Today was the last Christmas performance of my Handbell Choir, We play along with a large choral group -- and it was a beautiful program. I wish every one of you could have been there. Of course the hall only holds 160 people.:) I am playing catch-up listening to my recordings of the program and will add a few comments tonight and more later.
I want to thank Jeffchristie who summarized the first hour, and Frankj who summarized the second hour. ETF1_Robert listened to the program and sent notes covering some key points in the program. And Jim sent these comments which I totally agree with.
If the purpose of Moneytalk is to help you be your own personal financial manager then I guess we must make investment decisions based upon the Japanese elections and what Elizabeth Warren has to say, because those topics took up the majority of the first two hours. I guess that's all a financial talk show host has to talk about after a week when the markets went against him.
The only interesting moment of the show was when he gave his new definition of stock market "noise" vs. "short term correction" vs. "intermediate term correction".
JEFFCHRISTIE'S FIRST-HOUR MONEYTALK SUMMARY
Bob's opening monologue covered the election in Japan and the budget bill that was passed by the Senate. (Honey EC: Brinker just can't stop himself from making political commentary about certain politicians. It is my policy to not report on his political pontifications and shenanigans, but "who" he almost never mentions by name screams volumes when he starts mentioning others by name in his inimitably condescending tone.
Meryl in Oak Brook asked about the fall in oil prices and its effect on the economy and the stock market. Bob said the US was now producing an additional 3 million barrels a day and there is a price war going on. Opec is putting pressure on high cost producers. The world is consuming 80 million barrels a day. He did not address the effect on the economy and the stock market. (Honey EC: Brinker did address the subject of oil and the stock market in the second hour.)
Zack in Washington ask about a website operation day after that is predicting a global financial collapse. Bob said he has addressed this before and it is being done by people with an agenda to sell some type of product.
Ray in New York was unhappy with the provision in the Senate bill that weakens part of Dodd Frank.
Scott in Kansas city was worried about changes to the pension benefit guarantee board cutting back on the amount that they cover. Scott said that his current plan offers 9% or a lump sum. Bob noted that the lump sum option could be withdrawn in the future.
Craig in Washington was worried about his future. He is 22 married and is living paycheck to paycheck. Bob told him to do things that would make him more valuable as an employee. Learn a trade skill or get additional schooling.
FRANKJ'S SECOND-HOUR MONEYTALK SUMMARY
Bob started by reminding us the Federal Open Market Committee will met on Tuesday and Wednesday of this week. Wednesday afternoon they will make an announcement on what the plan to do with the overnight lending rate which has been at 0 to 0.25% for several years now. Bob sees no chance of them raising this rate. The Producer Price Index went down 2/10ths of one percent and has been declining recently but it is still up 1.4% year over year. We’ll get information on the Consumer Price Index on Wednesday and the FOMC will have this info as well.
The Univ. of Michigan/Reuters Consumer Sentiment Index increased by 5 points to 93.8 which is the highest it has been since 2007. Bob is not surprised that consumers are reacting positively to cheaper gas, better jobs reports and home price increases.
George from TN wanted to know why the drop in the price of oil is affecting the stock market. Bob said he does not see any correlation with the drop in crude prices because the S&P 500 Index is only 3.5% off its all time high. Bob said “stocks tend to fluctuate,” quoting J.P. Morgan. Fluctuations of around 5% are what Bob calls “noise.” Decreases of 6-10% fall into the category of short-term corrections, and decreases in the market of 10 to 20% are “intermediate” corrections. (Honey EC: I have transcribed Brinker's verbatim reply on this important subject -- posted below.)
Jim was up next, calling from New Mexico with a question on allocation. He and his wife have $60 in pension money, they are in their 60’s, retired, have not tapped Soc Sec, and have 70% in the market with 15% bonds and 15% cash. Bob said he’d be more comfortable if Jim lowered his risk profile by having a 50% allocation to equities.
Steve from Indianapolis serenaded Bob with criticism of Elizabeth Warren for hammering Wall Street but saying nothing about Fannie Mae’s recent announcement to make home loans to people putting down only 3%. Bob told Steve his comment “was music to my ears.” He went on to compare her to Evita Peron saying she must have gone to the Juan and Evita Peron School of Populist Politics.
Rich from Chicago talked about the recently passed budget bill which contained provisions favorable to Citibank. When Bob finally got to talk to Rich he pointed out that too often, Congress will take a bill like the budget one which is critical to pass, and they will load it with peripheral junk. Politicians may not like the peripheral junk, but this is not enough to make them vote against the bill. Bob then launched into another example of hypocrisy, citing the White House’s opposition to the Keystone pipeline while ignoring the environmental problems associated with fracking.
Carol from IL called to thank Bob for his advice over the years. She took a leap of faith years ago and invested $10,000 and is now in the catbird seat.
Jay from El Paso is a real estate agent who wanted to push back against Bob’s staunch opposition to very small down payments. He said he sees first time home buyers who have a hard time coming up with even 3%. Bob said they’d have to agree to disagree.
Honey here: In the past, Brinker has been known to change his definitions of stock market declines, so I wanted his verbatim response to George on the record:
OIL PRICE DECLINE NO EFFECT ON STOCK MKT.....Brinker said: I really don't see any correlation at this point, George. Oil prices of gone from over $100 a barrel to to the 57-58 range. As measured by West Texas Intermediate Crude. And in the $60 range for Brent crude – primarily burned in Europe and Asia. The S&P 500 is trading within 3 1/2% of its all-time historic high. So I would say, so far we have not seen correlation."
