Hello, everybody. It's Sam from Financial Samurai. And in this episode, I want to talk about the Fed hiking rates again. And what's next for the middle class, for investors for all of us. Because on May 3 2023, the Federal Reserve hike rates by another 25 basis points to 5% to 5.25% on the Fed funds rate, we are now at the highest level we've seen since 2007, right before the 2008 global financial crisis.

During that time, I personally lost about 35%, maybe 40% of my net worth in six months. That took 10 years to build, and millions and millions of lives were ruined. The time was so difficult, in fact, that I decided, well, I'm going to get off my butt and start financial samurai.com, which I had been thinking about starting since I had graduated from business school in 2006.

So finally, I had a catalyst because, heck, I needed something to do just in case I got blown out of my job. And so many people were getting blown out of their jobs in the financial services industry. My firm had, I think, at least five layoffs in 2008, and another maybe two or three layoffs in 2009.

So it was very hairy times then. As financial samurais, we should all be thinking, what next? Even though Silicon Valley Bank failed, FTX failed, that's more fraud, Signature Bank failed, Credit Suisse Bank failed, and now PacWest failed, the Fed still decided to hike up interest rates again, even though it's clear inflation peaked in June 2022, with the latest CPI print at 5% from 9.1% mid last year.

And even though job inflation is declining, and rents are declining, the Fed said, doesn't matter, we're still going to hike rates. And finally, even though it takes six to 12 months for these rate hikes to take effect and slow down the economy, the Fed continued to hike rates in May 2023.

Will they hike again? Well, the markets are expecting no, but I don't know if they should have hiked in the first place in May. Let us hope the Fed is done. Let us hope the next recession isn't going to be as bad as it was in 2008 and in 2009.

But if it is, we can look at some positives. Here are 10 plus positives. The first, the unhealthy desire for prestige, money, and status takes a backseat. Why are we all grinding so hard? I'm convinced the desire for prestige and status are important factors for explaining why many in the middle class feel miserable.

After all, we have the saying, keeping up with the Joneses, right? We are miserable because we always compare with our neighbors and our colleagues what they have. So we work harder to try to make more money to get those promotions and titles so we can buy more things. So when you're getting pummeled financially, you don't have the luxury of seeking prestige or status anymore.

You're just focused on survival. And when you focus on survival, you focus on what really matters. The second benefit of a Fed-induced recession, the student loan problem might get better. The main reason why there's a student loan problem is because too many people in high school pay too much for tuition for college education that isn't worthwhile.

If college overall was a good bargain, there wouldn't be so much angst about student loans. There wouldn't be $2 trillion worth of student loan debt outstanding. With middle class incomes and livelihoods at stake, parents and students will be forced to choose more affordable colleges or trade schools. Perhaps more colleges will also begin offering more free grants as the need goes up.

Colleges will be in trouble in the next recession because people will pull back and colleges are like businesses as well as enrollments are declining because of high tuition. And maybe more students will read more books, use the internet, and use AI to learn more things for free. So there might be this better alignment with cost and benefit that will help the average person's finances and mental health.

We talked in a previous episode on why there's so much angst and anxiety from parents raising children in expensive cities because they feel like they can never get ahead. You know, the correlation between hard work and reward is kind of breaking and they feel like maybe they need generational wealth for their children to be okay and have some upward mobility.

No more if there is a recession, a deep recession. Three, we might become better consumers and establish better financial habits. When you have less money or no money, you're forced to spend less and make do with what you have. Ask anybody who went through the Great Depression or the 2008 global financial crisis with a significant amount of assets.

They've probably been scarred for life, but they've also probably wisened up to their frugality and their asset allocation. Consumption is kind of out of control in America with only around a four to five percent median saving rate. That's not enough. Look at the other countries in the world. 20 percent, 30 percent savings rate nationally.

Four, there will be fewer cars, less pollution, perhaps more travel, and world peace. We have a love affair with cars for some reason in the United States. 50,000 is the average new car price, which is ridiculous given the median household income is about 75,000. So with the Fed deciding to crush the middle class, there will be fewer cars on the road.

