Last week I was writing a bit about a new threat in the form of interest rates. Long term rates have been in decline for almost 27 years straight.
Things are changing, which will have quite an effect on the economy this time around. Why is this so? Generally if rates were to rise to around 7-10% it would make the cost of borrowing higher and may cause the economy to slow down, but this time it is truly different.
The difference is the leverage in the economy. Easy, cheap money has prompted a rash of borrowings from everything from Real Estate to Stocks and everything in between. In summary, the economy is leveraged.
The problem is that most people have a heard mentality. They like to buy assets in the mania phase where everyone issupposedly making a fortune. Leverage in and of itself is not a bad thing.
Many fortunes have been build using leverage. It works very well when interest rates are going down. Interest rates are now starting to rise. If anything, this represents a signal to use caution and common sense. My advice would be to pair down the amount of debt even on asset purchases. Some people like to leverage their investments up to 100% or more. This has been especially true with real estate. It may be a good idea to reduce your exposure to interest rate risk by converting any adjustable rates to fixed and avoid borrowing more money for the time being.
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