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Borrowing to invest? Update Oct 21 2022

Greed goblins got you wondering?

Borrowing to invest------ Answered below

Investors often ask me if they should take out a loan, borrow a second mortgage or cash out an annuity or life insurance policy to invest in the stock market.

Since many advisors get paid on money under management and might encourage such a thing, I am of the opinion suggesting new borrowing to invest is unscrupulous behavior on the part of an advisor, with very few exceptions.

Since no one can forecast with any certainty market behavior, having the client take out new loans or cash out an annuity or life policy to invest in stocks may be exposing them to undue risks.

As for the annuity or life policy, one would have to look at the terms and conditions of the contracts. Perhaps in certain cases, cashing out an annuity or life policy might be prudent based on the contract terms, but doing so to put it in the market may not be in the client’s best interest and it could be said, is instead, in the interest of the advisor. That is because money coming from that liquidation, if put under management with the advisor, might boost the income to that advisor.

As sworn fiduciaries to steward client monies only in the best interest of the client, when I hear about such behavior, I take note of what advisor did it, and catalog that information for future reference. Quite simply, suggesting that a client go in debt to plow it into the market is, in my stern opinion, very bad advice.

The reason for this is that markets can indeed go up, making the debt a generator of profits over and above the original amount of the loan and its interest payments. But markets can also go down. And these ups and downs of the market can go a lot farther and last a lot longer than expected.

Imagine taking out a $100K loan, and investing it, and then the market falls hard and for an extended period of time, such as what we are witnessing now.

Since the legal disclaimer of investing includes the statement “you can lose money, including total loss of principal”, one has to consider the possibility he or she won’t make money, break even, or possibly even lose some or all of it, and subsequently be on the hook to pay back money they no longer have.

Not a pleasant thought.

There are probably some advisors and investors that would argue this thesis, and have encouraged such actions from their clients. I am of the opinion that one should run far and fast from the very suggestion of borrowing to invest and the person or firm who suggested it.

An arguable variation of this would be to decide whether to pay off a mortgage or instead stick it in the market. For reasons I can’t explain, my brain doesn’t so violent regurgitate this idea but I suppose it should. Guess I do have my biases.

I would have to think long and hard about the mortgage question, see what interest rate the client is paying on the mortgage, the term of the mortgage and the financial situation and risk tolerance of the investor and then move forward from there.

Having said all that, there is a situation, at least right now, that I might toss out my recommendation of nixing any loans, and suggesting investors take a look at the U.S. government I-BOND, of which I have written about a few times here in Money Matters.

Link: (https://www.theunion.com/news/business/marc-cuniberti-a-gift-from-the-us-government/)

With 100% principal guarantee and paying 9.6% APR at this moment in time, investors might consider looking at an I-BOND, comparing what it might pay against the borrowing costs to fund it.

In the terms of the I-Bond, interest rates paid can change, an early withdrawal penalty may apply, and there are a some restrictions, all of which should be well known before considering. I suggest using the link above to my previous article to review a brief summary of the I-BOND, then going a step farther and pay a visit Treasurydirect.gov for all the not-so-gory details.

That said, the restrictions versus the opportunities presented by the purchase of the I-BOND along with the government guarantee of principal may make it one of the very few instances where a debt encumbrance to finance an investment might be worth considering.

“Watching the markets so you don’t have to”

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249.

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Update on the real estate market Sept 8 2022

My mortgage rate is HOW MUCH????

The housing market is toast.

Or at least I thought so until just last week a friend told me they sold their house in 4 days.

Although my friend offed her house in blistering speed, the FEDs multi-decade ultra-low interest rates as it pertains to puffing up the real estate market is likely at the beginning of the end.

The last real estate blow up of 2008 should have decimated the realtor profession and actually started to, but then the foreclosure tsunami hit America. The wave of foreclosure resales made a windfall of profits for the agencies whose “deal” is to facilitate the deal.

Simply put, in 2008 it looked as if the real estate markets was about to weed out about a zillion sales agents as homes prices imploded, but then the industry started hawking at foreclosure bargain prices the very same real estate they so feverishly hawked for full price just a few years earlier. A true example of making lemonade from lemons courtesy of the banking system.

No, it wasn’t a great time to sell in 2008, but it was a great time to be foreclosed on, and that meant selling all those previously “sold” homes now in foreclosure was about to become very good business. Why let a good crises go to waste right?

