Market Perspective

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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It Is The Interest Rates! Week 5

Posted by on Sep 19, 2018 in Ned Massie, Perspective | 0 comments

Demographics and the Residential Market: What is unique in the residential market today is the stark differences between the three generations that are active in the residential market. The Boomers are looking to downsize and control an enormous amount of the nation’s wealth. Gen Y is the generation which has been hammered by the Obama economy. They are now beginning to acquire full-time jobs and entering into the housing market as buyers. They are the largest generation of Americans that are active in the economy. That is a significant fact. Just as significant but less understood is that the generation in between the Boomers and Gen Y, called Generation X, is the smallest of the three generations. Their small size will also significantly impact and distort the new housing market as interest rates go up. Literally demographics will win. 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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It Is The Interest Rates! Week 4

Posted by on Sep 13, 2018 in Ned Massie, Perspective | 0 comments

Housing/Residential Market: As interest rates increase, the impact on the residential market is predictable. The average household has a certain number of dollars that they can afford to spend on housing each month. As mortgage rates increase, the amount of mortgage bought by that monthly payment is reduced. Given the fact that households also have a certain amount of equity that they can put into buying a new home, the result of that combination is that the price that they can pay for a home (resale or newly constructed) is reduced. Residential sales are a leading indicator of the economy. While less than 2% of the GDP of the USA, residential sales ripple through almost 30% of the GDP of the USA. 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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