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The Great Financial Crisis Part II?

Being old does have some advantages in the fact that the best way to learn something is by seeing it a few times and having to work through issues. We are in the middle of a financial experiment by the Federal Reserve and the U.S Government and I will take the odds that they screw this up and we pay for it! I was a branch manager at Merrill Lynch during the "Great Financial Crisis" with more than $1,000,000,000 in assets under management. I ended up on a daily basis of eating, breathing, and not sleeping through the destruction in the financial lives of many companies and people in retirement. Policy mistakes and foolish decisions by the Federal Reserve and U.S Government were the problem and they did a masterful job of pointing fingers at banks and wall street after they screwed us all into the ground!

The Federal Reserve Chairman was Ben Bernanke and he was slow to see what was coming and let it get to a point of catastrophe.

"The Federal Reserve is not currently forecasting a recession." Ben Bernanke, Jan. 10th 2008

"The impact on the broader economy and financial markets in the subprime markets seems likely to be contained." Ben Bernanke, June 20th, 2007

The U.S Treasury Secretary was Henry Paulson and was equally blind to the coming financial disaster at the doorstep.

"I don't see (subprime mortgage market troubles) I think it is going to be largely contained."

Henry Paulson, August 10th, 2008

"It is a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation." Henry Paulson, July 20th, 2008

MARCH 5th 2009 the Dow Jones Industrial Average closes at 6926 A 50% DROP from the pre-recession high.

The blame game then began and the real beginning of the problem was the government's idea that everyone should be able to own a home and passed legislation as such. Everyone should not own a home and fogging a mirror was the standard for lending money to people. This created a bubble of greed and stupidity at all levels. People who had adjustable-rate mortgages with no money down and no math skills were doomed. Animal spirits began to arrive packaging all these into tranches to make money and the rest is history!

Fast forward to our current situation and I see similarities that are ominous and the clouds are forming and hidden in plain site again!

Huge policy mistakes are happening and it is a risky set of circumstances as the Federal Reserve waited way too long to address inflation that they called "transitory". If transitory is measured by years they got it right but it is not what they meant. They have now raised interest rates at the fastest pace since 1981 and are not done yet! This is an effort to slow the economy and tame the markets they stimulated in the pandemic with HUGE LIQUIDITY in conjunction with the Government throwing HELICOPTER CASH to the entire country. Estimates of the amount of stimulus are between $6-10 TRILLION. This has never been done before at these levels so it is unknown how long that takes to burn off in the system.

Today as the Federal Reserve raises rates and reduces liquidity the U.S Government continues passing legislation spending huge amounts of money that counteracts the efforts of the Fed.

The Infrastructure and Jobs Act is spending $1.2 Trillion and the Inflation Reduction Act spends another $ 891 billion and calling spending an inflation reduction shows the disconnect with realities in trying to reduce the money flowing in the economy by the Fed. This likely is making the job of the Fed more difficult and inflation more sticky leading to higher rates for longer. It is like a wildfire you are starting to get under control but the ambers can ignite at any time. It will all be revealed in the coming months and years and I am hoping and praying for a "soft landing" but not counting on it as my strategy for retirees and those nearing retirement.

There are great opportunities in the market due to the actions taken to raise rates and these types of yields have not been available to conservative investments for a long time. We use a short-duration bond fund that has a coupon of over 7% and bonds at 93 cents on the dollar creating a yield to worst of over 9%. These bonds are rated A- to BBB+ with a very short duration of under 2. We feel these are great alternatives for part of a portfolio for almost any investor but the most aggressive.

This is a time for caution for those who have saved their entire life to retire and now depend on their portfolio for income. The outcome is far different in a bear market for those in the distribution phase and they cannot take big early losses in their retirement years on top of withdrawing money. Having a portfolio that provides passive income streams to provide as much of the needed income without selling shares of holdings is ideal. See my whitepaper on floor income on my website comparing owning a building you rent and collecting income vs. selling property.

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