June 10, 2018, Bob Brinker's Moneytalk: Stocks, Bonds, Economy and Investing

June 10, 2018….Bob Brinker's Moneytalk....(comments welcome)

ADDED From Hour One   dRahme:  AUDIO CLIP.... FED winding, unwinding, CPI, Tariffs, Interest Rates

Honey was doing a handbell and choir concert Sunday, but Frankj has done a complete 3-hour summary of Moneytalk.

FRANKJ WROTE: 

Moneytalk June 10, 2018

First hour

Bob’s first hour monologue focused on what the Fed has been up to.  He expects another FOMC interest rate increase of 25 basis points this coming week.  This will bring the short term (overnight) rate up to a range of 1.75 to 2.00%.   He speculated that there will be two additional increases in 2018.   These raises pose a headwind for stock prices as people sell securities and move funds to fixed income. 

Bob reviewed the gyrations that the Fed went though, going back to the Great Recession.  First they lowered short term interest rates to near zero.  Then they launched the quantitative easing program, buying Treasury notes, bills, and bonds.  QE was designed to create liquidity and (hopefully) stimulate the economy, especially the housing sector. 

Last year the Fed announced they’re reversing course and will be quantitatively tightening.  They’ll sell those treasury securities now on their books at an annual rate of $600 billion per year.   At the same time they’re raising interest rates as mentioned above. 

So, all this is a review for Moneytalk regulars but might be useful to those who are just now discovering the show. 

Despite all the talk about tariffs and trade wars, they really haven’t taken place.  The market is jumping up and down in response to the talk.  The actual tariffs in place represent a tiny fraction of the overall amount of trade.  He referred to the market as “trendless,”  and this was about his only reference to the market.

He gave out the toll free number at the end of the monologue which has become the norm lately.

·         Headwinds for preferred stocks:  Ron from St. Mary’s GA is in the land of critical mass, invested in Portfolio 3.  He asked Bob about putting some separate money in preferred stocks.  Bob cautioned him pointing out that the payout is fixed, making them bond-similar.  As such they’ll be subject to headwinds caused by rising interest rates.

·         A refinance question:  John in Crown Point, IN has an adjustable rate mortgage which is pegged to a short term rate he expects to go up.   He wanted to know what he should do, hang on, pay off, etc.   Turns out he has a net worth of $ 4 MILLION.   Bob said “the amount of the mortgage represents a tiny part of your net worth.” Implication:  it doesn’t matter what you do.  John then praised Bob for his past advice about 529 programs and how his grandkids are benefitting citing some dollar figures.  One wonders what was the real purpose of the call?

·         Short term interest rates:  Johnny called in from El Paso, TX on a scratchy phone line.  He’s having angst over the rates he’s getting on fixed income investments.  Bob told him to watch what the Fed does.  He said “normal” 10 year rates ought to be about equal to real GDP plus inflation.

I think we originally heard this in a 3^rd hour interview with the guy who runs the Doubleline funds.   

Bob said, if GDP is 3% and inflation 2% then the ten year rate ought to be about 5%.  The 10 year rate is now at about 3%.

·         Stick with stocks and roll the dice?  John from Lake City, FL seemed to be seeking Bob’s blessing on his 85/15 stock/bond allocation.   I didn’t get his age but he is still working and expects to live a long time yet.  Bob basically wished him well, acknowledging that John seemed to understand the risks associated with his allocation.

·         Worried about your junk bond fund?  Keep an eye on small cap stocks.  Who knew?  Bob told Fred in El Paso that just as credit markets affect junk bond funds, so too do they affect small cap stocks.  When the credit environment is friendly small caps do well and they are doing well right now.  But… Bob cautioned that this can change quickly.  

2^nd hour

Bob pointed out the grim projections for Medicare and Social Security.  Medicare funding is slated to run out in 2026, three years sooner than previously estimated.  Social Security is doing a little better with 2034 as a critical date.   Together, both programs account for 40% of federal government spending.   Bob that solving the fiscal problems of these two programs is one of the major issues facing Congress but given the level of partisanship in Washington DC no one is addressing them.  

ADDED....dRahme AUDIO CLIP....Medicare and Social Security (Honey wrote some personal EC's in the comments section here. 

·         529 plans.  Jennifer in Sacramento better adjust the allocation in the 529 plan devoted to her 16 year old grandchild since he’s only 2 years from college.  Then do the same as the other four approach college age.  

·         Don’t pay back that loan!   Dennis, a government employee is about to retire.  He borrowed from his retirement account years ago and has not paid it back.  With interest he owes $97K and the gov’t says if he doesn’t pay it back they’ll dock his pension by $8400 per year.  What should he do?   Bob did some ciphering and told him not to pay it back, take the hit on the monthly checks.  

·         Is that $250 or $250,000?   Jim has $250K in two different banks in Bend, OR.  He needs to find a home for another $500K when he sells a house soon.  (Nice problem to have).   Bob told him to put it in Vanguard’s Prime money market fund and earn about 2% with check writing at a minimum of “two-fifty.”   The caller asked if that was $250 or $250,000?   A good question for the MoneyTalk Final Exam.

