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What Happened to Silicon Valley Bank?


In March, Silicon Valley Bank and Signature Bank became the second and third-largest banks ever to fail in U.S. history. Both banks, as well as Silvergate Bank, took just five days to collapse. This sent panic that rippled throughout the economy.

Signature Bank was popular within the cryptocurrency community. Silicon Valley Bank (SVB) was the 16th largest bank in the country and like Silvergate, had depositors who were heavily involved in the technology industry.

SVB’s deposit base tripled between 2020 and 2022 and they earned billions of dollars through the loans they gave to startup tech companies, but how they handled this financial success eventually led to their downfall.

What makes the banks so fragile?

Kris Mitchener, economics professor at Santa Clara University and research associate at the National Bureau of Economic Research says, “Banks are fragile because of their business model.”

Banks use depositors’ money to make investments. They use those returns as well as interest from loans they give to individuals and businesses to cover their expenses and eventually profit.

This business model is fragile because banks need a lot of money on hand should their depositors need it, but they often utilize risky investments to turn profits. If the banks take a loss on those investments when the depositors need money they then risk bankruptcy.

Most banks have depositors from a variety of industries, so if one industry falls on hard times, they still have depositors from other industries giving them money to keep the bank running.

Mitchener explains that in SVB’s case, almost all of their depositors were from the tech sector – a historically volatile field – and exceeded the Federal Deposit Insurance Corporation’s (FDIC) $250,000 insurance limit.

The impact of rising interest rates

Knowing that SVB lacked variety in their depositor base and seeing that they had a plethora of uninsured accounts, SVB tried to minimize risk by taking their new earnings and investing them into government bonds – considered to be one of the least risky investments around.

What they didn’t consider was the double-sided disaster rising interest rates would cause. As interest rates rose, depositors across the tech industry needed to withdraw their money to cover the increase in the cost of the debt they used to start their untested ventures.

Those withdrawals picked up pace after Silvergate Bank collapsed on March 8. Depositors who saw similarities between Silvergate and SVB rushed to remove their funds and liquidate accounts.

Most of SVB’s clients had multi-million or even billion-dollar accounts, and when they went to take their money out, it wasn’t there. The bank needed the money it invested in those 10-year treasury bonds to pay its depositors and remain solvent.

When SVB made those investments, interest rates were incredibly low. By the time they cashed out their bonds to pay depositors, interest rates were much higher, erasing the bonds’ value.

Lost money means lost customers

SVB lost about $1.8 billion selling those bonds, intensifying the panic and sending customers into a full-blown bank run the likes of which haven’t been seen since the Great Depression.

“One day you think banks are healthy and the next day you wake up and you think they’re insolvent. When those beliefs coordinate on that new equilibrium where you think the bank is insolvent, then people run those banks and those runs can happen really quickly. We saw the same thing in 1929,” Mitchener told Crash Proof Retirement and discussed further in his paper, “Arresting Banking Panics: Federal Reserve Liquidity Provision and the Forgotten Panic of 1929.”

After the run, SVB’s shares tumbled 50% in one day, its steepest single-day drop ever. SVB quickly collapsed on March 10, leaving depositors who didn’t run the bank stranded.

Depositors involved in these recent bank failures far surpassed the FDIC’s
$250,000 limit, but this time, the FDIC made depositors whole.

“[The FDIC was] concerned about the risks, people waking up to these risks, and starting to run other banks who have similar characteristics,” Mitchener says as to why the FDIC assisted depositors.

All of this shows that banks take more risk than we thought and large sums of money were never safe – not even government bonds were truly guaranteed. The sad reality is that this is poised to happen again.

How is this allowed?

After a similar rush of bank runs fueled the Great Depression, the Glass-Steagall Act was passed in 1933. This created the FDIC, limited the investment risks banks could take, and led to decades of tranquility in the banking sector. But in 1999, former President Bill Clinton repealed the act.

Now banks can take risks to increase their profit and if those investments fail the FDIC is your only protection. If your deposits surpass the FDIC’s insurance limit, you’re out of luck. If the Glass-Steagall Act was still in place, this wouldn’t happen.

SVB’s failed investments are a prime example of exactly what the Glass-Steagall Act was trying to prevent. Confidence in the safety of banks is essential to keeping the economy running. Failing to maintain that confidence has caused some of the greatest market crashes in history, and it all stemmed from failed investments made by banks.

What impact will this have going forward?

The recent FDIC bailouts helped stabilize consumer panic, but unfortunately, the FDIC can’t continue to bail out banks much longer.

Ross Levine, the Willis H. Booth chair in Banking and Finance at the University of California, noted that it’s possible the FDIC will have to borrow money to pay for this round of bailouts.

While the FDIC is not tax-payer funded, loans from the U.S. Treasury are. If the FDIC does borrow money to cover its bailouts, it’ll be printed by the Federal Reserve, leaving hardworking taxpayers to foot the bill.

If a bank isn’t safe, then what is?

The bottom line is that bank safety is a facade. Since the repeal of the Glass-Steagall Act, banks aren’t as safe as they once were.

Bank failures are just one of the many things that could crash the markets, but what’s more concerning for those who worked a lifetime is that the investments they once thought were safe are no longer.

Only investments in the financial life insurance industry are proven, through all market crashes and bank failures in history, to protect every penny of investors’ money and allow them access to their funds when they need it. The licensed consumer advocates at Crash Proof Retirement are experts in these under-utilized safe alternatives and will customize a system around your goals to guarantee the retirement dream you worked so hard for.

If you would like to learn more about The Proprietary Crash Proof Retirement System call 1-800-722-9728 or fill out the online form on our contact page https://crashproofretirement.com/crash-proof-retirement-contact/.

