Economy - The Finance Gourmet

Fed Raises Rates On Schedule

Written by Finance Gourmet Leave a Comment

The Fed has been telegraphing a September rate hike for quite some time now, and they followed though with another 0.25 increase today. They also anticipate a December rate hike still this year as well.

I mentioned last time, this increase marks the end of the “free” rate increases that really didn’t do much to affect the economy as the rates were laughably low so much so that getting any commercially available rate meant a lot of “padding” in the rate from the Fed rates. This rate increase pretty much ends that.

From here on out, ever quarter percent increase goes right into the economy as an increasing headwind. Between political uncertainty, a burgeoning trade war, and an economic expansion getting long in the tooth, it’s my opinion that the Federal Reserve is acting recklessly here pushing ahead with its rate increase timeline without any evidence of inflation, and no evidence of wage growth. In other words, the Fed is raising rates despite there being almost no inflation.

Traditionally, this does not work out for the American economy. Every time the Fed starts raising rate for reasons OTHER than fighting inflation, the result is a recession, often a big one. There is no reason to believe this time will be any different. If the Fed follows through with a December rate hike, things will start to wobble. Another one in the first quarter next year is probably pushing the donkey cart off the ledge. Unfortunately, we’re all still attached to the cart.

Someday, we’ll get around the “my Dad is stronger than your Dad,” version of being an inflation hawk and go back to managing for full employment with a 2 percent inflation target (meaning that’s were we want inflation to be) rather than forgetting all about employment and looking at any increase in inflation, no matter how small, or how far away from 2 percent, as a command to act.

Time to play defense, financially speaking.

Stock Market Is a Leading Indicator

Written by Finance Gourmet 1 Comment

Remember, the stock market is a leading indicator.

What Is a Leading Indicator?

This should probably get its own post, along with what is a lagging indicator, but that isn’t the point of this article, so let’s hit the highlights.

At the most basic level there are leading indicators and lagging indicators. A leading indicator is a measurement of what is to come. A lagging indicator is a measurement of what has already happened. At a metaphorical level, the display on your car that says you have 80% of the life of your oil left is a leading indicator. It is measuring the future. Note that it does NOT predict the future. It’s a best guess effort based on available data.

Contrast that with a lagging indicator, which measures something in the past. Metaphorically, this might be the sticker on the windshield that says the mileage of the last oil change, or your maintenance log.

In the world of economics, most lagging indicators are big data compiled by the government. You may have noticed that the June Labor Report comes out in July. That’s because you have to wait until the end of June for all the data to even exist. Then, you have to compile it into a report.

This doesn’t mean it has no value. On the contrary, it is a valuable piece of information about how the economy is doing.

A leading indicator is one that is a measurement of the future. Since the future is unknown, leading indicators are, by definition, not 100% accurate. The stock market is a leading indicator. It is a measure of the expected value of business and companies. So, while the stock market is moving up, it means that investors think the economy is still growing.

Are they right?

Based on the data right now, probably so, but what people forget is that things change. Not just the market being wrong, but the actual world around the market changing. Things like new tariffs change the status quo. Things like rising deficits, tax changes, and interest rate moves all change the status quo. So far, the investors in the stock market think things still look fine.

But, it won’t take much to change their minds. Everyone has one eye on the exits at this point. Whether or not they need to use them, and when, is anyone’s guess.

Interest Rates Rising Into the End of the Year

Written by Finance Gourmet 1 Comment

The Federal Reserve did not increase interest rates at its August 1st meeting. That was widely expected after the increase from the pervious meeting. Traditionally, the Fed tries not to raise rates in back to back meetings unless it feels like the economy is getting away from them. It allows the markets, and just as importantly, the economic data The Fed relies on to adjust to the previous hike before implementing another one.

Rate Hike In September

The Federal Reserve Bank did try and telegraph that it is currently looking at another rate hike for September. While the Fed did not raise rates, it did repeatedly say how “strong” the economy was, and how strong all the economic data was.

