A Fed Rate Cut Is A Sign We Should All Buckle Down And Be Careful

A Fed Rate Cut Is The Signal We've All Been Waiting For To Buckle Down

The Federal Reserve's decision to cut the federal funds rate on July 31, 2019, the first time in 10 years, signifies several things:

1) The Fed screwed up in December 2018 by hiking rates for the 9th time in three years. Cutting rates just 7.5 months after hiking rates is like getting a divorce within a year. The signs were everywhere, but the couple simply chose not to look because they were too horny.

2) The Treasury bond market is a better indicator of the economy's health and dictates the proper interest rate policy, not the Fed. All year and parts of last year, the yield curve has been flat or inverted, telling the Fed it needed to cut rates as growth slowed. The Fed finally relented.

3) The Federal Open Market Committee members may have PhDs and plenty of financial experience, but they are often guessing at the best course of action just like the rest of us. Do not treat their word as God. Do not underestimate your own abilities to make money either. Relying on someone else to make you rich is suboptimal.

4) We should all be on high alert for an impending recession within the next 12-18 months. The more the Fed cuts, especially when rates are already so low, the more we should worry.

Note: Obviously, all this changed after the pandemic. But after 11 Fed rate hikes, the Fed should probably cut rates in 2024 and beyond, otherwise, another recession will likely happen. We need to prepare for a recession.

Recessions Always Follow Euphoria

Due to my experience working through the 2000 dotcom bubble and the 2008 housing bubble, I've learned that the greatest downturns tend to happen right after the most euphoric of times.

1999 was especially awesome because you could buy practically any internet stock and double your money within a few short months.

The Market Cycle In Emojis

It is clear to me we are currently in the Euphoria/Complacency stage. How long we last in this stage is hard to know.

We've been in a bull market since 2009 and the majority of us are the richest we've ever been. As a result, it's understandable to be punch drunk with financial happiness.

The median age in America is 38, which means that about half of the U.S. population has never significantly lost money in the stock market or real estate market.

When so many of us feel like we can't lose, we can often lose the most.

Late cycle indicators include:

  • The rise in remote work and freelance work. Going to work in an old stuffy office is so passé. According to the Freelancers Union (yes, there is such a thing), by 2027, more than 50% of American workers will be freelancers vs. ~40% currently.
  • The return of zero money down purchases for homes. To compete for more business, lenders are rapidly lowering their standards just like they did before the housing bust.
  • The explosion in credit growth despite credit card interest rates reaching 5-year highs. Consumer confidence is so high that they don't mind paying usurious rates.
Historical Consumer Confidence Index
  • Insiders from companies like Beyond Meat cash out to retail investors through a secondary offering after shares have soared.

When 23-year-olds making $30,000 a year tell me they have no problem retiring early because within 20 years they'll have amassed a $2,000,000 net worth by eating at Applebee's every day, never spending any income on fun, and earning a 12%+ compounded return, you know we are at max euphoria.

I have many more examples of illogical and delirious types of thinking. However, if I listed them all, you'll start thinking I'm a meanie with no heart. In this day and age of super sensitivity, this would be a dangerous road to take.

Instead, you'll just have to search the internet for stories about people who think they're going to live the good life on a modest financial nest egg with their lives never changing for the worse.

A Fed Rate Cut Almost Always Precedes A Recession

You may not accept any of my late-cycle indicators or believe my stories about euphoric people who think they just can't lose. That's fine. I can only share with you my personal experiences and the feedback I get from the over one million people who come to this site each month.

For the unbelievers, let's just look at the data from my favorite recession indicator chart. The chart below is from the Fed itself.

The blue line is the historical effective federal funds rate. The shaded gray lines indicate a recession. The red arrows that I've unartistically drawn emphasize the correlation between the Fed rate cuts and a recession.

Effective Fed Funds Rate And Recessions That Follow

Notice a pattern? As you can clearly see from this unbiased chart, a recession almost always follows within 12 months after the Fed starts to cut rates.

A Rate Cut To Help Save The Economy

It's important to understand that a recession does not occur because the Fed has cut rates. A recession follows because of the normal boom-bust cycle of the economy. The Fed is only making reactionary moves to try and prevent a recession because it is unable to predict accurately an economic cycle.

The classic boom-bust cycle can be illustrated by the housing market. The time-lapse between when developers first realize and then meet soaring demand for housing may be years because it takes time to build new apartment buildings and single-family homes. As more and more supply floods the market, prices fall.

The key is to have a large enough balance sheet to build and invest counter-cyclically, not at record high prices.

Market Quadrants Cycle

The Fed Is Often Behind

When it comes to the timeliness of rate increases or decreases, the Fed is perpetually behind. We saw an example of this inefficiency with the rate hike in December 2018 followed by the cut in July 2019. If the Fed was more efficient, the effective fed funds rate would be much less volatile and there would be no recessions.

The Fed certainly has more economic data at its fingertips than the average person. But even if the Fed foresees a dramatic slowdown in the future, it cannot transparently say so for fear of spooking the market. Thus, oftentimes the seeming lack of clarity in its statements. The Fed rightly fears that whatever it telegraphs will become a self-fulfilling prophecy and render its policy ineffective.

Therefore, a smart Federal Reserve Chairman will learn to speak for hours without saying anything meaningful. Ex-Fed Chairman Alan Greenspan was famous for talking gibberish. He successfully pawned off the bubble he helped build to Ben Bernanke on January 31, 2006.

If the Fed can continue to speak more gibberish and only cut rates this one time, the Euphoria/Complacency stage will likely continue. Borrowing costs are lower and the Fed is signaling the economy is strong enough not to warrant further cuts.

But if the Fed starts to cut interest rates more than two times and in larger increments, then a recession will most likely hit and the S&P 500 will most likely decline months from now.

