What to Expect in a Decreasing Interest Rate Environment

“Hey Mike, how do you expect the Fed decreasing rates will affect the markets and economy?” Discover how the market and your investments could be affected by decreasing interest rates. 

Text your questions to 913-363-1234.

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What is How to Retire on Time?

Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.

This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.

Mike: 00:05

Hello, and welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, insurance agent, and tax professional, Which means when it comes to financial topics, we can pretty much discuss whatever is on your mind. Now that said, please remember this is just a show.

Mike: 00:37

Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request your wealth analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thank you for being here today.

David: 00:56

Hello. Thank you.

Mike: 00:57

This is gonna be a fun show. And now just for the newcomers, David will be reading your questions, the questions you have submitted, and I'll do my best to answer them. You can send your questions in now or anytime during the week by either texting them in to 913-363-1234. That's 913-363-1234, or email them to hey [e-mail]. Let's begin.

David: 01:24

Hey, Mike. How do you expect the Fed decreasing rates will affect the markets and economy?

Mike: 01:30

Oh, that's a tough question.

David: 01:32

So we're gonna hold you to this answer.

Mike: 01:34

Yeah.

David: 01:34

We're going to play the tape back

Mike: 01:36

You're saying, what's the future of the market gonna do when no one knows the future of the market? And as a lot of people have woken up to realize that the fed doesn't always drop rates when the markets crash. So in in 2022, 2023, we saw bond funds were losing money even when the markets weren't cooperating.

Mike: 01:57

So the Fed has its own mind. The bond market is an independent market. The equities market is an independent market. And the Fed does kind of affect both of them in different ways, but there are so many factors here. It's it's near impossible to quantify.

Mike: 02:15

So let me try and answer the question a little bit differently. That okay?

David: 02:19

Okay. Yeah.

Mike: 02:20

So first off, if the fed decreases rates, it makes short term treasuries mostly, but it also affects all treasuries in some way or another. Or you could argue that it affects most all treasuries in one way or the other, just on the open markets, so to speak, that it makes money cheaper. If you make money cheaper, more people can borrow. If more people can borrow, more money is in the economy. If more money is in the economy, then, there's more growth potential, but there's also an inflationary risk potential there.

Mike: 02:48

More money in the economy, more inflation. That's why when the Fed, whether it was right or not, the Fed the Treasury, whether it was right or wrong, when they printed a lot of money to help people get through the pandemic, it was just a matter of time before inflation took off. But I could not see any other way around it. You know, I'm just one person that I guess it happened to get it right. I'd say that jokingly it's, this is basic economics, supply and demand.

David: 03:14

Sure.

Mike: 03:14

If you have a lot of money in the market, there's going to be an inflationary issue. That's just kind of how it works. So instead of predicting how the fed is going to affect the market, let's, let's talk about other market indicators that I think might be more of what this person is looking at. So the first one is the yield curve. The yield curve is basically comparing short term and long term treasuries and the yield, or basically the interest that they're offering.

Mike: 03:48

Have I got you so far?

David: 03:49

Okay. Yeah.

Mike: 03:50

This is much more technical, but I think it's really important to understand.

David: 03:53

Sure.

Mike: 03:54

So, David, I'm gonna use a chicken comparison for a second. Okay? K. I've got a chicken for you that guarantees for 10 years is gonna give you one egg a day.

David: 04:09

Okay.

Mike: 04:10

Alright?

David: 04:11

No problem.

Mike: 04:12

Guaranteed one egg a day. Or, and that's just kind of what's on the market. Pay $1,000, get this chicken. It's all fine. Right?

Mike: 04:21

Or you can buy a chicken that's guaranteed to live for 3 months, but it's gonna offer you 5 eggs a day. I know that's not fit probably physically possible, but go with me on the analogy.

David: 04:31

Okay.

Mike: 04:32

Which chicken are you more likely to get?

David: 04:35

I mean, I I like the guarantee of, hey, 10 for 10 years, I know I'm gonna get at least one. I'll I'll take that option.

Mike: 04:41

Okay. So that's the more conservative option. Many people are gonna take the 5 eggs a day, enjoy the eggs Yeah. And then just try and buy another 3 month chicken later on. Maybe in 3 months, it's 5 eggs again.

Mike: 04:54

Maybe in 3 months after that, it's 4 eggs a day. But for the same amount of money, you're getting significantly more back out of the chicken. Do you see how that works?

David: 05:05

K. Out out of which one am I getting more back?

Mike: 05:07

So the the chicken offers you 4 or 5 eggs a day. Oh, yeah. You're getting more eggs. Yeah. I am.

