• Despite a brief surge after lifting strict Covid restrictions, China’s economy is heading for recession
• Due to highly interconnected economies, a Chinese recession can negatively impact stock prices
• Physical safe haven assets like gold offer wealth protection against a global economic downturn

Slow Chinese Economic Recovery

China’s pandemic recovery is not going according to plan and it may end up hurting your retirement funds. Despite a surge after lifting Covid restrictions, the Chinese economy is slowing down. Elon Musk and JP Morgan Chair Jamie Dimon visited China to address concerns about the encroaching recession there. In today’s fragile global financial system, the fate of the second largest economy can have a severe impact on the rest of the world.

China’s stock market experienced a boom earlier this year. Investors bet on the economy bouncing back after China ended their strict zero-Covid policy. They are now losing that bet. The most recent official data points to an economy in decline. Retail sales, factory production and fixed-asset investments all came in weaker than expected. All the main Chinese stock indexes tumbled. The MSCI China index fell into a bear market. It lost more than a fifth of its value. And even shares of China’s state-owned enterprise have fallen 10%.

¹

Reasons for the slump tie into a lack of investor confidence due to politics. China and US relations soured after the shooting down of a Chinese surveillance balloon. “China’s focus on national security will make the government’s policies less growth-friendly,” Citi analysts wrote in a report on May 30.²

Beijing carried out raids on foreign groups such as Bain & Company, Capvision and due diligence group Mintz. They increased regulation of domestic private businesses as well. Chinese officials appear to be ending their clampdown on the tech sector. Yet, investors still worry that the government could move against other companies.

“They came out with regulation after regulation without warning the market…when you’re a commercial investor, you lose confidence when you see those kinds of things happening,” said a portfolio manager for Janus Henderson Investments.³

JPMorgan has a large investment in China. Chair Jamie Dimon has warned about the effects of the Chinese government’s policies. “If you have more uncertainty, somewhat caused by the Chinese government . . . it’s not just going to change foreign direct investment. It’s going to change the people here, their own confidence….And confidence is very important for growth.”⁴

The Chinese government says they are prepared to help bolster the economy. Premier Li Qiang said this month more targeted measures were needed to boost demand. And China’s central bank said on May 15 it would provide “strong and stable” support for the real economy.

Why China’s Recession is Our Problem

The slowing of the Chinese economy can impact the United States stock market. Reasons for this include:

Trade Relations: China is one of the largest trading partners of the United States. According to the US Census Bureau, China was the third-largest export market for US goods in 2020, accounting for $103.9 billion in exports. A slowdown in the Chinese economy can impact sectors which rely heavily on exports to China. Such sectors include manufacturing, technology, and agriculture. This can result in lower revenues and earnings, and in turn, lower stock prices.⁵

China is also the top supplier of goods to the United States. It accounts for 18 percent of total goods imports ($452 billion). A decrease in manufacturing there can result in price increases here.⁶

Global Supply Chains: Many US companies have complex supply chains that rely on China. If the Chinese economy slows down, it can disrupt these supply chains. This can cause production delays or increased costs for US companies. Such disruptions can affect their profitability and investor confidence. Their stocks could fall as a result. Chinese supply chain snarls during the pandemic are reported to have cost American firms billions.

Investor Sentiment and Confidence: The global financial system is highly interconnected. Events in one country can quickly transmit shocks to other economies. As Dimon pointed out, the stock market is influenced by investor sentiment and confidence. A slowdown in the Chinese economy can be perceived as a sign of broader global economic weakness. This may trigger a sell-off in the US stock market as investors become more risk-averse.

Commodity Prices: China is a major consumer of commodities such as oil, metals, and agricultural products. A slowdown in Chinese economic activity can result in reduced demand for these commodities. Reduced demand can lead to lower global commodity prices. This can impact the profitability of US commodity companies, such as energy or mining. Lower profits often translate into lower stock value. Commodity prices dropped significantly when the 2008 global financial crisis caused a slowdown in the Chinese economy. Oil dropped 80%, copper fell 67%, and corn declined 40%. Interestingly enough, during this time, gold surged from $650 to a peak of around $1,000 per ounce.^7,8,9,10

Debt Holdings: A Chinese recession can make our current debt crisis worse. The significant holdings of US government debt by China creates a potential vulnerability that can affect the US stock market. The Chinese economy’s ability to continue purchasing US debt is crucial for maintaining stability in the US stock market. If China faces economic challenges, it may reduce its purchases of US government debt, leading to potential disruptions.

