Investment and/or Personal Finance

[Eunos_Cosmo]

There doesn't appear to be any sort of general economy thread here (well, one from 2003...), so I thought I'd start one.

I think the most interesting thing happening right now is the $15T worth of negative yielding sovereign bonds being traded around. How is this going to impact fixed income funds in the years to come? What would an overvalued bond market collapse even look like?

edit: I should note that some sovereign bond yields are at unprecedentedly low yields. Like lowest yields in 250+ years unprecedented. Like genuine "we've never seen this" territory.

Some other thoughts:
How much is automated/algorithmic trading keeping the bottom from falling out of the stock market and how long can this artificial prop (if that's whats happening) keep it from doing so? As in, is there a algorithmic trading "bubble"?

How can we make building housing (quickly becoming a huge problem all around the country, especially in dense areas) more attractive to builders? Or how can we building more housing using alternative methods?

The "trade war" is obviously a big economic headline, but I find it boring.

 

[mustafur]

The World economy is all interlinked now, so if you talk about America you got to talk about the rest of the world because if something major happens there it effects everyone else.

The world right now is nearly maxed out on debt fueled by record low interest rates, the economy in general is in a much worse state world wide then how it was leading to the GFC in 2008, not many countries if any have enough interest rate buffer to protect their economy when another Recession hits which to me spells a potential 1929 sceniaro.

House prices for example are completely inflated by Debt, the rental market generally gives a better view of the housing market as people don't get loans to pay rent so they have to use real income.

 

[Dotini]

IMO the world economy is nearing the brink of collapse. Money can be printed but H2O cannot. 25% of the global population is facing an immediate water shortage crisis. Dozens of nations are within one bad drought of collapse with populations subsequently needing to migrate to remaining countries with water. Draconian emergency measures will be taken to control mass movements, meaning democracy yielding to military dictatorship by necessity.

 

[Danoff]

There doesn't appear to be any sort of general economy thread here (well, one from 2003...), so I thought I'd start one.

I think the most interesting thing happening right now is the $15T worth of negative yielding sovereign bonds being traded around. How is this going to impact fixed income funds in the years to come? What would an overvalued bond market collapse even look like?

Somewhat obviously this is betting on inflation. Negative yield bonds are profitable if inflation outpaces them. I think it's a pretty safe bet too - that those bonds will outperform their associated currencies. Inflation seems like an absolutely foregone conclusion, and of course inflation is always bad.

But look at it this way, inflation helps debt holders, and property holders generally do not come out significantly worse off. The people who really get hurt by inflation are currency holders - which causes more inflation, because people don't want currency that is going down in value.

That's scary stuff. That's a massive change from 2008. The only way to pay this debt off is to either outgrow it (seems impossible to have that kind of sustained economic growth, but maybe like... nuclear fusion or something could precipitate such a change) or inflate the currency. I'm guessing inflation.

 

[Eunos_Cosmo]

But look at it this way, inflation helps debt holders, and property holders generally do not come out significantly worse off. The people who really get hurt by inflation are currency holders - which causes more inflation, because people don't want currency that is going down in value.

This is something I've been thinking about lately quite a bit. If I get a (for example) 30 year fixed mortgage in 2019 at the sort of low rates we are seeing now and assume some amount of inflation over the course of those 30 years, by 2049 I'll be paying off an asset effectively still with 2019 dollars. If inflation increases substantially, you do even better.

Put another way: If I was able to purchase a house in 1989 (I was 0, so I couldn't have) for $144k, I would be now finishing up that mortgage in 2019., but always against that original $144k even though, through inflation, it should be $300k in 2019. You effectively have doubled your money, not even including appreciation of the asset. If you do include appreciation, especially somewhere like the Bay Area, you could have potentially quadrupled your money.

