The_Fed_is_determined_to_crush_us
00:00:00.000 | Hello, everybody, it's Sam from Financial Samurai.
00:00:02.840 | And in this episode, I want to talk about the latest Fed rate hike and what they said.
00:00:08.040 | Because unfortunately, I think hope is slowly seeping out of the balloon here.
00:00:14.480 | Federal Reserve Chair Jerome Powell, who is also worth more than $100 million, has basically
00:00:19.900 | raised interest rates by another 50 basis points to 4.25 to 4.5%.
00:00:25.320 | And more importantly, he telegraphed the Fed is looking at a terminal rate of 5.125%.
00:00:32.760 | So 17 out of the 19 governors, something like that, have agreed that 5.125% for the terminal
00:00:40.020 | rate, the end rate is where they're going.
00:00:43.680 | And that's a shocker because originally, the terminal rate was 5%.
00:00:48.800 | And much of the investment community hope the Fed would stop before 5%.
00:00:54.660 | So now for them to raise the terminal rate by 0.125% to 5.125%, despite October and November
00:01:03.120 | CPI numbers coming in below expectations, the only conclusion we can make is the Fed
00:01:10.760 | is okay with a recession.
00:01:12.840 | The Fed wants a recession to bring down inflation, which is already coming down quite rapidly.
00:01:18.940 | At this rate, you know, 0.1% month over month, by the summer of 2023, there is no doubt inflation
00:01:26.840 | will be below 5%.
00:01:28.720 | And it'll probably be closer to 3% at this rate.
00:01:31.400 | And I bet sometime in 2023, we're going to talk more about deflation rather than inflation.
00:01:38.320 | So I think with a 90% certainty, we should all be thinking this way.
00:01:42.840 | There's going to be another recession in 2023.
00:01:45.500 | And this is a self induced recession.
00:01:48.120 | I used to think with 85% certainty that 3577 on the S&P 500 was the bottom, but now the
00:01:57.240 | Fed is targeting a 5.125% terminal Fed funds rate.
00:02:01.800 | If we get to 5% or above, I think we're definitely going below 3577 on the S&P 500.
00:02:09.700 | So please be aware, you heard about the 2023 Wall Street S&P 500 forecast, the median is
00:02:16.700 | something like 4000 highs of around 4500.
00:02:21.000 | Some some actually new forecasts are at 5000.
00:02:23.800 | And then the lows are at around 3000 is looking more and more likely that getting back to
00:02:29.480 | 4000 in 2023, if the Fed funds rate goes to 5.125% is more and more unlikely.
00:02:36.760 | So mentally, you should think about investing in stocks as completely dead money in the
00:02:41.920 | next year.
00:02:42.920 | Now, let's look at the bright side.
00:02:45.300 | The bright side is right now in 2022, end of 2022.
00:02:49.920 | We know with high certainty that over the next 18 months, doom is coming doom as in
00:02:55.040 | another global recession, probably going to be a little bit worse than the 2022 recession,
00:03:00.360 | first quarter, second quarter GDP consecutive declines, because a lot of jobs are going
00:03:04.840 | to be lost in 2023.
00:03:06.960 | We're starting to see the cuts, but more and more are going to be lost in 2023.
00:03:11.360 | So if you lose your job, it's a depression, right?
00:03:13.620 | If you don't lose your job, but you lose money in the stock market, real estate, and so far,
00:03:17.840 | that's a recession.
00:03:19.480 | So where's the upside?
00:03:20.480 | Well, the upside is that we know doom is coming.
00:03:24.080 | Whereas in 2007, things were really hunky dory, and it was just boom times.
00:03:29.340 | And then we got side swiped in 2008 and 2009.
00:03:34.600 | Everybody was caught off guard.
00:03:35.820 | So when we know that doom is coming over the next 18 months, we can do things to prepare
00:03:40.760 | right?
00:03:41.760 | We can behave aggressively, we can buy short term treasury bonds yielding over 4%.
00:03:46.260 | We can asset allocate properly, we can reach out to our bosses and colleagues that matter
00:03:51.560 | so we don't get laid off.
00:03:53.420 | We can build side hustles and work on our side businesses.
00:03:57.160 | We can do so many things over the next 12 to 18 months that we become a solidified economic
00:04:03.620 | fortress that withstands the economic crush that comes our way.
00:04:09.240 | So when that crush comes, we will be able to outperform.
00:04:13.340 | Now let's say the crush, the economic crush doesn't come, and the Fed governors grow a
00:04:18.020 | conscience and they stop caring about their legacy of combating inflation, which is already
00:04:22.860 | coming down, and they start caring more about the middle class, and not crushing and eliminating
00:04:29.300 | a million plus jobs and hurting people's livelihoods.
00:04:32.660 | Let's say that happens.
00:04:33.660 | And let's say they don't get to 5% or 5.125% on the terminal rate.
00:04:39.320 | Well, in that scenario, risk assets will start doing well again.
00:04:44.000 | And with you and your preparation, you're going to outperform again.
00:04:47.720 | So really, it's a win-win scenario.
00:04:49.760 | You're going to outperform on the downside, and you're going to outperform on the upside.
00:04:53.960 | So key lesson here is to really start baking in dark sky scenarios so you can pre-mortem
00:05:00.020 | plan well before these things happen.
