April 30, 2017, Bob Brinker's Marketimer: Stocks, Bonds, Economy

April 30, 2017....Bob Brinker hosted Moneytalk live today....(comments welcome)

IN EDIT: Some have expressed a great interest in hearing Jim, the worried multi-millionaire's call for Brinker's help. Here it is, thanks to dRahme. 

Honey is being slowly driven crazy by ATT internet....Still having problems after 6 calls through computer-voice hell. The headache of installing a new modem (of course they change all the numbers), and two servicemen telling me they can't find anything wrong - and another one coming tomorrow. 

Our friend, FrankJ came to my rescue and wrote the program summaries today.  But alas, even that didn't go smoothly for me because he forgot to attach the links. But fortunately, I had his phone number so was able to call on my Verizon phone which is the only thing I seem to be able to count on working right now.  Oh woe is me.... LOL! 

FRANKJ'S MONEYTALK SUMMARY

Bob was live today on MoneyTalk, April 30, 2017. He reminded everyone that the show is all about acquiring the knowledge that empowers you to achieve financial security. The first few minutes of the show were chock full of statistics.

· The S&P 500 Index closed at 2384, just 11 points below its all-time high on March 1, 2017.

· The Dow is at 20,940 now, also just below its all-time high.

· First quarter GDP growth was only 0.7% the slowest in 3 years and the continuation in a series of weak first quarters.

· The Consumer Sentiment Index dropped one point from 98 to 97 for April. Despite the still-high value the sentiment has not translated into more spending.

· Employers are finding it is costing more to employ people. Wages are up 8 tenths of one percent, and benefit costs are up 7 tenths of one percent.

· Claims for unemployment insurance (4 week moving average) are the second lowest in 43 years.

· Bob reminded us that Cinco de Mayo (May 5th) is coming up. So is Mother’s Day (5/14) and markets will be closed 5/29 for Memorial Day.

· The Fed will this week for its usual Pajama Party on Tuesday followed by a box lunch on Wednesday. Bob does not expect a rate increase.

Don’t look for fiscal stimulus before 2018. Why? Because no package has been put together yet in Congress and with inflation and employment at target levels there is no rush.

Jim in Tacoma, WA led off the callers with a question on withdrawal rates. He’s 75 and his lifestyle demands 8% per year in withdrawals due in part to taxes and upkeep on two houses. They have $3.5 million in portfolio 3. Bob said the 4% withdrawal rate from savings and retirement minimizes the risk of running out of money. If Jim sticks with his 8% rate, he may have to sell his second house at some point.

Mark in Minneapolis confessed that Bob and Warren Buffett changed his life. He’s been a listener since the original Superbowl Sunday broadcast. He’s upset that at a recent Wells Fargo shareholder’s meeting no one on the board apologized or offered to resign for Wells’ recent scandal. Bob said apologies would have been appropriate but not resignations. Bob thought a more egregious scandal was when a Wall Street firm put together a package of mortgage loans which were intended to default. They then sold these to a European bank and one of the Wall Street firm’s clients shorted the package and made a ton of money. It was this client’s idea to do this in the first place and the investment bank went along.

Rick from Raleigh had a couple of Doomsday Scenarios to run by Bob. The first one involved having 3 bank CDs each with one year’s worth of expenses in case of a severe downturn. Bob liked this. He said he recommends having 1 – 2 years, and having 3 is a good insurance policy. This led Rick to his second “rainy day” plan: an umbrella policy for $2 million that covered about half of his $4 million net worth. Bob likes umbrella policies because for a reasonable premium you’re buying the insurance company’s legal staff if you’re sued. Should Rick increase the policy coverage? Bob didn’t seem opposed to that, but said there is no point in going beyond your net worth.

Joe in Poughkeepsie NY has $530K in a 401K and wants to know if there is one fund that would give him a 50-50 split between stocks and bonds. Bob said you can do it with the total stock market fund and a bond fund or CD’s. He told Joe if he wants to use one balanced fund, be aware of the allocation to stocks.

The second hour started with Bob reciting what information is out there on the administration’s tax reform plan. He managed to do this without mentioning President Trump’s name. (Is anyone keeping track of how many weeks it has been since he’s mentioned the President’s name?) 

The plan has a “dramatic twist” according to Bob. It is this: salaried workers will have a top rate of 39.6%. Small business owners who might have had the same top rate will pass their business income thru to their personal return. As self-employed taxpayers, their top rate will be 15%.

Deductions will be limited to the mortgage deduction, charitable deductions and contributions to retirement accounts will still get the pre-tax treatment. (This last item was a jump ball a few weeks ago.) There is talk of eliminating the estate tax completely. This drives the liberal/progressives crazy but in fact, only about 5000 families in the US were snagged by this in 2016 and it doesn’t raise that much revenue. The current exemption is $10.98 million for a married couple, half that for a single person.

The ability to deduct state and local taxes is in jeopardy. Currently people who itemize can deduct these on Schedule A. These taxes include: sales tax, property tax, state income tax and excise tax on vehicles if the tax is based on the vehicle’s value. These deductions can be significant and Bob speculated that some people may vote with their feet and move to a state with lower property taxes.

