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• Commercial real estate values are plummeting in the aftermath of the pandemic’ shift to remote work
• Drastically reduced valuations are running headlong into the need to refinance at record high interest rates
• The collapse of the commercial real estate sector can send shock wave through the entire economy

The Collapse of Commercial Real Estate

The pandemic’s enduring impact on work dynamics has reshaped the office landscape, turning office towers into empty husks. The seismic shift towards remote or hybrid work has shattered the very foundations of commercial real estate. The fall of WeWork was an $18 billion canary in the coal mine, shedding dozens of leases in New York City alone. Experts fear an impending collapse of what was once a cornerstone of the American economy. The ramifications of which could resonate and upend the financial system.¹

Gary Shilling is a financial analyst best known for forecasting the 2008 housing crash. He said ” I think the biggest bubble right now is commercial real estate… I think it is a bubble which is beginning to crack.”²

The office sector is the most visible sign of the commercial real estate collapse. Vacancy rates are at nearly 1.5 times the amount of 2019. There may be as much a 1 billion square feet of unused office space by the end of the decade. Moody’s Analytics calls the office vacancy rate of 19.2% this quarter “perilously close” to the 19.3% record-high vacancy rate in 1986 and 1991.³

Schilling sees this as part of larger economic downturn. He also predicts the S&P could fall to its lowest level since the pandemic and that there is a recession on the horizon, if we aren’t already in one. “I’ve been of the opinion that stocks would decline about 30% to 40%, peak to trough…If you look at many of the major indicators that are reliably forerunners of recessions, when you look at that combination of things, it’s pretty hard to escape a recession.” ⁴

Commercial real estate’s recovery will take a long time. Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia Business School, said “It could easily take several years for the office market to stabilize…it’s a trainwreck in slow motion.”⁵

“Shark Tank” star Kevin O’Leary shares the belief that the commercial real estate sector is on the brink of collapse. He says the ripple effects will be detrimental to investors and small business owners.

O’Leary pointed to the typical commercial real estate business model. A property is bought with a loan from a bank, usually a regional one. The owners then only pay back the interest on the loan, refinancing when the balloon payment comes due. This model worked when interest rates were near zero.

But in the next four years, roughly two thirds of the commercial office real estate will need to be refinanced. Crashing vacancies and lower valuations are going to meet significantly higher interest rates. There will be losses all around as owners are unable to pay back the banks.

Delinquency rates for commercial mortgages, which include office, multifamily, and other commercial properties, have been on the rise for four consecutive quarters, according to the Mortgage Bankers Association (MBA).

This will cause serious issues for the regional banks that are invested in these buildings. The banking system has about $3 trillion of commercial real estate on their balance sheets. Roughly two thirds of that are held outside of the largest 25 banks.⁶

“These banks are going to fail because up to 40% of their portfolio is in commercial real estate,” O’Leary said. The rapid rise in interest rates is what sparked the banking crisis and caused the collapse of Silicon Valley Bank and First Republic. Both were overleveraged in commercial real estate. ⁷

This will spillover and hurt small businesses. Regional banks are the prime commercial real estate lenders. With commercial real estate draining their resources, they will be unable or unwilling to make small business loans.

Adding to the problems caused by low vacancies and high interest rates are new banking rules. The rules were put into effect after the collapse of SVB to stall the banking crisis. Previously, banks didn’t have to do anything as long as loan payments kept coming in. Now, banks are required to set aside reserves for expected losses from existing loans. This strains the liquidity of some banks. It potentially turns a slow-moving downturn into a value disaster that everybody has to put in their balance sheet at the same time. Suddenly 500 banks can become insolvent on paper.⁸

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There is no precise date of when the commercial real estate sector will collapse. Some believe it is happening as we speak. Real estate tycoon Jeff Greene, who bet against the mid-2000s housing bubble and netted about $800 million, said that we’re just in the initial stages of a commercial real estate crash, “I think we’re just in the first inning of this correction.”¹⁰

The impact of such a crash will reverberate throughout the economy and could ultimately drag down the value of stock-based retirement funds. Now is the time to protect those funds. A Gold IRA can safeguard the value of your portfolio from the imminent real estate collapse. Contact American Hartford Gold at 800-462-0071 to learn more today.

Notes:
1. https://fortune.com/2023/11/20/economist-who-predicted-2008-housing-crash-says-commercial-real-estate-bubble-will-burst/
2. https://fortune.com/2023/11/20/economist-who-predicted-2008-housing-crash-says-commercial-real-estate-bubble-will-burst/
3. https://fortune.com/2023/11/20/economist-who-predicted-2008-housing-crash-says-commercial-real-estate-bubble-will-burst/
4. https://fortune.com/2023/11/20/economist-who-predicted-2008-housing-crash-says-commercial-real-estate-bubble-will-burst/
5. https://fortune.com/2023/11/20/economist-who-predicted-2008-housing-crash-says-commercial-real-estate-bubble-will-burst/
6. https://insights.som.yale.edu/insights/is-commercial-real-estate-in-for-downturnor-crisis
7. https://www.gobankingrates.com/investing/real-estate/kevin-oleary-says-coming-real-estate-collapse-will-lead-to-chaos/
8. https://insights.som.yale.edu/insights/is-commercial-real-estate-in-for-downturnor-crisis
9. https://www.bloomberg.com/news/articles/2023-10-02/us-office-market-is-poised-for-a-crash-investors-say-in-survey?embedded-checkout=true
10. https://fortune.com/2023/11/20/economist-who-predicted-2008-housing-crash-says-commercial-real-estate-bubble-will-burst/

• China’s governmental and personal debt is reaching dangerous new heights
• The skyrocketing debt can undermine the Chinese economy and, in turn, the global economy
• A Gold IRA can protect your portfolio from the severe negative impact of China’s collapse

The Danger of China’s Debt

The Chinese economy is like a sinking ship threatening to take down the global economy in its wake. China is the world’s 2nd largest economy. But it is also one of the most indebted large economies in the world. Its state-owned banks are perched on mountains of bad debt. And that’s just on the surface. Underneath are trillions of dollars in murky off-balance sheet lending that threatens to destabilize China’s, and in turn, the world’s economy.

The debt undermining China’s economy extends to the personal and government level. Defaults by Chinese borrowers have surged to record heights, highlighting the depth of the country’s economic downturn. More than 8 million Chinese citizens have been blacklisted by the government for missing payments. That number is up from 5.7 million in 2020. Blacklisted people are blocked from a range of economic activities and become unable to make money in the face of restrictions. Much like a debtor’s prison, they are trapped and unable to ever repay their debts. The situation is worsened by staggering unemployment, especially among younger people, that hit a record 21 %.¹

The government’s response to growing personal debt was to simply stop reporting the data. They are slow to pass regulations to help the situation because they fear corruption may be revealed.

A larger issue is that government debt is skyrocketing along with personal debt. China’s economic growth is slowing. Soon local governments will start defaulting on interest and principal payments. Most commercial banks are state owned. They often make decisions based on government decree rather than economic pragmatism. This include making risky loans to state-controlled companies. Official bad loans at Chinese banks hit $540 billion in 2020.²

Economists cite a bigger concern that cities and provinces across the country have accumulated a massive amount of ‘hidden debt’ following years of unchecked borrowing and spending. Hidden debt in the Chinese economy refers to undisclosed or off-balance-sheet liabilities, often within local governments or state-owned enterprises, that are not fully transparent or accounted for in official reports or statements. The IMF and Wall Street banks estimate the total outstanding off-balance-sheet government debt is between $7 trillion and $11 trillion. A significant portion of that debt is at high risk of default.

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To get non-performing loans off their bank’s balance sheets, they are often bundled and sold to investors. The exact thing that the caused Global Financial Crisis of 2007-2008. That crisis was triggered in part by the bundling of subprime mortgages (high-risk loans given to borrowers with poor credit) into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs), which were then sold to investors.

