Shades of 2008: It’s Like Deja Vu All Over Again

shades-of-2008:-it’s-like-deja-vu-all-over-again

As the Federal Reserve reiterates its desire to raise interest rates in order to keep inflation under control, markets seem to have finally come to grips with the fact that the easy money gravy train is over. And Fed Chairman Jay Powell continues to twist his knife in the economy’s back every time he speaks.

In late August, at the Kansas City Fed’s Jackson Hole monetary policy conference, Powell stated that the economy would face some pain as a result of the Fed’s tightening of monetary policy. This month, Powell stated that the housing market would require a much needed correction. And he reiterated that even though he wished there were a non-painful way to combat inflation, there isn’t one.

It’s hard to undo the learned lessons of the past 14 years, in which markets have been able to rely on an unprecedented amount of easy money. And it’s only very slowly that markets have come to the realization that Powell means business. But as that realization sinks in, we’re going to see actual market behavior changing to reflect that changed reality.

Interest Rate Hikes

The Fed’s interest rate hikes today are similar to those it undertook between 2004 and 2006, when the federal funds rate was raised from 1% to 5.25%. While the federal funds rate is only 3.25% today, it is widely expected that the Fed will continue to raise the federal funds rate through the end of the year. With two more meetings this year, the federal funds rate should end the year at 4% at least.

With the Fed’s tightening thus far having had little if any impact on year on year inflation rates, the likelihood of further rate hikes is high. And with Powell having signaled that the Fed intends to keep hiking rates until inflation is under control, it could be a while before the Fed even pauses its rate hikes, let alone thinks of cutting rates.

Market Response

Markets seem to have finally realized that Powell is serious, and seem to now begin making their slow unwind as they did in 2008. What many people seem to forget is that 2008 wasn’t an instantaneous crisis, it was a slow and steady decline that only intensified once everyone realized what was going on.

The seeds to the 2008 crisis were sown in the years before, as the Fed had kept interest rates too low for too long after the collapse of the dotcom bubble. And hiking interest rates set the stage for the bursting of the housing bubble, which by 2007 was already showing signs of weakness as Bear Stearns saw itself getting into trouble.

Markets peaked in October 2007, but it took almost a year before most people realized in what a dire situation the economy really was. It was only the collapse of Lehman Brothers in September 2008, and the Fed’s failure to bail the company out, that really woke most people up and caused Wall Street to panic.

It just goes to show that expecting to gauge the health of the economy by the performance of markets is a poor way to judge things. Markets almost always lag the economy and are trailing indicators, not leading indicators.

We could likely see the same thing today with labor markets, which the Biden administration is holding up as a sign that the economy is really doing well. All the while, layoffs have started. And it won’t be until the reality of recession is apparent to most people that we look at high unemployment rates and nod our heads in the realization that we’re in recession.

Recessions are always assessed after the fact. The 2008 Great Recession officially began in December 2007, at at time when markets were still doing well and government officials were reassuring us that housing market weakness wouldn’t spill over into the broader economy.

The reassurances we’re getting from Washington today sound an awful lot like those the Bush administration was giving us in 2007 and early 2008, even though anyone with eyes and a brain can tell that things are going poorly today. With high inflation weighing on household savings and consumer spending, and the economic outlook continuing to deteriorate, only the most partisan Democrats could deny what is happening in front of them.

And with a growing realization that we could be on the verge of another 2008-style crisis, now is the time to start thinking about preparing ourselves to weather that coming crisis.

Protecting Your Wealth With Precious Metals

Investors in 2008 were still stuck in remembrance of the glory days of the dotcom bubble. They remembered those glory years and hoped for their return. So the idea of another crash, and one that could decimate their savings, wasn’t even on their radar screens. But the 2008 financial crisis smashed their dreams into pieces.

Any hope that markets might return to their 1990s glory days was put to rest after the losses of 2008. With markets losing over 50% of their value during the crisis, maintaining wealth and recouping losses was the name of the game, and that wasn’t easy.

But at the same time that markets were hemorrhaging, gold gained 25% in value. And while markets struggled to regain their footing, gold continued to grow and hit all-time highs.

With the outlook for a recession and a market crash growing all the time, we could be faced with another crisis that could rival 2008 in severity. So it’s no surprise that investors who remember the losses of 2008 are looking to protect themselves with gold.

Demand for gold has skyrocketed in recent years as investors have sought to protect their wealth from the prospect of loss. 2020 was a wake-up call for many, and the current bear market has woken up even more people to the need to do something to protect themselves.

One popular option that many investors have begun to explore is that of a gold IRA. A gold IRA is a tax-advantaged retirement account that invests in physical gold coins or bars rather than financial assets like stocks, bonds, and funds that you would find in most Traditional IRAs.

With a gold IRA, you can benefit from owning physical gold while still maintaining all the same tax advantages as any other IRA account. And you can fund a gold IRA with a tax-free transfer of assets from an existing 401(k), 403(b), TSP, IRA or similar retirement account.

If you have existing retirement assets that you don’t want to leave exposed to the gyrations of markets over the next few years, maybe it’s time to start thinking about a gold IRA. With gold’s history of performing well when markets don’t, and its reputation as a safe haven asset, there’s a reason so many people today are buying gold.

With thousands of satisfied customers and over $1 billion in precious metals placements, Goldco has numerous gold options available to suit every buyer. Whether you want to open a gold IRA or just store gold coins at home to protect your assets, Goldco has something for everyone. Call Goldco today to learn more about how you can safeguard your savings with gold.

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About the Author: Paul-Martin Foss