Subscriber Steve F. issued a challenge:
“If the Fed pays lip service to inflation as Chuck suggested, inflation will continue to destroy the economy along with much of the wealth of the nation.
Can you and Chuck focus on ‘destroy much of the wealth of the nation?’ That seems like a subject the average Joe can get his or her head around. Why not put together what that would really look like for us?”
Chuck loved the idea! Let’s focus on what the Fed is telling us they plan to do.
This is opinion, at best an educated guess. It looks like times will become challenging.
The Fed created a HUGE stock market bubble. Hoisington Investment Management reports:
“…. Central banks expand liquidity but the inability of firms to profitably invest causes the velocity of money to fall but the additional liquidity boosts financial assets. Financial investment, however, does not raise the standard of living.
While the timing is uncertain, real forward financial asset returns must eventually move into alignment with the already present negative long-term real Treasury interest rates. This implied reduction in future investment will impair economic growth.”For the average Joe, this means, Wall Street got richer, but not necessarily Main Street. Eventually the bubble will burst and revert to more normal market levels.
Legendary Investor John P. Hussman paints what lies ahead:
“We are fully convinced that these historic valuation extremes have removed decades of investment returns from the future….
I believe investors…may discover the hard way that a retreat merely to historically run-of-the-mill valuations really does imply a two-thirds loss in the S&P 500.“
What would a huge retreat in the market mean for the average Joe? What about 401k plans and those already retired?
DENNIS: Chuck, thanks for weighing in for our readers.
I don’t like the negative tone – but…the Fed’s raising interest rates and discontinuing buying bonds is going to result in a market correction (S&P drops 66%?). Powell mentions a “soft landing”. Please explain.
CHUCK: Thanks again Dennis for this opportunity to opine…. The term soft landing has historically been used to describe how the Fed plans to cool down an overheated economy but not too much to depress it, thus providing a soft landing…
The Fed’s soft landing track record is not a good one folks…. In addition, Powell doesn’t have an overheated economy to combat inflation, at best, he needs to cool a lukewarm economy. So, to think things will be soft is a stretch of the imagination.
Basically, Powell signaled to the markets that his rate hikes won’t be aggressive. Look for small rate hikes of 25 BPS or ¼%….
Put enough of these ¼% hikes together you might get somewhere. Do you really believe the Fed has it in them to bring their Fed Funds rate back to normal levels? I don’t….
DENNIS: Let’s go back to the internet crash.
Historically the Fed may soften the landing for Wall Street, but not Joe on Main Street.
The big brokerage firms knew a crash was coming and unloaded their investments as quickly as they could – while telling their retail clients to stay invested! Wall Street sells out at a profit while telling Joe to hold on and sell at a loss later.
Almost in sync, these investment houses began shorting the market, driving prices down further. Their retail customers took a huge hit while the Wall Street shorts made them billions. The cartoon depicts many average Joe’s after the dust cleared.
Main Street is concerned about getting poor. Joe must cushion his own soft landing. How does he do that? I’m not shorting the market with my life savings.
CHUCK: I agree on shorting. The old saying, “The market can remain irrational longer than you can remain solvent” applies.
I once ran a margin dept for a large regional brokerage house. The margin dept deals with the short positions’ investors take…. I don’t recall ever seeing retail investors make money shorting the market. We were usually calling the investor and telling them they needed to deposit more funds or close out their position – at a loss.
Joe must protect his wealth first, and then hope to make some profit. He needs to be on his toes; perhaps doing some things differently. He may decide to sell some of his winners and allocate more to cash.
I was brought up learning how to diversify one’s investment portfolio. I gave presentations illustrating what a diversified portfolio would look like. I’m also a strong believer in setting up stop losses on my stocks.
Diversification helps protect your investment portfolio; however, it doesn’t ensure that you’ll walk away from the crash without losses…. Joe must protect his gains and avoid catastrophic losses, so he doesn’t end up like the cartoon character.
