Why Emotions Are Your Worst Enemy in Bad Markets
The topic of behavioral economics and its impact on investment decisions, particularly in turbulent times, is both fascinating and crucial for investors to understand. During periods of market instability, emotions like fear and greed can easily take the driver's seat, often leading to impulsive decisions that could harm long-term investment goals. Whether it's panic selling during a market dip or getting caught up in the euphoria of a bubble, emotional choices tend to be reactive and can result in missed opportunities or significant losses.
Historical Times Demand Prudence - And Patience
Navigating challenging economic conditions is a fundamental aspect of my responsibility, as it has been throughout my career. Writing about the necessity of exercising caution during historically bad investment times serves a dual purpose. First, it establishes us as a thought leader in the industry, someone who takes a balanced approach, considering both risk and reward.
Educating clients about why and how they should be cautious can help build trust, which is particularly valuable when market conditions are unfavorable. Content like this can act as a guidepost, helping clients understand that while market downturns are inevitable, catastrophic losses don't have to be.
Lots of Red at The Fed
For the first half of 2023, the Federal Reserve has officially declared a loss of $57 billion. a significant amount! A little-known report called the "Federal Reserve Banks Combined Quarterly Financial Report as of June 30, 2023" (CQFR) is noteworthy for its red ink. For 2023, we may expect a loss of over $100 billion annually, and we can expect the losses to continue into 2024.
How does a central bank lose tens of billions of dollars in just six months, especially the biggest and most significant central bank in the world? This information may seem perplexing to the average person who has been influenced by the Fed's mystique.
Remembering that the Federal Reserve is a bank—well, officially 12 Federal Reserve Banks (FRBs), spanning districts all across the United States—in addition to being a media star as the manipulator of the leading currency in the world is important in order to comprehend what is happening. They have enormous combined assets totaling $8.3 trillion (with a T). Similar to other banks, the FRBs have loans, investments, deposits, borrowings, interest revenue, interest expense, and profit or loss. Additionally, they have private shareholders in the form of the commercial banks that are "Fed member banks," and the Federal Reserve Banks of Washington, which supervises them and levies fees for its operations.
The combined FRBs' one-of-a-kind monopoly on the production of U.S. dollar paper money is what drives their desire to constantly be profitable. As a result of this lucrative privilege, they collectively have $2.3 trillion in dollar bills that are freely circulating in the nation and around the globe that they can use to fund interest-bearing assets at no expense. Simply put, they print some money and use it to purchase Treasury bonds. But in a historic turnaround, the merged Fed is now earning enormous losses rather than profits, as it consistently did for more than 100 years.
According to the CQFR, the merged Fed earned $88 billion in interest during the first half of 2023, but paid out $141 billion in interest expenses. It had to pay its $4 billion in overhead costs in addition to the $53 billion in interest it had to pay out.
Why doesn't it earn more money from interest? Because the Fed invested $5 trillion in one of the most traditional financial risks—borrowing short and lending long—and because interest rates have now moved sharply in the opposite direction, the risk has now materialized as actual losses.
On June 30, the combined Fed owned $5.5 trillion in Treasury securities with an average yield of 1.96% and $2.6 trillion in mortgage-backed assets with an average yield of 2.20%, according to the CQFR, which can be found on page 22. In other words, it made huge investments in assets with extremely lengthy fixed rates and secured a historically low yield of roughly 2% for many years. In the meantime, it was financing $5 trillion of these assets through repurchase agreements, the cost of which increased to over 5%, and floating rate bank deposits.
You don't need a Ph.D. in economics or a degree in banking to understand that borrowing money at 5% while lending money at 2% is a losing strategy. Our Federal Reserve Banks have done and still do this.
We close with a straightforward inquiry: Did the Fed's top officials intend to lose $57 billion in six months? Did they anticipate that this year will see a loss of almost $100 billion? Was a mark-to-market loss of more than $1 trillion something they had in mind? It is inconceivable that they did. The Fed's image for sound decision-making is not helped by the abundant supply of red ink they have delivered. - Mises,org
The Worst Economy Since . . .
The Census Bureau published its estimations for the shift in the real median family income for the previous year on Tuesday. According to its estimations, the median income of American families dropped by 2.3 percent in 2022, the biggest drop since 2010.
Even while history doesn't always repeat or even rhyme, there are times when it does. The second year of Biden's vice presidency saw a fall in household income comparable to the one experienced in the second year of his administration.
Before taxes, that is. Household income decreased by 8.8% when changes to taxes paid and subsidies given are taken into account. The collapse of the epidemic "rescue" measures of the Biden administration, such as child tax credits and the oversized earned income tax credit, which boosted incomes and contributed to the greatest inflation in decades, was a major factor in the post-tax slump.
Analyzing the Census report on income for 2022 in greater depth only makes the situation worse.
Family family income actually decreased by 2.9 percent, which is greater than the median decline. Non-family households increased by 0.8%. In contrast to the 1.4 percent loss for those under the age of 65, older Americans suffered an income decline of 2.1 percent. The elderly and families have so suffered the most.
How chaotic was it at the southern border? It isn't assisting Americans in increasing their incomes. While foreign-born wages actually increased by 0.2 percent, native-born incomes declined by 2.5 percent. - Breitbart
Peter Schiff Has A Lot To Say About Our Economy
He recently appeared on Nino’s Corner with David Nino Rodriguez to talk about the trajectory of the economy. Peter explained why the dollar is doomed to crash and what we can do to prepare. He also emphasized that the powers that be have managed to kick the can down the road for a lot longer than he expected. But you can’t kick the can down the road forever. Eventually, you will run out of road.
Here are some highlights from the interview:
“There really is no ‘Bidenomics.’ All they’re doing is spending money. Any fool can do that.”
“I just think they’re trying to get votes. That’s the bottom line. They’re trying to hand out something for nothing. The problem is the voters don’t understand how expensive it is when you get something free from the government. Politicians exploit that ignorance and that greed to perpetuate their own careers. Unfortunately, it undermines the living standards of all the people who are voting to reelect them.”
“Don’t think just because you didn’t get a tax hike that you’re not paying for Bidenomics. You’re paying for it all every time you go to the supermarket.”
“The problem with immigrants isn’t the immigrants. It’s the welfare state that attracts many immigrants. We need to turn that off.”
“We’re literally living on borrowed time. We’ve been able to kick the can down the road for many, many years longer than I thought we could a decade or two ago. But the problem is all these years of can-kicking have simply allowed the problems to get much bigger. And so the consequences we didn’t want to deal with a decade ago are much more severe now because we didn’t deal with them a decade ago. We let the problems get bigger.”
“When this crisis hits, because we’ve succeeded in delaying the inevitable, the inevitable is going to be that much worse.”
Navigating the turbulent waters of a volatile market is no easy task, especially when emotions like fear and greed threaten to hijack your investment decisions.
As we've discussed, behavioral economics reveals how detrimental emotional choices can be to your long-term financial goals.
Whether it's reacting to unsettling news from the Federal Reserve or getting swept up by the latest market trends, allowing emotions to dictate your investment strategies is a surefire way to risk significant losses. In times of uncertainty, it's crucial to remain disciplined, stick to your investment plan, and resist the emotional triggers that lead to reactive decision-making. By doing so, you're not just safeguarding your assets, but also positioning yourself to capitalize on opportunities that others might miss due to emotional misjudgment.