Stock market performance after a rate cut
Source: Dow Jones Market Data, Federal Reserve

Anecdotes Plus Data Likely Equal Reality

The key to reaching and maintaining financial independence is to avoid blowups. The blowups are what ruin lives because they not only rob you of money but of precious time.

You cannot afford a financial blowup if you are retired, within five years of retirement, have dependents, have a disability which may reduce your ability to work for longer than a potential recover, don't have enough passive income to cover your basic living expenses, or are delusional.

If you're still within the first 10 years of your financial journey, are able to eat at Applebee's every day, and never plan to have kids or take care of family or friends, feel free to take as much risk as you want. It's all about you baby!

For regular folks, I suggest being much more cautious at this stage in the cycle.

Please do not have revolving credit card debt, ever. Pay cash or don't buy it at all. The average credit card interest rate of 18% is highway robbery.

Please don't be tempted into buying a new car either because your car loan interest rate is now a measly 0.25% lower either. Paying much more than 1/10th of your gross income for a car is truly one of the worst purchases you can ever make. Drive your beater for a while longer.

Do refinance your mortgage if you can break even within 24 months and plan to own your home for years after. Fixing your living costs is one of the best financial moves you will ever make. An inverted yield curve is like borrowing free long term money.

Do save aggressively with banks that pay a higher interest rate than the current 10-year bond yield. Such an arbitrage opportunity is rare and should be exploited. If the markets tank but you're earning a risk-free 5%, you'll feel splendid.

Don't be so naive as to wish a financial crisis on the world so you can “buy assets for cheap.” Assets valuations are a reflection of their projected cash flow. A stock is not cheap if its price halves and its earnings decline by 90% for the next couple of years. In fact, the stock has gotten more expensive. Besides, you might not even have a job that will give you the guts to buy “on the cheap.”

Most of all, learn to enjoy your life regardless of where we are in the cycle. If you're on top of your finances, then you should be fine no matter what happens. It's only those people who have risk exposure incongruent with their risk tolerance who lose big.

Don't be like those people.

Related: When Will The Fed Cut Rates? An Exercise

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Related: It Feels A Lot Like 2007 Again – Reflecting On The Previous Top

About The Author

95 thoughts on “A Fed Rate Cut Is A Sign We Should All Buckle Down And Be Careful”

  1. Sam is spot on by comparing continuous Fed rate hike back in December of 2018 to a quickly divorce. It’s like getting married in Vegas and then next day trying to get an annulment.

  2. I’d be more inclined to interpret the Fed Rates chart as indicating that precipitous rises in the rate tend to cause recessions. Especially when there are no definitive effects of inflation. The Fed tends to raise rates when they get a whiff of inflationary indications and projections, then, when they’ve hobbled the economy which was doing just fine, panic and lower rates when they see that they’ve set things in motion to kill the golden goose.

    In this cycle, the economy was (is?) doing great, they know inflation will happen eventually, so they go in and meddle with something that’s not broken yet. Then they claim credit for preventing inflation. Not very impressive.

  3. Hi Sam – How would you proceed with this knowledge when considering buying a condo in a HCOL area such as Southern California where the motivating factor is a place large enough to start a family. Example: 1 bedroom -> 2 bedroom condo.

    Home sales seem to be slowing…would you put some offers 10% below asking price to protect against the potential for future lost equity? Or would you “bet” against property values rising in the next 2 years and make a decision at a later date.

    1. Tough call. There’s a lot more inventory now, I am buying this year is better than buying in the first half of 2018. Property downturns generally take 3 to 5 years play out.

      I wouldn’t be surprised if prices for about 15% from the peak. So you can put in some lowball offers now, that should help you.

      The thing is, volume is low right now which means there could be some pent-up demand as interest rates have collapsed a lot. They could be back to a strong market in the spring of 2020. So I would be aggressively looking right now and looking at some stale listings.

  4. What would you advise an extreme car guy to do when, after reading these articles and learning a little bit, is extremely in over his head on a car? I am 24 years old, got a windfall, financed one of my favorite cars at 56k after tax, make $56k a year, my payment is $605. My rational is i work for a family business and live at home so i have no rent. Starting a modification business of my own (carbon fiber aero parts) with the parts being for the car I’m financing.

  5. Negative yielding debt now at 15 trillion. Capital is fleeing down Exter’s Inverse Pyramid. Sovereign bonds are but a pit stop to the ultimate destination.

  6. Financial Nordic

    Good article. There are many warning signs. I’m have a plan/strategy for the recession, so I’m not afraid. More about that in my blog if someone is interested. Bring it on baby!

  7. Sam, thanks for another great post. I have been a reader for years, not much of a poster though. I am 28 years old with around $340,000 in “liquid assets” including my IRA/401K. My liquid assets position is currently divided into stocks ($221,000 – 65%), cash ($102,000 – 30%) and bonds ($17,000 – 5%).

    It is worth mentioning i have about 40K in student loan/credit card debt with an average APR of 4%, so it is not a debt i lose my sleep over, specially considering it can always be paid off, but given the low rate i don’t worry much about it.

    My annual income is modest at around $80K deriving from salary $70K and passive/side income $10K. Right now what is left on a monthly basis after mortgage, car, bills, daycare etc etc, I’m merely breaking even income/expenditures wise.

    Do you think, given my age and my time horizon of still over 30 years before i retire, that i am playing it too conservatively? I figured if a stock market crash does happen ( and it will) and worst case scenario it drops 60% i will stand to lose or more properly (devalue) by about $130,000 which is something I “think” i could stomach, since i will have over $100,000 cash to get me through it if worst came to worst. but again, i have never been through a market crash. I was actually able to build all of my wealth through the stock market, as i started investing (coincidentally) in 2009, right after the crash when i had just turned 18 years old. My salary has increased periodically throughout the years, since i started in retail banking at 18 years old, as a teller making around $25,000 a year.

