Thursday, July 9, 2009
Wednesday, July 1, 2009
The Ominous Statistic
While recently listening to NPR radio I heard a most uncomfortable thing: for the first time since WWII, the amount of jobs created in the last economic expansion has been eclipsed by the amount of job losses in the current economic contraction. In simpler terms, all the jobs created when things were good (est. 2002 - 2007) are now gone. Ouch!
That is not good. What that says to me is that economic growth, in North America, is cooling. From a cyclical perspective, America is in the mature stage of its growth cycle. Growth will be scarce and the future growth will net to zero (expansions minus contractions).
In economics, Kondratief and Elliot both expressed economic growth as a series of waves. In fact, wave theory, of which I am a firm believer in, is a great way of understanding, explaining and predicting economic performance. Such a statistics as this jobs figure is a clear indicator that the US economy is in a major transition. Note that I did not say the global economy.
For all the retoric that may come out of Washington, the US is clearly a nation in transition. The problem for the future is that US policy is going to be out of step with US reality. This is going to create lots of problems for those banking on the continuance of past history ( yes mutual fund holders, I am talking to you) .
If you are looking for investment guidance for your portfolio look no further than the Doors. Just remember what Jim Morrison said, "the future's uncertain and the end is always near". Beware.
That is not good. What that says to me is that economic growth, in North America, is cooling. From a cyclical perspective, America is in the mature stage of its growth cycle. Growth will be scarce and the future growth will net to zero (expansions minus contractions).
In economics, Kondratief and Elliot both expressed economic growth as a series of waves. In fact, wave theory, of which I am a firm believer in, is a great way of understanding, explaining and predicting economic performance. Such a statistics as this jobs figure is a clear indicator that the US economy is in a major transition. Note that I did not say the global economy.
For all the retoric that may come out of Washington, the US is clearly a nation in transition. The problem for the future is that US policy is going to be out of step with US reality. This is going to create lots of problems for those banking on the continuance of past history ( yes mutual fund holders, I am talking to you) .
If you are looking for investment guidance for your portfolio look no further than the Doors. Just remember what Jim Morrison said, "the future's uncertain and the end is always near". Beware.
Friday, June 19, 2009
Mortgage Insurance: Necessary Evil
The one important point in insurance, regardless of the kind of insurance, is that it should be hedging an identifiable risk. Mortgage insurance does just that. In case of death it pays out your mortgage. What you should understand is that amount is in a declining balance. Your payments will knock down your outstanding principle over time so the amount/risk being hedged is declining. Ideally, the amount of insurance required should also decline over time.
The most convenient mortgage insurance you are going to have access to is most likely going to be that provided to you by the provider of your mortgage at signing. Beware, this is most likely going to be way over priced. Banks make a killing on mortgage insurance premiums. As such, they usually go to fair lengths to get you to sign up for it. One common plug is that you can always cancel it later. The assumption is that you will forget about it and just keep paying the premiums. In my experience you are best to look for independent mortgage insurance, including increasing your life policy to cover the mortgage amount. I have seen cases where bank insurance was twice as expersive as that provided by third party insurance providers.
If you are reluctant to consider mortgage insurance, that is your prerogative, but always be aware of the risk you are still carrying. If you have life insurance and a large mortgage with no mortgage insurance; if something was to happen, the beneficiaries would have an income from the life policy but would still have to deal with the cost of shelter. This may put them into a position of having to sell the home and move to a less costly home. Now imaging this scenerio: would you want your family having to go through that while getting over your death? Probably not, but if you need to cut costs this is the reality that you have in place should the worst happen. It not perfect but it is what it is. You just need to be aware that that is the contingency that you have put in place.
The most convenient mortgage insurance you are going to have access to is most likely going to be that provided to you by the provider of your mortgage at signing. Beware, this is most likely going to be way over priced. Banks make a killing on mortgage insurance premiums. As such, they usually go to fair lengths to get you to sign up for it. One common plug is that you can always cancel it later. The assumption is that you will forget about it and just keep paying the premiums. In my experience you are best to look for independent mortgage insurance, including increasing your life policy to cover the mortgage amount. I have seen cases where bank insurance was twice as expersive as that provided by third party insurance providers.
If you are reluctant to consider mortgage insurance, that is your prerogative, but always be aware of the risk you are still carrying. If you have life insurance and a large mortgage with no mortgage insurance; if something was to happen, the beneficiaries would have an income from the life policy but would still have to deal with the cost of shelter. This may put them into a position of having to sell the home and move to a less costly home. Now imaging this scenerio: would you want your family having to go through that while getting over your death? Probably not, but if you need to cut costs this is the reality that you have in place should the worst happen. It not perfect but it is what it is. You just need to be aware that that is the contingency that you have put in place.
