Withdrawal Can Be Worse Than Addiction

My Next Appearance on iHeart Radio is Saturday

Hate Your Job? Could Be Worse.

At least you’re not him. Seriously, I feel bad for the Federal Reserve. Incredible scrutiny, and then you have to stand up there, while global financial markets parse every word, which you know run contrary to almost everything you know. No thanks.

The world is addicted to low, stable interest rates. How to wean our collective mindset off this underlying addiction will determine everything.

See the small letter “i”? It is too low, and it hasn’t moved, except lower, for decades. The Fed knows this, of course it does. However, ripping off the band-aid would create turmoil, even the thought of this has created uncertainty, which is highly unfavorable for all risky assets, of which the riskiest is stocks, which sit in your 401(k)s, IRAs, etc.

It isn’t only the direction, it is the uncertainty, and worse, the uncertainty about what happens to the value of your home, your ability to finance a(nother) new car, interest charges on your credit card debt, on and on it goes.

Buy High Sell Low

So this seems very very silly, right? However, it can be entirely rational and expected when there is turmoil in markets (the worst January ever, if current levels last through the end of the month).

The simple reason is that portfolios need to stay on balance, except that balance has relied on low and stable interest rates. When this stops, the world doesn’t know what to do, and then the ‘right’ balance gets thrown into question. This is not new at all, it’s that the interest rate market dwarfs the equity market (“Stocks for show, bonds for dough”).

The process is the same, the inputs are different. These videos are almost a year old. When the “glue” from the video comes into question, this violent up and down is no surprise at all. 0%.

What’s Not In This Explanation?

• Tesla reported net margins higher than expected

• Microsoft growth projections for cloud computer were raised

• Company X reports $yyy a share earnings

Why? Because in the scheme of things to the Fed, they do not matter. They are minutiae at best.

Projected Savings Medicare Beneficiaries Need for Health Expenses Spike in 2021 (link). True, but probably not as dramatic as it reads. The total numbers look stunning.

For a 90 percent chance of having enough savings, the man needs $142,000 and the woman needs $159,000. This is up 9 percent from 2020.

The issue is that no one says you need the entire amount right now. We aren’t even sure what calculation method was used here.

The article projects the assumption of Medigap Plan G, which is fine. However, it also fails to mention that adjustments can be made so that if Medigap premiums become excessively high, a person can switch to Medicare Advantage (under the assumption that the current structure remains the same.

So while this article is true, and consistent with my fave Medicare book (ahem), that fiscal and demographic stress is here to stay, these figures are there for shock value. That doesn’t make them wrong, let’s presume they know how to add, that is beyond dispute.

The Financial QB, on iHeart radio, on Saturday, January 29th, 9AM ET.