Author: George Yacik

Thinking About Social Security?

Posted on by George Yacik

If you believe the scaremongers in the financial press and elsewhere, the clock is rapidly ticking down to the time — early June, according to the Wall Street Journal — when the U.S. Treasury will default on its obligations unless Congress passes legislation to increase the debt ceiling.

If Congress doesn’t act in time, the government will default on all of its obligations, we’re told, including payments due Social Security recipients, veterans, and beneficiaries of other government programs, not to mention the millions of investors both foreign and domestic who own the $31.5 trillion (and counting) of outstanding government debt.

If you’re like me, you’re probably tired of reading another story about what a monumental disaster this could be, but don’t worry, I’m not going to bore you with one.

I’m just using the debt ceiling drama as a segue into one of my financial pet peeves, and that is the advice we’re constantly given about when is the best time to start claiming Social Security benefits — assuming there are any in the event Congress fails to act and the government defaults.

If you believe the scare talk and you’re over 62 and therefore eligible for Social Security, you’re probably thinking you should apply now before the government runs out of money.

But according to the experts, you’re supposed to wait until you reach your “full” retirement age, which for most people is between 66 and 67, depending on what year you were born. (“Full” means you can earn as much as you want from a job and still collect your full Social Security benefit; if you start collecting before that, any money you earn from a job reduces your benefit dollar for dollar, although you’ll eventually get it reimbursed over time. But we won’t get into that right now.) If you can wait even longer, until you’re 70, you’ll reach your “maximum” benefit.

By waiting until you reach your full or maximum retirement age, these experts say, you can earn a much larger monthly Social Security check, or about 8% a year, for as long as you live. Which is pretty substantial, and it’s true.

However, these same experts almost invariably fail to tell you that by waiting until you’re 67 or older, you’re forgoing Social Security payments you could have been collecting in the interim, which can also add up to a nice amount of money.

But what if you don’t live that long and never collect? Continue reading "Thinking About Social Security?" →

Higher Rates Are Here To Stay

Posted on by George Yacik

If you believe what the inverted Treasury yield curve is saying, you must believe that, eventually — but probably sooner rather than later — the Federal Reserve will start lowering interest rates in response to the economic recession it will have caused by raising rates by more than 400 basis points in the past year.

But based on the strength of the economy despite those higher rates, it’s looking more like rates well above 4% - and possibly 5% — are going to be around for a long time to come.

But that’s not necessarily such a bad thing. For all those younger than 40, 4-5% long-term interest rates had been the norm for decades.

It’s only in this century that we’ve become accustomed to super-low interest rates, engineered by an activist Fed to insulate consumers and the financial markets from seemingly one financial crisis after another.

But that era looks to be over. And it looks like we’re managing.

Even though inflation appears to have peaked and is moving steadily downward, the Fed is likely to keep rates fairly high for quite a while, certainly the rest of this year and probably 2024 and beyond, absent yet another global financial crisis, to make sure the inflationary beast is truly slayed.

Even on the unlikely chance that the federal government defaults on its debt later this year if Congress can’t agree to raise the debt ceiling, the Fed isn’t likely to start lowering rates for a long time, despite what many investors hope and the inverted yield curve would indicate.

As we know, an inverted yield curve is when short-term rates are higher than long-term rates, which is the exact opposite of the natural order of things.

Long-term debt usually carries higher rates because a lot more can go wrong over, say, 10 or 20 years, than it can over just a couple of years or less. But that’s not what we have now. Continue reading "Higher Rates Are Here To Stay" →

Treasury Default Hysteria Begins

Posted on by George Yacik

While fights over Supreme Court and Federal Reserve Board nominations come sporadically as vacancies arise, there is one political battle we can almost always count on from year to year, and that is the struggle over extending the federal debt ceiling.

If it’s not increased, we’re told, the U.S. government will default on its obligations, Social Security and other government program beneficiaries will be rendered destitute, Treasury bondholders will see the value of their holdings decimated as they go without their interest payments, our soldiers and other government employees won’t get paid, and the global financial system will grind to a halt.

Most serious-minded adults, however (I hope), have learned to ignore this annual game of chicken that the White House and Congress insist on playing every year, although the financial press and media commentators profess to take it seriously.

Whichever political party controls the White House or the houses of Congress, the drama generally follows the same predictable format, namely the Democrats always favor raising the debt ceiling to avoid the catastrophes described in the first paragraph, while the Republicans express opposition in the name of fiscal responsibility.