A wave of local bank defaults could spread losses far and wide. It could quickly snowball into a nationwide financial crisis. Credit markets could seize up and banks could start failing across the country.

Moody’s Investors Service lowered its outlook on China’s credit rating to negative from stable. They pointed to the central government needing to bail out local government debt and the country’s slowing economic growth.

China has also experienced a yearlong property bust and dozens of real estate defaults. Local governments and banks are being put at the greatest risk of collapse since they funded the majority of such projects. Local governments, however, are still under pressure to stimulate growth and are still borrowing heavily. Their outstanding debt has doubled since 2018.

Impact on the US

Much of China’s record growth was fueled by debt. With the bill coming due, China’s economy is rapidly sinking, like a house built on sand. With our highly connected world economy, China’s demise can have severe consequences for the US and significantly impact stock-based retirement funds.

There are various ways China’s decline will impact the West. Firstly, reduced demand for goods and services from China directly affects US companies reliant on exports to the country, impacting their revenue streams. Additionally, intricate supply chains involving Chinese components may face disruptions, hampering production capabilities of US firms. Moreover, a slowdown in China’s economy might decrease the demand for commodities, adversely affecting US energy and commodities sectors.

Investor uncertainty fueled by these events can spike market volatility and incite investors to offload stocks, further impacting market stability. Financial institutions with Chinese investments might undergo stress, potentially affecting US financial sectors. Furthermore, the depreciation of the yuan could instigate currency market instability.

As of now, US pension funds, individuals and institutional investors are on the hook for $2.1 trillion in Chinese companies listed on American exchanges. Holders of China’s foreign currency debt are at risk of losing $2.4 trillion.⁴

China’s economic chaos will eventually wash up on our shores. Before it does, it could pay to investigate how to protect the value of your retirement funds. One proven method is shifting assets in a Gold IRA. Contact American Hartford Gold today at 800-462-0071 to learn more.

Notes:
1. https://www.ft.com/content/f144f763-873c-4b4d-99e7-5e71ae07316d
2. https://warontherocks.com/2021/12/could-chinas-massive-public-debt-torpedo-the-global-economy/
3.

4. https://warontherocks.com/2021/12/could-chinas-massive-public-debt-torpedo-the-global-economy/

• JP Morgan CEO Jamie Dimon says the US is entering withdrawals from its addiction to debt
• Rising interest rates and rising debt are likely to drive the country into recession
• Adding physical precious metals to a portfolio can hedge against the impact of runaway national and consumer debt

Runaway Debt Threatens Economy

America’s addiction to debt, both corporate and consumer, has economists and experts cautioning about the state of the economy in 2024. Wells Fargo warns the first half of 2024 is going to be “really, really sloppy” for stocks. Investors can expect high volatility with frequent price fluctuations. That might be good for speculating in short term trades, but spells trouble for those with long-term strategies and retirement fund holders.¹

Debt is surfacing as a primary source of concern. The US has acquired an enormous amount of debt since the pandemic. That debt includes around a trillion dollars in stimulus checks and $4 trillion doled out by the Federal Reserve to buy government bonds. That massive cash infusion led firms to rake in profits as stocks soared higher.

Record inflation soon followed the debt-fueled stimulus. The Fed had to apply the brakes to the easy money. Comparing debt to heroin, JPMorgan CEO Jamie Dimon said our debt addiction is putting the economy in a dangerous position as it faces ‘withdrawal’. Stocks struggled through 2022 and are plagued by extreme volatility throughout 2023.

Dimon continued to say that despite high interest rates meant to slow the economy, inflation is likely to stay elevated.

“We’re on this sugar high and I’m not saying this ends in a depression [but] I think there’s more inflationary forces out there,” Dimon warned. “There’s a higher chance that rates go higher, inflation doesn’t go away, and all these things cause more problems of some sort.”²

This is in part due to continued high levels of government spending. The US total debt hit a record $33 trillion for the first time this year. It’s closing in on $34 trillion as gridlocked lawmakers fight over a new budget.

Economists have been banging the drum about the dangers of the country’s runaway debt. But the problem is constantly kicked down the road. They have warned of a potential crisis over the coming decades. If the US doesn’t change course, it could potentially default on its debt in 20 years, the Penn Wharton Budget Model predicted. A default could end up having catastrophic consequences on the US economy.

While Dimon’s concerns focused on corporate and government debt, others are pointing in alarm at the dramatic spike in consumer debt. Non-mortgage interest payments by consumers are up more than 50% year-over-year, surpassing $1 trillion (annual rate) in the third quarter of 2023, per Bureau of Economic Analysis data. As shown below, the burgeoning “living beyond means” character of the consumer can most easily be seen when looking at consumers’ revolving credit, shown in the blue line; and the associated increase in serious credit card delinquencies, shown in the yellow line. Those delinquencies are particularly acute among younger borrowers.

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Debt-fueled Recession

The rising cost of capital is starting to take a toll on corporations. The interest owed on their debt is ballooning. Historically, there is an 18-month lag between a move in Treasury rates and companies’ effective interest rates.  Which means the problem is only going to grow more severe over time. Corporations will soon be facing major defaults and bankruptcies. And those that don’t will find themselves with very little capital to invest and retain workers.

Charles Schwab predicts ‘economic pain is likely’ for 2024. They say the chances of the Fed “sticking the landing” are quite low. Their analysts believe that a recession in the traditional sense, meaning one declared by the National Bureau of Economic Research, is more likely than not in 2024. The Fed may want to do something to relieve the recession but will be unable to for fears of reigniting inflation. ⁴

Until that formal declaration is made, Schwab has been using the term “rolling recessions” to describe the economy. They point to several key segments of the US economy, including housing, manufacturing, and many consumer-oriented segments of the economy have experienced recession-level weakness.

Schwab also points to a yield curve that has been inverted for more than a year. As shown in the chart below, except for an extremely brief/mild inversion in 1998, inversions over the past six decades have had a perfect track record of signaling recessions.

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Conclusion

The price for America’s addiction to cheap debt is starting to be paid. And it may cost this country its economic future. For those looking to protect their portfolios from the ravages of runaway debt, now is the time to investigate safe haven assets like precious metals. A Gold IRA from American Hartford Gold can safeguard your retirement funds. To learn more, contact us today at 800-462-0071.

Notes:

1. https://www.cnbc.com/2023/11/27/wells-fargo-market-warning-2024-will-get-really-sloppy-in-first-half.html
2. https://www.businessinsider.com/us-debt-jamie-dimon-economy-fed-inflation-interest-rates-2023-11
3. https://www.schwab.com/learn/story/us-outlook-one-thing-leads-to-another
4. https://www.schwab.com/learn/story/us-outlook-one-thing-leads-to-another
5. https://www.schwab.com/learn/story/us-outlook-one-thing-leads-to-another

• Global gold prices surged in the past month
• Continuing geopolitical risks, peaking bond yields, and a bear market can sustain gold’s momentum
• A Gold IRA can help grow personal wealth while protecting it

Gold Prices Surge

October proved to be a pivotal month for gold in the global precious metals market. It witnessed a dramatic 6.8% surge, culminating in a historic monthly close of US $1,997/oz. This marked the highest-ever finish for the London Bullion Market Association Precious Metals (LBMA PM) price. The LBMA PM is a benchmark price set for gold. The increase reversed an initial downturn in the month. The resurgence was primarily attributed to safe-haven demand fueled by escalating geopolitical tension.¹

October started with gold prices trailing below US$1,850/oz at the end of September. However, the geopolitical events in Israel on October 7 sparked a rally that catapulted gold prices above US$2,000/oz by October 27. Notably, this record-high closure resonated across major currencies, reflecting a global shift in prices.²

Global Gold Demand Rises

Globally, gold bars and coins had a strong first half of the year. Investment slowed down in the 3rd quarter, but quarter-over-quarter demand was still over the five-year average. While European demand dipped and US demand plateaued, other global regions compensated to lift overall demand.

