Suddenly Safety Money is Risky
Common sense isn’t always so easy to come by, and when it comes to national spending, we often must make difficult choices. For example, winning WWII cost an enormous amount; in modern terms: $4.7 trillion! But as the coronavirus pandemic has led us into uncharted economic territory with $13 trillion in relief programs like quantitative easing and infrastructure investments, on top of already high federal debt levels (now at $32 trillion!), many people have sounded reservations about taking such a massive financial risk – not the least being that inflation could cause devastating long-term effects for everyone, from consumers up through the middle class. It’s certainly something worth considering before diving headfirst down a potential rabbit hole.
In a world that often feels unpredictable and chaotic, it can be easy to overlook the ripple effects of executive decisions. Take for example the recent pandemic-induced economic shutdowns or the implications felt across all sectors of society from the higher cost of capital due to massive spending programs, inflation. Moreover, as interest rates rise, banks, the largest holders of treasury bonds, lose more and more the higher rates go. This causes large depositors to take their money and run. This can, and often does, cause a run on the bank– potentially triggering massive financial instability, the kind witnessed with the collapse of Silicon Valley Bank.
Regarding Silicon Valley Bank: Several people have asked me about what it will mean to you and me. While it’s still too early to say, the ongoing question among economists and investors lately has been how high will the Fed raise rates? The general answer may be accurate. That is, they will keep raising rates until something breaks. Well, Silicon Valley Bank’s failure may be that break. Meanwhile, investors are now betting the dollar will trade lower. That means investors are betting rates may peak by May or June or earlier.
If the peak in interest rates has occurred, it may cause the stock and bond markets to rally. This is not what the Fed wants as it battles inflation. Nevertheless, expect bonds to rally first as the Treasury, the Fed, and the FDIC back depositors. I should note that while Silicon Valley Bank lost some $42 billion from lost deposits and mark-to-mark holding losses from treasuries due to rate hikes (as interest rates go up the value of bonds declines) Bank of America lost some $20 billion during the same time frame and other banks are experiencing runs.
Some institutional analysts believe the Fed cannot slow inflation significantly until the Ukraine war spending abates. Guns or butter. If the Fed continues to raise rates, it will cause more banks to fail, so expect a pause in rate hikes. Even now, many investors expect a recession by 2024 as the Fed has been draining $95 billion per month from the money supply. Add to this tighter borrowing rules in the wake of a press by regulators to solve the banking crisis and you get a tight-money-slowing economy.
In such a socio-economic mix alongside an upcoming presidential-election year, you can expect a tug of war for capital. Lobbyists from all persuasions will be pushing for their fare share. Expect support for reduced Ukraine spending, more support for a full border closure, a vote-for-me as the other guy/gal wants to do away with Social Security (no way), more pushback for and against ESG investing, more angry ethnic groups blaming their financial plight on others, more Antifa, more religious revival, and more unemployment in the short term, especially from start-ups who find funding elusive.
Bottom line: Decline is not inevitable, and neither is renewal. However, things should be good in 2025 and beyond after the next recession, or after the current one has been resolved as inflation fades in its importance.
Vaughn L. Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0284.