Bob quoted President Trump (again without stating his name) as saying, “I want to put HR Block out of business.” This was during the campaign.

(Editorial comment: I have some experience in this area. It seems very unlikely. Many of the people who come in to Block already have simple returns. Some are there because they want the rapid refund (on a debit card). Others simply don’t want to do their own return even if it only consists of one or two W-2 forms. Then there are those get the Earned Income Credit and in my opinion some of them have their return done by a professional because it gives them a sense of protection from audit. Then there are the people who do their taxes on-line and I think simplifying the tax code may drive more people to on-line vendors of which Block is one.) 

John from Texas was just off the golf course and he wanted to know what happens when “everybody” moves their money into index funds like the Vanguard Total Stock Market index? Will it get “musclebound” like Fidelity Magellan did years ago? Bob is not concerned because index funds simply spread the new money across their holdings in proportion to the stock weightings in the fund.

Bob didn’t get out into the weeds on this discussion but there is the notion that this leads to index fund investors ending up with shares that are more and more expensive as favorable markets attract more money into index funds. You can avoid acquiring “expensive” shares by simply not automatically re-investing capital gains and dividends.

Next at bat was Mel from Denver. Frankly I had a hard time tracking his question, so we’re going to move on to Jerry from Albuquerque who had an easy question. Since he is retired and since his wife is still working can she contribute to her IRA and contribute to one for him? Answer: Yes. As long as she makes $13K or more, she could contribute the max for each.

Greg in Traverse City MI said, “We’re 8 years into the economic cycle, could it go on for much longer?” Bob said “look for excesses – they lead to the perfect recipe for a problem.” One excess is an economy that expands too fast in search of the administration’s goal of 4-6% GDP growth.

3rd hour 

Today’s 3rd hour guest was Wall Street legend Dr. Henry Kaufman, author of the recent book, “Tectonic Shifts in Financial Markets: People, Policies and Institutions.” Bob was excited to have Dr. Kaufman on the program.

Bob got things rolling by asking the guest what he thought about the 2.3% interest on the 10 year treasury. Dr. Kaufman put things in (some sort?) of perspective saying that after World War 2 the 30 year rate was 2+% and in 1981 it was 15.25% and is now at 3%. He does not think we are going to see these big swings going forward.

Why do people put up with negative rates? The guest said some institutions have to keep a certain amount of their capital liquid. Also, they like to keep liquid assets in their own currency so for this reason they may have to put up with negative rates.

Bob and the guest got into tax policy, with the possible disparity between the 15% rate for small business owners and the top 39.6% rate for salaried people. The guest didn’t seem too concerned that these would survive the process in Congress.

Is tax policy a driver of GDP? No. Dr. Kaufman said economic growth is linked to credit growth. He pointed out that corporate debt is high now, household debt is relatively high and while government debt is high, only government has the capacity to take on more debt. Corporations and households are hampered by their credit ratings. In the 1980’s there were 61 banks with AAA credit ratings, in the 1970’s there were 15 and today there are none.

On the topic of politicizing of the Fed, Dr. Kaufman had some strong views. Referring to Alan Greenspan … he was a folk hero until he lapsed. The Fed did not get out ahead of the repeal of Glass Stegall in terms of where it would lead. Before it was repealed, a handful of firms controlled only 10% of financial assets. Now, that same number controls 80% as a result of the securitization of assets. The “heads I win, tails you lose” attitude is alive and well at publicly owned financial institutions. A trader will take outsized risks because if successful it will earn him a bonus. But, losses will be absorbed by shareholders. The guest contrasted that with his own experience in the 1960’s when he became a partner at Salomon Brothers when, as a partner, his personal wealth was on the line.

There were two calls but they aren’t worth mentioning.

Bob went to a favorite subject of his, what will happen when the blended rate on gov’t debt goes from 2.1% up to 6% which is where it was in 2000. Dr. Kaufman seemed to brush this aside; pointing out that the average maturity has risen from 4 to 7 years so he doesn’t have much concern. Nor does he have much concern about what Bob called complacency in Congress. The guest said our interest rates are competitive and he is not concerned over the next 3 – 5 years. The challenge is going to be managing debt among the government, businesses and households. When financial institutions get aggressive in their lending the marginal borrowers show up – and that’s a risk.

The take away is that our financial institutions perform a critical role involving both entrepreneurial drive and a fiduciary duty. For 20-30 years these have not been in balance and it is up to the institutions to regain this balance and up to the government to enforce it.

Bob closed out the interview, thanking Dr. Kaufman and referring to him as a national treasure.

Honey here: Thank you, Frankj for that great Moneytalk summary. 

Thanks to dRahme these audio clips:

 Short clip from Brinker's opening monologue
Short clip Brinker analyzing the proposed tax changes
Short clip Brinker talking about the FOMC meeting next week

Radio Stations:

710KNUS Denver

WNTK  
KION 1460  Monterey

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