As of July 2021, China was the largest foreign holder of US Treasury securities. Their holdings totaled approximately $1.1 trillion. Fewer Chinese purchases of US government debt can mean less funds available for government spending and programs. This could lead to higher interest rates or reduced government investment.

The potential reduction in Chinese purchases of US debt can also amplify China’s attack on the dollar. Decreased demand for US Treasuries can weaken the dollar’s strength relative to other currencies. This could increase volatility in international trade and the stock market.

Some may cheer the demise of an economic rival like China. But the financial reality is that our economies are intricately linked. A Chinese recession or collapse would most likely lead to a drop in American stock prices. Which of course would depress the value of most retirement funds. One way to protect the value of your funds is to move out of paper assets and into safe haven assets like physical gold. A Gold IRA from American Hartford Gold can shield your wealth from damage caused by a global economic downturn. Contact us today at 800-462-0071 to learn more.

Notes:
1. https://www.ft.com/content/5f389a80-96f1-4979-8eeb-fe484dc10cad
2. https://www.wsj.com/articles/heres-why-stock-market-investors-turned-bearish-on-china-e1cc345e
3. https://www.wsj.com/articles/heres-why-stock-market-investors-turned-bearish-on-china-e1cc345e
4. https://www.ft.com/content/5f389a80-96f1-4979-8eeb-fe484dc10cad
5. https://www.census.gov/foreign-trade/balance/c5700.html
6. https://ustr.gov/countries-regions
7. https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=rbrte&f=m
8. https://www.lme.com/en-GB/Metals/Non-ferrous/Copper#tabIndex=0
9. https://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn.html
10. https://www.americanhartfordgold.com/gold-price-charts/

• The deadline is rapidly approaching to raise the debt ceiling and avoid a government default
• Even if a deal to raise the debt limit is reached, there can still be severe negative consequences
• Any deal is just a short-term fix that kicks the real problem of astronomical debt down the road

Breaking the Debt Ceiling

The US economy is staggering on the edge of a financial cliff. It is only a couple of weeks before ‘X-date’ – the day the government runs out of money. If they fail to reach an agreement on raising the US debt ceiling, the nation could default on its record $31.4 trillion debt.¹ The results of which would be ‘catastrophic’ according to Treasury Secretary Janet Yellen.² However, even if a deal is reached, there will be aftershocks to the economy. Indeed, the crisis won’t really be solved. The underlying debt problem will remain lurking beneath the surface. We will have merely kicked the can down the road, only postponing the inevitable serious consequences.

³

The Consequences of Defaulting on Debt

If the government defaults, the effects would be devastating to the US and the global economy. Experts largely predict the US credit rating would drop and gross domestic product (GDP) would fall. Social Security and other benefit payments could be delayed, hurting tens of millions of Americans.

Unemployment rates would spike as millions of people potentially lose their jobs. Economists at Moody’s Analytics project that if the government exceeds the debt limit for even a few days, the unemployment rate would jump up to 5%. However, if the breach were to drag on for several weeks, the effects would be much harsher. The unemployment rate could spike to 8% and nearly 8 million people could lose their jobs.⁴

Interest rates have already been steadily rising due to 10 consecutive rate hikes by the Federal Reserve. An unexpected shock like a debt default would spike interest rates further and likely spark a recession. The cost of borrowing money could become prohibitive.

