Ep. 168: What's Going on With our Market?

[00:00:00] Good afternoon. This is Gabriel Shahin, certified financial Planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. Today we go over the knowledge you need. to increase your wealth. Now to the listener, you can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning.

[00:00:18] Our phone number is eight five five nine six three twenty five. 26. That's 8 55 and 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com. First short, we can have a personal confidential conversation to help relate this show to your specific situation. Now, I'm a principal of Falcon Wealth Planning.

[00:00:42] We are a fee only independent registered investment advisory firm here. That's headquartered in Southern California, but we help people all across the country. Folks. We also manage money as well. But folks, we can help put together a personal financial assessment for you folks. We can help relate to things that we talk about on a weekly basis to you.

[00:01:03] We've helped thousands of people. We help all across the country. Folks, give us a call. We would love to help. Our phone number is (855) 963-2526. That's 8 5 5 96. like the bird. So today I wanted to go over with you just in general, just what's going. In the markets as a whole because as inflation is continuing to rise, even though it was less than anticipated the last time the reports came out, uh, you have to understand with higher interest rates affects a multitude of things.

[00:01:38] And when you look back a few weeks ago where you were able to lock in, or I should say maybe a month plus ago, a four and a half percent, one to two year United States Treasury folks, US treasuries are. A risk free rate of return, it is absolutely risk free for you. There is no way it could default. You know why?

[00:02:00] Because if the United States government defaulted, which means they didn't have enough money, Pay. You guess what the US government does? They have this back room, by the way, and it's heavily secured. And guess what they do there? They have this big lever. It needs two hands to get it going, and they pull this lever down and they print more money.

[00:02:19] You get why it's risk free. Now imagine having an unlimited printing machine at your house for printing money. Yay. You would also spend it like crazy, like with our government. Sometimes you feel is. . So what's my point there is they were paying that at a four to four and a half percent rate, where at the time interest rates on one of those online banks were paying two to 3%.

[00:02:39] So this is extremely important when the risk-free rate of return is north of 4% on only a one to two year United States treasury. Now let's go into more focus of how. Affects you. So when you take a look at a bond right now, bonds price, US bonds have dropped significantly. Even international bonds at that as well.

[00:03:05] Why? Why as interest rates go up. Bond prices go down because who's gonna want a 5% bond or a 4% bond? When you get a risk free of four and a half percent? You get what I'm saying? Nobody's gonna win the right mind just for an extra half a percent, put their money at risk of a company that's subject to maybe defaulting something with market fluctuation.

[00:03:29] Absolutely not. It makes no sense. Right? For sure. Now focus on real estate. A lot of real estate properties out theres going for four to 5% what's called a cap rate. What does that mean? You buy property for a million dollars, it nets 50,000 a year, over 4,000 a month. That's after insurance, after property tax, after maintenance, after association dues.

[00:03:52] Okay, well, what's the big deal there? Who really cares about a four to 5% return where you can get a risk free, hassle-free return. Four and a half percent of a US treasury folks. This affects bond markets. This affects real estate markets. This is extremely important on why you are seeing one of the many reasons you are seeing real estate prices dropping, not just residential, but commercial as well.

[00:04:21] Yes. It's more expensive to buy it because the interest rates are now in the 6% plus range. Yeah, that makes all the sense in the world because now your payment. Is much higher than it was before. Your payment is roughly 50 to 60% higher than it was a year ago if you were to finance debt. So yes, real estate has taken a hit.

[00:04:47] It's logical. Folks, this is basic Economics 1 0 1. We are taught this. When I was 19 years old in economics 1 0 1. Then again a few years later when I took one of those 400 level finance courses. Then a few years later, when I decided to get my series seven licenses were taught this. Then a few years later when I decided to get my certified financial planner designation.

[00:05:07] Then a few years later when I decided to get my mba, not right after college when I had zero experience, I wanted it 10 years after experience. You get what I'm saying? Everything that's happening right now is text book to what we have been. So let me enlighten you on some more knowledge. By the way, folks, if you're just joining us, you're listening to Gabriel Shanin, certified Financial Planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance.

