Back in 2009, when Financial Samurai first started, one of my investment theses was that we'd have low interest rates for life. Here in 2021+, I will reiterate my belief that interest rates will stay low for as long as we shall live.
In May 2021, inflation rose 5% year over year, the highest YoY change since 2008. However, the 10-year bond yield actually went DOWN last week from 1.53% to 1.46% today.
In other words, the bond market believes May's inflation rise was temporary and not indicative of a trend for the coming months. This is probably the correct call since prices were depressed in May 2020, two months into lockdowns.
Most of the inflation surge in May 2021 has been due to transportation prices picking up (used cars and trucks, travel). Below is the 3-month chart of the 10-year bond yield.
Why Will Low Interest Rates Be Here For Life?
Here are the main reasons why low interest rates will likely be here for the rest of our lives.
- Technology makes information transfer much quicker
- Better coordinated global central banks
- More experience central bank governors who have learned from previous cycles
- Globalization makes the constant exporting of deflation, which keeps a cap on inflation
- Globalization also means financial markets around the world are more interconnected
- Decelerating population growth of many developed countries like Japan and the U.S.
- Post-pandemic, companies are more open to hiring labor from lower-cost areas of the country and the world
- Technological advances in food production to increase yield and lower food costs
- A deemphasis on paying massive college tuition given everything can be learned online for free
- Technological advances in electronics
- Less demand for automobiles due to work from home, more advanced public transportation systems, and ridesharing services from Uber and Lyft
Implications For A Permanently Low Interest Rate Environment
First, given the opportunity cost of earning a risk-free rate is so low, more money will flow towards riskier assets such as stocks, real estate, venture capital, art, wine, farmland, and other assets. Therefore, it is probably a good bet to stay mostly long our existing positions in risk assets.
Second, given rates are so low, more people will borrow more money to invest in risk assets. The risk here is that some people borrow too much and end up blowing themselves up. If too many people get to borrow too much, the rest of us could also get hurt (systemic risk). So far, the lending market has been quite tight.
Finally, the way we borrow changes. If we believe we are in a “low interest rate for life” environment, we are willing to take more risk and borrow at shorter durations to pay lower interest rates. The reason is that we no longer fear rates going up when it's time to refinance.
A low interest rate environment is great for investing and for building new companies.
When The 15-Year Mortgage Looks The Most Attractive Ever
If you've taken out an Adjustable Rate Mortgage (ARM) over the past 20 years, you've been winning over the 30-year fixed mortgage with a higher rate. Your ARM rate has either reset at a similar rate or gone down. Or, you've been able to refinance your ARM to a lower rate.
However, there are times when refinancing to a 15-year mortgage or getting a 15-year mortgage is a better call. Let's look at an example when borrowers could get the best VALUE with a 15-year mortgage.
In the chart below by Freddie Mac's mortgage market survey, you can see the average 15-year mortgage interest rate (green line) was below the average 5/1 ARM rate (red line). This was an anomaly. The GAP between the 15-year and 5/1 ARM average rate was also the widest in history.
It's not a surprise that this mortgage market anomaly didn't last as the economy strengthened. In a normal economic cycle, longer duration loans have higher interest rates due to the time value of money.
Here's a broader look at historical 30-Year, 15-Year, and 5/1 ARM rates through mid 2022.
Refinance Your Mortgage Today
If you don't have a 15-year mortgage, it's worth asking your current bank what kind of rates you can get for a 15-year.
Also check refinance rates online for free with no-obligation quotes from competing lenders so you can get the best rate. The more competing quotes you can get, the better. Credible is my favorite online lending marketplace to get loans.
If you've got great credit, you can easily beat the average mortgage rates. I beat the averages for my last two refinances by 0.5%.
Although I got a 7/1 ARM at 2.125% in 2020, I always keep an active eye on rates and refinance whenever a good opportunity arises. I love the idea of paying a lower rate and paying off the mortgage sooner.
Celebrating Life And Investing
The pandemic had a lot of ups and downs, but I'm feeling good about how far we've come and where we're headed. I even wrote a long reflections post about making money online since 2009. Today, I feel exactly like I did in early 2012, right before I engineered my layoff: weird, melancholy, and excited all at the same time.
Plenty of y'all have went back to living normal lives ages ago. But here in California, things were quite stringent for a long time. For example, we still had the mask mandate a month after the CDC dropped the mask mandate. But at least San Francisco has over 80% of its residents vaccinated. 80% is supposedly a herd immunity first for a large city in America.
To celebrate we're driving 1.15 hours up to Napa Valley to drink some of the finest wine we can find. In addition, I will be spending some time learning all I can about wine as an investment through Vinovest, a leading wine investing platform.
Fine wine has outperformed the S&P 500 index for the past 20 years and is an uncorrelated alternative asset.
I'm confident as things get back to normal, more people will be spending more of their savings on things that bring them joy and potential positive returns.
Real Estate Is A Great Asset With Low Interest Rates
Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. In a low interest rate environment, you want to buy real estate because its rental income becomes much more valuable. Further, more people can borrow at low rates to buy more real estate.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. Take a look at Fundrise, my favorite real estate crowdfunding platform.
Fundrise is a way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
Here's to enjoying our hard-earned money a lot more during these coming years. The YOLO Economy is here to stay and I can't wait to live my life to the fullest.
Sam – Financial freedom sooner, rather than later.