That brings me to another question. I've saved a decent amount of cash in the past few years that I want to put to work towards a mortgage in the mid-term (2-4 years or so). Bonds have such small yields right now that it doesn't seem worth it to park it there. I don't want the risk of stocks for this money (I have other accounts for that). Do I go high yield savings account? CD account? It seems either of those can provide a risk-free 2% return, though with some minor stipulations. Are there any downsides? Anyone have experience with those? I basically just want to park the money somewhere inflation won't eat into it too much in the short to mid term, but have relatively easy access to it as well....and little to no risk. Again, the eventual goal is to push this money into a mortgage, which seems like the best investment I can make for a multitude of reasons...I just don't want it hamstrung by inflation until I can pull the trigger.


edit: Just wanted to post some thoughts by Chris Watling about the current contradictory/unnatural nature of the European bond market:

in a normal system, savers are compensated for deferring consumption and thereby paid for the time value of their money and borrowers pay for the privilege of borrowing money. In certain parts of the western world, though, some mortgage holders are now being paid to borrow money to buy their house. Governments, of course, are also being paid to borrow (and therefore spend)… Equally if borrowers don’t pay for the privilege of borrowing money, capital allocation discipline should then break down, as the rate of return hurdle for new projects falls (or even potentially turns negative), making more and more projects feasible and overly boosting supply/competitive pressure.

Overall therefore, a negative risk free rate implies that the owner of the ‘risk free’ asset is paying for the privilege of owning it. Paradoxically, the ‘risk free’ asset is becoming ever riskier because of its rich, and unprecedentedly high, valuation level (clearly an internal inconsistency). Meanwhile, at the same time, the borrower is being paid to borrow, thereby distorting incentives in an economy which in turn leads to misallocation of resources.

*emphasis mine

 

[Exorcet]

That brings me to another question. I've saved a decent amount of cash in the past few years that I want to put to work towards a mortgage in the mid-term (2-4 years or so). Bonds have such small yields right now that it doesn't seem worth it to park it there. I don't want the risk of stocks for this money (I have other accounts for that). Do I go high yield savings account? CD account? It seems either of those can provide a risk-free 2% return, though with some minor stipulations. Are there any downsides? Anyone have experience with those? I basically just want to park the money somewhere inflation won't eat into it too much in the short to mid term, but have relatively easy access to it as well....and little to no risk. Again, the eventual goal is to push this money into a mortgage, which seems like the best investment I can make for a multitude of reasons...I just don't want it hamstrung by inflation until I can pull the trigger.

I'm in a similar situation, using both a high yield savings account and experimenting with a CD. No issues with either so far with pretty lax requirements for both. I was careful to make sure that I wouldn't need to pull money out for anything short of a disaster, so I haven't had to content with any penalties or transfer limits. The CD is nearing maturity, I still have to decide what I'll do when that happens. As in your case these are short term savings that I'm trying to protect from inflation. There are a few slightly higher interest options of the same kind (savings/CD) that I've found, I'll probably pool everything together into one of those until I'm ready to use the money.

 

[mustafur]

Somewhat obviously this is betting on inflation. Negative yield bonds are profitable if inflation outpaces them. I think it's a pretty safe bet too - that those bonds will outperform their associated currencies. Inflation seems like an absolutely foregone conclusion, and of course inflation is always bad.

But look at it this way, inflation helps debt holders, and property holders generally do not come out significantly worse off. The people who really get hurt by inflation are currency holders - which causes more inflation, because people don't want currency that is going down in value.

That's scary stuff. That's a massive change from 2008. The only way to pay this debt off is to either outgrow it (seems impossible to have that kind of sustained economic growth, but maybe like... nuclear fusion or something could precipitate such a change) or inflate the currency. I'm guessing inflation.

Inflating the currency would destroy the reserve Status for oil transactions, something they can't allow if they don't want the country to basically implode.

