How to take advantage of rising interest rates
I did something last weekend that I try to avoid at all costs… I watched TV and regretted it almost instantly.
I woke up Saturday morning to find Foo Fighters drummer Taylor Hawkins had died in his hotel room just before the band played a music festival in Bogota, Colombia. Taylor got his big break when he joined Alanis Morissette on her Little shredded pill album tour. I remember my parents playing the tape in our old station wagon, and they always skipped its single “You Oughta Know”, but wouldn’t tell me why. I quickly understood the answer when I snuck into a listen while waiting for them in the car one morning. As a drummer, Taylor was a huge inspiration to me and will always be remembered as one of the greatest drummers of all time.
Then news broke that President Biden called Vladimir Putin a butcher and said he wanted the Russian president removed from office. Of course, this did not go down well with US officials. Secretary of State Antony Blinken had to do damage control and backtrack on the president’s statement, saying the United States had no plans for regime change in Russia or anywhere else. This is classic doublespeak.
If any place needs regime change, it’s the United States. This is because we are at a critical point in the economy. The Fed says it has everything under control, but I’m not convinced.
Two weeks ago today, the Federal Reserve raised interest rates for the first time since 2018, marking the start of an effort to rein in searing inflation, which hit a 40-year high of 7 .9% in February.
The Fed announced its intention to continue raising interest rates throughout the year, with policymakers predicting that the benchmark rate (the rate at which banks borrow and lend to each other overnight) will reach 1.9%. Experts believe this is a conservative estimate and investors are paying close attention to it as it affects nearly every sector of the economy, from stocks and bonds to housing and education costs.
But raising rates too quickly can easily lead to a recession, much like the United States experienced in the 1980s when rising oil prices, excessive government spending and rising wages led to inflation. uncontrollable 13.5%. To fight inflation, the Fed continued to raise rates until they reached 21% in 1981. But this caused demand for new money to dry up, which in turn killed the market. housing, business investment and economic growth.
We see eerily similar signs today, but with the added pressure of student loans. And when rates rise even further, borrowers will no longer be able to pay their mortgages or other loans, so they will turn to private loans to secure lower rates with the added security of not being seized by banks.
In an effort to get ahead of this trend as an investor, you may want to consider buying companies that offer private loans.
I’ll cover some of the best below…
The uncertain future of student loans and mortgages
If Biden wants to win a much-needed political victory, he doesn’t have to write off student loan debt.
This is where every decision maker goes wrong.
All he has to do is waive any unpaid interest, then make all federal student loans interest-free.
After all, why does the government have to start collecting interest on student debt?
The pause on student loan repayments in effect since March 2020 has created an artificial boon for the economy as it has freed up tight wallets.
But there is a big caveat here. Many borrowers took out loans because they were kicking the streets, arguably making reckless financial decisions.
For proof, just turn to Twitter…
Once payments resume, this new homeowner will likely not be able to pay her mortgage. It’s not a wise decision to buy a home when you’re struggling with student debt and the only way to pay your mortgage is to suspend your student debt payments…
Now Biden has campaigned to forgive $10,000 in student loan debt for each borrower, but has yet to follow through on that promise. Senator Elizabeth Warren wants Biden to sign an executive order canceling $50,000 on each loan. She recently said, “The average borrower is going to have to start paying almost $400 a month back to the government instead of spending that money in our economy.”
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Whatever happens, the administration must give borrowers clear guidance on its decision, as 46 million Americans currently hold student loan debt. With payments set to resume on May 1, millions of Americans are struggling to plan for their financial future, which is weighing on the economy.
When it comes to mortgages, people are buying homes that they can’t afford with 30-year mortgages. This chart from NerdWallet shows that the average mortgage rate is steadily rising, sitting at nearly 5% today. And borrowers with adjustable rate mortgages will be fooled…
History tells us that three factors contribute to inflation and exorbitant mortgage rates: the Black Swan events, helicopter money and war. Although the economic environment we find ourselves in today is not exactly the same as that which caused the savings and loan crisis of the early 1980s, it is strikingly similar. At that time, 30-year mortgage rates reached 18.45%. Only time will tell how high the rates will go.
So as mortgage rates rise, companies providing private loans and refinances will stay busy.
My Best Refinance Choice
My top pick in this segment is SoFi (NASDAQ:SOFI). The company offers refinancing products for student loans, auto loans, mortgages, personal loans and credit cards. It even provides banking, investing, and crypto services.
SoFi CEO Anthony Noto also has some smart thoughts on the student loan crisis. In an interview with Yahoo Finance this week, he said, “It’s classic indecisive leadership – and it’s not exactly what the country needs. We need decisive leadership – we need the administration to take a stand. Kicking the road will not currently meet all the needs of the American people. »
He even laid out a plan for the president on the company’s website:
It’s time to take the lead on the basis of economics and social principles – not politics – and end the confusion by providing distressed and defaulting borrowers with the permanent relief they need, including 10 $000 in student loan forgiveness…
A strong leader can take a company very far. But what I like to see is the company’s C-suite executives investing their money in their own stocks. Insiders recently bought SoFi shares. In March alone, there were 11 purchases. CEO Anthony Noto, COO Micah Heavener and two directors all bought. And as momentum turns positive for the stock this week, it’s a business to keep on your radar.
Other companies in this segment include LendingClub (NYSE:LC), Beginner (NASDAQ: UPST)and Block (NYSE: SQ), formerly Square. LendingClub also made insider buying, with CFO Thomas Casey buying $50,000 worth of shares at $17.98. Two directors also bought, with one buying for over $230,000.
So why exactly is Biden dithering over the student loan crisis? Well, there’s something he’s not telling us.
It has to do with the Fed and all the money the administration won’t give away.
Learn more here…
Editor, Daily Wealth
After Alexander’s passion for economics and investing drew him to one of the world’s largest financial publishers, where he rubbed shoulders with former Chicago Board Options Exchange traders, hedge fund managers of Wall Street and International Monetary Fund analysts, he decided to pick up the pen and guide others through this new era of investing.