Fed_hikes_rates_now_what-2
00:00:00.000 | Hello, everybody. It's Sam from Financial Samurai. And in this episode, I want to talk about the Fed
00:00:04.720 | hiking rates again. And what's next for the middle class, for investors for all of us.
00:00:11.680 | Because on May 3 2023, the Federal Reserve hike rates by another 25 basis points to 5% to 5.25%
00:00:20.640 | on the Fed funds rate, we are now at the highest level we've seen since 2007, right before the
00:00:29.200 | 2008 global financial crisis. During that time, I personally lost about 35%, maybe 40% of my net
00:00:37.280 | worth in six months. That took 10 years to build, and millions and millions of lives were ruined.
00:00:44.560 | The time was so difficult, in fact, that I decided, well, I'm going to get off my butt
00:00:50.160 | and start financial samurai.com, which I had been thinking about starting since I had graduated from
00:00:55.840 | business school in 2006. So finally, I had a catalyst because, heck, I needed something to do
00:01:02.080 | just in case I got blown out of my job. And so many people were getting blown out of their jobs
00:01:07.200 | in the financial services industry. My firm had, I think, at least five layoffs in 2008,
00:01:14.880 | and another maybe two or three layoffs in 2009. So it was very hairy times then. As financial
00:01:21.440 | samurais, we should all be thinking, what next? Even though Silicon Valley Bank failed, FTX failed,
00:01:29.200 | that's more fraud, Signature Bank failed, Credit Suisse Bank failed, and now PacWest failed,
00:01:36.240 | the Fed still decided to hike up interest rates again, even though it's clear inflation peaked
00:01:43.280 | in June 2022, with the latest CPI print at 5% from 9.1% mid last year. And even though job
00:01:52.960 | inflation is declining, and rents are declining, the Fed said, doesn't matter, we're still going
00:01:59.440 | to hike rates. And finally, even though it takes six to 12 months for these rate hikes to take
00:02:05.200 | effect and slow down the economy, the Fed continued to hike rates in May 2023. Will they hike again?
00:02:12.800 | Well, the markets are expecting no, but I don't know if they should have hiked in the first place
00:02:17.280 | in May. Let us hope the Fed is done. Let us hope the next recession isn't going to be as bad as it
00:02:24.560 | was in 2008 and in 2009. But if it is, we can look at some positives. Here are 10 plus positives.
00:02:32.240 | The first, the unhealthy desire for prestige, money, and status takes a backseat. Why are we
00:02:38.800 | all grinding so hard? I'm convinced the desire for prestige and status are important factors
00:02:44.320 | for explaining why many in the middle class feel miserable. After all, we have the saying,
00:02:50.800 | keeping up with the Joneses, right? We are miserable because we always compare with our
00:02:55.600 | neighbors and our colleagues what they have. So we work harder to try to make more money
00:03:00.560 | to get those promotions and titles so we can buy more things. So when you're getting pummeled
00:03:05.840 | financially, you don't have the luxury of seeking prestige or status anymore. You're just focused
00:03:10.560 | on survival. And when you focus on survival, you focus on what really matters. The second benefit
00:03:16.480 | of a Fed-induced recession, the student loan problem might get better. The main reason why
00:03:22.720 | there's a student loan problem is because too many people in high school pay too much for tuition for
00:03:28.160 | college education that isn't worthwhile. If college overall was a good bargain, there wouldn't be
00:03:33.840 | so much angst about student loans. There wouldn't be $2 trillion worth of student loan debt
00:03:38.320 | outstanding. With middle class incomes and livelihoods at stake, parents and students
00:03:43.360 | will be forced to choose more affordable colleges or trade schools. Perhaps more colleges will also
00:03:49.520 | begin offering more free grants as the need goes up. Colleges will be in trouble in the next
00:03:55.920 | recession because people will pull back and colleges are like businesses as well as enrollments
00:04:01.760 | are declining because of high tuition. And maybe more students will read more books, use the
00:04:07.600 | internet, and use AI to learn more things for free. So there might be this better alignment with cost
00:04:14.000 | and benefit that will help the average person's finances and mental health. We talked in a previous
00:04:20.720 | episode on why there's so much angst and anxiety from parents raising children in expensive cities
00:04:26.480 | because they feel like they can never get ahead. You know, the correlation between hard work and
00:04:31.200 | reward is kind of breaking and they feel like maybe they need generational wealth for their
00:04:36.160 | children to be okay and have some upward mobility. No more if there is a recession, a deep recession.
