After the past several weeks, the economy worries me quite a lot. I read a story recently that auto loans have hit a new high, especially among subprime borrowers. We’re at $1.1 trillion in auto debt and counting. My student loan business also gives me a first hand look at the mounting but slow boiling student debt crisis. I believe we’re currently at $1.5 trillion in student debt in this country. To top it off, Snapchat just put out an IPO at a $24 billion valuation, and that seems like it’s too low since the price went from $17 a share to $24 a share in initial trading. Call me negative nancy, but the economy doesn’t feel good to me right now.
Interest Rates are Still Really Low
I’ve been dead wrong on this blog before, but I’m really questioning what happens when we start to see some inflation for a change. Bond investors have not seen a rising rate environment in over a decade. There is a whole generation of traders on Wall Street right now who have been conditioned to always hold the long duration position in their portfolios.
We’ll see what happens with bond mutual funds if the Fed jumps rates and we see an unexpectedly high inflation print. My guess is you’ll see a bit of a rush to the exits and bond investors will lose single digit percentage points in most cases.
Bonds absolutely have less risk than stocks on an absolute basis. I just don’t view them as a place for anything other than your stable money that you’re willing to have a negative real return on.
When Do Real Estate Prices Take a Big Hit?
Looking at big markets like NYC and SF, I just don’t think that the massive increase in real estate prices can last. We’re back to a frothy market for real estate, with all kinds of startups touting their success outperforming the S&P.
Here’s my view. Interest rates increase because of an unexpected jump in inflation thanks to Trump’s $1 trillion infrastructure plan. That causes real estate buyers to be confronted with high mortgage payments for the first time in a decade thanks to higher inflation. Hence, I think you’ll see a correction of sorts, particularly in the really hot markets of NYC and SF.
That really doesn’t mean anything for the average person. Here’s what I would do, if you’re thinking about buying a house, buy a smaller one than you wanted to. If prices drop, owning a smaller home will give you an easier time getting out from under it. Don’t buy a McMansion right now with the idea that you can sell it and move in a year or two. I think the market is way to unsteady for that.
The Dow Crossed 21,000
I wouldn’t let the current stock market levels deter you from continuing your regular investment plan. Please don’t let that be the takeaway. What I am saying is look at your portfolio. One of my friends had let her 70% stocks 30% bonds allocation soar to almost 90% stocks because of how well the stock market has done the past several years.
Remember when the Dow was down below 7,000 in March of 2009? We’ve come a long way, and we’ve got plenty of room to fall and fall hard. I’d suggest having diversification. Be invested in international and emerging markets stocks. Own some bonds as a diversifier, just make sure they aren’t 30 year bonds with tons of interest rate risk.
When Trump started bragging about the stock market performance in his recent joint address to Congress, I yelled at the TV, “SELL!” I’m kidding a little, but seriously it worries me when politicians start touting the short term performance of the markets. Clearly, Wall Street loves Trump’s big spending, tax reforming, anti-regulation diatribes. The problem is that they’ll also have to deal with the hangover when his policies lead to inflationary growth and irrational exuberance.
I Still Believe in a Great Tech Crash
Goldman Sachs recently wrote about how they think Snapchat’s revenue will continue to grow and be at $2 billion in 2018. Think about that for a second. A $24 billion company only having $2 billion in revenue in over a year’s time from now? That stinks. Yes long term they could take over the world and have everyone sending funny face changing emojis to each other with lots of ads, but I’m freaked out by tech and social media obsession on Wall Street.
Twitter has finally fallen a bit, but overall we still have these Silicon Valley startups valued at more than many gigantic profit making businesses. I think this is directly due to the low interest rate environment with the way that investors discount earnings with long term low rate expectations. When we see higher inflation, I expect tech shares to get crunched, which is why I steer away from them in my own portfolio.
Bitcoin What the Heck???
As I write this, bitcoin has just passed a record it set back in 2014. The latest exchange rate I could find put the value at about 1267. What the heck is the value even based on? Yes I’m ignorant in my understanding of crypto-currencies, but I know that a lot of illegal activity gets funneled through them.
As soon as Congress gets their head out of the sand and realizes this, I think they’ll pass some onerous rules regulating Bitcoin or possibly even criminalizing it. After all, Silk Road got slammed down and the founder imprisoned for life because authorities realized the site was little more than a way to sell drugs.
I’ve heard rumors of folks who’ve met up in Starbucks with stacks of hundred dollar bills to exchange Bitcoins at premium prices to the exchange. This has been done to avoid tracking by government agencies.
Honestly, of all the crap going on in the economy right now, bitcoin probably scares me the most. The public has no idea how it functions, it’s financing a huge part of the drug trade, and it has no central actor controlling its value or running the exchanges. If you have bitcoins, please get the heck out of them. You could lose out huge if the value continues to go up, but this feels full scale South China Sea bubble to me right now.
OK, I’m Done Freaking Out, Invest for the Long Term
At the end of the day, it does little to worry about the economy. Stock markets and bond markets will deliver positive real returns LONG RUN. Keep in mind that could mean decades if we experience a crash, but the basic truth is that they will.
So I’m keeping my investments in the stock market. I’m not selling anything. If markets fall, I’ll try to buy more. If you haven’t rebalanced in a while though, please do so as it’s an excellent time with the big run up in the DOW.
For those looking for value, anything outside of US real estate, tech, and large US stocks more broadly seems ok to me. For now, just please make sure your finances are set up for a crash. Have a lot of cash to meet your needs if you lose your job. Have a balanced portfolio, and for goodness sakes if Bitcoin is more than 10% of your portfolio please just sell it and go to Las Vegas instead. At least you’ll have some cool stories when you lose all your money.