Posted on 03/12/2023 8:41:39 AM PDT by Diana in Wisconsin
Expectations were great. When 2023 started, there was a general sense that the stock and bond markets had turned over a new leaf. A repeat of 2022 was out of the question.
The primary assumption was that inflation would relent. After that, everything else would neatly fall in line. Specifically, interest rates would decline, and the next great stock market boom would bubble up just in time to bailout the meager retirement savings of aging baby boomers.
That was the general outlook when 2023 commenced. But instead, the opposite is now happening. Inflation is persisting. Interest rates are rising. And stock and real estate prices are headed down, down, down.
This week, for example, Fed Chair Jerome Powell, in his semi-annual Congressional testimony, clarified that interest rates would go “higher than previously anticipated.” He also noted that, if needed, he’s “prepared to increase the pace of rate hikes.”
In other words, the much-anticipated Powell pivot has gone on indefinite hiatus. You can fight the Fed and buy stocks if you must. But you won’t likely be very happy with the results.
Moreover, Fed rate hikes are only part of the story. To be clear, the Fed’s rate hikes are to the federal funds rate. However, they do, in fact, influence Treasury rates.
Since March 2022, the Fed has hiked the federal funds rate from a target range of 0 to 0.25 percent to a range of 4.50 to 4.75 percent. As a result, and over this duration, the 2-year Treasury yield has jumped from 1.75 to over 5 percent.
What to make of it…
Radical Action
Rising interest rates mean higher borrowing costs. And higher borrowing costs mean a greater percentage of income is needed to service the debt.
This has various ramifications. For example, if more income is being used to service the debt there is less income available to use for savings, investments, or to buy other goods and services.
With less money available to spend or to invest in capital markets, economic growth stagnates. This, in short, intensifies the problem.
With less capital and savings available, and less spending taking place, there’s ultimately less economic activity. And when there’s less economic activity taking place there’s less cash flow available to service the debt.
To then make up the difference, consumers must use greater amounts of consumer debt to attain the consumer spending needed to preserve their lifestyle. This, again, is a dead-end street. Applying additional amounts of debt is a short-term solution for a long-term problem.
The debt, unfortunately, doesn’t magically disappear. It piles up until a point where radical action must be taken. Creditors get stiffed. Or debtors massively reduce spending to pay down the debts previously incurred.
It is all very basic. A simple acceptance of reality, and the determination to take the necessary footwork, can result in great things. In this case, it can turn the pain involved with digging one’s way out of debt into the foundations for building wealth.
A debtor that is successful at digging themselves out of a hole by massively reducing spending will then have the opportunity to build real wealth. Because once there is no debt left to pay off, the excess money can be saved and invested.
Americans on the Hook
Structuring your lifestyle and spending habits to be less than your income is fundamental to building real wealth. The best investment opportunity in the world could be right in front of your face. Yet if you don’t have the capital, you won’t have the ability to capitalize on it.
We’re not sure why, but few people have the discipline to spend less than they make, and then save and invest the difference. This is why most people should be prepared to eat canned lima beans in retirement – the puke green ones the cafeteria served you in grammar school.
Over the years, U.S. debtors – including consumers and the government – have spent their way into a massive debt hole. For several decades, these massive debts have been masked by low interest rates. The days of refinancing at ever lower rates are over.
Interest rates are rising. But what if interest rates must increase much, much higher than Powell anticipates?
The truth is, there are groundbreaking events that are well beyond Powell’s control. For example, Japan may be the world’s largest holder of U.S. Treasuries. But the appetite Japanese investors have for Treasuries may be souring. In this respect, the Wall Street Journal recently posited the following:
“Last year, the Federal Reserve’s interest-rate increases weakened the yen and lifted the cost of hedging against currency fluctuations for Japanese investors buying U.S. assets. That drove many to unload U.S. bonds, in a shift from years of purchases that made Japan the world’s largest foreign holder of Treasurys. Now, investors are growing worried the selling will resume, especially with Treasury yields hurtling toward decade-plus highs.
“Without that support, Americans could be on the hook for higher borrowing costs on everything from single-family mortgages to business loans.”
Are you an American? Do you delight in the prospect of being on the hook for higher borrowing costs? What Comes After the Great Liquidation
Fed rate hikes, to contain the inflation of its own making, are contributing to higher Treasury rates and higher borrowing costs. This will continue to push borrowing costs higher and higher until something breaks.
What will that something be? And what will be the first something to break?
Will inflation break first? That’s the soft-landing scenario that Powell is after.
Or will the economy and big banks break first?
In this scenario, there would be mass layoffs, business closures, and a giant wave of bankruptcies. There would also be the blow-up of several big investment banks or significant investment funds.
Alas, we believe the soft-landing scenario is highly unlikely. The recklessness that was committed in the run-up to the coronavirus panic, which then went into complete overdrive when the whole world lost its mind, must be reconciled.
There’s no easy way out of this one. Mass liquidation is coming. Still, when the dust settles consumer prices will remain higher than they were at the start of 2020.
There’s no going back to the prices of January 2020 for the same reason there will never, ever be penny candy again. The dollar debauchery that took place has permanently disfigured prices.
