October 2024
Here are some key takeaways from their conversation:
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Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski joined by wealth advisor, partner and amazing dad, Kevin Rex. Kevin, thank you for joining me.
I told you what trouble my son just got in yesterday. Wouldn't call me an amazing dad. No. Thank you. I love being here. This is always fun.
So we're here to talk about interest rates because the Fed recently cut rates by 50 basis points. We wound up here because it's been coming up a lot more with clients in terms of interest rates, the cost of borrowing, inflation. It seems to be something that's been in the headlines for quite some time. You've got some questions around like why 50?
It's sort of a fascination of how we got here. And then all of a sudden the Fed's reaction to it, because for a while this year they were saying we're not going to be cutting rates at all. And then boom, all of a sudden we're going to do a quick 50 basis point reduction in the short term rates.
Yeah. Speaking of how we got here, what's kind of funny is you were out of town. I thought I was going to get to host this and I was going to bring Mike on, and it's just dad's away. The kids were going to play. We're going to have a really good time. And now here we are back talking about interest rates in more financial jargon.
But all right, well we'll keep it serious.
Most people I think 25 basis points made sense. And it was kind of a shoe in... 50 was a shock. And I think when you look at the data, jobs were fine, GDP was fine.
I know we had a little tick up in unemployment, but it wasn't any area of concern. And so 50 is more of an emergency type shift. It's not so much just more the standard 25 standard. So then if everything's kind of fine, what do they know? Or what's the underlying cracks that maybe they're seeing or what was their intention or what were they trying to achieve.
And I don't necessarily have an answer for that, but it's just something that really struck me of like, I don't know. I felt most of us like when I saw 50, I was like...
Wow, I was surprised, too. I mean, look, I don't have a crystal ball. I lost it, at some point in my life. But if you looked at the data, stocks are all time highs, most real estate at all time highs, as long as it's not, you know, commercial, office buildings, you have gold at all time highs.
You've got the economy chugging, chugging along fairly well. Unemployment's kind of low. Inflation's high. It's you know in the low threes. So it's above that 2% fed target. We've seen some cracks in the system with some like small regional banks you know sort of going under for other reasons. But when you take all of that into consideration and the fed lowering interest rates, they want to lower interest rates because they want to stimulate the economy.
Yeah. Well, we weren't in a recession. Things seem to be going fine. Like from my perspective, why even lower rates at all. And then they wake up and do this emergency response of 50 basis points. They must know something that that I don't. One of the factors that I think drives it more than it should is the US is now in $35 trillion worth of debt.
That's $1.1 trillion of interest cost alone on our debt per year. So when you just think about federal spending, the revenue that they bring in from taxes, to be able to then use those moneys for, you know, energy infrastructure bills, all of the things that we need to spend our money on as, as, as a country, if $1.1 trillion of it is just going to pay the interest on your debt, it doesn't leave a lot of money left over for others.
Sure. And that's why they just keep printing money, right? It's just make more money and you don't have to worry about it.
Not getting political or anything, but the Fed should be data driven. And we just talked about how the data didn't necessarily justify or warned the cut. What else is it? I think what you're saying makes a lot of sense. I you know, I think a lot of us would question are there like political like concerns or ties to what happens?
Like it feels like the fed might move in different directions based off of many different factors, and not just be driven by the data like it should be or used to be one.
One other interesting thing that sort of came as a result of the fed lowering interest rates recently by 50 basis points. So I'm going to give a little bit of a history lesson. And then something interesting that came out of a dad's back. Right. That's back. So post 2009 we were in a very brutal economy. I mean, arguably could have been as bad as the 1930s from a depression standpoint.
So we had to take some very serious emergency measures to kind of help keep our economy afloat. We lowered interest rates from the mid fives down to almost zero. We kept them there for many, many years, printed trillions of dollars and sent that out in the economy through the form of quantitative easing. Get things going. Then all of a sudden, Covid hit 2020.
The fed then raised it, lowered interest rates down to basically zero, a quarter of a percent. Had to print some money and stimulate the economy because the whole world shut down for at least a few months. And then in July of 2023, the fed started raising interest rates from zero up into that short term target of call it 5 to 5 and a half percent. And then you fast forward to today or a month ago, the fed lowered their short term target from 5 to 5 and a half to the four and a half to 5% range. So everybody's thinking, oh cool. The Fed's lowering short term interest rates. That means that, you know, I might be able to go buy a home or refinance my mortgage at a lower rate.
And what happened in the last few weeks is the ten year Treasury went up from the mid threes, three and a half to 3.6 all the way up to close to 4%. And the reason why that's important is because mortgage rates are, you know, track the ten year treasury. So here we are. The fed lowered interest rates. People are thinking that money is going to be cheaper.
So as it relates to home purchases. But no they actually increased. And I found that that to be really interesting because here you think you know something and something else completely happens.
