Doomsday – then the day after!
It has been quite a while since my last post, and it has taken the first sightings of the financial mushroom cloud on the horizon to wake me from my blissful slumber.
It has been an amazing metaphorical summer in the post GFC glow. Sure, financial markets have not quite recovered, and the strong economic countries are experiencing the lowest cash rates in their respective histories.
However, what does this information mean for the average person… Nothing... It means nothing, low cash rates are good right?? That means my interest rates are low on my house, and for a while there I could service to buy two or ever three investment properties, the GFC is over and everything is right in the world because rates are still super low and im now “Debt Rich” and that’s what my property broker told me would help me retire 10 years earlier if I keep collecting “Good Debt” … sooo Winning right?!!
The unfortunate reality is that the lack of education has put everyone who was nodding along with my comments above in the worst possible situation you could ever been in and what I have to say next you really need to pay attention to.
Let me give you a quick catch up as to what these things mean and how they affect you.
Low cash rates – When a country has a low cash rate that means that the country is doing poorly, the lower the rate the more it is hemorrhaging, the rate is dropped low to help stimulate the economy. – So those low interest rates you have on your home loans means that things are not going well, higher the rate, the better the country (also to put into context, the higher the rate the higher you can increase your rents, we are definitely in a renters market at the moment as there have been no real significant rate increases in 10 years)
Good Debt – These is such a thing as good debt, for example, not everyone can lash out $500,000 to purchase an investment property for cash, so securing a loan to buy an investment property in a strategic growth area or to knock down your existing home and build two townhouses, this is good debt as a decent amount of thought and planning has been involved.
What is not “Good Debt” however are the excessive amounts of investment properties that have been sold to unsuspecting mums and dads by the multitudes of property brokers out there selling off the plan negative gearing investment properties – Most of you probably already know my thoughts on negative gearing as an investment strategy, but for those of you who have missed this particular rant, let me just say that any investment strategy that involves loosing money and hoping that interest rates stay at the record all time low that they have been for at least another 7 years so that you can break even while hoping that the value grows as well as counting on no change in the political landscape is stupid beyond belief… now this blame does not fall directly on your shoulders, well not all of it, it is the vulturous property brokers who are selling over priced properties and praying on the people who are genuinely looking for help (I digress, I shall try to keep my ranting within the confines of the current format)
Here is the issue – Once the cash rates start to rise so to do the interest rates on your loans.
So, the summer of our content / discontent. What does it mean?
Post GFC we saw record low rates; we saw record low serviceability and we saw property buying at record paces. All of this helped to stimulate the economy and keep Australia’s head above water while the world economy floundered around trying to find its bearings.
For the average Australian we didn’t even feel the GFC, it was some articles in the paper, $500 from good old K Rudd (Im still a huge fan of old K Rudd and would have loved to have seen him have a real run at the top job, but again ill keep the ranting on track) and we all bought a bunch of houses.
Now the reason we didn’t feel the GFC like a lot of other countries is that Australia was riding high on the way in to that one, interest rates were up near the 8% (remember, high rates means country good) so the reserve bank was able to slash the reserve rate quarter by quarter like a trailblazer in the Amazon, in order to keep the country stimulated.
So, what's the point of this entire article Shaun? We know all this and its old news!
Well that is where you are wrong, it’s just the final chapter of a very long 10-year story.
Let me give you the punchline first so that I can keep you interested to get to the end of this particularly long rant.
Financial Armageddon has always been on the way… but now we have a date.
Four weeks ago, the bell curve for “one year to ten year” US bonds inverted. What this means is that there is a lack of confidence in the market which will now make funding for lending institutions more expensive as there is a lack of confidence in investing in these types of bonds.
The facts – since 1969 there have been 9 instances where the bell curve has inverted, 8 of these times the US had a recession and the one time that it didn’t which was at the end of 1966, it did invert again in 1969 2 years later and did cause a recession.
OK, got it, but what does that mean for us here in Australia – There is no real way to predict exactly when the recession will hit the US but looking at the facts… its going to hit, looking at past inversion to the time the recession kicks in is between 3 months to 24 month, on average, 12 to 18 months.
Here is where the danger lies for us in Australia. The last recession being the GFC, we had a huge buffer of our cash rate being so high at 7.25%, however right now the reserve bank only has a couple of drops left in it with a cash rate of 1.50%.
That means that in this next recession the reserve bank can’t do anything to help us, my guess is that the government will lean on the banks to lower serviceability to stimulate property purchasing and we will see housing interest rates at a record low.
Things that scare me – Money in shares, stockbrokers pushing quick sales and doubling down, old people with all their money with super funds and financial planners.
Things that make me happy – precious metals, property (cash flow positive geared property if I need to be exact), lending products (where you have lent cash out on fixed interest terms)
My thoughts – Gang, im no expert, im a qualified finance broker, Im RG146 accredited, Iv sold property and I own an accredited retail Mortgage Fund and a Venture Capital Enterprise, im no Warren Buffet or David Koch (Koshy) but I am an avid investor and I spend a lot of my day researching events, data and asking a never ending stream of questions to people that are smarter than I am. This all being said take my thoughts with a grain of salt and seek your own professional advice, or if you fit any of the examples that I have given possible medical assistance.
But things are not great, you need to take a serious look at your financial situation, and you need to ask as many questions as you can as quickly as possible.
Things I told my mum – OK, so the end is coming, it is definitely the financial apocalypse, and as The Walking Dead is one of the most watched shows in TV history I will assume that you are all preppers and have an action plan in place in the event that the world ends and how you will survive, this is just like that. The world ends... then the sun comes up the next day, my tips to good old mum are these:
Number 1 – Don’t sell your houses in a downturned market, if the GFC taught us anything it was that your house wasn’t worth less than the day before, fear in the market made it drop (psst... most people don’t want to buy stuff when the world is on fire, so don’t sell dummy)
Number 2 – If you are investing in anything, make sure it is an asset class that you have control over (basically my rule of thumb is invest in things where you can go and physically choke someone to change the outcome)
Number 3 – buy everything you can (yes sounds bad, yes you are profiting of someone else’s misfortune, it is what it is, you didn’t create their situation, and you were smart enough to shore up your situation so that you are in the stronger position)
There are two very famous quotes which I will leave you with today which summarize both points that I am making here.
"the time to buy is when there's blood in the streets." Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family. And if anyone should know it’s the Rothschild's, they made a fortune buying in the panic after the battle of Waterloo against Napoleon
“It's a recession when your neighbor loses his job; it's a depression when you lose yours.”
I have not seen many reports or articles highlighting the coming dangers, and logically it is the sort of thing one keeps close to the chest if you own all of the money and want to discreetly divest oneself of high risk assets and shares before the inevitable mass exodus and run for the emergency exits.
But the best article I have seen is written by Alexis Carey on news.com.au and I will post the article at the end of this post.
I am also incredibly impressed with Former Coalition policy adviser John Adams and his comments on the issue and the genuine nature of the unsolicited holistic advice for personal wellness, I feel this speaks incredibly highly of his character and not seeing average Australians as 1’s and 0’s, Bully to you sir.
That is it from me my kind readers (mum), please be safe, please take the time to go through your finances and create a plan, please, PLEASE do not fire sell anything, and above all, look for opportunity.