Yet no matter how long the drama plays out, the outcome is always the same: the Republicans eventually knuckle under, life goes on and everyone gets their money, until the next debt debacle. Lather, rinse, repeat.

This year, it seems, the play has begun early.

Five whole months before the government allegedly runs out of money without a debt limit increase, Treasury Secretary (and former Fed Chair) Janet Yellen has already sounded the alarm and instructed her troops to put in place “extraordinary measures” to allow the government to keep paying its bills before it hits the current $31.4 trillion debt limit in June.

Yellen wasted no time in using the dreaded D-word to emphasize the supposed seriousness of the situation.

“A failure on the part of the United States to meet any obligation, whether it’s to debtholders, to members of our military or to Social Security recipients, is effectively a default,” she said. Continue reading "Treasury Default Hysteria Begins" →

Jerome Powell's Declaration of Independence

Posted on by George Yacik

Remember back about four or five years ago (was it really that long ago?) we heard a lot about how the Federal Reserve’s sacrosanct independence was being threatened because the incumbent in the White House at that time was trying to influence the Fed’s monetary policy?

We don’t hear that much about it anymore since the Oval Office and Congress switched sides, although the threats against that independence have grown even louder, largely because they don’t get reported on to nearly the same degree.

For example, last fall the chairman of the Senate Banking Committee, Sherrod Brown, and the then chairman of the House Financial Services Committee, Maxine Waters, both sent letters to Fed Chair Jerome Powell decrying his recent policy of raising interest rates by more than 400 basis points since March to combat inflation. “You must not lose sight of your responsibility to ensure that we have full employment,” Brown wrote.

Around the same time Sen. Elizabeth Warren, another Democrat, said Powell “risks pushing our economy off a cliff.” Warren, who loudly voted against Powell’s reappointment as Fed chair, added, “There is a big difference between landing a plane and crashing it.”

I suppose they have a right to criticize Fed policy as much as anyone else, although that right should extend to members of both parties. To his credit, Powell has largely kept silent or muted his comments on these attacks.

But now it appears that Powell believes he is being pushed too far. Criticizing the Fed for the way it conducts monetary policy to maintain stable prices and full employment—its legal mandate from Congress, after all—is one thing.

But to force the Fed to go way beyond its mandate and do something that is the rightful purview of Congress is an entirely different matter. And Powell said he won’t stand for it.

I’m talking about the desire of many progressives and environmentalists to have the Fed impose their views on climate change on the banks the Fed regulates and the customers those banks serve. Continue reading "Jerome Powell's Declaration of Independence" →

My Latest "Prediction" For 2023

Posted on by George Yacik

Back in March I posited the notion that the S&P 500 would need to fall to about 2,900 before all of the froth that the Federal Reserve had injected into the market through its various monetary stimulus programs dating back to the Great Recession had finally burned off.

On Christmas Eve the S&P closed at 3844, which would put it 19% below its all-time high of 4,766 on December 27, 2021, or about a year to the day.

In recent days some market prognosticators have been warning that the market is poised to fall another 20%, which would put the index at about 3,000, or slightly above my guesstimate.

So do I feel vindicated, if that is the right word? No, and I hope I’m wrong anyway.

First, my guess was not a prediction, just a quick back-of-the-envelope calculation based on my assumption that the Fed was responsible for about half of the stock market’s 600% gain between the March 2009 bottom of 683 and the time I made my comment.

So, if we cut that 600% gain in half, that would reduce the S&P’s gain to a still respectable 300%, or a little below 3,000.

Not an educated estimate, maybe, but I thought a reasonable guess—a worst case scenario, if you will.

Second, we don’t know if these bears will turn out to be right. I hope they’ll be wrong.

I now believe the Fed won’t have to drive the economy into the tank in order to get inflation down to where it wants it to be, probably in the 2.5% to 3% range.

Remember, about two years, in what was considered to be a major policy shift, the Fed said it was willing to let inflation “overshoot” its long-term target of 2% for a time, as it indeed it did.

Now it looks like inflation is dropping a lot faster than most people thought, and the Fed itself is now forecasting that inflation will fall to 3.1% next year before declining in 2024 to 2.5% and 2.1% in 2025, i.e., putting it at its long-term target. Continue reading "My Latest "Prediction" For 2023" →