There will be less traffic. I don't have to stress as much about setting my kids to school. And then maybe, maybe the environment will get better because there'll be less pollution. Air travel and accommodations could be cheaper as well. Many of us have not traveled in several years because of COVID and we're like, well, cheaper travel, better experiences.

That could be great for the world because the more we see of the world, the more empathy and understanding we will have for other cultures. Five, there could be one million, two million jobs lost once the Fed gets done tightening plus six months. And as a result, millions of people will need to find new jobs.

And during this hunting process, job hunting process, there'll be an opportunity to finally try something new. A chance to start anew is a huge benefit. I think many of us have dreams of different career paths. However, we get stuck on one and then we keep on going because we want those raises and promotions.

And then 20 years go by and we realize we've been doing the same thing for our entire post high school or college education lives. And then we wonder what else could there be? Inertia, fear, laziness, lack of motivation, all this stuff gets thrown out of the window once you lose your job because you have no other choice.

You might use this opportunity to take a leap of faith and try something new. Personally, I'm kind of grateful, well, years later that the global financial crisis happened because it forced me to think outside of the norm. I didn't want to do my finance job for 20 plus years.

I was bored. I wanted to do something new, something that provide a little more value and meaning to society, in my opinion. So I negotiated a severance and I tried my hand at consulting. I wanted to learn about startups in the fintech space. I decided to write a book, actually two books, and then write on financial samurai more consistently.

And looking back, I don't regret trying something new. Oh yeah, I even coached high school tennis for three years. I've always wanted to be a teacher. So there might be a real big silver lining to your career if we go into a deep recession. Six, less overcrowding in schools and more time with your children.

Public schools have often felt the strain of a boom economy with an influx of more children and not enough pay to retain or attract enough teachers. Classrooms get busier. Meanwhile, private grade schools also get more crowded and difficult due to the rapid wealth creation of households. With the economy on the decline, there will be more spots open for all students.

There may also be more teachers available given teaching is a relatively more secure profession. And maybe more people like myself might want to be a teacher as well. I'm actually looking at being a teacher in Hawaii one day. And that's something I think which would be great for everybody.

In addition, if one parent loses their job, they might want to pursue homeschooling, or at least provide more supplemental education. My wife and I homeschooled our son from what, March 2020 until August 2021. And it was a lot of work, but it was very gratifying and our son learned a lot.

So there could be a huge win out there. Seven, a rekindling of current and lost relationships. And I'm reading this book called The Good Life Project. It's a 80 plus year Harvard longitudinal study of what makes a good life. And the bottom line is better relationships with friends and with family members.

That was the consistent theme of all these folks. Once making money is harder to do, the natural inclination is to focus on all the things we've been neglecting for the sake of money. They are our children, our spouses, and our friends. With more time spent with friends and loved ones, our loneliness should naturally decline.

Even the US Surgeon General came out with a loneliness report in May 2023. They talked about how we need these relationships, these connections to heal ourselves and our minds. It's interesting because in the personal finance space, there are actually several personal finance bloggers who've gotten divorced. They might've been too frugal, or they might've been chasing fame too much or money too much.

And it's interesting to see how relationships change once money is no longer a focal point. Also, there are folks who focus so much on making money that they neglect family, having a family. I know many people who've just been focused on money, money, money, and career and fame, you know, into their thirties and forties.

And then they realize, well, we want to have kids. But unfortunately, biology doesn't cooperate because having a child after the age of 35, and especially after 44 women is very, very difficult. And then these folks tell me and share with their friends, I have all the money in the world, but I have nobody to spend it with.

So don't have these regrets about focusing so much on money and recession will take away that money hunger, maybe it'll help you focus on other things that matter as well. Such as point number eight, your health. You know, some jobs are just physically and or mentally unhealthy, but we carry on because we need or want the money we need to earn to provide.