Mike: 05:12

So and then you can just reassess later on.

David: 05:16

That makes sense.

Mike: 05:16

This is an inverted yield situation to where shorter term investments or specifically treasuries are giving you more money than the long term.

David: 05:27

Okay.

Mike: 05:27

So, yes, people still buy longer term because, like, you they they want the certainty. But if you're looking from a yield standpoint, the shorter term is gonna make more sense. This is the inverted yield curve. Because basic economics would suggest if you're locking up your money, not really locking up your money, but if you're gonna hold a debt security or a bond or a treasury for 10 years, you ought to be compensated for sticking around for 10 years. So the normal yield curve is when 3 months would offer you, let's say, one egg a day, and the 10 year chickens offering you 2, 3 eggs a day, baby.

David: 06:05

Yeah. I like that.

Mike: 06:06

That that that would be a normal situation. Yeah. So we've currently been in an inverted yield curve to where the shorter term investments are offering better rates.

David: 06:16

Oh, okay.

Mike: 06:17

It disincentivizes longer term treasuries or bonds in this sense. K. Are you with me so far?

David: 06:25

Yeah.

Mike: 06:26

Historically speaking, the longer the yield curve is inverted, the worse the results are as in going to a market crash of sorts.

David: 06:38

Okay.

Mike: 06:38

So for the past 40 years, when the yield curve went from inverted to normal, normal being longer term investments were offering a better rate than the shorter term

David: 06:49

Yeah.

Mike: 06:49

Securities in in these debt obligations. When that gets back to normal, in the near future, there's typically a significant market crash. We could speculate as to why this happens. There are many theories out there, but it's been rather consistent every time for the last 40 years, it's been right except for 2 times. Those two times, it went from inverted to normal, and then quickly back to inverted.

Mike: 07:20

We call that whipsaw when things chained on a dime real quick. So it's like a tease. That was in 1998, and that was in 2006.

David: 07:28

Okay.

Mike: 07:28

Now just think about that for a second. It was inverted for a while. It it went normal and then went really quickly back, and then eventually went normal 2 years later, the 2,000.com crash, which lasted 3 years, which was horrible. Yeah. Or in 2,006, it went back down to an inverted yield curve, and then it went to, back to normal.

Mike: 07:48

And then what happened? 2,008. Yeah. So the two times that we got false positives, it still happened. It was just 2 years later.

Mike: 07:58

So as of recently, it depends on what do you hear the the this in a recording, but as of the time we're recording this, the yield curve is back to normal. Oh. That's a that's a indicator that we could be headed towards very difficult economic times as in a big market crash. Like I said earlier, the longer this yield curve is inverted, the worse the crash is. There's a direct correlation between this.

Mike: 08:25

And the only time the yield curve was inverted longer than what we experienced was for the 1929 crash, the worst crash that we've ever experienced. There there are turbulent times ahead to say the least. Now in addition to that indicator, which is going off, there's also the SAM rule. The SAM rule, s a h m, suggests that if unemployment tracks or increases at a certain rate over a certain period of time, the SAM rule triggers these indicators, says that there is a recession in the near future. And it's accurately predicted every recession with, I think, 2 or 3 false positives where it was just a little bit later, but it still happened.

Mike: 09:12

So we have 2 of the most reliable indicators that I have found in my decade of research, because I care about these indicators. I wanna know what's going on. That are going off right now. Yeah. Suggesting that whether it's next year or in 2 years or in 3 years or whatever it is, that we are headed towards very difficult economic times.

Mike: 09:34

So I'm not as concerned about what the Fed does as to the Fed is probably being forced to some very difficult decisions where they're they can't do it right. They're just gonna be doing damage control at some point. The Fed doesn't control the market. The Fed's just kinda like a referee doing its best. They're trying to create stability in a very greedy market.

Mike: 09:55

And the market is very greedy right now. People are buying and buying and buying. And that that can be a problem. So with all this information, there's a couple of things I think are really important to point out. When people hear this, they get very concerned.

David: 10:11

Yeah. It does sound concerning when you say, like, you know, there's some turbulent times ahead. Should we all be kinda freaked out? Or

Mike: 10:17

Well, yes. The answer is yes and no. Uh-huh. We're all still here. Yeah.

Mike: 10:23

And anyone that's, I guess, born after 2008, you've lived through the 2008 financial crisis. Anyone that's retiring now saw what the 2008 financial crisis was, and you you got through it. Yeah. You can get through difficult times. The reason why I think this is so important is many people go to fear, and out of fear, they'll make one of 2 common emotional decisions.

David: 10:46

Yeah. Okay. Let us know.