“If policymakers actually do fail to increase or suspend the limit before the Treasury runs out of cash and defaults on its obligations, interest rates will spike and stock prices will crater, with enormous costs to taxpayers and the economy,” Mark Zandi, Moody’s chief economist, said.⁵

The housing market would also be severely affected. An already tattered housing market would be sent into a “deep freeze,” according to Jeff Tucker, a Zillow senior economist. Tucker projected that home sales would plummet, mortgage rates would climb to as high as 8.4%, and buyers’ mortgage bills would soar by over 20%.⁶

Stock prices would also likely plummet and wreak havoc on retirement savings. Moody’s predicted that, under a prolonged default scenario, stock prices would plummet by one-fifth, wiping out about $10 trillion in household wealth.⁷

If A Deal is A Reached

⁸

A debt default is not likely to happen. Even under the current gridlocked circumstances, Moody’s Analytics puts the chances of a default happening at 10%.⁹

If the US manages to avert default, the consequences would still be significant. To pay its bills, the government would need to sell Treasury bills worth over $1 trillion. When the government sells a significant number of Treasury bills, it increases the Treasury General Account. This is essentially the government’s checking account. It will go from $95 billion to $500 billion in a month. The account will hit $600 billion 3 months.¹⁰

However, when there is more money in this account, there is less money available for other purposes. It becomes harder for banks to lend to individuals and businesses. Consequently, borrowing money would become more expensive, leading to higher interest rates. The housing market would suffer, with tumbling sales and soaring mortgage rates. Stock prices would also likely crash, causing a significant loss of wealth.

Money markets, often considered a safer investment, could also become casualty in a debt ceiling deal. A new imbalance between the amount of Treasuries issued and the available cash could cause short-term rates to rise. This means the funding for money markets could be disrupted. Investors could be better served moving to safe assets such as gold and silver.

A Temporary Solution

Raising the debt ceiling without addressing the underlying issues is like applying a band-aid to a deep wound.

Renowned investor Ray Dalio said, “Increasing the debt limit the way Congress and presidents have repeatedly done, and most likely will do this time around, will mean there will be no meaningful limit on the debt. This will eventually lead to a disastrous financial collapse.”¹¹

The underlying problem lies in unsustainable spending and increasing debt. Central banks are left with the unenviable choice of raising interest rates or printing money to buy debt. Both of which have negative ramifications. Our situation is speeding to an unescapable doom loop that ends in total economic ruin.

The government may very well avoid defaulting on the national debt. What they cannot avoid is damaging the economy with their reckless spending. There will severe consequences as the debt crisis is resolved. Yet, these are only temporary fixes. The real dangers of our astronomical debt are being willfully ignored. Ultimately, that debt must be reckoned with. And that reckoning could make the Great Depression look like winning the lottery. If you want to protect your wealth from an impending debt crisis, then you should investigate how a Gold IRA can safeguard your future. Call us today at 800-462-0071 to learn more.

Notes:
1. https://www.bloomberg.com/news/articles/2023-05-18/a-1-trillion-t-bill-deluge-is-painful-risk-of-a-debt-limit-deal#xj4y7vzkg
2. https://www.bloomberg.com/news/articles/2023-05-18/yellen-tells-bank-ceos-debt-limit-failure-would-be-catastrophic#xj4y7vzkg
3. https://www.bloomberg.com/news/articles/2023-05-18/a-1-trillion-t-bill-deluge-is-painful-risk-of-a-debt-limit-deal#xj4y7vzkg?leadSource=uverify%20wall
4. https://money.com/debt-default-money-impact/
5. https://money.com/debt-default-money-impact/
6. https://money.com/debt-default-money-impact/
7. https://money.com/debt-default-money-impact/
8. https://www.bloomberg.com/news/articles/2023-05-18/a-1-trillion-t-bill-deluge-is-painful-risk-of-a-debt-limit-deal#xj4y7vzkg?leadSource=uverify%20wall
9. https://money.com/debt-default-money-impact/
10. https://www.bloomberg.com/news/articles/2023-05-18/a-1-trillion-t-bill-deluge-is-painful-risk-of-a-debt-limit-deal#xj4y7vzkg
11. https://www.kitco.com/news/2023-05-23/-Disastrous-financial-collapse-Ray-Dalio-on-problem-bigger-than-raising-debt-ceiling.html

• Studies show Americans are unprepared for retirement due to record inflation and household debt
• The gap in retirement savings could become trillion-dollar liability for the government
• Retirement planners should seek safe haven assets to make sure their funds are there when they need them

Retirement at Risk

The future of retirement for many Americans is becoming increasingly uncertain. Record debt and persistent inflation are hurting Americans’ retirement prospects. These endangered retirements hold potential consequences for the entire economy. People should be taking measures now to safeguard their future.

