Hello, everybody. It's Sam from Financial Samurai, and I want to talk about the Fed rate cut. This is the first time in 10 years we've had a Fed rate cut, and this is interesting because it's the 10-year anniversary of the global financial crisis in 2009. We can learn several things from July 31st rate cut.

One, the Fed screwed up in December 2018 by hiking rates for the ninth time in three years. Cutting rates just seven and a half months after hiking rates is like getting a divorce within a year. The signs were everywhere that it wasn't going to last, but the couple simply chose not to look because they were just too horny.

Two, the Treasury bond market is a better indicator of the economy's health and dictates the proper interest rate policy, not the Fed. All year and parts of last year, the yield curve has been flat or inverted, telling the Fed it needed to cut rates as growth slowed. But they waited too long until they finally relented.

Three, the Federal Open Market Committee members may have PhDs and plenty of financial experience, but they are often just guessing at the best course of action, just like the rest of us. Do not treat their word as God. Do not underestimate your own abilities to make money either. You don't want to rely on someone else to make you rich.

That's a suboptimal decision, because that someone could make you poor as well. And then finally, we should all be on high alert for an impending recession within the next 12 to 18 months. The more the Fed cuts, especially when rates are already this low, the more we should worry.

The Fed funds the range right now is 2% to 2.25%. There's not that much more room to cut. If we look at history, we know that recessions always follow euphoria. Due to my experience working through the 2000 dot-com bubble and the 2008 housing bubble, I've learned that the greatest downturns tend to happen right after the most euphoric of times.

I remember in 1999, working on Wall Street, investing in internet stocks every single day. You could make 50%, 100% in a few short months, sometimes in days. You know, remember those B2B companies, the Ariba networks, Broadcom? Yahoo was just going crazy, everything. And we just felt like we couldn't lose.

And of course, in 2000, March 2000, things just stopped going up. And the Nasdaq proceeded to implode for the next several years, and everybody, well, a lot of people got fired. Same thing in 2007. Man, 2007 was a fantastic time. Career-wise, stock market-wise, real estate, everything was going gangbusters.

And then of course, a couple of companies folded, like Lehman Brothers, Washington Mutual, and then it was just an unraveling of confidence. So if you look at my post, you'll see this cool chart on the market cycle. I think we're currently in the euphoria complacency cycle. And after complacency comes anxiety, denial, fear, panic.

We're going down, down, down. Then anger. And then depression. And then we kind of hit the bottom as we're depressed. And then we go up with hope, relief, and then optimism, excitement, thrill, and then back to euphoria, complacency, and then so forth. That's the way it is, folks. This is boom and bust.

We've been in a bull market since 2009, and the majority of us are the richest we've ever been. Let's not brag here. Let's just be honest. Let's look at our net worth. Over the past 5, 10 years, if you have been diligently saving and investing, you should be at your highest net worth point in your entire life.

And when you're at that point, it's understandable to be punched drunk with financial happiness. It's understandable to spend more money than you normally would or take on debt at higher interest rates and so forth. The median age in America is 38 years old, which means that about half of the US population has never significantly lost money in the stock market or real estate market or any risk assets.

And so when so many of us feel like we can't lose, we can often lose the most. So here are some late cycle indicators. One, the rise of the financial independence retire early movement. I've been writing about FIRE since 2009 with zero fanfare until circa 2017. Now you can't go a day without reading or watching an early retirement story.

And I know I'm definitely contributing to that because I've continued to write about the early retirement lifestyle. But that's no different from what I was doing 5, 7, 8, 9, 10 years ago. It's just that it's just this big, big frenzy now. Two, the rise in remote and freelance work.

Going to work in an old stuffy office is very passe. According to the Freelancers Union and various studies, by 2027, more than 50% of American workers will be freelancers versus about 40% today. And I bet you didn't know that we're already at 40%. That's a lot. The return of zero money down purchases for homes to compete for more business.

Lenders are rapidly lowering their standards just like they did before the housing bust. You're seeing online real estate marketplace companies like Zillow get into the flipping business. That's also a late cycle indicator. Four, the explosion, explosion of credit growth despite credit card interest rate reaching five-year highs. Credit card interest rate, the average is about 18% now.

