Around 11 months ago I boldly predicted we would see imminent inflation which would lead to rising interest rates and I was wrong. I was partially right about the inflation. Food and commodity prices rose significantly over the past year and then moderated somewhat recently. But no increase in rates. In fact, we have record low rates. So what’s the story?
I had lunch recently with a guy who advises mega-investment funds on Wall St. We discussed inflation in relation to money supply and he almost sheepishly said his research didn’t reveal much of a correlation. He said the only consistent correlative factor he could find was the percentage change in the labor force — not the unemployment rate but the number of people in the workforce. As more and more baby boomers are retiring, the pool of workers continues to decline. He even had a chart going back to 1930. Two statistics that travel together are not necessarily correlated but his argument was quite compelling.
His basic contention is that when you are working you are spending; when you retire and leave the workforce you stop spending because you don’t know how long you’ll live and don’t want to run out of money. After hearing his argument I started looking around while at places people spend money like restaurants and malls and there really aren’t very many people 70 or over frequenting these venues. So the logic goes like this — more boomers retiring = less spending. Less spending = less incentive for businesses to start or expand = fewer borrowing needs. Fewer borrowing needs = less demand for loans = lower rates.
There are a thousand other factors that influence rates to varying degrees but that was one I really hadn’t thought about. If he is right and if changes in the pool of workers is THE major factor then we’ll see low rates for at least another few years.
Assuming the above is true, here are some practical issues to consider:
– If you are counting on higher bank deposit rates to supplement your income, look elsewhere because money market and savings rates will be minuscule for some time to come. Check out safe, conservative options like whole life insurance with a reputable company like Northwestern Mutual or Guardian. Ask your agent about over-funding the policy.
– Business and personal loan rates will stay low for at least another 18 months and maybe much longer. No need to rush to refinance your mortgage but if your rate is in the high 4% range or higher look into refinancing now. Rates can’t go much lower.
– Residential real estate prices will remain low for years to come. Don’t look for your home to produce equity from appreciation and don’t think of retirement properties as investments.
– Think “niche” — every major market change creates opportunities for those who can see the big picture and have the willingness & ability to make an investment of time and money.
– If you would like to borrow personally or to invest in your business, interview several bankers. Banks are hungry to make loans right now.
I would enjoy hearing and unique thought on rates or the economy in general so please comment below or send me a note if you have any.