Image Source: Pixabay

Richard Maybury provides a realistic assessment:

“…. Everybody is always trying to figure out what these people (The Fed) are afraid of at any given moment, so we can get ready for their actions against it.”

Despite overwhelming evidence that inflation is nowhere close to the Fed’s 2% target, Chairman Powell continues to trumpet three rate cuts before year-end.

Expert Fed watcher Chuck Butler recently told us:

“Well, three rate cuts before the election would certainly help the current administration. It will be a rally cry for the stock market, of which most people (incorrectly) associate with the economy.

What most people, traders, hedge fund managers, investors, etc. don’t understand is that it has been proven (a fact) that inflation rebounds on its own. If the Fed Heads cut rates too soon, inflation will come back, and with a vengeance. It happened to Paul Volcker.

While rates have held steady, Powell still signals rate cuts ahead. Credit Bubble Bulletin tells us, ‘Powell and the Fed surely recognize the backdrop, yet they continue to deliver the music Bubble markets are eager to dance to: No more rate increases.’

I recently wrote, The Fed Has an Itchy Trigger Finger:

‘Former Treasury Secretary Lawrence Summers criticized the Federal Reserve for continuing to signal that it’s prepared to lower interest rates in coming months, despite a strong economy that’s giving off projections of still-too-high inflation.

My sense is still that the Fed has itchy fingers to start cutting rates and I don’t fully get it, …given how the economy and financial markets are performing. I don’t know why we’re in such a hurry to be talking about moving towards the accelerator.’

If Powell delivers as promised, he will find an excuse to drop rates, creating a much bigger inflation problem for the next administration.”

If rate cuts happen, what “actions against it” should investors be taking?

Inflation isn’t going away soon!

Holding assets that combat inflation is a must. When the market crashes, it will eventually come back.

Chuck was clear:

“First of all, make sure you don’t have debt that’s piled up to your eyeballs… A little debt is OK, but none is better!

We’re speeding down the road to financial system collapse; you better have some Gold & Silver – or farm land somewhere where you can have a big garden, and live off the land. Remember, we were still primarily an agricultural society during the last Great Depression. Get out of Dodge so to speak…”

A recent note from subscriber “Gee Whiz” provides another reminder:

“I just received notice from my on-line broker that JP Morgan Chase Bank is calling in two of my CD’s. They WERE paying nearly 6%. Good while it lasted!!!! Here we go again.”

Fool me once, shame on you – fool me twice, shame on me!

In 2008 thousands of investors, who thought they were set for life, learned an expensive lesson. I was one of them.

The bulk of our life savings was invested in long-term 6% CDs. For our first few retirement years, I could predict our investment income and expenses for the upcoming year, and sleep well knowing we would have money left over.

I defined a comfortable retirement as “having enough income to enjoy your current lifestyle, without having to constantly worry about money.” Our comfort level dramatically changed in 2008 – when the Fed bailed out the banks, cutting interest rates to zero.

Rates stayed low until inflation skyrocketed; Powell had little choice but to raise them in 2022.

When they flooded the banks with cheap money, they no longer needed to borrow our money at reasonable rates. Literally overnight, all our CDs were called in by the banks. The 6% safe, predictable interest income was no longer available – not even close.

Corporate America quickly followed suit, borrowing cheap, not only calling in all their expensive debt, but also borrowing even more to pay extra dividends and buyback stock – at all-time highs.

Investors like Gee Whiz, who thought they had safe, reliable income, were left high and dry.

Learning our Lesson

As Powell began raising rates in 2022, trillions moved from the stock market back to safe, fixed-income investment – with interest rates higher than published inflation. That’s a reasonable expectation in a free market.

Gee Whiz’ note was a good reminder.

I checked current rates with my online broker for CDs and bonds:

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In today’s market, investors have two considerations in making their fixed-income investment decisions.

First and foremost. Is the Fed likely to bring inflation under control? The effects of easy money caused inflation to rise rapidly.

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Locking in 5%+ for several years may look appealing now – but – if the Fed keeps its promise and cuts rates too quickly, expect inflation to take off again. Current rates won’t be enough to offset the loss of buying power. 

Inflation risk is still very high.

Borrowers with long-term, cheap mortgages are doing well. Lending can be unforgiving. While your principal is returned safely, there is a risk of substantial loss of buying power.

Second consideration. As Gee Whiz outlined, his 6% CDs got called in by the bank. They’re not going to pay him 6% when they can get all the money they need from the Fed at a lower rate.

Most CDs are a one-way street for the banks.

Assume you bought the available 5-year (or 10-year), 5.25% CD. The bank agrees to pay 5.25% interest over the life of the CD, and fully redeem the principal at maturity. Should interest rates rise, the bank will happily pay you below market rates over the life of the CD.

Should interest rates go down, they’ll grab cheaper money from the Fed and call in your CD in a New York minute. Income you thought you could count on will disappear. Even a small rate cut will prompt banks to call in their debt, rolling it over at a lower rate.

If the Fed follows through with three rate cuts before year-end, a lot of folks will be left high and dry! Don’t be one of them….

Fool me twice – shame on me. 2008 lessons should NOT be forgotten. If you want to invest in top-quality bonds and FDIC-insured CDs, protect yourself – buy the right product.

I clicked on the 5-year, 5.25% link. Here’s a sample of some that are available:

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All the 5.25%, 2029 offerings are callable. They are 5-year CDs, unless the bank wants to get out of the deal because cheaper money becomes available, which the Fed says is likely to happen soon. The banks are unlikely to call them in if rates stay the same, or go higher.

I changed the search criteria to “new issues” and “non-callable.”

Here is what popped up:

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Five offerings were paying between 4.15% and 4.55%. Y-Chart tells us, “US Inflation Rate is at 3.48%, compared to 3.15% last month and 4.98% last year.” After taxes, these offerings are unlikely to cover current inflation.

Banks understand the risk of being locked into above-market rates and are not going to put themselves in that position.

Tying things together

Although Chairman Powell recently tempered his rate cut remarks, he is still signaling rate cuts; presumably between now and the end of the year; likely timed to the election. While things may change, they’re “itching” to cut rates.

When the cuts come, expect the market to sing, “Happy Days are here again,” – stocks should levitate even higher. The media will proclaim political victory – “Trump broke it, Biden fixed it.” Baloney! Both broke it, neither fixed it and we should expect higher inflation to follow – just like it did when Volcker cut rates too soon.

What if I’m wrong and the Fed holds rates steady?

It’s a win either way.

If the Fed holds rates steady it’s because irrefutable inflation numbers forced them to do so. Those holding short-term CDs and bonds won’t lose a dime; they’ll get the interest income they bargained for. They will mature quickly, minimizing inflation risk. You can either roll them over, or take advantage of other bargains which appear.

If they keep their promise and cut rates, expect inflation to skyrocket like the Volcker years. Holding cash and short-term, non-callable fixed-income products provide necessary liquidity and flexibility; again with less risk of losing substantial buying power to inflation.

Meanwhile, search for good, safe, inflation-beating dividend stocks; grab them now, and beat the crowd. Continue to bolster your defenses with gold and precious metals.

Most of all, don’t allow yourself to be duped into holding callable long-term CDs and bonds, thinking you can count on the income for the next several years. The banks will call them in as soon as interest rates come down.

Stock market bargains will appear. Much of corporate America is faced with paying off, or rolling over their cheap money debt at much higher interest rates – putting a drag on profits and cash flow; eventually affecting stock prices. Those with capital are earning some interest, while remaining liquid, are patiently waiting.

The Fed is giving investors fair warning…take heed!

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