Author: George Yacik

The Fed Kicks It Up a Notch

Posted on by George Yacik

A long, long time ago — 1992 to be specific — the American media howled with derision when then President George H.W. Bush professed “amazement” at a new supermarket bar code scanner, the coverage of which was supposed to demonstrate that Bush was hopelessly out of touch with the daily lives of ordinary Americans.

To its credit, the Associated Press a few days later tried to correct that impression, but by then the rest of the press had moved on and the falsehood has lived on ever since.

Bush’s supposed gaffe at least had no policy ramifications, although the story didn’t help his reelection efforts that year.

The same can’t be said about President Biden’s absurd comments to 60 Minutes last Sunday that inflation is now under control, albeit at more than 8%, the highest sustained level in more than 30 years.

After dismissing August’s monthly CPI reading as "up just an inch, hardly at all," he proceeded to gladly dig himself even deeper, proudly telling the interviewer Scott Pelley that “we're in a position where for the last several months, it [inflation] hasn't spiked, it's been basically even.”

In other words, inflation hasn’t risen to 9% or 10% year-on-year, so we’re in good shape.

This comes on top of other whoppers he and other members of his administration have said over the past several months, such as telling us that the recent student loan giveaway and an earlier deficit-raising budget measure were all already “paid for,” as if there was no cost involved.

Not to mention labeling his most recent budgetary measure the “Inflation Reduction Act.” Talk about Newspeak.

The point here is to demonstrate just how hard Federal Reserve Chair Jerome Powell‘s job is going to be to try to bring down inflation — yes, Mr. President, it’s really high and not getting lower — without any help from the fiscal authorities led by the White House. So brace yourselves for more interest rate increases. Continue reading "The Fed Kicks It Up a Notch" →

After The Student Loan Bailout

Posted on by George Yacik

Should President Biden's recent pay-for-votes forgiveness of student loans make you nervous if you own government-guaranteed securities?

Although it seems highly unlikely, the student loan giveaway could create a slippery slope that leads next to mortgage forgiveness for veterans or some other protected or politically favored class, or some other form of federal debt relief. 

In that event, what would happen to so-called government-guaranteed securities backed by VA mortgages if the president declared that some or all of those loans were forgiven? Why not FHA loans, that are made to many of the same people who have student loans, i.e., those who supposedly have trouble paying back their loans or getting them in the first place because they have marginal credit or can’t afford a large down payment.

It wasn’t very long ago that Fannie Mae and Freddie Mac, the twin secondary mortgage agencies, failed and were taken over by the government, leaving equity investors with shares worth next to nothing (both are currently trading at about 50 cents a share on the pink sheets).

Before they went bust during the global financial crisis, it was widely assumed that Fannie and Freddie were backed by the full faith and credit of the U.S. government, which turned out not to be the case (as that great legal scholar Felix Unger reminds us).

Assuredly, mortgages backed by the VA and FHA are different animals than those issued by Fannie and Freddie, but that doesn’t mean they’re invulnerable (they historically have high default rates). With interest rates on mortgages now north of 5% and a recession possibly looming, how long will it be before pressure grows on Biden to give the weakest homeowners a break?

Now it doesn't seem so far-fetched, does it? Today student loans, tomorrow home mortgages. How far do we want to take this? 

In the past we've heard some people say we should weaponize Treasury securities against our foreign adversaries, such as the Chinese, who own so much of our debt. Does this now become a little less of a fantasy and more of a possibility, as our relationship with Beijing continues to deteriorate and the president is in such a forgiving mood?

The actual dollar cost of Biden’s student loan giveaway has yet to be calculated, but it’s safe to say it’s a lot more than he and his defenders claim. Some analysts say the total cost will be about $1 trillion, which certainly seems reasonable. It could certainly add up to a lot more, if and when those saps who are still repaying their loans wake up and realize that they have indeed been duped and demand forgiveness, too, or simply stop paying. Continue reading "After The Student Loan Bailout" →

The Fed's Intentions

Posted on by George Yacik

As we all know, there is a debate going on in the market about whether or not inflation has finally started to recede and therefore the Federal Reserve can start to let up on the brake pedal and — this seems a stretch — even start lowering interest rates and easing monetary policy in the near future.

