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The Coming Tectonic Shift That 99% of Investment Professionals Are Unprepared For
The single most important issue for investors to focus on today is the coming rise in interest rates.
For 40 years, the financial world has experienced a bull market in bonds. What this means is that for 40 years, bond prices have risen while yields fell. As yields fell, it became easier and easier for investors to borrow money.
For simplicity’s sake, let’s focus on the 10-Year Treasury.
The 10-Year Treasury is the benchmark for risk in the financial system. All asset classes and interest rates are ultimately priced relative to the 10-Treasury yield.
The reason for this is that lending money to the US is considered to be the effectively “risk free” because A) the US can tax its citizens to pay you back or B) can print money. This, combined with the US’s low rate of defaults (the US has never officially defaulted on its debts, though there have been metaphoric defaults e.g. when we left the Gold standard)
Stocks, corporate bonds, mortgages, auto loans, emerging market stocks… everything you can name are ultimately priced based on their perceived risk relative to the “risk free” rate of lending money to the US for 10 years. After all, if you can earn 4% “risk free” why invest in a more risky investment unless you can earn more?
This is the basic philosophy underlying all modern financial analysis. It is applied by everyone from mutual fund managers to C-level executives looking to decide on whether to fund an expansion or not (again, if they can make 4% on their case “risk-free” any business venture they pursue should hopefully yield more than this if it’s worth the risk).
With that in mind, let’s take a look at the history of the 10-Year Treasury.
In 1980, at the depth of the last bear market in bonds, the 10-year was yielding around 16%. This meant that in general, if you borrowed money at that time, you would be paying more than 18% per annum on the loan (anyone who lent you money instead of the lending to the US Government by buying a Treasury, would be expecting a much higher rate of return for the greater risk).
So, if you’d borrowed $100,000 in 1980, you’d need to pay at least $18K to finance the loan per year (for simplicity’s sake, I’m not bothering to include principal repayments).
Obviously, with interest rates at this level, you’d think twice before taking out that loan.
The great bull market in bonds started in 1983. Since that time the yield on the 10-year has fallen almost continuously.
When thinking about this it is important to assess two things:
1) The psychological resistance to borrowing money/ investment risk shrank year after year.
2) The overall timeline and its impact on different generations.
For 40 years, with few exceptions, it became increasingly cheaper to borrow money. The flip side of this is that the overall “risk” of the investment world (remember that all investments move in relation to “risk free” 10-year Treasuries) shrank on an almost yearly basis for 40 years.
This was a truly tectonic shift in the investment landscape occurring over four decades. During that period we had the Long-Term Capital Crisis, the Asia Crisis, the Ruble Crisis, the Peso Crisis, the Tech Crash AND the 2008 Meltdown.
Throughout this period, despite these numerous crises, risk became increasingly cheaper. This is truly astounding and can be largely traced to the Federal Reserve (more on this later).
The second item is important because this time period (40 years) encompasses at least 2 if not 3 generations. A 30 year old who shied away from borrowing money at 18% in 1980 was 50 with children in their teens by the year 2000. That individual’s children would grow up in an era in which interest rates were below 10% for their entire lives and below 7% for as long as they could remember.
From an investor perspective, this means that any professional investor who was working in the late ‘70s/ early ‘80s would now be retired (e.g. a bond fund manager who was 25 in 1980 would now be 65). Put another way, there is an entire generation of professional investors aged 22-60 who have never invested during a bear market in bonds (a period in which risk was generally increasing).
In the near past, the last time the Fed raised rates was in 2004. And that was the first rate raise in four years. Put another way, the Fed has only raised interest rates once in the last 14 years.
So not only are we dealing with an investment landscape in which virtually no working fund manager has experienced a bear market in bonds… we’ve actually got an entire generation of investment professionals who have experienced only one increase in interest rates in 14 years.
Moreover, we must recall that throughout 2011-2012, the Fed continually pledged to hold rates at zero until as late as 2016. These repeated statements, made by numerous Fed officials, further inculcated investors with the belief that rates will not be rising anytime soon.