Check out our Digit App review.

And, for the first time in a long while, inflation is actually running near the Fed’s so-called target rate of 2%. While the Fed’s actions seem much more like 2 percent is a ceiling, rather than a target, recent data does suggest that inflation is running solidly near the two percent mark, so action is likely warranted.

Will Higher Rates Trigger the Recession?

Here is where things get tricky.

While the Federal Reserve cannot let inflation run wild, the fact is that the current expansion of the U.S. economy is coming up on “longest ever economic expansion” territory. Add to that the uncertainty of the mid-term elections in the United States, an wobbling international economy, and the thundering bull-style tariff implementations of the Trump administration, and there are a lot of winds buffeting the economy. Any one of them could knock it off course, and trigger the next recession.

Fate has a heck of sense of irony some times.

The Great Recession was arguably caused by the Federal Reserve raising rates to cool off an overheating economy powered by unrealistic real estate market reaction.

The big internet bubble pop recession was also triggered by a Fed raising rates into the “irrational exuberance” of a stock market where valuations no longer made any sense.

And, here we are, an economic expansion on its last legs with plenty of uncertainty all around and here comes the Fed with — you guessed it — a series of interest rate hikes.

Will history repeat itself?

Unfortunately, the answer is almost uncertainly yes. This next rate hike, and maybe even the next may be tolerated and absorbed into the enormity of the U.S. economy, but the Fed can’t seem to contemplate what it might be doing OTHER than fighting inflation. Other Feds preached the value of the soft-landing, but this Fed hasn’t even THOUGHT about the fact that its own actions might causes circumstances that require a soft landing.

As always, I am not a fan of market timing for long-term investors. I do encourage you to rebalance your portfolio if it has been longer than a year, and take a real hard look at your risk tolerance. In the next year or so, it is VERY likely that you will be looking at your portfolios’ expected LOSS rather than your portfolio’s expected gain.

The one thing we have going for us this time around is that no matter how much politicians have tried to ruin the progress made in securing better capitalization for banks during the Great Recession, the fact remains that most banks are in a much stronger position to help withstand the winds of a market crash this time around. That doesn’t mean it will be fun, it just won’t be a complete and total threat to our entire economic system.

In the next month I’ll be building up a series of articles on how to prepare for the imminent recession. Bailing out of the market for long-term investors is not one of the steps, but there are things you can do now. For starters, make sure the job you have is the one you want for the next few years. Finding a new job is always harder during a recession. If you’ve been thinking about moving the time is now. Just be sure that wherever you land will both be able to weather the storm, and will be willing to keep you during it. Now isn’t the time for risky, companies that might not make it.

Take a look at whether Credit Karma is a scam.

If you are thinking about buying a house, make sure you are not reaching for the payment. Your next raise is likely the last for a few years. Same thing with car payments, or any other payments for that matter.

If you don’t have an emergency fund, bump the priority for saving one up to the top. You just might need it soon.

Don’t panic, but be smart. Make conservative financial decisions for the next 12 months.

The Fed, Inflation, The Economy

Written by Finance Gourmet Leave a Comment

Here is where things start getting tricky.

For the better part of the last decade, the U.S. economy has been on an expansion back from the Great Recession. Various measures of recovery show the economy having regained its footing and moving forward. That’s all well and good, but it puts us in a rather odd spot today.

The Coming Recession

Economies contract and expand.

Period.

End of discussion.

There is no new normal, not this time, not the last time, not the time before that.

Every economy eventually runs out of steam and pulls back. Sometimes it’s a brutal collapse. Sometimes, it’s a more gentle, pull back, but there will be a recession.

On a strict time-basis, this economy’s expansion is now very old. The official start of this economic expansion is June 2009. That makes it the second-longest expansion in U.S. history. On the one hand, YEA!, on the other hand, it’s like your dog living to be 17-years old. It’s great, but you know there aren’t many years left. If this expansion makes it to mid-2019, it would be the longest in history.