IRA Portability Rules

Good News. Happy senior couple looking at each other and listening to saleswoman sitting at the desk in the background

Investors have the ability to move certain assets in order to create a financially beneficial environment for their retirement. Whether they are an account owner, a spouse, an eligible ex-spouse, or a non-spouse beneficiary, there are a number of options available when it comes to moving assets that belong to some type of IRA account or workplace retirement plan. These options include rolling over assets from one retirement plan to another, converting a retirement plan into a different type of retirement plan, and transferring funds between two similar retirement plans. When it comes to the portability of certain assets, there are some restrictions and stipulations that are occasionally updated by the Internal Revenue Service. For IRA owners, it is important to stay on top of these regulations to avoid any potential complications with your accounts.

Rolling over assets from one retirement account to another is typically done in one of two ways. The first is a direct rollover, in which case a plan sponsor, be it a 401(k), will write a check payable to an eligible traditional IRA institution, and the funds are rolled over into the new account. Since the money never physically enters the possession of the account holder, the IRS does not consider a direct rollover to be a taxable event. However, if the workplace retirement plan is being rolled over to a Roth IRA, the funds would be subject to federal income taxes prior to going into the account. 

The other way that funds can be rolled over from one retirement plan to another is indirectly. Instead of the original retirement plan, such as a 401(k) writing a check payable to the new IRA sponsor, the check is made payable to the account holder. When this is the case the account holder has up to 60 days after receiving the distribution to roll those funds over into an eligible IRA account. Since this type of rollover places the funds in the hands of the account owner, the IRS considers this to be a distribution from the original account, thus creating a taxable event. In order to avoid paying taxes on the distribution, the account holder must roll the funds into an eligible IRA account before the 60-day period expires. 

Furthermore, rollover funds must be reported to the IRS in your tax filing each year to avoid discrepancies and potential penalties if not completed correctly. It is also important to remember that a Roth 401(k) cannot be rolled over into a traditional IRA and a Roth IRA cannot be rolled over into a traditional 401(k) because taxes are assessed prior to the funds being invested in Roth accounts. Additionally, only one rollover event is allowed to take place per year and if the account owner is over the age of 72 and taking required minimum distributions, those mandated withdrawals are not eligible to be included in a rollover of funds. In the event that ineligible funds are rolled over into a retirement account, a penalty from the IRS would be assessed unless the problem is corrected. 

When an account holder wishes to move funds from similar retirement accounts like a traditional IRA from one institution to another traditional IRA at another institution, they would complete a transfer of funds. Fund transfers can only occur between two IRA accounts or 401(k) accounts that are exactly the same; therefore, an investor cannot transfer funds from a traditional IRA to a traditional 401(k), which would require a rollover of funds. Transfers are simple, non-taxable events that are facilitated by the two active plan sponsors. Thus, if an investor wanted to move a Roth IRA from one institution to another Roth IRA at a separate institution, they could do so by way of transferring the funds. 

The investor could also transfer the funds from the original institution to several other institutions as long as the account types were all the same — in this case, a Roth IRA. Unlike limitations on rollovers, an unlimited number of transfers can occur in any given year because the type of retirement account does not change and therefore the IRS does not consider the changing of institutions to be a taxable event. There is also no 60-day limit on transfers because the transaction is facilitated by the two institutions that are moving the funds. Furthermore, if required minimum distributions are being withdrawn from the IRA that is being transferred, the transfer can still be enacted because the type of account is not changing. 

There are, however, limitations on who can transfer and rollover funds. An account owner and the spouse beneficiary of an account owner have the ability to transfer funds between like accounts, as well as rollover retirement funds. Eligible ex-spouse beneficiaries, as well as non-spouse beneficiaries, only have the ability to transfer inherited assets between like accounts. 

The final way that assets can be moved from one retirement plan to another is by converting the funds of a traditional account into a Roth account. A conversion serves the purpose of taking a tax-deferred account like a traditional 401(k) or IRA and paying taxes on those funds at the present date so the money can grow tax-free in a Roth IRA for the life of the vehicle. This kind of conversion cannot happen the other way around, in which a Roth account would be converted to a traditional account because taxes have already been applied to the funds in a Roth account. Converting a traditional IRA to a Roth IRA can be completed similarly to a rollover in which the institutions can move the funds directly or indirectly. 

When a direct conversion occurs from a traditional account to a Roth account, there is no 60-day stipulation, however federal income taxes must be paid on the conversion of funds. If the funds are converted indirectly, just like an indirect rollover the current institution will write a check payable to the account owner and the owner will have up to 60 days after receiving the distribution to convert those funds to a Roth IRA, as well as paying taxes on the conversion. There are other stipulations when it comes to converting funds from a traditional account to a Roth account and that includes who is eligible to make that conversion. According to the IRS, conversions may only be executed by the account owner, a spouse beneficiary, or an eligible ex-spouse beneficiary. A non-spouse beneficiary only has the option to roll over the inherited funds, they cannot convert to a Roth account. 

The portability of IRA assets and the regulation thereof are constantly changing from year-to-year, and it is imperative that IRA owners and their beneficiaries stay up to date with the changes that do occur. Not doing so can subject you to penalties and create a potential tax nightmare. Moving your assets from a workplace retirement plan to an IRA, or simply moving funds between IRA accounts, can be facilitated by meeting with a licensed retirement phase expert who can ensure that the process is completed smoothly and accurately to avoid the potential pitfalls with the IRS. 

Global Insecurity on the Rise


The fallout from COVID-era monetary policy continues to wreak havoc throughout the global economy as more experts are slowly, but surely, waking up to the reality that a global recession is all but inevitable. This includes the World Bank Group, who released an Equitable Growth, Finance, and Institutions Policy Note, in September, detailing the grim multi-year outlook ahead for the global economy. While food shortages, supply chain delays, and international conflicts have all fed the beast of inflation, the efforts made to quell the financial pain of Americans and others around the world have largely fallen short. In fact, the actions taken by American policymakers and the central bank have exacerbated complications with inflation and shortages. 

Previous Global Recessions

In the near century that has unfolded since the Great Depression, the United States has experienced 14 recessions, with the most recent taking place in 2020 during the COVID pandemic. Although the 2020 recession was dreadful for investors, it only lasted for a few months and quickly bounced back due to an unprecedented stimulus effort by the federal government. One would have to go back to the 2008 global financial crisis to witness a prolonged recession that was ultimately thwarted by quantitative easing.  

