December 16, 2012, Bob Brinker's Moneytalk: Summary, Excerpts and Commentary

December 16, 2012.....Bob Brinker hosted Moneytalk today.....(comments welcome)

STOCK MARKET: Brinker never said a word about the stock market today and no callers mentioned it either.

Honey EC: Why Brinker's long silence about the stock market? My personal opinion is that Brinker is playing the carrot-on-a-stick game to the hilt right now. The carrot he is dangling is the possibility that he may sell some or all of his equity holdings. He's been hinting for a couple of months now that he is "keeping an eye on" his so-called Marketimer timing model©. The Marketimer timing model consists of four components: Economic Outlook; Monetary Policy; Equity Valuation; Investor Sentiment.  (Bob talked about his timing model at a public Leukemia event in San Jose a few years back.  I double-checked in Marketimer -- it has not changed.)

In the December 2012 Marketimer, Brinker reviewed the history of secular/cyclical markets like he has done so many times in the past.  He said that while studying secular markets is fun, he focuses on cyclical trends,  and depends on his Marketimer timing model for his forecasts. It's been a while since Brinker reviewed the "5-root causes of a bear market," but you may want to read what he was saying last year. 

GOLD...Caller Bob from Oregon said he was largely in cash and wanted to know if he should buy gold. Brinker told him that would depend on how much he was willing to speculate since gold is a speculative investment.  Brinker also told him that if he decided he wanted a "hedge" in gold, he should buy GLD and stay away from numismatic coins. Brinker said: "I would keep it small. That means I would keep it at 5% or less." 

Honey EC: Since May 2009, Brinker has included GLD on his short list of recommended individual issues, along with MSFT, VOD, Suncor and several large index ETFs. Brinker has never given any Marketimer guidance on how much  to buy or what price to pay. Today he said 5% or less but made no comment on price. 

FISCAL CLIFF...The only thing NEW that Brinker reported on this subject is that Boehner has offered tax increase for entitlement cuts.

BRINKER FIXED INCOME PORTFOLIO AND BALANCE PORTFOLIO....Caller Ronnie from Alabama said he had been listening to Moneytalk since 1986. He said that he had gone from negative net worth to "critical mass" of about $1 million. Brinker asked him how he did it. Ronnie said that, in addition to "paying himself first" out of a largely six figure income,  he took more risk than Brinker advised and had bought gold when it was about $1200 an ounce. Ronnie said that he was working toward a goal of 50-50% asset allocation and asked:  "What I've done on my asset allocation right now is 70% stocks as mirrored by your Marketimer portfolio #2 on page eight. And then my 30% in bonds is mirrored by your Marketimer income portfolio on page 7. Is that the correct way to do it?"

Brinker replied: "You can do that. I've talked about hybrid portfolios a number of times. You may have heard it on the broadcast....Now we publish a balanced portfolio on page 8, the model portfolio III....We publish fixed income as part of that portfolio  but we also publish a separate income portfolio on page 7.  If someone wants to substitute the income portfolio on page 7 for the income portion of the balanced portfolio, they can do that. That would be a hybrid.....Right now, we don't have any money in the stock in the income portfolio on page 7.  There have been times this year when we have had up to 10% in the stock market in the portfolio......"

Honey EC: Did you get all of that? The fixed income portion of the balanced portfolio III "on page 8" are also in the fixed-income portfolio "on page 7."  Was Ronnie a plant? I don't know, but he sure knew the jargon Brinker uses to hawk his wares. :)

Brinker sold all the Vanguard Wellesley Income Fund holdings in October from both portfolios.  It seems odd to me that Brinker has now sold all of the Vanguard funds in the fixed-income portfolio, except Vanguard Ginnie Mae Fund, and replaced them with funds that have much greater expenses. 

The "new" funds in the income portfolio are all higher expenses. DoubleLine Total Return Fund charges three times more than Vanguard funds. Metro West Total Return Bond Fund, which basically replaced Vanguard High-Yield Fund, charges almost three times as much. Dodge and Cox Income Fund (DODIX) is about twice the price of Vanguard's funds. I compared the performance of all three of those funds with Vanguard's High-Yield Fund and it's astonishing to see that the high-yield fund has outperformed all of them over the past year. 

IRA BENEFICIARIES AND WITHDRAWALS FOR CHARITY:  FrankJ, who knows taxes, covered this call for us:

Caller William from Oregon asked about making a charitable contribution with a distribution from an IRA. He also asked whether he should will his IRA "to an old person or a young person?" 

Bob advised that age should not be so much of a consideration as simply who do you want the money to go to? He also advised William to consult a CPA or enrolled agent for advice. 

Expanding on BB's answers a little: with regard to the charitable contribution, you can direct your IRA trustee to make a direct payment to a charity. You do not get to deduct this as a charitable contribution, but you do not have to count the contribution as part of your taxable income. Oddly, (and I looked this up on the IRS's site,) you must be 70 1/2 or older to do this. 

