On The Verge Of A Major Turning Point

Authored by Simon Black via SovereignMan.com,

This morning I had the pleasure of being buried in a mountain of paperwork– the penalty for trying to do basically anything in the financial system these days.

It seems that everything, from sending a wire transfer to establishing a new account, comes with endless bureaucratic hoops to jump through as you’re forced to convince these people that you’re not a criminal money laundering terrorist.

In my case I was opening a new brokerage account. And as I went through the process, the questionnaire asked me about my risk tolerance.

Was I seeking low risk and low returns? Or high risk and high returns?

This is one of the oldest fallacies in investing– the idea that risk and return go hand in hand.

I remember taking a personal finance class more than 20 years ago and seeing a neat little graph in the textbook showing a straight line at a perfect 45 degree angle: the higher the risk, the higher the reward.

Sadly there was no option for “None of the above.” Because in truth I prefer strong returns with minimal risk.

And for anyone willing to put in the hard work, there are options to achieve this outcome.

We’ve been discussing this concept a lot lately because I think we’re on the verge of a major turning point.

Just consider what’s happened in the last two weeks alone:

Yesterday, the Federal Reserve raised interest rates, as expected.

But the Fed also signaled continued rate increases based on concerns about inflation and an overheated economy.

Two days earlier, the Department of Labor published data showing that inflation in the US reached a 6-year high.

And earlier this month the Labor Department reported the lowest unemployment rate in decades.

(The unemployment rate is a deeply flawed metric. But regardless, the central bank typically raises interest rates when it gets too low.)

This is all happening at a time when the federal government has racked up a record amount of debt that is only going higher.

The Treasury Department’s own estimates are that it will borrow trillions of dollars more over the next few years.

This is going to be incredibly difficult given that Uncle Sam’s most reliable lenders over the past decade (China, Japan, and the Federal Reserve) are no longer buying US debt.

And because there are fewer buyers for US government bonds, the interest rates on those new bonds will be higher. It’s basic supply and demand.

Bottom line, all of these trends lead to higher interest rates.

And for an economy that has been addicted to 0% interest rates for more than a decade, this will likely have serious consequences.

One obvious consequence is that higher interest rates tend to put pressure on asset prices.

Think about real estate as an example: most people borrow money to buy property.

If a buyer makes enough money to be able to afford a mortgage payment of $3,000 per month, that’s enough to buy a $827,000 house (assuming a 20% down payment) if interest rates are 3.5%.

But if rates rise to 5.5%, that same $3,000 per month only buys a $654,000 house.

Higher rates mean buyers can’t pay as much, so real estate prices fall across the board.

It’s similar with stocks.

For the past several years, companies have borrowed enormous quantities of money and used a lot of it to buy back their own shares.

Stock prices surged as a result of this artificial demand.

Rising interest rates should significantly diminish these debt-fueled buybacks, meaning that one of the biggest contributing factors to rising stock prices over the past few years is going away.

So no matter whether you’re buying a house or investing your retirement savings, we’re reaching a turning point where there’s a lot of risk looming over important financial decisions.

And that takes me back to risk vs. reward.

Bottom line, you don’t have to take a lot of risk to achieve higher returns.

Here’s an easy example: right now the biggest banks in the US pay almost nothing to their depositors.

Bank of America’s interest checking account pays just 0.01%. JP Morgan Chase pays a whopping 0.02% on a 1-month Certificate of Deposit.

The government of the United States, on the other hand, is currently paying almost 2% on a similar product, the 28-day T-Bill.

There’s virtually no difference in risk: loaning money to your bank, versus loaning money to the government.

To be clear, neither is risk-free. Not by a long shot. But I’m illustrating that the risk differential between the two options is essentially zero.

Yet the reward with T-Bills is 100x as great. So you’re taking similar risk but achieving a MUCH higher reward.

It seems obvious. But most people don’t think about this.

We’ve been trained to believe that our savings belongs in a bank, that our investment capital belongs in the stock market, and that higher returns require higher risk.

But there’s an entire universe of options that defies these conventions.

We talked about a few of these yesterday— including T-Bills, asset-backed Peer-to-Peer loans, and deep value investments.

