We’re just back from yet another EPIC Investor Summit at Sea™. If you missed it, be sure to get on the advance notice list for 2020.
It’s hard to describe how transforming and powerful the Summit experience is. So we won’t.
Instead, today’s focus is on the flip side of the Fed’s flop on interest rates … in context of the #1 thing Robert Kiyosaki told us he’s MOST concerned about.
We recently commented about the Federal Reserve’s abrupt reversal on plans to raise rates and tighten the supply of money (actually, credit … but that’s a whole other discussion).
The short of it is … there’s more air heading into the economic jump house.
Based on the mostly green lights flashing in Wall Street casinos since then, it looks like the paper traders agree. Let the good times roll.
Real estate investors care because the flow of money in and out of bonds is what determines interest rates.
When money piles into bonds, it drives interest rates LOWER.
Not surprisingly, as we speak … the 10-year Treasury is yielding about 2.3% … compared to nearly 3.3% less than six months ago.
While a 1% rate change may not seem like much, it’s a 43% decrease in interest expense or income (depending on whether you’re borrower or lender).
So as a borrower, your interest expense is 43% lower. Obviously, with record government debt and deficits, Uncle Sam needs to keep rates down.
But as a lender (bond investor) you’re also earning 43% less. And yet, lenders (bond buyers) are lining up to purchase.
That tells us they probably expect rates to fall further and are speculating on the bond price.
But whatever the reason, they’re buying, so bonds are up and yields are down.
As you may already know, lower Treasury yields mean lower mortgage rates. So this headline was quite predictable …
Mortgage Rates are in a Free Fall with No End in Sight – Washington Post, 3/21/19
Falling mortgage rates are bullish for real estate values because the same paycheck or net operating income will control a bigger mortgage.
This purchasing power allows buyers to bid up prices … IF they are confident in their incomes, and IF their incomes aren’t being directed towards rising living expenses.
So lower interest rates don’t automatically mean a boom in real estate equity. But they help. We’ll probably have more to say about this in the future.
For now, let’s take a look at the other side of falling rates … the impact on savers and especially pension funds.
Remember, if you’re investing for yield, your income just tanked 43% in only six months. Unusually low interest rates creates problems for fund managers.
During the Summit, Robert Kiyosaki revealed he’s VERY concerned about the global pension problem.
Low interest rates are only one part of the problem. A much bigger part is the demographics and faulty model underneath the pension concept.
The net result is there’s a growing disparity between pension assets and liabilities. And it’s not a good one.
Like Social Security, both public and private pensions worldwide are on a collision course with insolvency … led by the two largest economies, the United States and China.
This problem’s been brewing for a long time. But it’s a political hot potato and no one has a great answer. So the can keeps getting kicked.
But we’re rapidly approaching the end of the road. And this is what has Kiyosaki concerned.
Yet few investors are paying attention … probably because it all seems far away and unrelated to their personal portfolio.
However, the pension problem has the potential to affect everyone everywhere.
The reasons are many, but the short of it is the problem is HUGE and affects millions of people. The pressure for politicians to do SOMETHING is equally huge.
Peter Schiff says the odds of them doing the right thing are very small.
Our big-brained pals say it probably means 2008-like mega money printing and bailouts … except even BIGGER.
So what does all this mean to Main Street real estate investors?
Keep in mind that some of the biggest pension problems are states and local municipalities. California and Illinois come to mind.
Unlike private corporations, public pensions don’t have a federal guarantee.
But even if they did, Uncle Sam’s Pension Benefit Guaranty Corporation (PBGC) is in trouble too.
According to this government report, the PGBC will be broke in 2026 …
“ … the risk of insolvency rises rapidly … over … 99 percent by 2026.” – Page 268
Sure, the Fed can simply print all the money needed to save the PGBC … and Social Security … and more … but at the risk of ruining faith in the dollar.
As we detailed in the Future of Money and Wealth, China’s been systematically moving into position to offer the world an alternative to the U.S. dollar.
Will they succeed? No one knows, but it’s yet another story we’re paying close attention to.
Meanwhile, unlike Uncle Sam, states and municipalities can’t just monetize their debts away with a little help from the Fed.
Of course, we’ll bet if the stuff hits the fan, the Fed will “courageously” attempt to paper over it … just like they did with Fannie Mae and Freddie Mac in 2008.
But many observers contend the Fed’s recent inability to “normalize” either rates or their balance sheet means they might not have the horsepower.
In other words, it may take MORE than just the full faith and credit of the United States to persuade the world the dollar is still king.
Oil and gold might be more convincing. Perhaps this explains some of Uncle Sam’s recent foreign policy moves?
Of course, that’s conjecture FAR above our pay grade.
But until the pension problem becomes a full-blown crisis and federal policy makers attempt to ride in on their white horses …
… cash-strapped states and municipalities are on their own … and likely to do desperate things in their attempts to stay solvent.
Some will adopt policies designed to attract new business and tax revenue.
But we’re guessing most will push the burden onto consumers, businesses, and property owners. That seems to be the way politicians roll.
So when you’re picking states and cities to make long-term investments in, pay attention to the fiscal health of the local governments.
And if your tenants are counting on private pension benefits, they may not be aware of 2014 legislation allowing a reduction of those “guaranteed” benefits.
If YOU have any direct interest in private pensions, you should read this page.
You’ll discover that plan participants can vote against a reduction. But even if most who vote reject it … if not enough people vote, it can pass anyway.
For retired carpenters in Southwest Ohio, benefits drop on April 1, 2019 … along with their ability to pay you rent.
The bad news is the pension problem is a slow-motion train wreck. It’s rolling over small groups of people a little at a time … but it’s building momentum.
The good news is it’s slow-motion right now, so there’s time to watch, learn, and react.
But Kiyosaki says it’s a big deal that’s probably going to get a lot bigger.
From a real estate investor’s perspective, some markets will lose, and others will gain.
Choose carefully.
Until next time … good investing!
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