Hello, everybody, it's Sam from Financial Samurai. And in this episode, I want to talk about the latest Fed rate hike and what they said. Because unfortunately, I think hope is slowly seeping out of the balloon here. Federal Reserve Chair Jerome Powell, who is also worth more than $100 million, has basically raised interest rates by another 50 basis points to 4.25 to 4.5%.

And more importantly, he telegraphed the Fed is looking at a terminal rate of 5.125%. So 17 out of the 19 governors, something like that, have agreed that 5.125% for the terminal rate, the end rate is where they're going. And that's a shocker because originally, the terminal rate was 5%.

And much of the investment community hope the Fed would stop before 5%. So now for them to raise the terminal rate by 0.125% to 5.125%, despite October and November CPI numbers coming in below expectations, the only conclusion we can make is the Fed is okay with a recession. The Fed wants a recession to bring down inflation, which is already coming down quite rapidly.

At this rate, you know, 0.1% month over month, by the summer of 2023, there is no doubt inflation will be below 5%. And it'll probably be closer to 3% at this rate. And I bet sometime in 2023, we're going to talk more about deflation rather than inflation. So I think with a 90% certainty, we should all be thinking this way.

There's going to be another recession in 2023. And this is a self induced recession. I used to think with 85% certainty that 3577 on the S&P 500 was the bottom, but now the Fed is targeting a 5.125% terminal Fed funds rate. If we get to 5% or above, I think we're definitely going below 3577 on the S&P 500.

So please be aware, you heard about the 2023 Wall Street S&P 500 forecast, the median is something like 4000 highs of around 4500. Some some actually new forecasts are at 5000. And then the lows are at around 3000 is looking more and more likely that getting back to 4000 in 2023, if the Fed funds rate goes to 5.125% is more and more unlikely.

So mentally, you should think about investing in stocks as completely dead money in the next year. Now, let's look at the bright side. The bright side is right now in 2022, end of 2022. We know with high certainty that over the next 18 months, doom is coming doom as in another global recession, probably going to be a little bit worse than the 2022 recession, first quarter, second quarter GDP consecutive declines, because a lot of jobs are going to be lost in 2023.

We're starting to see the cuts, but more and more are going to be lost in 2023. So if you lose your job, it's a depression, right? If you don't lose your job, but you lose money in the stock market, real estate, and so far, that's a recession. So where's the upside?

Well, the upside is that we know doom is coming. Whereas in 2007, things were really hunky dory, and it was just boom times. And then we got side swiped in 2008 and 2009. Everybody was caught off guard. So when we know that doom is coming over the next 18 months, we can do things to prepare right?

We can behave aggressively, we can buy short term treasury bonds yielding over 4%. We can asset allocate properly, we can reach out to our bosses and colleagues that matter so we don't get laid off. We can build side hustles and work on our side businesses. We can do so many things over the next 12 to 18 months that we become a solidified economic fortress that withstands the economic crush that comes our way.

So when that crush comes, we will be able to outperform. Now let's say the crush, the economic crush doesn't come, and the Fed governors grow a conscience and they stop caring about their legacy of combating inflation, which is already coming down, and they start caring more about the middle class, and not crushing and eliminating a million plus jobs and hurting people's livelihoods.

Let's say that happens. And let's say they don't get to 5% or 5.125% on the terminal rate. Well, in that scenario, risk assets will start doing well again. And with you and your preparation, you're going to outperform again. So really, it's a win-win scenario. You're going to outperform on the downside, and you're going to outperform on the upside.

So key lesson here is to really start baking in dark sky scenarios so you can pre-mortem plan well before these things happen. And if these things don't happen, you're going to be winning all the same. There's one last thing I want to leave you with as I sit in my car and contemplate the future.

And that is, I don't think any of us have to worry about ourselves. We don't have to worry about you and me listening to this podcast, anybody who is paying attention to their finances, saving aggressively, allocating properly, and doing the right things. What we have to worry about are those who don't do the right things, who just wing it, who are going crazy and investing in things that they shouldn't be because they think they're going to win a lottery ticket.

A good example of this was back in 2008 and 2009 when a lot of condo owners and homeowners did short sales because they were underwater on their mortgage. They bought homes that they couldn't afford with tiny down payments, and their interest rates went up, and they just couldn't afford it.

And so they got crushed, but unfortunately, everybody else who just kept on paying their mortgages because they could afford it, or who didn't have any mortgages, also got hurt because the marginal actors brought down the majority of people who just did what they were supposed to do. So what's the solution?

Well, the solution is to mentally prepare for this to happen, to have your net worth get hurt by marginal actors. But given your finances are solid, and you can wait things out and not get hurt as bad, your next step is to take advantage of the decline in asset prices and buy those assets from those marginal actors.

And here's what will likely happen over time. Let's say you do a short sale, you go bankrupt. Well, your credit score is ruined for seven years, maybe longer, and you're not able to get credit to buy anything else. However, you as the good actor, go ahead and take advantage and buy those assets on sale.

And over the course of seven to 10 years, these assets will likely rebound in value, stocks, real estate, and so forth. However, if you're the marginal actor who couldn't get credit over seven, 10 years, you weren't able to take advantage. In fact, you lost money because you sold at the low.

And then when you're trying to get back in seven to 10 years, when you can actually get credit, asset prices are much higher, and you permanently maybe get shut out. And if you get shut out, then your children will likely get shut out. And then this is why there's this growing dichotomy between the knowledge folks, the people who care, the wealthy folks, and the people who are just winging it and not bothering to care.

So please care about your finances. If you can hold on, hold on for better days ahead. Personally, I'm taking it down a notch in 2023, because the return on effort is not there. It's not as high during the bull market. So why bother? Don't fight the Fed, folks. We've given one man enough power to ruin economies and to grow economies, to kill jobs and to grow jobs.

It's unbelievable, actually. We give one man all that power. But who are we to step in the way of one powerful man? We should get out of the way. If the Fed wants to hurt the economy, I guess we got to let them. And we got to let capitalism work itself out.

And for those who aren't prepared, they're going to suffer. But that gives opportunity for those who are prepared. If you want to better prepare, I suggest you pick up a copy of Buy This, Not That, my Wall Street Journal bestselling book at FinancialSamurai.com/btnt. And please sign up for my free weekly newsletter, FinancialSamurai.com/news.

I'm actually really excited today, because it's my daughter's third birthday. And boy, three years have flown by. I still remember writing the post, "Why I Failed at Early Retirement," a love story. And it was when my daughter was born in December 2019. And it's interesting, once you become a parent, you do everything possible to get your finances right, do the right thing, stay in shape, and ensure that you can provide for your family.

So that's one of the interesting things about parenthood. And I'm on this journey, and I'd love to hear from all of you parents as well, on how you have better focused on staying healthy, fit, and getting your finances right. Because this is clearly evolution that I'm experiencing and witnessing.

And I'd love to listen to your stories and learn from all of you as well. So leave a comment. Don't be shy.