Fast forward to today with interest rates skyrocketing, and 30 year mortgages rising to ridiculous rates, it is likely neither a good time to sell nor a good time to buy, which flies in the face of what we’ve been told for decades. It also flies in the face of my friend’s experience, but like I said, I think it’s the beginning of the end. The last domino to fall being homes prices, that one just hasn’t been hit yet.

But the facts speak for themselves:

Sales of previously owned homes fell nearly 6% in July compared with June, and sales dropped about 20% from the same month a year ago, according to the National Association of Realtors. “In terms of economic impact we are surely in a housing recession because builders are not building,” said Lawrence Yun, chief economist for the Realtors. One in 5 sellers in August dropped their asking price, according to Realtor.com. The average home sold for less than its list price for the first time in over 17 months during the four-week period ended Aug. 28, according to a report by Redfin.

Making matters worse was Fed Chief Jerome Powell in a sobering 8 minute speech at the annual Federal Reserve meeting September 26^th all but guaranteeing higher rates will follow with what he called more “pain” for the economy.

For the housing market, that pain won’t be easy foreclosures sales juiced up by Fed-hammered, ultra-low interest rates this time around. It’s more like a no-holds barred, in your face, upper cut to the economy and the housing market with historic interest rate increases the likes that have not been seen since the 80’s.

Like I said at the start of this news article, “the real estate market is probably toast” and there are no white knights wearing Federal Reserve hats that are coming to the rescue with ultra-low interest rates and ridiculous loan forgiveness programs like all other previous housing crashes.

I have a lot of real estate agent friends and acquaintances and I have to warn that the pecking you may hear in the months to follow will not be typewriters hammering out new sales contracts. Instead, it will be the 2008/2009 chickens that finally found their way home to roost in a cratering market.

With no Federal Reserve to lower rates again thanks to the free money inflation brought to you by decades of overspending politicians, the foreclosure signs this time around unfortunately will likely be on the real estate agency offices in just about every county of the country.

“Watching the markets so you don’t have to”

Update September 5 2022

Is this in our future for the US dollar?

With inflation the worst in 4 decades, we look for reasons why prices are skyrocketing. Economist Milton Friedman said “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”.

Put simply, increase the currency in an economy faster than the total output of goods and services increases and inflation will rise. The more imbalance of currency to production, the higher the inflation.

Washington for decades seemingly discounts Friedman’s theory. It’s no surprise to anyone that freshly minted money has poured out of Washington’s money conduit, the Federal Reserve, with the most egregious money creation occurring in the last 2 years or so. The more than generous handouts were an attempt to stave off the detrimental effects of CoVid and its subsequent worldwide shutdowns by governments everywhere.

Much of the blame coming out of Washington points the inflation finger at the Russian/Ukrainian conflict which has pinched down the supply lines of many commodities. Although there is little doubt the war has constrained supply, some argue that much of the inflation follows along the lines of Friedman’s hypothesis.

After all, Friedman was no dummy. He was fully aware of supply side effects on prices, yet if one rereads his inflation hypothesis, he unequivocally points the finger exclusively at monetary creation as the sole cause of inflation.

There are arguments stating worldwide economies cannot simply be shut down almost entirely for a year or more and then turned back on like a light switch. Supply conduits are complexed systems. Once halted, it takes months to start them up again and even more time to get them functioning to the levels they were prior to the shutdowns.

No doubt Friedman never imagined a total stoppage to the entire world’s workforce as was witnessed during CoVid, and one wonders what Friedman would have to say as it pertains to inflation. We will never know if he would have adjusted his exclusive claim that money creation is the sole source of a general increase in prices.

That said, there is little argument among scholars that the massive money creation that was bequeathed on individuals and businesses in the last two years has played a large part in the inflation we are now seeing. The total money supply in the U.S. was increased by 40% or so in the last two years. This is without precedent.

That said, there is still little mention in our political hallways that at least acknowledge that massive government spending is contributing to our record inflationary rates we are now seeing.

To validate that one, look no further than to the State of California who will soon be sending out yet more checks to its residents to help offset the rising costs consumers are struggling with. The irony, at least to those that believe Friedman’s hypotheses on inflation is correct, is that California is printing even more money to counteract the previous effects of previous money printing.

Sounds like typical government reasoning to this analyst.

“Watching the markets so you don’t have to”

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214

(530) 559-1214

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