China’s appetite for gold was the strongest since 2021. A depreciating currency and lack of alternative safe haven assets sent people to gold. The People’s Bank of China continued brisk buying as well. The country’s economic and political uncertainty boosted demand 16% year-over-year and a walloping 66% quarter-over-quarter. The outlook for future buying looks strong.³

India and Turkey also posted remarkably higher demand. India’s gold demand came from a growing economy and increased purchasing power. Paradoxically, demand in Turkey skyrocketed in response to collapsing economic conditions and political instability.

Central bank buying was also back in force. They are positioned to beat even last year’s record-breaking level of purchasing. Their gold acquisitions helped prices defy the headwinds of surging bond prices and a strong US dollar.

What’s Needed to Sustain This Rally

To sustain this bullish momentum, analysts believe one or more of the following need to occur. Geopolitical risks must continue or get worse. There must be a peak in bond yields and the US dollar. And there needs to be a bearish trend in equities coupled with a resurgence of recessionary fears.

Geopolitical Risks

As seen after the invasion of Ukraine, worsening political risk bolsters demand for physical gold. Economists think the current situation is worse than Ukraine because it adds to existing tensions instead of replacing them. Conflict dampens economic optimism, disrupts supply chains, and threatens to hike energy prices. All of which can slow growth and increase inflation, moving the global economy closer to stagflation. Under these conditions, investors turn to gold as a safe haven asset to preserve value.

Peak in Bond Yields

The recent spike in bond yields is wreaking havoc on the economy. But when bond yields have peaked, and inflation is decreasing, bonds become more attractive due to better returns. As a result, there’s a potential impact on how bonds and stocks relate to each other. During such times, investors might seek assets like gold as a hedge against market uncertainty. Thereby increasing demand and potentially lifting gold prices.

Bear Market and Recession Risks

Stocks have been on a continuing downward trend. After a solid start to the year, US stocks suffered declines in August, September, and October. They’ve given back nearly half of their gains. Six of ten industry sectors in the S&P 500 were in negative territory through the first nine months of the year. And the Nasdaq is down more than 10% from its mid-year peak during what is supposedly the seasonally strongest period. A greater than 20% drop would effectively enter a bear market. This could spur additional interest in gold from investors as they realize buying stock dips is no longer paying off. History shows recent bear markets have been good for gold returns. ⁴

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Looking Forward

The past two years have cemented gold’s ability to remain strong in a turbulent environment as demand for gold comes from various independent sources. This diverse global market helps defy perceived price drivers. Gold is set to break out further in current world conditions. The necessary events to maintain gold’s momentum – sustained geopolitical tensions, potential equity market downturns, and a peak in bond yields- are all taking shape as we speak. Now is an opportune time to secure your retirement funds with physical precious metals. A Gold IRA from American Hartford Gold can help grow your wealth while protecting it. Contact us today at 800-462-0071 to learn more.

Notes:
1. https://www.gold.org/goldhub/research/gold-market-commentary-october-2023?utm_medium=email&utm_source=newsletter&utm_campaign=GOLDHUB%3A+Your+Weekly+Gold+Market+Round-up%2C+November+10%2C+2023
2. https://www.gold.org/goldhub/research/gold-market-commentary-october-2023?utm_medium=email&utm_source=newsletter&utm_campaign=GOLDHUB%3A+Your+Weekly+Gold+Market+Round-up%2C+November+10%2C+2023
3. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q3-2023/investment
4. https://www.usbank.com/investing/financial-perspectives/market-news/is-a-market-correction-coming.html
5. https://www.gold.org/goldhub/research/gold-market-commentary-october-2023?utm_medium=email&utm_source=newsletter&utm_campaign=GOLDHUB%3A+Your+Weekly+Gold+Market+Round-up%2C+November+10%2C+2023

• Despite inflation dipping slightly in October, JP Morgan CEO Jamie Dimon urged caution on the economy
• Analysts see inflation and high interest rates lingering for years
• Long-term inflation is taking a heavy toll on ordinary Americans

Inflation Dips

Inflation dropped from a year-over-year rate of 3.7% to 3.2% in October, according to the latest Consumer Price Index report released by the US Bureau of Labor Statistics. While the first drop since June sparked hope on Wall Street, others weren’t so enthusiastic. JPMorgan Chase CEO Jamie Dimon said that inflation might not improve as quickly as anticipated despite recent indicators. Inflation, and its consequences, are going to be with us for some time.¹

Dimon Weighs In

Dimon said people are overreacting to short term numbers and “they should stop doing that.” He said, “I’m afraid inflation might not go away that quickly.” He continued that the Federal Reserve is right to pause hikes for now but “they might have to do a little bit more.” Dimon’s remarks echoed those by Citadel founder Ken Griffin who said, “the Fed needs to have the message that they will put the inflation genie back in the bottle.”²

Dimon has been saying for over a year that despite being in good shape now, US consumers and businesses are facing major headwinds. The pushback includes the reduction of the money supply and geopolitical tensions. He said in September that JPMorgan is telling clients to be prepared for 7% interest rates. And that the Fed may have to further hike its benchmark rate to combat inflation.

Inflation Still Taking a Toll

Overall headline inflation was slightly down, but the effects weren’t the same across the board. Gas prices dropped. But prices of groceries, restaurant meals, clothing, and housing increased. Housing was up 6.7% since this time last year.

The markets are cheering the headline numbers. But as investors seem to be anticipating rate cuts from the Federal Reserve, the pressures of the paycheck-to-paycheck economy remain firmly in place.

“The challenge with inflation is it’s cumulative. So, if inflation goes up 8% one year, 10% the next year, and the rate of inflation growth slows down to 3%, big deal. But the price of a home is 30% higher than it was in 2020. The price of eggs is almost double what it was in 2020, and prices don’t come down,” said Mitch Roschelle, Madison Ventures Plus managing director.³

Recent data shows inflation’s lingering impact. 80% of consumers are exhausting their savings to pay bills. Middle-income consumers have seen their readily available savings drop 18% in the last year when factoring in inflation. And 12% spent more than they’ve earned in the last six months.⁴

In addition, the core inflation rate is telling another story. The core rate, which excludes volatile food and energy prices, is expected to rise 4.1% on an annual basis. The team at Bank of America is forecasting a slightly higher read.

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The majority of Americans share one at least one belief with the billionaire chief of JPMorgan – they both think inflation will remain high through 2025. They anticipate further belt tightening down the road.

Fed Offers No Guarantees

Federal Reserve Chair Jerome Powell struck a cautious note about the central bank’s fight against inflation. He warned that it is premature to declare victory and that additional rate hikes may be warranted.

“We know that ongoing progress toward our 2% goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so,” he said.⁶

Powell’s comments came after the Fed voted to hold interest rates steady at a range of 5.25% to 5.5%, the highest level in 22 years. Policymakers have raised interest rates sharply over the past year, approving 11 rate increases in the hopes of crushing inflation and cooling the economy. In the span of just 16 months, interest rates surged from near zero at the fastest pace of tightening since the 1980s.

Officials are now trying to figure out whether they have tightened monetary policy enough, or whether they need to raise rates higher to tame stubborn inflation. They are scheduled to meet one more time in December. Odds are there won’t be another increase. But if Bank of America’s core rate prediction is true, a hike isn’t off the table.

Despite some investors’ optimism about the economic outlook, the road ahead remains uncertain. While there has been a slight drop in inflation, signs of continued economic strain linger, raising concerns about safeguarding one’s nest egg from inflationary pressures. In times of such uncertainty, diversification into assets that historically weather economic storms becomes crucial. A Gold IRA from American Hartford Gold provides a reliable hedge against inflation, offering stability and security in an ever-changing financial landscape. Learn more about protecting your savings by calling us today at 800-462-0071.