Wednesday, May 6, 2009
Mortgage Rates: Lock In or Go Variable
As the central banks have pumped money into the global system, banks have been able to borrow at cheaper rates. This has also been reflected in lower costs of borrowing for new borrowers and those in floating rate loans or mortgages. As the banks move out of the financial crisis they were mired in just months ago to more surer footing, competition should put downward pressure on the banks lending rates, lowering the cost of borrowing, as long as their cost of borrowing remains low.
The question you need to ask yourself is how long is this going to last? Eventually rates will move up. They have been lower than historical averages for sometime and as the expected economic recovery materializes, rates will start to move up.
On top of this will be the future effects of all the liquidity the central banks are advancing. One concern is that the actions we are taking today to restart the economy are going to lay the seeds for it's future stall out. This scenario sees inflation advancing as spending comes back in a big way. After deferring spending through the past year or two, consumers and businesses could unleash a torrent of new purchases that end up driving prices up. Think about it. All those people that delayed new car purchases have to sooner or later go back to the dealership. The same with businesses that were afraid to spend their cash when business was soft. With prospects improving lots of spending could quickly happen. This will be great news for stocks, but only for the short run. They will soon see that their costs increase just as quickly. All those plant closures that have happened over the last few months will mean that producers cannot ramp up supply as quickly as demand increases. The result will be increases in prices. If there is one thing the central banks hate almost as bad as negative economic growth, it's inflationary price increases. To halt this they will raise rates, possibly very quickly. It will be at this point that those on variable rate borrowing will see interest payments start to rise and rise both quickly and substantially.
Since you are the one paying the cost of your borrowing. You should consider the possible risks you are exposed to if this scenario were to take place. The alternative is to lock in your rate and move into a fixed rate mortgage. You would be looking paying a premium over variable rates but the future changes in interest rates may make this a prudent option for you to consider. I suggest you keep your eye on rates and watch for changes to the variable/fixed spread. If you find that the extra cost of locking in is acceptable you may want to give serious thought to eliminating your future interest rate risk.
The question you need to ask yourself is how long is this going to last? Eventually rates will move up. They have been lower than historical averages for sometime and as the expected economic recovery materializes, rates will start to move up.
On top of this will be the future effects of all the liquidity the central banks are advancing. One concern is that the actions we are taking today to restart the economy are going to lay the seeds for it's future stall out. This scenario sees inflation advancing as spending comes back in a big way. After deferring spending through the past year or two, consumers and businesses could unleash a torrent of new purchases that end up driving prices up. Think about it. All those people that delayed new car purchases have to sooner or later go back to the dealership. The same with businesses that were afraid to spend their cash when business was soft. With prospects improving lots of spending could quickly happen. This will be great news for stocks, but only for the short run. They will soon see that their costs increase just as quickly. All those plant closures that have happened over the last few months will mean that producers cannot ramp up supply as quickly as demand increases. The result will be increases in prices. If there is one thing the central banks hate almost as bad as negative economic growth, it's inflationary price increases. To halt this they will raise rates, possibly very quickly. It will be at this point that those on variable rate borrowing will see interest payments start to rise and rise both quickly and substantially.
Since you are the one paying the cost of your borrowing. You should consider the possible risks you are exposed to if this scenario were to take place. The alternative is to lock in your rate and move into a fixed rate mortgage. You would be looking paying a premium over variable rates but the future changes in interest rates may make this a prudent option for you to consider. I suggest you keep your eye on rates and watch for changes to the variable/fixed spread. If you find that the extra cost of locking in is acceptable you may want to give serious thought to eliminating your future interest rate risk.
Sunday, April 19, 2009
Debt. Load Me Up?!?
I was talking with a very good friend of mine. He's buying his first house and he told me that the advise he has been getting form friends and family is: take on as much debt as you can, now is the time to buy and make money. Real estate is cheap.
I say: Bullshit!
We might be the most highly evolved species on the planet, but the part of our brain that handles risk probably got stalled out at the reptile stage. How else can you explain how it is that the average investor's concept of financial history seems to only go back 7 years.
Like all assets classes, real estate is cyclical. There is nothing mythical about it. It does not always go up. A young guy like my friend, just starting out loading up on debt. Copuld he make a killing? Sure: overload on anything and you stand to score big if you choose right. But this is wrong for two reasons. First, just because the price is low does not mean it can't go lower. Even if this is the bottom, the market could remain flat while exposing him to substantial interest rate risk as he finances the big debt. Second, this is not a good president for the financial habits. Heavy leverage is like gambling. As long as your streak of luck holds you are golden. One wrong turn though and you can see all of you winnings go back to the house.