[00:05:35] And today we are talking about the basic core economic principles of interest rates going up in higher inflation. Focusing on interest rates going up is extremely important. And here's another example of what gets hurt, what gets punched in the. when interest rates go up and oh, by the way, our fed chair has been talking about interest rates going up for a while.

[00:05:57] Since the late 2018. They've been mentioning it. They mentioned again in 2019. They said it would be a couple years then. what happened? Covid happened in 2020 and they raised rates, or excuse me, they lowered rates even more. Why do you think real estate was popping at that point? Why do you think it was doing well?

[00:06:15] Because interest rates were lower. You can afford that house, that extra $50,000 on that house. That's probably why you were seeing people over bid on some houses where you were at the time, back in 2020 and 2020. . This is why tech companies did really well. Listen, they were losing billions of dollars, a lot of these comp, uh, tech companies.

[00:06:33] But when you're able to borrow at virtually nothing, this was for two reasons. Number one, to Covid. They gave a lot of relief out there from a small business owner's point of view. They call that payment protection, those P P P and also E I D L loan, these disaster loans that they gave out, they also did this to Fortune 500, 1000 and 2000 c.

[00:06:54] They were handing these out so they were able to sustain continually making no money. Amazon did that. They turned out pretty well, right? They made no money for a long time. Tesla. Woo. Talk about a great example. I swear to you, they came out at the best possible time ever, why they came out. During a low interest rate environment and they exploded.

[00:07:15] They were able to use their money to fund their idea by losing billions upon billions upon billions on an annual basis, at times quarterly basis, because they had a vision that they were able to continue to expand. They were the perfect storm to be where they are today, and a perfect execution, and they had no marketing.

[00:07:33] They had arguably one of the greatest marketers of all time, an Elon Musk. . What's my point with this story is tech companies do amazing in low interest rate environments. In hindsight, it was textbook. You should have invested in a lot of tech in 2020 and 2021. Naturally, you should have in a low interest rate environment, it's kind of common sense, right?

[00:07:56] You have banks that's lending money Extreme. . You have private equity companies, you have head funds, you have individuals that are able to get money at a low rate and give to these investment companies to lose these billions of dollars. Heck, that happened with Zoom for a long time. Happened with Peloton for a long time.

[00:08:14] It happened with Open Door, it happened with Zillow, it happened with Trulia. It happened with many different companies. I'm gonna list a lot of these companies. Carvana was another one. Redfin was another. , uh, I already said Peloton. There's a lot of them that are out there. Folks that just continue to lo lose money.

[00:08:31] Roku is another one, wicks another one. So there are over 30 tech companies, mo worth of billions of dollars at the time that have lost over 75% of their portfolio value, of their asset value. They were, were worth 150 million company. Now they're only worth eight. . So in a low interest rate environment, tech companies do very well because of the high valuations, because of low interest rates.

[00:09:00] Where else are you gonna put your money? Banks included, they were able to get these tech companies. To pay rates of five, 6%. Now, here's the thing. When interest rates start going up, tech companies hurt a lot more. They're not getting these empty paychecks, these empty checks to help fund their company and their dream.

[00:09:19] People have to be tighter. Banks are a bit tighter on how they lend private equities and hedge funds are a bit tighter. They can't just borrow money at 0.5% to put into these tech c. . It doesn't work like that anymore. They actually have to care, especially where they can put their money and get a four and a half percent risk free rate of return.

[00:09:39] So now it's more important than ever. Which is why when you are in a low interest rate environment, you shouldn't be focused on hurry I paying off your mortgage. You know why? Cause you're two and a half percent mortgage, why would you rush to pay off a two and a half percent? Which, oh, by the way, is a writeoff.