00:04:44.000 | Three, we might become better consumers and establish better financial habits. When you
00:04:49.200 | have less money or no money, you're forced to spend less and make do with what you have.
00:04:53.440 | Ask anybody who went through the Great Depression or the 2008 global financial crisis with a
00:04:59.520 | significant amount of assets. They've probably been scarred for life, but they've also probably
00:05:04.800 | wisened up to their frugality and their asset allocation. Consumption is kind of out of control
00:05:12.240 | in America with only around a four to five percent median saving rate. That's not enough.
00:05:18.240 | Look at the other countries in the world. 20 percent, 30 percent savings rate nationally.
00:05:24.080 | Four, there will be fewer cars, less pollution, perhaps more travel, and world peace. We have a
00:05:30.880 | love affair with cars for some reason in the United States. 50,000 is the average new car
00:05:35.680 | price, which is ridiculous given the median household income is about 75,000. So with the
00:05:41.440 | Fed deciding to crush the middle class, there will be fewer cars on the road. There will be
00:05:47.040 | less traffic. I don't have to stress as much about setting my kids to school. And then maybe,
00:05:53.280 | maybe the environment will get better because there'll be less pollution. Air travel and
00:05:57.680 | accommodations could be cheaper as well. Many of us have not traveled in several years because of
00:06:03.280 | COVID and we're like, well, cheaper travel, better experiences. That could be great for the world
00:06:09.280 | because the more we see of the world, the more empathy and understanding we will have for other
00:06:13.920 | cultures. Five, there could be one million, two million jobs lost once the Fed gets done tightening
00:06:21.520 | plus six months. And as a result, millions of people will need to find new jobs. And during
00:06:26.320 | this hunting process, job hunting process, there'll be an opportunity to finally try something new.
00:06:32.320 | A chance to start anew is a huge benefit. I think many of us have dreams of different career paths.
00:06:40.080 | However, we get stuck on one and then we keep on going because we want those raises and promotions.
00:06:46.160 | And then 20 years go by and we realize we've been doing the same thing for our entire post high
00:06:51.920 | school or college education lives. And then we wonder what else could there be? Inertia, fear,
00:06:59.040 | laziness, lack of motivation, all this stuff gets thrown out of the window once you lose your job
00:07:04.160 | because you have no other choice. You might use this opportunity to take a leap of faith and try
00:07:10.080 | something new. Personally, I'm kind of grateful, well, years later that the global financial crisis
00:07:17.360 | happened because it forced me to think outside of the norm. I didn't want to do my finance job
00:07:24.560 | for 20 plus years. I was bored. I wanted to do something new, something that provide a little
00:07:30.400 | more value and meaning to society, in my opinion. So I negotiated a severance and I tried my hand
00:07:36.720 | at consulting. I wanted to learn about startups in the fintech space. I decided to write a book,
00:07:43.040 | actually two books, and then write on financial samurai more consistently. And looking back,
00:07:49.120 | I don't regret trying something new. Oh yeah, I even coached high school tennis for three years.
00:07:54.800 | I've always wanted to be a teacher. So there might be a real big silver lining to your career if we
00:08:00.400 | go into a deep recession. Six, less overcrowding in schools and more time with your children.
00:08:06.160 | Public schools have often felt the strain of a boom economy with an influx of more children and
00:08:12.320 | not enough pay to retain or attract enough teachers. Classrooms get busier. Meanwhile,
00:08:17.280 | private grade schools also get more crowded and difficult due to the rapid wealth creation
00:08:22.640 | of households. With the economy on the decline, there will be more spots open for all students.
00:08:28.720 | There may also be more teachers available given teaching is a relatively more secure profession.
