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Well, Credit Suisse and First National Bank have both got the help they need, so that should shore up the system for now. However, in this day and age, bank runs can happen in the blink of an eye so I suspect there's going to be some wariness and market jitters on and off for the next few months.

This also feels like only the opening act of the denouement to high interest rates. It feels like there will be more acts to follow, all mostly based on the fact that a lot of assets haven't taken the hit yet that they should have. SVB was because a lot of banks are sitting on underwater bonds but don't have to reflect this in their accounts if they hold to maturity (just that SVB couldn't hold with all the withdrawals).

Commercial real estate is another one where valuations have yet to materially drop, which may blow a hole in some company's balance sheets. I suspect there are also a lot of worthless mortgages on the books now (locked in for low interest rates for 30 years) that banks aren't able to shift for very much money.

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16 hours ago, Jeor said:

I suspect there are also a lot of worthless mortgages on the books now (locked in for low interest rates for 30 years) that banks aren't able to shift for very much money.

I wouldn’t say worthless. This isn’t (yet!) an asset quality issue like in 2008 (a ton of subprime debt backed by depreciating residential property).

Edited by Paxter
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4 hours ago, Chataya de Fleury said:

I’m just here to cry about having to sell some stock to meet my tax obligations. Tax obligations that came about from a stock that was issued to me at call it $50 per share, then it vested at $20 per share, and now it is worth $10 per share.

That means my comp package was scheduled at a $50 share price. It vested and settled at $30, so I owe taxes on that. It’s now worth $20. And since my base pay just got reduced by 1/3, coming up with this cash is not easy.

Yes, you can add the obligatory three zeroes.

Ouch, that hurts. Forced selling of stock at any time is a doozy but even more if it's caused by paper machinations. I've had to sell stock a couple of times for cashflow reasons and it's always been a wrench.

My wife has worked in financial services but is off work now to care for our baby son (and older daughter), so we're relying on my low (but stable) pay as a high school teacher. We have a general principle to try not to sell assets to pay for everyday expenses, but sometimes you don't have a choice if something big comes up and it just has to be paid. At the moment, though, I'm holding a bit of cash in the portfolio so at least can dip into that if needed.

Still, years ago I remember selling a bunch of stock when we had to get together a deposit for the house. I know I'm probably breaking an investment rule but I still keep a watchlist of that portfolio to see how it would have gone if I held onto it. Makes for some painful reading now, but I just pretend that the capital appreciation of our house makes it worth it...

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3 hours ago, Chataya de Fleury said:

That will not be going to happen this time around. “Afloat” will happen. Maybe. If I’m lucky.

We were catching up with friends on the weekend and the outlook truly is dire for some. Two children, still a large mortgage that is being ratcheted up (in Australia most mortgages are floating rate and hence move with the interest rate rises) and the husband is potentially about to lose his job with his company cutting a third of his team next week. He's optimistic with his skillset he'll find something else reasonably quickly but that's not a worry you want to have at a time like this.

Hoping things turn out well for you @Chataya de Fleury and that it will be better than just staying afloat!

Edited by Jeor
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14 hours ago, Jeor said:

We were catching up with friends on the weekend and the outlook truly is dire for some. Two children, still a large mortgage that is being ratcheted up (in Australia most mortgages are floating rate and hence move with the interest rate rises) and the husband is potentially about to lose his job with his company cutting a third of his team next week. He's optimistic with his skillset he'll find something else reasonably quickly but that's not a worry you want to have at a time like this.

Hoping things turn out well for you @Chataya de Fleury and that it will be better than just staying afloat!

Having an adjustable rate in this environment sounds like a nightmare. So many people got burned by these in 70"s and 80's that a lot of folks wont touch them with a pole.

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1 hour ago, DireWolfSpirit said:

Having an adjustable rate in this environment sounds like a nightmare. So many people got burned by these in 70"s and 80's that a lot of folks wont touch them with a pole.

I wouldn't be able to sleep at night with less than a 5 year fix (ive currently got 7 years left at current rate which was fixed at bottom of market). 

 

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Most of the anglosphere outside of the US have mortgages that are variable or else re-set very quickly.  They’ve had a very easy run for the past decade or more but they’ll be suffering some hardship now.  Places like Australia, NZ, Canada, Ireland and the southern half of England also had a significant run up in house prices, so any recent buyers are especially at risk once their first re-set arrives.

We have a 7yr ARM with five years remaining at the initial fixed rate (unusually short in the US these days).  I hope that’s long enough to see short rates decline again but even if it isn’t, my entire mortgage is only ~1.2x my current annual gross income.  I’m not overextended unless my income declines a lot permanently.

