• 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/

• The Federal Reserve voted to keep interest rates at a 22-year high
• Fed Chair Powell said to expect more hikes in the future as rates stay higher for longer
• Stocks drop as hopes for rate cuts diminishes

Fed Hits the Pause Button on Rates

As predicted, the Federal Reserve chose not to raise interest rates again after their latest meeting. They voted to keep interest rates at their 22-year high. Since March 2022, the Fed has lifted interest rates 11 times and held them steady twice, including September’s pause.
Even with a temporary break, the rate hikes are still impacting the stock market, gold, and retirement funds.

¹

Fed Policy Statement Changes

The Federal Reserve Policy statement is a periodic announcement by the Federal Reserve that outlines its decisions on key interest rates and provides insights into its current economic assessment and monetary policy intentions. Economists read it like tea leaves, deciphering every word to make predictions. In this latest statement, the pace of economic activity changed from “moderate” to “solid.” This is being interpreted to mean that the job market is still too strong, so more rate hikes can be expected to drive up unemployment.

Future Hikes

Officials forecasted an additional rate hike before the end of the year to bring down inflation. Powell said, “We’re prepared to raise rates further if appropriate.” He kept his comments on future hikes ambiguous. Powell told reporters that future decisions will be based on upcoming economic data. But a looming government shutdown added more uncertainty to the economy. It could limit the Federal Reserve’s ability to get key data and hinder policy making.²

“A resilient US economy and high consumer spending over the next several months will likely prompt the Fed to raise rates again heading into the new year,” said Frank Lietke, executive director and president at Ally Invest Securities.³

Rate Cuts

The Summary of Economic Projections is a consensus of Fed opinions about policy and economic conditions. It showed that most central bank officials now expect fewer rate cuts next year. That is compared to their estimates from last June. Economists anticipate rates to remain elevated for longer. A sharp economic downturn, like a severe recession, would be necessary to prompt more rapid cuts.

They may get that recession. Unemployment is predicted to jump up to 4.5% over the next two years. They did round up their growth projections for 2024. It went from 1.1% in June to 1.5% now. But that growth rate is still lagging behind inflation.

There are numerous negative consequences when growth lags inflation. The purchasing power of individuals and households diminishes. This means that the money people have becomes less valuable over time, making it harder for them to afford the same goods and services they used to. As lingering inflation erodes purchasing power, people may have to allocate more of their income to cover rising costs. This leaves less room for savings and discretionary spending. A lower standard of living, reduced savings, and worse returns on investments are all potential results. The increased uncertainty reduces business investment and hastens deeper recession.

Market Reacts

Both the S&P 500 and the Nasdaq dropped after Federal Reserve Chair Powell said that the central bank did not consider a soft landing a “baseline expectation.” A soft landing is where the US economy avoids a recession but successfully lowers inflation. Powell said avoiding a recession is possible. But he continued that price stability is the Fed’s top priority. Price stability, in the context of the Fed’s mandate, is typically defined as a low and steady rate of inflation. It aims to achieve an inflation rate of around 2 percent over the longer run. Long term high interest rates are seen as bad for business and profitability. Hence, the fall in stock prices.

Gold

The Fed’s announcement could create a good long-term position for gold. Prices for the metal have been holding steady despite recent hikes. An eventual reduction in interest rates coupled with lingering inflation create a positive environment for gold prices. Those seeking safe haven from inflation tend to turn away from lower paying Treasuries and towards gold.

Conclusion

According to the Fed, inflation is far from over. And neither are rate hikes despite a few months reprieve. Americans can expect at least one more before year’s end. Economists foresee interest rates staying higher, longer. No one can say when they will be cut. If high interest rates push us into recession, and inflation remains unresolved, we may find ourselves mired in stagflation. Much to the demise of savings, stocks, and retirement funds. For those who want to protect the value of those funds, a Gold IRA may be the right choice. To learn more contact American Hartford Gold today at 800-462-0071.

