Letter to Our Clients - December 2015
Dear Clients and Friends:
Years ago, my dad, brother and I woke up at dawn to take a hike – and not just any hike!We were camping with our whole family in the Strawberry Mountain Wilderness in Eastern Oregon, and we were going to summit Strawberry Mountain. While not a technical climb, it is a challenging hike, and not recommended for the inexperienced.Having grown up exploring the Pacific Northwest we were seasoned hikers, although admittedly we might not have been as experienced as we thought we were.
Bob had summited the mountain years before, so he knew generally what we were up against. My brother Andy and I were excited by the challenge and ready to conquer a new peak. After hours of hiking through beautiful alpine meadows and up steep cliff faces, we found ourselves at the top of the world.The views from the summit were breathtaking, and a very fitting reward for the strenuous ascent.This was, of course, before the age of the digital camera, but we had an old film camera and we took several good shots. I have attached a scanned version of the picture I took up there.
After taking some time to enjoy ourselves, and after, I happened to find a coin from Macedonia among the shattered rocks at the top (which is the subject of a different letter), we started our decent back to our campground. Upon reaching the bottom of the dizzying cliffs and walking along the path for a while, we found the path getting smaller and smaller, until the three of us looked at each other and agreed we had been following a deer trail for some time, instead of the trail home we were expecting.It was not that we were lost (we told ourselves), because we knew where we had come from, and we knew the general direction we needed to head.So, while not lost, we just didn't know where we were.
Of course, we were experienced hikers and we were well prepared.We had plenty of food, water, and warm clothes, in addition to flashlights, compasses, radios to communicate with our family at camp, and first aid kits.Even if things had really gone awry we would have been fine. However, despite a moment of concern, we did not panic, we reasoned through our situation, we made a plan, and we bushwacked through the wilderness in the direction we knew our camp was. We hiked through several landscape changes and at times we lost sight of landmarks we were using to guide us, but we regularly regrouped, agreed on our next move, and stayed calm. Soon enough (depending on who you ask!) we met back up with our trail, headed down off the mountain, and walked back into our camp to find our family waiting for us with a delicious dinner and a roaring campfire.
This experience was memorable for us, but understandably not something that everyone would enjoy. However, whether you would want to join us on our next hike or not, we will all be heading out on a "hike" with unknown consequences soon, probably in the middle of December.The Federal Reserve will likely be raising interest rates, or "hiking" them, at their December meeting, which ends on December 16th.Interests rates plummeted to record lows during the financial crisis in 2008, and now that we have passed that crisis and recession the Fed has been wanting to raise interest rates for quite some time, but has been waiting until the economic data has been positive enough to make them comfortable moving forward.At this point all signs indicate that they are likely ready to "hike" or "lift-off" now, although it is possible that they will push the decision off for a few more months into 2016.
Whenever the Fed does "hike" rates, it will have been a long time coming and will be a step back towards a more normal economy. Interest rates normally fluctuate up and down through economic cycles, and have been an important tool of monetary policy that help to regulate the economy. In the past, moving rates too much or at the wrong times has arguably caused economic problems that could have been avoided (in hindsight), so we expect lots of dramatic headlines when rates are actually raised. We expect the financial markets to have large swings, although no one knows for sure how the stock markets will react. For a number of reasons, bond markets in general may drop when rates rise, but if that happens it will be a normal part of the cycle and not the dramatic unforeseen crisis that some pundits will suggest.
The Fed's detractors will say that the Fed has gotten lost on the mountain of economics,that it is not moving in the right direction, and that it has made some grave navigational errors. Supporters of the Fed will assert that it is not lost and that it knows exactly where it's going, although they might admit they're not exactly sure the best way to get there, or which tools should be used along the way.Maybe the Fed would be curious to learn how Bob, Andy and I made our navigational decisions that day on Strawberry Mountain.
What does all this mean for you? It depends, but probably not too much. Higher interest rates will make mortgages more expensive for consumers, but it will mean that savers will earn more in the bank, in money market accounts, and in CDs. It will mean that governments and corporations will need to pay more in interest to take out new loans, but for the most part it will not affect current loan balances outstanding, and it is important to remember that an interest rate "hike" has been anticipated by these governments and corporations for the past several years.Overall, it will simply be the first step towards a more normal economy. In reality, more telling than the first "hike" will be what happens in the economy and with interest rates in the months and years after the first rise in interest rates.
Here at Advanced Wealth Management we are not included in the Fed meetings and do not know what data they are analyzing to make their final decisions. Even if we were included in their meetings, we would not know the "right" course of action from here. We do not know if a rate hike will be the best idea at the moment, or if they will make all the best decisions in the coming years.Bob and I heard from Ben Bernanke, the past Chairman of the Federal Reserve, when we attended a conference in Washington D.C. last month, and even he said he did not know the best route that the Fed should or would take to improve the economy!However, we do feel at this point that a rate hike will be the beginning of a return to normal, and not a cause for concern or panic. Since we cannot control the decisions the Fed will make, the best we can do is continue to move towards our goals and adjust along the way as the landscape changes.Hopefully, we can all stay on our intended financial trail and stay focused on our goals, with no surprises or missed turns. However, no matter what the Fed or the markets do to your financial plan, we will be here to help you navigate through whatever challenges arise and lead you towards your destination.
We hope this short story and explanation of our views on the upcoming Federal Reserve announcements has been helpful.If it has raised any questions or if anything has changed in your life since the last time we talked, please reach out to us to schedule a time to meet.If you think that any of your family or friends would benefit from our thoughts here, please feel free to forward this message to them. We will look forward to hearing from you soon, whether you contact us or we reach out to you. Until then, Happy Holidays and best wishes for the New Year! Everyone here at Advanced Wealth Management is so grateful to be able to work with all the amazing people we have as clients and friends, like you! Thank you for the continued opportunity.
Theodore R. Haley, CFP®, AIF®
Robert K. Haley, JD, CFP®, AIF®