On willing your IRA to someone else, William and his adviser will no doubt review the rules surrounding an IRA willed to someone other than a spouse. The recipient is obligated to take minimum distributions and these are governed by the recipient's age and the value of the IRA. If there are multiple recipients, they should consider splitting the inherited IRA into separate accounts because the required minimum distribution will be set by the age of the oldest recipient. There is a time limit on splitting the account, so if you snooze, you lose. 

If you don't go the req'd minimum distribution route, then you have to distribute the entire IRA in the 5th year following death. So if death occurs in 2011, the IRA must be distributed by the end of 2016.

Guest-writer FrankJ has done a summary of  the third hour speaker for us:

Today’s MoneyTalk guest was William L. Silber, author of Volcker: the Triumph of Persistence. Mr. Silber is a professor at NYU’s Stern School of Business and has been an advisor to the Federal Reserve.

FrankJ's (Editorial comments are in italics). 

BB asked Silber his reaction to what is going on in Washington, DC right now?

The guest said that the credibility of the Fed is at stake, that monetary integrity is affected by fiscal integrity (or lack of it). Bob asked a follow-up question about how our debt affects the long term integrity of the dollar. Mr. Silber said the rest of the world still uses the dollar as an exchange medium, citing for example, China paying Japan in dollars. But he was not sanguine about how much longer the world will continue viewing our dollar in the same way as they have in the past.

Bob asked about entitlement programs, specifically Medicare – pointing out that, by a 2:1 margin, people do not want any reductions in benefits. Mr. Silber said at some point, Congress will have to face reality and pointed out that one way to make Social Security more sustainable is to raise the retirement age.

Bob then turned the topic to Paul Volcker, the subject of the guest’s recent book.

Mr. Silber pointed out that most people know that Alan Greenspan was the Fed Chair before Ben Bernanke but very few know that Paul Volcker was the Fed Chair before Greenspan. Those who do remember Paul Volcker probably also remember the soaring interest rates, out-of-control inflation and the persistence he demonstrated in bringing inflation down to 4% from 12%. In so doing, he restored the purchasing power of the dollar, and the credibility of the Federal Reserve.

Bob asked the guest what he thought about Obama bringing in Paul Volcker for advice early in his administration.

The guest said his reactions were mixed. The world reacted with enthusiasm because he is still viewed today, as the most trusted man in the world of finance. Mr. Silber’s view was there might have been a quicker response to the crisis we faced if Mr. Volcker had been brought in as Secretary of the Treasury, but he speculated that Mr. Volcker’s independent streak may have given the administration pause.

Bob turned the subject to the current Fed Chair, Ben Bernanke. In an assessment of Bernanke’s performance, Mr. Silber said he would have graded him an “A” or “A+” for opening the credit floodgates in 2008. Then he quoted Mr. Volcker, who once said, there will be fallout “for remaining too easy for too long.” And, “you can’t wait until you see inflation,” (before tightening).

This mild criticism did not upset Bob, who is usually very quick to put down any criticism of the Fed Chair’s job. 

Bob did ask about risk to the economy by tightening credit in the face of an economy that is barely growing. The guest agreed, and said OK to not tighten right now, just don’t ease anymore. He alluded to the thin line the Fed Chair walks, by pointing out that the Fed Chair knows that Congress can pass legislation to abolish the Federal Reserve.

MoneyTalk regulars would at this point, recognize that Bob could have launched into his oft-heard (and correct) rant about the danger of Congress being in charge of monetary policy. 

Bob asked about the Fed’s recent announcement to keep buying debt and the guest did not address this directly, but pointed out the need to return to long term fiscal integrity and he mentioned Medicare and Social Security once again. (Fiscal policy is the responsibility of Congress).

The guest pointed out that if we had followed the recommendations of the Simpson-Bowles committee, we would be on the road to fiscal integrity.

Caller John from Pierre, South Dakota made a short speech and then asked if welfare recipients should pay back their benefits at some point. The guest said the real problem was Social Security and Medicare.

Bob asked about the debt limit and Mr. Silber said that we are one of the few nations in the world with a debt limit. He said having a debt limit has helped in the past because it acts like a “speed bump” and forces Congress to think about what they’re doing with regard to spending.

(FrankJ) EC: The federal budget includes discretionary and non-discretionary spending. Defense, education and agriculture are examples of discretionary spending, appropriations for discretionary spending are made in Congress each year. The elephants in the room are the non-discretionary components: Social Security, Medicare, interest on the debt and federal pensions. These non-discretionary programs, whose spending was set by their enabling legislation, are simply on auto-pilot. For the 2012 budget of $3.57 trillion dollars (about $1 trillion of which is borrowed), these programs constitute 63% of the budget. So Mr. Silber was correct in his several references to SocSec and Medicare as the keys to re-establishing the nation’s fiscal integrity.

Brinker's guest-speaker was William Silber: Volcker: The Triumph of Persistence

Jeffchristie's Moneytalk Final Exam Question:

Because of the current situation with the fiscal cliff, Bob Brinker said that we are all passengers on:

A) The Soul train.
B) The good ship Lollipop.
C) The ship of Fools.
D) The Orient express.

ANSWER

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