WOW … the news is FULL of things to keep an investor awake at night.
Some of it’s so exciting, you can’t wait to seize the opportunity. Other things are so spooky, you want to pull the covers up and hope it’s just a Halloween gag.
Right now, stock market investors are learning it can be a mistake to try to ride the bull all the way to the peak … squeezing every drop of paper profit out …
… falsely believing you can beat the bears to the exit.
Stocks fall for 12 of the last 14 trading sessions – Yahoo Finance, 10/23/18
Yeah, but that’s Wall Street …
Existing-Home Sales Decline Across the Country in September – National Association of Realtors, 10/19/18
Oops. Meanwhile …
Homeowners poised to start tapping $14.4 trillion in equity – CNBC, 10/19/18
Big banks reveal challenges in consumer credit, mortgages – Yahoo Finance, 10/15/18
“banks are seeing challenging headwinds … as charge-off rates – a measure of defaulted balances – continue to rise.”
So while there are MANY things to like about what’s going on in the U.S. economy …
U.S. named world’s most competitive economy for the first time in 10 years– Washington Post c/o The Chicago Tribune, 10/17/18
We remind you (and ourselves) … the economy and the financial system supporting it are two VERY different things.
That’s why you can have two camps … one saying the economy is strong … and another saying disaster is looming. And they’re BOTH right.
Of course, “disaster” does NOT mean the end of the world … or a descent into some Mad Max post-apocalyptic anarchistic society.
Disaster can be as simple as a rapid shift in asset or currency values that the majority of people are on the wrong end of.
Just like the 2008 crisis ( a warm-up for what Peter Schiff calls The Real Crash which is yet to come) …
… those who were not aware and prepared got CRUSHED … while those who were made MILLIONS.
So “disaster” isn’t a universal experience when the economic winds shift suddenly.
It’s more a personal choice (often by default from neglect) and depends on the set of YOUR personal financial sail.
You’ll either get capsized, face severe headwinds … or you’ll catch a gust of wind at your back and sail on to new fortunes.
So watching the changing economic winds is an important responsibility of any serious investor.
Interest rates are the barometer which signals a change in the economic winds.
That’s why pro investors fixate on every move or utterance of the Federal Reserve, which is ONE of the most powerful influencers of interest rates … but NOT the only one.
No investor left behind …
Interest rates are a by-product of the bid on bonds, which are debt securities.
So if the U.S. Treasury decides to borrow money (which they do ALL the time), the bid on those securities sets the yield.
The lower the bid, the higher the yield and vice-versa.
Falling interest rates (yields) come from a STRONG bid on bonds. That is, there’s lots of buyers for bonds relative to the supply of bonds for sale.
When the Fed wants to push rates down, they add to market demand by BUYING bonds … bidding UP the bond price and driving DOWN the yield.
Are you with us so far?
But when the Fed wants to push rates UP, they do NOT bid on bonds (leaving demand up to the open market without the Fed’s bid).
Sometimes, the Fed will even SELL bonds they already own (“unwinding their balance sheet”) … adding to the supply offered by the Treasury (and other sellers like Russia, China and even Japan).
And more supply and less buyers means bids go down … so yields go UP. Make sense?
Apparently, government officials aren’t concerned about soft demand for Treasuries …
Treasury Secretary Mnuchin: I won’t be ‘losing any sleep’ if China dumps US bonds in retaliation over trade – CNBC 10/12/18
“If they decide they don’t want to hold them, there are other buyers …”
Okay then. No worries. But …
Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets –Wall Street Journal, 10/23/18
“Yet it is clear that the foreign pullback has helped fuel a bond selloff this fall, which has driven the 10-year yield to 3.17% and has shaken the nine-year-long rally in U.S. stocks …”
There’s a reason stocks are tanking and it has little to do with the economy. That’s why President Trump is so upset with the Fed.
But it seems to us rising interest rates could be bigger than the Fed. And the world looks different if the Fed loses control of interest rates.
Head spinning yet? That’s okay. It can be complex. But there’s a reason big money watches the bond market like a hawk.
We try to keep is simple and just focus on the big concepts and how they trickle down to our Main Street investing …
More bonds than buyers mean rates are likely to rise.
For real estate investors, it means downward pressure on values … and more caution when using short-term financing.
Of course, when you can lock in long-term rates, today’s debt actually becomes an asset over time. But that’s a topic for another day.
And just in case the ramblings of two dudes with mobile microphones and a fetish for news articles don’t make the case …
Last Saturday, we paid a visit to the New York home of former Director of the Office of Management and Budget or OMB (like the OMB numbers you see on your tax forms) … David Stockman.
Of course, we plunked down our mics and recorded a FASCINATING interview at his kitchen table … looking out his penthouse window at the stunning New York City skyline.
If you have any doubt Stockman is a world-class brainiac, buy a copy of his EPIC tome, The Great Deformation.
Bring your lunch and dictionary, but it’s totally worth it. Only Robert Kiyosaki’s copy is more highlighted and marked up than ours.
You may not agree with Stockman’s politics, but he’s well-qualified to have an opinion on economic matters. So we listen carefully.
Stockman believes even higher interest rates are coming to an economy near you.
So if there’s any doubt all this airy-fairy macro-economic babble matters to YOUR Main Street investing … think again.
And be VERY thankful these things roll out slowly.
There’s still time to re-arrange your portfolio and activities to fall squarely in the “aware and prepared” camp … and NOT in the “WTF is happening?” camp.
Of course, you can’t just float along with the crowd … unless you’re very careful to pick the right crowd.
But even then, it’s dangerous to fall asleep at the controls of your portfolio.
If you’re super studious, you can probably load up on books, podcasts, newsletters, video courses, and news articles … and you’ll be ahead of most.
And if you’re like us, you’ll do all that.
But you’ll ALSO invest to get in the right rooms with the right people so you can have portfolio-saving conversations.
Since you’ve read this far, you should consider joining us at both or either theNew Orleans Investment Conference and the Investor Summit at Sea™.
It’s where we go to get around a lot of REALLY smart people for SUPER enlightening conversations.
And it’s arguably more important RIGHT NOW than in recent memory …
,,, because for many investors, this is the first time in their investing career they’ve faced a rising interest rate environment.
You can learn by trial and error (expensive and painful) … or by gleaning wisdom from seasoned investors and well-qualified subject matter experts.
It’s probably obvious which one we advocate.
Until next time … good investing!
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