• The Federal Reserve raised interest rates .75 percent to fight inflation
• The Fed will continue raising rates well into next year with the aim of hitting a 2% inflation rate
• The blistering rate hikes could cause recession, sink stock markets and raise unemployment

Interest Rates Increased by 75 Basis Points for Third Straight Month

Federal Reserve raised interest rates three quarters of a percentage point to fight inflation. This is the third massive interest rate hike in a row. The goal of this rapid escalation is to ease inflation by slowing the economy.

Inflation is at its highest levels since the 1980s. To the shock of the Fed, inflation rose in August. The increase occurred even after two record setting rate hikes. After this rate increase, the rate is now in the 3% – 3.25% range. That is the highest it has been since 2008.¹

The Fed indicated they will keep hiking rates to well above the current level. They signaled rates could be raised to 4.6% in 2023. Which means another potential three-quarters point hike in November. Fed Board members don’t expect to cut rates until at least 2024.²

This is the most aggressive tightening cycle as of 1990. Fed Chairman Powell surrendered any hope that inflation was transitory when rates were raised back in March. And after his remarks in Jackson Hole, he has virtually given up on achieving a ‘soft landing’. Instead, he warned of pain coming to households and businesses.

Members of the Federal Reserve Board hope inflation drops down to 5.4% by the end of this year. But when food and energy prices are removed from their calculations, inflation is expected to drop only .1% this year. They don’t plan on reaching their 2% inflation goal until 2025.³

Effects of Rate Increases

Rate increases make home loans, credit cards and car financing more expensive. Some credit card issuers have hiked up their rates to 20%. Mortgage rates have nearly doubled from one year ago to 6%. Existing home sales plunged in August. That’s the seventh straight monthly drop. Prospective buyers are failing to qualify for mortgages as rates tick up.⁴

The Fed says they feel comfortable raising rates because of the current low unemployment numbers. They point to an hourly pay increase of 5.2% from last year. What they don’t emphasize is that inflation more than wipes out any wage gains.⁵ Unemployment is expected to rise to 4.4% by next year from its current 3.7%. Unemployment jumps that large usually go hand in hand with a recession.

The Fed predicts GDP growth slowing to .2% in 2022. That’s down 1.5% from their last estimate in June. Their prediction follows two consecutive quarters of negative growth. In other words, we’re in a technical recession and expect it to continue into next year.

Market experts fear the Fed will slow the economy more than investors expect. Some traders are pricing in the idea that the Fed will give up when they get close enough to their inflation target. That they won’t force a recession to stop inflation. Chairman Powell wants to drive home that there will be no pivot.

“The Fed almost always over-tightens because it uses lagging indicators,” said Tom Porcelli, chief U.S economist with RBC Capital Markets, “It has to wait for everything to be out in the open.”⁶

The stock market is going to be battered if another 75-basis point hike is issued at the next Fed meeting. The rate increase will create a drastic slowdown in profits and the economy.

The Chief Investment Officer with Citi Global Wealth said, “People haven’t considered the amount of earnings declines and the impact on the markets. There’s a real risk to the economy. It’s why we’re worried about corporate earnings next year.”⁷

The Federal Reserve has proven that they are committed to stopping inflation at any cost. By continuing this path with wavering, the Fed could cause markets to collapse, unemployment to jump and a severe recession to take hold. The effects on retirement funds could be devastating. There is a way to protect your savings. Ask us about a Gold IRA today to learn more.

Notes:
1. https://www.cnbc.com/2022/09/21/fed-rate-hike-september-2022-.html
2. https://www.cnbc.com/2022/09/21/fed-rate-hike-september-2022-.html
3. https://www.cnbc.com/2022/09/21/fed-rate-hike-september-2022-.html
4. https://www.foxbusiness.com/economy/fed-meeting-interest-rate-hike-jerome-powell
5. https://www.cnbc.com/2022/09/21/fed-rate-hike-september-2022-.html
6. https://www.cnn.com/business/live-news/stocks-markets-today-fed-rate-hike/index.html
7. https://www.cnn.com/business/live-news/stocks-markets-today-fed-rate-hike/index.html

• Stocks plummeted more than 1,000 points on news of rising inflation
• The real estate market could collapse as the Fed must drive housing prices down to tame inflation
• Analysts are saying this bond bear market is the worst year in history due to inflation

Stocks in Disarray

Current events are rewriting the investment rule book. Traditionally, a well-balanced and diversified investment portfolio is like a three-legged stool. One leg represents stocks, the second one bonds, and the third leg is real estate. With inflation stuck at a 40 year high, the stool is falling apart.

Stocks had their worst day in more than two years on Tuesday. The market plummeted after the Consumer Price Index data showed that inflation increased in August. All three leading indexes suffered a drop. The Dow fell 1,276 points. The S&P 500 declined 177 points and the Nasdaq slid 632 points. For the year, the Dow is down 14.4%. The S&P 500 has lost 17.49%. And the Nasdaq plunged 25.64% into bear territory. ¹

The stubborn inflation numbers made investors sell everything. The 11 sectors of the S&P and all 30 of the Dow Jones equities experienced declines. Traders fear the Fed will be forced to continue raising interest rates to bring inflation down. High interest rates will devalue stocks by damaging corporate profits. There is also a high chance that raising rates will cause a recession.

There is now talk of the Fed issuing an unprecedented 100 bps rate hike. The Fed’s own website says that they must raise interest rates above the core rate of inflation. That means the market is vastly underestimating how high rates will go. Powell has repeatedly confirmed his 2% inflation target. Recession or not, any chance of the Fed pivoting away from their aggressive plan is wishful thinking.

Savita Subramanian is the Bank of America’s Securities head. She says the S&P 500 is the “worst thing to own” in this current high inflation environment. That is, unless you are willing and able to wait 10 years. “If you’re thinking about what’s going to happen between now and let’s say the next 12 months, I don’t think the bottom is in,” she continued. ²

Real Estate and Bond Markets in Trouble

The other two investment legs, real estate and bonds, are looking wobbly as well.

Analysts worry the Fed could crash the housing market. Interest rate hikes can lead to higher mortgage rates. Which could give potential home buyers second thoughts. Housing costs are largely responsible for August’s high inflation numbers. Thus, the Fed is going to focus on forcing housing prices down.

