More Knowledge, More Wealth - Ep 153: Interest Rate Hike

MKMW 153 Interest Rate Hike

[00:00:00] Gabriel: Good day. This is Gabriel, Shahin certified financial planner, and your host of more knowledge for wealth you're on every weekend. Talking about all important topics of personal finance. Our goal is to give you the knowledge you need to increase your wealth. Now to the listener, you can always reach out to myself or any one of our calling here at FA wealth planning.

[00:00:58] Our phone number eight five five nine six three. 25 26 that's 8 55 96, Falcon like the bird, or visit our website at Falcon wealth, planning.com. That's Falcon wp.com for short. Now I'm a principal of Falcon wealth planner. I'm the only registered investment advisory firm, and we have offices all across the country that we can help you with.

[00:01:22] And we specialize in anything that involves a dollar sign. We are feet. That also does investment management as well, but we cover anything that involves the dollar sign folks that goes over where you are today. How retirement looks like talks about taxes, investments, estate, planning, insurance, folks who name it, anything that involves a dollar sign.

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[00:02:04] That's 8 5, 5 96, Falcon like the bird. So today I wanted to talk about interest rates and the feds just raised rates. Another 75 basis points. And what does that mean for you? And if you notice the stock market really didn't react negatively, how is that possible? How does that make sense? What is going on here?

[00:02:24] Does that mean? My interest rate of my mortgage is up almost 1%. Now, if I'm shopping for a house, if the current rates were 6%, does that mean it's gonna be 6.75%? Folks. I am happy. You are bringing that up and you're sending me these requests. And if you do have requests that you have questions, please email radio, Falcon, wp.com, and we're able to answer those questions for you.

[00:02:48] And we can even play the audio file if you want to ask it via audio file. My point is there are two different types of interest rates. When the feds raise rates. The first one is like the prime rates and the fed fund rates. When they see them raising rates by 75 basis. that gets affected by direct lending.

[00:03:08] What is direct lending? This could be lines of credits, whether it's your home equity line of credit, but personal line of credit, your credit card fed funds when they raise these rates, this affects. Current borrowing. And it's very important, especially on variable loans as well. There used to be something called LIBO LIBO really does it exist?

[00:03:28] That used to be a London based index, which would talk about interest rates. Now it's fed funds seems to be the most reliable that everybody's discussing. That is important because yet again, a lot of dent is tied to that. Not mortgages though. Mortgages are not tied to. Mortgages are tied to the 10 year treasury.

[00:03:50] And what I like to say is governments control the fed funds and the primes, but we control the treasury. that is truly based on supply and demand. Actually, what happened during that time with, uh, last week is when interest rates were up by 75 basis points. When the feds increased it, the 10 year treasury dropped from like 2.8 to almost 2.5%.

[00:04:15] That's a big re. Folks that's about 30 basis points drop, which means those who are currently in escrow with an interest rate on their mortgages, six in eight, they can currently get five and a half percent rates drop significantly. The rates you think the stock market is well told the treasury market has been way more volatile than the stock market.

[00:04:37] And so you have to know that treasuries is what. Mortgage companies use to identify how much you're gonna be paying. That is an important piece to understand the distinction between the two, because they also the treasury effects on the bond prices, which is like in your portfolio yet again, fed funds are important.

[00:05:02] And prime rates and so on does affect consumers. Cuz a lot of what they're using is lines of credit. Your mortgages are locked, they're fixed. You can't really change that. That's no big deal. That's not an issue. The issue becomes is your free cash flow could be affected. Cuz now your prime that used to be your mortgage used to be three in a quarter home equity line of credit.

[00:05:23] I should. Uh, is now maybe 6%. So it's got up substantially over the past 12 months, let alone the past six lots. So when you compare that to the. To the 10 year treasury, which is always key indicator of the 10 year treasury heck a two year treasury is higher than the 10 year treasury, which happens when it's so volatile.

[00:05:45] Unfortunately. And so this affects mortgages and mortgages look to and are normally tied to the 10 year treasury rate. And they're currently, they hover. I mean, as I'm talking by the time you'll listen to this, it's gonna change it's at roughly two and a half to 2.8%. It seems to go up and down. It's it's very.

[00:06:06] Very volatile by the way, folks, if you're just listening, you're listening to Gabriel, Shahin certified financial planner and your host of more knowledge, more wealth here and every week, and talking about all court topics of personal finance today, we were talking about the interest rate hike that the feds did last week.

[00:06:21] and it went up by 75 basis points again. And crazy enough, the market actually seemed to have liked that probably because the stock market doesn't like uncertainty and our federal government did say they're going to raise rates by 75 basis points and sure enough, they raised it. So they. Listen, they finally agreed.

