I would be interested in a follow up on these strategies.Originally Posted by Sensei
Perhaps another thread, dedicated to that line of thought...?
I would be interested in a follow up on these strategies.
Perhaps another thread, dedicated to that line of thought...?
"who will take care of me?"
how about you take care of yourself? you can buy stuff, you can pay for a service, but you can't pay someone to care.
A dear friend has been involved in financial assets (owning, selling, financing) for multiple decades. His opinion, reluctantly shared over adult beverages, is that most (but not all) of the currently rich will lose a large part of their wealth rather quickly as interest rates rise. This is because asset values fluctuate with interest rates.
FORMULAS: The most important contributor to the value of financial assets is their capitalization (cap) rate. My friend suggests thinking of the cap rate as an "interest rate" received for that particular purchase at that particular moment in time. One formula determines cap rate: Net income divided by price paid equals capitalization rate (in decimals). EXAMPLE: An investment with a net income of $10,000 annually and purchased at $100,000 has a 10% cap rate.
Another cap rate formula reveals net income: Purchase price times cap rate equals net income. A purchase at $100,000 multiplied by a 10% cap rate reveals a net (annual) income of $10,000.
And a third formula tells us the purchase price: $10,000 net income divided by 10% cap rate equals the $100,000 purchase price.
HISTORICAL TREND: Rates have dropped in the recent half of this secular cycle. Much wealth was made from declining interest rates. Interest rates for the 10 year Treasury peaked at a touch over 5% in June, 2007. Considering only the effect of changed interest rates (using the 10 year Treasury note as a substitute for cap rate), an annual stream of income of $10,000 capitalized at 5% yielded a value (June, 2007) of $200,000. In other words, back then if a person wished to earn $10,000 annually, he could do so with a $200,000 investment at a 5% yield.
Eleven years later, in June 2016, rates had declined to 1.5%. That $10,000 stream of income capitalized at 1.5% became worth $667,000. ($10,000 divided by .015). The value of the investment more than tripled due solely to lowered cap / interest rates.
FORECAST: My friend believes we're entering the first half of the next interest rate cycle. That's the part with the climbing rates. Already rates have climbed from the June 2016 rate of 1.5% to the current 2.85%. That $10,000 stream of income, worth $667,000 two years ago, is now capitalized at $350,000. The rich are already losing significant wealth due to rising cap / interest rates.
MINSKY MOMENT: The recent extended period of ever-lowering rates (and consequently ever-rising values) encouraged nearly everybody to borrow money. Even the hugely rich try to leverage their wealth. When a family buys an office building in Manhattan, or a chain of franchised restaurants in the mid-west, the purchase price is commonly at least partially borrowed. As cap rates climb and the asset's value deteriorates, there comes a time when the asset cannot be sold for even the amount of the existing loan(s). At that point, everything collapses as Bill and Mike discussed ("The Sun Also Rises"): "How did you go bankrupt?" Bill asked. "Two ways," Mike responded. "At first slowly, then suddenly".
CONCLUSION: This is only the normal interest rate cycle asserting itself. As it rotates the rich are displaced from the top and replaced by (formally) second tier folks who invested wisely at or near the last interest rate peak. When this happens the currently rich will have more to worry about than a rebellious security force.
Everyone needs a son and a daughter. Your son makes sure that your nursing home bill gets paid. The daughter makes sure that they are actually wiping your ass.
Aside from getting your progeny right, my recommendation to weather the coming centers around 2 principles:
1) Have a marketable skill that cannot be automated and will alway be needed. In other words, we will always need someone who can remove an appendix or build a bridge; a chief diversity officer - not so much.
2) Begin preparing you body, mind, and portfolio yesterday. Do not do stupid shit like carry unsecured debt, extra body weight, intoxicants, or worthless people.
If you follow those simple rules, you will likely die old and comfortable unless you get really unlucky.
Last edited by Sensei; 07-22-2018 at 07:04 PM.
I like my rifles like my women - short, light, fast, brown, and suppressed.
In the meantime, the MLB vice president for social responsibility and inclusion (yeah, it's a thing) has a salary over one million dollars. Yep, it's a brave new world.
Control what you can. To Hell with everything else.
I like my rifles like my women - short, light, fast, brown, and suppressed.
I know who the author is but don't accept the fact this meeting occurred. If it did, I'm not certain that he was the best qualified to answer the big question. And if it really took place, how can the author generalize from a minute sample to the rest of the super-rich population. One question should have been will all the self absorbed narcissistic pricks chosen to live in the bunker get along, and if they won't, how can we make them, and while we have you here, must we include a certain number of trannies and others to maintain diversity?
I have serious doubts whether or not Sid meeting really occurred either.
I figure to be dead by 2042 at the latest. What you all do after that is up to you.
"Gunfighting is a thinking man's game. So we might want to bring thinking back into it."-MDFA
Beware of my temper, and the dog that I've found...
Hey, if it turns out that the lights are still on afterward, try to find me so we can hang out and make fun of everyone.I figure to be dead by 2042 at the latest. What you all do after that is up to you.
There's nothing civil about this war.
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