Market Risks

Hi. So this is Mike Noone.

I'm just out on a, a bit of a walk here beside the ocean. And I just wanna talk to you for a bit about how the investment landscape at the moment is looking very, very iffy. Interest rates are not gonna go down, and here's why. The federal budget office projects that the United States, is gonna increase its budget deficit to run to about $52 trillion by 2034.  

So that's roughly $20 trillion we'll be borrowing in the next 10 years.

Now, obviously this is going to be created by the, the United States government selling, you know, some form of bonds as an investment to Federal Reserve, uh, or a treasury rather, will then sell these bonds to the Federal Reserve or then deposit money and to the United States Governments account.  

Now what this means, if it's gonna be a huge increase in the money supply, and what that will do is it will reduce the purchasing power 'cause you've got more dollars, more currency units chasing the same number of goods and or services.  

Foreign buyers of US government debt, you know, US treasuries, et cetera, we're gonna go, oh, hang on a minute. Do we really want to pack our hard earned, currency In an investment whereby, because of, of a massive increase in, uh, United States, uh, dollars for purchasing power, that's gonna be less.  

So basically we're gonna be parking our money for 10 years, but at the end of it, we're gonna have less purchasing power. My guess is the answer to that is no, we're not going to. So what this means is that the United States Treasury, that the United States of financial system will have to increase interest rates in order to compensate for the increased risk.  

And one of the things about the bond market is that the, the value (···1.1s) of a bond is inversely correlated to the interest rates.  

So the high, the interest rates go the lot, the value of a bond, and it's just one of the quirky things about it. So that then puts the United States commercial real estate market into a somewhat precarious position because, um, commercial real estate is about 52% of the assets on the books of United States banks.  

So as the interest rates goes up, the value of those assets in nominal dollar terms goes down, which then means that on the assets side of a balance sheet for banks have got, got, uh, less there to cover, the money.  

They've got loans to these big commercial real estate organizations. And this is basically what undid for the Silicon Valley Bank, um, and the other couple that went bused towards the ends of 2023 there. And this is gonna go happen right across the US banking system. And the interesting thing is, there's some research done towards the end of 2023 that found that there's something like a hundred and something United States Bank that were either technically insolvent or so close to us to make no difference.  

So, um, why am I telling you all of this? The main thing is that you as a, an individual, as a retail investor have absolutely no control over the equities market, over foreign exchange markets, over the treasuries markets, over, uh, interest rates, nothing at all.  

So you've gotta look at where can you actually have any sort of influence and the only place you've really got any sort of influence is inside of your own business. You can set the prices for your goods and services and I hear you say, yeah, but you know, discretionary spending is down.  

And that may be true, but if that's affecting, is probably a result of you targeting the wrong audience or having the wrong offer. So, um, more I miss over the next couple of days. I'm gonna be doing these walks and talks every day. So until this time tomorrow, I'll see you then.  

Bye for now.