Deep value is essentially buying $1 for 50 cents.

This is our Chief Investment Strategist’s primary area of expertise– he routinely finds absurdly undervalued businesses that are selling for a fraction of their liquidation value.

Think about it: if you only pay 50 cents for an asset that’s legitimately worth $1, you stand to double your money.

Yet most of the risk has already been taken off the table. So there’s not much downside remaining.

Low risk. Strong return.

Whatever you choose to do, it’s important to start paying close attention to what’s happening.

The people who drive these policy decisions are being EXTREMELY vocal.

The Federal Reserve. The Treasury Department. They’re telling us what’s coming next. Ignore them at your own peril.

And to continue learning how to safely grow your wealth, I encourage you to download our free Perfect Plan B Guide.

Comments

Life of Illusion NVTRIC Thu, 06/14/2018 - 19:11 Permalink

 

Think about real estate as an example: most people borrow money to buy property.

If a buyer makes enough money to be able to afford a mortgage payment of $3,000 per month, that’s enough to buy a $827,000 house (assuming a 20% down payment) if interest rates are 3.5%.

But if rates rise to 5.5%, that same $3,000 per month only buys a $654,000 house.

LET THE REAL MARKET TAKE OVER 

THAT 827K HOUSE WOULD BE 400K

NOT WITH FED DOING THE MBS BUYNIG..

https://www.newyorkfed.org/markets/ambs_operation_schedule.html

In reply to by NVTRIC

duo Life of Illusion Thu, 06/14/2018 - 19:52 Permalink

There was a retired guy that lived down the street.  We met at a neighborhood party 10 years ago.  Back then he was making $150K a year in interest on his savings, was buying a new car every year, and had contractors working on his house all the time.  He planned on leaving his principal to his grandkids.

Last time I saw him 3 years ago, he was living as a poor man.   Contractors were no longer hired.  He had an old used car.  He was burning through his grandkid's inheritance just to stay alive.  His house went up in value $200K but he could give a rats' ass.  This is ZIRP.

In reply to by Life of Illusion

shortonoil NVTRIC Thu, 06/14/2018 - 19:49 Permalink

What the FED is doing by raising interest rates is restricting the number of buyers of US dollars at the low income sector of the economy, and raising the price to everyone else! It is probably a move that will increase their profit margins. The "How to Make Money With A World Bank" book was never finished.

In reply to by NVTRIC

Quantify Thu, 06/14/2018 - 19:06 Permalink

Yea. I will have to pay more for shit. But at least I have a 3.25% locked in mortgage. And a 1.99% auto loan. And Trump might be pushing for legalizing MJ, so hopefully in 8-10 years I can retire and step out in the backyard for a joint.

HRH of Aquitaine 2.0 Quantify Thu, 06/14/2018 - 19:14 Permalink

2.875%, here. I refi'd right before Trump was elected and closed in December 2016. I don't think I will see rates like that, at the cost I paid (almost nothing) for the rest of my life.

You can take a vacay in many states, now, and buy legal MJ. Trust me, the older you get the less interesting it becomes. I still buy a gram once or twice a year. Meh. The thrill is gone.

In reply to by Quantify

HRH of Aquitaine 2.0 Able Ape Fri, 06/15/2018 - 01:16 Permalink

Exactly. It isn't as much fun now that it's legal. Do I get excited about buying onions at the grocery store? Thyme? Even oyster mushrooms? Not really. Finding still fresh wild morels is exciting! Same for fresh venison heart. Or moose sirloin. Yeah, priorities and perspectives change, over time.

Plus the neighbor's would smell it. My neighborhood has families and is pretty laid back. Not cool to piss off the neighbor's.

In reply to by Able Ape

BadSpybot Thu, 06/14/2018 - 19:37 Permalink

Somehow the interest rate I pay on my credit cards never made it to 0% or even single digits. I guess the banks never thought of passing along the savings.

Endgame Napoleon Captain Nemo d… Thu, 06/14/2018 - 23:49 Permalink

I don’t understand half of this stuff and have no skin in the game, anyway. For the minority of Americans with extra money, most of the options sound bad in different ways. They are Eeyore options: choices sure, but bad choices. 

