Banks
Banks are the institutions through which personal and business transactions originate daily (dating back several centuries). Banks make loans, provide savings and checking services, and provide Treasury services to customer accounts. Since the 1980s, banks have had affiliations with Securities firms, either on an owned basis or to provide “clearing services” for customers making securities purchases. A bank’s main question to a new account holder is often “How long can you leave these funds with us”. Banks earn interest on deposited funds for their own accounts and pay interest on depositor’s funds (today around 4.3% per annum, or APR). They earn interest on funds placed with them from other banks on an overnight basis (REPOS: Repurchase Agreements). For customers with high-balance accounts (funds with $5,000,-$10,000 or more), they may be offered Sweep Accounts, which pay overnight interest on these excess funds left in their account.
“Everyone wants interest on their bank deposits”. That’s bad for Main Street banks. Some banks began to move away from conservative practices, looking for new, high volume, wealthy customers in questionable businesses. That was the formula that hit failed banks: Silicon Valley Bank (Technology funding for companies), Signature Bank (funding for law firms, real estate companies, and cryptocurrency assets). This began in March 2022. Many others followed until the Federal Reserve intervened to backstop the assets of failing banks. The crisis subsided, but not before banks tightened their client account requirements and increased collateral requirements in loan transactions. Consumers must be aware of what their bank's current rules are to see if that relationship is still worthwhile. By spreading their deposit account funds among several banks, that provides an additional $250,000 per account in FDIC protection.
The Federal Reserve began a rapid tightening cycle in March 2022 to counter a major increase in inflation. By March 2023, interest rate increases had reduced the value of fixed-rate assets like securities and mortgages, resulting in substantial unrealized (paper) losses in the banking sector. To remain solvent, most banks have returned to their conservative lending and funding practices for taking on new customer accounts. In an economy that is seeing a slow reduction in inflationary pressure, watch closely how bank depository rates are reducing. It is the ‘current dance' between banks and their customer base.
Life Insurance Companies
The First Life Insurance company established in the American colonies was the Presbyterian Minister's Fund, organized in Philadelphia in 1759 (some 265 years ago). There was great activity in the period of 1830–1845, when many prominent Mutual Life Insurance companies were established. This was an important development because the owners of a Mutual Life insurance company are the policyholders! And they could share in the financial profits of the company (in the form of dividends or the return of unutilized premium dollars). In a Stock insurance company, the profits go to the stockholders of the company, not the policyholders. Insurance companies invest in very conservative investments to protect the guarantees they provide to policyholders. They have large product portfolios of both Permanent (cash value building ) and term insurance policies (taken for a stated period of time (1 year–30 years) to protect indebtedness or other obligations of insureds).
A large percentage of each premium dollar (calculated by actuaries for each company) goes into the policy owner’s reserve fund. The reserve liabilities are established as financial safeguards to ensure the company will have sufficient assets to pay its claims when they fall due. Life insurance companies that comply with these legal reserve requirements are known as legal reserve companies. In addition, as a backup system, each state has established a Guarantee Fund to make sure claims are paid on certain products (like annuities), which are other insurance products found in a company’s portfolio. A Whole Life is a valuable asset to hold in today’s economy. A typical policy contains two elements: Cash Value (which is guaranteed by the contract) and Dividends (which are the Non – guaranteed portion of the policy). When you consider a representative sample of this combination, the numbers may look like this: (A Guaranteed cash value of 5% plus a Non-Guaranteed Dividend of 5%). This is a very competitive offering in today’s marketplace.
Another fact to consider is a policy’s Loan Rate. In the example above, the Loan Rate is 5.2%. In BOLI Bank-Owned Life Insurance and COLI Corporate-Owned Life Insurance situations, each of those entities has 25% of their assets invested in Life Insurance policies they own for their Upper Management Key employees. It is cheaper for these entities to borrow money on these policies from a life insurance company than to finance purchased items from a bank. It is also a way for them to finance some of their retirement programs through the use of these life insurance policies.
For the life insurance policyholder, the uses of their policy are endless. They can finance cars, other vehicles (boats, RVs), large home improvements, trips, college education, retirement planning, business opportunities, business supply purchasing, homes (as collateral for initial purchases), other real estate purchases, and debt reduction. With multiple purchases, it can take care of the entire family’s future financing needs – regardless of marketplace conditions. There are no qualifying requirements and no tax limitations on a policy’s usefulness. It is a structure that grows in value each year as premiums are paid, and the policy is in force.