Notes:
1. https://www.cnbc.com/2023/11/14/long-way-to-go-before-inflation-is-under-control-expert-says.html
2. https://www.bloomberg.com/news/articles/2023-11-14/jpmorgan-s-dimon-says-inflation-might-not-go-away-that-quickly
3. https://www.foxbusiness.com/economy/inflation-easing-consumer-prices-remain-high
4. https://www.pymnts.com/economy/2023/jpmorgan-ceo-inflation-battle-isnt-over-yet/
5. https://www.foxbusiness.com/economy/inflation-easing-consumer-prices-remain-high
6. https://www.foxbusiness.com/economy/inflation-easing-consumer-prices-remain-high

• Half of Americans believe their finances are worse off since Biden took office
• The negative outlook is primarily due to high inflation, interests rates, and consumer debt
• Surveys show the economy will be the deciding factor in the 2024 election

Financial Situation Worse After Biden Elected

Since the 2020 election, the financial outlook for many Americans has taken a turn for the worse. According to a recent Bankrate survey, a staggering 50% of Americans now believe their financial situations have deteriorated over the past few years. Proving to be a significant blow to President Biden and his “Bidenomics” campaign theme, this downturn in economic confidence is shaping the direction this country takes in 2024.

The survey revealed that approximately 45% of respondents place the blame on President Biden and his economic policies. While 35% attribute their worsening financial situations to Congress. Another 27% hold the Federal Reserve responsible for their economic woes.¹

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Surprisingly, only a minority of those who reported an improvement in their financial situations credited President Biden for this positive change. In fact, more than half of those who witnessed improvements believed that neither President Biden, Congress, nor the Federal Reserve had played a significant role in helping them.

Unrelenting Inflation

The White House has been keen to emphasize the steady decline in inflation as one of the successes of the current administration, yet many families have yet to experience any real relief. Economists argue that this decline is primarily the result of Federal Reserve interest rate hikes rather than the President’s economic agenda. Inflation has decreased from its peak of 9.1% to 3.7% but it is still far from the Fed’s 2% target.³

The Consumer Price Index (CPI) remains significantly higher than the pre-pandemic rates. The costs of essentials like food, gasoline, and rent continue to be far more expensive than they were just a year ago. As a result, Americans are now forced to allocate approximately $700 more per month compared to two years ago, according to data from Moody’s Analytics.

Political Impact

These ongoing economic challenges are expected to have a considerable impact on the 2024 election. An astounding 89% of respondents revealed that the state of the economy will be a major factor influencing their vote. A majority of respondents, 69%, stated that their cost of living has worsened since November 2020. Forty two percent reported that their short-term savings have taken a hit. Furthermore, 34% expressed concerns about their long-term investments, including retirement savings.⁴

Unsurprisingly, the perception of a declining economy varies significantly among political affiliations. Generally, Republicans and independents are more likely to view the economy as having worsened compared to Democrats. Nonetheless, most of all Americans seem to attribute their financial woes to President Biden, Congress, and the Federal Reserve, with President Biden being the most frequently cited reason.

Interestingly, the sentiment that personal financial situations are worsening appears to be more pronounced among older generations, particularly Generation X and Baby Boomers. These groups share concerns about the state of their retirement savings, cost of living, and overall financial well-being as they approach retirement age and grapple with the harsh reality of their financial situations.

Causes of Pessimism

Several economic trends appear to be shaping this negative financial outlook:

Interest Rates: Experts anticipate that interest rates will remain high throughout 2024, with no indications of cuts on the horizon. While these rates were increased to combat inflation, they have resulted in Americans paying more for car loans, mortgages, and home equity loans.

Inflation: Although inflation has decreased from its peak in 2022, it currently stands at 3.7%. Economists suggest that it may not hit the Fed’s 2% target until 2025 or 2026. High inflation leads to increased expenses across the board. It especially impacts the middle class and lower-income Americans who live paycheck to paycheck.

Consumer Debt: A significant number of Americans are grappling with substantial debt and minimal savings. Pandemic stimulus funds have been exhausted. Many individuals are now faced with repaying student loans and dealing with skyrocketing credit card debt. Studies indicate that 35% of Americans are carrying debt from month to month. The stress of which is taking a toll on their mental health.

Credit card debt has reached record highs, as have delinquencies. This growing reliance on credit cards raises concerns among economists, given astronomically high interest rates. The average annual percentage rate (APR) recently hit a new high of 20.72%, making it more expensive for consumers to repay their debt over time. The previous record was 19% back in 1991. The middle class is carrying a greater debt load at a greater cost as they turn to credit cards to cover everyday expenses.⁵

The New York Federal Reserve said credit card debt hit a record high at the end of September. It surged to $1.08 trillion from July to September, an increase of $48 billion. That is the highest level of credit card debt since 2003 and the 8th consecutive annual increase.

Furthermore, the amount of credit card debt contributed to a record total household debt of $17.29 billion. That is an increase of $2.9 trillion compared to the end of 2019.⁶

Delinquencies are also increasing. Borrowers are struggling with credit card, student, and auto loan payments. The number of newly delinquent individuals has surpassed the pre-pandemic level.

Future Outlook

Economic indicators suggest a 46% chance of entering a recession by September 2024, painting a bleak outlook for many. This general pessimism surrounding the economy has led to a collective feeling of hopelessness about the future.⁷

While economists and policymakers continue to grapple with high interest rates, inflation, and mounting consumer debt, individuals are left navigating an uncertain economic landscape. The importance of securing one’s savings and financial well-being cannot be overstated, especially in these turbulent times. Physical precious metals like gold and silver are seen as hedges against the potential repercussions of government economic policies. Notably, a Gold IRA offers an avenue for individuals to preserve and grow their wealth. To learn more about how a Gold IRA can serve as a shield for your savings, we encourage you to reach out to us at 800-462-0071.

Notes:

1. https://www.foxbusiness.com/economy/half-americans-believe-they-are-worse-biden-blow-bidenomics
2. https://www.msn.com/en-us/money/personalfinance/survey-1-in-2-americans-say-their-overall-financial-situation-is-worse-now-than-it-was-before-biden-was-elected/ar-AA1jznrj
3. https://www.foxbusiness.com/economy/half-americans-believe-they-are-worse-biden-blow-bidenomics
4. https://www.msn.com/en-us/money/personalfinance/survey-1-in-2-americans-say-their-overall-financial-situation-is-worse-now-than-it-was-before-biden-was-elected/ar-AA1jznrj
5. https://www.foxbusiness.com/economy/credit-card-debt-hits-new-record-delinquencies-also-rise
6. https://www.foxbusiness.com/economy/credit-card-debt-hits-new-record-delinquencies-also-rise
7. https://www.msn.com/en-us/money/personalfinance/survey-1-in-2-americans-say-their-overall-financial-situation-is-worse-now-than-it-was-before-biden-was-elected/ar-AA1jznrj

• The Federal Reserve kept interest rates unchanged after their latest meeting
• Some analysts think economic indicators show Fed rate hikes aren’t working
• A severe recession may be necessary to break the hold of inflation on the economy

Fed Pauses Rate Hikes

After its most recent meeting, the Federal Reserve choose not to raise interest rates again. Instead, they are taking a wait and see approach to observe the impact of previous rate hikes. While some may be happy to see a pause, others see a potential mistake.

¹

The facts on the ground show that the Fed’s policy isn’t working as anticipated. The economy is still too strong, and inflation is too high, even with 5.25 percentage points of rate hikes since March 2022. While the current 3.4% PCE rate (a measure of inflation that reflects changes in the prices of goods and services purchased by households for consumption) is better than the previous 7%, it is still far from 2%.²

In addition, the labor market is too resilient to reach the 2% inflation objective. The ratio of unfilled jobs to unemployed workers is well above the 1-to-1 ratio that Fed Chair Powell considers necessary.

Despite wages going up, overall inflation has outpaced wage growth. Consumers have been making up the difference with excess savings boosted by Covid relief. But those savings are running out. Consumers are cutting back and sinking into debt to stay above water. To make matters worse, spiking oil prices are eroding purchasing power and putting the brakes on the American economy.