Right now, those who believe the Fed is done tightening are winning the debate, witness the sharp rise in equity prices over the past two months. But at the same time several Fed officials have been warning that they are not done tightening yet — not by a long shot — and that more rate hikes are in the offing.

Notably, Minneapolis Fed President Neel Kashkari said last week that “there’s a disconnect between me and the markets,” adding that it was “not realistic” that the Fed would be lowering rates in the next six to nine months.

St. Louis Fed President James Bullard was equally blunt, telling the Wall Street Journal that he would “lean toward” another 75-basis point rate hike at the Fed’s next scheduled meeting beginning September 20. He said he expects high inflation “to prove more persistent than what many parts of Wall Street think.”

Yet many investors don’t believe them.

Does this mean that the Fed needs to make a much stronger message about its intentions, or is it content to let the market do what it wants to do and suffer the consequences if it has misjudged? Or are these investors correct in their assumptions?

Throughout his tenure, Fed Chair Jerome Powell has been not only market friendly but also keen on making sure the market understands what the Fed is up to. He doesn’t want any surprises. So does this mean that he is ok with what the market is doing, or if it’s wrong in reading the Fed, does he need to make a much clearer message?

Later this week the Federal Reserve Bank of Kansas City will host its annual Jackson Hole Economic Symposium in Wyoming. That seems like a good time for Powell to make it more crystal clear what the Fed’s intention are. Continue reading "The Fed's Intentions" →

Has the Fed Already Whipped Inflation?

Posted on by George Yacik

To hear Jeremy Siegel tell it, the Federal Reserve has already won its fight over inflation and should start taking its foot off the monetary brakes.

“I think the Fed should be near the end of its tightening cycle,” the ubiquitous market prognosticator and Wharton School finance professor told CNBC last week. According to Siegel, current headline inflation may still be high, “but forward-looking inflation has really been stopped. And I think the Fed should really slow down the rate of hiking, and if we get a snapback in productivity that’ll put further downward pressure” on inflation.

Is he right, or is it just wishful thinking so stocks can resume their decade-long winning streak?

Right now the signals look mixed, based on the two most important and widely-followed economic reports issued last week.
According to the Commerce Department, second quarter GDP fell 0.9% at an annual rate, on top of the prior quarter’s 1.6% decline.

Until this year, the mainstream media would have immediately pounced on that as clear evidence that we are officially in a recession, following the traditional definition of a downturn as two back-to-back negative quarters. Now, however, with a feckless president poised to lead his party to an election Armageddon in November, we learn that the old standard simply doesn’t apply anymore, so we can’t use the dreaded “R” word.

Whether that’s pure bias or pure something else that also begins with a B, July’s robust jobs report, which showed the economy added a much higher than expected 528,000 jobs, does create some doubt whether we are in a recession or not, and if so, what the Fed plans to do about it.

Instead of viewing the jobs report as good news being bad news – i.e., the Fed will need to continue tightening to stifle economic growth—and sell stocks, the market instead went up on Friday and continued to rally on Monday morning. Is the recession – if there ever was one – now officially over, the inflation monster slain and no further need for the Fed to continue to raise interest rates? Continue reading "Has the Fed Already Whipped Inflation?" →

Here's Another Crisis the Fed Can Fix

Posted on by George Yacik

Now that the geniuses at the Federal Reserve are on their way to engineering a soft landing — taming inflation while avoiding a recession — maybe their next task should be trying to fix the U.S. retirement system.

