U.S. bonds. Are we to expect massively higher interest rates? But what happens then to this horrible economy?

A. Bonds are already falling in price, driving their yields higher, and you can expect a lot more of the same. In a period that has already seen more giant companies in bankruptcy (or bailouts) than any other in history, higher interest rates could be the coup de grace.

Bank of America

Q. BofA needs billions and their stock jumps 14%. What’s up with that?

A. The government’s promise to be the grand savior has investors temporarily mesmerized. But rising interest rates could end that magic spell quickly.

Shaky Life Insurance

Q. I am getting very concerned about my whole-life insurance policy. I have a current cash value of about $30k, and am due to make my yearly contribution soon. But I have a nasty feeling that when the insurance companies start taking the hits that appear to be inevitable, my policy may just evaporate. What do I do?

A. If your insurer is rated D+ or lower, I’d consider pulling out. If it’s rated B+ or better, it should be secure. And if it’s C-, C or C+, I’d monitor it carefully. For the latest list of weakest insurers, click here. Also click here for more detailed instructions.

Short-term Treasuries Q. First, let me say thank you for the early and unambiguous warnings. I am still heavily invested in short-term Treasury money markets because capital preservation trumps missed opportunity. But it is hard to stay disciplined while collecting no yield. With banks being required to raise additional capital following the stress test results, would you consider buying CDs from any of them if the yields are decent?

A. If the bank is rated B+ or better and you keep your CDs under the old $100,000 FDIC limit, it’s something to consider. Otherwise, no. Click here for additional instructions.

Mortgage Repayment Q. Should I pay off my 30-year fixed $92,000 mortgage at 5.37% interest? I have $130,000 in cash, and $300,000 in a 401K.

A. Generally speaking, if it’s an adjustable-rate mortgage, it could be a burden and it’s a good idea to pay off as much as possible. But if it’s a fixed-rate mortgage at a reasonable rate, it should not be as onerous. Rather than deplete a big chunk of your available cash, yes, it may make sense to pay it down at a faster pace than required — but not all at once.

Good luck and God bless!

Martin

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