The Fed Put A 50% Tax On Your Retirement Plan by John Mauldin
If a politician said he thought he should tax the income from your retirement plan, right now, at 50% (no matter where you are in the retirement process, that would certainly hurt the ability of your portfolio to compound), what would you think (other than that he was completely Looney Tunes)?
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The economy remains in distress, although there are signs of recovery underway. John Buckingham of Kovitz, editor of The Prudent Speculator newsletter, has found that value stocks typically outperform coming out of economic downturns. Thus, he argues that this is an excellent time to be a value investor. Q4 2020 hedge fund letters, conferences and Read More
It has reduced the fixed-income returns in retirement plans and the broad pension plans upon which so many people are dependent to practically nothing. And the Fed has done this to prop up asset prices.
Here’s why the Fed can’t raise rates
The Fed should have allowed rates to normalize years ago. Now, the Fed has unbalanced the financial system so badly that the markets will likely have another tantrum—no, make that a grand mal seizure—when rates start to rise.
And that means your bond funds will get killed. So will your equity funds. It’s going to be a huge disaster for retirement and pension plans. Any right-thinking person knows that.
That’s why the Yellen Fed can’t get to the point of actually normalizing interest rates. They know the reaction from the stock market is going to be truly ugly. And because they’ve pushed the heroin of ultra-low rates, they are going to be blamed for the withdrawal.
Larry Summers just went on a rant in the Washington Post. It’s instructive reading. His title is “The Fed thinks it can fight the next recession. It shouldn’t be so sure.”
He points out that despite all the happy talk from Janet Yellen at Jackson Hole, the Fed doesn’t have any ammo left. Larry and others argue that the Fed typically cuts interest rates by about 550 basis points in a recession.
If a recession kicked in tomorrow, that would plunge us to the breathtaking interest rate of -5%. As I wrote last week, Janet Yellen cited a footnote in her paper. She suggested that rates should go to -6% or -9% during the next recession to be effective.
Now here’s Larry, teeing off:
And here is where one of the highest of High Priests and I agree. Models have serious limits. We should be very wary of policies based on models that rely on past performance:
Now, would the markets have screamed bloody murder if the Fed had raised rates back to 3% in 2010 or 2011?
For sure, but the members of the FOMC must make these weighty decisions. They are not there to be popular. And, they are not there to worry about the level of asset prices.
Or are they?
Fed Vice Chair admits to sacrificing savers
Federal Reserve Vice Chair Stanley Fischer shared a moment of perfect candor with Bloomberg’s Tom Keene. I guess he didn’t realize that some of us might take offense.
Keene asked him about the impact of negative interest rates on savers (emphasis mine).
- FISCHER: Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time, and the idea is, the lower the interest rate the better it is for investors.
That’s about as clear as it gets. The Fed has no interest in helping savers earn a decent return on their bank deposits or money market funds. Dr. Fischer thinks “decent equity prices” are great and lower interest rates are good for investors.
In any case, the result has been nearly a decade of return-free risk for millions of savers and investors. Those living off of fixed-income portfolios—never mind simple savings accounts or CDs—have grown more desperate as each holding matured and couldn’t be reinvested at a decent rate.
The bottom line? They are willing to trade off your returns on fixed-income for a rising stock market.
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