It's Worse Than a Recession... And It's Already Here

The traditional financial advisor has little incentive to warn folks about bad things that might happen in the markets. It's not in their interest. They want you to keep your money with them as long as possible. If they issue warnings, most people don’t want to hear them, and they may walk away, taking their money and their fee income with them.

Most are financial planners, not portfolio managers (though many people might expect them to be the same thing). You're probably aware that full-service brokerages like Wells Fargo, Edward Jones, Merrill Lynch and Raymond James aren’t motivated by the performance of your investment portfolio—they're paid on making trades and/or the amount of money they manage... their business model is almost entirely predicated on simply recruiting more wealthy clients.

This is perfectly legal and not considered to be unethical by industry standards. Do you remember the testimony of Goldman Sachs CEO Lloyd Blankfein in front of Congress after the 2008 financial crisis where he reluctantly admitted that Goldman bets against their clients... and that it was okay?

I've heard people say that since they get fees on your portfolio, your 'objectives are aligned'. Please, do the math. Assume he or she gets a 1% fee on your tidy sum...

Say you have a $1,000,000 portfolio....now, they increase it by 1% - likely by increasing the risk... So $10k would be the gain, of which s/he then gets $100.?Now is that 'advisor' incented to get your money working hard, or to get the next $1m, and the next?

But if they lose $100,000 of your money, they lose only $1K of their annual income. Harsh truth. Therefore, the birthday cards, congratulations etc.?

Often they trash annuities, which is intriguing, as they are busily turning their clients into annuities on themselves.?There is simply no excuse for failing to protect a Constrained Investor's longevity risk. No market-based alternative can match the annuity. Most RIAs' approach to income planning is so out of sync with today's requirements for retirees, they are destined to (deservedly) lose clients/assets as their lack of expertise in retirement income planning becomes increasingly exposed, as retirees' AUM further declines, causing a permanent and tragically needless reduction in clients'?retirement standards-of-living.??

And - don't be misled - the assumption of someone being a fiduciary’ won’t change this.?

No matter how nice, likable and friendly your individual financial advisor is, the fees you're paying almost certainly do not translate into superior investment portfolio performance, and they're definitely not protecting you from market crises. Remember your experience in 2008?

Most present-day financial analysts are around 40 years old, and have never lived through a high-inflation environment... They don’t know what to do.

We don't know where inflation will go from here, but it's anything but 'transitory', as they tried to sell last year, and even if it drops to half of the current rate it'll be high compared to history. From 1990-2021, inflation has averaged 2.5%. We are over 3 times that today, and 4X the (unrealistic) Fed 'target' of 2%!

The Taylor rule is a formula tying a central bank's policy rate to inflation and economic growth. Developed by economist John Taylor, it assumes an equilibrium federal funds rate 2% above the annual inflation rate. This means the Fed funds rate would have to be over 10%. There is no way the Feds can raise to this level. The economy would crash.

Let's be conservative and estimate rates of 5%. A 5% Fed Funds rate would be the highest since 2007… And there’s no question rates that high will dramatically slow the U.S. economy.

It will also be difficult to go much higher than 5% because of federal debt.

Currently, U.S. federal debt stands at $30.5 trillion… That’s 121% of GDP.

The interest payment on that debt is $63 billion per month. At 5%, interest payments would balloon to $127 billion per month, extending the federal deficit by 27%.

So there’s only so much room the Fed has to maneuver before it blows a hole in the federal budget and sinks the entire U.S. economy.

For over a year, some of us have been advising caution. We have said valuations are way too high (and they still are historically high), bonds are not safe, cash is your friend, to heed your stop losses, to beware of "bear market rallies," and to know the circumstances you are stepping into when buying stocks or any other investment.

Falling stocks can create generational buying opportunities in high-quality businesses. But there are still risks in the market in the meantime.

Now, I don't enjoy delivering "bad" news, and being surrounded by it wears on me. But I simply cannot see how we are at the bottom here. I hope I'm wrong. But hope is not a strategy! I'd also like to believe in unicorns and the fairy godmother...however...

I've stated many times 'don't predict; prepare'.

And our philosophy is even more important in these risky times...

There is more value in first avoiding any unnecessary losses before trying to pick the winners.?

As the top graphic shows, most equities still are near 2021 levels. Now is the time to prepare. Asset allocation is imperative here, especially for those in or near the retirement 'red zone'. There is good news in the market. Get at least some of your money out of the risk tank, and into the safe tank.

In a world that seems increasingly less receptive to independent thinking, doing just that – thinking differently – might be the most important thing you can do when investing today.