 

[ROAD_DOGG33J]

That brings me to another question. I've saved a decent amount of cash in the past few years that I want to put to work towards a mortgage in the mid-term (2-4 years or so). Bonds have such small yields right now that it doesn't seem worth it to park it there. I don't want the risk of stocks for this money (I have other accounts for that). Do I go high yield savings account? CD account? It seems either of those can provide a risk-free 2% return, though with some minor stipulations. Are there any downsides? Anyone have experience with those? I basically just want to park the money somewhere inflation won't eat into it too much in the short to mid term, but have relatively easy access to it as well....and little to no risk. Again, the eventual goal is to push this money into a mortgage, which seems like the best investment I can make for a multitude of reasons...I just don't want it hamstrung by inflation until I can pull the trigger.

High yield savings account would be the most flexible and the interest rates are not far off of CDs. There are limits on transfers, but the positive is that it's pretty easy to transfer money to your savings/checking account if needed. CDs would work if you know when you will need the money, or staggering (different term CDs plus possibly a high yield savings account).

 

[DDastardly00]

@Dotini

This may be out a ways but the Space Economic Boom is coming faster than we think and it will dwarf the personal computer revolution, the e-commerce revolution (combined) and other such recent notable economic periods. They will really pale in comparison actually. Manifest Destiny, Part Deux, will be humans expanding into Space, the Final Frontier, where Star Trek predicted we would "boldly go" 50 some odd years ago, not timidly go or quietly go, no, boldly, and that is what we will do. Space Ships will become the Automobile of the 21st Century and resource extraction, mining gas giants and asteroids will become the new California gold rush..

Here is the US Chamber of Commerce's outlook according to Senior Economist, Brian Higginbotham: https://www.uschamber.com/series/above-the-fold/the-space-economy-industry-takes

Goldman Sachs analysts predicted the sector would grow to about $1 trillion by 2040, consistent with a forecast by Morgan Stanley. On the high end, analysts at Bank of America Merrill Lynch predict the sector will surpass $3 trillion over the same period. In our estimation, this sector will increase from approximately $385 billion today to at least $1.5 trillion by 2040.

 

[Danoff]

Inflating the currency would destroy the reserve Status for oil transactions, something they can't allow if they don't want the country to basically implode.

I'm not sure what the reserve status for oil transaction is. If you're referring to oil reserves, they're relatively unscathed by inflation, because it takes more dollars to buy the same amount of oil. Inflation is bad, for sure, but it's the only thing I can see for the debt problem we have. I think it is somewhat inevitable.

 

[mustafur]

I'm not sure what the reserve status for oil transaction is. If you're referring to oil reserves, they're relatively unscathed by inflation, because it takes more dollars to buy the same amount of oil. Inflation is bad, for sure, but it's the only thing I can see for the debt problem we have. I think it is somewhat inevitable.

No I'm saying all Oil purchases around the world by Countries is done in US Dollars, if the currency inflates there will be pressure to ditch it for something else like Gold or another currency, if that happens all those US Dollars will be dumped into your system and create even worse inflation.

The US Dollar is the Reserve Currency.

 

[Danoff]

No I'm saying all Oil purchases around the would by Countries is done in US Dollars, if the currency inflates there will be pressure to ditch it for something else like Gold or another currency, if that happens all those US Dollars will be dumped into your system and create even worse inflation.

The US Dollar is the Reserve Currency.

I see. Yea, we just have to make sure we inflate slower than everyone else. Shouldn't be a problem, basically all of the wealthy nations of the world are in this boat.

 

[mustafur]

I see. Yea, we just have to make sure we inflate slower than everyone else. Shouldn't be a problem, basically all of the wealthy nations of the world are in this boat.

The big problem here is China, China is forcing countries to trade oil in Yuan and this is a massive issue for US, especially considering China is buying up alot of the world's Gold Reserves and is rumored for a future switch to the Gold standard as they know it will basically finish the US Dollar Reserve status.