[00:06:41] They said, and did what they were gonna do, what they said they were gonna do. So the stock market seemed to have liked that. And I know we came off another quarter of declining GDP. You know what that is considered that is actually considered a recession. So we have actually entered official definition of a recession.

[00:07:01] Now people are talking, is this really recession? You know why they're saying that? Because. The costs have gone up significantly as well. And the feeling that consumer sentiment is not as negative and as dire, especially with low unemployment numbers are still in the 3% range. So this doesn't really seem like a normal recession.

[00:07:22] What has happened is because the tech companies, what interest rates are low. they do very well. They seem to be a cyclical industry sector. When interest rates are low, they get a lot of cheap money to help in their growth. Even when they're losing billions of dollars. I mean, Tesla really came out. If you think about it in the perfect storm, they came up when a low interest rate environment.

[00:07:43] So it was easy for them to continue getting money after losing billion. Billions upon billions on an annual basis. Now they're finally profitable making netting billions of dollars. So really I feel sorry. Number one, for all those other electric companies, uh, that are out there, um, electric vehicle companies.

[00:08:02] But my point is this matters. With low interest rates and a lot of tech companies were completely overvalued because of that, that is important to note. Do not forget that that these companies were successful based on outside money, keeping them afloat. That's a serious, serious problem. And we see that happening time and time again.

[00:08:24] So as interest rates go up, techs get punched in the face and we see that often. And so there's no difference. We saw that during the.com bubble. We see it now. Heck a lot of these companies have bonds that need to get refinanced. Well, those bonds are gonna get refinanced at a higher interest rate. Some of.

[00:08:40] Banks at these financial institutions, I should say will not refinance the debt, cuz they're considered too risky. How are you gonna pay us back? So you might be even. bankruptcies come upon this as well. That does affect that's. The fed fund increases does affect all of that, but going back, this is different than the treasury and the 10 year treasury matters.

[00:09:03] You should be looking at that at a daily basis, especially if you're looking to buy a house and interest rates did come down from that where they were, they were over 3%, the tenure treasury. Now, of course they're close the two and a half range, depending on the day that you listen to this on the video or on the podcast or on the Spotify, or if you're listening live, it's roughly two and a half percent currently.

[00:09:26] So the purpose I'm telling you, this is not everything is created equal in interest rates. Like right now with the feds increasing rates, you can go on ally bank, American express in capital one and get rough. 1.5%, 1.4 to be specific as of today, which is. On the 5th of August. And so these are important factors to look at that.

[00:09:53] Now, now, granted inflation is going up on track for 10% and we're over here excited about 1.4% interest rate. Of course, we're not excited about it, but at least it's better than nothing. The 0.1% you're getting at bank of America, the 0.1%. You're gonna get. And the 0.1% you're getting at Wells Fargo. So you'd have to just explore what's out there.

[00:10:16] And that's why there is no substitute of just revisiting your situation. Yes, I agree. Cash is king right now, especially times of volatility. There could be some great opportunities for real estate investments. Once this thing drops a little bit, which. Just looking at history. It should, because people can't afford the homes of what they used to be at a five and a half to six point half percent interest rate.

[00:10:39] So naturally it should. It's common sense that it should. And I'll talk to you a little bit more about the common sense of the financial and investment world. When you look at bonds, why have bonds dropped so much at Falco wealth, China, we like short term high quality bonds. We recommend that for you, especially in an environment like this.

[00:10:58] Because as interest rates go. Your bond prices drop and what's supposed to be conservative. There are certain bond indices over 20 per 20 year bonds that have dropped over 20%. So I'm gonna talk about why here in a little bit, but if you need help with this, there's always ongoing changes. Take a look at your situation.

[00:11:20] We can, we could point you in the right direction. We can give you low hanging fruit, just like of a high interest rate that are out there or other things that you should potentially do. Give us a call. We do this on a daily basis. Folks, we can help you with this. Our phone number is (855) 963-2526. That's 8 5 5 96.

[00:11:44] Falcon like the bird, or visit our website@falconwealthplanning.com. That's Falcon, wp.com. For sure we could help answer your questions and we have offices and we can help you all across the country. Folks would be happy to help. We can identify the things that you should be doing. And the thing is not many.

[00:12:06] If any financial professionals help in trying to increase your overall net worth, most of them focus on investments. So we'd be happy to help. We're gonna take a little break here. We're gonna talk more about the bonds and interest rates and why one goes up. And the other goes down after a few words, stay with.

[00:12:26] Welcome back folks. This is Gabriel Shahin certified financial planner, and your host of more knowledge, more wealth you're on every weekend. Talking about all important topics of personal finance. Today, we're talking about the interest rates and we're talking about the difference of the treasury rate, uh, the 10 year treasury to be specific and the fed funds raising prize raid, uh, the feds raising fed funds in prime, uh, just last week.

