Thousands of Japanese households are pouring their savings into stocks and other risky investments. It is the last stance of greed. Easy money.

Or is it?

There is an old investor's rule: sell when the house-wife starts investing. Stocks across the board are still fundamentally overvalued. Many are already insolvent if their balance sheets would be cleaned of intangible assets. Many are simply trying to buy time and hope to avoid bankruptcy. Unemployment will skyrocket within weeks and we will see 11 or 12 million people on the street before Obama takes office.

The economy is going to contract by at least 27% (check my article series on economic stimulus). The stock market will inevitably contract by at least another 50% and corporate bonds may turn out as junk.

We are looking at a fundamental shift not only how credit is assessed but also how businesses are valued. Both lead to a systemic downsizing of asset values and the economy as a whole.

Where should you invest? Stocks, bonds, money, gold? Here is the number one option which guarantees your highest return: your mortgage or debt. It is as safe as it gets. There is no other investment that guarantees 5 % or more, depending on the type of debt.

If you are looking for a safe heaven, there is no substitute with higher returns than driving down your debt, mortgages, credit cards, car loans, etc. Debt is what you are ultimately responsible for. You loaded it up. You've got to pay it back. Remember, the harder the times, the worse it is to carry debt. The real value of your house is irrelevant to you unless you are speculating to flip it for profit. That won't happen. As long as you exchange one home for another when you move, everybody is sitting in the same boat. Your home is what keeps you comfortable no matter what comes at you. It's the number one asset that you want to protect and you do that by lowering or eliminating debt.

Talk to your bank before you make such a move. There are usually penalties attached for early retirement of debt. However, banks are strapped for cash. They'll treat you like a king.

Nothing is safe

My outlook remains unchanged since my report "Bailout yourself - invest safely" four weeks ago. Money, stocks, or bonds are not safe. As the states of New York, New Jersey, Alabama, and California proof, it is now a certainty that state and city governments overextended themselves and there is a high probability that the Federal Government will do so as well. Bonds might turn out to be junk. You might end up with no value in paper assets but WITH a mortgage and other debt. It's your ultimate financial death trap. If you pay it back, you can loose your job or your business and sustain yourself for a longer period of time.

Forgo risk that you don't fully understand. If things turn out to recover, you will have equity in your home and an undamaged credit rating to leverage new buys when markets are stabilized. If things look like they recover, don't rush. It might get worse.

Do you need to panic? Probably not. I wouldn't wait, though. See your bank and investment advisor soon. I wonder which facts those "experts" are basing their opinion on that recommend to ride it out and to keep on pouring monthly contributions into it. Is it maybe that they have a conflict in interest as they're after your commissions?

When to come back

The time to go back into the liquid asset markets is when you receive two clear signal: firstly, derivative risks of financial institutions, businesses and governments are disclosed and isolated, in order not to spread further into the rest of the economy. Secondly, disposable income is on the rise.

Should I invest in rental properties

If you understand real estate, go for it. Look for bargains that appear really, really cheap, meaning between 25% and 50% of the peak value, or even lower. Try to take over mortgage rather than getting a new one. Factor in high levels of rent defaults and you might be fine. However, it is not safe. It incorporates a lot of work and needs prudence.

This of course is not for the seasoned speculator. There is tons of money to be made right now. Fortunes can be built very quickly. However, fortunes can be lost just as fast if you don't know what you are doing.

Disclosure

Please note that I am not an investment advisor. I am "Mr. Nobody" with a conservative financial view and a lot of experience with helping troubled businesses. You need to make up your own mind as I might just as well be wrong. I haven't seen any numbers, though, that convince me otherwise and I am fine with taking the blame if you have to watch the shares rocketing back up. I doubt it. Don't trust bankers or politicians. They are in the business to calm you down: things will go back up, don't panic.

I will try to address your comments, if I can.

H.R. Tschudi, economist and entrepreneur, Vancouver