 

[Danoff]

The big problem here is China, China is forcing countries to trade oil in Yuan and this is a massive issue for US, especially considering China is buying up alot of the world's Gold Reserves and is rumored for a future switch to the Gold standard as they know it will basically finish the US Dollar Reserve status.

Overall it looks like something on the order of 90% of all commodity trades include the dollar (according to the article: "on at least one side of the transaction"). Moving away from the dollar (at least for oil) is a good move for China. In fact, if they can stand behind their currency better than the US, then they'll benefit overall for it. It's what they ought to do.

I try to stay out of dollars myself. I owe more dollars than I currently own, which means overall inflation is (at least to first order) beneficial to me.

I agree with you that the extension of the dollar into a global currency is somewhat problematic for inflation. Because if people stop using it, it could mean that the number of goods the current supply of dollars has to buy could drop quickly, and that causes significant inflation. In terms of bills, apparently 2/3 (or something like that) of all $100 bills are held outside of the US. If the distribution of all dollars is similar to that, and all nations suddenly dump it because we inflate the hell out of it, it would represent our currency dropping to 33% of its current value. Not a fun prospect!

On the other hand...

US inflation is something the entire world pays for. And if the dollar loses value sharply, and 2/3 of it is outside the US, that means the 2/3 of the impact of that drop is felt outside the US. If the world tries to start shipping dollars back to the US, they'll do so at a heavy loss.

Overall, if I were in a situation of needing to inflate my currency, I'd much rather that the financial burden would be distributed as far from me as possible.

 

[mustafur]

Overall it looks like something on the order of 90% of all commodity trades include the dollar (according to the article: "on at least one side of the transaction"). Moving away from the dollar (at least for oil) is a good move for China. In fact, if they can stand behind their currency better than the US, then they'll benefit overall for it. It's what they ought to do.

I try to stay out of dollars myself. I owe more dollars than I currently own, which means overall inflation is (at least to first order) beneficial to me.

I agree with you that the extension of the dollar into a global currency is somewhat problematic for inflation. Because if people stop using it, it could mean that the number of goods the current supply of dollars has to buy could drop quickly, and that causes significant inflation. In terms of bills, apparently 2/3 (or something like that) of all $100 bills are held outside of the US. If the distribution of all dollars is similar to that, and all nations suddenly dump it because we inflate the hell out of it, it would represent our currency dropping to 33% of its current value. Not a fun prospect!

On the other hand...

US inflation is something the entire world pays for. And if the dollar loses value sharply, and 2/3 of it is outside the US, that means the 2/3 of the impact of that drop is felt outside the US. If the world tries to start shipping dollars back to the US, they'll do so at a heavy loss.

Overall, if I were in a situation of needing to inflate my currency, I'd much rather that the financial burden would be distributed as far from me as possible.

The only way any of it works is if everyone inflates together, the moment that doesn't happen a Currency Crisis is on the Horizon.

I got to say it's a big issue that Trump is being hard on Allies over the NATO issues and Trade Deals, because as far as I see it they basically control the US Dollar valuation, and with China expanding it's Belt and Road initiative and most of it's sphere of influence now using Yuan for Oil Purchases, the last thing the US wants to do is push it's allies towards China.

 

[Danoff]

The only way any of it works is if everyone inflates together, the moment that doesn't happen a Currency Crisis is on the Horizon.

I think a currency crisis is on the horizon anyway. But everyone will inflate together (they're doing that now), except it sounds like maybe not China. I keep thinking the dollar is going to tank, and it keeps outperforming because every other currency is tanking harder.

It has been overlooked I think (way too much) how much debt we've been piling on since '08.

 

[mustafur]

I think a currency crisis is on the horizon anyway. But everyone will inflate together (they're doing that now), except it sounds like maybe not China. I keep thinking the dollar is going to tank, and it keeps outperforming because every other currency is tanking harder.

It has been overlooked I think (way too much) how much debt we've been piling on since '08.

