June 21, 2022

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TOGETHER WITH

Good day. The Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced, according to CNN. It's based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect. Can you guess where the Fear & Greed Index stands today? a. Extreme Fear, b. Neutral, c. Greed. Follow the wave 🌊 below for the answer.

Today's money and finance topics are:

Shrinking of the Fed's balance sheet has begun
Putting retirement planning on hold?
Breaking up with your bank

ECONOMY

Shrinking Of The Fed's Balance Sheet Has Begun

Living through some once-in-a-lifetime economic scenarios will guarantee a couple of different outcomes for most people. One is that you’ll add some wrinkles and gray hairs, and the other is that you end up learning about the mechanics of monetary policy, whether you want to or not.

We’re now in the latter days of that extreme situation that saw extreme measures be taken by the Fed on behalf of the economy. As we enter the so-called unwinding period, it’s time to look at the implications of undoing all of this, and what that means exactly.

The diet has started

The Fed’s finances: The Federal Reserve isn’t a business, so their balance sheet is far from normal. Their holdings consist almost entirely of government bonds and mortgage-backed securities, and since March of 2020, their portfolio balance has more than doubled from $4.2 trillion to over $8.9 trillion in assets held.
Standing ovation for the money printer: When the Fed bought those assets, it did so with money that they printed. This is actually what they always do anyway, it’s just that in this case, they did a lot of it.
Time to cut back: The Fed was always planning to eventually reduce their balance sheet, but the current state of inflation also makes it a must now. The Feds will reduce its balance sheet by allowing these assets to "run off," which means the Feds won't reinvest some or all of the principal returned back to them when those securities mature.
The timeline: The balance sheet reduction began on June 1st, 3 months after purchases stopped. The plan is to allow $47.5 billion worth of assets to run off each month through September, and this will then double to a total of over $95 billion per month split between bonds and MBS. At this rate, the Fed will have reduced their balance sheet by nearly $1 trillion dollars by the end of next May.

Source: Federal Reserve Bank of St. Louis

What this means for us

Cloudy with a chance of fear: The markets have been given mountains of reason to be fearful over the last 6 months, and this is just another. Although this is a necessary part of the quantitative tightening process and not as evil as investors think, it does still strike fear in traders any time easy money recedes.
Bond rout continues: This balance sheet runoff will further add to the supply of bonds on the market, likely reducing prices even more, and therefore continuing to increase yields. Although uncertain, higher yields could definitely make stocks even less attractive as they traditionally have done.
DCA (dollar cost average) for the emotionally inclined: The markets are in the midst of conflicting times, with some trends pointing eventually higher while others worry about doomsday scenarios. We’ve seen volatility rise throughout this year, and that’s likely far from done. In moments like this, objective investing strategies tend to allow for the most inner peace.

FINANCIAL PLANNING

Putting Retirement Planning On Hold?

It’s been a wild few years to say the least—from meme stock euphoria in its prime to a bear market in the aftermath of it all.

This period has created a lot of ambivalence amongst investors of all generations. Things are seemingly so uncertain to the point where many people are beginning to question whether they should even try to invest for the future right now.

How's the crowd feeling?

You know what they say—feel good, look good, play good. Right, well at the moment, many of us don’t seem to be feeling too good about our investments, and that can be a scary indicator.

Overall confidence: Investor confidence recently hit its lowest point in decades, the Fear & Greed Index is teetering on extreme fear, consumer confidence just dipped again in May, and apparently about 80% of US investors believe they’ll see a recession this year.
Retirement confidence: Not only are we wary of the overall economy, but the pressure it’s exerting on the markets is making us apprehensive about investing too. Per a recent survey from Fidelity, 55% of younger respondents (18-35) said that they’d put retirement investing on hold for now, and didn’t see any point in it until things got back to some sense of normalcy.
Inflation’s warpath: To top off this pessimistic cake, we should also account for sentiment around inflation too. About 70% of investors surveyed said they’re concerned inflation could derail or alter their retirement plans, and 30% said they haven’t a clue how to ensure their savings don’t lose value during these inflationary times.

History is your friend

We know that, generally speaking, trying to time the market is far from a reliable path to wealth. So, trying to find a more ideal moment or “wait for more normal times” like 55% of investors seem to be planning on doing, is perhaps a risky bet.

History tells us that over time, the broad markets go up, and if your horizon is longer than at least 20 years, the odds of you losing money are slim, and the odds of your multiplying (thanks to compounding) are high. Things look grim right now, but it helps to take a macro perspective for peace of mind.

MONEY TIPS

Breaking Up With Your Bank

Giphy—Emma Stone

Banks are in the business of making money, both literally making money and a profit, actually. However, you’re also in the business of making money—money for yourself and your own financial wellbeing.

So, hopefully your bank will understand if you have to make a business decision to break up with them.

But, why would you ever break up with your bank? There are a lot of potential reasons why, and none of them include “it’s not you, it’s me.”

Should you leave your bank? Here’s how to know.