Home sales are already slipping. Sales declined in July for the sixth month in a row. Housing starts are a measure of new home construction. They also plunged in July.

The safety of bonds is evaporating too. Analysts are saying this bond bear market is the worst year in history due to inflation. The Bloomberg Global Aggregate Bond Index down more than 20% from its peak for the first time ever. And it is only set to get worse. ³

The Fed is accelerating their ‘quantitative tightening’(QT). In other words, they are speeding up the process of unloading their balance of almost $9 trillion of Treasuries. They bought the assets to help shore up the economy during the pandemic. Now, QT is threatening the already fragile bond market. The government bond market is considered the bedrock of the global financial system. QT is removing the liquidity from it.

Bank of America has described the Treasury market strains as “arguably . . . one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007.”⁴

These uncertain times are throwing out the traditional investment rule book. Stocks, bonds and real estate are all stumbling. However, gold remains a sturdy safe haven investment. Robert Kiyosaki is the best-selling author of the ‘Rich Dad, Poor Dad’ series. Kiyosaki says to protect your portfolios with “hard assets” like gold and silver as the “biggest crash in history” unfolds.⁵ To learn more how a Gold IRA can preserve your wealth, contact us today.

Notes:
1. https://www.financialexpress.com/investing-abroad/featured-stories/us-stocks-suffer-their-worst-day-in-more-than-two-years/2667050/
2. https://markets.businessinsider.com/news/stocks/warren-buffett-investing-advice-sp500-worst-thing-to-own-bofa-2022-9
3. https://www.reuters.com/markets/europe/bond-bear-market-worst-year-history-asset-inflation-bites-2022-09-02/
4. https://www.ft.com/content/70e43592-30d0-4348-916b-673910ad7726
5. https://www.kitco.com/news/2022-09-14/The-biggest-crash-in-history-is-here-protect-your-portfolio-with-gold-silver-and-livestock-Robert-Kiyosaki.html

• The Federal Reserve needs unemployment to increase to bring inflation down
• The Fed is massively underestimating how high the unemployment rate needs to go
• With a ‘soft landing’ unlikely, working Americans will pay the price for the Fed’s mistakes

The Fed Likes Unemployment

People going to work is good thing. Unless you are the Federal Reserve. They were happy to see unemployment increase slightly in August. Especially after it had gone down in July and job openings increased to 11.2 million. The Fed is counting on massive job losses to reduce the soaring inflation now hammering the economy. The idea being that increasing unemployment will decrease consumer spending. By removing money from the economy, inflation should go down. Fed Chair Jerome Powell euphemistically called sacrificing other people’s livelihood “softening the labor markets”.¹

The Fed’s plan to reduce inflation is a double punch to working Americans. Not only are they at risk of losing their jobs. Skyrocketing interest rates are making it harder to get a mortgage, buy a car, and manage debts. Meanwhile, the August jobs report showed hourly wages increased. This fuels the Fed’s decision to keep raising interest rates. The irony is that those wage increases are basically wiped out by inflation. The Fed is hurting the people that the government’s inflation-causing spending spree was meant to help.

For decades, economists have thought about inflation as an outgrowth of the unemployment rate. They will tell you that when the unemployment rate falls, the inflation rate rises. That’s because workers have the power to bargain for higher wages. These costs then get passed on to consumers. When the unemployment rate rises, inflation should drop. Workers have less leverage in a weak labor market. Ideally, there is a balance point where the rate of unemployment doesn’t increase or decrease inflation. The problem is, no one knows that point until after you’ve passed it.

Powell keeps emphasizes his goal of a ‘soft landing’. He believes inflation can be stopped without going into a recession or causing staggering unemployment. Yet, he has committed to doing whatever it takes to bring inflation under control. History is not on his side. “We’ve had 13 or 14 recessions since World War II, and more than two-thirds of those recessions were caused by the Fed raising the interest rate faster than the economy can handle,” said University of Chicago economist Austan Goolsbee. ²

The Fed Underestimates How High Unemployment Must Go

Larry Summers is a former Treasury Secretary. He is pushing back against Powell’s unfounded optimism. He said we need five years of unemployment above 5% to bring inflation under control. That translates to throwing more than 10 million people out of work. ³

The goal of a soft-landing clashes with a historical fact. Once the unemployment rate increases beyond a certain amount, it tends to keep rising. Since the 1940s, modest increases of half a percentage point spiral to jumps of 2% or more within a year. “Usually, once the labor market gets going downhill, it picks up speed and it goes further downhill,” said Claudia Sahm, a former Fed economist.⁴

“We don’t seek to put people out of work,” Powell said. “But we also think that you really cannot have the kind of labor market we want without price stability.” If the Fed doesn’t waiver from its 2% inflation goal, unemployment may hit 10%. Powell’s soft landing will be small consolation for millions of people. As former Fed Vice Chairman Alan Blinder said, “To the people that lose their jobs, this is not soft at all.” ⁵

Job insecurity is growing every day. It is important to make sure your assets are protected from inflation and recession. Contact us about our Gold IRA to learn how it can provide financial security during this economic downturn.

Notes:
1. https://thenewamerican.com/the-federal-reserve-wants-you-fired/
2. https://www.npr.org/2022/07/24/1112770581/inflation-recession-soft-landing-rates-jobs-fed
3. https://slate.com/business/2022/07/larry-summers-massive-unemployment-fed-inflation.html
4. https://www.reuters.com/markets/us/feds-job-friendly-soft-landing-hinges-history-not-repeating-2022-09-02/
5. https://www.npr.org/2022/07/24/1112770581/inflation-recession-soft-landing-rates-jobs-fed

• Analysts say lingering inflation and recession will send gold prices to record levels by the end of the decade
• Numerous global economic forces are sending investors looking for safe haven assets like gold
• In the near term, gold is forecast to break $2,000 an ounce

Gold Demand Will Send Prices to New Highs

Gold hit record highs this year. And according to recent reports, those records are set to be broken. Analysts say gold is on track to end the year above $2,000 an ounce. It could rise to nearly $5,000 an ounce by the end of the decade according to the “In Gold We Trust Report” from Incrementum AG. The nearly 400-page “In Gold We Trust report” is world-renowned. It has been dubbed the “gold standard of all gold studies” by the Wall Street Journal. ¹

Inflation has already caused stocks to lose value. The Nasdaq has lost 25% of its value this year. The report presents the case that inflation and recession will power a gold bull market. Gold will be sought as a hedge against the losses caused by the two forces.

