Inflation and Your Mortgage: Its time to pay attention!


July 27, 2020

My Dear Reader,

Over the weekend I read an interesting article that extrapolated Goldman Sachs Financial conclusions with regards to inflation, and the results shocked me. According to this graph, the US debt to GDP ratio will be at 101% by 2021, and by 2030 it will exceed 120%. There’s a little bit of good on a personal finance level that can come from this and it’s always good to see the bright side of things, but I believe it’s in our best interests to talk about the negative first.

As we have discussed numerous times over the past few weeks, the only financial response from the FED seems to be to print more money and to continue to cut the bond rate. This will effectively guarantee that the US will have a negative interest rate in the coming years and that the traditionally safe position of bonds will have such a low yield that diversification into that asset class almost seems foolish. A year ago Sovereign Man Investing published a study that described the negative interest rate from central banks in Europe and some Asian countries. 

“Perhaps most of all, we now regularly witness some of the most extreme financial anomalies imaginable. And one of the most obvious examples of this is negative interest rates. In a number of countries, including Switzerland, Japan, Denmark, and the entire Eurozone, central bankers have printed so much money that interest rates are actually negative. If you buy a TEN YEAR German government bond, for instance, your annual investment return will be NEGATIVE 0.27% per year, based on this morning’s rates. That’s insane. But just a few days ago the insanity reached a whole new level. According to the Wall Street Journal, there are now some JUNK BONDS in Europe that have negative yields. Think about this: a junk bond is basically debt issued by a company with financials so risky that analysts expect there’s a good chance the company won’t pay its debts. Hell, the company might not even be in business by the time the debt matures. And yet, despite these substantial risks, investors are willing to loan money to these companies, at NEGATIVE rates of return.”

Yet just this weekend, I heard a financial professional pontificating on the radio about the virtues of diversification. now diversification can mean many things to many people, but typically in the industry failing thought is to have a 60/40 split between stocks and bonds. however with rampant inflation becoming the norm, and negative yields on different kinds of bonds, we have to wonder how the average investor is going to get ahead. How will the financial industry compensate for the stalling of the market? Even as larger investment companies like Berkshire Hathaway accumulate more cash on hand, we are told to tell our clients to stay the course. But if the stock market is not good enough for titans like Warren Buffett, why is it good for Grandma and Grandpa?

This will compound the necessity to understand modern Finance at every level of society. Especially when Americans can get taken advantage of like thanks in Europe do with their savers. In an article by Sovereign Man’s International contributing editor in 2019, he described an interaction he had with a Danish Bank.

“Now, negative interest rates ARE the norm. Thousands, if not tens of thousands of Danes will go out and take out mortgages that will pay them every month. This is completely mind-boggling to me. But it just highlights how broken the financial system really is. Everything about this is in complete violation of the law of prosperity Simon Black’s been writing about for years: produce more than you consume and invest the difference. Now, institutions and governments are incentivizing people to consume, instead of save. In fact, they’re paying people to go into debt. That is not how prosperity is created. Instead of encouraging people to invest their surplus capital in productive investments, people are penalized for saving in the first place. It’s like everything has been turned upside down. Some of the most popular investments on the planet are the ones that burn the most cash (Tesla, Netflix, Uber, etc.) Insolvent governments in Europe are able to borrow at negative yields, with no afterthought whatsoever as to the consequences.”

Just 12 months later, we are seeing the same trends in the United States, and the same uncaring politicians that want to spend us into oblivion. It doesn’t take a rocket scientist to find out why the inflation projections are the way they are. But there is one upside when it comes to our personal finances. In my book Smoke and Mirrors, I gave an example of two brothers: one who took a 15-year mortgage and one who took a 30-year mortgage. We found out that the 30-year mortgage will consistently beat a 15-year mortgage in terms of efficiency. That means more money in the pocket of the consumer because less money is being used on debt service and therefore opportunity cost doesn’t play as much of a role. The other reason is that the longer loan terms are, the market factor of inflation plays a bigger role. In the example I used, the 30-year mortgage was worth just one-third of the value at the end of the mortgage term then it was at the beginning of the mortgage term. Now with an inflation rate at an estimated 2 to 4% and mortgage rates at 2 to 3%, the interest rate is practically wiped out by inflation alone. This means that a 30-year mortgage will provide much more value over time to the consumer. And I hope that the financial institutions take note and begin promoting this fact.

To Your Creation and Potential,

Kevin Prendiville