As concerns about rising inflation are compounded by painful stock and bond market downturns, expect anxiety about savings, investments, and a stable financial future to increase.
However, by better understanding the key issues and the difficult steps that will eventually get us out of this predicament, we can stay steady and take advantage of new opportunities during the tricky months ahead.
Our innovative economy and the American Spirit are still too strong to crumble, even under the current adminstration in D.C., which is rife with mismanagement.
The Good News:
1.) Our U.S. banking and financial system is safe, sound, and substantially capitalized. Banks have been cautious with lending and are benefiting from savings deposits growing at historically high double digit rates.
Household balance sheets remain robust totaling approximately $2 trillion.
In addition, years of generous Federal Reserve quantitative easing programs have provided the financial industry with more than enough reserves to handle the current inflationary period and potential stagflation or recession in the years ahead. Don’t be surprised by an unexpected financial company blowup — which is not uncommon during dramatic market movements — but the system has a substantial financial base to weather major shocks.
2.) The U.S. dollar is quite strong, reflective of our still powerful economy, formidable business sector, and abundant natural resources (so long as the Biden administration doesn't completely shut down our energy sector). We remain more fortunate and certainly in better stead than Europe with their dependence on Russian energy.
3.) America possesses a strong labor market with over 11.5 million current job openings. Job vacancy totals exceed the number of unemployed; this translates to a solid economic base.
4.) The nation's overall business picture remains positive because the cost of capital is still historically low. This benefits business expansion. Additionally, home prices remain strong even with mortgage rates rising from 3% to over 5.6%.
Now, The Bad News:
1.) We are facing a volatile market correction for the foreseeable future. Long term Treasury Bonds (30 year maturity) are down 18% this year through April 30. Long term interest rates have doubled since December 2021. This is greater than the previous record loss of 17% in the period from March 1979 to March 1980.
Inflation is the worst thing that can happen for an income investment like bonds because their interest payments are fixed.
We had a 40 year Bull Market in bonds and now find ourselves in very different circumstances. Rates could likely rise further.
People are stressed as they see unexpected losses in bond investments, especially since these investments were once viewed as being part of a completely safe portfolio.
Stocks have also been performing poorly in all sectors.
The S&P 500 is down 15% so far this year; the Nasdaq is down almost 25%.
In fact, within the Nasdaq index, 50% of stocks are down more than 50% due to its high composition of previously soaring technology stocks that have been specifically slammed.
2.) The actual economy shrank by 1.5 percent in the most recent quarter due to soaring inflation. Supply chain problems and skyrocketing prices disrupted inventory buildup for businesses.
3.) Inflation is a devastating punch in the gut to American wage earners and retirees over time, particularly those of lower and middle incomes.
Wages have not kept up with double digit increases in energy, food, transportation, and housing prices. Retirees have fixed incomes that are vulnerable to soaring price increases.
As the market downward spiral continues, Americans will increasingly worry about investment declines in taxable and retirement (401K and IRA) portfolios.
All this is a siren call for our administration and monetary authorities, who have waited too long to address the inevitable. If inflation is not contained soon, it will get much worse down the road for investors, our markets, and our economy.
There is no short term fix.
But as a start, to help fight inflation, we are dependent on two things happening to stabilize markets and prices. First, the Federal Reserve needs to raise interest rates more aggressively.
So far, the Fed has moved only 75 basis points or three-fourths of a percent.
Second, the administration needs to stop pursuing federal spending as fiscal stimulus.
Continued spending will only aggravate an inflation rate running north of 8.5% — the highest inflation rate we’ve seen in 40 years.
Supply chain issues will take time to be sorted out — likely into 2023, but the bottom line is that monetary authorities will have to lead the way in tightening and slowing demand, and the federal government will have to stop spending money we don’t have.
Both of these goals should be much easier to accomplish with the changes we are bound to see in November. Hopefully, fresh, authentic fiscal conservatives will get elected to Congress who will be able to sufficiently tackle these big problems.
In the end, even with all the challenges we now face, we can’t be against America.
Here’s to hoping that the Fed will do the right thing, the government will stop recklessly spending, and a new slate of conservatives in Congress will help our financial crisis dissipate sooner, rather than later.
Clara Del Villar is Director of Senior Initiatives at FreedomWorks Foundation. Her financial industry career included senior roles in Investment Management, Private Asset Management, and Capital Markets. Her entrepreneurial ventures involved digital media as Founder, CEO of The Hispanic Post; energy tech as founder of InEnergy and health tech. She is a former adviser at 60 Plus Foundation. Currently, she is a Board Director at General American Investors Co. and Executive Committee of Weill Cornell Women's Health Symposium. She earned a BSFS at Georgetown University. Read Clara Del Villar's Reports — More Here.
© 2023 Newsmax. All rights reserved.