The markets are set for a dramatic re-adjustment when rates finally begin to rise. Whether it’s this week, next or a year from now, there is an entire generation of investing professionals who are totally unprepared.
This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://phoenixcapitalmarketing.com/special-reports.html.
This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.
Best Regards
Phoenix Capital Research
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People are already in massive debt. What will they do when rates rise and their home equity disappears? Rising rates are on the horizon. The Fed missed the boat and housing prices will be brought to their knees.
"Rising rates are on the horizon." -- and they will be indefinitely.
I shall be your most faithful slave if there is a sustained rate rise. R O F L
I read "Teutonic"
When markets are under captives by Oligarchs, there is no high or ZIRP as the price discovery mechanism is dusfunctional. Oligarchs want the ZIRP to go on so that they can still foster leverage into snake oils. (The fallacy lies in comparing today with past 40 years when interest have been more determined by freer market forces).
There is still a juice in the pensions, 401K and remaining savings with mutual funds, etc who are encouraged to go yield chasing.
Take the cue from foreign institutional investors and smart monies, they are in the short end of the Try Curve..F the interest just a temp shelter, a flight to safety in the most liquid space.
A whole gen of investment professionals are so desperate for their jobs and careers to keep the game going and if they have any brains will know that they cannot fight the force of deflation. Deflation cannot be controlled by the FED alone, there is the global markets and creditor nations (like China) who are exporting deflation.
Don't worry about hyper inflation with high interest rate, these will come at Stage 2 after deflation. Another article that spin with shallow arguments.
I'm pretty sure the dial on the Fed's interest rate machine only goes to 3.
Someday, Phoenix Capital Research will be right . . . Someday.
Yeah, but he understands the difference between shrink, shrank, and shrunk.
Ya know, I don't think rates will rise unless that is the way they intend to kill the dollar and the Fed. They have no method of putting this country in order without killing the international banks and restarting ... so they have no intention of putting the county in order.
There is a reason that it is said that money is the root of all evil.
I mean LOOK at this friggin' chart:
http://stockcharts.com/h-sc/ui?s=$NYA&p=D&yr=3&mn=0&dy=0&id=p83733137120
The summation index graph hit *exactly* zero and bounced slightly, this is *exactly* what I thought Yellen has been working on since before she even took office, and there it is.
There are no tectonic shifts anymore.
Of course there may eventually be a planet-buster, but that's a whole different enchilada.
Here are some points to consider if you think interest rates are going up any time soon.
1. The banking system cannot afford to pay so much as 25 basis points in interest on its quadrillion dollar derivatives bubble.
2. Rising interest rates will bring about collapses in all asset classes - stocks, bonds, real estate, precious metals. Remember what happened to gold and silver prices in 1980-81 as interest rates rose to double digits.
As someone previously mentioned, rates will rise when we reach the end game. That will be when confidence in money and/or the financial system simply evaporates. When that happens is anybody's guess.
For all the importance that numerous commentators place on The Fed's actions-and it is a very long list- consider that a U.S. dollar currency collapse is baked into the cake because the rest of the world is well along in the process of tapering U.S. debt holdings. They aren't selling, but (and you can include Belguim in the calculations) they are no longer net buyers.
Rising interest rates are guaranteed because, despite what The Fed is doing now, they are, whether some (or all) at The Fed are fully cognizant of this or not, now entirely dependent on private (hot) money to pick up the slack that now exists in the wake of the waning official and structural support for U.S. debt.
Lest anyone is confused, I'm not referring to the currency deals that have proliferated like mushrooms on the lawn after a rain storm. Those deals, mostly enacted by China with everyone else, are prophylactic measures that have been taken as a means to continue to conduct trade when the dollar finally goes Weimar as the result of The Fed being forced to print to support Uncle Sam.