A survey by the Certified Financial Planner Board identified American’s main financial concerns. Sixty percent of Americans worry about purchasing necessities such as food and clothing. A further 55% worry about paying rent or a mortgage. And 69% worry about preparing for retirement.

The biggest challenge to preparing for retirement was debt. Those under 45 and those over were just as likely to withdraw money from a retirement account. “These past several years have not been easy for Americans,” CFP Board CEO Kevin R. Keller said in a statement. “From the pandemic to the latest banking news, uncertainty has been prevalent.”¹

Household debt has reached an unprecedented level of $17 trillion. It increased $2.9 trillion since pre-pandemic 2019. Mortgages typically drive household debt. But new mortgages dropped due to high interest rates. Mortgage debt saw a decline of 62% compared to the previous year. Yet, credit card debt reached a record-breaking $986 billion. A 17% jump from last year, this is the first time in two decades it hasn’t gone down after the holidays. This surge in debt shows the financial strain experienced by many Americans. More and more, people are relying on credit cards to cope with rising costs.²

³

Cost to the Economy

The number of financially vulnerable individuals aged 65 and above is expected to increase. From 2020 to 2040, the number is predicted to rise 43%. Alarmingly, approximately 56 million private sector workers lack access to employer-sponsored retirement plans. Many households are left with limited options for building enough retirement funds. Numerous Americans will be facing a lower quality of life during their retirement years.⁴

The Pew Research Center says the shortage of retirement savings could cost the government $1.3 trillion by 2040. This savings gap could place an immense strain on state and federal budgets. There will be a greater proportion of elderly individuals compared to the working-age population. The expense of Medicare and other programs is expected to be borne by a smaller portion of the workforce. The extra public funding could result in higher taxes. Analysts estimate the projected shortfall would cost $13,600 per household.⁵

Several states are recognizing the urgent need to address the retirement crisis. They have launched automated savings programs. They allow individuals to set up state-sponsored Individual Retirement Accounts (IRAs). These initiatives are proving successful. Enrollees are saving between $105 and $190 per month. Some analysts believe such initiatives could help reduce the burden on public resources.⁶

Challenging Economic Landscape

The National Retirement Risk Index highlights the economic challenges faced by working-age households. It shows that about half of the nation’s households may struggle to maintain their standard of living in retirement. One third of households are taking a major hit from the increase in Social Security’s full retirement age. The economy had a period of improvement after the Great Recession. But the uncertainty caused by the pandemic and inflationary pressures undid those gains for many people.

Inflation’s Impact on Retirement Funds

A survey by the Senior Citizens League found inflation is wiping out retirement funds. The percentage of retirees reporting a drain on their savings rose from 20% in the third quarter of 2022 to 26% in the first quarter of 2023. Moreover, a record-high 45% carried credit card debt for more than 90 days.⁷

“Retirees exhaust retirement savings as they age, but it looks like inflation has sped up the process,” Mary Johnson, a Social Security and Medicare policy analyst at the Senior Citizens League said.⁸

Record household debt, insufficient retirement savings, and persistent inflation are making retirement planning essential. The strain on retirement funds shows the need for individuals to seek safe-haven assets that can protect their wealth. A Gold IRA can provide a hedge against inflation and safeguard retirement funds in an uncertain economic climate. By taking acting now, individuals can work towards ensuring a more stable and prosperous retirement future. Call American Hartford Gold today at 800-462-0071 to learn more.

Notes:
1. https://www.foxbusiness.com/personal-finance/americans-prioritize-retirement-savings
2. https://qz.com/americans-are-still-using-credit-cards-to-buy-necessiti-1850440401
3. https://qz.com/americans-are-still-using-credit-cards-to-buy-necessiti-1850440401
4. https://401kspecialistmag.com/retirement-savings-gap-could-create-1-3-trillion-burden-by-2040/
5. https://401kspecialistmag.com/retirement-savings-gap-could-create-1-3-trillion-burden-by-2040/
6. https://401kspecialistmag.com/retirement-savings-gap-could-create-1-3-trillion-burden-by-2040/
7. https://www.foxbusiness.com/personal-finance/americans-prioritize-retirement-savings
8. https://www.foxbusiness.com/personal-finance/americans-prioritize-retirement-savings