00:08:33.680 | And maybe more people like myself might want to be a teacher as well. I'm actually looking at
00:08:37.840 | being a teacher in Hawaii one day. And that's something I think which would be great for
00:08:42.800 | everybody. In addition, if one parent loses their job, they might want to pursue homeschooling,
00:08:48.560 | or at least provide more supplemental education. My wife and I homeschooled our son from what,
00:08:54.160 | March 2020 until August 2021. And it was a lot of work, but it was very gratifying and our son
00:09:01.440 | learned a lot. So there could be a huge win out there. Seven, a rekindling of current and
00:09:07.760 | lost relationships. And I'm reading this book called The Good Life Project. It's a 80 plus year
00:09:12.800 | Harvard longitudinal study of what makes a good life. And the bottom line is better relationships
00:09:19.200 | with friends and with family members. That was the consistent theme of all these folks.
00:09:24.320 | Once making money is harder to do, the natural inclination is to focus on all the things we've
00:09:29.600 | been neglecting for the sake of money. They are our children, our spouses, and our friends.
00:09:35.600 | With more time spent with friends and loved ones, our loneliness should naturally decline.
00:09:40.160 | Even the US Surgeon General came out with a loneliness report in May 2023. They talked
00:09:47.120 | about how we need these relationships, these connections to heal ourselves and our minds.
00:09:54.080 | It's interesting because in the personal finance space, there are actually several personal finance
00:09:59.040 | bloggers who've gotten divorced. They might've been too frugal, or they might've been chasing
00:10:03.920 | fame too much or money too much. And it's interesting to see how relationships change
00:10:10.720 | once money is no longer a focal point. Also, there are folks who focus so much on making money
00:10:18.080 | that they neglect family, having a family. I know many people who've just been focused on money,
00:10:23.760 | money, money, and career and fame, you know, into their thirties and forties. And then they realize,
00:10:29.920 | well, we want to have kids. But unfortunately, biology doesn't cooperate because having a child
00:10:35.840 | after the age of 35, and especially after 44 women is very, very difficult. And then these folks tell
00:10:43.040 | me and share with their friends, I have all the money in the world, but I have nobody to spend it
00:10:47.760 | with. So don't have these regrets about focusing so much on money and recession will take away
00:10:54.560 | that money hunger, maybe it'll help you focus on other things that matter as well. Such as point
00:11:00.560 | number eight, your health. You know, some jobs are just physically and or mentally unhealthy,
00:11:06.480 | but we carry on because we need or want the money we need to earn to provide. However,
00:11:12.400 | when we're older, we may regret sacrificing our health for our jobs. Manual labor is obviously
00:11:19.760 | tougher on the body than knowledge intensive jobs. However, even knowledge intensive jobs
00:11:24.720 | can take a tremendous toll on the body over time. I truly believe stress is a silent killer.
00:11:31.600 | I went through teeth grinding, TMJ, plantar fasciitis, lower back pain, sciatica, where I
00:11:37.920 | couldn't even drive to work because I had numbness in my lower region and my behind for many years.
00:11:44.320 | And then I had all these allergies, I just couldn't kick them. And then within a year after
00:11:49.440 | leaving my stressful day job in 2012, all of these chronic symptoms went away. And I couldn't believe
00:11:57.040 | it because I had been living with all these symptoms, this pain for 13 years, and I had
00:12:03.440 | forgotten what it was like to wake up pain free. So if this is you, then know that maybe your job
00:12:10.400 | is silently killing you, unfortunately, and you might need to step away. Getting laid off or
00:12:17.120 | furloughed or receiving reduced hours could literally extend your life. Use your time away
00:12:22.960 | from work to heal your body and mind. Perhaps if you want to relocate to a state that has a higher
00:12:29.760 | life expectancy. I wrote a post on this and those states include Hawaii, California, Wisconsin,
00:12:37.360 | Minnesota, the Northeast, without a job tying you down, you have more freedom to move. All right,
00:12:44.720 | nine, a change in political power, if the Fed destroys the middle class, then whichever political
00:12:50.720 | party is in power will probably lose the next presidential election, next congressional election,
00:12:56.960 | and so forth. Given America is divided equally along political lines, roughly half of the country
00:13:03.200 | will be happier after the next presidential election. For now, we have another debt ceiling
00:13:09.520 | debacle to deal with. Now if the debt ceiling isn't raised, then expect another stock market
00:13:15.040 | meltdown temporarily, I hope, but hopefully, the government will figure it out and come to a
00:13:21.120 | compromise. Treasury bonds may also sell off given treasuries will suddenly seem more risky. And as a