For the past year or so I have been bombarded with phone calls, emails and regular junk mail to sign up for Medicare, and this past weekend I finally reached the American Holy Grail: Medicare eligibility. It used to be Social Security, but with medical insurance so outrageously expensive Medicare has become the ultimate goal. 

Over this time I've found out the difficulties of trying to maneuver through this vast labyrinth of government benefits. Let me tell you, it ain't easy, so prepare yourself when it’s your time. 

How the government ever came up with this plan, I’ll never know, unless its intention was to deliberately confuse the heck out of its oldest citizens and to create a whole industry to help people navigate it. In that it has succeeded.

The first thing you need to know is that Social Security and Medicare are joined at the hip, but not exactly. While you’re eligible for Social Security starting at 62, you have to wait until 65 before you can sign up for Medicare, which again, is the more important of the two, unless you’re lucky enough to have your medical insurance covered by someone else, like your employer. For the vast majority of everyone else, however, Medicare is a critical benefit.

Maybe Bernie Sanders’ idea of Medicare-for-all isn’t such a great idea, but at least the two should start at the same time, just to avoid confusion.

First there’s the question of when to start taking Social Security. While you can start taking benefits as early as 62, you don’t reach your “full” payout until later, depending upon when you were born. For those born in 1957, you reach “full” retirement age at 66 and 6 months; add another six months if you were born in subsequent years.

Now, don’t confuse “full” retirement age with your “maximum” Social Security benefit, which occurs when you turn 70.

Confused yet? I’m just getting warmed up.

Most of the advice you hear about when to start taking Social Security is that you should wait until you reach your “full” benefit or, better yet, your “maximum” benefit. That’s because benefits rise by about 8% a year between 62, when you’re eligible to collect, and beyond. And the difference is indeed meaningful. For example, if you start collecting when you’re 62, rather than 66 ½, your monthly benefit will be reduced by $725, or 27.5%. Now that’s every month for the rest of your life.

While it may indeed be more financial advantageous to wait for the bigger payout, the fact is lots of people can’t – they need the money now. In fact, about a third of eligible recipients start collecting as soon as they can, at 62.

Waiting to collect isn’t always the best advice. If you believe you have a short life expectancy, either because of your lifestyle, family medical history, or both, it may be wise to start collecting early.

You also need to consider the amount of money you will forgo by waiting until “full” or “maximum” retirement age – that’s a lot of monthly payments you’ll be missing. In fact, the breakeven point between the two occurs around age 78, so if you don’t think you’ll live to see that, it may be wise not to wait to start collecting.

Now let’s get back to Medicare, whose rules are just as complicated.

There are several parts to Medicare. Part A, which covers hospitalization, is free. Yes, you heard that right - FREE.

The most expensive medical expense you can probably face is spending a night in the hospital, which Medicare estimates costs an average $13,600. And yet that coverage is free. I kid you not.

Part B covers your doctor visits, but there is a fee for that, which comes directly out of your Social Security payment. You are automatically enrolled in both Part A and B when you start collecting Social Security (I told you they were joined at the hip).

Part D covers your medicines, but not all the drugs you take are covered by Medicare (neither are dentistry, eyecare, and hearing aids, i.e., the stuff you really need when you’re old). There’s a fee for this, too.

Which brings us to Medicare “supplemental” insurance and “advantage” plans, which sound the same but are completely different. You’ve probably heard about them on TV.

As the name implies, supplemental insurance — which you also have to pay extra for - picks up some of what Medicare doesn’t cover (see above).

Advantage plans, by contrast, largely take the place of Medicare, but their premiums and coverages range all over the place. In case you were wondering, Advantage plans are also known as Medicare Part C.

I failed to mention that Social Security and Medicare make up the lion’s share of the federal budget and run out of money every few years, at which time Congress has to “fix” them to make them appear solvent for a while, which usually means making them even more complicated.

So maybe the Fed is the right place to seek a solution. It seems to solve just about all our other financial problems.

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.