    As you can see, the little i have has been made through good old regular hard word and dollar cost average investing in the market for the past 10 years. What would you recommend my portfolio breakdown should be, and what advise do you have on how to best stomach a potential $100,000 loss/devaluation resulting from a market crash?

    thank you for your time Sam.

  8. Why is it that a recession almost always follows within 12 months after the Fed starts to cut rates? Doesn’t the Fed cut rates to try to avoid a recession?

    1. The Last Bubble

      The Fed follows the EuroDollar yield curve. These are USD deposits outside the control of the Fed in foreign banks. In effect, this Eurodollar system has functioned as the world’s central bank for decades and it’s expansion is what has inflated USD financial assets. But it has been in retreat since 2007. The GFC was a result of the Eurodollar collapse. Central banks stepped in to try and ameliorate the collapse but are doomed to fail.

      China and the BRICS are setting up an alternative system. BRICS 5.

  9. When looking at the fed funds/recession chart, what strikes me is how LOW the rates are currently by historical standards. How worrisome is it that the Fed only has a ~2-2.5% range to play with before it hits 0%? In the past, this has typically been 5-10%, so a much larger tool at the Feds disposal. Any conjecture on how this would impact a recovery?

  10. I am cautiously optimistic.

    That said, business confidence is waning as everyone puts things on hold and as this continues it will eventually effect the consumer. Feels more like a shallow stage (very low growth vs recession). I know in my world (tech) the feeling is more pronounced right now, as so many companies are effected by overseas and China.

    I think it’s very prudent to trim exposure to equities, more so if you are closer to FI.

  11. Interesting discussion! Everything depends on where you are in your earnings. Ive made too many mistakes trying to time, read this article which confirmed my thoughts! Just wait it out if you have time, go safer if you dont.


    BTW love the picture but dont get it :)

  12. TheEngineer

    This is a thorough and well written article. The comment I am about to post is not a throw down of the effort, but more of an observation of the general population mindset.

    This is an intellectual masturbation for 99 percents of the population!


    Ninety percents of the people who read this article do not have any involvement with all the economic fundamentals discussed in this blog.

    This is similar to locker room talks of sports with passions, but none of the participants are part of any team – real players or real coaches who make the calls and execute the plays.

    All the discussed macro-economic fundamentals are being formulated and carried out by an exclusive team at the Federal level that have solid data not just within the border, but global. Given the access to that big data, many decisions are executed not without luck in implementation.

    Our country is blessed with the size and the freedom no other country in the world will ever have the same fortuity – we are too big to fail and we sit on top of the world shoulder.

    The fact that all the economic points discussed in this article when executed at the Federal level will be impacted by how the rest of the world reacts to the decisions – and when final outcome trickle down to us, the citizens of the country, the probability of our individual forecasts (more like guesses) are less intelligent than the local weatherman’s predictions.

    Meanwhile, we spent countless hours of our precious time passionately discussed, worried, depressed and trying in-vein to fortify our lives years after years and forget to live our lives with family and friends.

    Here is the fundamental financial math that every one of us can be the player in our own lives –

    1. 90% or greater of probability of success for the duration of 30 years or greater – design your own lifestyle expenses and divide that number by 0.04 and that is your financial independence target.

    2. 95% or greater of probability of success for the duration of 30 years or greater – design your own lifestyle expenses and divide that number by 0.02 and that is your financial independence target.

    3. 100% or greater of probability of success for the duration of 30 years or greater – design your own lifestyle expenses and divide that number by 0.01 and that is your financial independence target.

    All three options will take at least 10 years for planning and execution – with option 3 is the hardest to implement.

    Caution – DO NOT change the financial independence target after you have succeeded. Find something that you are passionate about and go after it. If the passion earned you an additional dollar, use it as an external metric that measure your passion and the effectiveness of your execution.

    With so much time and financial resource above the population – you must harness the blessing toward something useful – and that usefulness has to be in-lined with our unique DNA.

    Otherwise, we will easily become the victims of our own success!

    Again, I am sincerely love and recognize the amount of effort and the intelligence expressed in this article.

    But if I ponder on it too long, it will become the source of anxiety and depression.

    (Don’t be offend with this comment if you are the 1% of the population)

    Good luck!

    1. You are very confident about the future of America as we know it. “Our country is blessed with the size and the freedom no other country in the world will ever have the same fortuity – we are too big to fail and we sit on top of the world shoulder.”

      Perhaps the Greeks, Romans, British Empire, and others felt similarly at one time. Our overconfidence could be our undoing.

      I can’t argue with your FI numbers, we’re almost there….

      1. TheEngineer@1DesignerLife

        Bruce – you left out the word “blessed” that makes all the difference!

        When you are fully aware you have a blessed life, you will not take anything for granted due to arrogance, ignorance and sometime downright paranoia!

        Instead, you will lead a useful life with passion and compassion – worthy of the blessing!

        Good luck with the FI number – as long you have calculated it with your own lifestyle inputs, the number is golden and you will be very happy with it once you have crossed the FI mile marker!

  13. What a refreshingly frank post Sam. A well presented, logical and practical view on the current state of the world, without screaming impending doom, and shining a light on some of the ‘naivety’ that the majority of us believe (myself included at times).

    A massive financial crisis where friends and family potentially lose jobs and wealth, along with the negativity that surrounds people through these times, is nowhere near compensation for the unlikely opportunity to truly buy assets ‘on the cheap’.

    Great work.

    Cheers, Frankie

  14. Ugh! I’m so conflicted. I want to relocate to N. Idaho so I can live closer to my 5 year old son. My intention is to purchase a home in the $350 – $500k range which can get me something nice, and even include 5 acres + at the higher end of my price range.