00:13:26.880 | result, mortgage rates will increase, thereby reducing the demand for real estate. And this
00:13:32.480 | is a risk to my bullish 2023 housing call. Now 10 borrowing costs should go back down as we go into
00:13:41.680 | recession. If the debt ceiling does get increased, then during times of economic calamity, there will
00:13:47.760 | be a flight to Treasury bonds, the safest asset class. As a result, Treasury bond yields and
00:13:54.080 | mortgage rates and student loan rates will come down the most. So this is the economic cycle at
00:14:00.000 | work. Boom bust cycles as we bust, more money goes into treasuries, rates go down demand because
00:14:07.200 | demand for credit goes down in a recession, and then things get cheaper. And then demand goes up
00:14:13.280 | for these risk assets for goods and services. And then the economy slowly booms again. So number 11,
00:14:21.360 | inflation will finally decline part of the cycle. Once the middle class gets beaten up, demand goes
00:14:27.280 | down, inflation will finally fade. And this is ultimately what the Fed wants. It'll help protect
00:14:33.760 | their legacy that they conquered inflation, despite causing millions of job losses, and
00:14:40.720 | the economy can reset. Finally, because the Fed is behind the curve by at least six months,
00:14:46.160 | it's actually easier to generate more passive income and retire earlier because of all these
00:14:52.000 | Fed rate hikes, right? Treasury bills are yielding over 5%. Now, money market funds are also yielding
00:14:58.480 | close to 5%, if not above 5% as well. certificates of deposit along many durations are also yielding
00:15:05.920 | over 5% as well. During the global financial crisis, the best I found was 4.5% and 4.25%.
00:15:12.560 | So we're at five plus percent while inflation is declining. By the end of 2023, you could easily
00:15:19.520 | see CPI at 4% or three and a half percent and in 2024 could go back down to 3%. So if you can lock
00:15:26.320 | in these higher risk free rate returns over the next year, two years, three years, well, you are
00:15:32.240 | going to be winning on the middle and back end because of the lag. Now so far risk assets have
00:15:39.360 | come back a little bit right the stock market up since October 2022. Real estate seems to be
00:15:46.960 | catching a bid. It's coming back up. Although on the East Coast, it seems to be continuously
00:15:51.760 | pretty strong. So if you can maintain steady asset class values, with increased risk free income,
00:16:00.400 | dividend income and rental income, because rates are going up, well, then you're winning. So so far,
00:16:06.800 | investors are rebounding and they're winning. It's not going to last forever in terms of the higher
00:16:12.720 | passive income numbers, but we should enjoy it over at least about a year, maybe two years. It
00:16:18.960 | depends on how far out on the duration curve you're going to invest your risk free money.
00:16:24.000 | Now, these are the positives of a recession and will we go into recession? I think we will. How
00:16:31.440 | bad? Not so sure. Hopefully not as bad as the 2008 2009 one. But I think we're going to go through
00:16:38.320 | one. However, listen to what Fed Chair Powell says about the possibility of going into a recession.
00:16:44.480 | And because I've been doing this podcast for four or five years now, I feel that I can hear whether
00:16:52.400 | one is confident or unconfident, whether one is lying or not lying. So let's listen in on what
00:17:00.240 | he has to say after a reporter asked him this question on whether we're going to go into a
00:17:04.800 | recession. I don't think you know, I know what's printed in the summary of economic projections and
00:17:10.640 | all that. I don't think you can deduce exactly what you said about what participants think,
00:17:15.600 | because you don't know what they were thinking for first quarter GDP at that point. They could
00:17:19.920 | have been thinking about a fairly low number anyway. In any case, I'll just say I continue
00:17:24.480 | to think that it's it's possible that this time is really different. And the reason is there's just
00:17:30.320 | so much excess demand really in the labor market. It's it's interesting as you know, we've raised
00:17:37.600 | rates by five percentage points in 14 months and the unemployment rate is three and a half percent,
00:17:43.360 | pretty much where it was even lower than where it was when we started. So job openings are still
00:17:48.080 | very, very high. We see by surveys and much, much evidence that that conditions are cooling
00:17:54.560 | gradually. But it really is different. You know, it wasn't supposed to be possible for job openings
00:17:59.840 | to decline by as much as they've declined without unemployment going up. Well, that's what we've
00:18:04.880 | seen. So we there are no promises in this, but it just seems that to me that it's possible that
00:18:11.920 | we can continue to have a cooling in the labor market without having the big increases in
00:18:17.280 | unemployment that have gone with many prior episodes. Now, that would be against history.
