Market Perspective

Understanding How “This Time is Different” to Make Great Investment Decisions – Week 5

Posted by on Oct 30, 2018 in Ned Massie, Perspective | 0 comments

What is Different This Time – The Real Estate Market: In our previous blogs, we have illustrated the fact that rising mortgage rates typically mean a reduction in the value of real estate. There are a number of facts in addition to interest rates that determine the severity of the impact of the increasing interest rates, such as household income growth, rate of inflation, etc. Just focusing on increasing interest rates and therefore, higher mortgage rates, one would expect the real estate market to suffer severe problems. Once again, the 2017 Tax Law gives reasonable hope that a transition will be bumpy but achieved without too severe a disaster. The key in the real estate arena are the Section 179 assets, typically equipment. From a seminar I attended, it appears the 2017 Tax Law broadened what qualifies as Section 179 assets. If this is correct, it could create an incentive to invest in commercial real estate because of the increase of the after-tax return on commercial real estate investments. The effect is similar to the decrease in corporate tax rates working to increase corporate profits to offset the effects of stock values of increased interest rates. Once again, the change in the Section 179 assets may offset some of the effects on real estate values of increasing interest rates. The group that designed the 2017 Tax Law were Absolutely Brilliant. I am not saying it is perfect, but the 2017 Tax Law provides our economy with a reasonable chance to transition back to normal without a financial catastrophe. Pray it works, because the alternative is total collapse. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land....

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Understanding How “This Time is Different” to Make Great Investment Decisions – Week 4

Posted by on Oct 24, 2018 in Ned Massie, Perspective | 0 comments

What is Different This Time – Financial Markets: The 2017 Tax Law has numerous positive benefits. In this case, we are going to focus just on the values of stocks and other financial instruments. In our last blog, we talked about how higher interest rates should lead to lower asset values and quantified that impact on the real estate arena. You will recall that higher interest rates could mean a reduction in values of approximately 25%. If the financial markets, including publicly traded stocks, suffered a 25% decline, that would be called a financial panic. The stock market volatility over the last few weeks reflects the stock market attempting to calculate the impact of higher interest rates on stock values. If the 2017 Tax Law did not exist, the higher interest rates appeared to be permanent, and nothing else changed, then the impact would be a financial crisis similar to the Great Recession or perhaps even the Great Depression. Fortunately, the 2017 Tax Law was passed. We are experiencing the potential problems of transitioning away from QE, Quantitative Easing. Raising interest rates as part of normalization simply exacerbates the effect. Therefore it is critical to understand one of several IMMENSE BENEFITS of the 2017 Tax Law is the reduction in corporate taxes. That single event dramatically increases corporate profits. The increase in profits could easily offset the increased cost of money, called interest rates. The result…the stabilization of stock values. That is not the same as removing volatility from the stock market. Whereas normally rising interest rates would mean lower stock prices, because of the 2017 Tax Law we have enjoyed both rising interest rates (Normalization) and a rising stock market. The result is a VERY STRONG possibility that the financial markets may remain stable contrary to every other transition out of Quantitative Easing that has occurred in the economic history of the world. The group that designed the 2017 Tax Law were Absolutely Brilliant. I am not saying it is perfect, but the 2017 Tax Law provides our economy with a reasonable chance to transition back to normal without a financial catastrophe. Pray it works, because the alternative is total collapse. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is...

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Understanding How “This Time is Different” to Make Great Investment Decisions – Week 3

Posted by on Oct 17, 2018 in Ned Massie, Perspective | 0 comments

The Cost of Normalization: The formula that is used to value the stock of publicly traded companies has two leverage points, anticipated rate of inflation and interest rates. For this discussion, the easiest way to understand the formula is that if interest rates go up, stock prices go down. Bonds are similarly inversely affected by interest rates. In the exact same manner real estate values are influenced by interest rates, in particular the mortgage rates. The higher an interest rate a borrower has to pay on a loan for a real estate investment, the higher the rate of return the investor wants to obtain on that real estate investment. If the interest rate paid for the loan is higher than the rate of return on the real estate investment, that is called “negative leverage”. Obviously, it is a very dangerous position and it means someone made a very bad investment because they are losing money. Perhaps the simplest way to illustrate the impact of interest rates on real estate values is to look at housing: If a potential home buyer can afford a $1,000 per month principle and interest payment and interest rates are 3.5% per annum for a 30-year fixed rate mortgage, then that borrower can borrow approximately $223,000. However, if the interest rate on the 30-year fixed rate loan becomes 6%, then that same borrower can only borrow about $160,000, about 25% less. The lower amount that the buyer can borrow means that their purchasing power relative to a home has been reduced by about 25%. This ignores a lot of factors, but it gives a very simple illustration of the impact of higher interest rates. If a home buyer’s purchasing power is reduced, that takes some buyers out of the market thus slowing the market/economy and puts downward pressure on home prices. Does this sound familiar? This impact of higher interest rates will be felt across the economy. The 2017 Tax Law is brilliantly designed to offset some of the impacts, but not all of them. I need to provide to you some more information before we have that...