However, when we're older, we may regret sacrificing our health for our jobs. Manual labor is obviously tougher on the body than knowledge intensive jobs. However, even knowledge intensive jobs can take a tremendous toll on the body over time. I truly believe stress is a silent killer. I went through teeth grinding, TMJ, plantar fasciitis, lower back pain, sciatica, where I couldn't even drive to work because I had numbness in my lower region and my behind for many years.

And then I had all these allergies, I just couldn't kick them. And then within a year after leaving my stressful day job in 2012, all of these chronic symptoms went away. And I couldn't believe it because I had been living with all these symptoms, this pain for 13 years, and I had forgotten what it was like to wake up pain free.

So if this is you, then know that maybe your job is silently killing you, unfortunately, and you might need to step away. Getting laid off or furloughed or receiving reduced hours could literally extend your life. Use your time away from work to heal your body and mind. Perhaps if you want to relocate to a state that has a higher life expectancy.

I wrote a post on this and those states include Hawaii, California, Wisconsin, Minnesota, the Northeast, without a job tying you down, you have more freedom to move. All right, nine, a change in political power, if the Fed destroys the middle class, then whichever political party is in power will probably lose the next presidential election, next congressional election, and so forth.

Given America is divided equally along political lines, roughly half of the country will be happier after the next presidential election. For now, we have another debt ceiling debacle to deal with. Now if the debt ceiling isn't raised, then expect another stock market meltdown temporarily, I hope, but hopefully, the government will figure it out and come to a compromise.

Treasury bonds may also sell off given treasuries will suddenly seem more risky. And as a result, mortgage rates will increase, thereby reducing the demand for real estate. And this is a risk to my bullish 2023 housing call. Now 10 borrowing costs should go back down as we go into recession.

If the debt ceiling does get increased, then during times of economic calamity, there will be a flight to Treasury bonds, the safest asset class. As a result, Treasury bond yields and mortgage rates and student loan rates will come down the most. So this is the economic cycle at work.

Boom bust cycles as we bust, more money goes into treasuries, rates go down demand because demand for credit goes down in a recession, and then things get cheaper. And then demand goes up for these risk assets for goods and services. And then the economy slowly booms again. So number 11, inflation will finally decline part of the cycle.

Once the middle class gets beaten up, demand goes down, inflation will finally fade. And this is ultimately what the Fed wants. It'll help protect their legacy that they conquered inflation, despite causing millions of job losses, and the economy can reset. Finally, because the Fed is behind the curve by at least six months, it's actually easier to generate more passive income and retire earlier because of all these Fed rate hikes, right?

Treasury bills are yielding over 5%. Now, money market funds are also yielding close to 5%, if not above 5% as well. certificates of deposit along many durations are also yielding over 5% as well. During the global financial crisis, the best I found was 4.5% and 4.25%. So we're at five plus percent while inflation is declining.

By the end of 2023, you could easily see CPI at 4% or three and a half percent and in 2024 could go back down to 3%. So if you can lock in these higher risk free rate returns over the next year, two years, three years, well, you are going to be winning on the middle and back end because of the lag.

Now so far risk assets have come back a little bit right the stock market up since October 2022. Real estate seems to be catching a bid. It's coming back up. Although on the East Coast, it seems to be continuously pretty strong. So if you can maintain steady asset class values, with increased risk free income, dividend income and rental income, because rates are going up, well, then you're winning.

So so far, investors are rebounding and they're winning. It's not going to last forever in terms of the higher passive income numbers, but we should enjoy it over at least about a year, maybe two years. It depends on how far out on the duration curve you're going to invest your risk free money.

Now, these are the positives of a recession and will we go into recession? I think we will. How bad? Not so sure. Hopefully not as bad as the 2008 2009 one. But I think we're going to go through one. However, listen to what Fed Chair Powell says about the possibility of going into a recession.

And because I've been doing this podcast for four or five years now, I feel that I can hear whether one is confident or unconfident, whether one is lying or not lying. So let's listen in on what he has to say after a reporter asked him this question on whether we're going to go into a recession.

