I've been thinking . . .

[DaleGG]

HI

I am about 2/3rds through RK's latest book "Prophesy" - yes, I know, its been around for a while, I've been preoccupied with something else . . .

Now like him or hate him is irrelevent here.

RK and many more qualified people before him such as Harry S Dent have identified that the world will be a very different place in a few years when the baby boomers start to retire and cash in their superannuation an dmanaged funds. And, in doing so, create an unstable economy with a crashing stock market.

Now, let's assume (I know, I know) that these people are right and that we are in for a bumpy ride. My thoughts are:

"what will happen to interest rates at that time?" In particular, for those people who use IO instead of P & I.

My initial thoughts are that with many people so cashed up and continuing to cash up, we will see spending rise which normally encourages the economy to move quicker. When this happens, there is pressure on the RBA to increase interest rates.

Any more thoughts? I'd be interested to know.

Dale

 

[duncan_m]

Originally posted by DaleGG
HI
My initial thoughts are that with many people so cashed up and continuing to cash up, we will see spending rise which normally encourages the economy to move quicker. When this happens, there is pressure on the RBA to increase interest rates.

Dale,

Why are you bothering with Property if Superannuation and Managed Funds are, according to RobertK, going to create so many cashed up comfortable retirees who's spending is actually going to increase to such a level that it actually destablises the world economy..

On one hand Robert says "superannuation and managed funds" are not good investments, on the other hand he says they are so good that its actually going to cause problems..

I'm of the opinion that the Goverment will actually tighten access to Lump Sum superannuation payments and force the purchase of annuities with tight control over terms.. the money will stay in the system and be drip fed out over the Baby Boomers extended retirements.

Robert ran out of steam after Rich Dad Poor Dad, like a trashy romance novelist he's just trotting out the texts to the fawning masses to feed their blind allegiance.

Regards,

Duncan.

 

[Sim]

I agree with Dunc's assessment of the Government action - there have already been changes to retirement/super laws that encourage the use of annuities, and I think before crunch time comes, we will see less "encouragement" and more "force" requiring people to take an annuity option for their retirement.

That's in Australia at least, I don't follow the US market in these areas, so I wouldn't know what the government there has done or looks like they may do.

 

[sbe]

Interesting posts....

To clarify on point, RK was indicating in the book that the superannuation thing was so good in that it forced everyone into the market etc. The bad thing is that upon retirement, this has to be withdrawn out by law.

Now, you may use part to pay off loans, go on a holiday, update the car etc, the rest you buy an annuity or whatever. Remember too, he's talking *US* law here. How does this affect us, well they are the largest economy in the world.... Wall St coughs, the world catches a cold....

Why property?

With forced withdrawal from the stockmarket, prices typically are driven down - the point RK was making.

Property? Well, retirees dont have to sell that (if they have it). Plus cashed up retiree's can pay more, driving up prices for property.

As for Interest rates at the time, that depends on more than just what retiree's are doing. Retiree's aren't using credit, so interest changes wont affect them. What it will affect it the worker.... there's a whole thread you could start just on this affect....

"Robert ran out of steam after Rich Dad Poor Dad, like a trashy romance novelist he's just trotting out the texts to the fawning masses to feed their blind allegiance.
"

Well, at least he got you and others thinking about this huh .....

Cheerio

Simon.

 

[Nicholas H]

I wonder how many Sydney baby boomers who have a lot of money in there PPOR will try to sell up and move to another state to live off the value of the property .. Or have two properties and sell off one. The Government has no control over that like they do with super.

 

[DaleGG]

Re: Re: I've been thinking . . .

Hiya Duncan

It took me a long time to get to this book for some of the reasons that you mentioned - and quite a few others, as well.

I was posing a theoretical question as to what people might expect will happen when the baby boomers do start to retire and flee the markets. As you know, when the mood changes in the share market, it does so quickly and in an ugly way.

