Transcript:
Tom Vaughan:
I’d like to start off the show with just a summary of what I saw happened this week in the market. One of the biggest things that we do, heading into retirement or in retirement, is managing the money that we have. Eventually, once you retire, you’re going to be living off of these assets, so making sure that they have the proper structure and can grow and such is really important. So, there’s several really big things that happened, actually, that I thought were fascinating this week. First of all, on Monday, we started to see a big downturn caused by a company called Evergrande in China, and so a couple things happening there. This is a big real estate company. They have 300 billion in debt. There was a lot of concerns because of the size of the debt: they have an $85 billion of that debt that was coming due. So normally, that’s just bonds coming due, they’d issue new bonds. Well, because of the high leverage and in the situation in China is a little bit unsteady right now, the regulators are coming into lots of these different businesses, and so outside capital is being a little bit cautious about coming into China also. So, there were some question marks of whether they were going to be able to reissue new bonds, and make this payoff. And so some of that was resolved, and hearing a little bit more news now that maybe some of it isn’t resolved. But personally, I don’t think that’s going to be a huge problem. We’ll see what happens there, but a lot of people were thinking about Lehman Brothers, which had $150 billion bailout that they were talking about doing, that they didn’t do, and it ended up cascading into what happened in 2008 downturn. So that’s the fear that’s happening there, but this is also a centralized controlled government and trying to become more so. So I do think that there’s enough money there to kind of handle some of these situations, but it’s something to definitely watch for.
But then on Wednesday, we had the Federal Reserve meeting. And this was very fascinating, because they said things that I hadn’t heard, really ever before. Number one, they’re talking about raising interest rates in 2022, and that they might have six to seven interest rate increases by 2024. So that has not been talked about before. In the past, it was always about raising interest rates in 2023. And so that was new. They also talked about cutting back on the bond purchases. And some of the wording that they talked about was that they might have to cut back on those bond purchases faster, depending on what happens. So, the market responded quite nicely to this, especially yesterday. We had a really big upward movement, and so it seemed to find those comments in a positive light, which was interesting to me, because all the way through this year, including all the way up to the summer, whenever they started talking about raising rates faster, cutting back on the bonds quicker, there was a lot of softness in the market around those comments, and to see a very strong upward move, I thought it was kind of interesting. But, part of that reasoning may be because there’s a bunch of investors that are worried about inflation, and they’re worried that the Federal Reserve isn’t going to respond fast enough. That they’re going to continue to buy bonds for too long, and or not raise rates fast enough to contain the inflationary threat. So, this is going to be walking a tight wire for the Federal Reserve. It’s going to be really interesting to see how this plays out, as far as that goes. So, that’ll be an ongoing story. We’ll know more here, and after the next meeting, that’s for sure.
So the other story, I think, is probably the most important, at least in my opinion, and that’s the the raising of the debt ceiling. Going back to 1870, they decided that the Treasury Secretary had to come to Congress, and ask for the debt ceiling to be increased, and then they basically can continue to issue new debt, which is what we do to kind of pay our bills and pay off old debts and what have you. And so we’re going to hit this ceiling here, at some point here in October, it looks like. Essentially, it’s now become sort of this big political football. Which I really don’t like to talk a lot about politics on this show or on my videos, just because I have clients across the entire spectrum, and I don’t want to offend anybody. But this is one place where politics is really intersecting very heavily with the stock market. If they don’t raise the debt ceiling, and we were actually to default, which has never happened, but if that did happen, it would be pretty cataclysmic, so it’s a big deal. So, the House passed package, that would increase the debt ceiling. It’s gone off to the Senate; nothing’s happened in the senate yet. My thought processes, they’re going to try to run it through the Senate, to try to make the Republican side vote No, so they can use that as ammunition in the midterms. And then the democrats have actually two different ways to raise the debt ceilings on their own. One of which, is this reconciliation package that they’re working on. This $3.5 trillion package you keep hearing about, and who knows what dollar amount will actually be in the end. They could ask a debt ceiling increase to that package, and pass it was just a simple majority, with the 50 votes that they theoretically have. The problem with that is that that package is so large and quite contentious, even within the democratic side, that there might not be enough time to get that package through in time to not have a default on some of the debt that we have. So, the other way, I think is probably the more ideal scenario, we’ll see what happens, and that is that they can change the filibuster rules inside of the Senate. So technically right now you need 60 votes to basically get things through the Senate. And so they can use the filibuster to create that, but if they change those rules, so it’s just a simple majority that needs… and they’ve done that twice before. They did it once, for federal judges. So right now, you only need 50 votes to get through a judge. And they also did it again for the Supreme Court judges, and so again, you only need 50 votes to get that through, get a Supreme Court justice in place. They could change the filibuster rules, again. Again, just identifying the debt ceiling, as an exception to that. And so they could then say, “Alright, this is majority vote, we only need 50”, and then they’d run that vote through get the 50 votes and raise the debt ceiling, or in my opinion, even better yet, why don’t they just get rid of the whole concept altogether? Because when you ask basically, the Treasury Secretary coming to Congress, it used to be it wasn’t a problem, but now it’s become this big political thing. And you know, the market movement that would happen from that isn’t something that interests me, so I hope they get rid of it. But, that is a very, very valid solution is to amend the filibuster for that. So, that’s what’s going on right there.
Now, one of the other things that we’re seeing here, right after the announcement from the Federal Reserve is that the 10 year Treasury yield is starting to come up. It’s up about 1.42%, now. And so we’re starting to see that move upward, also. That has all kinds of different impacts on the stock market, so we’ll have to wait and see what happens. Generally speaking, when you see interest rates moving up like that, the growth stocks, that tech stocks, and those types of things will slow down, and the value type stocks will do better. So you know, we’ll have to watch and see how that plays out. But that’s an interesting piece of what’s happened since the Federal Reserve made their announcements and their speech as far as that goes. So altogether, if you look at last Friday’s, positive Friday piece, you can see, the market has been doing incredibly well, for a reason. There’s a whole bunch of positive pieces that are underpinning this, and those are still there. This downturn, so far at least, it’s only been 3.6%, from high to low. And so that’s not too terrible for the month. And then we’ve got this scenario where, you know, the market fell through the 50 day moving average, and then got back above it again. So we’re barely holding that 50 day moving average right now as we speak, and that will be somewhat important to see what happens, because there are a lot of people that trade on these technical pieces also. So, very fascinating timeframe. I think that this is an OK piece: I like to see the debt ceiling resolved. Other than that, everything else I think is fine. These downturns help to release the pressure of a continuation of an upturn that could get too expensive. So let’s see what happens and I look forward to talking to you about it again next week.