8 May 2019 FT — Articles to Read

8 May 2019


Question: According to MSN: Money, what are three (3) expenses to avoid if you want to retire in 10 years?


Interest-only commercial loans rise to pre-crisis level – Pg. 1

–          Interest-only mortgages accounted for 77% of the loans backing $16.5bn of new commercial mortgage-backed securities in the US during the first quarter…up from 68% a year earlier

–          The trend means greater risks for the lenders, which face bigger losses on unpaid principal if stretched borrowers start to default on their loans.  If the economy weakens and commercial property prices begin to drop, the collateral backing the loans also creates in value, increasing the threat of write-downs that could open up big holes in lenders’ balance sheets

–          The growth of interest-only mortgages is a sign of more intense levels of competition within the industry, …


How our low inflation world was made – Pg. 9

–          …prior to 2009, the BoE never lent to banks at a short-term rate below 2%.  That ha been low enough to cope with the Napoleonic wars, two world wars and the Depression

–          Yet for a decade its rate has been close to zero

–          The US Federal Reserve has managed to raise its federal funds rate to 2.5%, but only with difficulty

–          The ECB’s rate is still near zero, as I the BoJ’s

–          …we should not be surprised by this world of persistently weak inflation and ultra-aggressive monetary policies, including outright asset purchases by central banks and favourable long-term lending to banks

–          US policymakers were the most successful in reacting comprehensively.  In the 1990s, Japan took too long to adopt the right combination.  So did the Eurozone after 2008, largely because of obstacles to active fiscal policy in such a currency union, but also because of ideological resistance to using the full capacities of the central bank

–          First, while financial and household debt have fallen relative to incomes in mature economies, that is not true for debts of governments or non-financial corporates.

–          Second, the transatlantic crisis triggered offsetting debt explosions elsewhere, notably in China

–          Third, crisis-hit economies are still far below pre-crisis trend output levels

–          Finally, the populist politics on left and right remain in full force


Answer: (1) Owning a second home (Prof Note: Owning a second home is a quality of life/life goal rather than an investment decision); (2) Taking out loans for your child to go to college (Prof Note: Address the payment of college through estate asset transfer upon death); (3) Whatever your largest expense is (Prof Note: Rarely is it not possible to downsize…)