[00:12:49] By 75 basis points and how this is important and how it affects many, many things. It affects corporations to have lines of credits and loans, even a loan that are variable. Most corporate loans are variable loans. So as the interest rates go up, that's more, they're gonna have to Panama the. Basis. And a lot of these reset either annually or every six months or some of them every month, even because they're variable variable, not just on the loan side.

[00:13:15] So you are able this effects, you are able to see the impact of the company's cash flows, especially those that are highly leveraged. And it could be for you as well that we're looking and utilize your home equity line of credit on a daily basis. If now those go up by 1%, that extra, if you have a hundred thousand dollars debt on your home equity, and it goes up by 1%, it's just went up by 75 basis points.

[00:13:40] But for simple math, that's a thousand dollars more that you're gonna pay on an annual basis. That's roughly $85 extra a month. So, how does this impact you and your investments? And this is why you should be talking to a professional and consistently looking to review your situation. It's because when you look at the bond world, when you see that interest rates are going up, you have to identify, Hey, our feds are still saying that they're gonna raise the rates.

[00:14:08] You have to identify that bonds. This is not an opinion. This is a matter of fact, when interest rates go up, bond prices. it's a science, it's an absolute reality of the situation. So let me explain to you the why behind it, something as simple as this, let's say you and I are in a business transaction and that business transaction says something like this.

[00:14:32] Let's say I have a lemonade stand. And, um, I do very well. I make a lot of money. I'm gonna say, Hey, I buy lemonades down the corner. I'm looking to move it to a brick and mortar office. I think I could sell a lot more, but I need a million bucks. How about you? Give me 10. Uh, I, you gimme $1 million and I give you 10% of my company.

[00:14:55] Well, that means it's valued at 10 million. That seems pretty insane for a lemonade stand, but follow me here. So. With that being said, let's say that next year I net $1 million. Well, as a 10% owner in my company, I can give you part of the 10% of net profit. So you get. A hundred thousand dollars, not bad.

[00:15:18] It's about a 10% dividend, but as the business owner, I don't have to pay the dividend. I can just reinvest that all the time. That's what companies like Microsoft, apple, and so on, have done throughout their careers throughout their lives, throughout their growth. They can do better than reinvesting it versus just paying you out at dividend.

[00:15:34] Now, this concept's made a lot more sense to you with, uh, shows like shark tank that came on, but. Let's just say now I don't wanna just open up at the brick and mortar store, but I'm gonna open up at nationwide and I need another million dollars, but I don't wanna give away 10% of my company cuz it's gonna be successful.

[00:15:54] So instead I say, how about this? You give me. A million dollars and I will give you $50,000 a year. That's a 5% interest rate. That's a bond. That's literally how a bond works. The first 10% is stocks, stocks in a company. That's exactly how a stock works. The other one is a bond. You become the bank. You let me borrow.

[00:16:14] A million dollars and I'll give you 50,000 a year now, please, guys, this is not a solicitation. This is completely fabricated. It's just an example. So I'm not asking for money here. This is just purpose. So you understand how it works with bonds. So let's just say I pay you the $50,000. That's 5% on an annual basis.

[00:16:34] Okay. So now let's say the next year I need, I want to expand even. and I want another million dollars, but because interest rates have gone up, I can't pay 50,000 a year. I have to pay them 70,000 a year. So now they get an extra 20,000 a year, an extra 2%. Their bond now is 7%. And the person who did it first with me is only have 5%.

[00:16:59] Now let's say that other person wants out, Hey, I want my money back. Well, don't talk to me. I need that money. We promised I needed it for 10 years. You gotta find something to buy that bond. The thing is folks. He cannot get his million dollars back. You know why? Because it only pays him 50,000 a year. The new ones are paying 70,000 a year.

[00:17:17] That's a $20,000 negative that the new person just bought from him. It would be lower than they went straight from the company. So he has to sell his for a discount. He can't get a million for his cuz he's only getting 50,000 a year. He has to reduce that to make sure it's enticing for whoever news to.

[00:17:38] Just like the person who just bought the bond for 70,000 a year payout, he says, Hey, I'll buy your bond, but I'm not gonna give you a million. I'm gonna give you 800,000. The first buyer says to the second buyer, well, how does that make sense? Well, cuz it gets 20,000 less a year over the next 10 years, I lose 200,000 versus going back to Gabriel and getting another bond.