Nobody should be borrowing on a credit card. 18% versus 2% on the 10-year bond yield, that is a 9x differential. And that's high-rate robbery, folks. And if you look at the consumer confidence index, we're also at all-time highs at about 138. So that is about matching the time right before the dot-com bubble bust.

So because we're so overconfident, we're willing to pay sky-high interest rates because we think we're going to continue making lots and lots of money. And then finally, insiders from companies like Beyond Meat cashing out to retail investors through a secondary offering after the price of the stock went up like 5x.

I mean, come on. How can you guys be so cruel? I know you guys want to cash out, but man, do you really have to take advantage of the poor retail investor who's like, "Whoa, the stock is up 5x. I got to buy right now." And then my personal favorite, when 23-year-olds making $30,000 a year tell me they have no problem retiring early because within 20 years, they'll have amassed $2 million in net worth by eating at Applebee's every day, never spending any income on fun and earning a 12% plus compounded return.

That to me, folks, is a sign that we are at max euphoria. That's a little bit delirious type thinking, illogical thinking. You can't really see through it, and that is a sign. So a Fed rate cut always precedes a recession. You may not accept any of my late cycle indicators or believe my stories about euphoric people who think they just can't lose, but what you can believe is the Fed itself and that the data it provides.

If you go to my post, "The Fed Rate Cut is a Sign We Should All Buckle Down and Be Careful," you'll see this chart that highlights the Fed cutting rates, and then within 12 to 18 months, a recession follows. So I'm counting back to 1950. One, two, three, four, five, six, seven, eight.

It's happened eight times out of, it looks like about 10 times. It's important to understand that a recession does not occur because the Fed has cut rates. A recession follows because of the normal boom-bust cycle of the economy. The Fed is only making reactionary moves no matter how hard it tries to predict the future.

The Fed cannot do so very well. If you look at the chart, there's these huge spikes up in the Fed funds rate and down, and then recessions every five to 10 years because the Fed can't get it right. We already saw this when they hiked rates in December 2018 and then cut seven and a half months later.

The Fed is only making reactionary moves because it is unable to predict accurately an economic cycle. The classic boom-bust cycle can be illustrated by the housing market. The time lapse between when developers first realize there's so much demand and then meets this demand for housing may be years because it takes time to build new apartment buildings and single family homes.

If you come to San Francisco, I'm trying to build an auxiliary dwelling unit. It's going to take six months to get approval, and then I've got to build the thing and go through the various permit phases and so forth. It's kind of a nightmare, but you can just kind of wait and get someone to do it for you.

But by the time all that supply hits the market, it's just going to suppress and crush prices. You're seeing that right now in 2019 in places like Seattle and in New York City. There's a lot of supply going on because a lot of these developers built several years ago when times were really, really good.

So the key is to have a large enough balance sheet to build and invest counter-cyclically and not at record high prices. It feels terrible investing when prices are down, things are sluggish, but you've got to practice doing that because that's when the future returns are going to be the best.

So you can check out the post. There's a market quadrant cycle. It's from a classic book from Mueller, Real Estate Finance, 1995. And when we talk about the Fed, it's important to realize about moral suasion and gibberish, frankly. Alan Greenspan was famous for gibberish where he talked for hours and hours, and you just couldn't figure out what the hell he meant and what he was saying is just gibberish.

And the reason why is because the Fed is kind of scared, it knows its power, and it knows if it says to the world, "Hey, we see a slowdown on the horizon," it knows that the markets and investors and just the public in general will probably freak out a little bit and accelerate that downturn and probably overshoot it.

And same thing on the upside. We tend to overshoot and undershoot all year history long. It's just the way we are because of the boom and bust cycle. So if the Fed can continue to speak in more gibberish and only cut rates this one time, maybe two times at 25 basis point increments, the euphoria/complacency stage will likely continue.

After all, borrowing costs are lower and the Fed is signaling the economy is strong enough not to warrant further cuts. This is really key here. But if the Fed starts to cut interest rates more than two times and in larger increments, then a recession will most likely hit and the S&P 500 will most likely decline months from now.

