Old, Sick & Very Broke pt 3 of 3… Michael Douville
Deuteronomy 28:12 The LORD will open for you His good storehouse, the heavens, to give rain to your land in its season and to bless all the work of your hand; and you shall lend to many nations, but you shall not borrow.
Deuteronomy 23:20 You may charge a foreigner interest, but you may not charge your brother interest, that the LORD your God may bless you in all that you undertake in the land that you are entering to take possession of it.
Continuing with the theme of rising interest rates, bad things happen to Stocks as well.
Rising interest rates compete with the dividend rate of stocks. Currently, the S&P pays a total of 1.68% for annual dividends, but accepting market risk. Currently in June of 2018, a 1 year Treasury held to maturity pays 2.34% with almost no risk. That rate has risen from 1.22% just exactly 1 year earlier. Further, Corporations have been the largest buyer of their own company stock. Executives have realized that by borrowing money to buy company stock, they can reduce the outstanding shares and thereby raise the per share return just by maintaining the same revenue. The Executives bonus is tied to increasing share revenue which increases their bonus share offering. Everyone wins; well the executives win!
The Real Estate turmoil should be contained as a correction in an ongoing Bull Market. It could be severe! It could be scary!
However, as rates rise, it is more difficult and more expensive to borrow funds earmarked for Financial Engineering so less and less buybacks will occur at exactly the same time Central banks are reducing purchases. Share prices are directly related to profits; rising rates will deteriorate those profits. As an aside, $4 Trillion in Corporate Bonds are due to be refinanced in the next 3 years; all will be at much higher rates. Higher rates cause costs of Production, Research and Development, and all CAPEX to rise squeezing viability. Just this one HUGE change should cause the hair on the back of your neck to rise; for 10 years, rates were basically ZERO. Now they are NOT!
Retirees hold 70% of their assets in Stocks. Prices can go down much faster than they go up. In fact, they can plummet! This fact has been ignored for years until a 3000 point drop in 2 weeks in February 2018. UH-OH! Wake Up! Historic Margin debt may be one cause of these sharp air pocket declines. Leveraging an Equity position is oh so fun as the market expands to new levels. A reverse of trend will intensify and magnify the losses. Margin calls will force sales which forces prices down which forces sales. A very bad spiral.
Boomers have watched this Movie before; get out of the way! Take Profits! Remove some portion of the portfolio to safety.
Higher rates will impact the Real Estate asset class as well. Fewer families will be able to afford a home of their own as the Affordability Index is directly correlated to payment levels. Fewer buyers qualifying places pressure on prices. Property in overheated markets will be at risk. Luxury homes will become less affordable. Already our neighbors to the North are experiencing declining sales in Toronto and Alberta. New York City is starting to feel pressure in the luxury condo market as new units come onto the market already crowded with existing units. The Real Estate Cycle is long; 18.5 years. The last Real Estate Bubble scorched the Earth when it failed, but that was only 9 years ago. Too early for completion of that cycle.
However, the timing would be perfect for a Real Estate correction which typically occurs 7.5 to 9.5 years from the bottom. Just as a reminder, the bottom was January 2010, give or take a few months. Simple math places the Real Estate Cycle in the middle of the Jeopardy Period; perfectly matching the expected Epic completion of both the Stock and Bond Markets.
The Real Estate turmoil should be contained as a correction in an ongoing Bull Market. It could be severe! It could be scary! It will be a Generational buying opportunity for those with vision and courage; also surviving Capital!!! Remember the Affordability Index that should start to close families out of the buying market. They will become TENANTS!!! Long term TENANTS!! Fortunes will be made!!! Not only huge Capital Gains as the Real Estate Cycle moves out of the correction phase, but CASH FLOW! Increasing CASH FLOW. More revenue each year, growing earnings. If a little leverage is used, the tenants PAY OFF the Mortgage! Remember the Bengen Rule with 4% fixed for life depleting in 30 years? Throw it out!!! Not only will the rental revenue grow and grow providing more and more cash each month, but the loan is being paid off. A simple 20% down payment becomes a 100% after 30 years; multiplying by 5 times!!! Rentals are easy! Rentals are Profitable! Rentals are run by Property Managers, NOT you!!!
Consult with your Professional about an Exit Strategy for the Stock and Bond Markets. Take Profits and preserve your Wealth! Move your assets into a different Asset Class that has a much longer horizon for Wealth and Income forever!!!
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