[00:09:54] Depending on your tax bracket, a two point a half percent mortgage might be 1.1% on after tax basis. So let's just say everything's pre-taxed, pre-tax, two and a half percent mortgage, and you can put your money right now in a four and a half percent. two year treasury. You get what I'm saying? I'll never forget this.

[00:10:13] I got a car, this was in May of 2018. I got Tesla. I was one of the first model three people to get, I was very excited. I live in Southern California. It was great. So I got it. Got a two and a half percent at the local credit union, American Christian Credit Union. Then from there, as I was walking out the door, they had a CD special, $10,000.

[00:10:32] You know what? They were gonna pay me 4%. So I'm like, wait a. . I just got a loan from you guys at two and a half and now you're gonna pay me four. I'm ahead. One and half percent. It's the same logic folks. Banks are smart. Maybe not that credit union if you know what I'm talking about, but banks are smart cuz they're taking your money and they're making money off.

[00:10:53] And if the risk, risk-free rate of return is four and a half percent, why are they gonna waste their time with? paying four or 5% on a loan. They're not. So they're gonna make it harder for you to borrow, number one and number two, it's gonna be at a higher rate. Now let's talk about these tech companies, right?

[00:11:09] Tech companies. Why are they gonna have a tough time? Exactly what I'm saying. They're gonna have a tough time restructuring their debt, folks. Why is that? Well, because they owe these banks, and the banks may not want to restructure or remodify their. and I'm gonna talk to you about why they don't when we come back, because there are a lot of different things that you have to look at that you're not paying attention to.

[00:11:32] And you're invested in tech companies, you're invested in growth companies, you're invested in general, and you have cash reserves. You should be talking to a professional cause there's so much out there you don't know, which you don't know. Folks, give us a call. We would love to help. We'll offer one to two meetings, one to two hours of our time at no cost.

[00:11:48] Our phone number eight five five nine six three. 25, 26. That's 8 5 5 96. Falcon like the bird. Folks, we're gonna go on a quick break and we'll be right back at for after a few words.

[00:12:03] Welcome back folks. This is Gabriel Shahin, certified financial planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. Today we are talking about just markets in general and interest rates going up, and what does this mean for your portfolio.

[00:12:20] We're gonna discuss what it means on just the rate side from an investment, from a bond point of view, because right now your bonds are getting smashed in. and the Fed said they are not done. They said they're still gonna continue to raise rates to q2, to Q3 of next year, which is 2023. But let's take a step back.

[00:12:38] We talked about why banks right now get a tougher worth their money to lend out. Why do they wanna lend out to you for five to 6% where they can get a risk free rate of return from the United States government, from a US Treasury at four and a half percent for one to two years? Okay, so what are you trying to.

[00:12:54] Well, these banks have given loans out to tech companies that have been losing billions and billions and billions of dollars. That was so easy before for them to get money. Before from investors, private equity companies, hedge funds, and banks. Well, now banks are saying, Hey, we don't need that as much.

[00:13:09] You're paying 4% on this loan, even 6%. Well, these companies are gonna have a tough time paying these back, especially if they're non-revenue and they're not getting any new money. Hell, it almost sounds like a Ponzi scheme to me, but now I'm being facetious and I'm making bad jokes. , but my point is these companies are losing billions and billions of dollars, and yet again, it's happened to companies like Amazon, like Tessa, like Apple, where they've lost a lot of money in the beginning and later turned a profit.

[00:13:36] Yet again, if the vision is strong, banks are gonna continue to fund it. But if the vision is, eh, not so much. So why are the banks gonna say, you know what? Let's foreclose. , let's go there so we can siege. Let's put this company into bankruptcy so we can seize our assets. Why would they do that? Well, because they might, these companies, if they don't get their money first, other companies might be doing that for them too, putting them into bankruptcy.

[00:14:01] The banks want their money first because there is still a value to those companies. So if they were to default on the loans and they come after through bankruptcy hearings and go there and try to grab their money, at least they're one of the first people to grab it to. . So this is extremely important to know how it works, as the banks are saying, we'd rather get our money now versus later.