I don't think you know, I know what's printed in the summary of economic projections and all that. I don't think you can deduce exactly what you said about what participants think, because you don't know what they were thinking for first quarter GDP at that point. They could have been thinking about a fairly low number anyway.

In any case, I'll just say I continue to think that it's it's possible that this time is really different. And the reason is there's just so much excess demand really in the labor market. It's it's interesting as you know, we've raised rates by five percentage points in 14 months and the unemployment rate is three and a half percent, pretty much where it was even lower than where it was when we started.

So job openings are still very, very high. We see by surveys and much, much evidence that that conditions are cooling gradually. But it really is different. You know, it wasn't supposed to be possible for job openings to decline by as much as they've declined without unemployment going up. Well, that's what we've seen.

So we there are no promises in this, but it just seems that to me that it's possible that we can continue to have a cooling in the labor market without having the big increases in unemployment that have gone with many prior episodes. Now, that would be against history. I fully appreciate that.

That would be against the pattern. But I do think that it that this that the situation in the labor market with so much excess demand yet, you know, wages are actually we just have been moving down. Wage increases have been moving down. And that's a good sign down to more sustainable levels.

So I think that I think it's still possible. I think, you know, the case of avoiding a recession is, in my view, more likely than that of having having a recession. But it's not it's not that the case of having a recession is I don't rule that out either.

It's possible that we will have what I hope would be a mild recession. All right. So you've heard it from the horse's mouth. He says, quote, the case of avoiding recession is, is, in my view, more likely than that of having a recession. Now, if you were a CIA operative, and you captured him, interrogating him behind closed doors, don't know where in the world.

Do you believe him? He uses um, that, you know, you know, you know, so many times. And as someone who loves to listen to podcasts, he doesn't sound very credible. When you're credible, you speak with confidence, you speak with clarity. And I didn't really hear that with Jerome Powell, the Federal Reserve sees all the data, they see what's going on with bank balance sheets, the composition.

And just one and a half, two hours later, PacWest announces to the public, it's looking for quote, strategic options, and the stock is down 40% in after hours. So in conclusion, I say be careful, the S&P 500 is trading at about 18.8 times expected earnings, which is higher than the 16 and a half times median earnings.

valuations simply don't look that attractive. Look at the previous recession, February through April 2020, maybe longer, right, because it's two consecutive quarters of negative GDP growth. Now there were there weren't any other options besides going to cash and earning nothing back then, the stock market ended up declining by 32% from peak to trough.

And those who decided to sell real estate in the first half of 2020, likely missed out on about five to 10% price appreciations by the end of the year. So back then, we just had to either sit tight or invest in risk assets that were declining, ie the stock market because that was the most liquid asset that was getting pummeled.

This time around, we have some options. Okay, 2022, bear market S&P 500 down 19.6%. But we're climbing back, we're clawing back. But if we're going to go back into a recession, a noticeable one, a bad one, then we have options, we have tremendous risk free options in Treasury bills, CDs and money market funds yielding over 5%.

So 5% after already seeing a eight and a half percent 9% year to date increase in the stock market, you tack back on well, that's like what 12 to 13% for the year, which is above the median stock market return of about 10% a year. So you have to ask yourself, are you happy with a 12 to 13% return for one year in 2023?

I would say 70% of the people would say yes, and I'm one of them. Alrighty, folks, it's time to pick up my son from school. I hope you enjoyed this podcast. If you did, please share with a friend. Please rate it. Five star review is appreciated with some nice commentary.

I read them all. And I try to use the commentary to make the following podcast a little bit better. Also sign up for my free weekly newsletter at financialsamurai.com/news. If you want to support my work, you can pick up a copy of Buy This, Not That at financialsamurai.com/btnt. Or you can pick up my Severance Negotiation book, How to Engineer Your Layoff at financialsamurai.com/hteyl and use the code SAVETEN to save $10.

Take care, everyone.