The_Most_Bullish_Economic_Indicator_Of_The_Year
00:00:00.000 | Hello, everybody. It's Sam from Financial Samurai. And I just realized something that
00:00:05.240 | could be the most bullish data point I've heard all year, all 2022. And that is the
00:00:12.080 | Treasury Department announced the Series I savings bond interest rate is going to be
00:00:18.520 | 6.89% issued from November 1st, 2022 to April 30th, 2023. Now, the average person might
00:00:28.000 | think, oh, OK, 6.89%. Not bad. OK, maybe it's below the rate of stated inflation at the
00:00:35.520 | moment. But 6.8% pretty good. It's like the third highest rate ever. And so the average
00:00:42.380 | person goes to TreasuryDirect.gov and buys up to $10,000 per account. Pretty simple stuff.
00:00:50.280 | However, as a financial samurai, you think in derivatives. And as a listener of the Financial
00:00:56.000 | Samurai podcast and the website, you also see that I think in derivatives. So what does
00:01:01.120 | this mean? 6.89% is not bad, but that's down from the 9.62% rate offered since May 2022.
00:01:10.360 | A 2.73% decline is massive. Well, I'll tell you what it means. It means the government
00:01:17.200 | believes or knows inflation has peaked and is heading down. This is the most obvious
00:01:23.160 | sign I have ever seen that the government knows inflation has peaked. Given one of the
00:01:28.560 | goals of the government is to maximize revenue, right? Think about all the tax dollars and
00:01:32.600 | the 70,000 pages tax rules that we've got to go through to figure it out. They want
00:01:38.440 | their money and they should probably operate a balanced budget. So the government isn't
00:01:44.280 | willing to pay a higher interest rate than it has to. So the government is paying this
00:01:48.960 | interest rate. It's debt from the government's perspective as they borrow money from us.
00:01:55.960 | So the government has shown us its cards. As a result, we can make higher expected value
00:02:02.160 | bets. Imagine if you're playing poker and you knew everybody's whole cards. You would
00:02:06.360 | bet more aggressively preflop on the turn and on the river if you knew what everybody
00:02:11.480 | had. Well, we know from the series I bond rate offer what the government believes about
00:02:18.000 | inflation. We can now assume the inflation figures coming out on November 10th, 2022,
00:02:24.600 | December 13th, 2022, January 12th, 2023, February 14th, 2023, March 14th, 2023, April 12th,
00:02:34.280 | and May 10th, 2023 will either be below inflation expectations or have a blended overall inflation
00:02:43.360 | rate below expectations. And if that is the case, if inflation comes down quicker than
00:02:50.040 | estimated, we should see an increase in risk appetite for stocks, real estate, and other
00:02:56.640 | risk assets. Now, of course, nobody knows how well risk assets will perform in the future.
00:03:02.120 | However, the series I bond new interest rate makes me more confident the worst is over.
00:03:08.920 | On October 17, 2022, the S&P 500 declined to 3577. It closed that day at that level.
00:03:17.440 | That's probably the bottom of this latest bear market. Because if inflation comes down,
00:03:22.560 | interest rates are coming down, the net present value of future cash flows goes up, and the
00:03:28.160 | value of companies go up. So tech companies that have gotten crushed, and other companies
00:03:33.520 | that have high debt levels will probably do better because they're going to save on their
00:03:38.840 | debt interest payments. So how do we make money in the future? Well, the first thing
00:03:44.040 | we should do is not sell our risk assets because again, the worst is over. The second thing
00:03:49.760 | we should do is probably set up parameters as to where we're willing to buy. Now I'm
00:03:54.160 | willing to buy if the S&P 500 gets below 3600 all day long, because I think 3577 is the
00:04:01.360 | bottom. So if we're closer to the bottom, then I'll be buying because long term, the
00:04:05.400 | S&P 500 goes up and to the right. But now that I have this new news, I think buying
00:04:12.080 | below S&P 500 3800 is probably going to be a decent bet over the long term. In terms
00:04:19.240 | of real estate, my favorite asset class to build wealth, you want to strategically try
00:04:24.040 | and make low ball real estate offers for 10 to 20% off right now. Right now, over the
00:04:30.520 | next three months, I would say winter is my favorite time to buy real estate because most
00:04:36.800 | people who list during the winter are generally more motivated than those who can just wait
00:04:41.960 | until spring when the weather is better, people are back and people are more motivated to
00:04:45.680 | move. And after people have gotten paid their bonuses and have gotten promoted. So strategically
00:04:51.400 | try to make low ball real estate offers during this winter before mortgage rates start coming
00:04:57.200 | down by two to 3% by April 2023. That's right, folks, the series I bought interest rate offer
00:05:05.280 | is literally telling us mortgage rates will start heading south by April 2023 as well.