    I can put up to $150k down, but with a recession on the horizon do I wait or just pull the trigger now? I feel that even though we will have a recession, it won’t be anything we’ll all really “feel” like 2009. To be honest, my divorce hurt me more financially than the big recession, LOL.

    What advice would you recommend, FS? I’m a 3rd year business owner (I own a niche recruiting agency). 840 FICO. No debt other than a car payment ($343/mo), which a client of mine pays for, and an emergency fund of 1 year’s worth of expenses ($65k).

    SEP, Roth IRA I can no longer contribute to due to being past the income limits, and a brokerage acct is my retirement portfolio.

    1. Why not rent for a bit first? Check out the area, see what you like, take your time. There’s no rush now as everything is slowing.

      I’d absolutely try and live close to your son as possible. That is a priceless win.

      1. You wouldn’t believe how hard it is living in San Diego when my son is in Sandpoint, ID. I’ve been visiting 3-4x a year since he was born going on 5 years now. All I want to do is be there for him and I always feel the longer I wait, the higher chance he’ll turn to someone else or something else for a Father figure.

        That said, the rental market is very tight up there. Especially in Sandpoint. I could go further south about 45 mins away and rent in Coeur D’Alene and still be a helluva lot closer than San Diego. Inventory is decent up there right now and things seem to be staying on the market longer. I’m hoping by next spring I could get a good deal fin the mid $300k range for 3bd/2ba.

        1. TheEngineer

          Steve – with the FICO score of 840, you are financially responsible and secured above the general population. You will not make a bad financial decision rent or buy in N Idaho. But, beware of your lifestyle creeps up due to relationship stresses!

          Move to Idaho to be close with your son is the right move and you seemed to have the freedom in movement due to your years of being financial responsible.

          Your goal is to be with your son – he will help fill up the relationship voids in your life right now.

          Take FS advice on renting something modest just to feel our the place. Your son do not care if he is spending time with you in a $500K home or running around you under a shaded tree in a public park – he just want to be next to you just as you want to be in proximity to him.

          The next 5 years is the most precious time between you and your son before he turns 10. Continue to be financially responsible, but invest more time in this relationship.

          Good luck!

  15. Honestly a recession is coming. But I remember 1996 and then 1999 where it took three years for it to arrive. I’m certainly peeping for the next crash, but I believe you should always be doing so as they can happen at any time. Ie I’m maintaining my asset allocation and my emergency fund the same as always.

    I will tell you five years ago I told my wife the next recession would happen the month I paid off our mortgage. That will happen December. As good a predictor as anything else that. So if it goes in December you can blame me.

  16. Here is the only comment that I might take slight exception too:

    “It is clear to me we are currently in the Euphoria/Complacency stage.”

    To me, based on past Euphoria stages, the current state doesn’t feel this way. I see more people climbing the proverbial “wall of worry” which is what most bull markets run on. I don’t see euphoric or highly speculative purchase trends in the market right now. I actually see people being cautious, rebalancing portfolios and hoarding cash in anticipation of the next buying opportunity. This just feels to me like the continuation of a secular bull market with an eye on the fact that we will have some kind of recession and normal corrections in the market at some point but nothing that should trigger any kind of panic unless there is a significant shock or geopolitical issue that pops up.

    Depending on your time horizon, as long as you are well-diversified and have a solid emergency fund in place, I think this is just a time to sit back and let the market run its normal cycle. At some point, we will “revert to the mean” but just keep dollar-cost averaging for the long haul and rebalance to maintain your targeted allocations and we should all be fine.

    1. Agreed, most unloved bull market ever…this smells like a secular bull market with much more legs.

  17. I’m a year from retirement and moved a decent chunk of equity money into fixed income just recently. Feel good about my allocation which is 66/24/10 (equities/fixed income/investment real estate). Will eventually get to 60/30/10 in a few years and keep it there.

    1. If you feel good about that allocation, that’s all that matters.

      If I was one year away from retiring after a 10 year bull market, I would be less than 50% equities and more cash.

      1. Paper Tiger

        Sam, when looking at asset allocation, which is the best way to think? Is it best to look at things as the percentage of investible assets or as a percentage of net worth? The reason I ask is that I have fairly healthy home equity and so that somewhat skews my thinking depending on which scenario I am considering.

        1. Fire and Loving It

          One way to look at it is to “take the least amount of risk necessary to achieve your goal(s)”. One’s goals are obviously different for everyone. Is your goal to live a good life on your assets? Can you live off 3% (example) of your assets as long as your assets stay relatively stable? Then you will be very low allocated to equities. Is your goal to grow your assets as much as possible for whatever reason – desire, charity, kids, etc? Then you will likely be much higher allocated to equities/alternatives/start-ups/etc. I realize more likely somewhere in between which is why I would only take on the risk necessary to achieve my goals. As I contemplated my exit from the working world (I tweaked my spreadsheet for years), I knew each year I stayed lowered the necessary investment % return to achieve to live a nice lifestyle with less and less investment risk. Again, different for everyone, I knew for my situation each year would lower my necessary return by approx 25-50 basis points. That was very important as I wanted to be prepared should interest rates not go higher/remain low/go lower – and not have to go back to the working world unless I desired. And yes, I stuck to my plan within 1 year…I didn’t stay too long (i.e. the one more year syndrome).

  18. Preach brother. I’m old enough to remember my dad struggling with job loss in the early 80s recession. I’ll never forget waiting in line for those Catholic Church brown bag handouts. Then I graduated high school into the early 90s recession. Then 1999. 2008. Recessions happen. It’s natural.

    I’m pretty risk averse so a lot of our money goes into a big cash cushion and rental properties as our main investment strategy. I still invest in the market but it’s just our regular IRA max contributions. What’s your strategy to get through hard times ahead?

      1. FI, will real-estate crowd funding and P2P lending vehicles be mostly unaffected by recession?

        1. Yes, I believe all risk assets will be negatively affected. Some more than others. But I think real estate in growing demographic and job growth areas that are low and valuation will hold up better than expensive coastal real estate.