The central planners, eager to deliver something for nothing, caused an epic disaster. And they won’t stop. They’ll continue to act – and they’ll say they’re acting with courage. What then?
More than likely, through money supply expansion and currency debasement, the central planners will continue down the inflationary path. Maybe it will continue at a subtle or moderate rate over many years or decades. Or they could trigger runaway inflation, where velocity spikes up and prices double and triple in just a few weeks.
No doubt, we’ll all find out soon enough. In the meantime, pay down debts, save cash, buy gold, and stack silver. With a little luck, you’ll make it though with a slimmer waistline and a greater mistrust of the planners in charge.
“save cash”
Keep some cash, but live as best you can now because we will become Argentina del Norte.
I’m obviously not as deep a thinker as other FReepers here.
I always like this guy as he lays things out in simple terms that I can understand.
He also holds the same opinions that I do, hence my ‘bolded’ quotes as the first posting to the article.
I think he’s nailed all the important reasons as to why we’re in the fix we’re in.
It truly is Mother Government against ‘We The People.’ Though the majority of ‘We The People’ hardly have their financial houses in order, either.
Me & mine should be just fine. We’re not HAPPY about it, but we’ve weathered worse storms and are prepared for just about anything. Except being nuked. Not sure how you completely prepare for that. ;)
*SHRUG*
Silver coins or ingots, piled on top of each other.
“Expectations were great. When 2023 started, there was a general sense that the stock and bond markets had turned over a new leaf.“
Oh…uh…ok…
Banks caused this by paying rates as low as .1%, which enabled the federal government to issue massive amounts of low interest rate debt, which banks can choke on.
Will nanzi
let her winery fail brian ?
Or will she reach into the taxpayers pocket. .
Yeah, I had never heard of a specialized term for that before...
I think you have this backwards. The Federal government doesn’t issue low-interest debt because banks pay low rates on deposits. The banks pay low rates on deposits because the low-interest debt issued by the government drives down the rates banks charge customers on their loans.
Wow — there goes that trip to Napa we had planned ....bastards!!
Obama got a Moslem education as a kid in Indonesia.
The Moslem religion forbids interest. In the Prophet’s time money was gold and silver. Money was lent for a fee and for a short time.
Also after the 2008 debacle, the federal government raised capital requirements, which could more easily be met by paying bank depositors nominal interest.
Once banks got away with paying low interest rates, they all wanted to continue to do so.
Or not. It’s a hard rule for some to not use consumer debt. It’s okay to use credit cards to keep your overall credit rating up, but expect a slight hit to your credit rating if you pay them off every month. I personally think it worth the hit, credit is for extreme purposes that are way beyond emergency cash on hand. Being debt free is liberating. That’s not to say you can’t carry a responsible amount of debt. It depends on where you are in life. I foresee no need for debt in my future. I am planning to move in the future for the last time in my life and I will purchase a home with cash. I am going to buy a new-car-to-me (used) later this year with cash saved solely from retirement income this year.
“Many of us here remember the pain of the Carter years.”
He’s the reason I went into the Army in 1978. No jobs, no gasoline, crazy prices, ridiculous interest rates and inflation. Vietnam had just ended in 1975; lots of people thought I was nuts to join then.
My folks were hanging on by a thread, financially - they had no $ for me for college, so I joined up, partially for that reason as well as the ‘no jobs’ thing.
Best thing I ever did, actually, but I probably wouldn’t recommend it to the youngsters at this point in time. :(
The Trump-era inflation wasn’t really 3% either.
Wow — there goes that trip to Napa we had planned ....bastards!!
This apparently impacts basically every winery in N. California, Mid and Southern California.
Also, the wineries on both sides of the Columbia river.
You and I are on the same page. My credit is fine, though I do the same - if the (only one!) card is used that month, it’s paid off that month.
Being debt free gives you so many better options in life - and the earlier the better.
If things continue as they are, you should be able to find a great house for cash in the near future.
I just CRINGE sometimes when listening to Dave Ramsey callers about the massive amount of debt they have. And its usually student loan debt, credit cards, ridiculously expensive cars or some combo of all. People are drowning in debt, and they are going to be the first casualties of this WAR that Mother Government continues to wage against us. :(
This is why we’re in this mess. The so called “big brains” have unrealistic great expectations.
I turned my daughter’s boyfriend onto Ramsey a while back. He’s a partner in a law firm and pretty young so he still has lots of student loans. He’s on the debt free bandwagon and plans to pay off his student loans this summer. That’s the direct route to my heart. I hope my daughter finds that and the rest of him appealing enough to get married.
What amazes me most is the speed of paying of high debt that some of Ramseys callers pull off.
I just CRINGE sometimes when listening to Dave Ramsey callers about the massive amount of debt they have. And its usually student loan debt, credit cards, ridiculously expensive cars or some combo of all. People are drowning in debt, and they are going to be the first casualties of this WAR that Mother Government continues to wage against us. :(
The only thing I can think of is that the carrot of more credit is offered, avoiding the tough decisions. But the problem doesn’t go away, until the phone call that says, “no more credit.”
https://www.fool.com/the-ascent/research/personal-bankruptcy-statistics/
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