Oh, if I could just say everything in one sentence.
New headlines describing insolvency every day, certainly every week, but definitely every month – this saga drags on and on and on. So, in one sentence, I’ll make it a question:
What type of headlines are you reading when your sports team is doing better this year than last year - and what headlines are you reading when they are doing worse than last year? (I know it’s a run-on sentence but you get my idea.)
By answering that question, it is pretty easy to see the big picture. So, zoom out with me. We aren’t economists, we are plain people. Which still makes us miraculous creations when comparing us to a rock or a lion. We have thumbs, if you were in any doubt about the miracle claim I just made.
So, what does this headline mean to you, just you -between your ears, while holding the thought, “am I concerned about the location of my retirement savings, or the currency its valued in?”
Here’s Marketwatch’s headline; “Fed’s $1 trillion pile of paper losses are turning into actual losses — with more in sight”
Just to articulate, the Federal Reserve Bank, one would think to be the finest, ultimate in savvy, and future vision, is suffering a loss of $100,000,000,000.
The Fed, with its roughly $1 trillion in paper losses, has now converted more than $100 billion into real, tangible losses. No, this isn’t some abstract number on a balance sheet—it’s a flashing red warning light on the dashboard of our economy.
Just for help visualizing this because $100 billion is chump change these days, right? There are 119 entire countries that gross less than $100 billion a year! If this $100 billion loss was in Saudi Arabia that would be one-eleventh of its gross sales for the year!
So no, $100 billion is still an enormous amount of money in the real world, it’s just in our government’s world that it’s a meh amount of money.
Worsening the situation, the longer interest rates stay elevated, the harder it becomes for the Fed to repair its balance sheet. It’s like an old episode of Gilligan’s Island - we’re trying to climb out of quicksand: but every move the Fed makes only sinks you deeper.
Here’s a “suppose you had to” exercise… The company you work for, that your income comes from is on a ship that is sinking, your family is on another that is catching fire, you can race out from the shore and save only one. Which do you save?
The Fed is saving the company. Period. The Fed’s function is money, not family. You and I live amongst both worlds. Does it seem like the Fed’s choice making is saving the American family? How much money did you get to save your home in 2008? I may be reading this wrong, if I am please correct me, but a report put out by the Federal Reserve shows they’re holding $2,354,642,000,000 (trillion) in mortgage-backed security debt. Who did that money save? That money wasn’t printed to save and keep you in your home, was it?
The Federal Reserve - the mighty institution that wields the power to make or break our economy is still doing Fed like things – and we, the people we are, staring at a colossal mess of its making.
Expert, upon expert, are producing reports and articles about what looks like financial missteps, misguided policies, and the coming disaster that could redefine our economic future.
The Fed’s aggressive moves during the 2007-2009 financial crisis and the 2020 COVID-19 market panic. were supposed to stabilize financial markets, but they’ve left us with an overgrown balance sheet propping up risky assets and stoking inflation. Now, the Fed is sitting on nearly $1 trillion in unrealized losses. The hole in its finances is pegged at around $170 billion.
Some might argue that the Fed can simply print more money to cover these losses, but let’s not kid ourselves. This isn’t a magical fix—it’s a temporary band-aid on a gaping wound. While the Fed isn’t facing a bank run that forces it to sell assets at a loss, the long-term implications of its bloated balance sheet are ominous.
But this isn’t the only red flag pointing us to a crash. Schannep Recession Indicator (SRI) is used to forecast recessions. When the unemployment rate three-month moving average increases by at least 0.4 percentage points from its last cyclical low, the SRI is activated. With only one false signal in its history, the SRI has correctly anticipated each of the last 12 US recessions since 1946. The most recent indication of a possible recession came on June 7, when the three-month average of 4.0% unemployment in May increased to 3.9%.
Again, following the numbers – this seems like another giant warning light being lit. History teaches us that financial bubbles—especially those inflated by central banks—always burst. The longer this bubble stretches, the more catastrophic its eventual collapse will be.
Enter Harry Dent, perhaps a financial prophet of doom , BUT I don’t think he is wrong. Dent warns that we’re on the brink of a crash bigger than the Great Recession.
According to Dent, the “everything” bubble, sustained by an unprecedented level of artificial stimulus, is set to burst. His predictions are dire: the S&P 500 could plummet by 86%, the Nasdaq by 92%, and even hero stocks like Nvidia could see a 98% drop.
The situation today isn’t just a result of pandemic-era policies; it’s the culmination of years of financial strategies that have pushed the boundaries of traditional economic practices.
During the 2007-2009 financial crisis, the Fed's bond purchases were seen as a necessary evil, to prevent the collapse of the global financial system. That move was then replicated during the COVID-19 pandemic. The Fed doubled down, buying trillions of dollars in low-yielding treasuries and mortgage-backed securities to keep credit flowing and markets stable. But stability came at a cost—an inflationary spiral and a balance sheet bursting at the seams with risky assets.
Jerome Powell’s current dilemma is akin to my analogy from earlier, do you print money to save the ‘company’ or do you save the family? The high interest rates needed to combat inflation, from printing money, are simultaneously exacerbating the Fed’s financial woes. While rates remain high, the Fed’s losses will continue to mount. Yet, lowering rates prematurely could reignite inflation, undermining the very stability the Fed is trying to achieve. It’s a delicate balance, and one misstep could tip the economy into a recession or worse.
Harry Dent’s prediction of a return to 2012 housing prices is not unfounded. The real estate market, propped up by low interest rates and speculative investments, is showing signs of strain. In countries like China and Japan, where residents are buying properties as collateral, the risk of a market correction is real and imminent.
The interconnectedness of global economies means that a crash in one region can have ripple effects worldwide. As central banks around the world navigate their own financial challenges, the global economic future hangs in a delicate balance. The Fed's decisions in the coming months will not only shape the U.S. economy but will also reverberate through global markets, influencing everything from interest rates to investment strategies.
The bills are coming due, and the cost is staggering. The once-mighty Federal Reserve is now caught in a financial quagmire of its own making, and what is the way out?
The stakes have never been higher. The decisions made in the coming months will shape the economic landscape for years to come. Will the Fed be able to unwind its balance sheet without triggering a crisis? Can it achieve the elusive soft landing that so many economists hope for? Or are we on the brink of an economic downturn that will redefine the financial landscape?
What, say, you?
This is where we are, with lots of unanswered questions – with warning lights flashing, stuck in quicksand and the world is watching. The road ahead is uncertain and our dashboard blinking red, and the Fed just keeps doing Fed like things. Buckle up, it could get bumpy.
***If you want to argue with me or tease me about my wardrobe choices - go ahead. Comment. Let me know what you think. I read all the comments and I’m always hoping to learn something new.