This guy seems to be saying that, if people study their options closely, they can find a few better alternatives. At the few points in life when most people have any extra money after basics are covered, they do not have the time (or the expertise) to take advantage of few, lucrative avenues that are open to the plebeians.

In reply to by Captain Nemo d…

looks so real Thu, 06/14/2018 - 21:30 Permalink

Why are prices raising right now? Is it labor shortages or is it commodities shortages? If it's labor shortages 103 million people are out of work a reason for this no one wants to fill out lots paperwork and not get hierd so they convince themselves that nobody is really hiring and don't want to waste time getting their hopes up.

Endgame Napoleon looks so real Fri, 06/15/2018 - 01:44 Permalink

Many Americans have been put through the mill, working temp or churn-mobile jobs, which 1) do not pay enough to cover rent that absorbs more than half of their earned-only income, particularly for the single & chilldless and the single parents with kids over 18.

These job applicants must cover all household bills on the low wages alone without spousal income, child support that covers rent or layers of monthly welfare that covers everything from rent to groceries for the womb-productive single earners, when they work part time to stay under the income limits for these programs, in addition to the up to $6,431 in refundable child tax credits that hoist up their pay.

Yes, many of us who lack unearned income are tired of jumping through endless hoops to get low-wage churn jobs. We cannot even count on a steady flow of low-wage compensation. 

We find out that, even when we are one of the few employees meeting the quotas every month by coming to work every day and staying all day, it has zero reward in this rigged labor market, where employers in “voted best for moms” jobs openly seek & retain a workforce that has “somethin’ comin’ in” from spouses, ex spouses or welfare & child tax credits. They want employees who have unearned income covering their major household bills; this makes the low pay and / or part-time hours acceptable to them.

Many companies post the same exact churn job, over and over, filling the slots with temps, hired by five different temp agencies. All kinds of hype is spewed by the young temp agency employees and by management, but the companies appear to do it just to cover brief upticks in work volume or anticipated volume that does not materialize.

In the few non-temp jobs, crony-parent managers are often as absentee as the moms with unearned streams that they prefer to hire and retain. They play a lot of games with hardworking employees, praising the hard workers loudly at first to get them to sell more to bump up their numbers, then churning them while retaining fellow, frequently absentee and non-quota-meeting parents.

They churn & burn, as most workers are easily replaced in the era of automation, even when they are one of a handful of employees actually meeting the quotas. Most non-managerial staff cannot get or retain a job that pays enough to cover rent and a full range of basic household bills by hard work and quota meeting. For non-managerial staff, other things———-non-work-related things———mean much more than hard work and production. 

Workplaces revolve around a lot of mean & cutesy theatrics, oscillating between mandatory participation in silly time wasters—like baby-mommy-look-alike-bulletin-board-decorating contests, Halloween dress-up days, tacky Christmas sweater contests, family day picnics, etc.—and a lot of needless cutthroatery that is draining without increasing sales volume or account retention.

Mindless mom-bonding rituals for crony-parent employees are what managers often stress more that production, more than sales numbers and activites that focus on paying customers, such as the number of accounts generated & retained.

Yes, job seekers have become skeptical, thinking nothing matters to employers but the expense reduction of an expendable workforce and a workforce that does not need decent pay or hours due to major household bills that are covered by spouses, ex spouses or welfare & child tax credits.  

Most of the few jobs with benefits and wages sufficient to cover rent are concentrated in the households of dual-earner parents who hire / retain mostly other “needs-the-job” parents who understand “what it is like to raise two boys.”

A mom manager of a worker’s compensation company in the field where I hold multiple licenses said it best, as she bolted out the door in the middle of the work day during an interview with a childless woman she had no intention of hiring for her all-mom workplace: “Busy single moms never get a night out.” She went home to get ready for a date.

If I had been hired, I would have seen many above-firing mommas, taking whole mornings, whole afternoons, whole days and whole weeks off, in addition to their pregnancy leave and PTO. Even if I met the in that case production quotas, rather than the sales quotas, those mommies would have fired me for the tiniest, pettiest of infractions if I did not fit in their workplace social clique. But those mommas decided right away that I was not a culture fit for their social club called “work.” 