• The latest Consumer Price Index shows inflation is slowing down but far from over
• Coupled with the banking crisis, the Federal Reserve may pause any future interest rate hikes
• Gold is increasing in price, with analysts predicting potential new highs

New Data Shows Persistent Inflation

The latest Consumer Price Index report shows that while inflation may be decelerating, it is bound to linger in our economic landscape well into the foreseeable future. The index rose 4.9% in April from a year earlier. This marks the 10th straight month of easing inflation. Yet, inflation remains historically high despite the slight easing, with a recent peak of 9.1% in June 2022. US stocks opened higher, the dollar fell, and US Treasury prices rose in response to the data. But consumers are still suffering in essential areas, while Federal Reserve policy and the price of gold react to the new information.¹

Rising prices of shelter, gasoline, and used cars contributed to the inflation numbers. Shelter costs, contributing to 40% of core inflation, rose by 0.4% in April and 8.1% over the past year. Gasoline prices spiked after a decrease in March. The rise was driven by OPEC+ oil producers’ announcement of further oil output cuts. Used car and truck prices increased by 4.4% in April, reversing previous declines. The cost of groceries fell slightly, but food prices are still higher compared to a year ago.²

Core prices, excluding food and energy, rose for the fifth consecutive month. Economists consider core prices as a better predictor of future inflation. In the 12 months through April, the core CPI increased by 5.5%, showing strong underlying inflation.³

“Inflation has moved beyond sticky at this point and after three months of core CPI hanging above 5%, it’s become tenacious,” said Robert Frick, corporate economist with Navy Federal Credit Union. “Given the biggest contributor to high CPI once again was shelter, and home sales prices have hit their own plateau, we may not see significant drops in CPI until this fall.”⁴

⁵

Federal Reserve

Analysts believe the new CPI data is giving the Federal Reserve room to alter their policy. The Federal Reserve has been raising interest rates aggressively to combat inflation. The Fed’s rate increases have had significant effects on mortgage rates, auto loans, credit card borrowing, and business loans. Economists fear the rate hikes are driving the country into recession and fueling a recent wave a bank failures.

Even with the downward trend, inflation is still well above the Fed’s 2% target. “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go,” Fed Chair Powell said. The CPI report suggests a potential need for rates to remain high for longer than anticipated, according to economists.⁶

The Federal Reserve recently raised interest rates to the highest level in 16 years. This is its fastest monetary policy tightening campaign since the 1980s. The Fed has hiked its policy rate by 500 basis points since March 2022. But the language in their statement suggested a possible pause in further increases. The Fed will weigh various factors to determine the need for future rate hikes.⁷

Powell indicated that the Fed has yet to decide whether to suspend rate hikes but acknowledged the possibility. He said Fed will take a data-dependent approach moving forward. In a statement after its latest policy meeting, the Fed removed a sentence from its previous statement that had said “some additional” rate hikes might be needed. It replaced it with language that said it will now weigh a range of factors in “determining the extent” to which future hikes might be needed.⁸

Gold

Gold prices rallied after the CPI report came in close to market expectations. Gold’s uptrend depends on a weaker U.S. dollar and lower interest rates. Some analysts believe gold could reach record highs due to a pause on interest rate hikes, debt ceiling concerns, and China’s continuing buying spree. China is expanding its gold reserves and potentially reducing its holdings of US Treasuries in favor of gold.

Edward Morse is the global head of commodities strategy at Citi Research. He predicts gold prices will eventually reach $2,400 an ounce. Citigroup is bullish on gold but emphasizes the need for patience and acknowledges the choppy road ahead. He said, “The gold prices are really an anticipation of what’s going to happen to interest rates and what’s going to happen to the US dollar. Clearly, there is a lot of money to be made.”⁹

The latest Consumer Price Index information holds both promise and pitfalls. Consumers should brace for elevated inflation to become a fact of life. However, there is now more cause for the Federal Reserve to pivot from its course of aggressive rate hikes. Even more so in the face of a spreading bank crisis and a looming recession. With gold positioned to rise, now is an opportune time to safeguard your portfolio with precious metals. A Gold IRA from American Hartford Gold can not only secure your wealth from inflation but can also potentially grow it. Contact us today at 800-462-0071 to learn more.

