Call Us: 201-842-7655
Website     The Difference     About Us     Insights     Contact Us   


 
Happy Holidays and welcome to the December edition of The Wealth Chronicle.  
The Fed Raised Interest Rates - Now What?
 As expected, on December 16th the Fed raised interest rates for the first time since 2006. The rate hike lifted the Fed Funds rate from zero to a target of 0.25% to 0.50%. The move was based off of three metrics: Employment, Inflation, and GDP Growth. While inflation is running below targets, the employment and overall GDP numbers are ahead of the targets the Fed set for the increase. They claimed the economy is improving at a moderate pace and left the window open for additional, gradual increases in 2016.

What is the federal funds rate? 
The federal funds rate is the interest rate at which institutions such as banks/credit unions lend reserve money to other banks/credit unions overnight with no collateral.

Who does the rate increase impact most? Borrowers
Most credit card contracts are based on the "prime rate," which is the interest rate that most large commercial banks charge their best customers. That rate correlates highly to the federal funds rate. If the interest rate you pay on credit card interest is 15%, it will probably be raised to 15.25%.

What about my student loans?
This beginning of an interest rate increase cycle could affect your existing student loans and any additional student loans you plan to take out in the future. You need to determine if your loans are fixed or variable loans to understand if the interest rate changes will affect your monthly payments. Fixed rate loans won't be affected by any interest rate adjustment, but any variable rate loans will see interest rates increase, likely in the same increments as the Federal Reserve chooses to raise rates over the coming months.

Will I finally start getting a higher rate on my savings account and CD's? Unfortunately Not Likely
In general, it will take a while for an increase in the federal funds rate to turn into an increase in your savings account interest rate. For an American with $10,000 in their account, this will amount to only $25 extra each year if your bank passed on the full interest rate rise, which they are not obliged to do.

How will it impact home buyers?
Consumers shouldn't see any major immediate change. The interest rate on 30-year mortgages is only loosely tied to the federal funds rate. With such a small increase of 0.25 percent, we shouldn't expect any dramatic short-term changes in mortgage rates. But this could signal the end of very low home loans for new buyers. We may see the U.S. property market cool over the next six to 12 months, especially if there are additional rate rises in 2016.

How will my investment portfolio of stocks and bonds be impacted?
Just as bond prices go up when yields go down, the prices of bonds you own now will generally drop as interest rates go up. There are two ways to include bonds in your portfolio: Individually or as part of a bond fund. If your portfolio has individual bonds, you will not be impacted as long as you hold the bonds to maturity.

An initial rate increase could cause pain in the short term to bond funds. But over the long term, the rate increase will act to your benefit. Over a period of years, bond-fund investors will do better in an environment of rising interest rates than in one in which rates stay at today's unusually low levels. 
This is because as the bonds in funds' portfolios mature, managers will reinvest in newer issues with higher interest rates, and investors will benefit from increased income. In addition, the interest payments from the bonds in the portfolio will be reinvested at higher rates.

Stocks are more of a wild card. Historically when interest rates have been raised stocks have a short period of dropping following with strong performance over the next couple of years. It is said that it takes time for investors to adjust to the new rate increase. In this case things may be different. On the positive side investors have known for some time now that rates were going to increase and had time to adjust.  On the negative side there are a lot of economists who say that the economy isn't ready yet for a rate increase.

The graphic below was taken from Time Magazine and provides a summary of what to expect with the rate increase. Their analysis ties pretty tightly correlated to what I wrote above.

How To Curb Impulse Purchases
There are many reasons why we purchase things, one of them being straight impulsive buys. I am especially guilty of this when it comes to books. Whenever I come across a book that I think would be good I buy it even though I have about 20-25 books on my shelf that are in queue to read. I probably should just put the book on my Amazon wish list until I knock off some more books from my queue. For other people the impulse buy may involve shoes, electronics, or other larger things that can be classified as "toys".

I recently read an interesting article  on Business Insider where the author asks himself the same question any time he is about to make an impulse buy.

Would I rather have this or X,Y,Z? (Insert any big picture goal you have been planning for)

It's a technique he learned as a kid on how to make choices on what to spend his money on. For him it wasn't about approaching money from a place of lack, instead it was about making an either, or choice. His family could afford a lot - if they didn't squander it on impulse purchases along the way.

Making impulse purchases becomes the default for your money when you have no other vision or place for it to funnel into. Therefore, one of the best ways to combat the urge to spend is to have a bigger plan for your money. This could be anything from going on a vacation to getting out of debt, to adding to your passive income number - anything that gets you excited and motivated to keep working towards that goal.

Not only does this strategy benefit you by driving you toward your goals. It takes you out of the emotionally charged moment, helps you see how trivial that one purchase might be, and it lessens the reliance on willpower.


Watercooler
Ballast Point gets sold for $1 Billion
It's popular nowadays for entrepreneurs looking to create a company to sell for a big profit go into the tech space.  You may want to reconsider and start brewing craft beer. Constellation Brands, the maker of Robert Mondavi wine and Svedka vodka just purchased craft brewer Ballast Point for $1 Billion. 
 
Since 2011 craft brewers Goose Island, Blue Point, 10 Barrel Brewing, Elysian Brewing, Virtue Cider, Saint Archer, Lagunitas, and Golden Road Brewing have all been acquired by the big beer companies (InBev, Miller Coors, and Heineken NV). It looks like the industry will continue to consolidate and be lucrative for craft breweries looking to cash out.


Buffet Sponsors Beer Mile World Record Holder
Speaking of beer, you can make money not just by brewing it, but also being able to run and drink it fast. Brooks, a running sneaker company owned by Warren Buffet just sponsored the Beer Mile World Record holder, Lewis Kent. The beer mile is a race that entails drinking a beer, running 400 meters, drinking a beer, running 400 meters, drinking a beer, running 400M, and finishing it off with the 4th beer and 400 meter lap. Lewis completed the beer mile in 4:47, which is a fast time even if he didn't have to pound 4 beers. 

Coverage of the 2015 Beer Mile World Championships
  


Maintaining the Millenium Falcon
The new Star Wars movie crossed the $1 billion threshold in only 12 days after it's release. The high revenues will be needed. After analyzing the cost of commercial and fighter jets, UK engineering firm SG Engineering projected that it would have cost Hans Solo about $3 million a year to maintain the Millenium Falcon. At 111 ft long by 82 ft wide, they conclude that it would cost about $4.8 billion to build it. I wonder if Lockheed Martin is actually working on making one.

We shouldn't worry too much about Hans Solo having the money to cover the maintenance costs. He was reportedly paid $20 million for his role in Star Wars, about 50 times more than his co stars made.

Just How Cheap is Oil
The price of oil has come down so much over the past couple of years that it is now cheaper than water, milk, soda, coffee, and wine.



I brings back a memory of a trip to Paris and England in 2002 where I observed that a beer at the time was cheaper than ordering a soda or bottle of water at a restaurant.

Please contact me regarding any of the articles above, or if you would like to discuss your personal or business finances

Sincerely, 

 





Marc Bautis
Bautis Financial
201-842-7655