The monetary policy that has dominated the United States financial system since 2009 implemented a low-interest rate environment to encourage economic expansion without exceeding a 2% inflation target rate. By and large, the federal reserve was able to achieve these goals, but the growth was artificial; instead of experiencing a natural financial reset in the wake of the 2008 financial collapse, investors across the globe were lifted by an economic wave propped up on stimulus. In 2020, the global markets were tested by the COVID pandemic and when the government increased their stimulus to historic levels, the financial house of cards started to collapse. Now, after nearly two years of dismissing critics concerns about overstimulating the economy as fearmongering, central banks are admitting that inflation is devastating investors in the United States and across the globe. 

World Bank Group Prediction 

The World Bank Group conducted research which concluded that by making monetary decisions in a timely manner, central banks could have eased the difficulty of addressing inflationary issues. While this analysis may seem obvious, inflation was initially classified as transitory because modern day central bank monetary policy has primarily concentrated on the demand side of economic growth. Now, as a result of these issues being cast aside, the global economic community is facing a high-risk of destabilization. This deterioration of the global economy will take place over a long period of time as issues of food insecurity, political malfeasance, and international conflicts erode the security and stability of nation states in the short term.  

This ultimately guarantees that an inescapable ripple effect will extend global losses for investors. History has shown that every political and monetary policy decision has the potential to shift economies around the world. In 2020 and 2021 central banks pumped a record amount of stimulus into the global economy and unearthed the hottest inflationary environment since the 1970s. Prior to the pandemic, during the early years of the Trump administration, tariff wars with China and other countries impacted global imports and exports while trade deals were renegotiated. Countless foreign conflicts, real estate at home and abroad, and political upheavals throughout Africa and the Middle East over the years have all made their mark on economies and their investment markets. 

Given the issues that are currently impacting the United States and other countries around the world, the World Bank Group concluded that widespread inflation would cause global economies to painfully decline through 2024. The authors noted, “Recent consensus forecasts suggest that the global economy will experience its steepest decline in growth over the next two years following an initial rebound from global recession since 1970.” Researchers from the World Bank Group went on to argue that a global recession is inevitable as central banks from around the world engage in a synchrony of monetary policy tightening to slow economic growth and cool down inflation — which they say is likely to remain above 3% globally through 2024. 

Global Inflation Rates 

Currently there are a handful of developed nations, including the United States, that are struggling with high rates of inflation. According to Trading Economics, an online economic database that forecasts more than 20 million economic indicators, there are several countries in Europe experiencing higher inflation than the United States (8.2%) due to a global energy crisis, largely stemming from Russia’s invasion of Ukraine and a supply drought that dried up in the later months of 2021. 

Germany is among the notable countries in the group, who are currently dealing with their worst bought of inflation in over 70 years at 10%, while preparing for a very uncertain Winter season given their dependence on Russian oil and gas for heating and fuel. Other countries struggling with similar issues include: the Netherlands (14.5%), the United Kingdom (9.9%), Spain (9%), and Italy (8.9%). These high rates of inflation from developed nations throughout Europe are largely attributed to skyrocketing energy costs, much of which are a direct result of supply cuts from Russia in retaliation for Europe’s support of Ukraine. 

As these economic issues continue to persist, consumers all over the world will be forced to pull back from spending on goods and services, which will reduce global growth outlooks just as the World Bank Group suggested. While globalization connected the world through trade and commerce, it also linked the world’s financial problems in such a way that would resemble falling dominos. 

Protecting Your Nest Egg During Global Recessions

The abundance of issues impacting the global community makes it clear to those willing to pay attention that the economies of the world are tightening in the hands of inflation. Had central banks taken this issue seriously from the onset of the COVID pandemic, perhaps inflation would not be as devastating for investors as it is today. Due to their inaction and misguidance, inflation has no end in sight. This fact, however, does not mean investors cannot take the time to protect their hard-earned assets. Investors in the United States can meet with licensed financial advisors in Montgomery County, Pennsylvania or anywhere nearby to learn how a proprietary Crash Proof Retirement System can fight inflation with a structure of investments that will protect and grow their nest eggs during uncertain times. To learn more, call 1-800-722-9728 or contact a licensed retirement phase specialist online by filling out the contact form on the Crash Proof Retirement website.

The Recession After Tomorrow

The Recession After Tomorrow

The stock market is brutalizing Wall Street investors, falling more than 17% year-to-date in August. Earlier in June, the market lost more than 20%, briefly falling into a bear market as economists anticipated Gross Domestic Product (GDP) to return negative for a second consecutive quarter. When initial estimates determined that second quarter GDP contracted by 0.9%, many Americans believed that this was the official beginning of an economic recession. Under ordinary circumstances they would have been correct, but Americans are currently living through unordinary times. Although economists, government officials, and the current administration refuse to admit the reality of the situation, and deflect to a recession that may never come, Americans should know that they are in a recession today. 

After two months of arguing the merits of a real recession and technical recession, economists had a rude awakening when Federal Reserve Chairman, Jerome Powell, delivered an emphatic speech on the Federal Reserve’s commitment to fight inflation. Speaking at the Economic Symposium in Jackson Hole, Wyoming, Powell warned that businesses and households should expect financial pain as the Fed maintains it’s aggressive push to ease inflation with their historic rate hike program. 

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Chairman Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” 

The Federal Reserve has raised the federal funds rate to 2.5% so far in 2022 and is expected to go even higher until inflation is tamed. In January, economists only anticipated three rate hikes that would put the federal funds rate around 1.0% by the end of 2022. In fact, the Fed became so aggressive in their fight against inflation, they nearly raised rates a full percentage point in June, increasing rates by 75 basis points, which was the largest hike since 1994

Following Powell’s damning speech about inflation and the Fed’s unfettered commitment to bring it down, economists began to admit that a recession was inevitable, but not till 2023 and it won’t be because of higher interest rates. According to Steve Hanke, an economics professor at Johns Hopkins University, the reason the United States will enter a recession is due to the lack of M2 growth. M2 is the term used by the Federal Reserve to define money supply. Available data shows that from the onset of the pandemic through August 2022, M2 increased over 40% from $15.4 trillion to $21.7 trillion, thanks to a tsunami of unprecedented stimulus from the federal government. 