And we just look at that through the history of what's happened before. After a 75 basis point cut, three months later, the S&P 500 is down about 4%, six months later, down about 4%. It generally doesn't look good six months later. In the beginning, a little euphoric again, "Oh yeah, cheaper money.

The Fed is on our side." But six months, 12 months, it's looking pretty dicey. The key to reaching and maintaining financial independence is to avoid blowups. The blowups are what ruin lives because they not only rob you of your money, but of your precious time. You'd rather lose 1%, 2%, 3% here and there in terms of performance if you can sidestep a 30% to 50% decline.

So if you lose 50%, you got to get 100% return to get back to even and who knows how long that's going to take. You cannot afford a financial blowup if you're retired, you plan to retire within three to five years, have dependents, have a disability which may reduce your ability to work for longer than a potential recovery, don't have enough passive income to cover your basic living expenses, or you're simply delusional about your abilities in the future.

If you're still within the first 10 years of your financial journey, okay, you can afford to take more risk. Eat an Applebee's every day, never plan to have kids or take care of friends or family members or give to charity or whatever. That's fine. It's all you. All you, you, you.

You have nobody to care about but you. But for regular folks, I suggest being more cautious at this stage in the cycle. Please don't have any revolving credit card debt ever. 18% interest rate is a freaking ripoff and this is why there are companies sprouting all over the place in Silicon Valley doing personal loans because they're thinking, "Oh, we're going to help you consolidate your debt at 18% for only 14%." It's still a ripoff, folks, and these companies are doing very well, these personal loan companies.

Pay attention. Avoid these personal loan debts. Please don't be tempted into buying a car either because your car interest rate is now 0.25% lower. That's just silly. The average car price is like $38,000 now versus the median household income of $62,000 pre-tax and you got to spend $38,000 after tax.

Try to stick to my 1/10th rule for car buying, folks. I know it's a little bit arduous but look, trust me when I say that a car is going to be one of your first worst financial mistakes. Do refinance your mortgage and take advantage of lower rates. The bond market has already given us a chance to refinance our mortgage for the past three months and now the Fed is saying, "Okay, fine.

You're right. I don't want to have this yield curve inversion." Borrowing long-term money when the yield curve is flat or inverted is like free money, folks. If you can refinance and break even within 24 months and plan to own the house for years afterward, longer the better, forever the better, then you should refinance.

And then do save aggressively with banks that pay a higher interest rate than the current 10-year bond yield. The current 10-year bond yield as of August 2019 is under 2% now. That's like 1.9%, but you can get a risk-free online bank interest rate for 2.3%. That's a 40 basis point arbitrage, folks.

If you had trillions of dollars, you would be taking advantage of that arb all day long for free money and just kicking back and laughing. And that's what we should do, and that's what I've done, and that's what you should do. Also, don't be so naive as to wish a financial crisis on the world so you can "buy out" assets for cheap.

I hear this all the time. I'm going to buy assets for cheap when the economy crashes and the stock market goes down 80%. Yeah, look, asset valuations are a reflection of their projected cash flow. A stock is not cheap if its price halves and its earnings decline by 90% over the next several years.

In fact, the stock has gotten a lot more expensive. Besides, you might not even have a job that will give you the guts to buy on the cheap. So don't be delusional in this type of thinking here. Be consistent in your investing strategy. And most of all, learn to enjoy your life regardless of where you are in the cycle.

If you're on top of your finances and you're investing in a risk-appropriate manner, you should be pretty fine no matter what happens. It's only those people who have risk exposure incongruent with their risk tolerance who lose big. So don't be like those people. I hope this episode has given you some things to think about.

Definitely click over to the post to check out the amazing charts that I provided that help you visualize where we are in the cycle. It's up to you to decide how much risk you want to take because we're all on different parts of our financial journey. For me, I'm more conservative than average because I'm older than average and I have a family to take care of now.

And I want to make sure that my wealth continues to steadily go upward over time. I just don't want to go in reverse because I've gone into reverse many times before or enough times before and I just never want to go back. So only you can decide. And it's 6.08 a.m.

right now. I've been up since 5 a.m. and I still got a couple more hours before my boy and my wife wake up. So I'm going to go back to bed now and wish for the best. Sweet dreams everyone.