Now is NOT the Time to Accelerate Debt Repayment

[Scott Passman]

There are few times in our history where there’s been more uncertainty about what things will look like in the short-medium term future. There have been a lot of posts on BP espousing opinions and predictions about where our economy is heading and what moves are the most prudent right now. One thing we can be pretty certain about though is that the Federal Reserve is going to double and triple down on driving up inflation numbers over the next several years in an attempt to stimulate the economy and drive the recovery as quickly as possible. This is not speculation, Fed Chairman Jerome Powell has said on multiple occasions when asked if he is worried about inflation and thus considering raising interest rates that “we’re not even thinking about thinking about raising rates”. Powell has stated openly that the Fed will adopt a new target to get inflation over 2% annually rather than “up to 2%” and is in the process of developing plans to drive higher inflation in our economy.

The 2% inflation indicator is measured via the Consumer Price Index (CPI) which is controversial (https://www.investopedia.com/articles/07/consumerpriceindex.asp there are many articles on this, but here’s a start) because this tool is believed to do a poor job capturing true inflation numbers and has been “adjusted” by the government numerous times over the past decades because they felt it overestimated inflation despite many other inflationary measurement tools indicating just the opposite, that is grossly underestimates inflation. The government has a lot to benefit from publicizing low inflation numbers so it stands to reason that if there is high incentive to show low numbers that is exactly what they will do. The data compiled into the CPI are not publicly available which adds to the uncertainty of how these numbers are derived.

Considering the current and expected Fed policies to keep interest rates at 0% and continue massive infusions of capital into the economy over the next several years, it creates very little incentive to overpay debt at this time because of the near certainty of higher inflation. No one knows exactly what that will look like and this is often debated here on BP and other sources, but there is an old saying that you don’t fight the Fed and if they say they are going to drive higher inflation then you better plan on it. Some things that would benefit from higher inflation:

-Leverage Debt- Take on low interest long-term debt to acquire hard assets like real estate.

-Don’t Overpay Low Interest Debt- Take advantage of paying more of the debt with tomorrow’s dollars which will be worth less.

-Precious Metals- The current environment is well suited for precious metals to do well. It is something to consider whether adding some to your portfolio would benefit you as a means to hedge against a worst case currency crisis. Keep in mind, precious metals are not really investments but rather tools for wealth preservation against currency fluctuations. 

-Investing in Stocks- The current U.S. market is highly overvalued compared to historical norms and history shows us time and time again that when this happens it will correct itself. The U.S has been driving the global markets the past decade and the cyclical nature of markets suggests that it may be time for foreign stocks to outperform the U.S for a while. So divesting some of your portfolio into some foreign stocks may be a great way to diversify.

-Limit Cash Holdings- In an inflationary environment cash does nothing but lose value. We need to be smart here and find a balance of holding enough to keep reserves high and be ready to take advantage of possible opportunities in the future, but not move so much capital into hard assets that liquidity is compromised in the event of financial hardship with our portfolio.

This post is not meant to portend “doom and gloom” but rather to point out in these uncertain times there is at least one thing we can be pretty certain about and thus plan for. Everything is about finding balance and financially surviving this pandemic takes precedence. So even though there is a possibility of “missing out” on opportunities in a high-inflation environment by holding excessive cash, nobody benefits if reserves are too low to retain current assets. As real estate investors, we are in a great space to use inflation to our advantage with real assets that can retain our nominal values so keep investing!

[Shannon Goldsmith]

If you ask any investor who lost their butts and their portfolios in the Great Recession due to their properties being leveraged, they would respectfully disagree with your post, Scott. I know several examples of such investors. All smart. All savvy, capable, knowledgeable men and women. The reason they lost their properties? Debt... A few of them started rebuilding eventually. And guess what? The few who have rebuilt their portfolios are now passionate (scratch that... obsessed) about paying off their properties as quickly as possible.

And guess what else? It's still possible to grow and rapidly pay off properties at the same time. I help investors do this everyday. With the help of a financial tool that I show them, investors (and traditional homeowners) are able to rapidly pay off their mortgages (and other debt including credit cards, student loans, tax debt, medical debt, car loans, etc.) in as little as 5 to 7 years. That's without changing their budget or their lifestyle.

And if they want to balance growth with debt pay down, it helps them do that too.

One last thing... we are standing on the precipice of a serious market shift. It's been happening for some time now. There are many more indicators to watch than just interest rates. If you could see what I see, you would know that the Fed's stance on inflation and interest rates represents will do little to overcome the other powerful forces happening right now that will lead us into a major shift. It's coming...