[00:14:24] So this is why tech companies will continue to struggle into Q2 and Q3 of next year. Some are still gonna do great. Why? Cuz the vision is strong, but others are struggling and I named a few of them earlier, whether it's Peloton, whether it's Zoom, Zoom's actually making money now, but when you're looking at, uh, multiple red.

[00:14:46] Zillow, Trilio, wicks, Roku. I mean, there's just a bunch of companies out there that are down 75% plus and they're losing money. So those are still gonna continue to struggle. And growth companies in general typically are traded at their current value based on what they're expected to. , this is a problem that you should be understanding in your portfolio.

[00:15:14] You're seeing this, what's happening in the NASDAQ or qq Q is another one. These are tech companies, minus financials. They're struggling. They're down a whole bunch, almost 30% for the year. So while the dao, which has a lot more value, companies that are down, what, maybe 10% for the year, maybe. value companies right now is where the money is made.

[00:15:38] Why do I say that? Because these are companies that are actually making money. These are companies that are actually turning profits that are cheap based on what they make and what they're trading for. They are a value purchase. This is why. You're able to see good returns on value companies. Now, what is a value company, by the way, what I'm saying is not to go buy or sell these stocks right now, but value companies are like Johnson and Johnson, Proctor and Gamble, McDonald's, Pfizer.

[00:16:09] These are companies that's been around that turn profits on a consistent regular basis. Coke, Pepsi, ups, FedEx. . So by understanding these characteristics, you can have an idea of what to expect. Especially when the feds, every time in 2022, when the feds increase their rates, bonds dropped, which is crazy to me cuz everything is supposed to be efficiently priced.

[00:16:34] If you look at the five year return numbers of some of these, they're dismal. Not only because it was a poor year this year where the average aggregated bond index is down 15%, but what I'm saying, , when you take a look at the previous five years, the reason they were so bad a few years ago is cuz the Feds told us they were gonna raise rates.

[00:16:51] So they're instantly right then and there, they dropped in value. As we were approaching the first rate increase in 2022, they were dropping in value cuz everybody knew the rates were gonna drop and then what happened? Rates went up and then bonds dropped, which is crazy. We knew everybody knew the rates was gonna go off.

[00:17:06] Then number two happened. Rates went up again, bonds dropped. It's like, what the heck? We knew that we know when the feds meet again, they're telling us they're gonna raise rates. Rates went up. The third time they dropped again. Are you gonna continue to hold bond in your portfolio? No. Our clients have Falcon Wealth Planning.

[00:17:21] What did we do? We had to adjust. We had to make changes. We bought the United States Treasury. We helped put our clients in private debt and some other investments. You can't just continue to catch a fallen knife. What are you doing? The stocks were down 30%. The bonds, long term bonds were down 30%.

[00:17:36] Everything was down 30%. . Insane, but people didn't make changes, professionals didn't make changes. This is insanity if you ask me. By the way, folks, if you're just joining us, you're listening to Gabriel Shahin's, certified Financial Planner and your host, more Knowledge, more Wealth here on every weekend, talking about all important items of personal finance.

[00:17:56] And today we're talking about the rising rates and what does that mean in general for you making changes is necess. , listen, you wanna stay on course. You hear buy and hold. Buy and hold is extremely important. It is because on the stock side, especially assuming you're in index. Hey, how did buy and hold work for you for Chevron and Enron?

[00:18:17] Excuse me. Enron. Chevron's doing great. Look at oil and gas, but for Enron, WorldCom, Lehman Brothers, Baird, Stearns, Washington Mutual, radio Shack. How did that work for you? Buy and hold, but if an index, you're gonna be fine. Why? Cuz this is hundreds of stock, thousands of stock, depending on the industry, but on bonds, you can't just do that.

[00:18:36] Even those who believe in indexes more than anybody will tell you you need an active approach to. . You can't just sit there in a volatile interest rate environment and do nothing. It's insanity. And if you wanna argue with me, show me Vanguard's portfolio and how their index is done versus Fidelity's actively managed.