Another indicator of the Fed’s policy not working is that the GDP is growing too fast. The third quarter of 2023 far exceeded the 20-year annual average for growth. Economists attribute the GDP growth to robust consumer spending and $1 trillion of government spending on infrastructure, green energy, and the semiconductor supply chain. Also, the sudden AI boom caused an S&P 500 rally that largely reversed the Fed’s tightening of financial conditions. Even if growth slows in the fourth quarter, it may not be enough to push inflation lower.³

These factors are leading analysts to think that the neutral rate Powell is aiming for may be higher than planned. The “neutral rate” refers to the level at which the interest rate neither stimulates nor restricts economic growth. It is often considered the ideal or balanced interest rate for the economy.

No Soft Landing

Economists have compared the Fed’s quest for a soft landing to a unicorn hunt. At this time, the Fed hopes that holding rates steady will result in 2% inflation without a recession. Historically, soft landings are almost as rare as unicorns. Only once, in 1994, has the Fed accomplished a soft landing. But the inflation it tamed was hardly comparable to the recent record heights.

The Fed is playing a dangerous balancing act. If rates aren’t high enough to push inflation down to 2%, inflation expectations could rise. When people expect prices to rise, they might buy things sooner, thinking it will cost more later. This can lead to higher demand for products and services, which, in turn, can increase prices. All the accomplishments of previous rate hikes could be undone. The Fed could be forced to return with more drastic rate hikes.

Unfortunately, it may take a severe recession to reach the 2% goal. In the 1980s, then Fed Chair Paul Volcker had to inflict a recession on the US to break the rampant inflation of the 1970s. Powell is amply aware of the history. Nonetheless, he may be repeating it.

Future Hikes

Fed Chair Powell is open to more rate hikes in the future. The Federal Reserve will keep the possibility open until all signs point to a steady path to 2% inflation. The problem is that the rate of inflation is growing chaotic. It slows, then speeds up and then slows again. When the stock market believes the Federal Reserve is done increasing interest rates, financial conditions get easier. This fuels more growth, and more inflation, so the Fed must consider another rate hike. Powell outright dismissed any talk of rate cuts soon.

It’s like the Fed is driving a car on a winding road with unpredictable weather. The Federal Reserve needs to adjust its speed and direction as the road conditions change, even though they don’t control the weather. They have an idea where they want to go, they just don’t have a clear vision to get there. And if they aren’t careful, they can steer right off a cliff.

According to some analysts, we are facing more than the risk of recession, we are facing the NEED for recession. Otherwise, the economy will be trapped in this endless up and down inflationary cycle. Whether its inflation or recession, things are going to need to get worse before they get better. If you are looking to protect your savings, now is the time to investigate a Gold IRA from American Hartford Gold. Contact us today at 800-462-0071 to learn more.

Notes:
1. https://www.fool.com/the-ascent/federal-reserve-interest-rates/
2. https://seekingalpha.com/article/4644859-market-wont-be-pleased-fed-message-this-week
3. https://www.investors.com/news/economy/why-no-fed-news-is-bad-news-for-the-sp-500/

• Massive 3rd quarter GDP growth caught economists off guard
• The growth occurred despite the Fed’s rate hikes meant to tame inflation
• Prominent Wall Street voices warn to prepare for an economic downturn

Warnings Amid Unexpected Growth

The economic landscape continues to surprise those in charge of mapping it out. In the third quarter, our Gross Domestic Product (GDP) showed surprising growth. It soared at an annual rate of over 5%. Such robust economic expansion contradicts expectations. It’s squashing the Federal Reserve’s desire for the economic slowdown needed combat rising inflation. Despite this sudden economic surge, Wall Street is weighing in with a pessimistic outlook on the future.¹

²

Let’s unpack the surprising economic growth in the third quarter. The GDP figures far surpassed the predictions, raising eyebrows across the board. As far the Fed’s policy goals are concerned, this should not have happened.

Economists point to the government’s fiscal policy as the reason. The budget deficit doubled in the past year. It reached an astounding $2 trillion, according to the Congressional Budget Office. This sizable deficit, more than 7% of our GDP, contributed to the boost in economic growth. Such deficits are typically considered a result irresponsible fiscal management unless we are facing an extraordinary situation like a war.

About $500 billion of the $1 trillion added to the deficit served as an indirect stimulus. The other half a trillion dollars didn’t add to the economy. Instead, it was put toward things like bailing out collapsing banks.

Another factor boosting the GDP was an unanticipated easing the government’s monetary policy. The Treasury took actions that wound up countering the effects of the Fed’s interest rate hikes. The Treasury Department halted some debt issuances and borrowed from various savings accounts. This happened because the Fed reduced its bond purchases. The Treasury responded by issuing fewer bonds. As a result, it made more money available to people.

Now that the effects of the deficit and the shift in monetary policy have been felt, this boost in GDP unlikely to be repeated. A return to fiscal tightening is pointing towards a shrinking economy and a recession.

The coming downturn has the attention of some of the most powerful voices on Wall Street.

Wall Street Weighs In

Amid this economic chaos, several renowned figures in the financial world are offering their perspectives.

Jami Dimon is the CEO of JPMorgan Chase. As uncertainty grows, he warned about the dangers of locking in an outlook about the economy. He pointed to the poor track record of central bank predictions.

“I want to point out the central banks 18 months ago were 100% dead wrong,” Dimon said. “I would be quite cautious about what might happen next year.” He is referring to when the Fed insisted that the inflation surge was just transitory. Then it shot up to a 40-year high of 9.1%. Fed officials also projected their key interest rate rising to just 2.8% by the end of 2023. The rate is now almost double that at 5.25%.³

Dimon doubted “this omnipotent feeling that central banks and governments can manage through all this stuff.” He then warned that the Fed funds rate could eclipse 7%.⁴

Dimon recommends investors be prepared for fresh challenges in the new year. “This may be the most dangerous time the world has seen in decades,” he concluded.⁵

Ray Dalio is a legendary investor and founder of the world’s largest hedge fund, Bridgewater Associates. He is pessimistic about the global economy. He identifies geopolitical conflicts and the historic levels of government debt as key destabilizing factors.

David Solomon is the CEO of Goldman Sachs. He gauged the strength of the economy through mergers and acquisitions (M&A). He points out that the economic stimulus and low interest rates during the post-pandemic period led to a boom in M&A activities. However, capital has now become scarce, leading to a significant reduction in M&A deals. This is leaving Solomon uncertain about the current economic climate.

Larry Fink is the CEO of Blackrock. He predicted interest rates will rise further. The increase will ultimately be due to heightened conflicts around the world. Not only will interest rates rise, Fink says that unless the wars are resolved, it will lead to a “contraction in our economies.”⁶

Steve Schwarzman is the CEO of the Blackstone Group. He believes that it will take time to move past the pain of inflation and higher interest rates. He pointed out that recession struck after the Arab-Israel war in 1973. He said, ” We’re coming off the top and we’re starting to go down, so that would say to me that next year perhaps is not so wonderful.” Schwarzman pointed to the fragile commercial real estate market that is now facing up to 30% vacancy rates. “That’s going to have a very bad ending.”⁷

Conclusion

With a GDP bump soon to be in the rearview mirror, Wall Street experts are offering pessimistic takes on the financial future. As the economic landscape undergoes rapid shifts and uncertainties, it’s crucial to diversify your portfolio and explore options that can withstand the economic turbulence. One such option is to consider a Gold IRA from American Hartford Gold.

With a Gold IRA, you can secure your assets with physical gold, a proven hedge against uncertainty. In times of rising inflation and economic unpredictability, physical assets like gold can provide a valuable safety net. Contact us today at 800-462-0071 to learn more.