That was one of a handful of jobs I have seen that pay enough to cover rent and a full array of basic household expenses, including for college grads with multiple licenses and years of work experience. It is better to have none of that, in fact, but to instead have streams of unearned income for womb productivity.

For good reason, many job seekers simply do not believe that they will secure a job with wages sufficient to cover rent by going through all of the hoopla, time and time again, since they have already tried that route. 

Perhaps, the hoop jumping to secure 6 weeks of temp work that will not enable a single, childless employee with no unearned income from a spouse or government to sign a lease agreement is a little less arduous since they dropped Obama’s program, which allocated $9,000 tax credits to employers per mom on SNAP hired.

Non-womb-productive temp job applicants who do not receive pay-per-birth freebies from government to hike up their wages—like free rent, free EBT groceries, monthly cash assistance, refundable child tax credits up to $6,431 or $2,000 in non-refundable child tax credits–had to fill out a lot of additional paperwork to accommodate that rigging of the labor market. We had to specify that we were not moms—I mean “working families”— on SNAP.

Call us whatever you want, but many of us do not relish the thought of one more job interview, where momma managers say, as you sit down to interview after driving for an hour and waiting for an hour: “We have 17 women in here [moms, unlike you], and we HAVE to have someone who fits in” [our back-watching gang of frequently absentee and above-firing moms, and you (if you are one of the rare non culture fits hired) will be bullied out with no UC to cover rent between churn jobs over the slightest of petty trivialities, even if you never miss a day of work and meet the quotas every month].

People like me understand that such unprofessional people are “the talent.” But nonetheless, no, we do not relish the thought of more yahoo interviews for positions that we are plenty qualified to hold, with licenses in the field, experience and a degree to boot, where we are told that “YOU just don’t know what it is like to raise two boys,” which is a requirement for....this.....”job.”

It is not just the motherload of paperwork. It is multiple, jerk-you-around, impolite interviews and assorted hoop jumping, just to get a churn job that is temporary, part time or that pays too little to cover rent. After you have done this for years, no, you do not believe it will result in anything remotely professional or decent.

But you have to sit there, going through the motions, politely, even when being overtly jerked around. If you have good manners, you go through all of this without letting unprofessional interviewers who are often playing a bunch of needlessly impolite games with job applicants know that you regard it as a colossal waste of time at best.

Many Americans are jaded about this rigged, crony-corrupt job market, yep. 

In addition to the many crony-corrupt mom-gang jobs, there are also a lot of outright scams———jobs that are not really jobs. You interview over the phone for an hour, driving for an hour to interview, only to find out that one more nice-family scammer advertised a job that is really an attempt to sell something without purchasing a lead list.

I have seen everything from “nice families,” trying to sell franchise businesses or books of business by using job boards in this deceptive manner to other types of scammers, using office space in affluent areas of the city. They lure in job applicants, using them as prospects for products that they (or their wives) are selling or to add fresh chumps to pyramid schemes that will cost the job applicants money. 

Each time you go through this, it is presented as a “job” until the moment when they realize that you are not a good prospect for whatever they are selling. 

They require you to fill out a bunch of employment paperwork with tons of information, just like you do when you get legitimate (but churn-mobile) jobs, gig jobs or temp jobs. Are you skeptical? Sure, you often are after you get there, but you do not really know. Many jobs that end up producing a little income likewise look less than legit. Since you need money, you go through all of these motions, regretting filling out all that paperwork in most cases. 

It is an endless, fruitless, mostly impolite and often scammy merry-go-round, where hard work and even most numerically verifiable production for non-managerial employees is unrewarded—-pay-wise or job-security-wise. Many people who are hard workers when employed are staying out of this ZOO as long as possible, yes. What, prey tell, is the reward for rejoining the zoo? The reward is more child tax credits for babyvacationing parents. 

In reply to by looks so real

whatisthat Fri, 06/15/2018 - 06:32 Permalink

I would observe the wall street party is over, and interest rates will be normalized at 8% to ensure financial security of what is important to American taxpayers....