And the reason that The Fed will have to print, and why rates won't simply rise, but will go exponentially higher, is because support for the U.S. bond market is now entirely a matter of the behavior of private hot money that can (and will vanish) as soon as the herd gets spooked. Look at a very long term chart of the TNX, and you will see the process of "getting spooked" is well underway as the mother of all inverse H&S is setting up on the chart. The last nine months of bond rally has not only done nothing to change the aspect of that chart, it has reinforced its appearance. The seven year bond chart's nine month correction off the market's lows from last winter is even more tepid than the ten year's. When "they" no longer want what you are selling, no one, including the facilitator of what is/was thought to be a riskless asset, has no leverage. That is what is setting up right now.
Well said mate....well said...
Yes ZIRP is counterproductive and presumably must end some time and presumably soon and it will be like getting out of a heroin addiction or worse.
Did you have another point?
No one will borrow for tens years at 2%. Why do you think they would at 3%?
I also question your premise that financial "professionals" are expecting lower rates. All that I know of are calling for higher rates.
What one wants and what one expects can be two different things.
40 years indeed. Can't this guy subtract? Or is he predicting the bond bull to run past 2020?
2014-1981 = 33
That was bugging me too. In the last _40_ years the world has seen massive interest rates if we're talking the late 70s and early 80s. That said, I agree rising interest rates will blow a hole in the boat. But when are Jesus and high interest rates returning? Any day now...
This bull will not end until all of the treasury bears are scalded, scorched and dead.
Wow anotgher Bond bubble post?
Can we not yet take it as overstated and an absolute given yet that:
1. Bonds are a massive cycle long run bubble
2. Rates are ridiculous there is no paper incentive to save
3. It was all done to refloat Banks that were insolvent on mark to mark basis on their secured mortgage portfolio
4. we cant ever raise rates significantly as Sov debt will quickly consume all tax revenue in interest payments
5. We all awaiting a reset point for paper currencies esp $.
The insightfulness comes in the timing, as you can be 'right' on the bond market but trading dead as they outlast you and squeeze out more 'phony' market 'safe haven' status.
We need mored detail in the modeling of the fallout to have an idea when to get back into property when is the final sign of capitulation on bonds.. etc.. No more hey ' Bonds is a bubble guys' duh!
Wow anotgher Bond bubble post?
Can we not yet take it as overstated and an absolute given yet that:
1. Bonds are a massive cycle long run bubble
2. Rates are ridiculous there is no paper incentive to save
3. It was all done to refloat Banks that were insolvent on mark to mark basis on their secured mortgage portfolio
4. we cant ever raise rates significantly as Sov debt will quickly consume all tax revenue in interest payments
5. We all awaiting a reset point for paper currencies esp $.
The insightfulness comes in the timing, as you can be 'right' on the bond market but trading dead as they outlast you and squeeze out more 'phony' market 'safe haven' status.
We need mored detail in the modeling of the fallout to have an idea when to get back into property when is the final sign of capitulation on bonds.. etc.. No more hey ' Bonds is a bubble guys' duh!
"Buy Boeing," my licensed, professional broker tolkd me last week:
Boeing Dreamliner engine fails over the AtlanticA Boeing 787 Dreamliner carrying 288 passengers had to divert to the Azores after an engine problem on a Thomson Airways trans-Atlantic flight last week.
http://seekingalpha.com/news/1922955-boeing-dreamliner-engine-fails-over...
Glad to see they've ironed out their problems.
"Metaphoric" defaults? "...the US has never officially defaulted on its debts, though there have been metaphoric defaults e.g. when we left the Gold standard...." Is that what Phoenix Cap says? What's metophoric about defaulting on the Continental Dollars? What's metaphoric about defaulting on gold bonds, 1933? What's metaphoric about defaulting on Constitutionally protected gold and silver backing money, 1933? What's metaphoric about defaulting on the value of paper money through planned inflation, 1913-2014? What's metaphoric about defaulting on silver certificates, 1964? What's metaphoric about defaulting on gold backed dollars to foreign governments, 1971? The US has defaulted many times, and is on its way to the mother of all defaults, speaking non-metaphorically. This article - sophomoric !!