This argument about overstimulating the economy did not gain much traction with many economists as the Federal Reserve, Biden Administration and others referred to inflation as temporary and transitory. The team at Crash Proof Retirement®, however, has stated since April 2021 that massive stimulus efforts risked overheating the economy — history looks kindly upon those with truth and logic. When the current administration finally came around to recognize inflation as a persistent problem for Americans they pointed to a new scapegoat in February, blaming Russia’s invasion of Ukraine for high inflation. 

The conjecture from federal officials and economists is finally coming home to roost as individuals, like Chairman Powell, are starting to say the quiet part aloud — there will be pain. Their admittance is too little too late because Americans have experienced pain for nearly two years. According to the American Enterprise Institute, inflation is causing the average household in the United States to pay an additional $450 a month for the same goods and services they were buying over a year ago. The untold truth of Powell’s statement in Jackson Hole is that Americans are going to experience more pain than what they are struggling with right now. 

Regardless of whether experts want to classify current economic conditions as a recession or not — based on consecutive GDP contractions — this fact remains the same: higher interest rates will eventually reduce the impact inflation has on Americans pocketbooks. Conversely, Americans will replace the pain of inflation with more expensive debt, as a result of higher interest rates. The New York Federal Reserve recently published their Quarterly Report on Household Debt and Credit for August 2022, which indicated a record $16.15 trillion dollars of debt held by Americans. 

Due to higher prices, credit card debt increased 13% year-over-year, which was the largest increase since the early 2000s. Consumers carrying large amounts of variable-interest debt will not only be forced to reduce their spending to pay their bills, but if they struggle to pay their bills this opens the door for a potentially catastrophic debt crisis occurring amidst an economic recession. 

Despite these efforts to tame inflation, it is likely that inflation will persist through 2024 and the point made by Professor Hanke is a valid one. Money supply must be brought down as well, and the process of accomplishing that goal will slow the economy. This would mean that the Fed will increase bank reserves, which in turn will reduce lending and decrease economic advancement. While all of these actions threaten to place the economy in a deep recession, there is a backend risk of taxes being raised to account for increased deficits created by the ironically named, Inflation Reduction Act. 

Continuing to deny the existence of a problem, such as a recession, puts Americans and their hard-earned savings at risk, especially for those who are invested in the stock market. Conveniently, Chairman Powell made his statement at Jackson Hole just in time for investors to enter September, which has historically been the worst month for investors since 1950. It is now up to investors in or near retirement to take it upon themselves to protect their hard-earned nest eggs. For Wall Street, however, profit has always taken precedent over security. Investors can follow simple tips to avoid losing years of their precious growth time by removing the risk of volatility and fees from their investment portfolio while following a safe path, especially during this economic recession. 

The Big Lie about Gas Price Inflation

The Big Lie about Gas Price Inflation

History was made on the tenth of June when the United States crossed the gas price rubicon. The cost for a gallon of gas soared above $5 for consumers across the country, forcing the United States to take one more step towards a devastating financial recession. The rapid rise in gas prices is not only damaging American’s pocketbooks at the pump, but also weighing down their purchasing power for other items ranging from electronics to cosmetics. Unfortunately, the severity of this issue has been politicized and deflected, and rather than put an actionable plan in place to address the problem, lawmakers have instead opted to lie to the American people. 

Inflation reached 8.6% in June, which was an unexpected increase for economists and politicians who hedged their bets that inflation peaked at 8.5% in March. As the stream of misinformation flows through legacy media, here are just a few of the lies being told to deflect blame from the current administration’s lack of effort to address the growing energy crisis. 

From the White House: “Americans face rising prices at the pump because of Putin’s Price Hike.” Perhaps one of the biggest misleading claims coming from lawmakers and the current administration is that the gas price increase is a result of Putin’s unprovoked invasion of Ukraine. While the invasion had a significant global impact on the supply and demand of oil and other products, such as food, the fact of the matter is that the price of gasoline was on the rise well before Putin’s invasion. According to the U.S. Energy Information Administration gas prices were $2.42 when Biden took office (January 2021) and increased to $2.89 two months later. By the end of February 2022, less than a week into Russia’s invasion of Ukraine, the price of gas had risen to $3.61 — a 49% increase in 12 full months. Based on the available data it is clear that Russia’s invasion did not cause the price of gasoline to rise, rather it accelerated its inevitable rise. Remember, this was the administration that promised to make evidenced based decisions and encouraged the public to trust the science

Let’s entertain the Biden administration’s assertion that the rise in gas prices is a direct causation of Russia’s invasion into Ukraine. Banning Russian oil and natural gas from being imported into the United States and Europe, as well as other parts of the world caused the available supply to dwindle. The obvious solution to filling that supply gap would be to ramp up production elsewhere to counter the sharp increase in price and thus avoid the notorious Putin Price Hike. Unfortunately, the Biden administration’s Department of Interior announced in May of 2022 that they were canceling several drilling leases on more than one-million acres of land in the United States, because there was a “lack of industry interest.” Perhaps that interest was diminished by the administration’s efforts to increase environmental regulations and royalties that must be paid to the government; not to mention the 80% reduction in available federal land for drilling

While handcuffing the American energy industry, the Biden administration has continually lambasted oil companies for their greediness while parroting a popular exaggeration that oil companies determine the price of gasoline for consumers — even though only 1% of the nation’s gas stations are owned by major oil companies. This politically perilous rhetoric will likely cost Biden and his Democrat party their control of Congress come November. Determining the price of gasoline is not as basic as lawmakers would lead consumers to believe. For starters, gas prices are governed by the laws of supply and demand. Consumers are paying a price that is based on the future expectation of supply. So, as the expectation for future oil supply decreases, the price of gas is naturally going to increase. Additionally, there are several components that are baked into the price of gasoline including the price of the oil, the cost of refining that oil into gasoline, transportation costs, and federal, state, and local taxes. This would explain why a tax-heavy state like California has gas prices exceeding $6.40 per gallon, while a state like Georgia, which suspended their gas tax, has the lowest price per gallon of $4.43. 