Notes:
1. https://www.wsj.com/articles/get-ready-for-a-short-lived-economic-boom-da221867
2. https://www.bloomberg.com/news/articles/2023-09-06/us-economic-data-strength-has-fed-set-to-double-growth-outlook?embedded-checkout=true#xj4y7vzkg
3. https://www.cnbc.com/2023/10/24/jamie-dimon-rips-central-banks-for-being-100percent-dead-wrong-on-economic-forecasts.html
4. https://www.cnbc.com/2023/10/24/jamie-dimon-rips-central-banks-for-being-100percent-dead-wrong-on-economic-forecasts.html
5. https://www.cnbc.com/2023/10/24/jamie-dimon-rips-central-banks-for-being-100percent-dead-wrong-on-economic-forecasts.html
6. https://www.businessinsider.com/dalio-dimon-fink-schwarzman-solomon-economic-outlook-inflation-recession-war-2023-10
7. https://www.businessinsider.com/dalio-dimon-fink-schwarzman-solomon-economic-outlook-inflation-recession-war-2023-10

• The housing market is frozen in ‘gridlock’: not getting worse but not getting better
• High interest rates are dampening sales, keeping prices elevated, limiting supply, and increasing foreclosures
• With home equity becoming inaccessible, people are turning to physical precious metals for long-term stores of wealth

The American Dream of Homeownership Put on Hold

The American Dream of home ownership continues to be deferred. A once reliable long-term store of wealth is escaping the grasp of most Americans. As mortgage rates race to 8%, mortgage demand has plummeted to its lowest point in three decades. Housing affordability is now worse than it was during the peak of the 2008 housing bubble. And real estate experts fear the only thing that can fix the situation stands in direct opposition to the policy that created the problem in the first place.¹

Overall Housing Market Decline

The slide in the housing market is primarily due to the increase in interest rates. The average rate for a 30-year loan has been on the rise six consecutive weeks. It is now reaching 7.7%. This figure is the highest it’s been since November 2000. In comparison, the average rate stood at 3.9% before the pandemic hit. The Fed has hinted at yet another rate hike this year. There is an expectation that rates will remain high for an extended period of time.²

In response to the Fed’s aggressive interest rate hikes, there has been a dramatic shift in application volumes. The Mortgage Bankers Association’s index of mortgage applications fell a staggering 6.9% in the last week. They dropped to levels last seen in 1995. Application volume has shrunk by 21% compared to the same time the previous year. The demand for refinancing is no exception. It has fallen by 10% over the past week, down 12% from the same period last year.³

Affordability and Inventory

⁴

High mortgage rates are having a direct impact on housing affordability and inventory. Homeowners are hesitant to sell their properties. Those who locked in low mortgage rates now find themselves unwilling to sell while rates hover near two-decade highs. Consequently, there is a shortage of available homes for potential buyers, resulting in a surplus of demand.

The shortage of homes on the market has led to a plummet in sales. In 2021, mortgage rates had dropped to the mid-2% range, leading to a surge in home sales. However, after the spike in mortgage rates, sales have significantly decreased. This year is on pace for a 17% decline from 2022.⁵

Real estate experts suggest that the housing market will not rebound until more homes are available. Available home supply remains down by a staggering 45.1% compared to pre-pandemic levels. This scenario is unlikely to change until mortgage rates fall to at least the mid-5% range, according to experts.⁶

Homebuilders are unable to construct new homes quickly enough to alleviate the housing shortage, which has led to a gridlock in the housing market. The National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, has fallen for the third straight month, dropping by 5 points to 40. This is the lowest reading since January 2023, and any reading below 50 is considered negative.⁷

Home builders are doing everything in their power to attract buyers, including cutting prices. In October, 32% of builders reported cutting home prices to encourage sales. Typically, a near tripling of mortgage rates over such a short period would result in lower home prices as buyers can only afford so much. However, the scarcity of supply is keeping prices inflated. Homeowners are only selling if there is a life event necessitating a move, such as a death, divorce, or relocation for work.

The Fed’s Housing Market Trap

Experts in the real estate market have pointed out the paradox that the Federal Reserve and the housing market find themselves in. Although high interest rates were intended to combat inflation, they are preventing builders from increasing the housing supply. Thereby, reducing demand pressure and lowering prices. In the realm of housing, lowering rates would actually reduce inflation. Robert Dietz, Chief Economist of the National Association of Home Builders, stated, “Boosting housing production would help reduce the shelter inflation component that was responsible for more than half of the overall Consumer Price Index increase in September and aid the Fed’s mission to bring inflation back down to 2%. However, uncertainty regarding monetary policy is contributing to affordability challenges in the market.”⁸

Devyn Bachman, Senior Vice President of Research at John Burns Research and Consulting, stressed, “In order for the market to recover, we need more inventory. The only way we’re going to receive that inventory is if or when mortgage rates retreat.”⁹

Other Concerns

Adding to these concerns is the increase in home foreclosures across the nation. They have surged by 34% compared to the same time last year, according to real estate data provider ATTOM. Their data shows that foreclosure filings have spiked by 28% in the third quarter. Analysts fear the problem may worsen with the resumption of student loan payments.¹⁰

A poll conducted by Pulsenomics revealed that most economists believe that homeownership rates will be affected for at least a year by the resumption of student loan payments. In total, borrowers will resume paying approximately $10 billion a month, posing a significant challenge to the stability of the housing market.

Conclusion

As the deputy chief economist at First American Financial Corp said, “This market is anything but normal.”¹¹ The housing market is facing a challenging gridlock, with the root of the issue stemming from interest rate hikes aimed at curbing inflation. While homeowners watch their home equity grow, it remains locked in without an opportunity to access it without losses due to high mortgage rates. In such times of uncertainty, people should consider seeking additional pillars of support for their retirement. One solution that can weather the storm of interest rate hikes is a Gold IRA. Offering safety, stability, and long-term preservation of portfolio value, it stands as a reliable alternative to personal real estate in an unpredictable housing market. Contact us today at 800-461-0071 to learn more.

Notes:
1. https://www.foxbusiness.com/economy/mortgage-demand-plummets-new-three-decade-low-rates-race
2. https://www.foxbusiness.com/economy/mortgage-demand-plummets-new-three-decade-low-rates-race
3. https://www.foxbusiness.com/economy/mortgage-demand-plummets-new-three-decade-low-rates-race
4. https://unusualwhales.com/news/housing-affordability-in-the-us-is-near-all-time-lows-per-goldman-sachs
5. https://www.realtor.com/news/trends/the-housing-market-is-in-gridlock-and-why-its-not-getting-better-or-worse/#:~:text=%E2%80%9CThe%20housing%20market%20is%20in,better%20than%20the%20resale%20market.
6. https://www.foxbusiness.com/economy/mortgage-demand-plummets-new-three-decade-low-rates-race
7. https://www.foxbusiness.com/economy/homebuilder-sentiment-continues-downward-spiral-spike-mortgage-rates
8. https://www.foxbusiness.com/economy/homebuilder-sentiment-continues-downward-spiral-spike-mortgage-rates
9. https://www.realtor.com/news/trends/the-housing-market-is-in-gridlock-and-why-its-not-getting-better-or-worse/#:~:text=%E2%80%9CThe%20housing%20market%20is%20in,better%20than%20the%20resale%20market.
10. https://www.foxbusiness.com/economy/home-foreclosures-upswing-nationwide
11. https://www.realtor.com/news/trends/the-housing-market-is-in-gridlock-and-why-its-not-getting-better-or-worse/#:~:text=%E2%80%9CThe%20housing%20market%20is%20in,better%20than%20the%20resale%20market.

• War, oil shocks, and stubborn inflation has some analysts predicting a return to ’70s-style stagflation
• High interest rates are stagnating the economy along with prolonged inflation expectations
• Market makers advise minimizing market risk and exposure, in the way physical precious metals can

Analysts Warn of Stagflation Threat

With trouble in the Middle East, spiking oil prices, and skyrocketing inflation, it’s like we’re in a 1970’s flashback. But instead of a return to disco, the US is facing a return to stagflation – the dreaded economic condition characterized by stagnant economic growth, high unemployment, and simultaneously high inflation.