Notes:

1. https://www.foxbusiness.com/economy/cpi-inflation-april-2023
2. https://www.foxbusiness.com/economy/cpi-inflation-april-2023
3. https://www.reuters.com/markets/us/us-consumer-prices-increase-solidly-april-2023-05-10/
4. https://www.foxbusiness.com/economy/cpi-inflation-april-2023
5. https://www.foxbusiness.com/economy/cpi-inflation-april-2023
6. https://nypost.com/2023/05/10/consumer-price-index-rose-5-5-in-april-as-fed-weighs-more-rate-hikes/
7. https://www.reuters.com/markets/us/us-consumer-prices-increase-solidly-april-2023-05-10/
8. https://nypost.com/2023/05/10/consumer-price-index-rose-5-5-in-april-as-fed-weighs-more-rate-hikes/
9. https://www.kitco.com/news/2023-05-09/Gold-s-recent-push-near-all-time-highs-was-just-a-test-run-as-Citigroup-s-Morse-sees-prices-hitting-2-400.html

• The US government is hitting its debt ceiling and will soon be unable to pay its bills
• Experts say there will be an economic catastrophe if the debt ceiling isn’t raised
• Gold prices are surging as investors seek safe havens

US Hits it Debt Limit

The United States government is quickly approaching its debt limit. The US could default on its debt as early as June 1, meaning the country would run out of money to pay its bills. Americans could face an economic catastrophe if the debt ceiling isn’t raised. Treasury Secretary Janet Yellen warned there would be dire consequences, including job losses, big cuts to retirement savings, and a severe economic downturn.

What is the Debt Limit?

The debt limit is the maximum amount of debt that the federal government is allowed to borrow to keep paying for programs already mandated by Congress. The US hit the debt limit of $31.4 trillion in January. Since then, the Treasury Department has been using “extraordinary measures” to keep the government running.

What Happens if the US Defaults on its Debt?

If the debt ceiling is not raised, it could lead to an economic disaster. The Joint Economic Committee found that a default could cost Americans $20,000 in retirement savings.¹ Moody’s Analytics estimates that a default could lead to 2.6 million job losses and cause the stock market to plunge by one-third, erasing $15 trillion in household wealth. Social security beneficiaries might not receive their monthly checks.²

Interest rates would rise even higher. Kathleen Day is a business lecturer at Johns Hopkins University. “The cost to borrow for homes, cars and credit cards would explode,” she said in an email. “In short, default would cause mayhem.” Consumers are already struggling with higher borrowing costs due to the Fed’s record pace of interest hikes. A stalled housing market would get even worse.³

What is the Current Situation?

The House passed Speaker McCarthy’s bill to raise the debt ceiling by $1.5 trillion or through March 31, 2024, whichever comes first. The bill included $4.5 trillion in spending cuts, including banning student loan forgiveness, and adding work requirements to welfare programs. However, the bill is unlikely to pass the Democrat-controlled Senate and White House.⁴

Has This Happened Before?

In 2011, Congress narrowly resolved the debt ceiling. Despite a last-minute deal, the stock market went down 14% over four weeks. Because of the crisis, debt-rating agency Standard & Poor’s downgraded the US debt for the first time.⁵

What is the Impact on Gold?

During the 2011 debt ceiling crisis, gold hit $1,900 an ounce for the first time. It then reached a record high at the time of $1,910 an ounce. Today, gold is aiming to surpass $2,020 as its safe haven appeal grows alongside debt ceiling worries. An extension in the US debt ceiling could result in a downgrade of the US long-term outlook. This would have a negative impact on the US Dollar, Treasury yields, and the S&P 500, all of which can drive the price of gold higher.⁶

The government is playing a dangerous game of brinkmanship with the economy. If the debt ceiling isn’t resolved, retirement funds may drop off a cliff. People looking to protect the value of their funds should investigate gold. Call us at 800-462-0071 to learn how a Gold IRA can safeguard the value of your portfolio.