Economists share in this strategic sleight of hand to pass financial responsibility onto someone else and mislead investors about the direction of the economy. Responding to national gas prices inflation beyond $5 per gallon, a CNBC reporter cited an economist stating, “While consumers are feeling the pain, prices are not yet at a level that would tip the economy into a recession.” The article went on to surmise that gas prices alone would not be enough to start a recession; therefore, other economic components must be involved, neglecting that oil is used for much more than producing gasoline. Ultimately, this lip service continues to threaten the security of investors’ nest eggs, and the proof is in the bear market that Wall Street reentered on June 10th (the stock market first entered bear market territory in May 2022). 

The heavy-handed price of the big lie about big oil influences every part of the United States economy, beyond consumers filling up at the pump, heating their homes or making investments. Most of what consumers purchase rely on products that were made using oil or natural gas. These include, but are not limited to toothbrushes, lipstick and other cosmetics, dentures, garden hoses, car parts, clothing, and electronics. Once again, the laws of supply and demand come into effect and as the Biden Price Hike continues, consumers will reduce their spending on goods and services and therein lies the road to recession. 

Economic Symptoms of the Ivory Tower Syndrome

Newspaper headlines depicting the economic depression

It is hard to argue that Americans are not struggling in this economy, but politicians and the mainstream media are certainly trying. Sitting atop their ivory towers, Wall Street propagandists tout labor market misinformation to paint America’s decline as an economic recovery. This calloused view, is a contagious symptom of a larger financial epidemic, which ignores conclusive evidence that suggests the United States is on the verge of entering a dark period of economic pain — worse than what consumers have already experienced with record high inflation.

In the first quarter of 2022, real Gross Domestic Product (GDP) from the St. Louis Federal Reserve fell by a rate of 1.4% due to the United States recording a historic trade deficit as imports increased nearly 18% while exports decreased more than 5%. Economists foolishly touted that the trade deficit was financial noise and not to be taken too seriously and used this as further evidence that the country was not heading toward a recession. While the media was quick to dismiss the troubling GDP report, they joined the chorus of misinformation to say that inflation also reached a peak

Additionally, while the Biden administration spins tales about monthly job reports, Nela Richardson, the Chief Economist at ADP poured cold water on the administration’s claims that they are responsible for creating new jobs. The fact of the matter, as Richardson noted, is that the increase in labor market activity is due to jobs being recovered, not created. As a guest on CNBC, Richardson stated that the economy “hasn’t added one single job from the 2019 high water mark.” The 2019 high water mark is a reference to the record low unemployment and strong labor market conditions experienced during the previous Trump administration. She went on to say, “All the jobs that we have seen gain are recovered jobs that we lost. We are not producing new jobs…so these wage gains are coming on top of a shrinking workforce, and it’s not being fueled by productivity enhancements.” 

To those who believe that the economy is recovering, the consensus is clear — it is not. Food and energy shortages are causing complications for consumers as the price of gas seemingly sets a new record every day, and many food prices are up over double-digits in the latest Consumer Price Index report. Although consumer spending increased in the face of high inflation, this trend will soon reverse itself. Former Chief Economist for the Securities and Exchange Commission, Larry Harris, said to CNBC that it would be exceedingly difficult for the Federal Reserve to fight inflation without causing a recession in the process. Even if the Fed were to avoid a recession, it is even more likely that it will be caused by consumers repurposing their spending. 

Gas prices reached a new record of $4.91 on June 7th, which is 60% more expensive than in 2021 when gas prices were $3.06 and 136% more expensive than May of 2020 when the price of a gallon of gas was $2.08. Labor costs are also increasing throughout the United States as there are more jobs available than unemployed to fill them, and since wage increases can’t keep up with the high rate of inflation, Americans are actually losing money. The logical argument suggests that if consumers’ purchasing power decreases while prices rise, the natural reaction from Americans would be to streamline their spending as much as possible to avoid racking up massive amounts of debt. Wall Street insiders and politicians have refused to acknowledge this rational view of microeconomics. 

The same argument holds true from a macroeconomic perspective. Debt is a dead weight on a country and since the start of the pandemic, the American people have accumulated historic levels of debt. A rapid increase in housing costs forced homebuyers into more expensive mortgages as housing prices surged over 20% compared to prices in 2021, according to the CoreLogic Case-Shiller Home Price Index. Worse than the rising price for homes is the debt that comes with the home purchase. While prices have increased so have mortgage rates, which are now at 5% or more for a 30-year mortgage. The Washington Post recently reported on Americans who purchased new homes that were under construction, who signed contracts expecting one interest rate for their mortgage and are now facing a rate that is 40- to 50% higher due to rising interest rates. 

To make matters worse, while rates and prices continue to rise, the demand for housing plummeted over 16% causing economists to become fearful of a massive housing market bubble burst, adding more financial obstacles to an already troubled economy. Additionally, as the Federal Reserve embarks on their interest rate hike campaign — and subsequent tightening of their balance sheets — credit cards and other variable forms of debt are becoming more expensive for consumers to finance, which presents a dangerous situation that could lead to a wave of financial defaults in the short to medium term. A recent report indicated that for every basis point that the Federal Reserve raises interest rates, it adds one extra dollar to every $10,000 in debt. For example, if the Fed reaches 2% interest rates before the end of 2022 — a 200-basis point increase —this would add an additional $200 in interest on every $10,000 of debt. 

Rising interest rates also have an adverse effect on the stock market and at-risk investors have lost approximately $5- to $8 trillion dollars in response to volatility on Wall Street as a result of recent economic problems and the threat of a recession. Ultimately, Americans are being financially ambushed from all fronts and the consensus is clear, the only path forward is through a deep economic recession. While politicians and Wall Street media insiders focus on pulling the wool over the eyes of at-risk American investors, the reality is that food and energy shortages, crippling inflation, and an incredibly poor stock market performance has forced the economy into a nosedive towards a financial collapse.