Stagflation is when the economy gets caught in a trap. Imagine you have two levers: one for taming inflation, and the other for boosting economic growth. Pulling one lever, say, to control inflation, often ends up pushing the other in the wrong direction, potentially making the recession worse while trying to combat rising prices, and vice versa. It’s like trying to fix one thing and accidentally breaking another. The only solution that seems to work is essentially breaking the whole machine and starting from scratch.

Warning from JPMorgan Chase

Jamie Dimon is the CEO of JPMorgan Chase. He sees potential stagflation on the horizon. His forecast is tied into his belief that interest rates may break 7%. Dimon’s worries come from the impact that higher interest rates have on debt repayment. Higher interest rates can make repaying debt more expensive. This adds financial stress on individuals and businesses. When interest rates rise significantly, the risk and number of loan defaults also increases. Dimon calculates a 7% interest rate could be devastating to an economy.¹

Deutsche Bank Prediction

Deutsche Bank also fears a return to ’70’- style stagflation. Deutsche Bank sees current parallels with that decade – unrest in the Middle East, anemic growth, stubborn inflation, and labor unrest.

²

Between 1973 and 1983, GDP rates plummeted. Inflation averaged 11.3% and there was an
oil price shock caused by war. Today, the Russia-Ukraine war lifted oil prices from around $80 per barrel at the start of 2022 to over $139 in just three months. Deutsch Bank analysts said, “These supply shocks caused serious difficulties for the economy, both in the 1970s and today, since they push up inflation and dampen growth at the same time.”³

The number of striking workers is also on the rise in a repeat of the 1970s. Actors, screenwriters, autoworkers, journalists, and more have all taken steps to push for higher wages to compensate for inflation. Fifty years ago, US workers struck to raise their wages by as much as 9% annually to compensate for rising prices. But some economists believe the persistent wage increases helped exacerbate inflation and fear current worker strikes could do the same.

Deutsche Bank analysts are concerned unchecked inflation expectations will lead to recession. Inflation expectations refer to people’s anticipations about the future rate of inflation. These expectations influence economic decisions such as spending, saving, and investing. If expectations aren’t contained, spending and investing could dry up. Recession would result.

Their stagflation warning was based on several other reasons. One is that is inflation is still above target in every G7 nation. US inflation started rising again in August. It grew at a faster clip than the 3.2% price growth recorded in July.

Second, a new price shock could easily set inflation expectations soaring. An oil crisis, grain failure, or even the predicted El Nino weather event could send the global economy into disarray.

Added to that is the sluggish rate of economic growth. Tighter financial conditions have begun to take a toll on the economy, and there’s little room for that to change. Increasing interest rates and higher borrowing costs are further dragging growth down. However, there is a difference between now and then. The US debt-to-GDP ratio has soared well-above what it was in the 1970s. The amount of fiscal stimulus that can be used to stoke economic growth has been severely limited. And that stimulus is even further restricted by sticky inflation.

Deutsche Bank concludes that the last stretch of the Fed’s inflation war is likely to be the hardest. As inflation inches closer to its target, markets are putting more pressure on the Fed to slash interest rates. Higher borrowing costs weigh heavily on asset prices. Factoring in the lag between hikes and effects, there is a risk the Fed could plunge the economy into recession. But if the Fed stops too soon, inflation will persist. And the country will find itself back in the middle of a stagflation crisis.

Conclusion

Economic indicators are pointing to a repeat of the stagflation that plagued the 1970s. Pointing out the downward trajectory of the economy, Dimon said it would be a “significant misjudgment” to assume prolonged prosperity for the US economy.⁴ His comments underscore his belief that preparation is key when navigating uncertain economic waters. People should be working to avoid and minimize risk. One of the best ways to mitigate risk is with physical precious metals in a Gold IRA. Learn more about how you can protect the value of your portfolio from the dangers of stagflation by calling us today at 800-462-0071.

Notes:
1. https://www.investing.com/news/economic-indicators/jpmorgan-ceo-jamie-dimon-warns-of-potential-7-interest-rate-hike-amid-stagflation-concerns-93CH-3185318
2. https://twitter.com/LHSummers/status/1695045318524440688
3. https://fortune.com/2023/10/09/israel-war-like-1970s-stagflation-risk-deutsche-bank-warns/
4. https://www.investing.com/news/economic-indicators/jpmorgan-ceo-jamie-dimon-warns-of-potential-7-interest-rate-hike-amid-stagflation-concerns-93CH-3185318

• The banking crisis is quietly persisting as bank stocks continue to slide
• “Higher for longer” interest rates are destabilizing traditional sources of bank income
• Banks are turning to unreliable ‘hot money’ (outside depositors) to stay afloat

Banking Crisis Continues

Now out of the limelight, the banking crisis continues. Surging interest rates are affecting their stability, profitability, and stock prices. The bond market upon which banks rely is eroding. This crisis isn’t just about banks; it affects consumers, government policies, and the overall financial stability of the nation.

Bank stocks are on pace for yearly losses as high interest rates take their toll. The S&P 500 financial sector was down 5.5% this year. Regional banks were hit harder. The S&P Regional Banking ETF was down about 32%.¹

The downward slide accelerated when the Fed said it will keep interest rates higher for longer. Kathy Jones is the chief fixed-income strategist at Schwab Center for Financial Research. She said, “It’s fairly obvious it’s not good for banks. The rise in yields has just been relentless.”²

Bank stock prices have slumped in four of the last five years. That is according to the calculations of veteran bank analyst Dick Bove, chief financial strategist at Odeon Capital Group. Over that five-year period, only four of the 106 banks he follows have outperformed the S&P 500.³

Bond Market Troubles

The increase in longer-dated Treasury yields has largely wiped-out the US bond-market return for the year. The popular iShares Core US Aggregate Bond ETF recently closed at its lowest level since October 2008.

The higher yields on newly issued Treasury bonds erode the value of portfolios that include older bonds issued with lower rates. Old bonds are less valuable because the new ones are offering better returns. The value of bonds goes down when interest rates go up because of an inverse relationship between bond prices and interest rates. Here’s a simple way to understand it:

Imagine you have a bond that pays you a fixed interest rate, let’s say 3%. If you’re holding that bond and interest rates in the market suddenly rise to 4%, the new bonds are paying more interest than yours.

This means your bond, which pays less interest, is not as attractive to investors anymore. They can get better returns with new bonds. So, to make your bond more appealing in the secondary market, its price must drop. When its price drops, the effective interest rate it pays (relative to its new lower price) increases to be more competitive with the higher rates available in the market.

Other Factors

The uncertainty of the commercial real estate market is destabilizing some banks. Commercial property loans will be difficult to refinance as rates stay higher for longer.

Banks can see the trouble ahead. The Fed created an emergency lending fund for banks after the Silicon Valley Bank collapse. Demand on that fund spiked in September. Banks are bracing for recession by increasing their reserve levels. Reserves are at their highest in three decades. But that may not be enough to cover their exposure. Banks were exposed to an estimated $558.4 billion of unrealized losses in the second quarter from debts that are worth less than what they were bought for.⁴

Impact on Consumers

The growing bank risk forced the President to say the government would guarantee all deposits at all banks. Now the government is working to reduce the risky position it put itself in. They are trying to shrink bank exposure by raising the capital requirements needed to make loans. This, in turn, will make it harder for people to get mortgages, car loans and credit cards. Lending restrictions can lead to a negative loop that hurts a bank’s bottom line. The whole economy can suffer as people lose access to spending money.

‘Hot Money’

Availability of loans will become more difficult for another reason. Banks aren’t attracting and holding onto enough depositors. They aren’t making enough money to pay depositors a market rate.

Banks are turning to ‘hot money’ to fill in the gaps. Hot money is brokered deposits from outside firms that funnel large amounts of customers to higher-yielding certificates of deposit offered by banks. These deposits are typically more expensive for a bank. They cut into profits during a challenging time for many financial institutions.