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Understanding How “This Time is Different” to Make Great Investment Decisions – Week 2

Posted by on Oct 10, 2018 in Ned Massie, Perspective | 0 comments

Normalization: For this portion of our discussion we have to define the term “normalization”. In economics normalization refers to the central bank moving interest rates back to a “normal” relationship. Our central bank, The Federal Reserve Bank (The Fed), is continuing to unwind the Quantitative Easing (QE) it did during the Great Recession. The Fed influences the American economy via its control over interest rates. The Fed lowers interest rates when they want to encourage economic growth by increasing both liquidity and asset values. The reverse is also true. Having held interest rates at abnormally low levels since December 2008 as The Fed aggressively encouraged economic growth in our country during the Great Recession, The Fed is now raising interest rates in an attempt to get the financial markets back to “normal”. From a long-term perspective on the economy, it is critical that our USA financial markets get back to a more normal state both from a stability and future economic growth perspective. An important question is “What is normal today?”. A review of 150 years of economic history shows that there are many definitions of “normal” financial markets. During my almost 48 year career, I would define a “normal” financial market as a Federal Funds rate around 4%, 10 year Treasuries around 5%, and mortgage rates around 6%. To me that is Historical Normal. During the Great Recession the Federal Funds rate was 0% to 0.25%, ten-year Treasuries were around 2%, a 30-year fixed rate mortgage was 3.5%, and interest rates paid on savings accounts were as low as 0.19%. Clearly those are abnormal rates compared to my Historical Normal. But they existed for so long that they began to feel like they were a New Normal. The inherent risk of normalization is that adjusting back to higher interest rates because they are “normal” will mean adjustments in asset values. That is a nice way of saying there is a high risk of a total collapse in stock, bond, and real estate values. In the economic history of the world, I am not aware of a single case of “normalization” that occurred that did not result in either (1) total financial collapse or (2) rampant inflation which then led to total financial collapse. Our next blog will discuss the “cost of normalization” as we finish setting the stage for a discussion of “Will This Time Be...

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Understanding How “This Time is Different” to Make Great Investment Decisions – Week 1

Posted by on Oct 4, 2018 in Ned Massie, Perspective | 0 comments

Introduction: Repeated so often that “This time, it’s different”, that phrase is completely worn out. But folks, the world has never seen what is evolving in the global economy. This time is amazingly different. Do not misunderstand me, what has been called Quantitative Easing (QE) is a game that central banks of individual countries have played over the centuries. Without fail, each time those central banks attempted to stop the “funny money” of QE, the result has been consistent. The result was the complete economic collapse in that particular country. How many times as a young man did I listen to laughter and derogatory comments made about Central and South American countries whose Tin Dictator practiced QE and then pretended that there was not going to be a problem weaning their financial markets off the funny money? Therefore, it was appalling to watch the United States of America play the funny money game. Even worse, we watched the whole world participate in QE. Now we have a front row seat on a truly unique event in the economic history of the world. The entire global economy, after practicing QE now has two of the largest economies in the world (USA and European) reducing QE. My mind, which normally looks for and identifies patterns and trends, has been full of so many questions: Is any intelligent being on this earth planning how to make this transition or are we just launching on a hope and prayer? Is there really a benefit to being the Hegemon? How does one plan for a total, global, economic meltdown? Regardless of our politics, based upon several patterns I believe I have identified from my research and analysis this year, if the trends I have identified are accurate this is the point in the movie when we all should get ready to CHEER! I am overcome with awe and admiration at the decisions that have been made by the Trump Administration regarding the economy and this transition away from QE. Based on my analysis, the economic decisions and the implementation of the Administration and Congress (proving even a blind pig finds an occasional pecan) will be recognized in history as totally BRILLIANT. My goal with this series of blogs is to share with you some insight so that regardless of your politics you can make the right investment decisions. There are risks and there will be some pain, but this is so awesome I can hardly wait to share it with...

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It Is The Interest Rates! Week 6

Posted by on Sep 26, 2018 in Ned Massie, Perspective | 0 comments

China: You are tired of me commenting about China. However, as the second largest economy in the global economy, what happens in China has enormous ripple effects. Similar to Turkey, China’s currency, the Yuan, has also fallen in value during 2018. Some think that it is the intention of the Chinese government to have their currency devalue to combat the tariffs being posed by the Trump administration. Since China is a dictatorship, I am confident that the President of the Central Bank of China is doing whatever he is told to do because he enjoys having his head firmly attached to his shoulders. China is not a free market nor do the Chinese enjoy our liberties. The enormous risk of China is that it parallels Enron in many ways. Perhaps the most significant question that would need to be answered is whether a Balance Sheet for China would show it to be Enron in huge capital letters? It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land. As these conflicting economic forces play out over the next several years, interest rates will fluctuate. Watch the trend to understand what is...

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