It’s said that when you wish upon a star with all your might, your dreams just might come true.
While we’re still waiting for that McLaren to appear in the driveway, we’ll at least accept the consolation prize…
Our Federal Reserve FINALLY grew a spine… or at least that’s what they want you to think…
Maybe Jerome Powell read our inflation dissection, where we pointed out that inflation was still running hot…
Maybe they looked at the sizzling economy, retail spending and still low inventory levels and said it wasn’t time to let off the brakes quite yet…
Or maybe, they finally decided that subsidized risk-taking built moral hazards into capital markets…
… lol… yeah right. Source: Midjourney.
Look, a broken clock is right twice a day, and that’s all that’s happened here.
We don’t believe that the makeup at the Fed changed overnight.
All they did was send a message to markets that they were willing and able to raise interest rates or, at the very least, hold them at higher levels.
Aren’t we being a bit too harsh?
Because they won’t admit how MASSIVE the problem is that they created.
Good thing we’re not ones to shy away from the truth.
Buckle up, folks, because we’re going to give the Fed an enema that shows the nasty truth they don’t want you to see.
Government Bails Out the Government
Most of you probably know this, but the single largest holder of U.S. government debt is none other than the Federal Reserve.
This wasn’t always the case.
Before the Great Recession, the Federal Reserve treated its balance sheet with more care.
But once the flood gates opened with quantitative easing (QE) infinity… well, we’ve never looked back.
The biggest jump in their balance sheet came in 2020 when that value jumped from $4 million to over $8 million.
Yet, despite higher rates aimed at stifling demand, the Fed’s balance sheet remains higher than a Cheech and Chong after-party.
Of the $8.25 trillion they own, $2.5 trillion are mortgage-backed securities.
$1.74 trillion will mature in the next one-to-five years. But a whopping $4.8 trillion doesn’t mature for 10 years or more.
So, the idea that the Fed is reducing its balance sheet by cutting purchases and just letting existing holdings run off (mature) is like filling up your tank a quarter of the way for a cross-country journey.
The point is their rate hikes only hurt short-term borrowers, pinching the one place more fragile than any other: business.
Who Interest Rates Actually Hurt
Most homeowners aren’t feeling the pinch either, as most mortgages issued in the last decade are 15 or 30-year fixed rates, which were locked in during happier times.
That’s not to say that current homebuyers aren’t paying through the nose.
However, as the data above highlights, they could and should be paying a lot more if the Fed would only sell off some of its longer-dated assets.
Instead, they’re screwing around with short-term interest rates in the one-to-five-year camp.
Those of you who run a business probably have experience with this: businesses don’t borrow money like homeowners do.
Our government subsidizes homeowner loans with FHA Freddie and Fannie loans.
Businesses get the shaft, with most taking on variable rate loans in the one-to-five-year camp.
In one of our recent newsletters, we explained the ticking timebomb underlying commercial loans, especially those for empty office buildings.
How bad has it gotten?
Take a look at the rates on new term loans from the Kansas Federal Reserve:
The median back during the pandemic was 1.16%. Before the pandemic, it averaged around 5-5.5%.
Unlike homeowners who aren’t going to need to recoup their loans, these commercial rolls will happen in the next 12-36 months, with many facing >100% interest rate increases.
How long do you think Bidenomics will help our economy then?
Preparing for the Inevitable
The massive rate distortion has left most investors reeling.
Many are skittish about putting money into the markets right now, and rightfully so.
That’s why it’s more important than ever to build a retirement blueprint to defend your nest egg and maximize every available resource.
No one knows how to do this better than Bob Carlson, a RETIREMENT EXPERT trusted by folks for more than three decades.
He’s served on the Board of Trustees of the Fairfax County Employees’ Retirement System since 1992 and is the editor of the award-winning Retirement Watch.
In his latest book, Bob lays out seven “end-around” strategies you can use to protect your retirement from a new law enacted by Congress that could… no joke… effectively CUT 30% OR MORE value off your IRAs, 401ks, and even your pensions.