00:05:12.200 | Because again, the latest offer is 2.73% lower than the last offer of 9.62%. And as a reader
00:05:21.280 | and listener of Financial Samurai, you know that everything is related to the risk free
00:05:26.380 | rate of return. All asset prices are priced off the risk free rate of return. And you
00:05:31.800 | can consider series I bonds as a risk free rate of return. But unfortunately, you can
00:05:37.500 | only invest so much right there's a limit, but it is another indicator. And if the interest
00:05:42.440 | rate is going to decline by 2.73%, then mortgage rates will also decline by probably two to
00:05:49.600 | 3%. So in other words, the average 30 year fixed rate mortgage is about 7%. Right now,
00:05:55.060 | we could see the average 30 year fixed rate mortgage go down to four to 5% by April 2023.
00:06:00.960 | And you know what the fun thing about writing on Financial Samurai and doing this podcast
00:06:05.440 | is we will find out whether my thesis is right in six months, and we will all rationally
00:06:13.560 | invest accordingly. So if you're thinking about selling real estate now, I wouldn't
00:06:18.040 | do it. I think you're going to encounter people who are going to try to low ball you smartly
00:06:22.040 | they will try to get 10 to 20% off because in six months when inflation interest rates
00:06:27.420 | go down, the demand for real estate is going to pick right back up. And the same thing
00:06:31.900 | for stocks, I would just hold on to what you have, please review your net worth asset allocation,
00:06:38.380 | look at your stock asset allocation, real estate asset allocation, alternatives, all
00:06:43.420 | that stuff. And mentally, I want you all to feel better that the worst is probably behind
00:06:49.680 | us. Because I know this year has been a grind financially. I've been writing and talking
00:06:54.280 | about ways to how to better enjoy our lives as it's harder to make money and risk assets.
00:07:00.680 | But we should feel good knowing that we're not going to revert back to the terrible times
00:07:06.220 | of the global financial crisis in 2008 2009 and a little bit of 2010. And I do think the
00:07:12.300 | worst is behind us. So I'd love to hear your thoughts through a comment and email, whether
00:07:16.600 | you believe inflation has peaked and the worst is behind us. I'm also really curious to see
00:07:23.560 | if other financial pundits, journalists, other just other people can connect the dots to
00:07:29.920 | make this correlation. Because this is one of the things that I was forced to think about
00:07:35.040 | when I worked in finance, how to connect the dots to make better investment decisions.
00:07:40.440 | And this dot connecting seems to be the most obvious one. But maybe something that's obvious
00:07:46.120 | to me is not obvious to everybody else. And maybe this will become actually more obvious
00:07:51.640 | to more people as time goes on, which in turn would create more appetite for risk assets.
00:07:58.320 | So if you think I'm totally delusional, or I'm missing something, please also let me
00:08:02.840 | know. Having investing in blind spots is just kind of the way of life, but it's also very
00:08:07.520 | dangerous. So it's good for all of us to learn together and to share our thoughts and opinions
00:08:13.480 | and argue why we believe the way we do. If you enjoyed this podcast, I'd love a positive
00:08:18.160 | review. If you'd like to support my work, my free podcast, my free writing, pick up
00:08:22.760 | a hard copy of Buy This, Not That at financialsamurai.com/btnt. The book has now over 200 five star reviews.
00:08:32.280 | So thank you very much for your support. It really means a lot. And if you're looking
00:08:36.440 | for life insurance, check out Policy Genius at financialsamurai.com/pg. During this holiday
00:08:43.960 | season, I hope everyone stays safe. I hope everyone bolsters their finances, reviews
00:08:49.560 | their finances, talks to their loved ones and their family about their finances. Right
00:08:55.200 | now is truly the best time of the year. My family had a wonderful time trick or treating
00:08:59.920 | in Noe Valley. It was so great to see the kids just dress up and just be so happy and
00:09:06.100 | excited. I remember when I was working, November and December were the best times because business
00:09:10.960 | was slow. There were a lot of holidays. People were merry. There were holiday parties. Oh,
00:09:16.320 | I'm so envious of folks who have holiday parties because that's one thing I don't have as an
00:09:22.680 | unemployed person or as a solopreneur. So let's take this slow time to appreciate more
00:09:27.520 | of what we have. And I hope to see everyone around the comment section. Take care.