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9:00 AM EST, Monday, December 17, 2007: I spent the weekend trying to get my arms around the sub-prime problems and what they mean for you and me. My overwhelming conclusion is simple. We'll weather this crisis as we have weathered others -- from the savings and loan crisis of the 1990s to the Tech Wreck of the early 2000s. It's only a matter of time. This one will take two years. In that time:

1. Cash remains king. It is hard to borrow and it will remain hard to borrow. Everyone -- from banks to hedge funds, from investors to home owners -- are hoarding their cash, fearful of the unknown. Sadly, there's no reward for holding cash, other than as a security blanket. Short-term interest rates have plummeted.

2. Your cash should be in the safest place around. There is fear that some of the banks' short-term money market funds may actually be "invested" in "iffy" securities. The safest place for money is $100,000 in many separate bank accounts. If you have a joint account with your spouse you can go to $200,000. I have some money in bank CDs. This morning I'm questioning what the CDs are invested in. If I don't get a satisfactory answer, I'll yank my money asap.

3. Distressed assets make sense under only two conditions: First, the property has real cash returns (also called rents). The rents are below market. And the rents pay all your carrying costs (including mortgages and taxes) and then some. Second, you find your dream house in which you want to live. A beautiful house on a lake with nice acreage makes 1000% more sense than a recently-built house in a half-finished development alongside a golf course that doesn't have sufficient members to pay for its upkeep.

4. This is the time to invest personal effort and monies in your own business. Anything you can do to improve your customers' experience -- speed of service, quality of product, etc. -- will repay itself a thousand-fold when we emerge from this. Get on a plane. Go visit them. Cuddle them. Love them. Do whatever it takes.

5. This is not the time to be in the stockmarket. With institutions and individuals hoarding cash, there is now no prevailing enthusiasm for equities, except for ultra-short-term day trading. We are in a bear market for at least a year. That doesn't mean there won't be "bargains." There will be. But be wary about gambling too heavily. If you do dare to go into the market, remember my inviolate 15% Stop Loss Rule.

Three things will determine how fast we recover:

1. How fast financials get injection of new funds. Examples: USB just received an "emergency capital injection" from two sovereign wealth funds. MBIA got $1 billion from Warbug Pincus.

2. How fast the Fed drops its interest rates. The Fed's BIG concern is not with saving the stockmarket, nor the financials but saving the economy from inflation. Sadly, inflation is rearing its ugly and threatening head. Nothing spooks central banks more than escalating inflation.

3. How fast housing recovers. Demand for houses comes from two sources: people who want to live in them; and people who want to re-sell them quickly. One group is called home owners. The other group is called speculators. The second group no longer exists. There is still a demand for houses. People are getting married. Immigrants are still arriving. We built too many houses. We have too many in inventory. Ultimately demand will catch up with supply. I don't know when. No one does. Interestingly, in the last year there has been a sharp reduction in the number of new households being formed. More people are putting off marriage and living with their folks, for now at least.

The worst thing about today's financial mess is that we don't know its extent. The good thing is you have to be optimistic. We've come through all the previous dumb asset bubbles (from tulips to tech stocks) stronger. And we will this time too. But, for the meantime, it is not business as usual.

This is what I'm worried about --- in better words than I could express:

After the Money’s Gone by New York Times' columnist Paul Krugman

On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it’s the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn’t count on it.

In past financial crises — the stock market crash of 1987, the aftermath of Russia’s default in 1998 — the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working.

Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.

Let me explain the difference with a hypothetical example.

Suppose that there’s a nasty rumor about the First Bank of Pottersville: people say that the bank made a huge loan to the president’s brother-in-law, who squandered the money on a failed business venture.

Even if the rumor is false, it can break the bank. If everyone, believing that the bank is about to go bust, demands their money out at the same time, the bank would have to raise cash by selling off assets at fire-sale prices — and it may indeed go bust even though it didn’t really make that bum loan.

And because loss of confidence can be a self-fulfilling prophecy, even depositors who don’t believe the rumor would join in the bank run, trying to get their money out while they can.

But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity — the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.

Matters are very different, however, if the rumor is true: the bank really did make a big bad loan. Then the problem isn’t how to restore confidence; it’s how to deal with the fact that the bank is really, truly insolvent, that is, busted.

My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia’s default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.

But when all was said and done, not that much money had been lost; a temporary expansion of credit by the Fed gave everyone time to regain their nerve, and the crisis soon passed.

In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system — both banks and, probably even more important, nonbank financial institutions — made a lot of loans that are likely to go very, very bad.

It’s easy to get lost in the details of subprime mortgages, resets, collateralized debt obligations, and so on. But there are two important facts that may give you a sense of just how big the problem is.

First, we had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.

Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

As home prices come back down to earth, many of these borrowers will find themselves with negative equity — owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.

And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What’s going on in the markets isn’t an irrational panic. It’s a wholly rational panic, because there’s a lot of bad debt out there, and you don’t know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won’t start functioning normally until investors are reasonably sure that they know where the bodies — I mean, the bad debts — are buried. And that probably won’t happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

An old scam: Your phone rings. The caller identifies himself as an officer of the court. You failed to report for jury duty and a warrant is out for your arrest. To clear it up, the caller says he'll need some information for "verification purposes" -- your birth date, your your social security number, your address and maybe even a credit card number.

Bingo, your identity has just been stolen.

Dear Santa,
Please send me a baby brother.

Santa writes back, "Please send me your mother."

Illegal immigrants are now the #1 presidential political issue
Jose and Carlos are panhandlers.

They panhandle on different areas of town. Carlos panhandles just as long as Jose, but only collects $2 to $3 dollars every day.

Jose brings home a suitcase FULL of $10 bills, drives a Mercedes, lives in a mortgage free house and has a lot of money to spend.

Carlos says to Jose "I work just as long and hard as you do but how do you bring home a suitcase full of $10 bills every day?"

Jose says,..."Look at your sign, what does it say?"

Carlos sign reads "I have no work, a wife and 6 kids to support."

Jose says "No wonder you only get $2-$3 dollars."

Carlos says "So what does your sign say?"

Jose shows Carlos his sign.

It reads, "I only need another $10 to move back to Mexico."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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