Wfearful_Bgreedy Posted March 8, 2020 Share Posted March 8, 2020 https://finance.yahoo.com/news/saudis-plan-big-oil-output-225511711.html BBB Downgrade: I think this is the biggest news no one is talking about. If oil prices keep going down US Shale operations becomes unprofitable and defaults on debt start occurring. Shale needs at least $46/barrel to break even. Russia and OPEC are going to starve shale out by increasing production simultaneously. Shale Boom or Bust?: There are a lot of US jobs, cities, and loans depending on the success of shale. When prices of oil drop further there will be a cascade effect starting with the downgrade of BBB shale and oil bonds AKA “investment grade” and forced selling by institutional investors, because pension funds are not allowed to invest below a rating of BBB as per their charter. Source: https://www.ft.com/content/c048d870-6138-11ea-a6cd-df28cc3c6a68 Pension Forced Selling = Losses on the Book: The downgrades will end up hurting underfunded pension funds that are 40% below where they need to be not even accounting for the recent corona virus dip. Teachers, Firefighters, Policemen made less income in exchange for a promise that they would be taken care of. City and muni underfunding will lead to less spending and increased fundraising in the form of higher property taxes which will hurt property values. Source: https://www.wsj.com/articles/the-stealth-pension-mortgage-on-your-house-1533496243 No equity in the Mortgage: Many mortgages have a second mortgage or cash out refinances, so not much cushion if property values go down. So take an early 30+ millennial that had to buy a home at ~1M with 5% down using a FHFA loan. Suddenly they will be servicing 2% of 1M instead of 1% to pay for boomer underfunded pensions (property values and tax percentages vary widely by location). The boomers who bought their homes at 350K find they owe 750K still because of the cash out Refis they did while their property value was increasing in order to pay for their kids 150K archaeology and psychology online degree. https://www.wsj.com/articles/americans-are-taking-cash-out-of-their-homesand-it-is-costing-them-11577529000?reflink=share_mobilewebshare Your Move Boomer: It was once the case that near retirement one was allocated 80/20 in stocks/bonds, that has since reversed. They can’t find safety in Treasuries or bonds because yields are so low. Their last asset of value is their property which is starting to look like a liability due to property taxes. Also turns out Millennials don’t want a 5 bedroom mansion with a pool and sauna 40 minutes away from the city. I honestly don’t know how this plays out, probably region dependent. https://www.businessinsider.com/millennials-not-buying-big-houses-mcmansions-real-estate-2019-8 Help us FED: FED will respond by lowering interest rates even more and might even try buying other types of assets with printed money such as securities in the same way the Japanese government has. Folks who have no real assets such as property, stocks, or bonds don’t get to participate in the asset inflation produced by the FED leading to a furthering of the divide between FED beneficiaries and non-beneficiaries. https://www.nytimes.com/2020/03/06/business/economy/fed-coronavirus-rate-cut-limited-ammunition.html Psychology: If you are in or near retirement and your 80/20 allocation in stocks/bonds is taking a volatility hit, your pension agreement is being restructured, medical costs are going up, your 4 bedroom home has one room occupied, your friends are leaving for Arizona, Jim Cramer is telling you to sell, your non-fiduciary financial analyst is telling you to use an S&P index and give them a 1% fee through their preferred broker, what do you do? Link to comment Share on other sites More sharing options...
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