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Higher for Longer

Yesterday was the Federal Reserve’s final Federal Open Market Committee (FOMC) meeting for this year. Going into the meeting, the was a 1.6% probability they would hike rates higher.

As expected, Chairman Jerome Powell and his team left interest rates alone at 5.25% to 5.5%.

In the end, I doubt it matters at all. The Federal Reserve has already done irreparable damage to bank balance sheets and the economy at large. Another quarter percent wouldn’t have changed that.

Let me explain…

Looming Banking Crisis
Silicon Valley Bank and Signature Bank failed in March. First Republic followed suit in May. In all, over half a billion dollars in assets went up in a puff of smoke to asset heaven.

By the third quarter, the consensus was the banking crisis was behind us. That belief prevails to this day. But I think we are just one shock away from another potentially larger banking crisis.

The problem that led to the three major bank failures in the first half of 2023 exists on the books of virtually every bank today. They have massive paper losses in Treasuries due to the pace and extent of Federal Reserve interest rate hikes.

If the banks hold these Treasuries to maturity, they are “guaranteed” to get full value.

But, what if… as was the case with Silicon Valley Bank, Signature Bank, and First Republic Bank… they have a need for liquidity that requires them to sell the Treasuries prior to maturity? What if depositors start withdrawing funds and the banks need to sell at a loss to return cash to depositors?

That’s right. The banks will be forced to take massive losses and hope they can hang on to maturity with the majority of their Treasuries.

But hope is not a strategy.

We are one crisis away from more bank failures. We are one depositor run away from more bank failures.

And there is a situation brewing in commercial real estate.

Before long, owners of commercial real estate will need to refinance the properties they own at much higher rates even though occupancy rates have dropped significantly from pre-pandemic levels.

Would you want to refinance your office building at a significantly higher rate with fewer tenants leasing from you?

I wouldn’t either.

Expect commercial property owners to walk away from loans, adding to the stress the banks are already feeling.

It doesn’t end well.

Consumers Are Strapped
A potential banking crisis isn’t the only problem the Federal Reserve has created by ratcheting up interest rates so quickly.

The Federal Reserve’s rate hikes on steroids have crippled the middle class. And by keeping rates higher for longer, I fully expect to see the economy break.

After the U.S. government caused inflation by their pandemic lockdowns (killing off supply of goods and services) and pandemic cash stimulus injections (stoking demand due to excess consumer liquidity), the Federal Reserve denied inflation even existed. Then, they blamed others (Russia and greedy corporations) for inflation. Then, they underestimated the severity and duration of inflation.

By the time they acknowledged inflation was significant and lasting and decided to do something about it, they were very late to the dance. As a result, they had to raise rates higher, faster, and for longer than they probably should have.

In short, they were completely wrong about inflation, and we are all paying the price.

Now, the Federal Reserve and Chairman Jerome Powell are convinced that household balance sheets and savings are far stronger than the Federal Reserve initially believed. They suggest elevated consumer spending is the proof.

I disagree. I believe the Federal Reserve is as wrong about the strength of household finances as they were about inflation being transitory.

They are completely misreading the tea leaves.

There is only one reason consumer expenditures are up. It’s because the things people need cost more to buy this year than they did last year.

The rate of inflation is easing… down 0.1% from October’s Consumer Price Index (CPI) print of 3.2%. But prices are still 3.1% higher than they were this time last year. And… last year’s numbers were nearly 10% higher than the year before!

To make ends meet, consumers have run their credit card debts up to $1.3 trillion! At double digit interest rates, that is not a sustainable practice.

Lastly, Chairman Jerome Powell continues to mention the resilient and strong labor market.

All I have to say to that is the labor market is a lagging indicator. When times are tough, employers tend to hold onto employees longer than they should. They do not want to lay workers off, and they do not want to have to hire and train new employees when market conditions ease.

But eventually, the dollars and cents make it clear employers cannot afford to maintain the same staffing levels. That’s when the labor numbers will start to show the pain in the economy.

And I do believe we are close.

The Big Bluff
At this point, I believe most people have embraced what I’ve been saying for the better part of a year. The Federal Reserve is out of ammunition.

Chairman Powell will continue to talk tough on inflation. He will continue to promise “Higher for Longer.” He will continue to misinterpret what is going on in the economy.

After all, tough talk is all he has left. If this were a poker game, it would be time to go “all-in” and call his bluff.

If you have not bought gold and silver yet, I urge you to consider doing so. There is no better way I know to protect your purchasing power. In other words, there is no better way I know to Keep What’s Yours!

Call us at (800) 831-0007 or email us. Let’s make shoring up your gold and silver allocation the first New Year’s resolution of 2024.