The Current Environment

There is some doom and gloom on the horizon of the economy right now. I’m normally a very optimistic person but things are going on right now that do not bode well for the future, and I would be not doing my job if I didn’t talk about them. You need to know what’s happening in the economy. It will affect your retirement planning if you just sit on your hands and hope for the best.

Financial planning is very different from investing money and hoping that it all works out. Planning is about strategically allocating assets so you can get the biggest bang for your buck. You want to strategically position your hard-earned money to protect yourself when markets don’t cooperate. We all know that the Fed is increasing interest rates. If you watch the headlines, a few days ago the inflation report came out. We thought that inflation was relatively under control. The expectation was that inflation would either come in flat, meaning it’s not rising anymore, or we even dared to wish it had gone down slightly. Neither of those things happened. The exact opposite happened; inflation went up.

We don’t have inflation under control yet. When that report came out, we were fully expecting the Fed to increase interest rates by three-quarters of a percent at the next meeting, but it was even worse. As a result of all of this, mortgage rates, which reflect interest rates, top 6% for the first time since 2008. Historically speaking, 6% isn’t the worst but how do you think that’s going to affect the housing market? Demand is going down.

Here’s another recent headline: mortgage demand from homebuyers falls 29% since last year as rates surged past 6%. Rising interest rates mean that fewer buyers can afford houses and having fewer buyers takes us from a seller’s market to a buyer’s market. Decreasing home values is never good for the economy. We are technically in a recession now, no matter what they say in Washington, D.C. We are in a recession by the definition of recession. With this news, I can predict that  they won’t be able to continue denying the fact that there’s a recession. I think you will indeed see the economy shrinking. That brings up a third headline today: we are sitting on the dreaded inverted yield curve.

What is an inverted yield curve? Let’s say that you lend me money. If you lend me a certain amount for a week versus a year, which time frame should I pay you a higher interest rate for? In theory, I should pay more interest for a year because you’re lending me money for a longer period. Your risk of not being paid back is higher, so you should be compensated for that higher risk. If you’re giving a three-year loan versus a 10-year loan to the same place, you should get a higher rate of return with the 10-year loan, because your money is at risk longer.

Yield curves are usually based on the Treasury of the US government; they are considered risk-free loans because the government can print money, so you’re guaranteed to be paid back. An inverted yield curve is where this commonsense concept of being paid more for a longer loan is flipped upside down. Whenever you buy a bond from the US government, you’re loaning them money. If you make a 12-month loan to the government right now, you would get paid 3.96%, which is not a bad deal. What about a 10-year loan? If you’re getting almost 4% for one year, don’t you think you should get closer to 5% for 10 years? Right now, for 10 years it’s 3.44%. For 30 years, you should get a lot more but it’s only 3.47%. There is a one-year rate of 3.96%, a two-year rate of around 3.5% and a five-year rate of 3.65%. It’s backward and upside down. Short-term rates are paying more than long-term rates, but the more important factor here is not the rate. There is a huge positive correlation between inverted yield curves, like we have right now, and recessions that follow. When you see an inverted yield curve, that’s a screaming red flag that a recession is coming.

We have mortgage rates over 6%, a declining housing market, increasing interest rates, a federal government that is spending money like a drunken sailor, and an inverted yield curve. The headwinds on this economy are starting to become gale-force hurricane winds. It is very probable at this stage that we’re looking at a recession coming up in 2023.

How do you protect yourself? The first way you protect yourself is to stop sitting there doing nothing. Do something now so in six months or a year from now you’re not looking back wondering why you didn’t do something. You don’t want to feel that way. You want to look back and be glad you acted. This isn’t the time to be messing around. You can’t just keep hoping at this point. Reach out to us.

In our next segment, we’ll talk about what exactly you can you do to protect yourself from the ugliness that is coming.





Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, and Centennial Advisors, LLC makes no representation or warranty as to the accuracy or completeness of the information, which should not be used as the basis of any investment decision. Information contained on third party websites that Centennial Advisors, LLC may link to are not reviewed in their entirety for accuracy and Centennial Advisors, LLC assumes no liability for the information contained on these websites. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Centennial Advisors, LLC. For more information about Centennial Advisors, LLC, including our Form ADV brochures, please visit https://adviserinfo.sec.govor contact us at 512.265.5000.




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