The bottom line: who knows exactly where this economy is going. No one can seay with cerainty. The solution: average in. What my frioend should do is not over extend himself on credit but get only take what he needs to finance the home. If he still wants more, he should wait until the economy starts to show it's hand as to where it is going. Once an uptrend is confirmed he could them use proxies for the large home investment. This could take the form of ETFs or shares linkled to home builders. It's not the same but it us a way of him managing his risk in a mature fashion yet still participating in his expected increase in home prices.
I say: Bullshit!
We might be the most highly evolved species on the planet, but the part of our brain that handles risk probably got stalled out at the reptile stage. How else can you explain how it is that the average investor's concept of financial history seems to only go back 7 years.
Like all assets classes, real estate is cyclical. There is nothing mythical about it. It does not always go up. A young guy like my friend, just starting out loading up on debt. Copuld he make a killing? Sure: overload on anything and you stand to score big if you choose right. But this is wrong for two reasons. First, just because the price is low does not mean it can't go lower. Even if this is the bottom, the market could remain flat while exposing him to substantial interest rate risk as he finances the big debt. Second, this is not a good president for the financial habits. Heavy leverage is like gambling. As long as your streak of luck holds you are golden. One wrong turn though and you can see all of you winnings go back to the house.
The bottom line: who knows exactly where this economy is going. No one can seay with cerainty. The solution: average in. What my frioend should do is not over extend himself on credit but get only take what he needs to finance the home. If he still wants more, he should wait until the economy starts to show it's hand as to where it is going. Once an uptrend is confirmed he could them use proxies for the large home investment. This could take the form of ETFs or shares linkled to home builders. It's not the same but it us a way of him managing his risk in a mature fashion yet still participating in his expected increase in home prices.
Sunday, April 5, 2009
The End of the End of the World?
I am calling it. I am calling the bottom of this market cycle on the S&P 500. In my view the technicals are there for the market to at least flatten, if not continue on their recent upward turn.
The technical picture for continued mayhem has started to deteriorate in my opinion. It's not so much that the bears are dead. Its just that the bearmobile may have just run out of gas.
The technical picture for continued mayhem has started to deteriorate in my opinion. It's not so much that the bears are dead. Its just that the bearmobile may have just run out of gas.
Thursday, March 5, 2009
Pimping the Public
What has amazed me about this downturn in the markets is how conventional market wisdom has been thrown out on the street like whores on a friday night. Yeah, I said it!
Two years ago when the markets started to soften, market pundits were calling for a 9 month slow down and soft landing. (For some reason analysts love pinning their predictions to a 9 month period.) There was no awakening to the obvious change that was taking place across the board. The talk instead focused on finding some sort of logic as to why we should believe the markets should recover quickly.
I am not saying that you can't be wrong. Everyone is wrong. Nobody knows for sure what is going to happen. But the Group-Think mentality and limited perspective of financial media and professional analysts create an audience of lemmings. Financial media should have open dialogue and there should be more discourse to enable consumers of financial information to make better informed decisions.
That will never happen. The Street knows how to make money in a rising market. A rising market keeps investors happy and happy investors don't sell out of their mutual funds and wrap accounts. If investing is gambling, your advisor is the house. And the house doesn't like to lose out on it's bonus.
The strange thing now is that the Bullish bias has given way to a Bear bias. Having been roasted as the markets sold off, everyone is now too chaistened to challenge the belief that financial meltdown must surely be coming.
The solution: Cancel your news subscriptions. Turn off your TV. It's your money. No one is going to care for it like you. Take control and stop looking for other people to tell you what to do.
Two years ago when the markets started to soften, market pundits were calling for a 9 month slow down and soft landing. (For some reason analysts love pinning their predictions to a 9 month period.) There was no awakening to the obvious change that was taking place across the board. The talk instead focused on finding some sort of logic as to why we should believe the markets should recover quickly.
I am not saying that you can't be wrong. Everyone is wrong. Nobody knows for sure what is going to happen. But the Group-Think mentality and limited perspective of financial media and professional analysts create an audience of lemmings. Financial media should have open dialogue and there should be more discourse to enable consumers of financial information to make better informed decisions.
That will never happen. The Street knows how to make money in a rising market. A rising market keeps investors happy and happy investors don't sell out of their mutual funds and wrap accounts. If investing is gambling, your advisor is the house. And the house doesn't like to lose out on it's bonus.
The strange thing now is that the Bullish bias has given way to a Bear bias. Having been roasted as the markets sold off, everyone is now too chaistened to challenge the belief that financial meltdown must surely be coming.
The solution: Cancel your news subscriptions. Turn off your TV. It's your money. No one is going to care for it like you. Take control and stop looking for other people to tell you what to do.
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