More importantly, perhaps what might happen to those people who still carry large debts to fund their large IP prtfolio. I am a P & I person myself and so I don't expect there to be too many negatiove consequences for us. But . ..

Dale

Originally posted by duncan_m
Dale,

Why are you bothering with Property if Superannuation and Managed Funds are, according to RobertK, going to create so many cashed up comfortable retirees who's spending is actually going to increase to such a level that it actually destablises the world economy..

On one hand Robert says "superannuation and managed funds" are not good investments, on the other hand he says they are so good that its actually going to cause problems..

I'm of the opinion that the Goverment will actually tighten access to Lump Sum superannuation payments and force the purchase of annuities with tight control over terms.. the money will stay in the system and be drip fed out over the Baby Boomers extended retirements.

Robert ran out of steam after Rich Dad Poor Dad, like a trashy romance novelist he's just trotting out the texts to the fawning masses to feed their blind allegiance.

Regards,

Duncan.

 

[Bill.L]

Hi Dale

If the stock market was a bucket with water in it and a tap above filling it(money going in) and a leak in the bottom(money going out via fees,brokerage,IPO's, and cash outs), then the increased leak in the bottom soon creates a problem.

Actually I believe the stockmarket is a whole series of buckets with some being emptied while others are being filled.

As for interest rates, I feel more money will look for a return in cash as shares continue to stall which may continue the trend of lower interest rates. The consequences of this is we may go down the Japanese experience of no growth, negative returns, etc. This may not be the desire of the powers that be, and they may choose to inflate a la early 70's style. Interest rates would consequently rise in the longer term and your P+I repayments would be best.

I see both senarios as positive for property though in slightly different ways. The first senario has the obvious benefit of lower holding costs and should produce a blow off type bubble in property prices in the next few years followed by a collapse in property beyond that(like the Japanese experience).

The second senario would have higher interest rates but would also have higher rental returns and capital growth as you would owe back the loans in deflated dollars.

bye

 

[duncan_m]

IO vs P&I (hijacked thread)

Originally posted by DaleGG
Hiya Duncan

More importantly, perhaps what might happen to those people who still carry large debts to fund their large IP prtfolio. I am a P & I person myself and so I don't expect there to be too many negatiove consequences for us. But . ..

Dale

Hi Dale,

Sorry to hijack the thread with a subject change.

I'm wondering if you've ever Spreadsheeted the impact that choosing P&I has on your portfolio? Especially given the current low rates and what I assume is still an early point in your IP investing?

A point some people miss is that when rates are low your Principal component is comparatively High, as an example:

A $100,000 loan.. during the first few years at 5.5% your Principal component is $156pm. At 18% your principal component is $17pm.

With three properties of that magnitude, your principal payment is enough to fund the payments on 1 more. After 10 yrs assuming a 7% growth rate your 4th property has added $96K in value to your portfolio. Of course, after just 3 yrs its added enough growth to fund the deposit on the fifth property. Another 3 yrs the property you couldnt afford due to choosing P&I has just added the 6th property to your portfolio.

I think its also important to not forget that IO vs P&I is a fluid choice, if rates go High, I'm going P&I, whilst they're Low, I'm sticking with IO.


Cheers, Duncan

 

[Kevmeister]

I think its also important to not forget that IO vs P&I is a fluid choice, if rates go North, I'm going P&I, whilst they're South, I'm sticking with IO.

North = High, South = Low?

Kind of had me confused because I thought the usual saying when something "went to hell" was "it went south".

 

[always_learning]

My thought "The baby boomers may be cashed up; but will they be ready and feel like spending it?", if I was a baby boomer looking at retirement in a few years, depending on my super (limited to "reasonable" benefits, or about $600K or if I am lucky $30K/year), I would feel anything BUT cashed-up and ready to spend. In fact would be feeling desperate, and wouldnft be spending.

