Client Update: August 2023

Welcome to Moneyville

Once upon a time, in a town not too far away, there was a place called Moneyville. In Moneyville, everything seemed perfect. People smiled as they went to the local bakery for delicious treats, and kids laughed while playing in the park.

But one sunny day, something strange began to happen. It was as if a magical wind had blown through Moneyville, making everything cost more. A shiny red bicycle, which used to cost just a few shiny coins, now needed many more coins. Even the ice cream truck had to charge extra for scoops. And everywhere they went, kids heard their parents talking in whispers about the cost of groceries and gas.

The people of Moneyville were puzzled

They talked about it at the town square, trying to figure out why everything was getting more expensive. Mrs. Johnson, a friendly grandmother, couldn't understand why her favorite knitting yarn had become so pricey. And Timmy, a curious young boy, wondered why the toy he'd been saving for now seemed farther away than ever.

Then, there was Mr. Wilson, who owned the local toy store. He scratched his head as he noticed that the toys he sold cost more to make. It meant he had to charge more, too, which made kids like Timmy very sad.

And just when things couldn't get more puzzling, Mr. Thompson, the town's banker, had news. He said that the magical interest rates, which made money grow in people's piggy banks, were rising too. People who had borrowed money for their homes or businesses had to pay more every month.

This worried the grown-ups in Moneyville. They gathered in the town hall and talked about what to do. Mayor Patterson, a kind lady who wore glasses, explained that inflation was like a magical breeze that made prices go up. She also told them that interest rates were like the cost of borrowing money, and they were rising to stop the windy inflation.

But the grown-ups and kids of Moneyville were clever

They decided to work together. They saved their coins wisely and found ways to spend less while still having fun. Mr. Wilson at the toy store held special sales, and Timmy found a new way to earn a few extra coins by helping his neighbors.

With their determination and teamwork, Moneyville started to feel like a happy place again. Prices stopped climbing so fast, and even the interest rates calmed down. The people of Moneyville learned that when they faced challenges together, they could make their town shine as brightly as ever, no matter what kind of magic the wind brought their way.

And so, with smiles on their faces, they went back to enjoying sunny days and delicious treats in their wonderful Moneyville.

The story is brought to you by ChatGPT ... with a few changes by me. I am not clever enough to write a children’s story about rising inflation and interest rates. But it is meant to illustrate our economy's challenges affecting our stock and bond markets.

Like the folks of Moneyville, you face these challenges

Tom Keen, a Bloomberg commentator and journalist, was once interviewing one of the world’s top economist – a brilliant lady. She was waxing eloquently about the U.S. economy's good position. Tom said, “Half of the country is flat on its back!” How can you say we are in a good position?"

The odd part is that both the economist and Mr. Keen are correct. Inflation is higher, so we pay more for everything, which stretches our budgeters thinner. Yet, unemployment is low, and the stock market is higher, we feel wealthier. Are we in a Goldilocks state, or will something give soon?

Look at the facts and follow these steps

First, U.S. leading economic indicators have been negative for 18 months. The longest negative period since the Global Financial Crisis in 2007-2009. These indicators point to underlying economic troubles.

However, unemployment has been at record lows. Therefore, people have jobs and incomes and are spending money; which is good, but driving inflation.

Second, The Federal Reserve is determined to kill inflation. They will keep interest rates higher for longer until inflation rates come down. They have created a credit crunch.

Third, this credit crunch is the effect that higher interest rates slow the economy by making it more expensive to borrow money. Therefore, people either borrow less or none at all. Real assets are hurt by these high rates. Real assets are those you can touch and feel – your house, an office building, a business, farm equipment, industrial machines, etc.

Eighty percent of our nation's debt is refinanced. So, when rates go up the economy slows down.

Fourth, the stock market is made of financial assets representing real assets. Ok, that’s a very nerdy statement, but stay with me. Stocks and bonds are “pieces of paper” that represent something real, like ownership in a company or a loan to a company.

Therefore, if real assets are having trouble, then financial assets will be in trouble. In other words, the stock market is the scoreboard for the economy. If the economy falters, the stock market will, too.

But what does this all mean?

We believe the stock market is set up for failure. The credit crunch is squeezing the economy; it will worsen, and the stock market will fall. And yes, we have been saying this for 18 months.

But the data has been bad for 18 months, so let’s be patient and find other ways for you to be financially successful – the stock market is not the only game in town.

Most of all, what should you do?

A story and economics class is nice, but why should you care, and what should you do?

Higher interest rates mean more investing opportunities. You should meet with your Sound advisor, develop or refine your investment and income plan, and then rebalance your accounts into new opportunities.

Currently, our fixed-income positions are paying higher yields than they’ve paid in years. We have positions you should explore that have not been available or worth considering in over a decade.

You have great financial tools at your disposal. So, let’s use them well.

We appreciate your trust in us and allowing Sound Financial to serve you. We hope to see you soon. Call us at 601-856-3825 or set an appointment with me - Chris' Calendar.

Take Care, Chris