This has probably been my toughest post to write. I've been hinting at what is to come through posts like Deja Vu. I believe the economic impact to come will be very rough on all of us and it is the primary reason I headed to the sidelines (moved most of my individual retirement accounts to cash) over a month ago. It's the reason why I have been holding so much in savings and declining to take on any real estate and other deals for the last few years. It was also the reason why in my Investment Account I stop investing in roughly Q1 of 2017 and began trading options --- short term bets I wanted to win quickly and then get out off. I did well but I still have some bets on the books that have been pummeled and probably overexposed myself to retail and consumer discretionary stocks. I have invoked my sandlot strategy (taking my ball and leaving the playground) and this has only happened one other time in my Gen X/Millennial lifetime (I'm on the border --- take your pick). You'll see the other time was during the financial crisis. Instead of me speaking on what is to come, I've decided to rip from the headlines snippets of what the everyday people feel and believe are their biggest risks to come. Almost all involve too much debt and that's why I rally around a lyric in an old Kanye verse from the Beyonce Ego (remix): "What you want dog, Tryna stay recession free". Yes sir, to stay recession free is to stay debt free. See the risks of limited savings, too much debt (over-leverage), and not having enough capital to make investments when others are swimming naked.
----------------DEBT - THE CURSE--------------------------------------------------------------------
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The Human Toll --- No Free Lunch
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(The Washington Post) -- In
interviews with more than a dozen laid off workers and small business owners,
nearly all said their biggest economic concern was paying the rent or
mortgage in April. Many people across the country have monthly payments that
exceed $1,000. The median monthly rent in the nation is just over $1,600, according
to Zillow, an online real estate database company. The median mortgage
payment is $1,400. Millions of Americans don’t know how they will get
the money in time to make rent. The nation has 40 million renters, who
tend to be younger. Black and Hispanic families are twice as likely to rent
as white households, according to the Pew Research Center.
(Bloomberg) -- “If the
government tells me you’re good enough to get a loan, I have to trust and
believe in the government,” Castillo said. “Then we just hope and pray that the client doesn’t get foreclosed
on.” Matt Badders, a
San Antonio lawyer who represents lenders, auctioned off two houses. The failed
mortgages remind him of the run-up to the financial crisis 12 years ago, when
lending to customers with spotty credit nearly brought down the world’s
financial system. “We’re almost back to 2007, when mortgage originators
are waking people up on park benches, saying sign here,” Badders said.
After the last financial crisis, the fund required a $1.7 billion taxpayer
bailout, its first in 80 years. The government has since tightened lending
standards and built up the insurance fund. Because of rising home
prices, borrowers who bought years ago now have considerable home
equity, which could provide some cushion as well.
But recent loans are the most likely to
fail. In San Antonio, Erika Wilson, a 32-year-old home health
aide who was separated from her husband, bought her dream house in June
2018. It had an eat-in kitchen and more than enough room for her two
young daughters. Along with her other debt, the $1,900-a-month mortgage payments ate
up more than half her family’s income.
On Q Financial, an
Arizona-based lender, foreclosed on her loan. She’s still living there
because the federal government has suspended eviction proceedings in its
lending programs during the pandemic. “I messed it up,” Wilson said. “I
didn’t know what I was doing. It made me feel like I wasn’t adult enough to
own a home.”
“The third wave will hit when people
realize they are worth so much less, particularly the Boomers, who are
focused on their retirement,” Zandi told me. “When they realize their nest
egg has evaporated, they'll go into panic mode and cut back on spending, and
that further exacerbates the problem.”
(Barron’s) -- The Federal
Housing Finance Agency on Monday said that Fannie Mae and Freddie Mac would
offer mortgage forbearance to some multifamily property owners—on the
condition that they suspend evictions on the basis of nonpayment of rent.
According to the plans Freddie
Mac and Fannie Mae announced Tuesday morning, landlords whose multifamily
properties are financed through the enterprises may be eligible to defer loan
payments for up to three months. Landlords who want to take advantage must
show hardship as a consequence of the virus and gain lender approval, according
to the companies’ press releases.
(Bloomberg) -- Real
estate investor Tom Barrack said the U.S. commercial-mortgage market is on
the brink of collapse and predicted a “domino effect” of catastrophic
economic consequences if banks and government don’t take prompt action to
keep borrowers from defaulting.
Barrack, chairman and chief
executive officer of Colony Capital Inc., warned in a white paper and in a
subsequent interview on Bloomberg Television of a chain reaction of margin
calls, mass foreclosures,
evictions and, potentially,
bank failures due to the coronavirus pandemic and consequent shutdown of much
of the U.S. economy.
“To keep people employed, you
have to support the employers,” he said Monday in the interview. “The biggest
part of employer expense is rent. When commerce stops and they can’t pay rent and they
can’t pay interest on the debt, and then the banks and the intermediaries
can’t pay their investors, it all collapses.”
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Savings Accounts – Gets you through the rough
patches in life
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Investment Accounts – Allows you to take risks
when others are NOT – like today
· Individual Retirement Accounts – This is truly
for your future, why NOT wait for a sign that the recovery is strong
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