·         Three great fears.   Bob answered John in Michigan’s question:  1)  that the Fed will make a mistake; 2) that inflation will heat up in light of the tight labor market; 3) growing protectionism.

·         Vanguard gets the nod again.   Mark in Virginia Beach:  take the $160K sitting in your bank earning practically nothing and stick it in Vanguard’s Prime Money Market, or build a CD ladder.

·         Risk averse in Nevada.   Tessa has some money from a home sale and she doesn’t want to risk it in stocks.  She said she has a 403B account that she’s had for 30 years and asked if she should put it in there since it has earned 4.5% per year, steadily.  

This was a strange call, I thought.  Bob did not at first pick up on the fact of this 403B.  It was not clear whether she was still working and it wasn’t clear that she could contribute “outside” money from the sale of a house into a 403B account.   This is what he seemed to be telling her to do.  

·         Shark attack on Virginia Beach.  A financially secure, 85 year old woman was the victim of a shark attack.  This shark didn’t have fins or teeth but was seen departing the scene of the attack with a signed, Whole Life insurance contract and check in his briefcase.   A male friend of the woman reported the attack to Bob who was on duty in the lifeguard stand.  Bob advised him to contact the shark and see about unwinding the sale before reporting the incident to the insurance commissioner.

·         A first for MoneyTalk?   Have we ever had a lottery winner asking advice?   Warren and his wife won a $5 million jackpot in Flint, MI.  After taxes they are looking at $2.4 million.  Warren seemed to be saying they were ok financially before the win and now they were sitting on a total of $4.5 million.   He wanted to know what he should do in light of future federal estate tax changes. 

Warren mentioned gifting, setting up a foundation and having various advisors in the background (which sounds scary).  Bob said no one has a crystal ball with regard to estate taxes.  They seem to change with whichever party is in control in DC.  The current exemption is $11,200 for individuals and double that for married couples, so Warren and his wife are OK, for now.

ADDED...Thanks to  dRahme AUDIO CLIP: The Week Ahead

3^rd Hour interview

Jacques Peretti, a journalist from London was the interviewee on the third hour of the June 10, 2018 edition of MoneyTalk.   Like most guests he wrote a book.   The title is:  “The Deals that Made the World.”  The subtitle is … annoying.  You’ll have to look it up yourself.

Ostensibly, the book is about deals that transformed different industries.  The interview consisted of him giving examples from the book and Bob’s questioning him about the state of affairs in the UK regarding Brexit.

Bullet points only (and not because I’m exhausted from the first two hours, I’m not, but this interview just wasn’t that interesting).

·         Pharma:  a Merck CEO in the 70’s told other pharma CEOs that the future is in treating the “well” not the sick.  So as a result, we have lots of preventative drugs (statins for example).   Treating the “well” widens the net of people that want/need prescriptions for what ails them. 

·         It was Great Britain that invented the off-shoring of business to the Cayman Islands for tax purposes.  They did this to invigorate their own economy. 

·         Robots:   All jobs fit into one of the following categories:  Cognitive/Manual;  Cognitive/Non Manual;  Non-cognitive/Manual;  Non-cognitive/Non Manual.  Robots will someday take over 3 ½ of these classifications.  

·         Peter Theil and Elon Musk were principals at Paypal before selling it to eBay.  Paypal was a monetization of the internet.  Theil and Musk became aware of some brain research that revealed a “flinch response – i.e. neural pain,  when someone making a purchase handed over the money.  Brain scans apparently documented this very slight hesitation.   

They should do a scan on my spouse, I don’t think any such flinch response exists with my darling wife.

So, if the payment could be handed over with the click of a mouse,  people would spend faster and more often.  And Paypal was off to the races.  

·         Planned obsolescence:  There is a light bulb in Livermore, CA that has been burning continuously for 115 years.  Lightbulbs were originally designed to last a very long time.  In the 1930’s makers of bulbs and other equipment decided to “fix” this problem.

·         There was mention of a Japanese researcher who was messing around with extracts from corn, trying to make an adhesive.  He had some extract on his fingers, licked them and it tasted sweet.  The extract led to corn syrup, something that is hard to avoid in many types of food today.  Good thing it wasn’t the precursor to Super Glue he had on his fingers. 

·         Some guy from MetLife messed with the Body Mass Index tables in such a way to make more people appear to be obese according to the tables.  This prompted a diet craze in this country. 

·         Finally Brexit:  the liberal elites, about 10% of the population are in a panic over it.  Another 10-15% are hard line in favor of it and wonder why GB hasn’t done it long before.  The rest don’t care and are tired of hearing about it.  They’re more worried about wages and crime in London which is at an all-time high.

Bob wrapped up the interview at about 3:50.

Honey here: Frankj, thank you so much for coming to my rescue with that fabulous, educational, summary of Moneytalk today!

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