March 25, 2018, Bob Brinker's Moneytalk: Stocks, Bonds, Economy and Investing

March 25, 2018....Bob Brinker hosted Moneytalk live today....(comments welcome)

STOCKS...At least twice today, Brinker commented that the stock market dropped 1150 points Thursday and Friday because of the proposed tariffs. 

Honey EC: Brinker gave no indication that he was unduly concerned about the stock market being back in correction territory again. He is still fully invested, and as of Sunday evening, has not issued any kind of special bulletin. 

TARIFFS, RONALD REAGAN....dRahme Audio Clip: Pie in the Face; Tariffs

MARKETIMER MODEL PORTFOLIO III (BALANCED).....Caller Steve, who is a new subscriber asked about bond duration in the Portfolio III.

Brinker replied:  "For the uninitiated, Steve - I want everyone to be on the same page - you are referring to page 8 of the Marketimer investment letter where we publish three of our model portfolios. You are referring to the model portfolio III, which we define as a balanced portfolio which invests in the stock market and also invests in fixed income securities."

BRINKER RECOMMENDS VANGUARD PRIME MONEY MARKET FUND (VMMXX).....Caller Steve asked if Brinker would recommend a Vanguard Fund with a duration of 2 to 3 years.

Brinker replied: "I recommend you  stay away from the extended duration.  (Here are) a  couple of things you could do.  They have a really attractive Prime Money Market Fund at Vanguard.....That fund has a current yield  of 1.58. That's a really attractive yield for a fund that has essentially zero duration.....You could also look at a ladder of fully FDIC-insured Certificates of Deposit.....I would use a three, six, nine, twelve month horizon on the ladder, and roll it as the CDs come due.....I cannot extend my duration recommendation based the outlook on the interest rate market as we see it."

Honey EC: It was nice of Brinker to tell the audience about the Vanguard Prime Money Market Fund that he added (20%) to his model portfolio III (balanced)  in exchange for (20%)  MetroWest Unconstrained Bond Fund. In the off-the-record income portfolio, he exchanged 35% of the MetroWest Unconstrained Bond Fund for 35% of the Vanguard Prime Money Market Fund. Those exchanges were made as of February 12, 2018.

VANGUARD GINNIE MAE FUND (VFIIX)....Caller Mike from Seattle said he has owned GNMAs and reminded Brinker that years ago, he used to talk about them every week.

(Honey EC: That is certainly true. Brinker used to brag almost every week about owning them, and he always pointed out that they could "fluctuate in NAV price" but those who own them for income shouldn't worry about price fluctuation - to expect them to bounce between $9.50 and $10.50.) 

BRINKER ON GINNIE MAES.... Brinker said to Mike from Seattle: "We sold out of our Ginnie Maes back in the day. Ginnie Maes are not doing well. Even the fund that I think that is probably the most correctly situated in terms of its expense ratio and management - the Vanguard GNMA Fund - is not doing well. The Fund has a current yield of 2 7/8% but a duration of 4.8 years. That duration is hurting the share price. The share price has been in decline and this year has a total return of negative 1.5%." 

Honey EC: Brinker didn't lie about selling the GNMAs, but he did not tell the truth. It's doubtful that he will ever tell the truth about when he sold them. He said "back in the day," Actually, it was five years ago, and in the interim, the Vanguard Ginnie Mae Fund has done very well for those who held it.  He sold VFIIIX  July 8, 2012 at $10.37....It has been as high as $11.20 over the past five years, and never below $10.00. Is now a good time to sell it at $10.24? Probably.....

Honey EC:  Brinker's deep dive into low-duration, which was years too early, cost his portfolios "hugely" in performance, so in January 2015, Brinker sold both portfolio holdings in FFRHX and replaced them with Doubleline Total Return Bond Fund (DLTNX).  As the years went on, Brinker continued to make changes to his bond fund holdings - adding more high yield bond risk. As of now Marketimer porfolios have  only three fixed income holdings: DLSNX; OSTIX and VMMXX

RATE HIKES THIS WEEK AND IN THE FUTURE....dRahme Audio Clip: The FOMC; Jobs - Need Trained Workers,  Education

INFLATION....Brinker discussed with the guest that there was almost no visible inflation,  but the Fed raised rates this week. 

THE WEEK AHEAD IN THE CANYONS OF WALL STREET.... dRahme Audio Clip: The Week Ahead

FRANKJ'S MONEYTALK GUEST SUMMARY

Bob plugged the third hour interview at least three times during the first two hours of the show.  Coy as always, he did not reveal who the guest was until the start of the interview.  It was a Wall Street veteran, Edward Yardeni, President of Yardeni Research.   The occasion was the release of a book:  “Predicting the Markets.”