Look. Guys. The cream did NOT rise to the top of the country. Wall Street is a stinky nepotistic joke- these people didn't get their jobs based on the merit of LEGITIMATE credentials.
Again.
CREAM DID NOT RISE TO THE TOP IN THIS COUNTRY= BAILOUTS = FAILURE.
Duhmerican boomers and their chosen morons. Um... so how do wages rise in PURCHASING power and employment go up when we failed to correct fundamental problems? Like the massive trade/INVESTMENT DEFICITS with the world. They didn't bother to get China to remove it's barriers to the uS financial sector- go to Macau to sell stocks.
http://www.bloomberg.com/news/2014-08-10/how-bond-traders-profited-off-a...
Investors are either manipulating or just fucking up and getting a bailout anyways.
That goes along the saying of a former boss of mine that "Crap breeds crap". I guess this is true until S(*really*)HTF.
I don't understand. If the bull market in bonds started in 1983, why would this be a 40 year bullmarket? WTF?
Either he can't subtract or he is predicting it will last until 2023.
So let me throw this question out to my ZH brothers: I'm 59 and a commercial real estate investor. I have about $6-7 mil. in commercial real estate equity and $1.2 mil. in mortage debt. I'm thinking about retiring and persuing other interests. What would you do?
Xploregon,
Cash out, buy TIPS, coast for your remainder, you only have to impress yourself, NOT the conned masses. Look at how much is seriously out of order
http://patrick.net/forum/?p=1246619
A low profile is indicated ...
WRONG advice for the coming hyperinflation...debt good, real things good, cash bad.
There has not been a single deflationary collapse of a purely fiat currency..ever.
How did you do in the last downturn? I expect another. I am in the architectural design business and know that the retail designers got wiped out in 2009. They are doing real well right now. I suggest selling some of the weaker positions now that things appear strong. Buy some PMs.
Sell the free and clear real estate with substantial downpayment owner financing. Repossess after values drop and payments stop. All the while earning interest. Invest some of the down payments in gold, silver and lead.
too late for that...end coming soon...
Sell, buy Gold and a soft commodities index.
You can buy Russian Stocks, maybe the Moscow Exchange. Russia has no leverage in its economy or very little.
http://trustedfinanceguides.com/wp-content/uploads/1970/01/retire-early.jpg
Oh yay. A BOOMER.
We've got enough overpriced rentals where people are forced to live with strangers because a few white racist college students have rich racist parents.
While I subsidize his or her real estate faux pas "values" so you can rob people in need of shelter (me) during STAGFLATION, rob me of PURCHASING POWER, where I get to live with racist tweaker psychotic landlords that beat me for a mere $800/month-makes racist and derogatory remarks, plus the room, doggie defecation and hard drugs on the property with no locked doors and an inept deputy task force that gets called for everything.
THat's before they steal electricity from their tenants, slander, libel us--- yeah you're like so awesome. Everybody's going to totally love you, I can tell.
Then I get to pay for y'all's Social security, disability, medicare, "medical" marijauna, heroine needles all - that's only if I'm LUCKY to break the lower middle class barrier to avoid living in a blockbustered shit hood where the car is vandalized.
My advice to you is to take your Metformin, hedge it with argenine and viagra- chase it with spanish fly and statins- then hang yourself upside down from a hook for a few hours.
Since pot is now legal, please feel comfortable and reassured that your EMS paramedic in training is a total stoner who is like-totally in control. Just trust me on this one, he can do no wrong. :)
Look you freek'in psyco (assuming that you're addressing me); I'm NOT in residential real estate, I'm in COMMERCIAL as in small business that's owned by real, hard working people who have homes and families and EMPLOY people. So do I. You might have heard of us...the "back bone of America"...and we're under attack.
My success depends upon their success.
If you don't have anything cognizant to offer, get back on you're crazy train.