[00:17:57] So you have to discount it by $200,000. So I will give you a million. I'll give you 800,000 because that's the current bear market price. Of the bond guys. That's exactly how the stock market works. And that's exactly how the bond market works. Could you imagine if it was a 30 year bond versus a one year bond, if it was just maturing next year and I had to pay him back the million dollars after the next year, of course he wouldn't sell it for 800,000.

[00:18:24] Cause he just has to hold out a year and he gets his money back. You get what I'm saying? He could probably sell it for 90 980,000 cuz remember it's 20,000 less on an annual. my point is there's no way to outsmart the markets and that's how the bond markets work by the way. Folks, if you're just joining us, you're listening to Gabriel Shahin certified financial planner, and your host of more knowledge, more wealth here on every weekend.

[00:18:48] Talking about all important topics of personal finance. And I wanted to talk to you about the simple concept of how a bond works and the way the bond works is is that when interest rates go up, nobody's gonna want your old bonds at a lower. So you have to sell it at a discount. It's almost like a CD. If you locked in a CD year ago, five years at 1%.

[00:19:11] Not a good idea, but I know people who did it well now you get a five year CD for 4%. Okay. So who's gonna want your 1% CD with four years left. Doesn't work that way. Nobody wants that CD anymore. It's outdated. It's old. It barely pays. Definitely. Doesn't keep up with inflation. Heck you can get one of those liquid online money market accounts.

[00:19:36] I talked about earlier for 1.4% that you can get your money out instantly at any time you get what I'm saying. So it's extremely important. You understand that these bond prices do matter with interest rates. They are dollar for dollar. Correlated when interest rates go up, bond prices drop and we are in a rising interest rate environment.

[00:19:59] And this is what I was telling you months ago, uh, be very careful for your current bonds. And I recommended even then that you should stay short term high quality. It just is not really logical to go long term. And now you've seen long term bonds that are down, which are supposed to be save money. Bonds are supposed to be.

[00:20:21] oh, down, over 20%. This is problematic. And we see this often and I recommend to be careful. It's not something you wanna do. And don't say, now it's too late because remember rates are still going up. And I know there's a lot of data and this is why you have to talk to a professional that shows when you have six months of this treacherous, if you look at the top 10 worst times in a six month period that the bonds have performed.

[00:20:50] And by the way, we're in the worst. If you look at the next six months or next two years of performance, they're typical. Positive now with that being said, I'm not guaranteeing anything. I'm not saying it's gonna be positive, but you have to look at your situation. You have to look how you're invested. You have to look at see what you're doing, because if you don't, you could be making a drastic mistake because there could be writing on the wall where you're gonna lose more money, or there could be writing on the wall that depending on the bonds that you have, you could be in a good position where making money is, could be a good probability.

[00:21:24] But there's no way for you to know. It's hard for professionals to know. We've seen people mess that up. We recommend talk to professional. And for us that serve the. I mean, our corporate headquarters are in Southern California, but we serve the whole country. We can help. And we are offering one to two hours, one to two meetings of our time at no cost to help answering these questions, told you what you should do because interest rates just went up last.

[00:21:51] Um, weak and they're gonna continue to go up throughout the rest of the year. How do I know it's not cuz I'm noro novice here. It's because our federal government has told us to be specific. The federal reserve has told us that they're gonna do it now. You don't read this stuff. You don't look at this on a daily basis.

[00:22:06] Sure. You saw it on the news, but that doesn't mean their mortgages went up. No, like I said, that's based on treasuries on the contrary, those went down, which was what I was talking about last. So my point to you is beware. Be knowledgeable and be careful I'm. Please just talk to a professional. This is what we do on a daily basis.

[00:22:27] Would wanna be able to help you give us a call. Our phone number is (855) 963-2526. That's eight 50. 96 Falcon like the bird or visit our website at Falcon wealth, planning.com. That's Falcon wp.com. For sure. We would love to help in your situation to identify the things that you should be doing. The low hanging fruit that are probably out there that you are not aware of.

[00:23:00] I have tax accountants as clients. We have financial professionals as clients. We have people that do this on a daily basis, but don't have the time don't have the care and frankly don't have the knowledge to do it. And we like to say, you need all three of those to do it successfully. Not everybody has all three of those.

[00:23:20] So if you need help, give us a call. We would love to help in that folks. That is a vast fast show. We wanna thank you for tuning in with us this weekend. Feel free to reach out to myself or any one of our colleagues here at Falcon wealth planning. Our phone number is eight five five nine six three. 25 26 that's 8 5 5 96.

[00:23:41] Falcon like the bird, or visit our website@falconwealthplanning.com. That's Falcon wp.com for short reach out. You'll have a private conversation confidential with one of our colleagues where we could help relate this show to your specific situation. We're gonna thank you for tuning in with us. Have a great weekend, have a great week.

[00:24:03] And God bless.