July 31, 2011, Bob Brinker's Moneytalk: Summary, Commentary, Excerpts and Discussion

Posted July 31, 2011....                                        (post and read comments)

Okay, I was wrong. Bob Brinker hosted Moneytalk today, in spite of my prediction that he wouldn't.... :)                   

(Brinker's comments summarized, paraphrased or quoted)

STOCK MARKET....Brinker said: "Isn't it amazing how the stock market has taken all of this in stride. I was looking at the S&P 500. It's actually setting about 5% below its closing high for the year, which is truly amazing.....This is resilience  when you look at this kind of political drama out of Washington DC......Remember we had a caller when the market was at 1268 at the end of June who asked whether he should sell out of the market because of the debt ceiling debate......Of course, the market is now at 1292, a couple of percent higher than when that call came in at the end of June. So this is what happens. If that individual would have sold out at 1270 at that time, he would be faced now with either sitting it out or re-entering at a higher level."

 Honey EC:  In spite of the year-to-date figure that Brinker used to make his point,  the stock market has had  six straight days of losses -- the Dow  falling 581 points or 4 percent. The S&P 500 Index closed at 1292 on Friday, down 3.9% for the week.  (Here is a link to the call that Brinker referred to from the   June 26th Summary.)

Brinker continued:  "And certainly we've seen some nice dollar-cost-average opportunities this past week in the market. I must admit on Friday I was taking advantage of some of the bargains that were out there with the market in the 1200's,  reacting to this hyper-drama out of Washington DC.    I know many of you also have been taking advantage of  the dollar-cost-averaging opportunities on short-term weakness - and certainly it's minor. I mean, 5% is really noise when you look at the market over time.......If you've been listening to this broadcast, we have not been part of the panic-brigade here on Moneytalk. 

I have said over and over on this program, this summer, that I never believed that the United States of America would default on its Treasury obligations. And certainly with the word out of Washington today that the framework has been established for the debt ceiling increase with deficit reduction, certainly that is exactly what is playing out. I think that we should congratulate those of you who listen to the broadcast that  have not joined the panic-brigade and panicked out when you are looking at a market that is trading within 5% of its high for the year,  and has shown incredible resilience in the face of probably one of the biggest fiscal passion plays of our lifetime.....

And it certainly has done damage to this country's reputation all over the world.....Let that be said.....There are stories coming out of Tokyo about the upset in Japan. About the fact that they are the second largest holder of Treasury obligations and they are being held hostage by this Washington Bruhaha. Obviously China has already made a decision to further diversify their portfolio and become less dependent on Treasuries. After all, they are holding 1.16 trillion in Treasury obligations while all this is playing out."

Honey EC:  Note that Brinker said he was buying this past week. Well, he must mean with his own money  because all of his Marketimer model portfolios are fully invested. The last time that he said on Moneytalk that  he was personally buying stocks was on the April 2008 show.  He said he was buying at low-1300's. At that time, he had also called a new market bottom and  issued a Marketimer buy-signal at the low-1300's. Of course, the market just kept on dropping, all the way down to 677 in March, 2009: 

Caller John said: “I took your recommendation, Bob.. When it was below the 1300’s I added."

Brinker replied: "And just for the record, I’m right with John. I was doing the exact same thing that John was doing. When we saw that weakness on the correction test into the low-1300’s and that very, very minor weakness that we had just below that level for a very short window of time, I was doing the same thing that John was doing – which was adding to positions."

INTEREST RATES:   Caller Don from New York asked Brinker why his Vanguard Bond Funds had not dropped much in value.  Brinker told him that "interest rates tend to fluctuate over time," but  that those who have been betting on rising interest rates are "seeing red ink" because the sluggish  economy has actually brought rates down. 

Honey EC: I am one that has been  "betting that interest rates will rise."  I believe that simply makes me early to the party, not wrong.  Brinker really wanted to rub it in because he told another caller that he "almost felt sorry" for those who have been expecting interest rates to rise. Okay Bob, then why did you sell all of your model portfolio Vanguard  TIPS;  and most of your Vanguard GNMA's  and about half of your Vanguard Short-Term Investment Grade Bond Fund?

UNEMPLOYMENT:  Still at 9.2%. This is very high considering we are two years into a recovery and it's contributing to the very slow growth.  

INFLATION: Caller Greg from Reno asked about inflation vs deflation over the long-term. Brinker said, based on the recent economic figures he is reading, we have low inflation.   

DEBT CEILING DEAL IN WASHINGTON: Brinker said that the framework for the deal is being worked out.   It will contain a balanced budget amendment, but  no tax increases.  Big Medicare and defense cuts are on the table -- none for Social Security.  The cuts would take place over a period of  ten years.  This deal would lift the debt ceiling until 2013, so would not be an issue in the 2012 elections. 

FOURTEENTH AMENDMENT: Several times on the show today, Brinker reiterated that the 14th Amendment says that "public debt shall not be questioned." He said that the "blockheads"  in Washington have actually "created this  crisis."   