There is enormous uncertainty right now whether we’re in a (1) temporary cyclical phase of higher interest rates (driven by unusual overheating by excessive stimulation, both monetary and fiscal, during COVID) that will soon return to secular stagnation and low rates, or (2) a new secular era of higher inflation potential due to more labor bargaining power for wages, transition to green energy and re-shoring/friend-shoring that will keep interest rates higher than the past decade.

My long term accounts are all still in stocks, but my discretionary accounts (which are just as large) are all in cash earning a very nice yield.  I have in mind a valuation at which I’d move that cash into stocks, but we’re not close yet. 

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10 hours ago, DireWolfSpirit said:

Having an adjustable rate in this environment sounds like a nightmare. So many people got burned by these in 70"s and 80's that a lot of folks wont touch them with a pole.

Believe it or not, in Australia it's commonplace to have variable rate mortgages and most banks only offer to fix rates for 1-5 years. In terms of the efficacy of the Reserve Bank raising rates, it does mean that it flows through the economy much quicker. But the historic pace of these rate rises has caught a lot of Australians off guard. We fixed ours for 3 years at 2.09% but in August 2024 we'll roll off onto an adjustable rate and who knows what that will be.

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On 3/20/2023 at 10:48 PM, Jeor said:

Believe it or not, in Australia it's commonplace to have variable rate mortgages and most banks only offer to fix rates for 1-5 years. In terms of the efficacy of the Reserve Bank raising rates, it does mean that it flows through the economy much quicker. But the historic pace of these rate rises has caught a lot of Australians off guard. We fixed ours for 3 years at 2.09% but in August 2024 we'll roll off onto an adjustable rate and who knows what that will be.

Differences in the the flow-through effect for mortgage rates are interesting.

On the one hand, around 80% of mortgages in Aus are variable (compared to around 30% in Canada, 15% in the US). On the other hand, only around 30% of Australians have an owner-occ mortgage (everyone else either owns outright or is renting). In Canada and the US, this is more like 40%.

In addition, while countries like Germany and the US tend to have very long-term fixed rate mortgages, other countries like Canada or NZ have much shorter fixed periods (similar to Australia). 

Probably the worst case is Sweden, with 43% of households being mortgagors and around 70% of those being on variable rates. Tough one for the Riksbank. 

ETA: I was reflecting on the low-ish Australian number of 30%. As an anecdote, none of me/my siblings nor the two generations above have ever had a mortgage. We all rent or (in my parents' and grandparents' case) bought property outright. 

Edited by Paxter
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12 hours ago, Paxter said:

ETA: I was reflecting on the low-ish Australian number of 30%. As an anecdote, none of me/my siblings nor the two generations above have ever had a mortgage. We all rent or (in my parents' and grandparents' case) bought property outright. 

That's a much lower number than I would have thought. I think a lot of it is a function of the recent market. I got into the property market as an owner-occupier mortgage in 2009, which was probably the last realistic time that prices were at a "reasonable" level after the fallout from the GFC.

I bought a 2-bedroom apartment for $400K on a salary of about 70K and had saved like a demon for an initial 100K deposit incl 14K first homeowners grant back then (I lived with my parents throughout university and my first year of full-time work), so the mortgage was only a touch over 4x income. Albeit the interest rate back then was around 7% on my mortgage I think.

And back then, before I was dabbling in shares, it was pretty easy to put any extra salary into the mortgage as it was a risk-free "earning" of 7%. Plus I was single so disposable income was much higher (than having our family of five now on my income - wife, two kids and mother-in-law living with us).

Ever since the GFC, property affordability in Sydney has only headed in one direction. Even now with property prices stalling (or slightly falling), the fact that interest rates are higher actually crimps any affordability advantage because prospective homeowners' borrowing power is reduced.

I suspect it's the same in the major cities of most developed countries.

Edited by Jeor
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  • 2 weeks later...

Markets seem to have calmed down over the past week and the banking situation has remained quiet. There are still a few challenges though and much will depend on central bankers' responses - we're entering that awkward period where no one quite knows when or if "the pause" will come, while bond markets are still pricing in cuts at the end of the year (which I personally think is unlikely unless there's a major financial crisis, and it would have to be a big one for the Fed et al. to cut while inflation is still high).

I've doubled my position in a major gold miner (Newcrest) in my portfolio now. The price may dip a little as people realise the banking situation is stabilised, but I think gold is positioned well in the next 12 months - whether it's a financial crisis (safe haven) or an interest rate pause, gold ought to benefit from both. And central banks have been buying a lot of gold lately, perhaps as a reserve buffer for a rainy day. With my gold producer (Newcrest) also having copper account for 30% of revenue it's also positioned for an economic recovery, so they have most bases covered.