The main reason—savings: Aside from high fees, getting a non-existent ROI on your savings is the main reason to leave your bank. Many local branches will offer rates as low as 0.01% APY, and if you’re saving like you should be, that’s just not going to cut it. Even though 1% still isn’t even beating inflation, it’s a heck of a lot better than what you had before. If you’re falling victim to these low yields, now is the perfect time to switch to a higher yield account as rates rise.
Are the fees worth it? The average US bank customer pays an average of $7 per month on bank fees charged on anything from out-of-network ATM fees, and excess transactions to overdraft and early account closing fees. Many banks and banking services don’t charge customers anything nowadays. Take a closer look at your statement, and if you see any fees and you didn't know about them, it’s time to figure out if those costs are worth it.
Multiple relationships here is okay: It would be easy to say you should break up with your local bank that offers 0.02% APY and go find an online one with a better return, but it’s not that simple. Some of us benefit from having a local branch, and so that bank still serves a purpose in your bankfolio. Instead of breaking up with a bank that’s lacking in one area, open an account with another that fulfills that need instead.

FEATURING NEXO

Crypto Lending—Borrowing at a Low Rate in an Inflationary Economy

There is no silver bullet when it comes to borrowing money at a low interest rate in this inflationary economy. Good credit history and the absence of other loans may help, but the most overlooked contributor to a low-interest rate is collateral, which is the asset you’re pledging to get a loan.

That’s where crypto lending becomes an interesting option. Like a house or a car, your cryptocurrency can serve as collateral for a loan with a relatively low interest rate. When you pledge your crypto for a loan, you continue to own it, but you may lose some rights, such as the ability to trade and sell it.

Besides low interest rates, crypto loans are popular because of same-day funding and no credit checks. And the interest rate may also be lower if the borrower maintains a low loan-to-value ratio, meaning the amount borrowed is small relative to the value of the pledged crypto. Some crypto loan providers such as Nexo have interest rates as low as 0%.

Things to know before getting a crypto loan

If all of this sounds too good to be true, let’s quickly go over some things to be aware of before getting a crypto loan.

⛔ No access to your crypto while you’re paying off the loan. Like we said before, once you pledge your crypto for a loan, you can’t sell it, stake it, or do anything else with it. For all intents and purposes, consider it locked in a safe deposit box you have no access to.

🛎️ Margin calls. If the value of your crypto drops significantly (typically for loan-to-value ratios of 70% and above), the lender may require you to pledge more crypto. In certain cases, they may even sell it to maintain the loan-to-value ratio. Unfortunately, such things happen when crypto prices fluctuate a lot.

🏦 Collateral insurance. The cryptos you’re pledging to get a loan are generally not insured. What that means is if the lender goes belly-up, your crypto could be gone too. But some lenders get around this by providing extra insurance for pledged assets, so evaluate the lender carefully before committing.

How do you get started?

Getting a loan can be done through a crypto lending platform. Lenders like Nexo have relatively low annual percentage rates (APRs), starting at 0% for their Platinum users and capping out at 13.9% for users with no Nexo tokens on their platform. They also offer $375 million in insurance on all pledged collateral via their partners BitGo and Ledger Vault.

The borrowed amount functions like a credit line. You can borrow anywhere from $50 to $2 million, and you can keep borrowing until you reach your credit limit.
The amount you can borrow depends on the amount and type of coins you’ve pledged. For example, for Bitcoin or Ethereum, your credit line will be 50% of the pledged amount, while for USD Coin it will be as high as 90%. Of course, the amount will fluctuate based on your crypto’s market value.
If the value of your crypto begins dropping, you’ll receive an email from Nexo to deposit more crypto to maintain your collateral. If you don’t deposit more crypto, and there is nothing left in your savings, Nexo will begin selling off your pledged coins to repay the loan.
Nexo also offers an NFT Lending Desk where you can take a loan against your Bored Apes and CryptoPunks digital assets. Your credit line will be 20% of the value of your pledged NFTs.

The takeaway

For more experienced investors and borrowers who’ve done their research on the risks and rewards, getting a crypto-backed loan may be a viable option for achieving certain financial goals. And locking in a lower rate can be advantageous in a rising interest rate and inflationary environment where borrowing is looking to become more expensive.

🔥 TODAY'S MOVERS & SHAKERS

Valneva (+81.3%) as Pfizer will buy an 8.1% stake (or $95 million) in the French vaccine maker.
Spirit Airlines (+8%) as JetBlue has increased its takeover bid by $2 to $33.50 per share. At the end of this month, they will decide whether they will take the offer or merge with Frontier Airline.
Kellogg (+2.1%) is up on the news that it'll be splitting up into 3 separate public companies: US cereal, snack & international cereal, plant-based food producer.
Acadia Pharmaceuticals (-35.9%) on a Wall Street analyst, Jefferies, downgraded the stock with a 12-month price target of $10. This follows reports that the FDA did not vote in favor to approve the company's new drug application for Nuplazid, which claims to treat hallucinations.
Bitcoin (+4.7%) to $21,513.00 (1D)
Ethereum (+4.7%) to $1,179.80 (1D)

This commentary is as of 7:30 am PDT.

🌊 BY THE WAY

⚖️ Answer. The Fear & Greed Index is pointing to "Extreme Fear" with a score of around 20/100 (CNN):

🟡 Nexo Co-Founder: Crypto Crash 'Like Panic of 1907’ (Decrypt)
💵 ICYMI. Dollar cost averaging—the pros and cons (Finny)
📆 Amazon Prime Day 2022: Ways to get $245 in Amazon credits (Tom's Guide)
🏝️ Finny lesson of the day. With many looking to even pause contributing to their retirement plans until things look more normal, here's a micro-lesson on why it matters to keep on saving instead:

Saving for Retirement & Why It Matters

Retirement Planning

8 mins

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