Notes:
1. https://cdn.statcdn.com/Infographic/images/normal/21023.jpeg
2. https://www.cnn.com/business/live-news/markets-fed-meeting-september/index.html
3. https://www.cnn.com/business/live-news/markets-fed-meeting-september/index.html

• Inflation rose for the second consecutive month in August
• Stubborn inflation may trigger even higher interest rate hikes from the Fed
• JPMorgan Chase CEO Dimon warns of an impending downturn

Inflation Climb Continues

Pushing consumer prices to alarming new heights, unrelenting inflation continues to be a major concern. It accelerated for a second consecutive month in August. The Consumer Price Index (CPI), which measures the price of everyday goods like gasoline, groceries, and rents, surged in August compared to the previous month. This increase marked the steepest monthly rise this year. On a year-over-year basis, prices climbed by a daunting 3.7%, exceeding the reading in July. The seemingly unsolvable problem of inflation has financial experts growing more concerned about recession.¹

The problem reaches beyond just headline inflation. That rise is largely attributable to a leap in gas prices. Core prices, which exclude the more volatile measurements of food and energy, also rose in August. It came in much higher than expected. Core prices are showing just how intractable inflation is becoming. They remain more than two times higher than pre-pandemic levels.

²

The Fed Response

The Fed has been aggressively raising interest rates to combat inflation. They are on one of the fastest tightening paces in decades. Despite efforts to curb inflation, it remains well above the Federal Reserve’s 2% target. As of now, the Fed is expected to maintain rates at their current 22-year high during their upcoming meeting in September. However, August’s hotter-than-expected inflation report could influence further rate hikes in the fourth quarter. That is much to the dismay of Wall Street, which was hoping for a pause, or even a cut, in rates that could spur the growth of stock prices.

Inflation’s Personal Impact

Benjamin Franklin said small leaks will sink great ships. Governments and corporations can argue about what effect a small percentage change in data will have on the macrolevel. But inflation’s impact on the individual is what truly moves the economy. And that impact is looking grim.

US household income faced a decline in 2022 for the third consecutive year. This decline was primarily attributed to the soaring 7.8% inflation rate. It marks the largest annual increase in the cost of living since 1981. People are running out of savings to keep up with rising prices. Total household debt reached $17.06 trillion in Q2 2023 and credit card debt exceeded $1 trillion.³

The Supplemental Poverty Measure (SPM) considers participation in government programs. It increased from 5.2% in 2021 to 12.4% in 2022. The data highlights the financial struggle faced by many Americans as the cost of living continues to rise.⁴

People shouldn’t expect relief anytime soon. Robert Frick is an economist with Navy Federal Credit Union. He said, “This was bad news for Americans who feel inflation most acutely when filling their tanks and writing their rent checks… And given core inflation rose, it’s clear inflation around current levels may be with us for months.”⁵

A Warning from Wall Street

JPMorgan CEO Jamie Dimon issued a stark warning about the US economy. Dimon said, “We’ve been spending money like drunken sailors around the world…To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake.” He cited several significant headwinds to the economy. He included stubborn core inflation, continuing war, and high interest rates.⁶

Dimon has previously warned about an impending “economic hurricane.” He now expresses doubts about the concept of a “soft landing.” While some economists anticipate a gentle economic slowdown, Dimon remains skeptical. He raised concerns about the Federal Reserve’s quantitative tightening campaign, increased reliance on fiscal deficits, and the downstream impact of various economic factors. Dimon emphasized that the impact of these changes might not be evident immediately. Businesses should be prepared for potential disruptions in the coming year.

Protecting Your Portfolio from Inflation

In times of rising inflation and economic uncertainty, it’s essential to consider strategies to safeguard your funds. A Gold IRA from American Hartford Gold can provide a valuable hedge against inflation. Precious metals like gold have historically preserved wealth and retained their value when traditional assets falter. By diversifying your portfolio with a Gold IRA, you can mitigate the impact of inflation and economic turbulence, ensuring a more secure financial future. Learn more today by contacting American Hartford Gold at 800-462-0071.

Notes:
1. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
2. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
3. https://www.newyorkfed.org/newsevents/news/research/2023/20230808
4. https://www.foxbusiness.com/economy/us-household-income-fell-2022-census-data-shows
5. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
6. https://www.foxbusiness.com/economy/jamie-dimon-warns-risks-us-economy-weve-been-spending-drunken-sailors