I know for sure that My country Australia is on the brink of a major economic downfall, we where saved in the GFC by China buying significant resources from us but now China has reduced their trading volume with us significantly, combine that with a populace who are indebted to their knees with a central bank pushing for us to get even deeper in debt because if we don't the whole structure of the economy collpases.

Our entire economy is based on Debt and Consumption, we make next to nothing as basically all manufacturing has been sent overseas we offer no value when things go wrong as the world doesn't need anything we have.

All we have is minerals in the ground that most of the world is trying to move away from.I fear for those that have bought an over inflated house in this economy.

And this comes back to America because when our banks need bailing out our government doesn't have the ability to bail them out, we are talking Trillions of Dollars in a country that has 25 million people, either we get the US to Bail us out like the Germans did in the GFC(Deutche Bank) or we are heading to serious inflation to print our way out of it.

 

[Dotini]

"The popularity of the safety offered by bonds is at financial crisis levels among professional investors as many steel themselves for slowing growth"

In other words, there is a serious problem looming in the future. It seems the aftermath of the next presidential election is coincidental to a recession.

@Danoff the yield curve inversion seems to be a statistical phenomenon. What do you make of it?

Main yield curve inverts as 2-year yield tops 10-year rate, triggering recession warning
PUBLISHED TUE, AUG 13 2019 4:19 AM EDTUPDATED 8 MIN AGO

Thomas Franck@TOMWFRANCK

KEY POINTS

• The yield on the benchmark 10-year Treasury note was at 1.623%, below the 2-year yield at 1.634%.
• The last inversion of this part of the yield curve was in December 2005, two years before a recession brought on by the financial crisis hit.
• A recession occurs, on average, 22 months following such an inversion, according to Credit Suisse.

The yield on the benchmark 10-year Treasury note on Wednesday broke below the 2-year rate, an odd bond market phenomenon that has been a reliable, albeit early, indicator for economic recessions. The yield on U.S. 30-year bond fell to a new all-time low, dropping past its prior record notched in summer 2016.
https://www.cnbc.com/2019/08/13/us-...level-since-2007-amid-risk-off-sentiment.html

 

[Eunos_Cosmo]

The ludicrous valuation of bonds seems to indicate, to me, a general and widespread attitude that the stock market has a lot of room to fall. I don't think a 10,000pt drop in the dow would be too outlandish.

 

[mustafur]

Dow dropped 800 points, the 4th largest Drop in history, we may be looking at the start of something huge.

 

[VFOURMAX1]

Dow dropped 800 points,

But it gained 400 points yesterday so it is not as drastic as it sounds. But it does sound exactly how much of our media will play it up though, have to make it sound as if the sky has fallen to get more clicks on the story

 

[mustafur]

But it gained 400 points yesterday so it is not as drastic as it sounds. But it does sound exactly how much of our media will play it up though, have to make it sound as if the sky has fallen to get more clicks on the story

4th biggest drop in history is a fact though.

 

[Eunos_Cosmo]

But it gained 400 points yesterday so it is not as drastic as it sounds. But it does sound exactly how much of our media will play it up though, have to make it sound as if the sky has fallen to get more clicks on the story

It's hard not to look at the big picture and not think there's trouble ahead

-Germany, Italy, UK, Singapore, Hong Kong all approaching recession levels
-China growth smallest since 2002
-Staggering recent events in the bond markets
-Every central bank basically everywhere easing with little effect
-Unhinged government and corporate debt
-Rapidly increasing consumer debt

There's a lot of problems out there right now.

4th biggest drop in history is a fact though.

It was a big drop, but not as big of a percentage drop (really the only meaningful historical comparison) as many others. Not in the top 20 or anywhere close actually. It would have to drop more than 5,000 points (at currentish levels) in one session to break the percentage drop record, for reference.

However, if tomorrow is 2019's "Black Thursday" I wouldn't be super surprised.

