Replies to post #14564 on A.I.M. Users Bulletin Board (AIMUSERS)

[aim hier]

Hi Tom,

I don't know whether to be scared by this article or consider it a contrarian sign of good times to come. If higher interest rates and inflation are the only way out of our 'debt bubble', now is not a good time to be debt free, it's a time to have a lot of long term fixed rate debt invested in assets that are likely to appreciate with inflation.

The world economy is so complex that I'm not sure anyone can really understand it. I have a record level of cash, for me, so I think I'm relatively well prepared for whatever is to come. I'm not sure armageddon is coming, it's been predicted a number of times before. If this situation was so obvious, why are long term bond yields below 5%?

[fire400bird]

Hi Tom,,

I have not posted in awhile and have a slightly different screen name. The scenario of that linked post rings all so true here in Indiana. Somebody had to lead the nation last year in foreclosures and bankruptcies,, and that was Indiana. We bought and sold our homes thru the same real-estate agent 19ys and 9 months apart. He's says worst he's ever seen in Indiana,, period. I asked him why all the cheap end homes 65k to 80k sitting empty around our neighborhood schools? He answered most are held by banks after foreclosing,, that's why they are empty. Very good friend works for Beazer Homes(large builder) and says I can get people financing up to 43% of gross,,, we thought going from 25% to 28% years ago was a mistake,, 43% or under of gross to qualify is ridiculous! Yes, no down payments either for a new home, they have grant money,,,,and almost all he tells me are on adjustable mortgages as your linked article states. I'm in my 40's and have never seen so many broke people in my life! I hope we get those rate increases myself,, I have money saved too,,, best to all on the board during our holiday season, Fire

[aptus]

Hi Tom,

That was an interesting article. Here's a link explaining what Warren Buffett has to say about the Trade Deficit --> http://www.freerepublic.com/focus/f-news/1053684/posts

I think there are two kinds of debt: good and bad. The bad is what many people have right now -- and that is using debt to purchase consumer (i.e. assets that decline in value) goods and services. I don't think anyone should have that kind of debt because it exposes them to all sorts of problems (from having to pay high interest rates, which takes after-tax money out of their pockets, to living paycheque to paycheque, which makes them very susceptible to economic changes, such as interest rate hikes and the like).

On the other hand, good debt is, well, good (when used intelligently). I'm a firm believer that if you have no bad debt and you're living below your means (i.e. your income covers all of your expenses with some left over for savings/investments) then you should have good debt (i.e. debt that is used to purchase assets that appreciate faster than the costs required to service that debt).

Examples would be a well-diversified basket of stocks that have been fundamentally checked and allocated properly as well as certain types of real estate (more on this in a minute).

The reason I like good debt is because it allows you to leverage other people's money to build your wealth. Of course it is possible to overuse even good debt and get into hot water, but the concept is that everyone should be trying to maximize their wealth building endeavors and good debt allows this to happen.

Now back to real estate... Many large cities have seen some tremendous housing price gains in the past few years. Coupled with a rising vacancy rate (partly because younger people are living at home longer and then purchasing more and more condos rather than traditional houses, not to mention the impending interest rate hikes -- I mean we're at historically low rates right now so it doesn't seem feasible that they can continue to drop), this means that the demand for houses in certain cities have to come down eventually.

Add to the fact that the baby boomers will start retiring very soon (and continue to do so over the next 20 to 25 years), means, I think, you'll see people start to sell their hyper-inflated houses, pull the cash out, and move to retirement cities and towns where they can use their stashes of cash to purchase more reasonably priced homes. This should have the effect of further decreasing traditional home values and raising retirement destination home values.

Others might also decide to keep living where they are (for whatever reason), but purchase vacation homes right now with an eye towards eventually retiring there.

I'm seeing this trend where I live. Many people are retiring here (actually many have already retired here, but they keep coming) and there are 5 houses on my street that don't have year-round residents. These people use their homes as a vacation property right now and plan to build their retirement dream house as soon as they can.

In my area, there is an abnormally high number of retirement dream-home construction going on -- so much so that I'm finding it difficult to find a builder to do an addition I've had planned for 5 months.

This only serves to drive up all prices in the area. As my uncle once told me many years ago, if you buy an investment property, ensure it's either a starter home or a very high-end home.

If the economy tanks, the average man-in-the-street will still need a place to live, so you will be able to sell (or at least rent) a starter home. And of course people who can afford the very high-end homes aren't usually affected by such economic events -- if they want to purchase a home, they'll purchase a home, regardless of the economy.

Of course most of us can't afford the very high-end homes, so that leaves starter homes. It's the ones in the middle that should have more problems.

So it seems to me that eliminating bad debt, using good debt to its full advantage, holding a well-diversified portfolio of stocks and/or ETF sector funds and investing in retirement area real estate (starter homes) before prices explode would be a good way to go.

At the end of the day house prices (and well selected equity portfolios) usually keep up with inflation (at least), you can always rent a house (since people will always need a place to live -- especially if they have just lost their house because of too many bad debts) and you can get other people to pay down the mortgage while enjoying the rise in value.

That's my plan anyway :-)

[DonCarlson]

Interest rates going up....hmmmm....for those of us holding EAD, ACG, or other hi-income bond funds, we don't really want to sell those funds and lose monthly income...also we do not want to take a huge draw down as interest rates go up.

So, what can we do? I've been considering buying some RRPIX (a 125% inverse of the 30 year treasury bond), so when interest rates increase, so does RRPIX. I would appreciate comments on this hedging approach.