Quote:
Originally Posted by GregWeld
I've warned here many times about RISING INTEREST RATES and their correlation to values of your holdings.
We CAN NOT ignore the relationship. House values are affected by rising rates... as the rush to beat the rise in rates temporarily pushes buyers in to the market - they'll be the ones paying the highest prices ------ until the rates reach a point where they simply price out the average buyer and then home prices will need to be adjust DOWNWARD to get the monthly payments down to where people can afford to make them.
Autos --- We've seen a big cycle of renewal... bolstered by low rates that are often near or at ZERO...
Banks.... they borrow your money at super low rates and lend it out at higher rates - "the spread" - this increases as rates rise. Remember that banks use leverage in their lending.... and a simple .25 rise in the spread makes the banks a lot of money.
Capital spending here in the USA..... this can only be a good thing for the USA. But there will be lots of bumps in the road because nothing ever really just steams ahead as planned.... so while we should see a increase in capital expense here -- if rate rise too fast too far - that will pinch corporate profits and slow cap ex.... so we need a nice balance here. Sales and profits might continue to fund Cap Ex spending..... squeeze one too hard and it pinches the other off. I think we'll see a rush to borrow to get ahead of rising COSTS.... The more you borrow now -- the smarter you'll look down the road. But you have to have the CONFIDENCE to invest in plant and equipment etc - so we need confidence to stay high as well.
Healthcare ----- Oh my...... Who knows where this is going to go. My guess is we'll see LOTS of pressure to bring down prices and costs.... that is going to have to come from somewhere.... usually someones bottom line until they adjust their costs. But someone will be a winner in this space.... we just don't know what that is going to look like yet. I expect winners and losers in this space - rising costs - rising borrowing costs - and a FED that is hot on the trail of making changes.
Why does any of this matter? ---- Because PROFITS are what drives the stock market in the end. In the end this is what really matters. So if your costs rise -- are you able to sell more to make up for this? Are you able to raise your selling prices? If BUSINESS IS GOOD.... then it's not a big problem. It's a problem when cost rises and sales falter.... Remember we need TOP LINE (SALES) growth and BOTTOM LINE (PROFITS) to have a good stock market. To have a good stock market - we have to have a healthy sales environment. WATCH FOR ANY CHANGE. A reset or rebuilding of America can be an absolute boon to our economy -- but we must be ever vigilant of the ugly elephant of INFLATION as we heat up.... You couple rising overhead costs (rates) and price increases to cover said rising costs.... and that can become hard to contain and can spiral out of control like it did in the early 80's.
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Is there really any doubt a correction is coming on the horizon? When you team what Greg said with the debt cycle, it seems likely in the near future. Think about what happened 7-10 years ago. Many wiped out there excessive debts through foreclosure, short sales, and bankruptcy. When the economy came roaring back, they now had a large percentage of income that could be displaced with debt. The fact is that roughly 85% of cars are financed. The US economy is very reliant on consumers taking on debt to make purchases of houses, cars, boats, furniture, etc.. When Americans start getting toward the end of their available monthly income due to excessive debt load, spending slows down. Team that with higher interest rates and.... I know I've seen people spending similar to 12-15 years ago.
I recently read in the Wall Street Journal that the stock market had it's second best run under Obama vs. any other president in history. That's 8 years of serious gains. Housing has been appreciating for 5-6 years in most markets.
Are we there yet? Who knows, but we are much closer than yesterday. If I was closing in on retirement, I'd be making some conservative moves with my money, that I know. Unless I lived off my dividends like Greg! 97% can't do that.
One thing is certain, cash will be king in the next low cycle. I hope to be ready.