Market Update
After saying that he did not think increasing rates by as much as 0.75% all at once was going to be necessary, Federal Reserve Chairman Jerome Powell and his committee did exactly that. On Wednesday the key rate was raised by 0.75% and now stands at 1.50%. Initially the stock market rallied on the news, signaling approval of the Fed’s aggressive decision, but the good feelings did not last. Markets turned down again after overnight news from big banks warned of an increased risk of a U.S. recession, however mild one might be.
At Wednesday’s press conference Chair Powell suggested, using a lot of wishy-washy language, that the Fed may raise rates to as much as 3% by the end of the year. This dovetails with what the bond market has already been signaling it expects. U.S. Treasurys, from the 1-year bill to the 30-year note, are yielding between 2.9% and 3.3%. The narrow margin between these securities is what analysts describe as a flattened yield curve. The chart here plots the rates of the different maturities, which are not only higher than a year ago but also trading in a tighter range. This flattened curve indicates that investors expect slowing future growth. Economic growth seems to be slowing already. The Fed has downgraded expectations for Gross Domestic Product (GDP) in 2022, from 2.8% to now 1.7%. Unemployment will grow to 3.7% and headline inflation will still be high, projected to be 5.2% by the Fed’s own forecasts.
The recipe for a recession is officially defined as a fall in the Gross Domestic Product (GDP) for two consecutive quarters. For those following along, GDP fell in the first quarter of this year, as it did for many other developed nations. Although current data points to a gain for this quarter, it may be growing by only the smallest of margins. Retail sales, which had been rising since January, fell in May. This is a key economic indicator watched closely for trends and insight to consumer habits. Spending on online purchases slowed. Car sales, which had been so hot, are falling dramatically as borrowing rates soar. While other countries, like the U.K. and other parts of Europe, are also battling high inflation and slowing growth, China and Japan are on different paths. China is struggling with growth but without the added issue of inflation. The People’s Bank of China is lowering rates and liquidity is ample but retail sales and spending continue to slump. Japan has pledged to keep rates low even with growing inflation and growth that will be the fastest in 12 years.
U.S. stock and bond markets will be closed this Monday in honor of Juneteenth, the market's first such observance. Banks and government offices will also be closed and the nation will honor the anniversary of the last enslaved Black people learning that they were free.
Paying for you Health
Advisors frequently warn that health care costs are among the most expensive budget items for a retiree. It is often more than annual food, travel and sometimes even more than housing costs. But the Americans surveyed by Fidelity vastly underestimated their health care expenses - and by a massive amount. Fidelity's group said that they believed $41,000 would be enough to cover premiums and out-of-pocket costs for a couple aged 65 for the next 20 years. In reality, that number is seven times higher at $315,000 for a couple; it breaks down to $150,000 for men and $165,000 for women. (It's higher for women who, per the actuaries, live to age 88 and men to age 86.) Fidelity, which has been releasing the cost report for 21 years, has included this survey to highlight how out of alignment the average American's reality is on this issue. With so much focus put on a retiree's upcoming lifestyle, where they will live, how they will fill hours of leisure time, the less fun parts of going to a doctor or taking medicine gets pushed to the side. Of course where someone chooses to live can have a big impact on their overall health and costs, too. While Fidelity's number considers regular premiums, doctor's visits and prescriptions, it does not add in any long-term care or dental care, which retirees must consider.
The best things that a pre-retiree can do is to save, sock money into a Health Savings Account (HSA) if one is available, and stay healthy. The cheapest health care plan is the one that you do not need to use all that often.
Winter for Crypto
If it seems like the stock market has been rough for a while now, imagine the pain for cryptocurrency holders. It has been one bad news after another. Let's start with crypto-darling, Bitcoin.
The strategists at Glassnode, a tracking company, says that the realized price, or cost basis, for most every Bitcoin owner, is below the current value. Put another way, if most Bitcoin owners purchased at Glassnode's calculation of $23,430, they are down 65% from November 2021's high. From Thursday's price, they are down 10%. Experts believe that this will put pressure on even long-term holders to sell while they can.
The crypto-lender, Celsius Network, ran into big trouble recently. It is not letting clients take any withdrawals, swaps or transfers. Celsius looks like a traditional bank, albeit without the protection of SPIC or any other backup security, or of transactions that occur solely in U.S. dollars. With about 1.7 million customers at one time, Celsius offered annual percentage rates up to 18% on cryptocurrency deposits, an appealing deal when compared to rates of closer to 0% at traditional banks. On the other side, Celsius invested and lent out the deposits. With plummeting crypto prices and no end in sight, Celsius is in a pickle, to put it mildly.
Coinbase, the world's largest crypto market exchange, is cutting staff and working to slash costs after growing from 1,700 employees to nearly 5,000 in the last year. Chief Executive Brian Armstrong said in a letter to employees, “a recession could lead to another crypto winter, and could last for an extended period." The company started traded publicly last year as COIN, marking a big shift for the rebellious crypto industry and the company was heralded as the adult in the room. It began trading at $381, going as high as $429 but now trades just north of $50.
Cryptocurrency insiders are warning each other that another "winter" is upon them, as in 2014 and 2017 when prices crashed. However, this is more like a crash and burn involving millions more investors than ever before and the end is not in sight. Crypto will survive but it will look markedly different when it emerges from the wreckage.
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