STANDARD AND POORS DOWNGRADE:  Brinker said: "Standard and Poors, one of the two major rating agencies, along with Moody, both of whom currently rate US Treasury obligations triple-A. Standard and Poors  has stated that there is a 50% chance of downgrade of that rating within the next few months. Now they are going to have to decide whether they are satisfied with the deficit reduction package that we are going to see sometime over the next 24 to 48 hours.....It's said to be close to 3 trillion dollars if you can believe Senate Minority Leader Mitch McConnell.....They'll have to decide at S&P whether that is sufficient for them to hold off on any possible rating change.  S&P says they have to see a credible solution to rising US government debt obligations or they will lower the credit rating. Most people think they would lower it to a double-A. Nobody knows for sure. ......What happens with a downgrade? The taxpayers pay. It'll become more expensive for the US to finance the national debt....We'll have to pay more interest over time."

DOLLAR WORLD CURRENCY:  Brinker said: "The good news is there are no real alternatives. When you look around the world for a reserve currency, where do you go? You go to the dollar. Where else do you go? That is when your heartaches begin....The fact is, there really is no other reserve currency out there. The Chinese Yuan is not ready for prime time as a global currency. Maybe some day.....The Euro? You must be kidding. With the problems in Euroland, the Euro as a reserve currency? Don't hold your breath on that one. The Yen? You must be joking! You see the problem. So even if by default alone, the dollar remains the global reserve currency for now."  

TREASURIES: Brinker said:  "Treasuries are still viewed relatively risk-free around the world. Treasury Notes and Bonds are possessive of both interest rate risk for Notes and Bonds because of their maturities. So I think Treasuries will remain the benchmark even if they are downgraded to double-A which is unknown at this time. No downgrade as of today.....But more interest over time will have to be paid if they are downgraded. And let's not forget some very important facts here. The United States has the largest bond market in the world, and the best liquidity of any bond market in the world........This is important not only the Treasuries, but also for the dollar because the dollar is the premier currency in terms of size, liquidity, volume traded around the world in the foreign exchange markets." 

POLITICAL BULLY PULPIT:  Brinker repeated all of his previous name-calling  and said if he said what he really thinks, he'd be off the air in five minutes.

Honey EC: Brinker seems to enjoy calling names and he is fastidious about making sure he appears to be a bi-partisan politician-basher, but he still manages to give special slams to those who do not want to raise taxes or increase the size of government. I wish he'd make up his mind. Is the spending out of control or isn't it? Does he want it to stop or shall we just all go over the cliff together? How ridiculous.

SOCIAL SECURITY IS DIFFERENT: Brinker said: "I think it's very important to understand that there are elements to the Social Security program that are different from all the other programs that are out there.  Payroll taxes, as I'm sure you pay them.....are paid by both the employee and the employer, and if you are self-employed, you pay both sides, which is 12.4% up to about $100,000. If you're self-employed, you're paying over $12,400 a year into the system.  The money goes into the Social Security Fund, if you will pardon the expression, to pay current beneficiaries. Now when there's a surplus, that money is invested in special Treasury securities that pay interest to the so-called Social Security Fund.  

At the start of this year, that fund had 2.6 trillion dollars in assets. By assets, I mean they own Treasuries, government IOU's. On the Social Security Fund side they are considered assets. On the Treasury side, obviously, they are obligations, they're liabilities, they are IOU's...... For the  first time in 27 years last year, the Social Security Fund actually paid out more in beneficiary checks than it collected in payroll taxes, but the fund still grew in size because of that interest it earns on those special Treasury securities......Any excess payroll taxes that are collected are essentially lent to the Federal Government, and the government uses that money for general purposes. 

But here is what is important to remember, and this is unique to Social Security. Social Security cannot by law add anything to the National Debt. We are talking statutory here.....Also, Social Security cannot by law, pay benefits unless it has sufficient income to cover the cost.....Last year they had to make it up with the interest that they earned on the $2.6 trillion, but they still had enough revenue with the interest added in......Social Security under United States law has no borrowing authority to make up short-falls in  benefits. They can't borrow money.....So that's why the long-term funding issues at Social Security benefits must be dealt with by congress. This is not related to the national debt, the debt ceiling, then annual deficit....So for that reason, if they had had a problem on Wednesday with the debt ceiling.....you could make a strong case that the Social Security checks should be paid out."

MEDICARE PART D CAUSING PEOPLE TO TAKE MEDICINE THEY DON'T NEED:   Brinker said: "Eliminate Part-D,  there are way too many prescription drugs being consumed in America today -- way, way too many. You know that, everybody knows that. Because of all the benefits that are thrown at people, encouraging them to get prescriptions, many of which they don't even need.  So bottom line is, you will dramatically reduce consumption of prescription drugs. Just get rid of Part-D." 

Honey EC:  I have some questions for Bob: Exactly HOW DO YOU KNOW that "way, way too many" prescription drugs are being consumed by people who don't need them?    And are you saying that doctors are illegally prescribing them?  Several times today, Brinker said he was all for doing away with the Medicare Part-D Drug Plan, but  nary a word about  Obamacare. 

Brinker's guest-speaker was Vito Tanzi,  "Government versus Markets: The Changing Economic Role of the State." It's also available on Kindle.  

Moneytalk on demand and to go with Bob Brinker, is available for FREE audio/podcasting at KGO810 radio for seven days after broadcast.  I download and save all three hours, including the third hour guest-speaker. (The program is archived in the 1-4pm time-slots.) If you don't download it from KGO within seven day, it's available at bobbrinker.com by paid subscription. KGO Radio Sunday Archives

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