by Berkley Badger
You hear the headlines….........
But what does this actually mean to your financial future and investment results?
Blame Covid or profligate Washington spenders or our country’s loss of its moral compass… Regardless, our Federal Reserve has been doing the
“unthinkable” for nearly a decade.
History tells us that any country living beyond its means needs to fund that excess spending by selling bonds (Government IOUs). But the current policy of our Central Bank and others have stretched “bad policy” to “deplorable policy.”
For when there are not enough willing global and domestic buyers of Uncle Sam’s IOUs, the Federal Reserve has filled the shortfall – to the present tune of $1.5 trillion per year.
Where do they get the money to buy all the debt? They literally create the fiat currency by declaration – grossly expanding money supply faster than Organic GDP (economic growth). This is untenable and never ends well…!!!
Higher inflation with higher interest rates find blistering bond-holders and truncating stock market valuations ensuing… ergo, tough-sledding for the markets, which have generally risen nicely over the past few decades.
Wise investors shift their risk onto others… i.e., instead of buying bonds directly, buy a fixed annuity. The money you deposit shall still principally go toward high-quality Corporate-bond purchases, but the annuity company takes the risk while you get interest returns rivaling the banks!
The same technique can be implemented to shift stock market risk to an annuity company as well… where one enjoys a percentage of the market gains but suffers no loss in years where the market actually declines.
Don’t be a hero in the face of rising interest rates, especially during a sea-change where rates have been declining while margin debt (as well as household debt) has increased dramatically.
Major debt (the result of stock investors borrowing money using the securities as collateral) is at record levels – closing in on $1 trillion. This is called “margin” debt.
If the market declines enough to trigger margin “calls,” more securities shall hit the market to pay for the margin calls. Any willing buyers will demand cheaper prices – pushing the market even lower – triggering fearful responses from others who remember the 1987, 1999, 2008, and 2009 crashes!
Where the stock market actually peaked in 2007, it would be another 4 ½ years (to get through the crash) before prices would fully recover. “Yeah, but it always recovers!” While this would be true… it all comes down to how much time you’re willing to wait.
If we were slurping noodles and sucking down sake in Tokyo right now, we would still be lamenting the fact that the Japanese (known for their high savings rate) stock market is only 80% of where it peaked “32 years ago”! Will it ever regain its 1989 high? Maybe in another 18 years or so – meaning one would have to wait half-a-century to get back to even.
Most people blindly risk what becomes ever more difficult (by virtue of age) to recover.
Be wise. Take some chips off the table – opting for higher-yielding guaranteed-deposit accounts with liquidity, which normally beats bank CDs. We can show you how.
Berkley Badger, host emeritus of America’s longest running financial broadcast, has been assisting investors for over four decades. His trusted advice has benefited scores of Floridians to re-align their portfolios into safer alternatives. Call him today @ 727-796-3339.
Office 813-693-5511 Kevin Leonard