  19. Eye opening charts! I haven’t been following the news very well, so I was very surprised to hear about the Fed rate cut. I definitely didn’t see that coming. I’m not a finance expert, but it does really feel like we’re overdue for a recession. Maybe we’ll just have a brief decline like last December, who knows. I remember feeling nervous last winter when things were looking dicey. I’ll be happy if the markets stay strong, but am trying to be prepared for a market downturn within the next six to twelve months.

  20. What is your opinion regarding refinancing now or opening a HELOC? Our current rate is at 3.5% on our house and we’re planning to cash out $200,000.00 for adding an in-law/ADU to our home. Also, $100,000.00 will be used for the in-law and the other half will be put in a savings account earning 2.3%. Is it better to refinance doing a 10/1 at 3.5% or open a HELOC?

  21. Sam – I’ve seen you mention the HYSA versus 10-yr Trs a few times. Won’t these banks, sooner rather than later too, cut the interest rate they are offering. I have two HYSA and both rates have been cut twice since I opened. Still above the 10-yr Trs but at some point in the near term won’t it be lower as the Federal Funds rate keeps getting cut.

    1. Yes, savings rates will eventually get cut down as well. But banks lag. I’m looking at CIT Bank right now and they are still at 2.3% after the rate cut (they did cut from 2.45% a couple months ago). 2.3% vs. 1.9% on the 10-year bond yield is a huge arb opp.

  22. Although I acknowledge your euphoric indicators are pretty good the best indicator I’ve ever seen is the friend indicator. When my friends or family ask me which stocks to buy I know things are going south quick! It happened in 2000, 2007 and more recently with the bitcoin bust. I had 3 calls the week bitcoin blew up. So far I’m not getting those calls so I feel pretty good.

    I honestly believe Trump is holding off on a China deal till closer to the election. Combine that with the fed and the fact that you usually get 18 months of gains from the time the yield curve inverts until recession, I’m still pretty bullish for the next year.

    Fortunately, I have learned predictions from everyone, “including myself” are worthless. I have a plan if the market goes up or down. Planning I think is the key. Take your emotions out of investing and you should be fine.

  23. I don’t understand the angst that so many feel about market swings. If you don’t sell your position low then you’ve lost nothing. I welcome it as a buying opportunity. The angst I feel is having to pay so much now for funds that are in my opinion way overpriced. If you’re close to retirement, then yes, it’s a good idea in my opinion to move your position into more conservative investments. In my opinion we are well past overdue for a market correction. The U.S. economy simply isn’t as strong as this market reflects, again in my opinion. Another good discussion. Sam, I’m a lurker and learner and not much of a poster but I’d like to now say thanks for this site and forum. It’s been very beneficial for myself and my friends I’ve turned on to it.

    1. You’re welcome!

      The angst comes from the amount of money you have invested and the stage of your life you’re in.

      For example, losing 30% on a $100,000 portfolio hurts at 25 years old, but it’s different from losing $1.5 million on a $5 million portfolio when you’re about to retire.

  24. I sold all of my ETFs in all retirement accounts last week. Also havent bought anything since Jan (bought heavily in Dec-Jan drop). Is this the best way to rebalance? I dont want to sell my taxable account stocks because I dont want to pay tax on those.

  25. I’m ready for a recession. Bring it on! It’s inevitable so let’s get it over with. The longer we put it off, the more painful it’ll be, like pulling off a bandaid.
    Cash is king and we’re stocking up while the good time last. No, I don’t wish for a financial crisis so I could buy assets for cheap. I just want to get it over with.

  26. http://www.ktvb.com/mobile/article/news/local/growing-idaho/treasure-valley-housing-crisis-19050-more-homes-needed-by-2021/277-b04d1dcf-fd26-4f16-bd22-b06b8ce79de6

    I don’t think we’re in danger of supply outpacing demand here in the Boise area. I 100% agree to be ready for a recession at any time. Do I think because they tend to be cyclical that we have to have one? No. If I would have listened to people who said the recession draws nigh 2 years ago and parked my money, I would have lost close to $200k in both appreciation and passive income. I’m taking about good honest people who care about me.

    I’m all in on real estate in the Boise area. The basics are all in place.

    Idaho is a very conservative state. Increasingly a rarity in western states. Those flocking in often consider themselves political refugees, smirk if you want. They’re bringing massive home equity cash-outs from all along the west coast from San Diego to Seattle.

    Boise area real estate is still considered a steal by these people. It’s vibrant, butts up to the Rocky Mountains, has three large rivers running through and next to it. We have four seasons but they are mild. (No 4 feet of snow to shovel. More like an inch in the morning that’s gone by noon). People can sell a million dollar home, come here and buy beautiful home in a great neighborhood for $350k and have an instant $600k+ nest egg.

    In addition to that, the last recession forced nearly all local builders to close shop for several years leaving a massive deficit in housing. One that could take an easy ten years to remedy.

    Last, this area’s median home value is much lower than many surrounding NON-COASTAL cities such as Reno, Las Vegas, Denver, Salt Lake City, and Eugene. In the opinion of many it’s also a much better place to live and raise a family.

    Do I agree that you should stay out of debt, have a reserve built up, and do other things to prepare for an inevitable recession that no one can really predict? Yes. Always. But that goes for all times. I will readily admit I have lost money by being too conservative when I probably could have gotten a little more aggressive. By the same score, I’ve never lost big in a recession either and I’ve adulted through at least three of them. Slow, steady, and safe gets it for me.

    1. I was in Boise on business this past April for the first time and loved it. If my son weren’t living in Sandpoint I’d move there in a heartbeat. For me it’s a toss up between Sandpoint and Coeur D’Alene to relocate to. I live in San Diego so can’t wait for the cost of living savings I’m going to experience.