 

[VFOURMAX1]

It's hard not to look at the big picture and not think there's trouble ahead

The economy always runs in cycles with up periods and down periods. So far in this country most areas are actually experiencing record low unemployment levels which is a good sign.
Many times foreign downturn which drops the value of their currency as far as exchange rate makes our money more valuable and their goods cheaper for us here.
Bottom line though is things as history outlines will take a downturn and the economy will falter from the high points of the good years. Just have to hope it does not fall to far or for to long.
A person that carries no consumer debt can usually ride out the downturns with minimum effect if the inflation levels stay reasonable.
People need to learn that credit cards and buying unneeded items on credit will keep them behind the 8 ball financially so when we have a downturn that affects employment they are screwed.
But the bottom line is what goes up will come down just not on a predictable timeline. It is and has been that way for decades, the sky is not going to fall for the majority of people in this country, may eat a few more beans instead of steak but they will get through it.

 

[mustafur]

Unless of course a Depression or Hyper inflation.

Given we are currently in the biggest debt Bubble in the world I wouldn't be soo dismissive of what is possible, for all intents and purposes the way economies recovered from the GFC was mass money printing and huge cuts to interest rates, where as now only the money printing is possible as most economies are close to zero on interest rates and if they are not they still don't have a big enough Buffer to combat a downturn.

Combine that with Low interest rates them selves making the issue bigger as loans are cheaper making house prices rise as more people can afford bigger loans you can see the problem.

 

[Eunos_Cosmo]

Personal Finance (edited topic title):

Decided to go with a high yield savings account. Discover bank has a 2.0% APY online account with a $200 opening bonus (under certain circumstances) and so I decided to go that route. I'm also looking into getting a discover cash back credit card...though my "other" may have better use of that, at the moment.

I'm starting to see evidence of a housing price correction or perhaps even an impending fall. Houses in the Bay area are sitting on the market for far, far longer than they were a year or two ago and they are seeing repeated price cuts, to the point where Zillow's projected price curve is actually sloping down a bit through 2020. I've also seen listings where the home was offered for rent for several months (with price cuts each month) before it appeared the owner gave up and instead listed it for sale. It's looking more fragile than I've ever seen it here. *waits patiently on a pile of cash*

 

[ROAD_DOGG33J]

I'm also looking into getting a discover cash back credit card...though my "other" may have better use of that, at the moment.

A good all-around card is the Citi Double Cash card, as it offers 2% cash back on everything (1% when you buy, 1% when you pay off the statement).

 

[mustafur]

I'm Moving my money from Fiat to Metals, I have been steadily collecting Silver Bullion for the last year or so once I realised Crypto isn't what it was looking like it can be.

I'm basically 90% Silver as it is been heavily manipulated by Futures markets and doesn't reflect the supply and demand Cycle, I expect any kind of Recession will basically open the flood gates.

If or when that happens I will start to move my money into index funds if they fall massively to get it while it's cheap.

I can't speak for everyone but I don't trust the Australian Dollar at the moment, our Reserve bank has been hinting for awhile that we are heading to negative interest rates which will ruin savers so apart from having an Emergency Fund all my funds will be into things outside Money.

 

[Dotini]

Stand by for an almighty global recession, with Europe leading the way down.



@mustafur I like your bet on silver.

 

[mustafur]

I can't name a single first world country that is in good economical shape, everyone has record lows or near record low interest rates which means their growth is slow or non existent as their country has been maxed out on debt and unable to take on any more, I will be very surprised if we get out of this one as good as 2008, the amount of stimulus required would basically wreck currencies world wide.

@Dotini I don't think at this present moment there is a better investment then Silver, all the stars are aligned, when you counter for inflation it's close to it's lowest ever price point and it's not that far above the mine price so it's risk factor for falling is minimal with the price rise potential limitless especially given the recession fears coming.

Alot of Bullion banks are already having supply issues with Silver and the price rise has been modest at best, the future markets manipulation has been overtly aggressive.