The report lays out the numerous challenges driving investors to the safe haven of gold. The report predicts inflation and recession will combine to create a period of extended stagflation. It said the ‘Everything Bubble’ will turn into the ‘Everything Crash’. Supply chain snags will continue to drive up prices. And the push for deglobalization will also fuel inflation.

Meanwhile, the Ukraine war will keep up pressure on oil and food prices. Rising interest rates and a collapsing housing market will grind economic growth to a halt. And a price-wage spiral, a cycle where an increase in one causes an increase in the other, has already begun.

Sanctions also powered the demand for gold. As countries fight and currencies are politicized, gold remains politically neutral, has no counterparty risk and is very liquid. Central banks are acquiring gold at a breakneck pace.

Overall, the bleak economic picture creates a good backdrop for gold. The diversification between stocks and bonds of traditional portfolios won’t be enough to stem losses. They will need gold as a hedge. Gold rises during both inflation and recession. In the last 90 years, there have been only four years when both US stocks and bonds posted negative annual performance. Currently, all indications are that 2022 could be the fifth year.²

Predicted Gold Prices

The “In Gold We Trust” report forecasts gold will hit $4,800 by 2030. Pierre Lassonde is an eminent mining expert and CEO of Firelight investments. His gold price predictions are even higher. Due to unstoppable inflation, he predicts gold will hit $2,200-$2,400 an ounce in the mid-term. In the long term, gold could go as high as $10,000 an ounce. He based this estimate on the Dow to Gold ratio. The Dow to Gold ratio indicates the number of ounces of gold it takes to buy the shares in the Dow Jones Industrial Average index. He said the Dow to Gold ratio could converge to 2:1. If the Dow Jones contracts 20-30%, which is possible in an extended recession, that would send gold to $10,000 an ounce. ³

Based on these forecasts, buying gold today could be a wealth generating investment. However, the demand for gold is ultimately derived from its safe haven qualities. If you are looking to preserve your wealth, then you should learn more about our Gold IRA. Contact us today.

Notes:
1. https://ingoldwetrust.report//wp-content/uploads/2022/05/In-Gold-We-Trust-report-2022-Compact-Version-english.pdf
2. https://ingoldwetrust.report//wp-content/uploads/2022/05/In-Gold-We-Trust-report-2022-Compact-Version-english.pdf
3. https://www.kitco.com/news/2022-02-28/Pierre-Lassonde-predicts-200-oil-price-and-2-400-gold-price-in-a-month-as-Putin-s-war-drags-out.html

• Inflation and sanctions are speeding up the process of “dedollarization” around the world
• Russia and China are taking steps to eliminate the supremacy of the US Dollar
• Central banks and investors are moving towards gold and away from the Dollar

Dedollarization Speeds Up

The US dollar hit record highs last month. The greenback’s gains have been fueled by a combination of higher central bank interest rates, haven buying, and recession concerns. But this may be the dollar’s last gasp. Dollar supremacy could be coming to an end. Changing global conditions are speeding up the process known as “dedollarization”.

Dedollarization is the process of other countries moving away from using American dollars. The American dollar became the supreme currency after World War 2. It became the basis for rebuilding the global economy. In the process, the dollar cemented the United States’ superpower role.

But the state of the world has changed dramatically since World War 2. Countries are rejecting the primacy of the American dollar. And this does not bode well for the American economy.

Russia and China started real dedollarization after 2014. Russia had annexed Crimea and was sanctioned by the West. Russia turned to China. They started trading in the yuan to sidestep the sanctions. China was then pushed closer to Russia after the US imposed billions in tariffs on Chinese goods.

The US turned their currency into a weapon and wound up cutting themselves. China and Russia have since cut their use of the dollar for trade in half. Before 2015, 90% of trade was in dollars. Now, it is at 46%. They moved from the dollar to using their own currencies – rubles and yuan.¹

Sanction’s Unintended Consequences

Sanctions made Russia’s access to their foreign reserves of US dollar inaccessible. So, they accumulated Chinese yuan as a reserve currency instead. They now own one quarter of the world’s yuan reserves. Russia has also allowed the purchase of Chinese bonds. In addition, Russia is making bilateral deals around the world that are based in rubles instead of dollars.

Jeffery Frankel is an economist at Harvard University. He warned that while the dollar’s position is secure for now, spiraling debts and an overly aggressive sanctions policy could erode its supremacy in the long run.

“Sanctions are a very powerful instrument for the United States, but like any tool, you run the risk that others will start looking for alternatives if you overdo them,” he said. “I think it would be foolish to assume that it’s written in stone that the dollar will forever be unchallenged as the number one international currency.”²

China Asserts Its Currency

The Chinese government is strategizing how to avoid the sanctions that hit Russia. They are thinking about dumping their US dollar reserves preemptively. China has world’s largest US dollar reserves at $3.2 trillion. If they drop their dollars, it’s the beginning of end of the dollar as the world’s reserve currency.

And it’s not just China and Russia that are getting rid of their US dollar reserves. The IMF said central banks today are not holding the greenback as reserves in the same quantities as yesteryear. “The dollar’s share of global foreign-exchange reserves fell below 59 percent in the final quarter of last year, extending a two-decade decline.”³

China is also shedding the amount of US debt they buy. The US props up its currency by issuing government debt to other nations to finance its deficit. China rescued the US during the 2008 global financial crisis by purchasing enormous quantities of US Treasury bills. As of last month, China had cut the amount of debt they owned in half. If China stops buying debt, the United States government might not be able to continue functioning. The value of the dollar would plummet, and taxes would soar.

Most alarming is the potential move away from the petrodollar. The US dollar is powerful because, in part, it is the de facto currency for oil sales. That got shaken when China and Saudi Arabia started talking about using the yuan to buy oil. China is the biggest buyer of Saudi oil. Doing so would undermine the power the petrodollar gives the United States.

