The moment is now

The intrepid explorers had hiked and kayaked their way around the world. An inspiring achievement at any age, doubly so given they didn’t start until they reached traditional retirement age. Both had led long careers in modestly paying professions, which contributed more to society than their bank balance.

They were an intriguing couple. Co-dependent. Sharing matching attitudes. Matching hobbies. Matching haircuts. Two peas in a pod. The kind of loved up old couple that deep down nearly everyone secretly aspires to part of one day, but few of us ever will.

The thing I found most intriguing was their matching fashion sense.

These were the people who venture into the camping stores and buy travel outfits. Flight pants. Travel vests covered in pockets. Convertible trousers with zip-off legs, allowing them to be instantly transformed into shorts. The kind of gear that screams tourist, no matter where in the world it is worn.

The last time I caught up with those globetrotting septuagenarians had been on a ridiculously hot day in the South of France. My iPhone had reported the mercury topping 40 degrees Celsius before it had a meltdown, complaining that it needed to cool down before it could be used, then switching itself off. I shared its pain and wished I could do the same.

I was about to ask the couple another question about their travels, when I noticed them both wearing matching convertible trousers with the legs still on.

I stopped midsentence. Goldfished. Gawped into stunned speechlessness.

It was hot enough to fry an egg on a car bonnet. The great white whales, those overweight tourists sun-worshipping on the beach, were swiftly transformed into bright red lobster people. Slowly being roasted from the outside in, their race toward skin cancer more of a sprint than a marathon.

And yet despite the oven-like conditions, the elderly explorers had not converted their trousers into shorts.

“If not now, then when?” I demanded, gesturing at their ridiculous matching khaki outfits.

The husband glanced at his legs. Gave a wry shrug. “Nobody ever tells you when the time is right”.

“Now! The time is now. The best time is already behind us, but the next best time is right now.”

I was reminded of that conversation this week, amidst all the economic doomsaying. Crypto cataclysms. The market gods schooling a whole new generation of investors that every so often investments experience gravity: what goes up must come down.

Click-bait headlines lamented a cost of living “crisis”. Inflation surging to levels unseen for 40 years, beyond living memory of all but the greyest of investors.

Wages are up a little. Purchasing power down a lot. Squeezing the most those with the least.

Interest rates rising from the dead, like a zombie in a low budget horror movie. It had been more than a decade since rates amounted to more than rounding error. In real terms, the use of “other people’s money” had been essentially free for almost a generation. Now base rates around the globe have begun their ascent towards their historical norms. Reversion to the mean is an outcome as predictable as it will be uncomfortable, coming from our recency bias induced sense of “normal”.

And yet the blogosphere and financial forums are littered with angst-ridden uncertainty over timing.

Wondering whether the time is right to fix their mortgage rates? To lock in certainty for a longer-term?

Asking whether the fall in the markets is a temporary aberration, destined for another central bank rescue like all the major dips since the Global Financial Crisis, before normal bull market service is resumed?

Or is it different this time?

Different as in the dip may not be a mere blip on an otherwise rapidly ascending share price, remedied within days or weeks.

Different, like the declines that the gnarled old-timers like to tell war stories about. The dotcom bust or the Black Monday of ‘87. A throwback to the olden days, when buyers bewore and investors found themselves facing paper losses for months or even years before the market’s eventual long term upwards trajectory brought them out of the red.

What they are really asking is whether that is daylight they spy at the end of the tunnel, or the headlight of an oncoming train? Providing great opportunities or rendering them to roadkill.

Questions to which there are many confident opinions.

Questions to which there are no certain answers.

Yet good questions to be asking nonetheless.

I don’t pretend to have all the answers. Well, any of the answers if I’m perfectly honest. My attempts to divine the future from animal entrails tend to leave me covered in excrement but none the richer. My prowess with a crystal ball is laughably bad.

Despite all of that demonstrable incompetence, I’ve done ok financially speaking. Fortunately, luck plays more of a role in our success than many would be comfortable admitting. As the old lottery slogan once said: “you have to be in it to win it”. Do the thinking. Call the play. Then follow through.

Humble brags and false modesty aside, my attempts to predict the future have been directionally correct much of the time. My timing on the other hand, has been suboptimal.