      Also will be nice to get away from the CA politics and to a place with more conservative values.

    2. I’m in the treasure valley also. One thing that concerns me is that the Boise housing market is just a by product of west coast housing prices. Not a ton of high paying jobs. A lot of people working from home (like me).

      If west coast prices fall or collapse, so will Boise’s. People won’t be able to sell their California houses to move here.

      I moved here a year ago from Hawaii and Love it. Its definitely my paradise (Hawaii was not for me).

      1. Can you elaborate why Hawaii was not for you? What were you doing in Hawaii and how is Boise better than HAwaii?

        I’m thinking of moving there in 2022 when my son can go to kindergarten. thx

        1. Hey Sam, you may love Hawaii, I still have a lot of friends there that think I am crazy for moving. But living there is a lot different then vacationing there. I met so many people that didn’t last 6 months. But I have friends that just lost their house to the Volcano. They still didn’t want to leave, they just bought a place up the road.

          I own an IT company based in Hawaii. I still own it, although I sold half to my long time employees. They are my feet on the ground there. Trips to Hawaii are tax write offs!

          For me it was a lot of minor issues that led me to want to move. I was on the big island, which is pretty rural. I started getting Island Fever. I was slowly starting to spend more and more time on the mainland. First it was 2 weeks, then a month, then 2 months. And then I realized I don’t want to go back to Hawaii. I love the mountains and road trips and snow. Even though I had that in Hawaii, it became the same thing over and over. Idaho (and the West) has so much to explore. Now that I am semi-retired I don’t want to just sit on a beach or hike the same mountain over and over again.

          I found I don’t do well in high humidity. I am very allergic to mold, which is rampant in Hawaii. Also dust mites. Boise doesn’t have either. I have been able to completely stop my allergy medicine since moving here.

          I love having seasons again. I love the high desert environment. The 300 sunny days but not hot. Cost of living is considerably lower. People in Hawaii are really nice and I found the people in Boise to be equally as nice. Not like where I grew up in Chicago or the Bay area.

          I have 2 sons, 10 and 8 now. There is so much for them to do and experience in Boise. We kind of ran out of things in Hawaii, although raising them there at a young age was great. You will definitely want to do a private school for your son in Hawaii. The public schools are garbage.

          I definitely recommend giving it a try for at least a year.

            1. Guess it depends on what you want to do and how much you want to spend. It has more shopping then the big island, but other then that it wasn’t that interesting to me. It has the worst traffic in the nation. Worse then the bay area!

  27. Simple Money Man

    It’s funny that you would be considered a good Fed Chairman if you can talk gibberish. I guess it’s about keeping everyone calm. Why are lenders back at lowering their standards; wasn’t this the start of the mess back in 2008?

  28. Hard to say about a recession. The Fed rate cut obviously signals they see weakness in the economy.

    But there might be a few positives that might happen and maybe they can help with a soft landing or even continued economic growth: (1) New trade deal with China; (2) Continued Fed rate cut to provide cheaper liquidity; and (3) Infrastructure spending to inject trillions into the economy.

    Overall, I’ve seen really smart people who tried to time the market given the fear of recession and have missed out on the strong run over the past 3 years.

  29. Renting considering buying

    Sam, you often advocate buying real estate. Does this analysis make you reconsider, especially for those of us living in expensive cities like SF?

    1. There’s a lot more supply now in the SF Bay Area. I’d be hunting and bargaining. SF Bay Area will probably correct 10% – 15% at most, then a resumption in upward prices. Look for stale properties that were overpriced.

      I do wonder what happens in the Spring of 2020 once thousands of tech IPO workers are flush with cash and new bonuses.

  30. “The key is to have a large enough balance sheet to build and invest counter-cyclically, not at record high prices.”

    That quick, seemingly throw away sentence could/should be a whole post to itself (and I’m sure you’ve already made posts relevant to this sentiment, but I’m too lazy to search).

  31. This is spot-on, Sam. And this time, the bubble that’s building isn’t a tech bubble or a real estate bubble, but a sort of everything bubble fueled by very low interest rates and investors’ increasingly blind faith in ETFs and index funds.
    This was really brought home to me a several months ago, as I was listening to a podcast by one of the most famous FIRE podcasters. She and a financial advisor were addressing a listener’s question about what to do with a large windfall of cash he had just received. They were utterly contemptuous of the idea of investing it cautiously, arguing instead that historically the best thing to do is to “throw” it all immediately into an index fund. No nuanced discussion of yield curve inversion, no mention of highly elevated CAPE ratios — just this silly blind faith that since it has generally historically made sense to bet on the broad market and avoid “market timing,” that also makes perfect sense today. What frightened me was how dismissive these supposed experts were about the idea of being cautious and holding a significant percentage of the money in bonds and CDs — that, to me, is the sign of euphoria.
    Responding to a CAPE ratio above 30 by increasing the percentage of money one has in bonds and CDs (say, from 20% to 40%), especially during a time of yield curve inversions and rate cuts, is simply smart. It’s like having health insurance when your body shows some signs of breaking down. If you go ten more years without a health crisis, then obviously the hedge will not have been optimal. BUT if you do have a health-crisis, you will be much better off with the insurance. Similarly, those of us who are currently transitioning toward holding more bonds and CDs as a hedge against the possibility of a bear market will be slightly less well off if there isn’t one, but much better off if there is.
    I’m not hoping for a recession and/or bear market, but I’m darn sure preparing for one.

    1. Paper Tiger

      There is a rationale for just jumping in and investing the windfall right away and it has to do with the importance of not missing the best days in the stock market since those tend to be the most important days for long term growth.