STRIPMALLS? Do your children know? I hear pizza's gonna be big! Oregon I hardly knew ya. Wait! Oregon? Three words: Sun tanning salons! It's the browning of America. Get ahead of the curve!
Honestly, you have nooooo idea how many people have been contacting me looking for medical maryJ outlets. Put one inbetween a pizza and a tanning business might be a BINGO! But I can't.
Um:
"Hello. I have six million dollars. What do you think I should do with it?"
Fuckhead.
Obviously you're going to lose it all. The skill set that got you your six million is not the same skill set where you keep your six million. So I'm with the other guy. You made six million because you're a baby boomer. You're not smart (posting this idiocy on the internet) and you're not hard working. So you will lose it all. The state will find ways to steal your shit that you (obviously) haven't thought of yet.
Envy
the sin that oozes from the less successful
Dear Mars Space Cadet- I have value in real estate I've worked my whole life for and, I work it every day. I haven't taken a "real"vacation in three years now. I repair roofs, do general maintenance, do all the management, leasing and anything else I can within my "pay grade" to save my tenants money. I hardly think that I'm going to "lose it all" but, I'd like to keep as much as I can and pass what I can to my children. I'm well aware of the many "creative" (and constitutionally illegal) ways .gov has set things up to bleed us now and, rob us in the future. As insurance, I've "stacked" a protective portfolio also.
You error in your judgment I assure you. How's that 7/11 job working out for you?
Ok, so now you have 6 million dollars in real estate, and you have "stacked" a "stack" of whatever, I assume you mean gold and silver.
Ok genius, Mr. Rocket Scientist, check this out:
http://lmgtfy.com/?q=What+is+OPSEC%3F
Anything else you'd like to share on the inter-fucking-net? Your Social Security Number?
Nope. Just reality sonny.
Dipshit, did you look up the phrase OPSEC?
Didn't have to. Tell you what...if you think I've given up to much intel, and you believe YOU are so smart, call, snail mail or email me.
Or will you just beam yourself up to my place space cadet?
Commerical real estate is something I would generally stay away from like the plague especially because so many factors are increasingly lining up against it especially since the conversion to online buying (and delivery) has just really started to pick up.
Need to know a lot more about what you own inclunding - where they are located, type of building, and what kind of businesses are your tenants, and the demographics mix of where they are located.
Me I stay strictly in residental and residental development because it is what i know and where my family/personally I have the most experience and skills.
My locations are essentially strip mall or free standing buildings. Internet competition doesn't come into play because the businesses are all services which can't be "shipped" such as restaurants, cleaners, hair salons, nail salons etc. One of my major fears is a few of the businesses are "elective" non necessity's such as dance studio and dog day care/wash businesses which when (not if) TSHTF, will be the first to fold in my opinion. The neighborhood however is directly adjoining arguably the best "monied" in my major west coast city.
I was in residential for years before I went full on commercial. Frankly, I got burned out of the Terrible T's- Termites, Toilets, Tenants and Trash (No offense to "Combatsnoopy" and "Seize Mars").
Ignore the class warfare trolls. For all the libertarian talk this site has more than its fair share of radical communists socialists and anarchist idiots. Most of those comments were jealousy plain and simple.
If you're commercial and decent at it then you most likely have no personal guarantees or at least very few of them. If you have them then get rid of them, you should have no problem refing them out in this market. Once that's done I would take a hard look at your asset class and who the customers of your customers are. Can they afford what your customers are selling? What if prices go up and wages go down? Do they need to borrow money in order to purchase those goods? Will they be able to do that if interest rates rise?
For those assets that fail those tests, take advantage of the ridiculous cap rates. Clean up your balance sheet, liquidate the soon to be losers. If you think you own an asset that is 80% leveraged, you better be able to walk away clean if you are wrong. Go as much debt free cashflowing asset as possible. We are talking about a depression coming. You have bet on inflation your entire life, deflation is something entirely different. Best of luck. We are all going to need it, no matter how prepared we think we are.