As to why he wrote the book the guest said it was in response to “a 40 year itch.”  He elaborated a bit that it was partly autobiographical.   Sounds interesting.   Dr. Yardeni is known for “the Fed model.”   You can read about it in various places on the web.  It is not clear whether he developed it, or simply named it.   From Investopedia:  “This model suggests that returns on 10-year Treasury notes should be similar to the S&P 500 earnings yield. Differences in these returns identify an overpriced or underpriced securities market.”

Not surprisingly, Bob led off with a question about the recent tariffs initiated by the Trump administration.  The guest was a welcome contrast to the one of a few weeks ago who went ballistic over the tariff question.  Dr. Yardeni said most economists would agree that globalization was good and free trade is a worthy goal.  But, there has been unfair trade and the administration has now come down hard on China.   A recent report, 215 pages in length, lists the unfair practices.  He said President Trump may save globalization from itself by taking some of the angst and anxiety out of the topic.   I interpret this to mean that the tariffs and adjustments made behind the scenes won’t mean the end of globalization, they’ll nudge things in a more fair direction for the US.  

Some bullet quotes:

·         Countries exempted from the steel and aluminum tariffs did so because they caved.

·         President Trump is “showing us the art of the deal” by making bold public statements, etc., while negotiations proceed. 

·         The guest “would not be surprised if Pres. Trump gets what he wants.”

·         “He wants to get away from multi-lateral negotiations which take too long, and get to bi-lateral  (country to country) negotiations.”

·         He complimented President Trump for “checking off the things he said he’d do while campaigning.”  These included doing something about trade and getting tax reform passed.

As to Jerome Powell, the new Fed head:  Dr. Yardeni likes him.  He’s a lawyer by training, not an economist.  He sees him as pragmatic.   Money talk regulars expected Bob to ask what’s happening with the 10 year Treasury rates which are at 2.875%.  The guest said part of the reason they continue at this low amount has to do with Europe holding rates down.   He does not think equity investors will run for the exits if the 10 year hits 3 to 3.5%.  Indeed,  if it does it is a signal that the economy is doing well. 

After the break Bob let some callers in.  First up was Rob from KKOB in Albuquerque, NM who asked if we’re headed for an inverted yield curve.   (As a certain popular radio personality would say:  “for those of you in Rio Linda that means are we headed into a recession?”)   The guest’s short answer:  no, he does not see this developing.   Bob and the guest gnawed on this a bit and the guest said that 2% inflation justifies a 2 – 2.5% fed funds rate which justifies a 3 – 3.5% 10 year Treasury.  

The Fed believes that monetary policy drives inflation.  Too much money and you get inflation so the antidote is to tighten by raising interest rates.  The guest said that hasn’t been the case for the last 8 years – that is, loose purse strings haven’t triggered inflation.  He said our population is aging and older societies are not as inflation prone.  (Less consumption.) 

Jim from IL, who we believe is a repeat caller, but a good one,  asked a question that stumped the guest.  When he visited China he found regular stuff like toothpaste to cost about the same as in the US.  When he went to buy shoes, he found they were a lot more expensive.  In contrast, he has had Chinese friends come here who want to hit the mall,  buy a suitcase and start filling it with stuff that is more expensive back home.    What’s the deal?  As noted the guest didn’t have a solid answer but speculated that the less expensive but still good quality products get exported to the US and this is what Jim’s Chinese friends might be after.  

Tom, listening on KKOH in Reno started off by complimenting Bob for the best guest so far this year.  I don’t know what his question was, I was distracted by 3 deer wandering through the front yard.   The guest said it was unusual to cut taxes in a good performing economy, thus risking overheating the economy.   He mentioned Larry Kudlow, recently named as top economic advisor to President Trump.  He said they know each other and expressed some admiration for Mr. Kudlow.  

Dr. Yardeni is a fiscal conservative.  He would like to see more restraint, not the kind of thing we witnessed this past week with the passage of a 2200 page spending bill filled with all kinds of stuff.  We’ve been getting away with deficit spending and increasing debt for a long time now without the higher interest we’ll have to pay on the debt if inflation kicks up.  If it does, we’ll be in trouble.  

On the market, he thinks it will go higher after we get through these tariff issues.

The take away:  don’t let politics get in the way of making money with your investments.  Stick to the facts.  Be long term.  You can make money in bonds …. If you bought them at the right price, otherwise you’re going to suffer.  

In signing off, Bob echoed Dr. Yardeni’s comments saying for 32 years on the program he’s said not to let politics get in the way of investing. 

 BEST MONEYTALK GUEST EVER! EDWARD YARDENI..,...dRahme Audio Clip

Brinker's guest-author was Edward Yardeni:



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