      Back in 2016, a report from J.P. Morgan Asset Management titled “Staying Invested During Volatile Markets” examined the broad-based S&P 500’s best and worst single-day performances over a 20-year period between Jan. 3, 1995, and Dec. 31, 2014. The report found that investors who held over the entire period — more than 5,000 trading days — would have made 555% or an average of 9.9% per year. Notably, this period includes the Great Recession and the dot-com bubble.

      What happened if investors missed just 10 of the biggest single-day gains? The answer is their return was more than halved to just 191%. If they missed a little over 30 of the best trading days over this 20-year period, all of their gains were wiped out.

      Now, here’s what really stood out among this data: A majority of the S&P 500’s biggest gains came within two weeks of its biggest losses. This isn’t a trend that’s isolated to the Dow. Therefore, if you sold your stocks and ran to the sidelines at the first sign of trouble, there’s a really good chance you missed out on some of the market’s biggest single-day gains, and potentially compromised your long-term returns.

      Perhaps most important is the fact that, with the exception of the correction in early 2018, all 35 stock market corrections totaling at least 10%, when rounded, since 1950 have been completely erased by a bull market rally. In other words, high-quality stocks tend to gain value over time — so you have virtually nothing to worry about when corrections strike, assuming you can count on history continuing to repeat itself.

      1. I have seen this study in many places, I wonder if there is the counter to the study that shows what your returns would have been if you missed the 10 worse trading days of the market. I believe the study incorporates the biggest losing days and then subtracts the biggest winning days. How about reverse that take out the losers and put in the winners.

        It looks like the study implies that you sold at the bottom and did not buy back until it rebounded. It is just another statistical analysis done to keep people fully invested at all times. Done by a financial institution making money off of that concept.

        1. Paper Tiger

          I think the real point is that statistically it shows you win over the long term and your chances of losing are significantly increased when you make moves over the short term because we all suck when it comes to trying to time the market, statistically speaking of course ;)

          I agree that the financial industry wants to keep us fully invested and their motivation is in their best interest and not ours, but that doesn’t change the statistical results of long term and index investing still being a winning approach for most average investors, particularly ones who don’t have the time or inclination to spend in research on their portfolios.

        2. Mebane Faber has looked at this in one of his papers 7-8 years ago. Missing the x best days crushes your returns, yes. Missing the x worst days juices your return, yes. Missing both the worst and best leave you slightly best off than holding, on a return basis, in the long term.

          What he found though, is that there is also volatility clustering (big down and up are near each other in time) and that the increased volatility occurs mostly (60-80%) when price has already declined (below 200d moving average in his case).

    2. To be honest, unless the listener was 65 years old or something, it sounds like their response to that question was a reasonable one.

      Let’s be honest, everyone. Macroeconomics and personal finance are not the same thing. Explaining to her CAPE ratios and inverted yield curves would have been a great academic exercise, but would not have been relevant in answering her question.

      The advice they gave her–on a broad level, at least–was very sound. Historical data shows that the stock market grows at an average annual rate of about 7% per year after inflation over the long term once you smooth out the volatility. This is not conjecture, euphoria, or blind faith; these are numbers and these are the statistics you need to know if you are going to invest. Index funds and ETFs mirror these indexes and thus should have roughly the same results.

      I would always recommend keeping some cash off to the side, but I guess maybe the listener already had that when she received her windfall? I would have also asked her some more questions, such as her age, her time to retirement, and ant upcoming financial plans. Maybe they did, I dunno. I don’t think a radio show or podcast really lends itself to the proper format for giving personalized financial advice. By that said, very broadly speaking, yeah that was the right advice to give. An in depth explanation of yield curves would have left the listener confused and without answers.

      As an aside, I despise radio call-in advice programs. Perhaps it was because I listened once to a show where the host detailed an email to the show from a 16 year old whose family was splitting up and the he would no longer be allowed to see his siblings ever again despite them having a very close relationship. After making this kid wait through an entire commercial break, her advice to him was simply to pray to Jesus for guidance, and to give her the name of the sibling so she can also pray for them.

      I prayed for a lightning bolt to strike her down on air, but it didn’t happen. I definitely think the kid won’t have much better luck.

      ARB–Angry Retail Banker

      1. The issue some people have is that all the market return statistics assume an indefinite investment period. Individuals usually only have 30-50 years max, and the sequence of the returns that produce that market average can matter a lot.

  32. Max Sayulita

    Firstly, none of the personal capital links work for me. Is this a glitch or Trump anti-canadianism? Just because we intend to invade and clean up the mess he has made if the Democrats don’t get their poop together!!!
    Having made more than enough to cover a lifetime of expenses for myself and my much younger wife, any suggestions on the best ways on how to profit from the coming financial Armageddon — or at least keep those realized junior exploration mining companies profits.

    1. I’m watching The Handmaid’s Tale on Hulu, where conservative Christians take over (most of) the U.S. It’s a great, well-done show (based on the book by Canadian author Margaret Atwood). But I’m just so frustrated that Canada DOESN’T invade.

      Please, please promise me that you will, if it comes to that? I mean, sure, the U.S. has a really huge military, but you Canadians are unfailingly polite and clever. I’m sure you could pick your moment and surprise the hell out of your southern neighbors.

  33. I don’t get the eating at Applebee’s every day meme. That’s something you’d do if you wanted to waste money and probably get fat, not something an aspiring low-income early retiree would do.

  34. Sam, one thing doesn’t change: market cycles. We should always be prepared for the next bear. It’s just a matter of time. I, like you, think it’s sooner rather than later. I’m keeping some dry powder, just in case.

  35. I think you analysis is spot on! I am surprised that we haven’t had a recession yet, and don’t want one, but you have to plan for it to come. One indicator I use is how many stupid articles that ask “Is the boom bust cycle over”. The answer is NO! I started seeing a ton of these in 2006 and 2007 right before the big housing crash, and unfortunately some of these are starting to show up again. Your suggestion of pay down debt and don’t overextend yourself are great advice. As someone who lost half there 401K in 2008 it was painful experience I don’t want to live through again. I am less than 10 years from retirement, so I am playing it safe, and your article is a good reminder!