What’s does this all hold for the future of the US economy? Dedollarization would show a loss of confidence in the US currency as a safe haven. The value of the dollar could drop drastically. Americans could expect inflation, recession, and wild stock volatility. Retirement funds could be wiped out. The US will lose its status as the sole superpower.

As the dollar drops, investors will seek safety in alternative assets, such as gold and other currencies. A survey published in June by the World Gold Council found that 80 percent of the central banks expect to expand their gold reserves within the next year. The survey said central banks are now less confident in the role of the US dollar as a global reserve currency.⁴

If you want to protect your wealth like the central banks, then you should consider the Gold IRA from American Hartford Gold. It is designed to shield your retirement funds from the effects of dedollarization. Contact us today to learn more at 800-462-0071

Notes:
1. https://asia.nikkei.com/Politics/International-relations/China-and-Russia-ditch-dollar-in-move-toward-financial-alliance
2. https://asia.nikkei.com/Politics/International-relations/China-and-Russia-ditch-dollar-in-move-toward-financial-alliance
3. https://internationalbanker.com/finance/we-are-witnessing-a-global-de-dollarisation-spree/
4. https://internationalbanker.com/finance/we-are-witnessing-a-global-de-dollarisation-spree/

• The recently passed Inflation Reduction Act drastically increases the number of IRS employees
• Despite promises to the contrary, new IRS audits will most likely target middle- and low-income Americans
• A Gold IRA can help shield savings from a newly empowered IRS

The Inflation Reduction Funds the IRS

Joe Biden just signed the poorly named Inflation Reduction Act into law. Many economists agree that the law will do little to reduce inflation. What it will do is give $80 billion to the IRS to hire 87,000 new employees. As a result, Americans should prepare for an onslaught of new tax audits.¹

Democratic leadership says middle-income Americans have nothing to fear. They say audits won’t increase in regularity for anyone making less than $400,000 a year. Yet, the same Democrats torpedoed an attempt to codify such language into the bill. There is nothing to stop the IRS from targeting average Americans. Nothing except the promises of politicians desperate to win their midterm elections. Treasury Secretary Janet Yellen was asked about the bill’s impact. She did not dispute that more middle-class and low-income earners might face audits.

Statistically, the IRS most often targets disadvantaged individuals and communities. Low-income individuals have less ability to contest audits. They do not have the armies of attorneys available to the super wealthy.

IRS Audits Will Continue to Focus on Low- and Middle-Income Americans

The Government Accountability Office studied the IRS. They said, “From fiscal years 2010 to 2021, the majority of the additional taxes IRS recommended from audits came from taxpayers with incomes below $200,000. Audits of the lowest-income taxpayers resulted in higher amounts of recommended additional tax per audit hour compared to all income groups except for the highest-income taxpayers.”²

The Joint Committee on Taxation expects the taxes on households earning between $50,000 and $75,000 to increase. But households earning more than $1 million might actually get a tax break. They also said up to 90 percent of the money raised from underreported income will come from Americans earning less than $200,000. The Congressional Budget Office studied the Act. They said $20 billion of the Act’s promised revenue will come from audits of taxpayers making less than $400,000.³

A House GOP analysis studied the Act using historic audit rates. It found Americans with an annual income of less than $75,000 would be subject to more than 700,000 new IRS audits. By comparison, individuals making more than $500,000 will receive about 95,000 new audits.⁴

The Inflation Reduction Act doesn’t fix any of the structural problems with the IRS. It gives them more resources to enforce the convoluted loophole-filled tax laws. Laws that the wealthy know how to dodge. Most middle- and low-income Americans don’t have high priced attorneys to defend them. They soon find liens placed on their property, bank accounts frozen and wages garnished. Punitive actions that occur long before someone has a chance to defend themselves in court. Right or wrong, it is easier to pay them off.

National Taxpayers Union EVP Brandon Arnold said, “A lot of taxpayers don’t want to fight the IRS. They don’t have the time, they don’t have the money to fight the IRS. So they’ll roll over and pay those relatively small amounts, and that’ll squeeze a lot of money out of taxpayers just by harassment.”⁵

The Inflationary Reduction Act isn’t about making billionaires pay their ‘fair share’. The IRS isn’t here to make sure you get a refund or a tax break. Instead, a bulked-up group of new IRS enforcers will audit regular Americans to justify their $80 billion government gift. You can protect your income from aggressive government overreach. A Gold IRA offers the wealth-building power of tax-deferment. It also provides the wealth protection features of physical gold. Once established, taxes on gains are deferred until your metals are withdrawn from the account or sold. Contact us to learn more today.

Notes:

1. https://thenevadaindependent.com/article/yes-progressives-also-should-be-worried-about-87000-new-irs-agents
2. https://www.gao.gov/products/gao-22-104960#:~:text=In%20recent%20years%2C%20IRS%20audited,incomes%20of%20%24200%2C000%20or%20more.
3. https://thenevadaindependent.com/article/yes-progressives-also-should-be-worried-about-87000-new-irs-agents
4. https://nypost.com/2022/08/16/ex-irs-whistleblower-says-middle-class-targeted-under-inflation-bill/
5. https://www.foxbusiness.com/politics/highly-suspicious-democrats-bill-beefed-up-irs-means-more-audits-taxpayers-union-exec-warns

• Gold prices ticked up after the recent inflation report and on a softening dollar
• Overseas demand is increasing with China leading the way
• Potentially smaller interest rate hikes and continued inflation make an ideal buying opportunity

Gold Demand Increasing

Demand for gold is going up around the globe. China is the world’s largest gold consumer. The World Gold Council said Chinese demand for the precious metal is booming. It increased as the price of gold fell and strict covid restrictions were lifted. Also, Chinese investors sought safe haven assets as their local stock market fell. In a traditionally quiet season, the Shanghai Gold Exchange had its strongest July since 2015. Gold imports were at their highest in five months to help meet the demand.

In the US, gold rallied as well. Gold prices had gained on Tuesday due to a weaker dollar. A weaker dollar makes gold less expensive for overseas buyers. Gold prices have gained for three consecutive weeks and are working on a fourth.

