Editor’s Note: Today we’re sharing an important note from our friend Andy Snyder, founder of Manward Press. Read on for his prediction about next week’s Fed meeting – and what it means for investors and retirees.
– Christina Grieves, Senior Managing Editor
Oh boy… this is going to get interesting.
Next week could very well turn out to be one of the most pivotal weeks ever for the American economy.
If you own stocks… pay attention.
If you own a house… listen up.
And if you’re on a fixed income… well, we’ll start with you.
In case you missed the headlines, the fine folks at the Federal Reserve will clonk their heads together next week. The monetary maestros will review their score, listen to the beat of the drums and ultimately emerge whistling a tune that we’re all forced to dance to.
We won’t review the data. And we won’t prognosticate what Jay Powell and his bank-sponsored cronies will do.
Instead… we’ll tell you about the inevitable fallout from all of this.
Home prices will fall.
Stocks will inflate.
And your money will disappear.
For the folks on a fixed income, it’s a nightmare.
We’re already seeing it. Bond rates have plunged. The benchmark 10-year Treasury is once again threatening to go below 2%.
And, we’ll remind you, that’s with a strong economy… with stocks at record highs.
Imagine how much lower those rates will go when folks are truly fleeing risk and pouring into bonds.
Negative interest rates – a nasty three-word term we suspect you’ll soon hear all over the place – are the only option.
When that happens, fixed income will become fixed outgo.
That won’t be fun.
In the meantime, though, smart folks are taking advantage of all the cheap money.
We got a note from a friend in the mortgage business recently. He’s quite busy these days. But it’s not new loans keeping him busy… it’s refinancing.
You see, when rates start to fall, those in the mortgage industry use a term we use in the options game. They call a mortgage “in the money” when it makes fiscal sense to refinance it at a lower rate.
For most lenders, the barrier is somewhere around 75 basis points.
In other words, if a current loan rate is 4.75% and rates fall to 4%, the mortgage is in the money and the homeowner will likely benefit from refinancing.
Right now, nearly a third of all loans made in the last 18 months (virtually brand-new loans) are in the money.
That’s nuts. It represents some $354 billion in loans.
It’s great news for homeowners… but it’s hell on the lenders – and their individual investors – trying to make a buck from a buck.
Like most things on this topic, the trend is good until it’s not. Eventually the refinancing will slow and the mortgage industry, too, will have its foot caught in the trap.
Will we someday soon see lenders advertising zero-interest mortgages? I guarantee it.
It’s a trend that started in the auto industry in 2008… and hasn’t gone away.
This trap is tough to get out of.
Death of the Greenback
Perhaps the biggest thing to come out of this trend, though, is the reshaping of our money.
Negative interest rates don’t work all that great when we have alternatives to banks. When it’s cheaper to keep our cash under the mattress, that’s what we’ll do.
That’s why it’s fascinating to see bitcoin and other cryptos surging in value this year.
In fact, Facebook’s big new crypto adventure may be the most interesting yet.
With the launch of the company’s own virtual currency, a fresh generation of folks will be sucked into an adulterated form of money.
Just like today’s kids will never know a world without social media and internet addiction… they’ll never see a world where a buck was a buck.
Of course, it could all fall apart next week.
We could be slapped in the face and proven wrong.
All that would need to happen is for the Fed to step aside and let the free market take control.
Powell would simply have to put his hands in the air and admit defeat. The trap around his foot would instantly disappear. The market would start its march toward normalcy, and we’d all be better off.
But here’s the thing… the free market tends to take power from those who don’t deserve it.
And nobody in Washington wants to give up their power.
So we’re stuck with it… and we’re stuck with a week that, when the ink is dry, could prove to be one of the most fateful weeks in America’s economic history.