  36. Kondratieff Winter

    They are going to take rates negative this next time. Push back there will be. But if Lagarde is going well below the zero bound then Powell will have to minimize the rate differential so that not too much capital flows to the dollar.

    We are f*cked. There’s no way out w/o devaluing the debt.

    Prepare accordingly. Avoid bonds. Invest in metals and the rare few companies that have pricing power in event of currency devaluation and have clean balance sheets.

    1. I need to ask a probably dumb question. If we think rates are going to go negative, why “avoid bonds”. Wouldn’t buying bonds today at ~2% be a good thing?

      1. Kondratieff Winter

        Bonds priced at +2% today would increase in price when rates go to -2%. You could reap a cap gain on such a bond. But this could be picking up the proverbial nickel in front of a steamroller. the risk will be transferred to the currency denominating the bond. Negative rates make no economic sense. Only speculators flipping them to the CB or managers of OPM mandated to buy such garbage will be the market. neg rates will kill the banks, money markets, pensions, savers, and insurance companies.

        There is no greater proof that the system died in 2007 that we spent a decade on zero, the junk bond market came off the rails when the 10Y hit a paltry 3.25%, and that the CBs are now going below zero.

        Welcome to Kondratieff Winter and the end of the current international monetary system.

  37. Don’t try and ask the ultimate or bid the ultimate low. Find an exit and entry that makes sense. Derisking feels like it should have been Happening since after December if u bought equity or credit there. Too much global liquidity could prop up for another 12-24 but it sure feels most are getting ready. Look at the amount of distressed and special sits funds benign raised by big shops or smart money….

  38. Appreciate the detailed analysis Sam. I agree that there are patterns abound that are hard to ignore.

    Everyone has FOMO and because of the marked gains in equities over the years, it is hard to take equities off the table. The risk is then you find yourself with a large decline when a recession does hit.

    I’m getting to the 5 years out stage of my life so I feel it maybe time to be going conservative and sell high instead of low with the waiting too long.

    I’m curious if you have advice for those who have established decent passive income streams (I feel I have via syndications) what would you suggest as a good % equity holding? My passive income streams right now can provide well above my basic needs and then some. I’m pretty close to 50-50 in terms of market and real estate in my portfolio. If I want to retire in 5 years what % equity would you feel is ideal range? (right now 75% equity, 20% alternative (REIT), 5% Bond).

    Thanks again.

    1. Paper Tiger

      Hi XRV, I’m in a similar position as you and thinking about the same question. Our mix of investible assets is very similar to you which is currently 72% Equities, 16% AI (PE + REIT) and 12% Cash/Bonds.

      We have pretty significant home equity so if I calculated everything as a % of Net Worth, instead of just investible assets, it would change to 58% Equities, 13% AI, 10% Cash/Bonds, 15% Home Equity, and 4% Personal/Collectibles.

      I’m about to pull the trigger on 250K of equities and move that to fixed income and then I will probably sit tight and just ride it out from here for now. Also, like you, I have enough passive income to cover living expenses and my goal has always been to retire on the income my investments and other passive income produces without needing to touch principal and we should be well-positioned in this area.

      You and I are in similar fields as I spent the majority of my career in Diagnostic Imaging Sales!

      1. That actually sounds like a reasonable plan Paper Tiger. It has been said that if you have already won the game you should stop playing and by having passive income equivalent to our burn rate should qualify as that.

        I do like Sam’s strategy of de-risking your portfolio when you get to that stage. It goes against every instinct (very hard to sell a winning hand because an element of greed kicks in and you would get seller’s remorse if say the stock market continues on a tear for a bit after you sell).

        But selling high and buying low is a lot better than the alternative, just hard to put it in practice sometimes.

        Appreciate your insight.

        1. Paper Tiger

          I agree with the de-risking part after winning the game. About 53% of our investable assets are in tax-deferred accounts so I will consider going to a more conservative mix in our 401Ks if I start to get uncomfortable with the market. Since I can make these moves without any tax ramifications while the money continues to sit in these accounts, it makes it a lot easier to consider.

          You are correct in that the psychology that goes with selling is much more difficult when you are so wired toward saving and investing. I’ve spent 30 years collecting some of these mutual funds and they almost feel like my children ;) I held my breath and just put in a sell order for 225K of funds at tomorrow’s opening so I’m glad I finally made the first move. I will sleep a little better moving these funds to fixed income and feel like I at least took some off the table while the market was near its current high.

    2. Retire in 5-years at this stage in the market? I would be at most 60% equities.

      But I don’t see you retiring from being a doctor in 5-years, so carry on! Hard to walk away from that type of money and career.

    1. Larry from Europe

      Fully agree. Truly enjoy Sam’s proper analysis, unlike the analysis on regular financial magazines.

  39. Sam, I believe your analysis is spot on in the last couple of paragraphs and should be heeded by all. I was a military contractor during the last financial crisis, and in the throws of the decline, even the US Military was cutting back on their spending: reducing fuel consumption, cutting training flights, laying off contractors, etc. If the US Govt. was cutting spending, that just gives you a solid idea of how bleak the world outlook was.

    Here we are just a decade removed and I’ve read numerous FIRE blogs over the past few years in which people espouse “buying assets for cheap” when the world starts to burn again. But unless you’ve lived through that and literally watched YEARS of savings evaporate in a week and a half’s plummet with no positive news in sight, one can’t imagine how visceral it truly is. Buy when there’s blood in the streets?! Easy on paper, but a whole lot harder when you’re part of the slaughter. And everyone was. For those of you who’ve never experienced it, trust Sam, it left no one untouched or unaffected.

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