The trust placed in our banking system took another hit when Wells Fargo disclosed that they opened up over 2 million unauthorized customer accounts. Before the news broke, Wells Fargo was recognized as one of the most reputable banks. Even Warren Buffett has placed full trust in Wells Fargo. He owns over 10% of the entire company. The deceitful actions taken by the 5,300 employees exemplifies how the culture of the banking system is mired in conflicts of interest. I’ve always known that the conflicts existed at large financial firms, which is why I chose the path to be an independently owned financial advisor. I never imagined that a bank such as Wells Fargo would go to this length to illegally open up accounts without the consent of their customers.
The trust in the Federal Reserve bank has also recently been challenged. They have chosen to keep interest rates artificially low, which has punished savers. There is much debate that we are in a “yield bubble” and what the consequences will be if the Fed gradually raises interest rates. We are in uncharted territory with interest rates near historical lows. Nobody knows what will happen if interest rates move higher. The current expectations are that interest rates are going to stay low for a very long time. At the September meeting, the Fed couldn’t raise rates 0.25% because of the fear that they would trigger a massive market sell-off.
I believe that the scandal at Wells Fargo and the Federal Reserve interest rate policy have one thing in common. Both policies have had unintended consequences. At Wells Fargo, top management created an incentive structure that led to employees cheating to increase their compensation. In the case of the Fed, the central bankers have set a course that has forced millions of investors to take additional market risks.
The blame will be squarely on the Fed if they are unable to gradually raise interest rates without negatively impacting asset prices. There are signs that the housing market is becoming frothy due in large part of the low rate environment. Utilities, REITs, and Telecom companies have recently sold off from the highs and rates haven’t even risen yet.
Over the next month, all eyes will be watching what might go down as the nastiest election of our lifetime. As soon as the election ends in November, investors will shift their focus on whether or not the Fed will raise interest rates at the December meeting. The uncertainty of a potential interest rate increase in a fragile economy should help to keep market volatility high through the end of the year.
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