The Donald Economy
Last week began with the State of the Union address and the President doing the usual boasting and backslapping over the Administration’s first year successes.  The only problem, at least as far as the economy is concerned, was the stock market was in the midst of a major selloff, largely attributable to rising interest rates.

Speaking of our economy, we are in a very unusual situation, where on one hand monetary policy is tightening, while on the other, fiscal policy is of a stimulative nature.  With fiscal policy, the Administration is trying to put the gas on the economy with the new tax law changes, the focal point being lower corporate tax rates, as well as adopting a more relaxed regulatory environment.  Meanwhile, the Fed’s monetary policy, with their ever-present concern of inflation, is trying to at least tap the brakes by raising the Fed Funds rate and entering bond buyback mode after years of quantitative easing.

So where do we go from here?

By most economists’ estimations, we are at the end of an economic cycle, whereby after 7-8 years of growth, we will eventually hit a plateau and enter a retractment or recessionary period.  The predominant viewpoint amongst economists though is that interest rates will continue to rise even more than the upward march we have seen over the last couple of months.  Currently, the 10-year T-bond yield sits at 2.84%, a huge upswing from the 2.06 it was at a mere few months ago in early September 2017.

I will take the contrarian view here and predict that rates will at least stabilize and most likely come down once again, whereby the 10-year yield will finish 2018 lower than its present 2.84%.  The fact of the matter is that rising interest rates will crimp corporate earnings (why we saw the selloff last week), as well as curbing small investors’ appetite for borrowing, including real estate purchases.  There has been a lot of “irrational exuberance” over the last few months and you can bet if the market pullback continues, there will be a reversal of current monetary policy, especially considering the Fed head is now a Donald appointee.

Regardless of if monetary policy eases, expect continued contained (i.e. low) inflation and lower historical interest rates.  While I like the attempt to manufacture growth, the reality is that the U.S. is a very mature economy with aging demographics and savings/ investment becoming more skewed to bigger companies and wealthy individuals.  Take a look at other similar mature economies with aging demographics, notably Germany and Japan, who have been in an extended period of very low interest rates for many years.  Furthermore, while the “Amazonification” of America perhaps has a trickle-down effect on creating jobs, it also squashes a lot of “Mom and Pop” businesses, whose employees will need to find new jobs.  Our country’s growth depends upon demand from Main Street America and quite frankly, don’t see the demand will be there if interest rates rise, making borrowing more expensive.  Hard-pressed to see any scenario causing rates to jump materially higher.

Mortgage Update
While we have seen rates jump up lately, they are still historically very affordable, being in the 4.5% range for 30-year fixed money & 4.0% area for 15-year fixed.  What will become more popular during these escalating rate periods are the hybrid fixed/ARM products, specifically the 5/1, 7/1, and 10/1.  With these loans, borrower will be fixed for the first 5, 7, or 10 years respectively, at which time they will convert to an annual adjustable rate.  What is great about these products is that you can get a substantial discount (in the 3.5% range) and if you are proactive, will probably be able to convert to a lengthier fixed period before your adjustment ever takes place 5 to 10 years later.  Here are a few other product highlights:

  • Great Jumbo 5/1 & 7/1 pricing (with interest-only option): one of our select investors has not raised their rates on these products even with the upward movement of interest rates
  • Non-QM Products:  Recent credit events (foreclosure/ BK) ok, bank statement programs, no doc investment property programs, asset utilization
  • Exceptional conventional, FHA, and VA pricing: we now have over 40 investors to choose from
  • Reverse Mortgages
  • Exceptional Streamlined Loan Process:  By using the most current automation and security features available, we can drastically reduce time to close and make it much easier for our valued clients.

Wealth Management Tips of the Day
While lower corporate tax rates should be good for our overall economy, many of us Main Street Americans will suffer from the material limitation of state taxes and real estate taxes paid, which is now capped at $10,000 combined.  This is especially true in California where we pay higher state and real estate taxes.  However, by being proactive, hopefully we can offset that with some benefits to the tax law changes:

  • Independent contractors (self-employed):  If you get your pay from commissions and are paid 1099 income, you should talk to your CPA regarding potential economic benefits of setting up a S Corporation, which is very easy and inexpensive to do.  There are potentially two great reasons to do so.  The first is you have an added layer of legal protection by being incorporated.  The second, that stems from the new tax law changes, is that pass-through entities (that includes S Corps) may now potentially have 20% of their income shielded from taxes.  While there are some caveats, what is certain is taking income through your Schedule C as a sole proprietor does not provide any incentives, so at least check out the possibilities.


  • Real Estate Investors:  Whether you own rental properties or have clients that do, if you expect to be cash-flow positive on your tax returns, probably wise to at least look into setting up a similar pass-through entity (LLC, limited partnership, etc.).  While there are a lot of caveats involved here, most notably if you are defined as an active or passive investor by IRS standards, this could help you by adding an extra layer of legal protection and potentially saving up to 20% in taxes as it relates to net rental income.

Cryptocurrency Mania
While admittedly not an expert on the subject (who is?), I find it pretty shocking the lofty valuations of the ever-expanding cryptocurrencies.  No doubt there is much value in the underlying blockchain technology, which creates a more seamless, transparent trading mechanism saving the small transaction fees we see in the modern banking system.  Spread over trillions of small transactions, these savings can obviously end up being quite substantial.

However, I see some inherent problems.  For one, who is to say the creators of each cryptocurrency decide to change their model and invoke some form of transaction fee, which I believe is now happening with the original bitcoin.  There is the issue of liquidity and being able to actually use the medium to purchase goods or services, as well as cashing out of your position, which currently can take days to execute a cryptocurrency buy/ sell transaction.  The biggest problem though is there are no actual goods being produced or real services rendered by these cryptocurrency “companies.”

I know for some that have invested, it is akin to a spin of the roulette wheel in Vegas, whereby they are just making a tiny bet.  However, if it is any more than that, buyer beware!  I agree with Warren Buffet’s stance that this is going to end badly for a lot of investors.  I’m always interested in learning though, so love to hear different viewpoints!

Free Mortgage Evaluation
With the onset of a new year, we always encourage our clients (and any new referrals) to give us a call for a free mortgage evaluation.  Whether you rent, have just your primary residence, or are looking at investment properties, it always pays to be proactive in looking at the possibilities.

At CB Investments, our goal is simple: to provide the best mortgage service available anywhere.  Through our experienced staff, expertise, and can-do attitude, we are equally adept at structuring difficult deals as we are at streamlining the loan process on all our deals.  When you want to be assured you are receiving the best mortgage advice as it applies to your overall financial goals, please give us a call.  We look forward to hearing from you!

Best Regards,