WHY OIL DECLINE GOOD FOR STOCK MKT.....Brinker continued: "The bottom line on all of this is, if you take a look at the stock market as a whole, you have declining gasoline prices putting more spending dollars in the pockets of the consumers so they can go out and spend to promote economic growth. You also have excellent jobs growth going on right now, and you also have a real estate market that remains in a gradual recovery. And all of those things are favorable factors, underpinning the economy and as a consequence you are looking at a stock market – the S&P 500 trading at the 2000 level – which is within 3 1/2% of its historic all-time record closing high. And I think that investors have correctly perceived that on the bottom line, it is a constructive thing for people to have more discretionary dollar spending power as a result of lower gasoline prices."
STOCKS TEND TO FLUCTUATE....Brinker continued: "And having said that, what about fluctuations in the stock market? Should we ever expect any fluctuations in the stock market or should we just expect the stock market to close at a new closing high everyday and never do anything else. That's absurd! J.P. Morgan told us decades ago in his infinite wisdom that stocks tend to fluctuate. That's a quote.… And of course he's right – they do fluctuate."
5%, 10% or 20%: WHAT IS A CORRECTION AND WHAT IS NOISE.....Brinker continued: "So let's talk about those fluctuations. If you're getting fluctuations in the range you had them so far of less than 5%, the category I place those fluctuations in would be stock market noise and nothing more. Now if you have fluctuations up to 10%, then I would call those short-term corrections. And if you have corrections 10 to 20% then I would call those intermediate corrections. So a 3 1/2% move off the all-time record high is clearly in the noise category at this juncture."
EXPECT VOLATILITIY THIS TIME OF YEAR....Brinker continued: "Obviously you're going to see volatility at a time of the year here in December there are so many people making tax related transactions, And I think we should expect to see volatility in this type of the market environment. Especially when you have a commodity such as oil that has been incredibly volatile in recent weeks."
FRANKJ'S ALAN BLINDER THIRD-HOUR SUMMARY
Today’s third hour interview was with Alan Blinder who has been a frequent flyer on the Starship Moneytalk. The last time he was on, about a year ago (?) they discussed his book. Bob made mention of the book a couple times but the topic was the upcoming FOMC meeting this week. Dr. Blinder is a former vice chair of the Federal Reserve.
Commenting on the recent drop in crude oil prices the guest said such a cut should stimulate the economy because people end up with more disposable income if they have to spend less on fuel. Likewise with businesses.
Bob and Alan talked about Japan – the prime minister Mr. Abe won big today in an election so his economic program “Abenomics” will continue. ( I confess I don’t know much about Abenomics other than to guess that it involves stimulus to get their economy revved up. I have paid little attention to Japan but who else remembers in the 1980s when there was fear that the Japanese were buying up “everything” in the US?)
Bob turned the discussion to the actual Fed meetings and asked what actually goes on inside the room. Dr. Blinder explained that after the secret handshakes are exchanged they get down to business. There is intellectual debate, exchanges of views and discussion of what the future holds. Politics are left outside the room.
The guest explained a little about the dollar as a world currency. When the dollar “goes up,” we import more and export less. Crude oil is priced in US dollars. Other countries sometimes price their goods in US dollars – he gave an example of a car made in Japan, priced in dollars, so as the yen fluctuates, the price of the car will go up and down but not as much as one would think.
Jack, calling from Portland Oregon and listening on KXL was the first caller. In graduate school he did some work on what the “right” rate of inflation should be. He came up with 0% or within plus or minus 1% of zero. Savers would not be penalized. Alan fielded this question cleanly, pointing out that interest rates adjust to inflation – as nominal rates. He said that if the Fed’s goal is about 2% it is actually ends up about 1% because the measures used tend to overestimate inflation. This positive rate of inflation buffers us from deflation.
Bob piped up here that the Fed wants NOTHING to do with deflation. In a deflationary cycle people tend to hoard dollars because its purchasing power increases over time. This can lead to business bankruptcies. Moneylenders (he called them creditors) benefit because they are getting paid back with dollars that have greater purchasing power.
Jeff from Madison, WI missed his turn at bat.
Pat from Des Moines asked about the relationship between interest rates and debt service on the Federal debt. This question gets to Bob’s frequent warning about what will happen to the Federal budget when rates “normalize,” i.e., a greater part of the budget will be devoted simply to paying interest on Federal debt. The guest explained that “we usually roll over debt,” that is, if the Treasury has a bond that comes due, they pay it off and issue an new one for the same amount at the prevailing interest rate. Short Treasuries have been near 0% for a long time and the 10 year is at 2.25%. This was one of those questions that a guest sometimes does not answer directly. Dr. Blinder did not say what would happen to the amount of money we spend paying interest if rates normalize.
Russ from NY asked if there was a level of gov’t spending that was too low? The guest said compared to other rich countries we are pretty low in terms of what share of the economy stems from spending.
Tom calling from Carson City was on a really bad connection but his question was along the lines of Pat’s: “Won’t gov’t spending on interest skyrocket when rates normalize?”
Answer from the guest: YES.
But the professor went on to explain that the Office of Mgt. and Budget and the Congressional Budget Office have embedded these higher rates into their budget and economic projections. (Editorial comment: What could possibly go wrong?)
The last caller was Mark listening to WLS, Chicago and the question concerned jail time for the people who brought us the financial meltdown. Dr. Blinder said that on his book tour he shows a slide of the highest ranking individual who was convicted and sentenced and no one in the audience recognizes him. This indicates the big fish got away.
Bob wrapped up the interview at 3:52 pm.
Jeffchristie's Moneytalk Final Exam Question:
Bob Brinker says that senator Elizabeth Warren is:
A) An extremist. B) A socialist. C) A populist. D) A communist.
San Francisco, Ca. KSFO 560: 1-4pm (KSFO archives Moneytalk Free on Demand for seven days after broadcast. You can download and listen on the go.)