A Path to Follow Amidst Financial Uncertainty

Senior couple of tourists looking at map in forest
Senior couple looking at the map during the hike in forest.

Past performance is not a guarantee of future results. This statement, often echoed by brokers in the securities industry, underscores a common tautology — you either make money or you lose money. In simpler terms, this is how Wall Street deflects the risk of investing in assets that are tantamount to spinning a roulette wheel, or betting on a horse race. For younger Americans, this long-term gamble has a higher probability of succeeding, despite dealing with significant losses along the way. Eventually, however, the accumulation phase of an investor’s working career ends, and the investor no longer has ample recovery time when the market crashes. 

The problem that investors encounter while transitioning from the accumulation phase to the retirement phase is the threat of the unknown. Predicting the future path of the stock market is one of the biggest unknowns in the financial industry, yet financial experts conjure forecasts and spread misinformation to keep investors blinded by the lust and vanity of risk investments. As a result, brokers are woefully ill-equipped to manage the transition into the retirement phase. When the market experiences a sharp decline, as it has in 2022, retirees who are stuck with Wall Street advisors find themselves in a helpless situation as their nest eggs erode without any education on how to prevent their nest eggs from experiencing losses in the first place. This phenomenon, known as the lost grow back time, exemplifies how investors accumulated wealth, gave it back during a market crash, and then had to spend time — years in most cases — trying to earn back what was lost. This period of gain and loss represents years of stagnation in investors’ portfolios. 

To address this phenomenon, retirement phase experts utilize an economic theory known as the Look Back Principle to visibly explain how the stock market historically submerged accumulation phase investors in volatility. Investors who had their money in the S&P 500 from 2000 to 2002 would have lost nearly 50% or more of their portfolio on Wall Street and would have waited several years to regain most of what they lost (if they were lucky) before their accounts were slashed in half again during the 2008 crash. Although the index fully recovered by 2013 (14 years in total), many investors were never able to regain what they lost, for several reasons including: hidden charges and fees charged by their securities advisors that further eroded their accounts and trying to foolishly time the market. 

Investors who are in the retirement phase of their lives are in a comparable situation today. After experiencing the 2020 market crash and recovery, investors are now watching the stock market meltdown at glacier speed. As of May 20th, the stock market had collectively lost over 20% while battling volatility for several months. Factors such as high inflation — reaching 8.3% in May — supply chain delays resulting from shutdowns in China, global conflicts, and Federal Reserve interest rate hikes, have all contributed to the stock market’s steady decline. The unknowns of present time question whether the market will find a bottom, while so-called experts encourage at-risk investors to buy the dip and try to discredit those who are sounding the alarm about the threat of a debilitating financial recession. 

During this time of financial uncertainty, investors in or near the retirement phase of their lives need financial guidance that prioritizes safety and security. Any advisor that cannot accomplish this simple goal is more interested in earning a paycheck from investor fees, which are paid in full regardless of whether their client earns an unrealized return. Unfortunately, many investors are unaware of safe alternatives that guarantee principal protection of an investment. This is due to brokers and investment advisors purposefully pointing their investors in the opposite direction, saying that safe financial instruments are a fraud. 

In lieu of investing in vehicles that could protect an investor’s nest egg, securities advisors encourage their clients to have a backup plan in the event that the stock market experiences a correction or crash. Even the media promotes this financially incompetent point-of-view, suggesting that retirees could transition to part-time employment, downsize from the home they’ve cultivated over the years and relocate, or simply reduce their living expenses. All of these suggestions dismiss the effect that inflation has in diminishing purchasing power. 

Although brokers and the mainstream media propagate misleading information, leaders in Davos, Switzerland were singing a different tune at the World Economic Forum. International Monetary Fund Director Kristalina Georgieva said that the global economy faces the “biggest test since the Second World War,” which serves as a significant warning for investors in at-risk assets given the amount of social, political, and economic instability just in the United States alone. Instead of waiting for these cataclysmic events to occur, investors should be prudent with their hard-earned nest eggs and learn about vehicles that can protect their money without having to worry about the stock market’s risk and fees. When analyzing the known, unknown, and yet to be discovered portions of the financial industry, Americans in or near retirement should err on the side of caution and eliminate unnecessary risk from their portfolios by meeting with a licensed retirement phase expert. Retirees are often led to believe that they must keep their assets tethered to the stock market in order to grow their nest egg, but this is simply false. With a growing number of Americans (56% according to the National Institute of Retirement Security) concerned that they will outlive their savings, the inherent risk of the stock market is counterintuitive to the established goal of security and peace of mind in retirement.

Controlling Your Nest Egg

controlling your nest egg
Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

Investors do not have control of their retirement investments when their nest egg is gambled on Wall Street. This is becoming abundantly clear as the government is now trying to address their climate change agenda through the power of investing. Known as ESG Funds, the government is incentivizing asset fund managers to think of climate-related financial risks when making allocations in pension and 401(k) plans under regulations in the Employee Retirement Income Security Act (ERISA). ESG is a form of sustainable investing, in which companies are put under a microscope and analyzed to be given a score based on their Environmental, Social, and Corporate Governance risks — hence ESG. 

Financial activists pushed ESG analyses into the forefront of investing conversations to encourage more ethical investing that not only benefits the stakeholders but ensures that money is being invested in companies that are helping the environment, serving the communities in which they do business, and taking care of their employees. Supporters of ESG and sustainable investing argue that these factors are often overlooked in traditional financial planning, which is primarily focused on earning a consistent return. Opponents to this type of financial analysis argue that ESG is nothing more than a gimmick used to boost marketing and public relations. For example, Tesla, who revolutionized the electric car business, was removed from the S&P 500 ESG Index from the sustainability benchmark over allegations of employees being mistreated in the workplace. Critics of the decision were quick to point out that Amazon, ExxonMobil, and Walmart all remained within the top 30 holdings on the ESG Index despite their substantial amounts of carbon emissions and allegations of workplace misconduct. 

