• September 24, 2022

The Remarkable Janet Yellen

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This Is How Technology Can Be Used For Good

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How To Buy Corporate Bonds At 5% Discounts And 10%+ Yields

Today we’re in a situation that looks a lot like 2016. And back then, some savvy contrarians tapped it to grab quick 62%+ returns. The same setup is back again—and so …

The U.S. economy, nearly halfway through 2022, continues to challenge small businesses. Inflation has increased to the worst level since 1981 and stock markets have plummeted straight into a bear market. Mortgage applications have hit a 20-year low, house prices are still 20 percent over the year, and mortgage rates are on the rise. Energy costs are soaring, and food inflation is double-digit. After keeping interest rates too low for too long and adding $6 trillion to its bond portfolio, the Federal Reserve has finally decided to fight inflation.

Small business owners would agree, it’s time to fight but why did it take so long? The answer is revealed by looking at the Federal Reserve’s mission: stable prices and full employment. Total employment is still about a million workers below its peak in February 2020. The Administration has focused on injecting lots of money into the economy, sending checks to millions of consumers, providing free loans to millions of firms, and providing generous unemployment benefits. Additionally, there were moratoriums on student loan and rent payments, both helping support an overheated economy. The Fed kept interest rates historically low, so loans were cheap and, according to NFIB’s monthly surveys, credit was the “easiest” it had been in 48 years. Only a percent or two said they didn’t get all the credit they wanted.

So, millions of former workers who were not producing anything had millions of dollars to spend. There wasn’t enough “stuff” available to meet demand, so prices started rising fast. Business owners complained that inventories were too low at 48-year high rates. Supply chains were broken, hindered by Covid-related disruptions and labor shortages. Wages rose to attract workers. Employment eventually rose and double-digit unemployment rates disappeared, but employment remained the focus of policy. The Administration dismissed inflation as temporary and kept the foot on the pedal, low interest rates, and more government spending.

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Inflation has become the #1 problem for small business owners (28%) displacing lack of qualified workers (23%) now in second place with taxes and regulations following. Only 1% cited credit issues as their top problem, thanks to the Fed. Compensation costs are rising as owners compete for a short labor supply and energy costs are soaring ($5 average cost of gas). Oil prices are over $120/bb, and that affects so many products beyond fuel. Natural gas prices are also very high, impacting critical products like fertilizer. Owners reporting lower earnings outnumber those reporting gains more than 2 to 1. This is not likely to change any time soon as the Administration’s policies are reducing the amount of oil produced by U.S. firms. The Administration is turning to Venezuela and Saudi Arabia, asking them to produce more oil to reduce world prices rather than encouraging U.S. production through policy changes.

Prospects for improvement are not good. Even if prices were to stop rising today, they are at levels higher than last year by double digits. Will prices fall? Will wages be reduced? If not, we are stuck at current levels as the new normal. Small business owners expect tough times coming. Wage costs are usually reduced by cutting employment, not actual wage reductions. Fifty-nine percent expect business conditions to be worse by year end, only 6% see better. The Index of Consumer Sentiment hit an all-time low in June, 50.2. The President said the best way to prepare for hurricane season was to get a virus shot. The storm is coming, hopefully the Administration has proper vaccines. So much for policy. The Fed plans to fight inflation by raising interest rates and decreasing spending (housing will be hit the hardest). With all the economic challenges lining up, it looks like the second half of the year will be rough sailing.

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