DENNIS: Many investors rely heavily on their fancy titled stockbroker in the plush office. Brokers are incentivized to keep clients invested in their fee-based funds – not always in Joe’s best interest. Ask about gold and they push back – it pays them no commission. The broker points to past gains and says, “trust me!” How does Joe know if he should?
CHUCK: Joe shouldn’t trust anyone other than himself when it comes to investments!
The broker should offer suggestions, maybe some advice, but abdicating total responsibility to the broker is fraught with risk. Investors need to stay informed, on top of their investment portfolio and move from one asset class to another when things become scary….
I tell all individual investors, the best investment you can make is in your own financial education. Many brokers and investment advisors are honest, but – if they make a mistake they lose a client, you lose your money.
DENNIS: One red flag is the young stockbroker, who never experienced a real market correction, telling their client, “Don’t worry, the market always comes back.” Can they guarantee it will come back in YOUR lifetime? Experience tops “theory” in my book.
I’m leery of the broker who relies heavily on computer models. Today a lot of models recommend 10% in cash. Models are obsolete since the Fed created trillions out of thin air.
How do you feel about cash today?
CHUCK: I’m not in a very good place regarding my investment portfolio. I recently had some bonds mature. These maturities brought me into a “Cash Rich” position. I don’t like that, especially during inflationary times … BUT… There’s nothing out there that I see as valuable/safe to invest in…. I’ve already got my allocation of Gold & Silver, so that’s not an option.
The dilemma? Cash will lose value because of inflation. I agree with Hussman, a market correction is inevitable and could be HUGE. Stocks and bonds will lose value!
So, which choice best protects my life savings? At least historically a crash presents some great buying opportunities.
If Joe feels the market is going to have a big correction, don’t let your broker talk you into staying fully invested.
DENNIS: One final question. You felt the Fed would stay their announced course…”barring any new crisis that demands more bond-buying!”
Do you feel the Fed has the courage to see this through like Volcker did? If they don’t, wouldn’t it change everything, likely speeding up the dollar’s demise?
CHUCK: Remember Laurel and Hardy, “This is another nice mess you’ve gotten us into”. That’s today’s Fed. In their attempt to stir economic growth and increase employment, they left interest rates too low, for too long…
They kept buying bonds with money created out of thin air until just recently… So, the economy was awash in dollars, and zero interest rates…
Inflation is a BIG problem again, the Fed needs to reverse things, and their challenge is how. Wall Street (the Fed’s masters) oppose the Fed’s unwinding of these two stimulants…
When Fed Chairman Ben Bernanke tried to taper the Fed’s Bond holdings, the markets revolted. It was called a “Taper Tantrum.” I wonder what the markets will call a new crisis, stomp their feet and cry about this time?
The real problem.
Wall Street will be screaming at them to again buy bonds and cut rates. Politicians and Main Street will be screaming about inflation. Torn between two lovers… Don’t mistake Powell for Paul Volcker. He will continue trying to burn the candle at both ends, creating an even BIGGER MESS!
I don’t see the U.S. ever getting back to normal interest rates. Congress, who is supposed to oversee the Fed, will not do their job, hurting Main Street, helping Wall Street.
As Hussman predicts, I see the country mired in stagnant growth for years because of the debt, and then one day it happens – the U.S. defaults on their debt – our currency is worthless.
Some average Joes will fare better than others because they acted independently, hedged against a market crash, bought some good companies’ dirt cheap, and also held enough gold to offset inflation. The world will be different; many more Americans will be poor.
Dennis, that’s my opinion. Thanks to you and subscriber Steve F. for asking.
Dennis here. The political class is governing against the will of the majority, and not doing their job overseeing the Fed.
Politicos ignored the TEA Party movement (Taxed Enough Already), joking about the masses throwing a hissy fit. Things continue to boil. “Average Joe” is totally fed up!
All choices appear to lead to a mess.