Real Estate
The Real Estate marketplace offers a Twisted Sister view of what is currently going on. Existing home prices are rising and look like they may stay high through 2026. First-time homebuyers are frustrated by high mortgage rates and high prices on the few existing homes they have seen. Buyer interest is thwarted by these factors! Housing affordability is a major problem in America today. Home prices spiked during COVID-19, and then the Federal Reserve began its war on inflation, sending mortgage rates soaring. It is an unaffordable time to buy a house! The supply of homes cannot keep up with demand. Thus, prices are heading up because the existing homeowners (with possibly an old 4% or less mortgage rate) are not going anywhere! The median price of a previously owned home climbed in May 2024 to a record $419,300, up 6% from last year. Before the pandemic, it was $270,000. Real Estate professionals expect home prices to rise by 4.5% this year and another 5% in 2025.
People who are already locked into their property after refinancing or getting a mortgage during the pandemic have no place to go. They may have saved thousands of dollars during the pandemic and have money to move up to a larger property, but the interest rate environment stops them. Most people have 30-year fixed-rate mortgages. Experts believe that the 30-year rate will be around 6% by the end of 2025. . Workers are reluctant to accept job offers in another state if it means sacrificing low housing costs. Relocations bring financial costs that neither employees nor new employers want to absorb. Experts believe that because of these conditions, newly built homes will remain flat for the next several years. New homes built across America in 2023 were 5% smaller than those built two years earlier. Builders are trying to keep new homes as affordable as possible for first-time buyers, but the trade-off is less space. Condo laws across the country are changing with strengthened state building codes. People with sufficient cash assets are seeing this as an opportunity to enter the real estate market in a smaller way.
The rental market presents an equally troubling real estate picture. Rents for individual family homes rose about 3% recently. But rents on apartment units are barely rising because there is a glut of new supply entering those same markets. A growing number of rental properties in the South and Southwest are in financial distress. Some have stopped making payments on their mortgages, and as many as 20% of these loans could wind up in default. Rents surged during the 3.5% to generate enough income. Owners cannot raise rents fast enough to come up with the cash to cover rising loan payments. New units coming to market have more amenities than older properties, creating a disadvantage in the same marketplace that existing tenants are able to exploit, getting a better deal from the new rental property owners.
Securities
First, a reading of the Economy’s strength based upon the government’s June 2024 available data. Employers added 206,000 jobs in June, displaying the economy’s ability to withstand the stubbornly high interest rates. The unemployment rate rose to 4.1% because 277,000 people began looking for work in June, and not all of them found jobs right away. There are few layoffs and a gradually cooling economy (inflation currently sits at 3.3%). Most workers are enjoying a comfortable level of job security with steady pay increases (averaging 3.5%). They have more spendable income than the previous two years. The U.S. gross domestic product (GDP)—the total output of goods and services—grew at a rate of 1.4% in the January–March quarter. When salaries rise more than inflation, you have a healthy economy with more available, spendable income.
Some 11 million people today make up the older workforce, a 4x increase since the 1980s. That increase is driven by the growth of the 65 and older population. The average Life Expectancy in the U.S. in 2024 will be 74.8 for men and 80.2 for women. Age can have a major impact on the way you live and the decisions you make before and during retirement (as reported by the CDC). Retirees say that keeping costs reasonable is important.
With the threat of facing an ongoing inflation risk, the U.S. Securities market is the place investors need to be. The first decision is to decide what level of Risk Tolerance (High, Medium, or Low) they will be comfortable with. With the average American income sitting at $59,384 a year, the challenge is to replace our wages with an ongoing stream of passive income coming from investment sources. The next challenge is to change saving and investment habits! Currently, there is approximately $6.4 trillion sitting in low-interest savings, CDs and money market accounts paying between 4 and 5% per annum. (That makes no sense today)! Sitting alongside these are the 26% gains in stocks and bonds over the past year. Consumers have been brainwashed to accept the lower returns on their hard-earned money, while an 8.5% rate of return is around the stock market’s historical annualized total return. While the stock market goes up and down over time and investments have their own level of risk, investors can find a mix of securities that match their risk tolerance and that pay 8%+ today!
America is one of the few countries where income growth exceeds inflation. So, US Securities is the place to be. The more you set aside each month (as a percent of your monthly income), the more comfortable you will be. The ultimate goal of THIS PROGRAM is to have enough income to be able to live comfortably on accumulated dividends and not have to touch the principal of those investments over time!