Notes:
1. https://www.businessinsider.com/what-happens-if-congress-doesnt-raise-debt-ceiling-jobs-retirement-2023-5
2. https://www.businessinsider.com/what-happens-if-congress-doesnt-raise-debt-ceiling-jobs-retirement-2023-5
3. https://www.cbsnews.com/news/debt-limit-ceiling-impact-on-your-finances-social-security-medicare-401k/
4. https://www.businessinsider.com/what-happens-if-congress-doesnt-raise-debt-ceiling-jobs-retirement-2023-5
5. https://www.cbsnews.com/news/debt-limit-ceiling-impact-on-your-finances-social-security-medicare-401k/
6. https://www.fxstreet.com/news/gold-price-forecast-xau-usd-eyes-above-2-020-as-white-house-needs-to-raise-us-debt-ceiling-sooner-202305030353

 

• First Republic Bank collapsed, following the failures of Silicon Valley and Signature Bank
• Analysts point to rapid interest rate hikes as the cause of the collapse
• To safeguard against a threatened financial system, investors are turning to gold

First Republic Bank Collapse

The banking crisis continued as First Republic Bank collapsed. JPMorgan Chase is set to take on “all of the deposits and substantially all of the assets of First Republic Bank” after the Federal Deposit Insurance Corporation (FDIC) confirmed that the troubled bank had collapsed on Monday.

First Republic was America’s 14th largest bank as of the end of 2022. Its demise follows the collapse of Signature Bank and Silicon Valley Bank – the 2nd and 3rd largest bank failures in American history. First Republic had lost more than $100 billion of deposits in the first quarter of the year. The losses sent investors and regulators into panic mode.¹

Prior to the collapse, eleven larger banks had previously infused $30 billion of deposits into First Republic to buy some of its assets at above-market rates. But there was no saving the bank.

First Republic’s appeal for a government bailout failed. Instead, the government worked to protect depositors. The FDIC said, “All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, National Association, and will have full access to all of their deposits.”²

Analysts are laying the blame for the collapse on Fed Chair Jerome Powell and Treasury Secretary Janet Yellen. The bank carried billions in unrealized losses, due in part to its book of mortgages that were issued when rates were significantly lower. Rapidly rising interest rates decimated the value of First Republic’s holdings. The collapse of SVB and Signature, for the same reason, sparked a run on First Republic and its ultimate demise.

Effects of the Failure

Experts don’t believe the banking crisis will divert Fed policy. Inflation is still much too high, as the most recent GDP report showed. Hence, the Fed is still likely to hike rates at their next meeting, further endangering hundreds of other at-risk banks.

The bigger issue is how far will the banking crisis spread and how it will ripple throughout the economy. Almost 200 more banks are on the brink of collapse, including financial giant Deutsche Bank.^3,4 Cascading effects could include banks tightening credit. This could make it harder for people to get mortgages or credit cards, and for businesses to get loans. And that could lead to an even worse outcome – a prolonged and severe recession. ⁵

As the banking crisis threatens to destabilize the global financial system, the price of gold is predicted to hit all-time highs.⁶ As a result, Americans are facing a severe recession and a drastic loss in their savings. People who want to preserve the value of their funds should look to safe haven assets that exist independent of the banking system. To learn how precious metals within a Gold IRA can safeguard your retirement, contact us today at 800-462-0071.

Notes:
1. https://www.reuters.com/markets/us/white-house-monitoring-situation-first-republic-could-step-if-needed-2023-04-27/
2. https://abcnews.go.com/amp/Business/jpmorgan-chase-assume-deposits-republic-bank/story?id=98979305
3. https://theweek.com/finance/1021940/nearly-200-banks-at-risk-of-svb-type-collapse-study-finds
4. https://finance.yahoo.com/news/deutsche-bank-next-fall-worried-133438711.html
5. https://www.sfchronicle.com/tech/article/first-republic-bank-collapse-recession-17845950.php
6. https://www.cnbc.com/2023/03/22/gold-price-could-hit-high-amid-svb-credit-suisse-bank-problems.html

• In a rare admission, the Federal Reserve stated that a recession is likely in 2023
• A recession forecast is supported by several strong economic indicators
• Stocks will most likely fall further before they hit a bottom

Recession Predicted

Already stressed by banking turmoil, markets are dropping as the latest economic indicators point to a recession. In a rare admission, the federal government stated that we could be facing a downturn. The Federal Open Market Committee (FOMC) makes key decisions about interest rates and the growth of the United States money supply. They expect a recession before the end of 2023 based on several factors.