Usually early.

Occasionally late.

Always slow to recognise in the moment, that the moment is now.

Do we dare to unzip our convertible trousers into shorts? Or swelter in uncertainty?

Suffer from analysis paralysis? Or risk rolling the dice and backing our judgement?

Wait for definitive certainty that may never come? Or potentially die wondering?

Interest rates today are 1%. Less than six months ago they were 0.1%.

Where will they be tomorrow? Nobody really knows.

What we do know is that historically, interest rates have averaged nearly 5%.

Real interest rates, or nominal interest rates minus inflation, are currently -6.8%. Less than a year ago they were -0.6%.

Where will they be tomorrow? Nobody really knows.

What we do know is that historically, real interest rates have averaged just over 3%.

Collectively, these facts suggest that interest rates are likely to increase over the near to medium term. Possibly by a lot.

Which shouldn’t come as a surprise, if we accept that the new “normal” since the Global Financial Crisis was a temporary aberration, rather than a permanent change in the rules of the game. In much the same way that Russia’s recent military misadventures demonstrated that land wars in Europe weren’t gone forever, they had just been out of fashion for a while.

So what can we do with this startling, yet obvious in hindsight, revelation? How can we make it actionable?

If interest rates are likely to rise over the next little while, then money will become more expensive to borrow. Mortgages, lines of credit, and margin lending facilities all cost more.

Those 10 year fixed-rate interest-only mortgages for less than 1% that were available a year ago now seem like an absolute steal in hindsight.

The same deals at less than 2% that were available six months ago also feel like a great deal.

Today those deals are nearing 2.5%. A year from now, will we be wistfully looking back at them also?

I suspect so. Particularly those interest-only mortgages that offer the option, but not the obligation, to repay up to 10% of the loan principle without penalty each year. That is far more than the average repayment mortgagee reduces their debt by over an equivalent period, but with vastly more flexibility.

Higher borrowing costs will likely create cashflow challenges for landlords operating properties in expensive markets with low rental yields, where the numbers barely work today. There are interesting times ahead for accidental landlords, particularly the heavily leveraged ones.

What about crypto? Speculators have taken quite the haircut so far in 2022. My father would have described the experience as character building.

The price of a bitcoin has been cut in half over the last six months. It is down a third from a year ago. Ethereum too has halved, giving up all its gains over the last year. Both remain many multiples higher than they were two years ago.

What does the future hold for crypto? Nobody really knows.

What we do know is inflation is outstripping wage growth, leaving consumers with reduced purchasing power. When the cost of the essentials increase, it is discretionary spending that makes way.

Crypto speculation is the most discretionary of discretionary spending. Limited utility. High transaction costs. Dubious value.

As the flood of greater fools and their money decreases, it is hard to see how the bubble keeps inflating. If the tide turns, and more money heads for the exits than lines up to ride the crypto rollercoaster, then prices fall. Basic supply and demand.

Whether that represents a temporary setback or a permanent fall from fashion remains to be seen.

Finally, what does the future hold for the stock market? Nobody really knows.

The S&P500 has given up all of its gains from a year ago. This time the dip wasn’t triggered by a sudden external shock, like the COVID pandemic or Global Financial Crisis. With inflation surging, it is unlikely central banks will ride to the rescue printing money, nor are governments likely to splash out vast quantities of helicopter money in an attempt to prop up the economy.

Over the long term, the markets go up more than they go down. It is just that the ups tend to be gradual, while the downs can be abrupt.

There is a popular myth that money invested does not have its purchasing power eroded by inflation, while money held in cash does. This narrative only holds true when the total returns generated by those investments exceed inflation, which thus far in 2022 has not proven to be the case. That said, in the absence of good answers, sometimes the least worst answer must suffice!

What does the future hold? Nobody really knows.

What we do know is that the moment is now. The moment when we make decisions. The moment when we take action.

I don’t think there is much point worrying about inflation and interest rates and the global economy, as those are all things are outside my sphere of control.

I do think that perhaps those intrepid old travellers with dubious fashion sense have the right idea. Dress like they just don’t care, and venture off in search of their happy.

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