Before you break out the champagne, you probably want to know that the longest expansion in U.S. history was the one that ended with the Internet bubble bursting and decimating the economy.

One of the very different things about this expansion is that it has been very slow, especially in those beginning years, unlike the race ahead “irrational exuberance” of the 1991-2001 expansion. One of the things that is very much alike about this expansion is that very generous Federal Reserve monetary policy has been one of the driving engines of this economy. And, thank goodness. Without it, a politics-before-country Congress would have surely locked the economy into another decade of recession, just so that they could blame each other for the pain.

What To Do About the Coming Recession

So, what do we do now?

Knowing history and the fact that another recession is coming, whether it happens next year, or the one after that, (or the one after that?), is all well and good, but what should someone do?

Believe it or not, trying to time the market by bailing out before a fall is NOT one of the things to do. Recall that most markets make quite a bit of up time even after they have officially run out of steam. Missing out on those end of growth rallies can be every bit as costly as the eventual downturn. Not to mention, knowing when to get back in is almost impossible.

Instead, it’s time to check your portfolio balance. A long-term investment portfolio should be balanced based upon your risk tolerance and long-term goals. Now is a good time to check and see if any one group of investments is over-weighted, or under-weighted and rebalance. Notice this is NOT the same thing as selling all of the stocks you thing are going to not do well during a recession. Instead, it’s about getting the balance right.

If you are contributing to an investment, whether it’s a 401k plan, a 529 plan, or an IRA, keep doing it. As always, dollar-cost averaging is your friend here. Your dollars now are buying fewer and fewer shares as prices rise. When the decline, the reverse will be true and you’ll be buying low.

Do NOT try and time the market, even though we can see the recession coming.

Review your plan, your goals, and your investment allocations.

Now IS the time to plan your landing. If you are in a long-term job and you feel good about where you are, stay there. Dig in and make yourself useful. If layoffs come, you want to be the last out the door.

If you’ve been thinking about making a move job-wise, the time is NOW. Right now, there are more jobs than there are workers. It’s time to find your five-year home. If the recession comes, finding a new job a thousand times harder than holding onto one. Wherever you are when things go bust is where you will be for the next few years.

Along those lines, now is the time to build your emergency savings funds. No matter how good things seem now, they can change quickly if the economy goes pop. A few months of savings to give your breathing space is invaluable if things go sideways.

Also, get your side hustle on. Build contacts and connections. If you need help later, you already want willing people on your side.

If you need to refinance your house, your car, or anything else, do it NOW.

Lenders get skittish when times are tough. Right now, they are all looking at growth. Get that lower interest rate or lower payment locked in now.

Finally, delay big purchases that you don’t need right now. A new car sounds great while times are roaring, but those payments can be an anchor around your neck in a few years. If you NEED a new car, get it soon. Buy used, and buy smart. Buy IN YOUR BUDGET. An 84-month loan is proof the car is NOT in your budget and that you are overbuying. Remember, you’ll lose 15% to 20% of the value the day you drive a new car off the lot. You won’t be able to sell it for years, especially if you have a really long term loan like that.

Starting a business?

That really depends on the type of business and the position you are in. Do you already have clients lined up? Can you get profitable fast… like NOW? If so, you can still make the jump. If it’s going to take you a year or two to build up, you might need to double that if the recession hits. Can you make it?

Be sure you aren’t getting in over your head and that you have plenty of outs. A low startup cost, low-overhead business is the way to go before the recession hits.

Above all, do what the banks do. Give yourself a stress test.

What are the odds that you would lose your job (did you lose it last time?)? What would happen to you if that happened? Is there anything you can do to help?

How about your loans and payments and needs? Where are you? Can you get your NEEDS now before time get tough? Re-prioritize your spending to needs first so that you have them if things get rougher.

Batten down the hatches, but don’t stop living your life. The recession might be short and light. Living in fear is not the answer. Making some smart moves now, is.