The Weekly Update 5/20/2022
You know from prior updates (The Weekly Update for 4/15/2022) I trademarked The Real Return Illusion™ based on the late 1970’s and early 1980’s level of inflation. The Fed Chair then was Paul Volcker and he kept increasing interest rates to get ahead of inflation and in doing so, crushed the economy, which was required to kill the Real Return Illusion.
This is where the recent market volatility comes in. As the Fed reduces money in our system via “Quantitative Tightening”, i.e., reducing the assets they hold, and increasing interest rates, it impacts borrowed money. There are large hedge funds and “black pools” that borrow money, sometimes 9x for every dollar invested. They put down $1, borrow $9, or more, and invest $10. But, when interest rates go up, their “cost to carry” goes up and their investment model requires adjustments to counter this. That just means they deleverage (sell) to reduce risk. With that level of leverage or drop of just a few percentage points could “blow up” the entire fund.
These investment platforms represent very large amounts of money and thus their deleveraging can add the very real volatility we have seen since January 4, 2022.
These volatility events are rarely fun! That said, I am very selectively making a few of the lemons into lemonade, i.e., tactically maneuvering to reduce the impact from taxes where possible, going forward.
In my experience, these midyear volatility cycles have been profitable when approached with the right mindset and skill set.
Our real estate investor clients tell us the lion’s share of the money in real estate is made based on the price paid when you bought it.
Through this summer, and into fall we intend to be thoughtfully adding to investment points at carefully selected price points, as this is where the money is usually earned when investing in Corporate America world.
I’m interested in your thoughts, comments and observations. Feel welcome to call, email or stop by the office and say Hi.
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.