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Right now I am more enthused about our industry than any time during the past year. My peek at the short term picture for the note niche is positive and here is why.
Uncertainty in the world economy as a result of Brexit has caused even more volatility in the stock market. If an investor is at or close to retirement and invested heavily in the stock market, the recent volatility must have him/her extremely jittery. An 800 point drop in the Dow in one day is certainly not a comforting event. Even with a somewhat positive rebound the outlook is not sterling, especially if one remembers the downturn from 2007 where many retirees lost over 50% of their portfolio value and have not yet recovered. The U.S. work force remains at the lowest since the 1950s. If retirement comes at the point of a downturn danger lurks.
And then, of course, interest rates are dismal. Average yields on 5-year CDs are still below 1% and may go lower. Both Japan and Europe have gone to negative rates. Will the U.S. follow? Who knows? It is not reassuring to think that you will pay the bank to hold your money and I have heard from what I consider reliable sources that many banks have less than 3% cash reserves on hand. If interest rates do go lower and possibly to negative and investors want their money out, can the banks handle the run.
I know, this is speculation and we are not prone to predict the future and are certainly not doomsayers. However, note investing does offer appealing features when one considers that the purchase is normally made at a discount. Therefore, there is a cushion in the event of a downturn. A cushion is not available in the stock market or CD investing.
Many of you know that I am a big fan of Michael Lewis (Liar’s Poker, Moneyball, The Blind Side, The Big Short). I am reading another of his books, Boomerang, another enlightening book; this time about shorting countries. It is alarming what countries have done to themselves, all self-inflicted, and unfortunately the U.S. is following suit. I recommend it.