Mike: 10:47

Yeah. The first one is they say, well, you know, I've worked this hard for all this money. I can't lose it. I don't know when it will happen, but I feel like it will happen, which is probably right. And so they they they try to time the market by going into cash and cash equivalents, like CDs or high yield savings or money markets.

Mike: 11:06

K? Well, no one can time the market. That's the problem. Yeah. And time in the market is going in the market and then going to cash and then going in the market and then going to cash.

Mike: 11:17

For example, in 1998, we had a false positive. Right? It looked like we were gonna crash, but then we had 2 years of incredible growth, 1999 being in a wonderful year, and then it crashed. So if you're trying to time the market, you could be missing out on significant opportunity because you don't have a well structured portfolio. It's not a deliberately designed portfolio.

Mike: 11:40

You're still in this generic cookie cutter buy a bunch of stocks and bond funds and ETFs and whatever and just kind of ride the market up and down it's a very reactive passive approach that would cause a lot of fear but there's a better way to do it So those people are saying, well, gosh, I don't wanna I don't wanna get this wrong. Let's all go to cash. That's emotional. It's not necessarily financially, I believe in your best interest because no one can time the market and there's there's significant possible problems. Okay.

Mike: 12:13

Now the other one that many people will emotionally do, and this is the insurance side, is they'll say, you know, gosh, all the indicators say the market's gonna crash. Don't retire until you've secured your your income for life, and they sell an annuity. Now, an annuity is not necessarily bad. It's transferring longevity risk to an insurance company, and the insurance company can do this because they pool a number of people together, and most people will die soon enough that they can make money off of this. That's how insurance works.

Mike: 12:43

It's most people don't cash in, and then the few outliers they can afford to pay off. And so they'll they'll, out of emotional fear, put themselves into fixed income. And then the fixed income. They then live off of that. But can you imagine the income that you would need today, 20 years ago?

David: 13:05

Oh, no.

Mike: 13:07

Most people can't fathom that with how inflation can increase or or do whatever out what the markets do. It just and 20 years ago, you didn't know you would use a computer this much. You didn't know you would need an iPhone or whatever. If you do Android, I you don't know what your lifestyle is gonna look like in 20 years from now. So to lock in your retirement with fixed income without giving yourself future flexibility is also, in my opinion, dangerous.

Mike: 13:31

But that's an emotional decision people are making. Again, if you want guaranteed income for life, you want to lock in your base just so you it helps you sleep better at night. That's fine. Let's just not call it an investment. Yeah.

Mike: 13:45

Let's let's call it insurance. And you're transferring longevity risk to an insurance company. Nothing does everything well. There's no such thing as a perfect investment product or strategy, but there is a better way to do this. Now we believe it's through the reservoir because if the markets crashed horribly, let's say, next year, and you could draw income, let's say for 3 years from principal guaranteed sources, allowing your other accounts to recover, then there's really no damage done.

Mike: 14:14

You prepared for the best and the worst at the same time. You maintained your liquidity and flexibility overall, though it may not have all been liquid today, but you had different amounts of liquidity events throughout your plan, and you're preparing yourself to get through the next, not just the next market crash, but the next couple of market crashes. We can't control the market. But to say, gosh, I'm gonna give up the thing that is gonna give me or support as best it can, because we can't control the market. But I'm gonna give up the thing that can help me prepare for my future because I'm scared of today is extreme.

Mike: 14:55

It's all in or all out. And there's a better way to do it. It's diversifying your portfolio deliberately by time based objectives for your money, giving purpose to your money. And most people don't realize how to do this. It's not intuitive, admittedly.

Mike: 15:13

The concept is simple, but it's difficult or it can be difficult to implement. You can read about my book, how to retire on time. You can get that on Amazon today or anywhere else. Shameless plug there. No.

Mike: 15:24

Or you could just let us show you exactly how it's done. You can just go to www.yourwealthanalysis.com and request your wealth analysis to where we'll explain this concept. We'll run your numbers, show you a plan that might actually be more informative, more comprehensive than your current plan, but also show you different options on how to blend different income strategies together, how to get through the next market crash, and so on so that you can sleep better at night. Our analysis is designed to help increase your potential income while also helping you lower your overall risk while maintaining your flexibility, that you're not signing lifetime contracts to insurance companies. Go to www.yourwealthanalysis.com to request that analysis, or you can text analysis right now to 913-363-1234, that's keyword analysis, to 913-363-1234, or go to www.yourwealthanalysis.com today to learn more and get started.

Mike: 16:26

That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.

Mike: 16:51

This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you, regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.