June 18, 2017, Bob Brinker's Moneytalk: Stocks, Bonds, Economy and Investing

June 18, 2017....Bob Brinker's Moneytalk....Live show on Father's Day....(comments welcome)

Honey here: Great gratitude to Frankj for coming to my rescue today. I have been too under the weather to write the Moneytalk Summary today. 

FRANKJ'S MONEYTALK SUMMARY: 

MoneyTalk, June 18, 2017: Father’s Day.

Miss Honeybee asked me to help out today but I didn’t realize it until almost 1:30, so I was late to the party.

==> Thanks to dRahme, short clip of the opening monologue that includes Brinker's report on the Federal Reserve.   

Bob’s first call concerned what might happen with bond yields, given the Fed’s recent raise. Bob told David in Santa Clarita that he had doubts about the level of demand for long term bonds. Investors in 10 year bonds are making about zero interest when inflation is factored in. The high quality of German sovereign bonds makes them competitive with US gov’t bonds.

David in St. Louis called to tell his company merged with another and the new entity made some tweaks to the 401K plan. They upped their match, from half of the first 6% to 100% of the first 6% the employee kicks in. But the Fidelity Spartan 500 fund is no longer available and it paid dividends 4 times per year. The new 500 fund, from State Street only pays dividends once a year. Bob said the frequency of dividend payments would make a difference over a long period of time. The two funds have similar expense ratios. I think the increase in contribution by the new company outweighs the frequency of the dividend payment.

What kind of house would $1 million buy in your town? 

In Santa Barbara, it buys a “starter” house. Caller Carol’s son is 26 and makes about $140K. He wants to buy a $1 million dollar house and rent it out. He lives in a rental with other people now and will stay there. Carol wanted to know what Bob thought about her co-signing a loan for $800K since he has scraped together a $200K down payment.

As a MoneyTalk listener, Carol credited Bob with her building a nest egg of $2.5 million. She owes $131 on her own house and has a very low interest rate. Bob and Carol batted this issue back and forth. Bob wasn’t keen on the idea, that was obvious. In the end he wished her good luck.

Meanwhile, in North Carolina, Todd was mulling this over and he called in later. His suggestion was for Carol to buy the house, “be the bank,” and her son could pay her back with 4% interest. Bob threw cold water on this idea, asking Todd what he thought would happen if Carol had to foreclose.

Are you a member of the club?

Bob opened the second hour with a rundown on the richest people, a lot of whom are in the USA. The statistics came from a study by a Boston consulting firm. America is the land of opportunity: of the total millionaires around the world, 40 % are in the USA and they control 63% of the wealth in this country.

Don’t get in a bidding war with Jeff Bezos for Whole Foods. Amazon’s market cap is about $500 billion. Bob said Amazon’s offer for Whole Foods (Whole Paycheck) is $13.7 billion – “rounding error.” Will other bidders come out of the woodwork? Maybe, but what’s the point in trying to outbid Bezos? Will the Whole Foods locations become distribution hubs for products bought on Amazon? We will know in the fullness of time.

==> Thanks to dRahme, here is a short clip that covers how many millionaires worldwide, Whole Foods and Amazon.

Bob helped Jim in IL with some simple math. Jim has $400K in money market and the only bond fund available to him is one with a 6.8 duration. How much should he move from money market to the bond fund to obtain an overall duration close to what Bob recommends for his $400K in fixed income. Answer: move $80K. I think Bob did the calculation in his head, this would give Bob an average duration of 1.36 on his fixed income.

Another Carol called in, this one from Ft. Myers, FL. She is looking ahead and worried that the Fed policy can lead to recession. The Fed’s tightening could result in problems for people with adjustable rate mortgages. They tossed this topic around quite a bit. Bob ended up agreeing with her. He said all we have is monetary policy – fiscal policy (the role of Congress) is absent without leave.

George in San Diego: You’re 69. It is good you’re thinking about your upcoming RMD. Put about 4% of your retirement value in a money market inside your retirement account, take it out the year you turn 70 ½.

Another George, this one in Monterey wanted to know if he’s in the Land of Critical Mass with $8000 in monthly income and $600K in a retirement account. Bob thought he was. (I think George has called before with a very similar question).

Third hour

Bob’s third hour guest today was Mohamed A. El-Erian's “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.” (Now out in paperback originally published in 2016). Mr. El-Erian was the former CEO at PIMCO. Bob listed his many other activities including being a contributor to various news outlets and his association with the Harvard Endowment. 

The Fed has three things they said they’re going to do. They hiked the Fed funds rate by 25 basis points, which was expected. They indicated there will be three increases next year (not expected). And they will shrink their balance sheet by letting $600 billion in bonds “run off,” (also unexpected).

With about 2% GDP growth, can we afford to raise the Fed funds rate three more times? The guest’s answer was no.

Can we afford to continue with a 2% GDP growth rate? Again, the answer is no. This low rate puts a strain on the economy. There is the perception that the benefits in the economy are going to a handful of people and this breeds resentment. The problem is self-inflicted, something the guest mentioned twice. We need more investment, infrastructure projects and tax reform. Demographics has an impact on GDP: even with an ageing population we can support a 3% growth rate but probably not a 4-5% rate.

With the Fed funds rate so low, the ten year government bond, has negative real returns when inflation is figured in. The guest said people (organizations) accept this because they may have a mandate to invest in “safe” US government bonds. Or, people invest because they think the rate could go lower!

After the break Bob asked Mr. El-Erian what he would do if he was the Fed chair. He would commit the Fed to normalize interest rates. Then he would carry through on the commitment. And he would visit Congress A LOT to convince them we need a policy handoff, that is, they need to do THEIR job with fiscal policy, a theme Bob has pounded on for years.

The guest’s medical analogy: The economy is impaired. It can walk but not run. The ministrations of the Fed are the equivalent of painkillers. We cannot continue with this regimen without risking more serious harm. The GOP has been critical of the Fed so now is their chance to take some of the burden off the Fed. Wall Street drove growth by financial engineering. After 2007 it was the Fed bank in the driver’s seat. We need to get back to growth based on the expansion of businesses.

CEOs face an uncertainty scenario with regard to tax reform so they wait to see what might happen. Low interest rates encourage people to do things they would not do in normal times such as corporations doing stock buybacks. Borrow money at low rates, buy back your own stock, reduce the number of shares, the share price goes up. Executives with stock options exercise them and increase their income. What’s not to like?

  
For a different view on the Fed and a number of other government regulatory agencies, one might consider John A. Allison’s book, “The Financial Crisis and the Free Market Cure.” (2013). Mr. Allison is the former CEO of BB&T, an Atlanta-based bank. He served as president and CEO of the CATO Institute from 2012 to 2013. Mr. Allison explains the failings of government agencies and particularly the Fed in a clinical and incisive way. 

==> Thanks to dRahme, here is a clip of  The Week Ahead and Carol's Fascinating House  Call! 

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