Welcome to our Friday mailbag edition!
Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.
Up first today, a question from reader Renate on the safety of the National Credit Union Administration (NCUA)…
If you have money at a credit union, is the NCUA as safe a guarantor as the FDIC?
– Renate F.
Hi Renate, thank you for that excellent and very timely question. I’m sure many other readers have a similar question on their minds as well.
The National Credit Union Administration (NCUA) is an independent agency created by the U.S. government. It regulates and protects credit unions and their owners.
It backs deposit accounts up to $250,000 in the same way that the FDIC does in the event of a credit union failure.
The difference is that while the FDIC insures banks, the NCUA covers credit unions.
Also, banks insured by the NCUA must pay a 1% fee every year. The National Credit Union Insurance Fund (NCUSIF) then uses these fees to insure credit union accounts up to $250,000.
So if the banks run into problems and depositors want to get their money out, that means some of the bank’s own money is already backing these deposits.
In the end, there’s no perfect way to ensure money above $250,000 per deposit account is 100% safe in the face of a massive, widespread banking catastrophe.
But there’s one way to make sure your money is safer in a credit union or a big bank. And that’s to divide anything you might have over $250,000 into separate deposit accounts across different banks.
Next, reader Keeron wants to know how the Fed’s 0.25% interest rate hike will affect the Treasury’s actions in the event of a bond default…
I have been working in the financial services industry supporting software onboarding for institutions for seven years.
I understand more from two months of becoming a Distortion Report member about what all the terms are in plain language and how the market is interconnected.
Thanks, Nomi, for making it easy to understand without feeling like you need a finance degree.
One quick question: We haven’t heard much else about the “extraordinary measures” that the Treasury Department is taking since it’s now up to Congress to get this done before default.
But what’s your take on how the Fed’s recent update for Stage 1 will impact the Treasury Dept’s actions?
– Keeron E.
Hi Keeron, thank you so much for sharing that information about your own background with me. And thank you for your kind words about the information we’re putting out in our Distortion Report advisory.
We spend a lot of time making sure things are as clear as possible, so I’m thrilled that’s coming across.
(For more information about how to become a subscriber, click here.)
And you’re right about the Treasury Department. Janet Yellen recently said the Department would take extraordinary measures if a U.S. bond default happens.
But we haven’t heard much about this because the Treasury Department is too preoccupied with the current banking crisis.
Plus, the Fed reached Stage 1 too late. It was too focused on inflation, not the budding banking crisis.
As a reminder, Stage 1 of the Fed’s three-stage pivot means smaller rate hikes.
The reality is, last year, the Fed raised rates quickly.
This, in turn, caused the value of Treasury and mortgage bonds to drop. Here’s why…
Higher-paying bonds are better for the investors buying them. That makes existing bonds with lower rates less attractive.
This means that any bank that held these bonds against shorter-term positions and loans faced huge losses.
And it’s why the Treasury Department and Federal Reserve created a $25 billion package in the wake of the Silicon Valley Bank, Silvergate, and Signature Bank failures.
And, as of this moment, the Fed has also created emergency lending lines of about $300 billion for the entire banking system.
That’s already about half of what they created in the beginning months of the financial crisis in the fall of 2008.
What’s more, on Wednesday, at the March Federal Open Market Committee (FOMC) meeting, the Fed raised interest rates by another 0.25%.
This means the Fed chose to tread carefully. And it also means the Fed will likely hit Stage two more quickly than I expected. As a refresher, Stage 2 would be a pause in rate hikes.
Finally, our last question this week is from Roger, who wants to know about the relationship between the U.S. debt, interest rates, and gold prices…
Regarding the U.S. debt, will the interest on the debt cause a pause in interest rates rising, and how will this affect the price of gold?
– Roger R.
Hi Roger, thank you very much for that excellent question.
The more debt the United States creates, the higher the interest payments on that debt will be.
This also means that the U.S. government is borrowing from the future to pay for the U.S. economy in the present.
I believe this will lead to a pause in interest rate hikes, or Stage 2 of the three stages of the Fed’s pivot.
As I explained above, Stage 2 will most likely arrive earlier than expected due to the banking crisis unfolding around the world.
With respect to the price of gold, here’s what I believe…
Increased debt, higher interest rates, and greater financial uncertainty are all lifting the price of gold up.
That’s because gold in this environment is not only acting as a hedge against inflation. It’s also acting as a safe haven.
During times like this, I like to refer to gold as a “sanity haven” investment.
And it’s for this reason that we have already seen the price of gold surge.
Just this week, the price of gold broke over $2,000 per ounce. It hadn’t been that high since March 2022. And I believe there is only more upside.
In fact, I just recommended a company positioned to benefit from the gold rally in my Distortion Report advisory. If you’re already a subscriber, catch up here. And if you’re interested in becoming a subscriber, click here.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins