Famous Last Words on Interest Rates

I do not know about you, but this fear of inflation is beginning to get out of hand. Ever since President Carter's unfortunate tenure as our President, we have had this huge fear of another bout of similar inflation. Personally and professionally speaking, I believe it is all a bunch of hooey. This could be my famous last words on the subject, but I am willing to stick my neck out.

What went wrong back then?

• Back when President Carter was in office, we had a horrible position of energy dependence. We needed a lot more oil than we had and we were subject to the whims of other countries.
• Insurance companies were allowed to purchase high yield bonds for their normally staid investment portfolios.
• Banks were just abject fools back then offering double digit CD's.
• Insurance companies were offering fixed annuities to compete with those bank double digit CD's by offering double digit fixed annuities.
• Bank regulators could not keep up with the fast moving changes.
• Insurance regulators were woefully inept.
  
• The biggest factor was that the Federal Reserve Bank thought that the best way to solve the runaway inflation problem was to raise interest rates.

What did we learn from all this?

• Never again be dependent on other countries for our oil supply.
• Limit the amount of high yield bonds that insurance companies can purchase.
• When you are a bank, you offer paltry CD rates and people will still buy them.
• When you are an insurance company, you offer paltry fixed annuity rates and people will still buy them.
• Bank regulation is much improved, especially since the 2008 fiasco.
  
• Insurance regulation is better, but there are still problems with product approvals. They are too complicated for the average consumer to understand, in my opinion.
  
• The Federal Reserve Bank is still a problem. Raising interest rates like they did fueled the problem.
  

We fixed most of those problems, but the Federal Reserve Board of Governors still believe that President Carter days are just around the corner, if we do not watch out. Never mind the fact that according to the Federal Reserve's own numbers, they have over seven trillion on their balance sheet at Federal Reserve banks across the United States. This is not a paltry sum by any means.

https://www.federalreserve.gov/releases/h41/current/h41.htm 

I for one do not believe that we will have to worry about inflation on the par of President Carter's tenure in office. The main reason for this is, if the Federal Reserve raises rates like they did back then, it would doom our economy and nation. It would cause the amount of U.S. Debt to increase exponentially with a rise in interest rates that would cause an enormous hit to our balance sheet, not to mention the government debt. In effect, they would be cutting their own throat. It is much easier for the Federal Reserve to keep buying fixed income investments (bonds and mortgages,) put them on their balance sheet, then let them mature, or pick and choose profitable times to sell. These actions will guarantee rates will be low for the foreseeable future. Inflation is not a problem and I do not believe that we should ever worry about it. So, when you see the pundits on television talking about inflation getting out of hand, know that they are full of bull. It is not going to get out of hand. I'll stick my neck out and say we will never see another round of inflation like we saw when President Carter was in office.

Economic Inflation Worries

Economic inflation worries are overblown. They have always been overblown ever since Jimmy Carter was President. Back then, banks were hawking CD's at unsustainable rates of 15% and more. Insurance companies were promising annuity rates just as high. Mortgage rates were also similarly high. Auto loans were equally ridiculous. There was an oil embargo that caused the price of oil to sky rocket and the supply to shrink. The people or economists who lived through this all blame "inflation" as the culprit.

It was not inflation. It was simply idiots in charge of everything. What kind of idiot was in charge of the bank making 30 year mortgages at 15% interest and expecting people to be able to pay that rate over the life of the loan? Or, how about a 15% auto loan? Really? I would have loved to be in the Board of Directors meeting listening to one of these idiots explaining why we needed to offer 30 year mortgages at 15% interest. I would have fired them on the spot for being so stupid.

What kind of idiot was in charge of the bank who paid CD's at the rate of 15% for a one year CD?  What kind of idiot was in charge of the insurance companies who promised annuity rates of 15% for 5 years no less? You read that right. For 5 years! They were doing it back then, believe it or not.

Paul Volcker, the Federal Reserve chairman was heralded as the savior who saved America from the evil culprit of "inflation." What a joke. He didn't save anything. The markets adjusted to the stupidity of the people running the banks and insurance companies. These bank executives and their Board of Directors finally got a clue that they could not pay 15% CD rates, loan money profitably on a 30 year mortgage at 15%, or a car loan for that matter. Paul Volcker did not have anything to do with it. Although, economists everywhere give him the credit for saving America from the ravages of "inflation." The market adjusted. It is called capitalism at work.

"Inflation" was not the problem. Stupidity was the problem. Ever since this period in our economy happened, we have been stuck with these Federal Reserve policy makers who are so scared of "inflation" that they think a 2% cap on "inflation" is all that we can handle. TWO-PERCENT! Are you kidding me? What is wrong with these people? They are so scared that we will see a repeat of the Jimmy Carter days of "inflation" that they have to stop it from happening at all costs! Anytime that the economy starts to do well, these Federal Reserve governors step in and put the brakes on. All in the name of saving the economy from the ravages of "inflation." They did it last December and the stock market immediately tanked as a result. Their justification was they were trying to get back to "neutral". Neutral? Neutral? Now, they are inserting a new Federal Reserve policy. Neutrality. What the hell is neutrality? It is some arbitrary number that they want to achieve that gives them some warm and fuzzy feeling. This is so freaking stupid it is simply unbelievable. Stupid is my favorite word, by the way. Read my latest version of Meet Wally Street. The Reason You're Stupid. 2nd Edition. https://www.amazon.com/Meet-Wally-Street-Reason-Stupid/dp/1720401543

Sadly, there is no common sense in the Federal Reserve's way of thinking. They are way over-thinking it. Take a moment and spend a few minutes looking at this page and you should come to the same conclusion that I did. The Federal Reserve has done an awful job of raising and lowering interest rates over time. https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135

Who bears the brunt of these poor decisions? The middle class. The people with a 401(k) who are trying to save for retirement. Just when the market gets going in the right direction, these Federal Reserve Governors, slam the brakes on the economy by raising interest rates at the most inopportune time, like December 2017. This kills the growth in the average middle class 401(k) account. Why on earth would the Federal Reserve Governors have a policy that stymies growth? Their answer is because they are worried about the "inflation" that they experienced personally when Jimmy Carter was President. They have never really evaluated this period in time. Like I said above. Stupidity was the problem, not "inflation."