⁵

Brokered deposits across the banking industry surged to $1.2 trillion in the second quarter. That is up 86% from the same period the year before. They accounted for 6.5% of total US bank deposits, the highest percentage in four years.⁶

But reliance on ‘hot money’ presents a risk to banks. These new customers hold no loyalty to the banks and will leave during periods of stress. “There has been a significant increase in broker deposits in the banking system over the past year,” FDIC Chairman Martin Gruenberg said, “and they can present liquidity risk.”⁷

It’s not just the mid-sized banks. Big banks are taking in more hot money too. Among the country’s four largest banks, Wells Fargo’s concentration rose from near zero to 6.39%. Citigroup maintains the highest concentration of brokered deposits among the big four, at 9.54%.

Higher concentrations can be problematic according to Alexander Yokum, a regional bank analyst for CFRA. He said, “It’s symbolic that a bank’s core operations aren’t enough and it’s just less profitable.”⁸

Conclusion

In these uncertain times, it’s becoming increasingly clear that traditional banks may not be the safest haven for your hard-earned money. The banking crisis, lurking just out of the limelight, poses risks that can’t be ignored. Fortunately, there’s an alternative that has stood the test of time: gold. Unlike traditional currency, gold holds its value independently of the volatile banking and financial systems. If you’re looking to secure your financial future and protect your wealth, consider the stability and resilience of a Gold IRA from American Hartford Gold. It could be the smart choice for safeguarding your assets in an ever-changing economic landscape. Contact us today at 800-462-0071.

Notes:
1. https://www.msn.com/en-us/money/markets/banks-are-bracing-for-a-recession-as-treasury-yields-surge/ar-AA1hDWk6
2. https://www.msn.com/en-us/money/markets/banks-are-bracing-for-a-recession-as-treasury-yields-surge/ar-AA1hDWk6
3. https://www.rockdalenewtoncitizen.com/arena/thestreet/banks-woes-are-bad-news-for-consumers-analyst-bove/article_11235d2f-9066-57ed-9fa9-eda88b76649e.html
4. https://www.msn.com/en-us/money/markets/banks-are-bracing-for-a-recession-as-treasury-yields-surge/ar-AA1hDWk6
5. https://www.aol.com/finance/banks-may-lean-costly-hot-110739812.html
6. https://www.aol.com/finance/banks-may-lean-costly-hot-110739812.html
7. https://www.aol.com/finance/banks-may-lean-costly-hot-110739812.html
8. https://www.aol.com/finance/banks-may-lean-costly-hot-110739812.html

• The Congressional Budget Office determined Social Security will need to cut benefits by 2034 when the trust fund goes broke
• A solution from Congress isn’t anticipated soon because it would require benefits cuts or higher taxes
• Advisors suggest preparing by protecting the value of savings with physical precious metals

Social Security Benefits Threatened

In the wake of demographic shifts and economic uncertainties, the specter of Social Security’s funding gap is casting a longer and longer shadow over the financial security of millions. Right now, one-quarter of US adults aged 50 or over have no retirement income outside of Social Security benefits. And unless there is significant action by Congress, most Americans are facing cuts in those benefits. Economists are emphasizing that people prepare now so they aren’t counting on benefits that might not exist when they need them.¹

Americans are rapidly losing faith in the sustainability of Social Security. According to recent polls, 75% of adults aged 50 and older are worried Social Security will run out of funding in their lifetime. A further 24% of adults of all ages believe they won’t get a dime of benefits they have earned.²

To keep things in perspective, Social Security won’t run out of money entirely. But it is facing a massive financial shortfall. Social Security benefits are funded primarily through payroll taxes paid by current workers. Those taxes go to today’s beneficiaries. Payroll taxes aren’t going anywhere anytime soon. But they won’t be enough to completely cover future benefits.

Taxes haven’t fully funded Social Security in recent years. The SS Administration has been tapping its trust fund to bridge the gap and avoid cutting benefits. The trust fund is currently around $2.85 trillion.

The Congressional Budget Office (CBO) determined the trust fund will be exhausted as of 2034. After that, the program can only pay out as much as it takes in from payroll taxes. That is estimated to be around 80% of future benefits. So, retirees could expect a 20% cut in benefits if lawmakers can’t find a solution before then.³

⁴

The CBO noted the impact on starting benefits would be felt beginning with those born in 1969 (those turning 65 in 2034). For those born in the 1970s, there would be a 25% reduction in initial benefits. For those born in the 1980s, 26%. And 28% for those born in the 1990s (assuming you start taking benefits at 65). ⁵

Why the Shortfall

Social Security’s ticking time bomb can be traced to a few reasons. Birthrates have collapsed from the days of the baby boom. And people are living longer. So not as many people are paying into the system while more people are collecting benefits for longer.

Another factor contributing to the shortfall is the payroll tax cap. Incomes for the best paid 6% of earners rose by 62% from 1983 to 2000. For the other 94%, incomes rose by just 17%. The net result is that the lion’s share of US income growth was above the Social Security tax cap. All that income wasn’t subject to the program’s payroll taxes. The situation hasn’t changed. Last year, almost 20% of earnings weren’t subject to payroll taxes. An overall increase in wages during that time drove up benefits. But tax receipts didn’t keep pace. Some economists are now proposing to raise the cap or eliminating it altogether to help keep the fund solvent.⁶

Fixing the Problem

Despite headlines highlighting the program’s issues and its profound impact on all Americans, no action has been taken to address the problem thus far. Any changes to Social Security would require 60 votes in the Senate. Therefore, it would have to have agreement from both parties. But a solution would involve either raising taxes (by a third), cutting benefits (by a fourth), or a combination of both. Solutions that each party would vote against.

The Inflation Problem

Social Security has another problem besides benefit cuts. The benefits themselves have lost a substantial amount of buying power over the years. Social Security is designed to keep up with inflation. In most years, beneficiaries will receive a cost-of-living adjustment (COLA) to help benefits maintain their buying power.

However, inflation has consistently outpaced these COLAs. In fact, since 2000, Social Security has lost a whopping 40% of its buying power. If this trend continues, Social Security may be even less reliable in the future. If you’re expecting to depend on your monthly checks in retirement, it may be time to come up with a backup plan.⁷

Solutions

Financial advisors suggest there are ways to prepare for the Social Security shortfall. Off the bat, increasing your savings is a simple method to reduce your dependence on Social Security.

Another option is to consider delaying Social Security. Waiting until age 70 to start taking benefits will earn you at least 24% extra each month on top of your full benefit amount. That could potentially add up to hundreds of dollars per month. Since that adjustment is permanent, you’ll collect larger checks every month for the rest of your life.

An additional option to prepare for sharp cuts in benefits is to safeguard the value of your current retirement funds from inflation. You can investigate how physical precious metals such as gold and silver hedge against inflation. And if they are put in a Gold IRA, they also gain tax-advantages as they preserve your purchasing power. To learn more about how a Gold IRA can help safeguard your retirement from potential Social Security cuts, call us today at 800-462-0071.

Notes:
1. https://www.fool.com/retirement/2023/09/19/is-social-security-going-bankrupt-most-older-adult/
2. https://www.fool.com/retirement/2023/09/19/is-social-security-going-bankrupt-most-older-adult/
3. https://www.fedweek.com/retirement-financial-planning/report-projects-possible-long-term-impacts-of-social-security-shortfall/
4. https://www.pgpf.org/sites/default/files/based-on-the-trustees-projections-combined-social-security-benefits-could-be-cut-by-20-percent-in-2034.jpg
5. https://www.fedweek.com/retirement-financial-planning/report-projects-possible-long-term-impacts-of-social-security-shortfall/
6. https://www.marketwatch.com/story/heres-the-real-cause-of-the-social-security-funding-shortfall-according-to-the-programs-chief-actuary-1a0e7d4b
7. https://www.fool.com/retirement/2023/09/19/is-social-security-going-bankrupt-most-older-adult/