I hate talking about Japan; as this is always an extreme case (always distrust any person like me constaintly using extreme cases to argue a point, extream examples are the signature of a weak point ), in Japan we (I live in Japan) have deflation not because there isnft enough money (there is lots of cash around, on average people have lots of cash in the bank), but because there is complete uncertainty and almost every investment vehicle in Japan is moving south. Everyone is holding his or her money and not spending it => deflation! (Anyone notice that intra-bank interest rates are negative in Japan, yes you have to give back less money the next day!)

I would propose the counter view to Dale and think baby boomers will stop spending (as much) so I think the next decade will continue to have sub 10% interest rates. (BTW what is the current 10-year fix interest rate?). I am less worried about interest and more worried about the ginevitabilityh of ongoing increases in property prices.

Like Japan I am sure Australia will increase the retirement age over the next few years, Japan will soon have retirement at 70years old. I think you will find this will be part of the solution in the western world to the baby boomer problem!

Luckily Australia is blessed with immigration. IMO, the more well educated, hard working couples who can come to Australia, work hard, pay lots of taxes, buy homes, then and spend all the rest on raising their kids; the better for Australia (and us IP owners!).

Originally posted by DaleGG
HI

I am about 2/3rds through RK's latest book "Prophesy" - yes, I know, its been around for a while, I've been preoccupied with something else . . .

Now like him or hate him is irrelevent here.

RK and many more qualified people before him such as Harry S Dent have identified that the world will be a very different place in a few years when the baby boomers start to retire and cash in their superannuation an dmanaged funds. And, in doing so, create an unstable economy with a crashing stock market.

Now, let's assume (I know, I know) that these people are right and that we are in for a bumpy ride. My thoughts are:

"what will happen to interest rates at that time?" In particular, for those people who use IO instead of P & I.

My initial thoughts are that with many people so cashed up and continuing to cash up, we will see spending rise which normally encourages the economy to move quicker. When this happens, there is pressure on the RBA to increase interest rates.

Any more thoughts? I'd be interested to know.

Dale

 

[Bill.L]

Always-learning
"(always distrust the person using extreme cases to argue a point)"

Attack the messenger and not the message?

In the late 80's Japan was held up as the shining example as to what western economies should aspire to. They had low inflation, unemployment and interest rates. They also had high inflation of assets a strong currency and were actively investing overseas as they were the wealthy country.

When looking at "extreme cases" in terms of economics/investing a wise person remembers that ALL senarios are possible. If you were an options trader who made his money selling options, to disregard the extreme cases outside of 4 standard deviations from the norm, would be a fast way to the poorhouse. One of the reasons why the random walk theory does not work is the number of "extreme cases" that do occur!

After all that I must say that I agree that our immigration should help prevent a Japanese type event occuring here. (remembering of course that the level of immigration in this country is an extreme case).

bye

 

[DaleGG]

Re: IO vs P&I (hijacked thread)

Hiya Duncan

Yes, I thought about it . . . but, I don't need cashflow at the moment because of my business income - whereas, i will need cashflow one day in the future when I do not want to do this anymore.

At that point, I will live off the rental income and not be worried about what interest rates do, or, what prices of housing does.

We know we could buy more using IO, but, we also feel very comfortable with our chosen strategy of reducing debt where we can and allowing all other factors to work independently.

Thanks for the thought, I think you raised an excellent issue.

Dale

Originally posted by duncan_m
Hi Dale,

Sorry to hijack the thread with a subject change.

I'm wondering if you've ever Spreadsheeted the impact that choosing P&I has on your portfolio? Especially given the current low rates and what I assume is still an early point in your IP investing?

A point some people miss is that when rates are low your Principal component is comparatively High, as an example:

A $100,000 loan.. during the first few years at 5.5% your Principal component is $156pm. At 18% your principal component is $17pm.

With three properties of that magnitude, your principal payment is enough to fund the payments on 1 more. After 10 yrs assuming a 7% growth rate your 4th property has added $96K in value to your portfolio. Of course, after just 3 yrs its added enough growth to fund the deposit on the fifth property. Another 3 yrs the property you couldnt afford due to choosing P&I has just added the 6th property to your portfolio.

