April 1, 2012, Bob Brinker's Moneytalk: Summary, Commentary and Excerpts

April 1, 2012....Bob Brinker hosted Moneytalk today.....................(comments welcome) 

STOCK MARKET.....Bob commented that this is the best first quarter since 1998. It's part of what Brinker calls a 29% "melt-up" that began on October 3, 2011.

Honey EC: Not even an inkling from Bob today that he might be thinking the market is ready to top...nada...no bear, no market top yet. 

INTEREST RATES.... "Very, very low" -- not much change at all.  The 5-year Treasury is in the vicinity of 1%, and the 10-year Treasury close to 2% -- historic lows. Bob said the Federal Reserve continues to be dedicated to keeping interest rates down.

NATIONAL DEBT AND THE INTEREST OWED ON IT:  Bob said: "It's a staggering number. Right now it's at 15 1/2 trillion dollars.....That's the national debt....the money that has been borrowed....
 national debt
I think that a lot of people are not aware of the make-up of the Treasury debt.....The average interest rate that we the taxpayers are paying on the marketable and non-marketable debt as of February data is 2.2% --- one of the lowest numbers ever.  Part of the reason that number  is so low is because the Treasury has chosen to skew their borrowing to the shorter end. That's not a real smart thing to do when you owe 15 1/2 trillion dollars because you, the borrower, in this case the Treasury, you take on the interest rate risk if rates go against you....."

WHEN THE TREASURY DEBT MATURES: Bob continued:  "The average maturity of this debt owed, the publicly traded portion which is roughly 9 to 10 trillion -- the notes and the bills and the bonds is an average maturity of 5 years and 3 months......That's pretty short.....The interest expense on the Treasury debt in fiscal 2011.... came to 454 billion dollars.....The amount of the Treasury debt that is coming due in the next five years is close to 6 trillion dollars....is going to have to be rolled over the next five years...."

ANNUAL DEFICIT FOUR YEARS AT ONE TRILLION DOLLARS: Bob continued: "I think there is a structural imbalance.....in Washington which is the annual budget deficit.  And we are in the fourth year now of annual budget deficits of over a trillion dollars....It's not being resolved....."

70% OF DEBT ROLLS OVER IN FIVE YEARS: Bob continued: "The United States will have to roll over almost 70%  of its privately held marketable securities in the next five years -- almost 6 trillion dollars....And that's unfortunate because the United States right now our deficit is 8.2% Gross Domestic Product. That's a big number, I said we want to see it down 3% or less....We're also running about 68% of Gross Domestic Product -- debt divided by GDP now 68%....."

Honey EC:  I wonder if  Bob isn't  a bit confused about the amount of debt to GDP.  On Moneytalk, July 24, 2011, he stated that the debt was at 90% of GDP.

NATIONAL DEBT INTEREST WON'T ALWAYS BE LOW:  Bob continued: "Here's the problem. There is no basis for anybody in Washington to assume that the rates that are out there today will be out there forever....There's no reason to expect that....What we should be expecting is normalization of interest rates over time....The cost of borrowing goes up fast because the average maturity is only 5 1/4 years and you have all this money to roll over...."

FED MAY DECIDE TO TIGHTEN DOWN THE ROAD:  Bob continued: "The Federal Reserve purchased about 60% of  net Treasury issuance in 2011....The Fed's not going to be in there making purchases like that forever. We don't even know at this point whether there will be a QE3 because if the economy does better, there won't be....There will only be a QE3 if they feel they need it to bail out the economy...These are all factors that could come together down the road." 

Honey EC: In the paragraphs above which are all part of Bob's outstanding first-hour opening monologue, he stated facts, and didn't  seem to be trying to scare listeners, but I found much of what Bob said very alarming. 

CONTINGENCY CASH RESERVES:  Caller Jerry from Virginia asked Bob if he considered three years  of liquid cash reserves adequate.  Bob said he thought three years might be a little long, but for holding them, he recommended low-expense money market funds, such as with Vanguard and Fidelity. (Honey: or Charles Schwab)


PURCHASING GOLD AND SILVER: Caller Brian from Illinois said if the world financial system collapses, bartering would be done with  gold and silver.   Bob said that he did not expect the imminent collapse of the world financial system.  However,  if you buy  gold or silver, never buy numismatic coins because of the tremendous mark-ups. He recommends avoiding the mark-ups by buying GLD, an exchange-traded fund based on gold bullion.

Bob  said: "Another way to go about it is to buy gold bullion coins, that you purchase for the purpose of acquiring the actual physical gold that is in the coin. This does not have to do with numismatics....The United States Eagle gold coin is trading at $1745.88 with a $75 dollar premium, but that premium only represents 4 1/2% of the value of the coin....Because of their portability, these coins tend to retain the premium....Now there are other Mexican Peso has a premium of less than 1% right now. The Maple Leaf has a 4% premium, as does the Krugerrand, but these are gold content coins, not numismatic coins." 