Despite sentiment surrounding ESG investing, the Biden administration sided with the financial activists by issuing an executive order in 2021 instructing the federal government to treat climate change as a financial threat to Americans’ retirement security. In response, the Department of Labor proposed a rule that would “make investment decisions that reflect climate change and other environmental, social, or governance (ESG) considerations, including climate-related financial risk,” according to over thirty Attorney Generals, State Auditors, State Treasury officials, and more, from across the country. Opponents to the rule believe that this could hurt investor returns by using non-financial variables to determine asset allocation in defined benefit and contribution plans. Additionally, former Blackrock CIO Tariq Fancy, raised the concern about potential conflicts of interest for fund managers who may be put into a situation where they can follow ESG guidelines at the risk of losing money, or not follow the guidelines and increase their chances of earning a higher return. 

At the end of the day, the Biden administration and the Department of Labor is taking their first steps in turning asset managers — whose responsibility should be to the clients they represent to maximize their returns — into activist investors, who prioritize non-financial factors. Many who fear the economic policies of the current administration have additional concerns about this DOL rule evolving into activist investors picking winners and losers based on non-financial data, while strong-arming companies to fit the ESG mold at the potential detriment to their company’s bottom line, which in turn hurts average investors. 

Although the sustainable investment market has seen billions of dollars flow into the coffers of companies listed on the ESG Index, researchers have determined that their returns have been less than impressive. The Harvard Business Review released a report that highlighted multiple studies across several different reputable financial journals and found that while ESG portfolios were supposed to promote sustainable and ethical investing, researchers found that this was not the case. Researchers at Columbia University and the London School of Economics reported that ESG portfolios actually had a worse compliance record for following environmental, labor, and corporate governance regulations. Furthermore, the University of Chicago published a paper in the Journal of Finance in which they compared the performance of the highest rated ESG funds to the lowest rated funds, and although ESG funds brought in more capital during the time of their study, their returns on investment were worse. Additional studies conducted on this comparison between ESG and non-ESG funds uncovered that ESG funds have higher investment fees which further erodes investors’ nest eggs. 

Despite their intent for good, the result of investing in an ESG fund increases the risk of losses and exposes investors to higher fees. The government’s push to force more of these funds into investors’ portfolios establishes a responsibility among asset managers to consider climate related risks when making recommendations and allocations. Doing so presents a greater possibility of running into a conflict of interest as ESG funds sacrifice financial returns for a facade of environmental sustainability. 

The primary goal of investing is to accumulate wealth and maximize returns to generate a larger nest egg for retirement. This is no longer the intended goal of investing based on the actions taken by the Biden administration to force asset managers to consider non-financial factors in making investment decisions. Sustainable investing and ESG standards not only threaten investors’ ability to retire with security and peace of mind, but risks worsening a growing retirement crisis here in the United States.

When Americans transition into the retirement phase of investing, they have the opportunity to take advantage of strategies that put their interests first by guaranteeing the protection of the wealth that they have accumulated during their working careers.

Increased Regulations for Brokers

Increased regulation for brokers
Liadership, difference and standing out of crowd concept. 3D rendered illustration.

A surprise ruling from the Securities and Exchange Commission will start to put brokerages and investment professionals from the securities industry in the hot seat as the agency seeks to increase protections for consumers. Dating back to 2019, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have attempted to impose stricter regulation guidelines on investment advisors and the firms that employ them to crack down on firms with a history of regulatory disclosure issues. In an attempt to provide more consumer protections in the securities industry, the SEC passed FINRA’s proposed Rule 4111 which establishes monetary punishments for firms and their advisors if FINRA designates them as a risk to the investing public. 

Misconduct in the financial securities industry includes violations of securities laws and regulations, criminal or civil litigations, client arbitrations, and other forms of financial harm. If it was found that a firm had a long history of misconduct, Rule 4111 mandates that the firm put cash or qualified security assets into a Restricted Deposit Requirement (RDR) fund that will be used as an insurance policy to cover the costs of pending and unpaid regulatory issues, such as arbitration awards. In 2019, nearly 30% of cases (totaling $19 million) that were awarded damages from firms went unpaid and nearly 35% (totaling $31 million) went unpaid in 2018, according to FINRA. The average balance of an unpaid consumer arbitration in 2019 was just south of $500,000 and stretched well north or $700,000 in 2018. 

Firms that are seen as a red flag, or in other words, are a risk to the investing public, would be subject to these mandates. The size of the disciplinary deposit would be determined based on the severity of the misconduct, how many disclosures are held by the firm and the individuals involved, while also considering the size of the firm. With that said however, FINRA will not assess financial penalties that would put a firm at risk of becoming insolvent. To determine whether these financial firms should be designated as a risk or not, FINRA intends on analyzing the companies each year to determine the proper course of action. When FINRA designates a firm as restricted, those firms will have the ability to appeal these decisions made by FINRA, but outside of the appeals process, FINRA obtains sole discretion when it comes to assessing the disciplinary actions for red flag firms and the monetary penalties required to be deposited. 

To address the restricted firm designation, these firms can release advisors that are high-risk to potentially mitigate their RDR penalty. While assessing monetary penalties and putting firms—particularly smaller firms—in the hot seat to unload advisors with records of financial misconduct is a step in the right direction, experts have pointed out that this kind of regulatory action does not go far enough to solve the industry-wide problem. Even if a firm were to fire a risky advisor, it doesn’t preclude that individual from being rehired by another firm, nor does it address advisors from other firms who may have slipped under the radar that also have a history of misconduct in the securities industry. 

Opponents of the newly adopted rule argued that FINRA is targeting smaller firms and the forced removal of staff could ultimately lead to legal challenges and other complications. Firms that are faced with a restricted designation from FINRA will have only two choices according to legal experts in the field. The first option is to simply accept the penalty for having advisors with regulatory issues working for the company and pay the RDR, or the firm can release the advisors who have a history of misconduct. Legal experts believe that this ties the hands of smaller investment firms. 