US Mint data show that gold coin sales are trending up. Annualizing current sales suggest that 2022 sales could surpass full year 2021. Sales would go up from 1.6 million ounces in 2021 to 1.9 million ounces in 2022. This would represent the strongest year of sales since 1999. ¹

Gold, Inflation, and Interest Rates

Gold ticked up after the July inflation data was released. Inflation appears to have cooled a small amount. It came in at 8.5%. Down, but still hovering near its highest rate in four decades. Markets had expected it to come in at 8.7%. This follows last month’s record shattering 9.1% inflation rate. ²

Gold jumped to a fresh daily high of $1,824 an ounce in reaction to the inflation data. “For gold, the slowdown in inflation could trigger substantial buying,” said analysts at TD Securities. Investors consider the precious metal an inflation hedge. Gold benefits when inflation is running high, and rates are flat. Investors move to gold as the purchasing power of currency shrinks. But higher interest rates make the non-yielding bullion less attractive. ³

Investors are getting bullish on the hope that a lower inflation rate may cause the Fed to slow down or stop their aggressive interest rate hikes. The Fed is trying to bring soaring prices under control by raising interest rates to tamp down demand.

However, the Fed is having a tough time figuring out how to react to recent data. Last week’s better-than-expected labor market report challenged their plans. The report showed employers added 528,000 jobs last month.

“If those numbers are to be believed, we generated over a half-million new paychecks in the month of July, which is a lot of extra income,” said an analyst at KPMG. “Even if individuals feel like they’re losing ground relative to inflation, that extra income is supporting demand, keeping upward pressure on prices.” ⁴

Investor excitement should be tempered by reality. The small drop in inflation is mostly due to falling gasoline prices. Core inflation paints a different economic picture. It takes out volatile food and energy costs. That rate remained virtually unchanged since last month. Regular Americans are still feeling the bite of inflation. Prices are rising faster than wages. Workers’ purchasing power is being chipped away. Average wages in July were up only 5.2% from a year ago — well short of the inflation rate.⁵

Thus, rate hikes are still coming. Only now, there is a slight chance they won’t be as epic as the last two increases. As a result, gold is in a perfect position. Prices look set to rise as higher interest rate headwinds die down. But the need for inflation protection remains. Contact us about a Gold IRA today to take advantage of this opportune moment.

Notes:
1. https://www.gold.org/goldhub/research/gold-market-commentary-july-2022
2. https://www.kitco.com/news/2022-08-10/Gold-price-jumps-as-U-S-inflation-cools-a-bit-but-key-core-metric-remains-unchanged-in-July.html
3. https://www.kitco.com/news/2022-08-10/Gold-price-jumps-as-U-S-inflation-cools-a-bit-but-key-core-metric-remains-unchanged-in-July.html
4. https://www.npr.org/2022/08/10/1116481885/gas-prices-inflation-interest-rates-federal-reserve
5. https://www.npr.org/2022/08/10/1116481885/gas-prices-inflation-interest-rates-federal-reserve

• The 60/40 portfolio strategy was a widely accepted investment plan to build wealth
• Inflation, high interest rates and recession are undoing the principles behind the 60/40 plan
• Advisors say a 60/40 portfolio should be rebalanced with real assets to protect wealth

The 60/40 Portfolio Strategy Works

What is the 60/40 portfolio? It is an investment strategy that splits a portfolio between S&P 500 Index stocks (60%) and investment grade bonds (40%). ‘Balanced’ portfolios blend the higher risk of stocks with the relative safety of government bonds. They are accepted as a robust method of building wealth. The combination was tough to beat for a long time. Investors using the 60/40 mix got better returns than more complex strategies from 2009 to 2021.

Until It Doesn’t

Then 2022 came. The tried and tested 60/40 formula for buy and hold investment portfolios got off to its worst start since WWII. They fell about 20% in the first half of 2022. That is the biggest decline on record for the start of a year. Some investors think it’s time to forget about this ‘set it and forget it’ model of investing.¹

All assets began 2022 in a precarious position. Stock and bond valuations were hovering around their highest levels in a century. They were being pumped up by super low interest rates and below-average inflation.

Due to a combination of factors, inflation soared to a 40 year high. Consumer prices and wages spiraled upwards. The Federal Reserve scrambled to undo the effects of their easy money give away. They raised interest rates at a blistering pace. Fears of recession now rattle investors alongside worries about runaway inflation.

Inflation, surging interest rates and recession all drove down the value of 60/40 assets. Stocks fell sharply. The S&P 500 Index is down 21%. Bonds are breaking records in the worst way possible. The Bloomberg US Aggregate bond index is down 11%. And with inflation eroding purchasing power, real returns are even worse. As a result, the 60/40 portfolio is floundering. It was down 17.6% this year through June 22. If it holds, that performance would rank only behind two Depression-era downturns, in 1931 and 1937.²

The idea behind the 60/40 strategy is being defeated. Theoretically, stocks serve as the growth engine of a portfolio. When stocks don’t do well, bonds serve as a counterweight. They are supposed to move in opposite directions. But that hasn’t been the case for 2022. Stocks and bonds have both moving in the same direction – down.

The near-term outlook for the 60/40 is not good. Christian Mueller-Glissmann is the head of asset allocation research strategy at Goldman Sachs. He said, “In an environment where you have both growth risk and inflation risks, like stagflation, 60/40 portfolios are vulnerable and to some extent incomplete. You want to diversify more broadly to asset classes that can do better in that environment.”³

Cash as an asset class isn’t a good option. If you are in cash right now, you’re losing 8.5% a year.
Real assets become more important when inflation is stuck at record highs. Precious metals can protect purchasing power when consumer and commodity prices are skyrocketing.

“A portfolio with a slice of real assets, like gold, performed even better than the 60/40 over the long run. In that case the optimal strategic asset allocation since World War II was closer to one-third equity, one-third bonds and one-third real assets”, Mueller-Glissmann said.⁴

Investors may need to reexamine their 60/40 portfolio plan. They should at least reset their expectations. Positive real returns will be hard to achieve in this climate. Instead, they should focus on protecting their purchasing power. This way they’ll be able to take advantage of future opportunities. Allocating a part of your portfolio to gold is one way to decrease risk. The price of gold is predicted to keep rising. Precious metal is an investment that can protect your wealth. It may also generate positive returns in a market where they are hard to come by. Contact us to learn more about how a Gold IRA can boost a changing portfolio strategy.