I think its also important to not forget that IO vs P&I is a fluid choice, if rates go High, I'm going P&I, whilst they're Low, I'm sticking with IO.


Cheers, Duncan

 

[duncan_m]

Re: Re: IO vs P&I (hijacked thread)

Originally posted by DaleGG
Hiya Duncan

At that point, I will live off the rental income and not be worried about what interest rates do, or, what prices of housing does.
Dale

You'll get withdrawal symptoms and start buying again..

Duncan.

 

[always_learning]

Originally posted by Bill.L
Always-learning
"(always distrust the person using extreme cases to argue a point)"

Attack the messenger and not the message?

Actually I was attacking myself; I was suggesting that people should be sceptical about MY point about using Japan

In the late 80's Japan was held up as the shining example as to what western economies should aspire to. They had low inflation, unemployment and interest rates. They also had high inflation of assets a strong currency and were actively investing overseas as they were the wealthy country.

When looking at "extreme cases" in terms of economics/investing a wise person remembers that ALL senarios are possible. If you were an options trader who made his money selling options, to disregard the extreme cases outside of 4 standard deviations from the norm, would be a fast way to the poorhouse. One of the reasons why the random walk theory does not work is the number of "extreme cases" that do occur!

That's why I like IP; market events are not as exteme as stock market, my wife is always thinking about extreme events eg. We have debt on the IP and I die and my life insurance doesnt pay and property market crashes and rental returns fall and interest go up and she has 2 small children to raise and she cannot afford the loans and cannot sell due to negative equity, can she then commit suicide; thus avoiding the case in which our children dont have to pay our debts all their lives?. So the idea of "investing" for our future has a different meaning for my wife

After all that I must say that I agree that our immigration should help prevent a Japanese type event occuring here. (remembering of course that the level of immigration in this country is an extreme case).

I very much hope immigration is the general case in the future.

bye

 

[Ross Sneddon]

Hi Dale

I have this philosophy of always borrowing IO as it then gives me the option, literally on a month by month basis, of only paying the interest or putting in a lump sum as a pseudo P & I type payment as it suits me, and redrawing for the next investment if I want it.

The other thing is, and I agree I haven't run it through on a spreadsheet, that as P & I payments largely take a greater amount at the beginning in interest and push the principal to the end of the term, the payments are in the bank's favour.

If you pay IO then the interest payment is evenly spread throughout the term and you have the choice of if and when you wish to make a principal payment.

Doesn't this mean that the borrower has the better of the two options?

The third point to consider is taxation. Interest is tax deductible and if you were to pay interest payments at the beginning of the year and principal payments at the end, you have a better tax position. Just a few points. I would be interested in your accounting opinion.

Regards

Ross

 

[DaleGG]

Hi Ross

I agree wholeheartedly with your thoughts and can see that the option of paying principal, or not, would work brilliantly for many people.

Dale

Originally posted by Ross Sneddon
Hi Dale

I have this philosophy of always borrowing IO as it then gives me the option, literally on a month by month basis, of only paying the interest or putting in a lump sum as a pseudo P & I type payment as it suits me, and redrawing for the next investment if I want it.

The other thing is, and I agree I haven't run it through on a spreadsheet, that as P & I payments largely take a greater amount at the beginning in interest and push the principal to the end of the term, the payments are in the bank's favour.

If you pay IO then the interest payment is evenly spread throughout the term and you have the choice of if and when you wish to make a principal payment.

Doesn't this mean that the borrower has the better of the two options?

The third point to consider is taxation. Interest is tax deductible and if you were to pay interest payments at the beginning of the year and principal payments at the end, you have a better tax position. Just a few points. I would be interested in your accounting opinion.

Regards

Ross

 

[Alan H]

Hi Dale.