Honey EC: Bob seems to be branching out a bit more with the advice on buying gold bullion coins. He still maintains GLD on his Marketimer list of recommended individual issue -- no price or amount advice to go with it, however. 

 

HOUSING MARKET:  Bob said: "I was reading this week that there have been some bidding wars developing. And I don't even know the last time we had any bidding wars for real estate, but we've seen some bidding wars in places like Seattle, the Silicon Valley, Washington D.C. Even though prices are close to  six-year lows, we have certainly seen some activity and as a result the bidding wars in a few markets."  

Honey EC: In neighborhoods near me close to Santa Cruz, homes are selling like hotcakes, sometimes even before they go on the market.

ESTATE TAXES: Caller Sam from Silicon Valley asked Bob what to expect next year on estate taxes. Bob said that no one really knows for sure since Washington didn't even know. But there are "some people"  who think it will be around  $3 1/2 million per person -- $7 million married couple. Bob said he thought $1 million is too small.


MODEL PORTFOLIO III WITHDRAWAL RATE: Caller Andy from Oregon asked Bob what would be a sustainable rate of return  out of model portfolio III -- and when does one reach the Land of Critical Mass.

After Bob explained that the Land of Critical Mass is a wonderful land where you only work if you want to -- like Ross Perot, Bill Gates  or Warren Buffet, Bob said: "I'm okay with 4% and I'll tell you why. Because most of that 4% is generated by investment income and that's the reason that I say that. You take the investment income in the form of the interest that you earn on the interest bearing securities in the balanced model III in the investment letter. You take the dividends that are paid by the equity investments in that portfolio and then you have capital gains from time to time. Various funds pay capital gains distributions. You put all of that money together -- in a taxable account, it's all taxable -- and you put that toward your 4% annual withdrawal.  In some years, it will exceed 4%, which gives you the ability to put money back into the portfolio. And other years, it will be shy of 4%, you might do a little bit of fund liquidation in order to get up to 4%. But it should be pretty close most years. And I think that is a number I am comfortable with -- 4% withdrawal rate."

Honey EC: Bob is right that the Marketimer model portfolio III is a balanced portfolio -- roughly 50-50 stocks and fixed income. Last year, it was the only one of his official model portfolios that didn't lose money. It was up 1% for the year, exactly the same as the Wilshire 5000.  Bob told Andy that some years, he may have to sell some funds to raise the 4% withdrawal. Well in 2008, the portfolio lost 23.9%, so that year would have been equivalent to selling  almost  28% of your fund holdings to withdraw 4%.

As we know from past Moneytalk discussions, the portfolio contains  20% Wellesley Income Fund (VWINX), 20%  Vanguard Ginnie Mae Fund, 30% in Vanguard Total Stock Market Fund (VTSMX), some very small holdings in Vanguard International funds and the most recent and surprising addition, the Akre Focus Fund (AKREX). 

PRICE OF OIL POLITICAL CALL AND BOB BLAST OBAMA FIRST TIME....Caller George in Tennessee brought up the subject of oil and gasoline prices. Bob said: "I am extremely disappointed in this president in terms of his energy policy.  Some of the decisions coming out of this administration are so disappointing to me, I really have to restrain myself when talking about it. I want to be specific. I have nothing against wind and solar, but to make it the top priority of your energy policy when it only accounts for 1% of all of the energy produced in the world, to spend this much time talking about it makes no sense. It's pure folly as far as I'm concerned. What about the other 99%? And why haven't we unleashed the incredible potential of natural gas in the United States?    All of our trucks and buses should be propelled by natural gas. Easy to do, and the government could lead the way by an executive order from the White House stating that all government vehicles henceforth must run on natural gas.....No good reason not to do.....The last straw was this recent decision regarding the Keystone XL Pipeline. If ever I saw a no-brainer, it was to approve the Keystone XL Pipeline. So I would have to give energy policy in the White House today a failing grade."

On a lighter note

MEGA-MILLIONS LOTTERY TICKET WINNER....Bob said it's impossible for him to have the winning ticket because he doesn't buy lottery tickets. He reported that there are winners, one in a small town (Redbud) outside of St. Louis, one in Maryland and one in Kansas. He said the  take-out on the mega-million dollar lottery is 50% -- expensive gambling. (Honey EC: I'm with Bob on this one -- never bought a Lotto ticket in my life. Mostly because I know I won't win. LOL!)

BOB'S HOUR-TWO OPENING QUOTE: "Our money is your money, we print it for you to use." Bob said some have asked him about this and explained for us young sprouts that  it's  an old-time comedy team, Bob and Ray --  said he  was "always  a huge fan."

Bob's guest author-speaker today was Barbara Weltman:  J.K. Lasser's Your Income Tax 2012: For Preparing Your 2011 Tax Return

 KSFO 560: 1-4pm  (KSFO offers FREE  Moneytalk on Demand  for seven days after broadcast.)

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