Notes:
1. https://www.goldmansachs.com/insights/pages/how-to-overhaul-tried-and-tested-investment-portfolio-when-inflation-soars.html
2. https://www.cnbc.com/2022/06/24/how-inflation-interest-rate-hikes-affect-the-60/40-portfolio-strategy.html#:~:text=Investing%20Club-,Inflation%20and%20rising%20interest%20rates%20have%20stressed%20the%2060%2F40,not%20dead%2C’%20says%20financial%20advisor&text=The%20model%20of%20a%20portfolio,inflation%20and%20rising%20interest%20rates.
3. https://www.goldmansachs.com/insights/pages/how-to-overhaul-tried-and-tested-investment-portfolio-when-inflation-soars.html
4. https://www.goldmansachs.com/insights/pages/how-to-overhaul-tried-and-tested-investment-portfolio-when-inflation-soars.html

• The Federal Reserve raised interest rates by another 0.75 percentage points to fight inflation
• The Fed has not ruled out higher rate hikes at future meetings, increasing uncertainty in the market
• The record pace of rate hikes is taking the US closer to recession and exploding national debt

The Fed Raises Rates – Again

When it comes to interest rates, it seems like the sky is the limit. The Federal Reserve raised interest rates by another 0.75 percentage points on July 27th. This is the fourth increase of the year, making it the fastest pace of tightening since 1981. The Fed had kept the rate pinned close to zero to ease the shock of the pandemic. The levels now match the peak of 2016-2018 tightening cycle.¹

The Fed is quickly raising rates to get inflation under control. Households are feeling the strain of costlier rent, groceries, and gas. The Fed has seen few reassurances that its souped-up rate hikes are working. Inflation in June notched a new peak, climbing to 9.1 percent compared with the year before.²

But wait, there’s more. A New York Federal Reserve survey suggests that price hikes aren’t over yet. The group predicts that prices will have risen approximately 6.8% from their current levels by June 2023.³

The Fed Plays Catch Up

The Federal Reserve waited too long to respond to early signs of inflation. Former Fed Chair Ben Bernanke said, “The forward guidance, overall, slowed the response to the Fed to the inflation problem.” Treasury Secretary Janet Yellen also acknowledged the misdiagnosis coming from her own department, and that of current Fed Chair Jerome Powell. “Both of us could have probably used a better word than ‘transitory,’” she said.⁴

Future of Interest Rates

The Fed is committing to bring inflation down to its target of 2%. It said that failing to get inflation under control and allowing it to become “entrenched” is worse than moving too aggressively.

The central bank is prepared to raise interest rates well into the second half of 2022. Economists are split on whether the Fed will raise rates by another 0.75 percentage points in September or downshift to a half-point increase. Economists think the benchmark rate must go from the current 2.5% to 5% to hit the Fed’s inflation goals.

“While another unusually large increase could be appropriate at our next meeting,” that will depend on the data between now and then, Powell said. Powell will likely avoid sending strong signals. He wants to keep the Fed’s options open for a half- or three-quarters point move in six weeks. Powell said they will make decisions on a “meeting by meeting” basis. This is leaving the markets guessing.⁵

Those guesses are taking different sides. Barclays predicted annual inflation will fall to 5.7% by December. Down from its current highs but still well above the Fed’s 2% target. Goldman Sachs and Barclays both expect the central bank to approve a half-point rate increase in September. They then believe the Fed will move back to more traditional quarter-point moves in November and December. Bloomberg Economics disagrees. They think there’s little chance that the Fed will slow down its rate hikes later this year.⁶

Effects of Interest Rate Hikes

Markets have switched to seeming to fear recession more than persistent inflation. Evidence of a slowing economy is already emerging. Initial jobless claims recently hit an eight-month high. Housing sales have slumped amid higher mortgage rates. Retail sales did increase last month. But they declined after adjusting for inflation.

Fed officials still maintain that a recession can be avoided. Powell said that he did not believe the economy was in recession. He cited a “very strong labor market” as evidence. He acknowledges that the path to avoiding a recession has narrowed. A Bloomberg survey of economists put the probability of a downturn over the next 12 months at 47.5%.⁷

Personal debt increases as interest rates rise. But so does government debt. Higher interest rates will drive US debt payments to record levels according to the Congressional Budget Office. The CBO found that the cost to the federal government to make just the interest payments on money already borrowed will rise to a record 3.3 percent of the nation’s gross domestic product by 2032. Under the CBO’s projections, paying off the nation’s debt will become the most expensive federal program. More costly than even Social Security or Medicare.⁸

The Federal Reserve is dead set on bringing runaway inflation under control. They are prepared to raise rates as high and as fast as they must. The Fed experiences the dangers of recession, depleted retirement funds and unpayable debt as numbers on a chart. But it will be individual Americans who live with the real consequences of their policy. Fortunately, there is a way to protect your retirement funds from the hazards of skyrocketing interest rates. A Gold IRA from American Hartford Gold is a safe haven for your assets. Contact us today to learn more.

Notes:
1. https://www.marketwatch.com/story/fed-hikes-rates-by-0-75-percentage-points-and-signals-more-hikes-coming-11658944875
2. https://www.washingtonpost.com/business/2022/07/27/fed-rate-hike/
3. https://www.cnbc.com/2022/07/27/how-the-federal-reserve-fights-inflation-through-interest-rate-hikes.html
4. https://www.cnbc.com/2022/07/27/how-the-federal-reserve-fights-inflation-through-interest-rate-hikes.html
5. https://www.bloomberg.com/news/articles/2022-07-27/fed-raises-rates-by-75-basis-points-to-double-down-on-inflation
6. https://www.usatoday.com/story/money/2022/07/27/fed-interest-rate-hikes/10150515002/
7. https://www.bloomberg.com/news/articles/2022-07-27/fed-raises-rates-by-75-basis-points-to-double-down-on-inflation
8. https://www.washingtonpost.com/business/2022/07/27/fed-rate-hike/

• Caused by high interest rates, a recession often sees dropping stock prices, collapsing businesses, increasing unemployment, and shrinking retirement funds
• Recession is especially difficult on pre-retirees due to lack of time to make up retirement fund losses
• Investors can prepare for recession by adjusting when they retire, building savings and investing in safe haven assets

Recession and Retirement

Skyrocketing inflation is punishing Americans with drastically higher prices at every turn. It’s also eroding people’s futures by reducing the value of their retirement funds. The Federal Reserve recognizes the dangers of inflation. Bringing it under control is now their top priority. The Fed is prepared to raise interest rates until inflation is tamed. Even if it means pushing the economy into a recession.