Yeah. And I think that speaks to a few different factors. But just rewinding one thing that I really struggled with 2009, they had to do what they had to do. Or we can argue they made some of the right calls. The big mistake for me was things got going, you know, 2012, 13, 14 rates stayed low. And if rates stay low, they really have two choices to stimulate the economy lowering rates or printing more money.
And they've been stuck with their back against the wall kind of being reactive for the past decade because they didn't raise rates when I thought they should have to kind of when the when the economy was more stable. But going back to your point, I think there were a lot of people celebrating like, oh, I can refinance.
Like I have a ton of my friends were like, I've been I bought at seven and I want to refinance. There was a a very quick moment that you could get in, and most people didn't catch that. But when the short end of the curve comes down and the long end goes up, the ten year goes up. It speaks to investor is requiring to get paid for something.
They're getting pay for the potential risk of inflation. They're getting paid. They want to get paid for maybe just the dollar not being as strong. Right. So what's going on in the economy? What's happening with with you know, when they're lowering rates, what are what is that 50 basis point mean. And so with the higher end, the longer end getting higher, it's investors saying like, well, we want to get paid for the risk.
There's more risk than we thought out there. So it's just a different mindset.
And that's a normal yield curve where short term rates are lower than medium term and then lower than long.
Should get paid for taking on longer risk. Right.
But right now, short term rates are calling in the 4.5% range. But then a ten year rate's at four. It's actually slightly below. So that's not a normal yield curve. And so we can see a situation where that could happen where longer term rates could go up. And then that creates you know some other problems. Yeah. How how do you try to help clients manage some of these investment decisions as it relates to, you know, the manipulation of the fed interest rates, what's going on in the world with stocks and real estate and other things at all time highs.
You know what, what's sort of your answer to them?
I know we talk a lot about the same things on here. We just don't know. And things are so decoupled from fundamentals. It used to be you could paint the picture based off the data and the fundamentals to really know what was going on. You know the stock market can continue to rally. So it's at all time highs.
And if you know, people say should I be investing in the markets. It's a really individual question. But do I think the markets are going to keep going up? I actually think the markets are going to be fine over the, you know, the short period of time. So is it a good time to invest? I would still say no, but it doesn't mean the markets aren't going to keep running.
So what else is out there. How do we diversify? You know our private credit strategies can get stock like returns without taking on that risk. But it really just comes down to fundamentals not mattering as much as they used to.
And so because of that it's really hard to predict, project. And so we try to say what else is out there that we can manage risk.
Another interesting thing that I came across as I was preparing for this. So about, you know, 25 years ago, when you looked at the, the federal debt and the price of gold and where we are today, obviously the federal debt is increased a lot rates are close to where they were in the mid 2000. But, you know, again, they went to zero and they came back out.
Interestingly enough, over the last 20 years, 20, 25 years, gold has gone up ten times in value, which is actually more growth than the stock market itself. Over the same period. I'd have to look at the exact dates that I think it goes back to, like maybe even 2000 to today. Gold has gone up ten x and the market hasn't even.
So, even as good as the stock market is, when you go through a period of, you know, creating an enormous amount of debt, devaluing the dollar, gold can be a great asset to hedge against your future purchasing power. And, that's one thing that I found pretty interesting.
And it's gone up ten x, but is it still a good investment going forward? If they're going to continue to print money and they're going to still just debase fiat currencies around the globe, it probably makes sense to have gold in the portfolio.
Yeah. Obviously we don't know what's going to happen going forward with the fed and what they're going to do with interest rates. They've been going back and forth between, oh, there might be a couple more cuts in the future or no, we're going to stand off, or stand back. I think that there are a lot of factors here that are in play that either should or shouldn't be that we don't really know, but one of the major ones, I think, has to do with the amount of debt that we have as a country.
The interest expense and cost is it's related to that and pressure, you know, from either both parties politically, you know, to control interest rates to a manageable level, to where that interest cost doesn't cover, you know, as much of the deficit as they currently have.
Yeah. My, my personal opinion and what I really kind of keeps me up at night a little bit there in the lower rates to, to manage that debt. I worry about inflation. If all of a sudden we saw inflation tick up slightly, not anything too alarming. But if they keep lowering rates and inflation spikes, they're going to be forced to raise rates to get it under control.
Then we're kind of right back to where we were not too long ago. So I that's just it's in the back of my mind of it. I'm glad I'm not making the decision of when to increase or reduce. It's a lot easier being, you know, what is it Monday morning quarterback. And like I would have done this or that.
But at the end of the day, that keeps me up. But I'm just happy that we're here and we have solutions that are going to do well regardless.
Yeah, well, I wasn't alive. But if you go back to the 40s and the 70s and you read some of that stuff, it seems like we're in a very similar position as we were back then. Knock on wood, that interest rates don't all of a sudden go from where they are today to 18 or 20%. So that way we, we wake up one day and say, oh, 30 trillion.
That's not a lot of money because we let inflation sort of, take over. So that's one of my biggest concerns as well. And Kevin, thank you for joining me today.
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