While opponents to the new rule raise a legitimate concern about the impact this will have on smaller investment firms, the importance of Rule 4111 is to establish credibility in the securities industry and crack down on rogue brokers while also identifying them to the public. For years, industry professionals and regulators have warned about red flags in the industry and brokers with a history of regulatory issues moving from throughout the industry. These include recidivist brokers who slip under the radar and are high-risk for consumers in the investment industry. In a joint public statement, SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw stated, “A firm’s high-risk status is important information and will help investors make informed choices about the firms they select.” They also said that they are pleased to have FINRA “disclose the identities of high-risk firms to the public.” 

Establishing consumer protections in an industry that is known for putting investors at risk is a step in the right direction but there is certainly more that the financial industry can do to protect investors. Despite the benefits of Rule 4111, the objections raised by investment firms and some legal experts about how the new regulations will impact the business of small firms speaks volumes to whom the industry is more concerned about representing. Investors young and old can utilize FINRAs online Broker Check to determine if their broker and investment firm are a risk to their investments by checking their regulatory disclosures. While retirees can utilize these tools there are no protections in the securities industry to protect nest eggs from the market risk and fees of Wall Street that threaten the retirement security of millions of investors every day. 

China’s Growing Debt Crisis

A pile of RMB banknotes Chinese yuan money
A pile of RMB banknotes Chinese yuan money

The threat of another global financial crisis sank equity markets on September 20, 2021, after news broke of a Chinese development company that was on the verge of defaulting on more than $300 billion dollars’ worth of debt. This event contributed to a growing tension in the United States surrounding the potential of defaulting on the country’s national debt that is fast approaching $29 trillion dollars. The combination of domestic and global debt issues creates a lethal mixture for Wall Street investors that could potentially cause one of the most disastrous market events in history—especially if the United States government defaults on their national debt. 

Evergrande Group, one of the largest development companies in China, was under increasing pressure to make interest payments to bondholders as they stated in a financial filing earlier in September that they could not guarantee that those payments would be made. This uncertainty spread fear among investors in China and Hong Kong as Asian market indices lost 3% or more. The fear of default quickly spread all the way to Wall Street, which shed 2% on September 20, 2021, and caused American investors to lose tens of thousands of dollars in one day before rebounding in the days that followed. 

A contagion of fear was the culprit for the decline on Wall Street and despite the rebound in the days that followed the 2% crash, an unsettling sentiment remained that this may just be the calm before the storm. Evergrande had multiple bond interest payments to make on September 22 and September 23 and missing either of those payments would bring the company to the brink of collapse and threaten to destabilize China’s economy. Investors are split on their speculation of a potential default from Evergrande as some believe that a default on more than $300 billion dollars will not have a global effect, encouraging Wall Street investors to remain steadfast in their holdings. Other experts, however, have drawn sharp comparisons between the Evergrande situation in China and the Lehman Brothers group, whose collapse in the late 2000s served as a catalyst for the 2008 global financial crisis. It should be noted however, that Evergrande is not the only Chinese company that is facing debt concerns. Another Chinese development company, Fantasia Holdings, is also having debt concerns.  

If Evergrande were to collapse on their $300 billion dollars of debt, it would be the second largest debt default in history, even outpacing Greece who restructured $200 billion dollars of debt during their 2012 collapse. The largest to date occurred in 2008 when the Lehman Brothers group defaulted on more than $600 billion dollars of debt and ignited a spark that led to the global financial crisis. Currently, there are some economists that dismiss the Evergrande situation as having the ability to cause a global financial crisis, but others are not so sure. Wall Street investors quickly panicked and even if the selloff was based on a contagion of fear, the fact of the matter is that the stock market still suffered critical losses as a result. If Evergrande and other companies in China start to default on their debt payments, it absolutely would have a broad impact on global equities, especially if the situation grows. This is a developing situation that could last for several months as bond interest payments will be due for the debt-laden development company every month for the remainder of the year. 

On top of the Evergrande Group situation, federal officials in the United States are racing against the clock to come up with a plan to avoid what would be the largest default in history. In 2019, former President Trump suspended the debt ceiling for two years. At the time, the national debt was roughly $22 trillion dollars and was signed several months prior to the start of the coronavirus pandemic. When the debt ceiling suspension officially came to an end during the summer of 2021, the national debt had increased $6 trillion dollars and was fast approaching a total of $29 trillion dollars. Congress failed to pass a budget proposition with a debt ceiling provision prior to their summer recess and this forced Treasury Secretary Janet Yellen to implement extraordinary measures to maintain the government’s financial obligations while congress attempted to find a solution. The problem that lawmakers are waking up to today is the exhaustion of those extraordinary measures and a fast-approaching October 18 deadline to avoid a national default. 

Secretary Yellen has pleaded with members in both parties in the House and Senate to pass an official resolution to avoid what she believes will be the most catastrophic financial crisis in history, potentially sending the United States into another recession. Federal Reserve Chairman, Jerome Powell, also expressed concern about the national debt during a press conference where he made the point that it’s difficult to contemplate the consequences of failing to raise the debt ceiling, but the United States should not wait to find out. To make progress in the debt debate, President Biden met with Congressional Democrats and progressives to discuss his $3.5 trillion dollar spending package, including the debt ceiling, but no progress has been made and Republicans in Congress have stated that they have no intention of voting to raise the debt ceiling any further.

The United States faces a very real possibility that the government will default on its national debt despite having raised or suspended the debt ceiling countless times over the last several decades. The outcome of this worst-case scenario is inconceivable for investors with at-risk assets. In conjunction with these domestic issues, investors must now keep a watchful eye on the debt crises occurring in other parts of the world, especially in China where multiple companies are now struggling with debt obligations. What was anticipated to be a year of progress and recovery quickly unraveled into an uncertain mess that clouds future expectations for the economy, investing, and even the state of politics, as lawmakers will soon shift from a legislative mindset to a campaigning mindset for the 2022 midterm elections—if they haven’t done so already.

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