Fed’s Secret Plan to Destroy Home Buyers & Retirees

Written by Damon Geller



Anyone knows that interest rates are usually a double-edged sword, either helping borrowers and hurting savers, or vice-versa. Look no further than the last few years, when home buyers and stock investors reveled in historically-low Fed-manipulated interest rates and a monsoon of free money at the expense of savers and retirees, who got taken to the woodshed on their money markets, CDs and annuities. Yet now that the Fed has announced it will “taper” its QE programs and allow bond yields to rise, you’d probably think this is good news for your savings and retirement accounts, right? Think again. A close look at the Fed’s new policy reveals the Federal Reserve’s secret plan to destroy both home buyers AND retirees by jacking up interest rates on borrowers and squashing interest rates for savers and retirees. The only good news? There’s still one thing you can do to escape the Fed’s wrath.
Damned Whether You Save or Borrow Interest rates are rising, but the rate you’ll see on your savings will not. That is a fact. The Fed has said that they will do whatever they can to keep rates low until 2016. This means retirees and savers will continue to suffer negative interest rates in the bank. This, however, does not mean rates won't rise on bonds and mortgages; on the contrary, they are already spiking. The biggest victims of the Federal Reserve’s easy-money policies have been old-fashioned savers. People who rely on income from CDs, bank accounts and other super-safe assets have watched their cash-flow dry up as interest rates have fallen to record lows. This is going to be the case for some time, so savers will continue to suffer as the Fed coaxes up long-term rates while continuing to keep short-term rates extremely low. And banks are simply not going to boost yield, because 1) they don’t have to, and 2) they can’t afford to. Here’s the recent move in the last 6 months on mortgage rates: And the average rate on a saver’s money market fund:
Things are about as backwards as they can be. The Truth about Fed Rate Manipulation The Fed is supposed to have a dual mandate of maximum employment and stable prices. But in reality, the Fed’s mandate is saving too big to fail financial institutions and punishing savers. The Fed is desperately trying to keep short-term rates low so that they can afford to service $17 trillion on the national debt. This allows the banks to pay you nothing, because the bank’s solvency is one of the Fed’s main mandates. But at this point, the Fed is losing control of rates and credit. So one of two things will happen: either rates will rise because the banks actually loan money and the volatility of money increases, causing inflation to set in like in the 1970s. In this scenario, the Fed is behind the 8-ball to chase inflation and slow down money volatility via higher borrowing costs. The other scenario is, rates rise because no one is willing to loan the US money, and the Fed can no longer afford to buy all the debt the US needs to continue chugging along. Either way, we are stuck with the burden of unsustainable debt and the attempt to somehow service it. How Do We Escape the Fed's Wrath? This leaves us with one investment vehicle that loves both negative interest rates in the bank and rising bond and mortgage rates: It’s gold. Why? Because there are two principal things that serve as a catalyst to higher gold prices: 1) Rising rates which kill housing, stocks and bonds, and 2) negative rates in savings accounts and CDs. Sure, the price of gold has been taking it on the chin, because the paper peddlers and central banks have been using their free printed money to sell gold on paper, all while buying physical gold. It is common knowledge that, for the last year, central bank purchases of gold around the world have ramped up significantly. Every exchange that sells physical gold, from The US Mint to the Shanghai Exchange in China, and everywhere in between, has been setting records for physical gold purchases. But because the price is controlled mostly by the paper trades, they've created the illusion that gold has become less valuable than in the past. Yet quite conversely, the importance of owning real hard gold has never been more fiscally responsible. This is exactly why it’s time to take a hard look at the fundamentals of gold again, because it won’t stay this cheap for long and may never be this cheap again. “Negative interest rates” can be defined as a period when your savings, money markets and CDs pay less in yield than the cost of living is rising year over year. This creates a situation where you are essentially going broke slowly, and it's a dangerous one for savers, especially retired savers. The Fed's Inflation Denial “Negative interest rates” for savers and retirees have obviously been the case since the Fed’s easy money and zero-interest-rate policies took over shortly after the credit crisis of 2008. Yet, while the official government “CPI” may have inflation down in the 2% range, you and I both know inflation is a lot higher. It’s easy to make it look like there’s no inflation – you simply don’t count the things that are inflating, like fuel, healthcare, education, energy, gasoline or food for the last five years. It is a fact that no bank will pay you anywhere near the rising cost of gas or health insurance on your savings. So the reality is, negative interest rates are only a fact if you are a saver. The good news is, during times of negative interest rates, gold has always outperformed banking products like savings accounts. Even when gold fell to $1,250/oz., gold was still up 56% in the five years since 2008, or an average of over 10% per year. And gold is insanely undervalued at these levels based on the fundamentals and the nation's unsustainable debt load. Below is a chart illustrating gold vs. real interest rates going all the way back to the 1970s: The Coming Collapse of Real Estate, Bonds & Equities The other side of the sword is rising bond and mortgage rates which have always been terrible for real estate, bonds and equities, which rely on cheap abundant credit. This should be obvious. When you look at the historical and current price action, it is clear that a spike in mortgage rates is bad for real estate. The cost to borrow for a mortgage jumped a full point in the few weeks after the Fed’s “taper” talk – and mortgage applications fell off a cliff. It is obvious as well that this increase in the Treasury rate equals falling bond prices. As far as equities are concerned, it should also be obvious that companies on Wall Street have not become 25% more efficient in the last 3-4 months as the gains in the S&P 500 would indicate, but rather that stocks are benefitting from cheap abundant credit. Yet when that cheap abundant credit evaporates, so will the price of equities. History doesn’t always repeat, but it sure seems to rhyme. We’ve had one period of history where rates rose for ten-plus years straight; that started in 1967. During that period, gold rose alongside rates and increased 2400% from $35/oz. to $851/oz. During that same period, inflation-adjusted real estate went nowhere and the DOW barely moved at all. Considering we’re at another all-time low for rates, and that they are starting to move up, it becomes clear where you don’t want to be: real estate, bonds or equities. It is possible that inflation gets so bad that these assets gain nominal value from here based on a debased US dollar, but that would obviously be great for gold as well, as gold is THE ultimate inflation hedge. Below is a chart illustrating the correlation between a rising Fed fund rate and the price of gold. You can clearly see the spike in both from the early 70s to the early 80s, another spike in both in the late 80s, and yet another spike in both during the early 2000s. The drop in both at the turn of the century is apparent as well, and then as rates began to rise in 2003, so did the price of gold. Rates obviously fell considerably after the crash of the 2008 housing market, but this marked the beginning of the end for credit market and an attempt by the Fed to put the markets on zero interest free money life support, so gold rose anyway against that chaos. Inflation is the biggest driver of rising interest rates and higher gold prices, and they typically happen together. Why gold? All this means that gold is suddenly looking good again. Why? Because it’s far cheaper than it was and nothing has fundamentally changed, save for the fact that the paper Ponzi scheme looks like it’s running out of time. If the higher cost of borrowing slows down the economy, causes housing prices to fall, and pounds the equity market, all at the same time bonds are losing money, the Fed will ramp up their QE efforts creating a perfect environment for gold – if the can get away with it. If the Fed can’t get away with it and the credit markets freeze up as they did in 2008, gold will fly anyway, as it’ll become the safe-haven asset it always has been. So at these levels, gold looks like a great value asset with enormous upside potential.

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