The FOMC isn’t alone in their prediction. The New York Fed’s Recession Probabilities Model suggests the odds of a downturn are at their highest since 1982. The model’s April reading shows a 57.7% chance of a recession. Their forecast matches private sector predictions. JP Morgan Chase says the chance of a US recession is greater than 50% before the end 2023.¹

Recession Indicators

Debt Ceiling – The deadline to raise the debt ceiling is rapidly approaching. Weak tax receipts may cause the Treasury to be unable to pay all the US obligations earlier than expected. If the debt ceiling isn’t lifted, an unprecedented default would result in a government shutdown and risk triggering a deep recession.²

Leading Economic Index – The Conference Board is a research organization. It counts over 1,000 public and private corporations and other organizations as members. Their Leading Economic Index (LEI) broadly tracks business cycles using 10 inputs from across areas such as manufacturing, unemployment, and interest rate spreads. The LEI saws its sharpest reversal on record outside of a recession dating back to the 1950s. Wells Fargo economists said it presents a “clear message” that a downturn remains ahead.³

Bond Yield Inversion – An inversion is when short-term Treasuries pay more than long-term Treasuries. It typically occurs when investors lose confidence in the economy. An inversion has preceded every recession since 1955. Today’s yield curve is more steeply inverted than it has been at any other point since 1960. A recession typically occurs about one year after an inversion. The curve first inverted in March 2022, which means we are due for a recession soon.⁴

Shrinking M2 Money Supply – The M2 money supply is a measure for how much cash is circulating throughout the national economy. It tumbled from this time last year.

Steve Hanke is a Professor of Applied Economics at Johns Hopkins University. He thinks “a U.S. recession is baked in the cake.” And said, “Due to the Fed’s monetary mismanagement, the M2 money supply is falling at its fastest rate since the 1930s. The quantity theory of money tells us that, with a 6–18-month lag after M2 drops, economic activity will slump.”⁵

Some government officials did push back on the idea that we are entering a recession. Treasury Secretary Yellen said the US economy will avert of downturn. However, her prediction track record isn’t exactly perfect. Last year, Yellen had said there would only be a “small risk” of inflation, and that it would be “manageable.” To which she recently commented, “Well, look, I think I was wrong then about the path that inflation would take.”⁶

What It Can Mean

Since 1948, bear markets have started before the onset of a recession. The National Bureau of Economic Research has yet to officially declare a recession. Therefore, the S&P 500 could reach new lows in the near term. No bear market in the last 75 years has reached its bottom before the beginning of a recession.

Billionaire GMO cofounder Jeremy Grantham said, “This one is pretty damn big. It’s bigger than 2000, because it includes real estate and bonds, and that one did not. The economy had a gentle recession. It had no problem with real estate. It had no problem with markdown of debt. And yet, the Nasdaq went down 82%, Amazon went down 92%, and the S&P went down 50%. Be advised, this is not a gentle setback like 2000.”⁷

Powerful signs are pointing towards a severe recession. People who are interested in protecting the value of their portfolios should investigate the benefits of precious metals. A Gold IRA from American Hartford Gold can safeguard your wealth through an extended economic downturn. Call us today at 800-462-0071 to learn more.

Notes:
1. https://markets.businessinsider.com/news/stocks/recession-economy-downturn-markets-conference-fed-inflation-stocks-business-cycle-2023-4
2. https://www.brookings.edu/2023/01/25/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/
3. https://markets.businessinsider.com/news/stocks/recession-economy-downturn-markets-conference-fed-inflation-stocks-business-cycle-2023-4
4. https://www.fool.com/investing/2023/04/22/recession-indicator-been-100-accurate-since-1955/
5. https://www.theepochtimes.com/recession-risk-grows-after-money-supply-shrinks-at-fastest-pace-since-great-depression_5187430.html?welcomeuser=1
6. https://www.nbcnews.com/business/economy/treasury-secretary-janet-yellen-admits-was-wrong-inflation-rcna31416
7. https://markets.businessinsider.com/news/stocks/jeremy-grantham-stock-market-crash-real-estate-everything-bubble-recession-2023-3