When markets fall, who do you listen to? This may seem like an odd title for a blog post, but it is an important one from a pyschological, health and financial well being standpoint. When markets fall and the economy experiences a down turn, the mainstream media highlights worst case scenarios and how bad everything can get. It can make your stomach churn if you have money in the markets, even if you have gone through such events in the past. The media is highly trained on how to illicit response with headlines that make you want to read them. That is how they make their money. It is also built into human pyschology that any danger signals trigger the pre-historic or primordial functions of the brain that are about survival. Add a terrible war in Ukraine and ongoing economic cold-war with China and you have a recipe for doom and gloom.

Reading the daily media headlines can be bad for your health. As Baron Rothchild once said "Buy when there is blood in the streets". That is of course much harder to do for the very reasons we are just referencing. Our brains and bodies are trained to "flee" danger, and not walk into it for good reason!

Who do you listen to or turn to when markets are falling is an important question. When you have a professional seasoned financial advisor, you have an objective party to speak with who can share their perspectives about bear and bull markets over decades of experience. When you are in the midst of a bear market, it seems like it will never end. Likewise when you are in a bull market it seems like it will never end. Both statements are false however. No Bull or Bear market is permanent.

The speed at which the economy has nose-dived from optimism to pessimism has taken a lot of people by surprise. That's the impact the Federal Reserve can have on the markets. Consumer confidence is fickle so when the daily news is filled with fears of recession and declining markets it impacts people in a way that causes people to spend less: The Nasdaq is down over 31% from it's highs and this along with all the media headlines of "recession" is generating a more fearful and less optimistic mood.

SNAP just anounced a significant revision in its profit forecasts due to macro economic conditions. Advertising revenue is down.

The mood on the street is somber and consumers are concerned. The critical question is what impact will this decline in consumer confidence and demand have on inflation? Will inflation numbers trend down? If they do, the current economic news may provide sufficient impetus for the Federal Reserve that they need to walk and talk a softer line and send some easening signals, such as for example, that rate increases may be sufficient.

The Fed is Waking Up and Is putting its foot on the brakes!

“Hindsight says we should have moved earlier. . . . But there really is no precedent for this.”  Fed Chair Powell, March 3, 2022

The Yield Curve inverting has been the most accurate predictor of the economy tipping into a recession for the last 50 years. Typically, it takes about 6 months from the time the Yield Curve inverts for a recession to kick in. So, what exactly does an "inversion of the yield curve" mean? An inversion of the yield curve is looking at and referring to the differences in interest rates being charged by banks over a 2 and 10 year lending horizon. Economists also look at the 3 and 10 year lending rates as well.

Typically banks will charge a lower interest for a short term loan than for a longer term loan. Banks are incentivized to lend out at higher interest rates over a longer term loan period. However, when the 10 year interest lending rate is less than the 2 year lending rate, banks have less incentive to lend. This is known as the "yield curve inversion" when the longer term 10 year lending rate is less than than the 2-year rate. It does not happen often but when it does, it has been a good predictor of an upcoming recession for over 50 years. 

The spread between 10-year and 2-year Treasuries has fallen from 0.89% in early January to just 0.18% on March 21. So while we are close, we are not there yet.

If you are walking into The French Laundry, a 3 star michelin restaurant in Napa, you may well expect to pay $50 plus for a sandwich extraordinaire. Not so, when you walk into your average sandwich place. I almost fell out of my chair when the person cutting my hair told me she was going to be charged $50 for a chicken sandwich at a local eatery in Walnut Creek, La Fontaine. She had paid $20 for a sandwich one day, $30 the next and then a few days later was presented with the $50 price tag. She declined the sandwich. 

While this may be an extraordinary tale of sandwich inflation and who knows what else, the reality is that the cost of eating out has gone up significantly, but this is sandwich madness. Yes, Russia and Ukraine are two of the largest exporters of wheat and there will be supply shortages that impact prices worldwide. The Russia-Ukraine situation has also sent gas prices soaring. Gas prices have risen to some of the highest in recent USA history. However, has America stopped growing its own wheat and raising it's own chickens? Of course not. So, why is a local sandwich shop in Walnut Creek charging $50 for a chicken sandwich? Is it the best chicken sandwich in Walnut Creek? Probably not.

The supply chain issues have given opportunity for corporate and business greed to inflate as well. While some price increases may be justified, of course, some price increases across a range of industries ranging from 50-500% are quite litterally "out of this world" and unjustified by any rational commercial standards.