Does anyone have any good old fashion common sense any more? I would make the case that "inflation" is a good thing and the market will correct on its own without intervention from these brilliant Federal Reserve Governors. Even in the most notorious inflationary period in recent memory, the Jimmy Carter Presidency, the markets corrected. It is called capitalism at work.

Alas, what can a peon like me do about it? All I can do is make my point and hope to change some ingrained (stupid) ways of thinking.

A Lesson About Stepping Up in the Clutch

If you were to listen to the investment pundits on television, then they would tell you that there is going to be runaway inflation. They all say the same thing. The Federal Reserve is printing money like it is going out of style so, as a result, you can expect runaway inflation.Well, I have news for you. Ben Bernanke and the Federal Reserve Board is not going to let inflation get anywhere near a runaway train. I think they will succeed in keeping interest rates low for an extended period of time.

I read a great article from Scott Minerd, the Chief Investment Officer at Guggenheim Partners, LLC. the article was entitled, 'The Urban Legend of the Bond Bubble.' In his view, we are in for more of a period like the 1940's. This was a period when the 10 year U.S. Treasury Bond averaged a paltry yield of under 2.00% for the entire decade of the 1940's. He believes that we are in a similar situation today. I tend to agree.

Think about the fact that the Great Depression took a long and I mean long time to recover. They tried everything to get the economy moving. It took a World War to put people back to work. After all, the real problem of the Great Depression was a lack of jobs. Which reminds me of the situation today. It is a similar lack of jobs.

Ponder, if you will that in order to create jobs, you have to incentivize the private sector of the economy with access to capital to grow, low interest rates and low taxes. Lest we not forget we need someone willing to buy what we are selling, also. This was the same problem created by the Great Depression.

I will certainly agree that we are able to recover much more quickly from the Great Recession than they did after the Great Depression. Our country is much more technologically advanced and productive today. However, I think we will see the yield on the 10 year U.S. Treasury move closer to 2.00% than 3.00%.

One thing that I have learned over the years is that the smartest guys in the room are not the smartest guys in the room. They are just winging it. Sad, but true. They are just better at winging it than most people.

Let me tell you a baseball story involving yours truly that happened several years ago. I played in the Men's Senior Baseball League World Series in Phoenix, Arizona one year and our first game was against the defending World Series Champions. You have never seen the male ego in hyper drive unless you see this event. This World Series Champion team heralded from the great city of Chicago. They had the best players that Chicago had to offer on this team. They had several ex-Major League players and most all the others had played in the Minor Leagues or had stellar college baseball careers.

Our team was a team primarily from Central Arkansas. We had one guy who played AAA and that was about it. The rest of us were just a bunch of country boys who liked to play baseball. Yet, here we were in the first game of the World Series against the defending champions. These guys were shuttling players in and out between innings. They had about 25 players with them and I think we had about 14 on our team. Intimidation was in the air. You could feel it. They were dead set on repeating as World Series Champions. You could tell by the way they were acting. They were confident.

In the fifth inning, they were winning 3 to 1. Us poor old Arkansas guys managed to get the bases loaded, then it was my turn to bat. Chicago called time out and brought in ex-Major Leaguer Tom Gorman to pitch, a former Minnesota Twin. His catcher was Bart Zeller who played with the Chicago Cubs in his career. Then there was me, waiting on the on deck circle for my opportunity at the plate. There was no disputing what my teammates expected me to do for the team. They obviously wanted me to get a hit and knock in some runs. At the same time, Chicago's team had great confidence in shutting this inning down by bringing in the pitching ace Tom Gorman. This guy was blowing some serious gas. He was throwing low nineties easy. Somebody was going to win this battle and somebody was going to lose. The odds favored Chicago by a country mile.

I was watching him warm up and he appeared to have two pitches. A slider which he was not able to get over during warmups and a fastball that was buddy you better believe it, fast.

This is a point in your life where you say, "Am I going to step up or am I going to let this intimidate me?" The first pitch was a slider in the dirt. I could see by the look on Tom Gorman's face that he didn't have confidence in that pitch, so I figured he would come with the fastball and try to blow it past me. I guessed right. I hit an opposite field grand slam off of him and we went ahead 5 to 3. You would not believe how demoralized those Chicago guys were after that grand slam. They just could not believe that a guy like me, who only played baseball as a kid up to age 15, could hit a grand slam off their ace. Ever hear that baseball is 90% mental and 10% ability? It's true, although I can hang with the best of them in baseball ability.

We went on to win the game and some of the guys on my team were telling me for days afterwards that "that ball is still going!" Chicago never recovered the rest of the week. They failed to repeat as World Series Champions. Although we did not win the World Series, it was certainly a gratifying experience to beat the World Series Champions and to do it in such a dramatic way.

Which brings me back to my point. A lot of times when I watch some of my peers on television giving advice, I sit back and notice that these guys are just winging it. They are not the smartest guys in the room. Yet, a lot of people put a ton of credence into what they say. My advice would be to be careful about listening to these advisors.

I just smile to myself knowing that I can play with the big leaguers, come through in the clutch and I am probably a little smarter than they will ever know.