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I’m still sticking with my hypothesis from January - bounce to start the year and then hopes of a soft landing dissipating. Market P/Es aren’t looking that attractive right now. Cash/bonds look good (especially if in a tax-free or concessional position).

Of course, the bulls will tell you (somewhat persuasively) to get invested now as we’re unlikely to have two down years in a row and a lot of puff has already come out of the market. *shrugs*

Edited by Paxter
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9 hours ago, Paxter said:

I’m still sticking with my hypothesis from January - bounce to start the year and then hopes of a soft landing dissipating. Market P/Es aren’t looking that attractive right now. Cash/bonds look good (especially if in a tax-free or concessional position).

Of course, the bulls will tell you (somewhat persuasively) to get invested now as we’re unlikely to have two down years in a row and a lot of puff has already come out of the market. *shrugs*

Yes, to be sure I still have a generally defensive position with 30% cash. My portfolio is now very slimmed down and concentrated, and geared towards the defensive - in addition to the cash, I have the large-cap gold miner, a telco, and then a Vanguard Global ETF, a Big Four bank and a large-cap iron ore miner (pretty much a given in the ASX).

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On 3/20/2023 at 10:48 PM, Jeor said:

Believe it or not, in Australia it's commonplace to have variable rate mortgages and most banks only offer to fix rates for 1-5 years. In terms of the efficacy of the Reserve Bank raising rates, it does mean that it flows through the economy much quicker. But the historic pace of these rate rises has caught a lot of Australians off guard. We fixed ours for 3 years at 2.09% but in August 2024 we'll roll off onto an adjustable rate and who knows what that will be.

What sort of down payment do you need to bring to get a variable mortgage there?  30 plus years ago in the states, you typically put 20% of the value in a down payment and got a fixed rate mortgage for the rest.  And then they started with second mortgages for the next 15% or so at a higher rate and then 20 years ago they stop underwriting at all.  How did that not work out?

My point being, if you only get a mortgage having 20 to 30% down at the start, a variable rate mortgage is less of hazard than if you're financing nearly everything.  Presumably one is less likely to default if one is already 20% into the game, even if the rising rates means you're worse off.  Until the rate goes so high that your equity is worthless in comparison to the payments.  

So I'm assuming the system there works usually, just wondering how it differs from not having 30 year fixed mortgages, which is the US standard.

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There are quite a number of underwriting hurdles you have to pass at origination before getting the mortgage in Aus (e.g. a rate stress test), in addition to a minimum deposit of typically 10-20% depending on your circumstances (you could get away with a lower deposit but you’d probably need a guarantor). Any mortgage with less than a 20% deposit requires the buyer to purchase default insurance to protect the bank. The borrower is of course potentially in trouble if interest rates rise - that’s the why the stress test is in place and hopefully most are able to cope.

The US and German systems are of course pretty great for borrowers for the most part but can be awkward for banks if they don’t manage their interest rate risk…

Edited by Paxter
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Im pretty bearish on the overall market.  I just dont feel like weve seen that sort of market capitulation that puts a real bottom in.

The correction of last year (-8.8% djia) didnt seem to me to price in the full measure of negative headwinds we face going forward with still higher than normal inflation, rising interest rates, likely tightened credit, supply chain issues, lower profits, likely slowing of consumer spending as the layoffs increase, worsening consumer sentiment, supply managers polling negative, inverted yields, banks with under water assets.

Its just a littany of negative indicators. I dont trust any rallys here, I think its more likely we see a 2008 type capitulation this year than a sustained Bull rally. Im just surprized how stubborn and resilient the upside/long has managed to remain hanging on thier greased rungs, because its look out below.:D

Edited by DireWolfSpirit
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On 4/3/2023 at 6:46 PM, DireWolfSpirit said:

Its just a littany of negative indicators. I dont trust any rallys here, I think its more likely we see a 2008 type capitulation this year than a sustained Bull rally. Im just surprized how stubborn and resilient the upside/long has managed to remain hanging on thier greased rungs, because its look out below.:D

I agree, the fundamentals point towards much lower valuations when you see the risks that don't seem to be priced in. However, markets are in a bit of a Wile E Coyote moment where they've run off the cliff and they're still airborne - the question is whether another bit of land will appear on the other side that they can run to in time, or whether we'll take the plummet.

I'm still 30% cash in case of a big downturn. And another 30% is in defensive stocks (gold miner and telco) so you could say I'm positioned bearishly.

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  • 2 weeks later...
  • 1 month later...

Yesterday I moved everything I had in the stock market to cash in preparation for a debt ceiling-related crash. Fortunately, the tax implications of that will be pretty minor for me. If I'm wrong, I'll sheepishly buy some new index funds in a couple weeks. And if I'm right, at least I'll be able to "buy the dip" while the economic chaos unfolds.

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