I haven't ready the 'Prophecy' book but it sounds like the thrust is that Managed Funds/Shares/Super will get 'savaged' as the money is withdrawn. Is that it?

If the theory is that all these assets are going to get liquidated to provide income to live on and hence prices etc will drop, did he also have an opinion on investment properties? Following this theory, wouldn't he also expect that many of these retirees would sell Investment Properties and cause a drop as well?

Just curious if he touched on the property implications too........

I guess the other thought though is that all this retiree money still has to go somewhere. Maybe(as always?) it just means we should be massaging the type of property/shares/investments we buy to reflect social change?

Possibly we should just be looking at buying property in more 'retirement' destinations or other commercial properties that cater for this retirement demographic such as retirement homes, hospitals, funeral parlours etc.

Similarly, Shares are just part of a business and I'm sure that this retiring Demographic will actually enhance certain business income and hence be reflected in certain Share prices. Maybe we should just be buying into firms that produce incontinence pads etc(hmmm.......maybe I could have used a better example so close to dinner ).

I may well be wrong(happens regularly.....) but I do wonder whether some of these almost doomsday predictions are really that dramatically negative or simply apart of the constant social changes we experience over any 50 year period.

 

[DaleGG]

HI Alan

You make some excellent observations and thank you for adding to the discussion.

As far as I have read ( and I won't finish it until tomorrow night) no, RK, has not mentioned what he thinks might happen to IP prices. . .

Dale

Originally posted by Alan H
Hi Dale.

I haven't ready the 'Prophecy' book but it sounds like the thrust is that Managed Funds/Shares/Super will get 'savaged' as the money is withdrawn. Is that it?

If the theory is that all these assets are going to get liquidated to provide income to live on and hence prices etc will drop, did he also have an opinion on investment properties? Following this theory, wouldn't he also expect that many of these retirees would sell Investment Properties and cause a drop as well?

Just curious if he touched on the property implications too........

I guess the other thought though is that all this retiree money still has to go somewhere. Maybe(as always?) it just means we should be massaging the type of property/shares/investments we buy to reflect social change?

Possibly we should just be looking at buying property in more 'retirement' destinations or other commercial properties that cater for this retirement demographic such as retirement homes, hospitals, funeral parlours etc.

Similarly, Shares are just part of a business and I'm sure that this retiring Demographic will actually enhance certain business income and hence be reflected in certain Share prices. Maybe we should just be buying into firms that produce incontinence pads etc(hmmm.......maybe I could have used a better example so close to dinner ).

I may well be wrong(happens regularly.....) but I do wonder whether some of these almost doomsday predictions are really that dramatically negative or simply apart of the constant social changes we experience over any 50 year period.

 

[bundy1964]

Hi

I may be wrong on this

Why wouldn't the baby boomers see a FP and end up investing in managed funds and anuities to continue the cycle?

In Adelaide at least the Advertiser keeps talking up FP's and managed funds while publishing a list of funds and there performance ( or lack of )

Of course some people will p!$$ the lot up against the wall and some that will go for the safety of the bank account, which gives us our tenants and our money for loans

bundy

 

[Jas]

Originally posted by Alan H
Hi Dale.

I haven't ready the 'Prophecy' book but it sounds like the thrust is that Managed Funds/Shares/Super will get 'savaged' as the money is withdrawn. Is that it?

Might not have to wait til they retire. there is a federal comittie on housing going on right now. One of their big ideas is for people to use parts of their super fund to buy a house.

They go in half and half with an instutional buyer, who then buys and sells their shares. When the place is finally sold, the instution gets 75% of the CG.

Think about this for a minute. What if the person never sells? Do you really see instutioanl buyers getting down and dirty with a _lot_ of individuals?

It's an interesting idea in the macro - having a place to store super funds when the stock market is going south, but it gets lost in the micro.

Steve, I remember you having something to say along similar lines. Maybe you should go and present your ideas there!

Jas