Bob’s Journal for 3/16/23

Silicon Valley Bank Probably Is Only the Beginning

During the last week, both Silicon Valley Bank and Signature Bank were taken over by the Federal Deposit Insurance Corporation. Those failures are likely only the beginning.

The Federal Reserve made two rapid changes in monetary policy in recent years. During the early years of the pandemic, the Fed engaged in historically aggressive quantitative easing with the purchase of most of the bonds the U.S. Treasury issued, as well as mortgages and some other securities.

Coupled with fiscal stimulus, the money from these purchases brought interest rates near zero and flowed into households and the markets. It supported prices of stocks and other assets. It allowed households to spend a lot of money.

The reckoning came in 2022 when persistent inflation took hold. The Fed then implemented a mirror-image policy, engaging in perhaps its fastest tightening of monetary policy ever.

Before 2022, some people and businesses structured their affairs to rely on continued easy money, high levels of liquidity and low interest rates. Some didn’t or couldn’t reverse those policies once the Fed started to tighten.

Silicon Valley Bank and Signature Bank were among those who didn’t change. The owners and employees of the banks paid the price in the last week. But they probably aren’t the end of the carnage.

Jeffrey Gundlach, of DoubleLine Funds, said in a recent webcast that many issuers of high-yield bonds are likely to be in trouble. He anticipates that high-yield default rates in the coming years could reach historic highs.

The big question for investors is whether the defaults and failures will be contained. The alternative is for the problems in some poorly operated entities to seep through the economy and affect others.

No one can know how things might play out. That’s why I always stress having a margin of safety and diversification in your portfolio. It is also why over the last year I recommended moving a portion of your assets to safe investments such as money market funds, certificates of deposit (CDs) and multiyear guaranteed annuities.

The Housing Market Took a U-Turn

The first effects of the Federal Reserve’s tightening of monetary policy were felt by interest-rate sensitive sectors, with housing being one of the most sensitive sectors.

Two years ago, the monthly mortgage payment needed to buy the median-priced home for sale in the United States was $1,500. Recently, it was $2,500. Over the last 12 months, the median monthly mortgage payment increased by 28.9%, according to Redfin.

It is no surprise that after the substantial increases in mortgage interest rate and home prices, mortgage applications are declining. Recently, weekly mortgage loan applications were at the lowest level since 1995.

Home affordability also took a hit. In 2022, only 21% of homes for sale were affordable to a buyer with median income. In 2021, 40% of homes for sale were affordable. In 2013, 50% of homes for sale were affordable to the median income buyer, according to Redfin.

The effects of monetary policy on the housing market are not uniform through the country. From the 2022 peak through January 2023, there were substantial price declines in formerly hot markets on the West Coast and in Florida. Most other areas of the country had modest appreciation or no change in prices, according to Zillow.

You might remember hearing during the pandemic of bidding wars for houses with many houses for sale receiving multiple bids.

In January 2022, about 60% of homes for sale nationally received multiple bids, according to John Burns Real Estate Consulting. In January 2023, that was down to 25%.

In the southwest, about 72% of homes had multiple bids in January 2022. In January 2023, multiple bids were down to 12%.

Software Can Determine Your Medicare Advantage Care

Medicare Advantage plans increasingly are using artificial intelligence (AI) and related tools to determine which care is approved for coverage.

Algorithms and artificial intelligence determine care in many plans and are driving denials of coverage to new highs, according to a study by STAT.

The case for using AI is that by processing more data than a human can, care can be personalized and deliver better outcomes.

The case against AI is that it uses historic and average data to make recommendations. It doesn’t adjust for individual circumstances and details. Critics also suggest that the recommendations of some of the AI programs are more stringent than Medicare’s coverage rules.

Sometimes the problem is how a plan uses AI. While the results of AI are meant to be suggestive, in some plans the AI recommendations are prescriptive and followed without deviation.

Advantage plan members, of course, can appeal a denial of care. But if the plan upholds the original finding, a beneficiary must resort to a multi-year appeal process.

As I discussed recently, the main point of contention in care in Advantage plans is nursing home care, also known as post-acute care and skilled nursing care, that’s provided after a hospital stay.

The STAT study said that most denials of nursing home care that are appealed eventually are overturned by the plan itself or an independent body that reviews Medicare appeals.

The Data

Retail sales declined 0.4% in February after rising a revised 3.2% in January. Excluding vehicles, retail sales declined only 0.1%.

Core retail sales increased 0.5% for the month. Core sales exclude vehicles, gasoline, building materials and food services.

The Consumer Price Index (CPI) remains well above the Fed’s target. In February, the CPI increased 0.4%, down a little from 0.5% in January. Over 12 months, the CPI increased 6.0%, down from 6.4% in January.

The core CPI, which excludes food and housing, rose 0.5% in February, higher than 0.4% in January. Over 12 months, the core CPI is up 5.5%, down slightly from 5.6% in January.

The Producer Price Index (PPI) declined 0.1% in February after increasing 0.3% in January. Over 12 months, the PPI was up 4.6%, as of the end of February, compared to 5.7% at the end of January.

The core PPI, which excludes food and energy, was unchanged in February after increasing 0.1% in January. Over 12 months, the core PPI increased 4.4%, down from 5.0% in January.

The Empire State Manufacturing Index tumbled to negative 24.6 in March from negative 5.8 in February.

Small business owners are a little more optimistic, according to the NFIB Small Business Optimism Index. In February, the index increased to its highest level in three months, 90.9. That’s up from 90.3 in January.

Optimism among home builders also is increasing, according to the Housing Market Index from NAHB. It rose for a third consecutive month to 44 in March from 42 in February. March is the highest reading since September.

But any reading below 50 indicates reduced activity. The index was 77 in April 22.

The economy created 311,000 new jobs in February, according to last week’s Employment Situation reports, which is down from 504,000 created in January but more than economists were expecting. The economy has added an average of 343,000 jobs each month for the last six months.

Average hourly earnings increased 0.2% in February, down from 0.3% in January. Earnings were up 4.6% over 12 months as of February, compared to 4.4% at the end of January.

The unemployment rate increased to 3.6% from 3.4% in January. That is partly accounted for by an increase in the labor force participation rate to 62.5% from 62.4%.

New unemployment claims increased by 21,000 to 211,000 in the latest week. That’s the highest level since December 2022.

Continuing claims, which lag a week behind new claims, increased to 1.718 million from 1.649 million.

The Markets

The S&P 500 fell 1.64% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 2.03%. The Russell 2000 declined 5.36%. The All-Country World Index (excluding U.S. stocks) decreased 1.15%. Emerging market equities dropped 2.12%.

Long-term treasuries rose 2.33% for the week. Investment-grade bonds gained 0.96%. Treasury Inflation-Protected Securities (TIPS) added 1.46%. High-yield bonds fell 0.84%.

On the currency front, the U.S. dollar declined 1.85%.

Energy-based commodities lost 3.69%. Broader-based commodities fell 1.52%. Gold gained 4.92%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.