Recessions have several negative impacts on the economy. Financial markets drop. There is an increase in foreclosures and personal bankruptcies. There is also a decrease in consumer spending and business investment. Some businesses may be forced to close their doors. Others are forced to lay off employees. Unemployment numbers tend to go up during a recession.

A recession is hard for the economy overall. But it’s especially difficult for those who are about to retire or have recently retired. The five years before and after retirement are often referred to as the “fragile decade.” A recession during this period can have a serious impact on your retirement funds. It is harder to make up portfolio losses once you enter the fragile decade. And if you’ve started to draw on your retirement funds, the withdrawals combined with the market losses could deplete your account faster than you had planned.

Ideally, you should avoid selling off investments during a recession. When you sell an investment that’s lost value, you lock in your losses. The market will someday recover, and your investments will bounce back. However, near-retirees don’t have as much time to ride out the ups and downs of the market. It is more difficult for them to recover from any losses in their retirement plan. This why some people choose to postpone retirement. The hope is that working for a few more years allows you to make up for your losses.

By continuing to work, you can keep contributing to your retirement account. If you stop contributing, you’ll be doing so when prices have dropped. As a result, you won’t see the benefits when the market bounces back. You will also be able to delay your withdrawals.

Delaying retirement has potential benefits. However, it is not always an option. During a recession, companies tend to layoff pre-retirees first. People are forced to retire earlier than planned. A worst-case scenario emerges. Without a job, you stop contributing to your retirement fund. You need to tap into your savings earlier than planned. Plus, you’ll be making these withdrawals when your portfolio itself is taking losses. You are basically depleting your funds with very little chance of ever gaining them back.

Recession Proof Your Retirement

A recession is obviously bad for people in the fragile decade. While economists argue if we are officially in a recession, there are things you can do now to protect yourself.

Advisors recommend saving money and building an emergency fund. You should also pay off high interest debt, like credit cards. Perhaps most importantly, you should diversify your portfolio with recession proof assets.

Gold is an exceptional hedge against recession. Former Federal Reserve Chairman Ben Bernanke said, “The reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.” 1

Historic gold prices prove out its value during a recession. After rising 2.6 percent in 2008, the Producer Price Index for gold increased 12.8 percent in 2009 during the Great Recession. From September 2010 to September 2011, gold prices jumped a whopping 50.6 percent, due to the uneven recovery and volatility in the U.S. financial markets. 2

As part of the business cycle, a recession is all but guaranteed. All you can do is prepare for it. Especially if you are nearing retirement or are already retired. Call us about a Gold IRA to learn how precious metals can protect your wealth.

Notes:
1. https://www.bls.gov/opub/btn/volume-2/pdf/gold-prices-during-and-after-the-great-recession.pdf
2. https://www.bls.gov/opub/btn/volume-2/pdf/gold-prices-during-and-after-the-great-recession.pdf

• The Consumer Price Index increased to a 40-year high of 9.1%
• Though led by energy prices, inflation is making every sector more expensive for Americans
• Recession is more likely as the Federal Reserve is set to raise interest rates more aggressively

Inflation Hits a New 40-year High

Inflation defied expectations, again. The consumer price index increased 9.1% from a year ago in June. It was above the 8.8% Dow Jones estimate. That marked that fastest pace for inflation going back to November 1981.¹

The record high inflation is punishing millions of Americans. The Bureau of Labor Statistics said shoppers are paying higher prices for a variety of goods. Costs swelled for gasoline, groceries, rent and dental care.

Energy prices surged 7.5% from last month. They are up 41.6% from a year ago. Gasoline costs 59.9% more than it did last year. Food and shelter costs were up as well. This was the sixth straight month that food and shelter increased. In addition, rental costs had their largest monthly increase since April 1986. ²

Inflation has largely erased the strong wage gains seen in recent months. Real average hourly earnings decreased 1% in June from the previous month according to the Labor Department. On an annual basis, real earnings dropped 3.6%. ³

The average American worker has lost $3,400 in annual wages under Biden thanks to inflation.
Meanwhile, the average family in which both parents work has lost $6,800 in annual wages. Inflation has basically wiped out the federal stimulus money people received during the pandemic. The same stimulus that most economists hold responsible for inflation in the first place. ⁴

Today’s data seems to counter the idea that inflation may be peaking. What is worrying is that the sources of inflation are increasing. A Navy Federal Credit Union economist stated, “Though CPI’s spike is led by energy and food prices, which are largely global problems, prices continue to mount for domestic goods and services, from shelter to autos to apparel.”⁵

Gas prices have started to drop in recent weeks. However, economists warn that the situation might not significantly improve for some time. People will continue to struggle to afford essentials like housing and groceries. Oxford Economics projects that inflation will still be running at 7 percent by the end of the year.

Chris Zaccarelli, Chief Investment Officer of Independent Advisor Alliance, said, “This morning’s number is staggeringly high. It’s higher than expected and shows that inflation is going quickly in the wrong direction. It really pushes the Fed even further into the corner they’ve been operating in. They need to raise rates quickly and they need to raise rates by large amounts.”⁶

The Fed Forced to Respond More Aggressively

The Federal Reserve seems set to take an even more aggressive position. They have already raised borrowing costs by 1.5 percentage points. The Fed is expected to raise interest rates another .75 percentage points at their next meeting. The last .75 percentage point increase was the biggest hike since 1994. ⁷

However, traders now believe a full percentage point increase is on the table. About 38% of traders are now pricing in the chances of a 100-basis point increase later this month, according to the CME Group’s FedWatch tool. That is up from a 0% chance last week. ⁸

The Fed’s plan is to make it more expensive to borrow money and do things like buy a home or take out a car loan. The goal is to weaken consumer demand, leading to Americans spending less, and, eventually, prices dropping. Economists fear the Fed won’t stick their ‘soft landing’. Instead, they will crash the economy into a recession. Record interest rate hikes without results are eroding the credibility of the Fed.