00:05:02.680 | And if these things don't happen, you're going to be winning all the same.
00:05:06.720 | There's one last thing I want to leave you with as I sit in my car and contemplate the
00:05:10.440 | future.
00:05:12.000 | And that is, I don't think any of us have to worry about ourselves.
00:05:16.160 | We don't have to worry about you and me listening to this podcast, anybody who is paying attention
00:05:20.960 | to their finances, saving aggressively, allocating properly, and doing the right things.
00:05:27.800 | What we have to worry about are those who don't do the right things, who just wing it,
00:05:32.440 | who are going crazy and investing in things that they shouldn't be because they think
00:05:37.040 | they're going to win a lottery ticket.
00:05:39.000 | A good example of this was back in 2008 and 2009 when a lot of condo owners and homeowners
00:05:45.960 | did short sales because they were underwater on their mortgage.
00:05:49.520 | They bought homes that they couldn't afford with tiny down payments, and their interest
00:05:54.360 | rates went up, and they just couldn't afford it.
00:05:56.840 | And so they got crushed, but unfortunately, everybody else who just kept on paying their
00:06:01.080 | mortgages because they could afford it, or who didn't have any mortgages, also got hurt
00:06:06.440 | because the marginal actors brought down the majority of people who just did what they
00:06:12.520 | were supposed to do.
00:06:14.080 | So what's the solution?
00:06:15.320 | Well, the solution is to mentally prepare for this to happen, to have your net worth
00:06:20.520 | get hurt by marginal actors.
00:06:23.080 | But given your finances are solid, and you can wait things out and not get hurt as bad,
00:06:28.720 | your next step is to take advantage of the decline in asset prices and buy those assets
00:06:34.800 | from those marginal actors.
00:06:37.340 | And here's what will likely happen over time.
00:06:40.160 | Let's say you do a short sale, you go bankrupt.
00:06:42.600 | Well, your credit score is ruined for seven years, maybe longer, and you're not able to
00:06:47.300 | get credit to buy anything else.
00:06:49.640 | However, you as the good actor, go ahead and take advantage and buy those assets on sale.
00:06:56.300 | And over the course of seven to 10 years, these assets will likely rebound in value,
00:07:01.000 | stocks, real estate, and so forth.
00:07:03.160 | However, if you're the marginal actor who couldn't get credit over seven, 10 years,
00:07:07.400 | you weren't able to take advantage.
00:07:09.040 | In fact, you lost money because you sold at the low.
00:07:12.320 | And then when you're trying to get back in seven to 10 years, when you can actually get
00:07:15.800 | credit, asset prices are much higher, and you permanently maybe get shut out.
00:07:22.260 | And if you get shut out, then your children will likely get shut out.
00:07:26.400 | And then this is why there's this growing dichotomy between the knowledge folks, the
00:07:31.400 | people who care, the wealthy folks, and the people who are just winging it and not bothering
00:07:35.420 | to care.
00:07:36.420 | So please care about your finances.
00:07:38.200 | If you can hold on, hold on for better days ahead.
00:07:41.720 | Personally, I'm taking it down a notch in 2023, because the return on effort is not
00:07:47.760 | there.
00:07:48.760 | It's not as high during the bull market.
00:07:50.740 | So why bother?
00:07:52.680 | Don't fight the Fed, folks.
00:07:53.960 | We've given one man enough power to ruin economies and to grow economies, to kill jobs and to
00:08:01.640 | grow jobs.
00:08:02.640 | It's unbelievable, actually.
00:08:03.780 | We give one man all that power.
00:08:06.520 | But who are we to step in the way of one powerful man?
00:08:09.920 | We should get out of the way.
00:08:10.960 | If the Fed wants to hurt the economy, I guess we got to let them.
00:08:15.280 | And we got to let capitalism work itself out.
00:08:18.520 | And for those who aren't prepared, they're going to suffer.
00:08:21.940 | But that gives opportunity for those who are prepared.
00:08:25.040 | If you want to better prepare, I suggest you pick up a copy of Buy This, Not That, my Wall
00:08:29.840 | Street Journal bestselling book at FinancialSamurai.com/btnt.
00:08:34.960 | And please sign up for my free weekly newsletter, FinancialSamurai.com/news.
00:08:40.640 | I'm actually really excited today, because it's my daughter's third birthday.
00:08:45.800 | And boy, three years have flown by.
00:08:48.800 | I still remember writing the post, "Why I Failed at Early Retirement," a love story.
00:08:54.420 | And it was when my daughter was born in December 2019.
00:08:58.160 | And it's interesting, once you become a parent, you do everything possible to get your finances
00:09:03.920 | right, do the right thing, stay in shape, and ensure that you can provide for your family.
00:09:10.120 | So that's one of the interesting things about parenthood.
00:09:11.920 | And I'm on this journey, and I'd love to hear from all of you parents as well, on how you
00:09:16.760 | have better focused on staying healthy, fit, and getting your finances right.
00:09:21.800 | Because this is clearly evolution that I'm experiencing and witnessing.
00:09:26.680 | And I'd love to listen to your stories and learn from all of you as well.
00:09:31.080 | So leave a comment.
00:09:32.080 | Don't be shy.