[00:18:57] Why do I'm picking on those two. Hey, we use both of those. We like both of these companies, but it's always been a battle between Van. And Fidelity Vanguard believes in passive management. The Bogleheads Fidelity believes, Hey, remember Peter Lynch, they believe in active management. They'd always fight against each other, passive versus active.

[00:19:13] Well, passive has proven to win in stocks over long periods of times, but on the bond side, active absolutely destroys passive. Absolutely. . Now, when I say 50% increase, that doesn't mean 50% return. That means one may get 2% passive and active may get 3%. That's a 50% increase. You get what I'm saying? This is extremely important for you to analyze your portfolio, to understand your situation and what you should be doing.

[00:19:45] And folks, if you need help with this, if what I'm saying sounds logical, what I'm saying is true and you feel your bond prices have dropped in value and you're getting frustrated by it, folks give us a call. We would love to help. We can help execute this for you. We do this on a daily basis. We can give you the advice, we can give you one to two hours, one to two meetings up our time at no cost spokes.

[00:20:04] Our phone numbers eight, five. 9 6 3 25 26. That's 8 5 5 96. Falcon like the. I'd be happy to put together an assessment for you to help relate the show to your situation and answer the questions that you have. Cuz right now in the rising environment with our government, with the Fed chair saying they're gonna continue to raise rates from Q2 to Q3 of 2023, you gotta act, you gotta do something.

[00:20:31] If not, I'm sorry, I'm gonna say it. You're absolutely crazy. You don't respect money or you're too, I always say you can't afford to be cheap. You can't. . You know why? Because look, you're losing money. As an amateur. Good job. You lost the right to complain because you're being told right now what you need to do.

[00:20:51] So take it easy. Understand that situations are able, by looking at your situation, are able to execute a different outcome. But you have to be able to. because right now you have to look at as rates are continuing to increase and you're still in your treasury, inflated, protected securities, or you're still in your, uh, as I was saying, tips or your intermediate term bonds, long-term bonds, and even short-term bonds, and you're doing nothing.

[00:21:19] as interest rates are going up. Sure there's been a little recovery, but the rates are still going up. We still have inflation coming and part of the reason inflation numbers probably went down is because gas prices went down cuz we're unloading from our reserve at billions of gallons a day. Don't get me started on that.

[00:21:35] That seems insanity. Doing that to lower prices. You should be doing that to make sure we have oil reserves. Hey, you've heard from the earlier segment, I got a Tesla, I can care less of gas prices are $10 a gallon. Why? Because, hey, I got a Tesla. I'm fine. But because I'm not selfish, it matters on the market.

[00:21:53] It matters for you and it matters for your overall portfolio. And now we're talking about inflation. It's all fiscal policy to make you think you understand what's going. talk to me mid to late 2023 maybe. Then it's time to get back into the bonds, especially as the market is saying, and our fed chair is saying they're gonna slow down rate increases, then they're telling us what they're going to do.

[00:22:19] Do you not understand that? If you do not do anything, is madness to me. . If you need help with this, if you still have any additional questions, folks, reach out to myself or any one of our colleagues. We got people all across the country, folks. We help people nationwide. Sure. Headquarters as I don't know. I work there in Southern California, but give us a call.

[00:22:39] We would love to help folks. 8 5 5 9 6 3 25 26. That's 8 5 5 96. Falcon like the. Or visit our website@falconwealthplanning.com. That's falcon wp.com for short. We can help put a personal assessment to help relate this show to your specific situation. Fast, fast show. Every time we do this show, it seems to be going faster and faster.

[00:23:09] Folks, I want to thank you for tuning in with us this weekend. You can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning. Our phone number is eight five five. 9 6 3 25 26. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for sure.

[00:23:30] We want you to enjoy your weekend. Have a great week. Have a blessed holiday season, folks, and have a happy New Year. If I don't talk to you, God bless.