Stocks fell following the data release. Since the Fed started raising interest rates in March, the S&P 500 stock index is down almost 9 percent. The Dow Jones Industrial Average is down more than 6.5 percent during the same period. It is down almost 16 percent since the beginning of the year.

Debt heavy technology stocks have been hit particularly hard. The Nasdaq stock index is down more than 10 percent since rates started going up. It is down nearly 30 percent since January. ⁹

Policymakers are short on solutions but long on blame. Inflation is rooted in multiple factors. They include clogged supply chains, outsized demand for goods, and trillions of dollars in Covid-related stimulus spending.

White House officials have blamed the uptick in prices on Russia’s invasion of Ukraine. However, inflation was already moving aggressively higher before that attack in February. The administration also blames “greedy corporations” for using the pandemic as an excuse to raise prices. And yet, after-tax corporate profits have increased just 1.3% in aggregate since the second quarter of 2021, when inflation took hold.¹⁰

The causes of inflation aren’t showing any signs of relenting. The Federal government is revealing how powerless it is to bring inflation under control. Investors should take the initiative to protect their wealth while they still can. A Gold IRA from American Hartford Gold can shield your retirement funds from runaway inflation. Contact us today to learn more.

Notes:
1. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html
2. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html
3. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html
4. https://www.foxbusiness.com/politics/average-american-worker-lost-3400-annual-wages-under-biden-inflation
5. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html
6. https://www.reuters.com/markets/us/view-hot-us-june-cpi-turns-up-pressure-fed-2022-07-13/
7. https://www.foxbusiness.com/economy/inflation-surges-june-hitting-new-40-year-high
8. https://thehill.com/policy/3557459-five-takeaways-from-the-stunning-inflation-numbers/
9. https://thehill.com/policy/3557459-five-takeaways-from-the-stunning-inflation-numbers/
10. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html

• The first six months of 2022 were dismal for the global economy
• This has been the worst start to a year for stocks in more than 50 years
• The second half of the year promises to be worse with soaring inflation, high interest rates, and recession

A Terrible First Six Months

The good news is that a miserable first half of the year is over. The bad news is that the second half looks like it’s going to be even worse.

A long list of economic crises is battering the economy. Uncertainty is at unprecedented levels. The Ukraine war persists. Covid 19 is wreaking havoc in China. Global supply chains are still snarled. Inflation is at an unrelenting 40 year high. Central banks are tightening monetary policy. Recession fears are growing. As the economy teeters, markets have tanked. The first half of 2022 was historically dismal for global stock markets. Analysts think the future isn’t any brighter.

This has been the worst start to a year for stocks in more than half a century. The NASDAQ has fallen by 30%. The S&P 500 closed out its largest first half decline since 1970. It is down over 20%. Both indexes are in bear territory. The Dow Jones Industrial Average is down over 15%. Bonds have had a terrible 6 months as well. This is a worrying sign since they are so closely tied to economic health. Whipsawing stock prices reflect how nervous investors have become. ¹

The Next Six Months Don’t Look Better

Deutsche Bank economists say it is “plausible” for the stock market to fall 35 to 40 percent from its January peak. This means that the current decline is only about halfway finished. Morgan Stanley also said there could be more downside ahead. According to them, a recession could send the S&P 500 more than 20% lower to 3,000 this year. In addition, Morgan Stanley points to falling bond yields as another indicator of an incoming recession. ²

It all began with a revelation from a Fed meeting on January 5. Data showed that Inflation was rising quickly. It posed a major risk to the economy. Interest rates would have to rise sooner than planned. And just like that, the era of red-hot stock prices fueled by cheap money ended. Aggressive interest rates to curb inflation dramatically altered the economic landscape.

The Federal Reserve’s determination to tame inflation by raising interest rates is a major factor in the current market turmoil. Jerome H. Powell, the Fed chair, said on Wednesday that the central bank’s efforts to fight inflation were “highly likely to involve some pain.”³

HSBC’s global chief strategist says the days of low inflation and low interest rates are behind us. He forecasts a future with persistent high inflation, increased interest rates and more volatile economic cycles. HSBC believes additional new reasons will fuel inflation. Deglobalization, climate policy and a commodity super cycle will push prices up across major economies. The bank believes we might be at peak inflation, but it won’t start declining until the end of the year. They advised that clients “will need to think harder about diversification and portfolio resilience.”⁴

The Schwab Center for Financial Research stated that stocks are going to feel strong downward pressure. The pressure is going to come from the Fed’s tighter monetary policy, reduced liquidity, and slow economic growth. They advise that investors should prepare for more volatility. Companies will be reporting earnings in the next few weeks. Weak earnings and profit margins could prompt yet another market downturn. They emphasize the importance of diversifying with low-risk assets. Gold has traditionally been such a safe haven asset.⁵

The risk of recession is rising. A lot would have to go right for there to be a second half of the year market rally. Inflation would need to be under control. A recession would have to be avoided. The Ukraine war would have to reach a resolution. And company earnings would have to stay afloat. Achieving any one of them is a tall order. All four would be nothing short of miraculous. Barring any miracles, major money managers are advising to hedge against risk with safe haven assets. The Gold IRA from American Hartford Gold is designed to preserve wealth during economic downturns. Contact them today to learn more.

Notes:
1. https://www.npr.org/2022/06/30/1108787657/6-months-stocks-2022-economy-first-half-nasdaq-dow
2. https://www.nytimes.com/2022/06/30/business/stock-market-worst-start-50-years.html
3. https://www.nytimes.com/2022/06/30/business/stock-market-worst-start-50-years.html
4. https://www.cnbc.com/2022/07/05/h2-market-outlook-strategists-on-how-to-weather-the-market-storm.html
5. https://www.schwab.com/learn/story/quarterly-market-outlook