00:18:22.960 | I fully appreciate that. That would be against the pattern. But I do think that it that this
00:18:28.320 | that the situation in the labor market with so much excess demand yet, you know, wages are
00:18:35.120 | actually we just have been moving down. Wage increases have been moving down. And that's a
00:18:39.520 | good sign down to more sustainable levels. So I think that I think it's still possible. I think,
00:18:45.040 | you know, the case of avoiding a recession is, in my view, more likely than that of having
00:18:52.720 | having a recession. But it's not it's not that the case of having a recession is I don't rule
00:18:57.840 | that out either. It's possible that we will have what I hope would be a mild recession.
00:19:02.320 | All right. So you've heard it from the horse's mouth. He says, quote, the case of avoiding
00:19:07.360 | recession is, is, in my view, more likely than that of having a recession. Now, if you were a
00:19:13.040 | CIA operative, and you captured him, interrogating him behind closed doors, don't know where in the
00:19:19.120 | world. Do you believe him? He uses um, that, you know, you know, you know, so many times.
00:19:26.640 | And as someone who loves to listen to podcasts, he doesn't sound very credible. When you're
00:19:32.080 | credible, you speak with confidence, you speak with clarity. And I didn't really hear that with
00:19:37.280 | Jerome Powell, the Federal Reserve sees all the data, they see what's going on with bank balance
00:19:43.440 | sheets, the composition. And just one and a half, two hours later, PacWest announces to the public,
00:19:49.600 | it's looking for quote, strategic options, and the stock is down 40% in after hours. So in
00:19:55.360 | conclusion, I say be careful, the S&P 500 is trading at about 18.8 times expected earnings,
00:20:03.680 | which is higher than the 16 and a half times median earnings. valuations simply don't look
00:20:09.520 | that attractive. Look at the previous recession, February through April 2020, maybe longer, right,
00:20:15.920 | because it's two consecutive quarters of negative GDP growth. Now there were there weren't any other
00:20:20.880 | options besides going to cash and earning nothing back then, the stock market ended up declining by
00:20:26.000 | 32% from peak to trough. And those who decided to sell real estate in the first half of 2020,
00:20:31.680 | likely missed out on about five to 10% price appreciations by the end of the year.
00:20:37.840 | So back then, we just had to either sit tight or invest in risk assets that were declining,
00:20:45.120 | ie the stock market because that was the most liquid asset that was getting pummeled.
00:20:49.520 | This time around, we have some options. Okay, 2022, bear market S&P 500 down 19.6%.
00:20:56.960 | But we're climbing back, we're clawing back. But if we're going to go back into a recession,
00:21:02.960 | a noticeable one, a bad one, then we have options, we have tremendous risk free options
00:21:09.120 | in Treasury bills, CDs and money market funds yielding over 5%. So 5% after already seeing a
00:21:18.560 | eight and a half percent 9% year to date increase in the stock market, you tack back on well, that's
00:21:24.400 | like what 12 to 13% for the year, which is above the median stock market return of about 10% a
00:21:32.080 | year. So you have to ask yourself, are you happy with a 12 to 13% return for one year in 2023?
00:21:39.520 | I would say 70% of the people would say yes, and I'm one of them. Alrighty, folks, it's time to
00:21:46.800 | pick up my son from school. I hope you enjoyed this podcast. If you did, please share with a
00:21:51.040 | friend. Please rate it. Five star review is appreciated with some nice commentary. I read
00:21:55.920 | them all. And I try to use the commentary to make the following podcast a little bit better.
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