MIKE: Good morning and thank you for listening to Decker Talk Radio’s Protect Your Retirement, a radio program brought to you by Decker Retirement Planning.
BRIAN: This week we’re covering market news for the last two weeks to play catch-up.
MIKE: The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
BRIAN: Good day everyone. This is Brian Decker of Decker Retirement Planning, just chiming in for another podcast. I want to cover a lot of information. I missed a podcast last week and so I’ve got two weeks of data here I want to catch up and cover. First of all, on the stock market, we are very optimistic. But we look for chinks in the armor, I guess. So right now, the market trend is higher because the stock market is trading above the 200-day moving average for the Dow, S&P, and Nasdaq.
BRIAN: When that happens, that’s a line in the sand. We want to make sure the everyone knows worldwide it’s accepted that your stock market is in an uptrend if the markets are above the 200-day moving average. Earlier this week we crossed it intraday for a couple of the indexes. But we’ve closed above it. So, the very positive, that the market uptrend continues.
BRIAN: We’ve had closes down 10 percent twice so far. The lows have been tested. The advance [CLEARS THROAT] Excuse me, the Advance-Decline Lines still remains pointed in the upward direction. So those three are very, very importantly still optimistic, still bullish. J.P. Morgan executive, Daniel Pinto, warned the equity markets could fall as much as 40 percent in the next couple of years. His comments come as investors worry about the effects of the Central Banks raising interest rates and raising inflation.
BRIAN: He quotes that, “It could be a deep correction,” said Pinto, the banks co-president in an interview with Bloomberg Television on Thursday of last week. He said the markets are nervous if President Donald Trump goes beyond what he’s already announced on tariffs and investors could react badly to what could be a worldwide trade war. The stock markets do not like uncertainty. And J. P. Morgan Chief Executive, Jamie Dimon, he agreed. He says there’s concerns about tariffs.
BRIAN: The market’s uncertainty is causing the volatility so far this year. The tariffs have created an uncertainty about earnings. But let’s talk about earnings. Earnings growth on the S&P 500 have been fairly stable since Q1 of 2012. From Q1 of 2012 corporate profits after tax have been flat. Q1 of 2012 through Q3 of 2017, corporate profits have been flat.
BRIAN: Now, they will be going up. There will be a jump in 2018 due to tax cuts. And the picture will look even better on an EPS earnings per share growth basis due to record buybacks. Now, we had a podcast a couple of weeks ago about buybacks. Stock buybacks have been the way that companies have increased their earnings per share instead of organic earnings per share growth.
BRIAN: Buybacks… Buying stocks back and lowering your capitalization have been the way that companies have been able to get to the better penny or two earnings per share. None of this is related to the underlining fundamental picture. It’s all the result of artificial intervention which is what fiscal tax cut stimulus is, artificial and purely debt finance with massive deficits. There has been a wealth transfer from the federal balance sheet to the balance sheets of corporations.
BRIAN: There is no evidence, in my opinion, that markets can advance without artificial stimulus in place or another free money carrot dangling in front of them. Here’s what I mean by that. In the last, gosh, several decades stock markets have crashed every seven or eight years, ‘08, ‘01, ‘94, ‘87, ‘80, ‘73, ‘74, ‘66 and it goes on.
BRIAN: Every seven years. Why haven’t the markets crashed yet? Why are we in year 10 of a 7, 8-year market cycle? It’s because when the markets have had huge stimulus in the terms of quantitative easing and TARP. Those funds have gone mostly into the stock markets and have funded a huge massive move in the markets. Far beyond where they normally would have gone without that stimulus.
BRIAN: So, now when you have a stimulus you have an artificial expansion that will once we do have the down trend will be an accelerated decline. So instead of the typical 30, 40 percent, the expectation is that we’ll have more. There’s two reasons for the stock market to go up. One is higher earnings per share. We just talked about that. And the second, all things being equal, is lower interest rates. Lower interest rates force people to take more risk in the markets because they’re not getting much of a return on their CDs or any of their bonds.
BRIAN: So now, what used to be tailwinds for the last 10 years are now headwinds. Interest rates are starting to go up. Not just in the United States but worldwide. And the Fed is buying back their debt. That’s called the tightening. Those tightening effects… Or those tailwinds are now headwinds. Let’s talk about the Federal Reserve. This is the idea that the Federal Reserve can pull its economic levers just so, gradually raising interest rates and slowly unwinding it’s quantitative easing program and withdraw its unprecedented stimulus efforts without triggering a recession.
BRIAN: That’s only been done once before. According to the official record, the Feds pulled this off one time. That was with Alan Greenspan. That was in 1994 where Greenspan doubled rates without causing a recession. You could argue that the burgeoning tech boom had something to do with that. But every other Fed tightening cycle, every other one has been followed by an economic downturn. By the way, let’s talk about interesting comparisons with what’s going on with FANG and the 1999 Nasdaq tech sector blow off top.
BRIAN: FANG is Facebook, Apple, Netflix, Google. The FANG has had a blow off top that if you overlap that with a move that the tech sector made in ’98 and ’99. If you overlap them it’s eerily similar. And then the pullback that we’ve had from that is very interesting to watch the overlap in the year 2001 when the tech second imploded for a 70 percent drop.
BRIAN: Nomura suggests that while the tech sector as a whole is not overvalued, the FANG stocks are reaching extremes. So, history shows with this overlap that we’ve got a [INAUDIBLE]. There’s a very interesting tech to utilities ratio. If you Google that, tech to utilities ratio, a measure of risk appetite. It shows a chart with the same pattern that happened right before the dotcom crash. It shows early-cycle, mid-cycle, and late-cycle.
BRIAN: We are now at 70 on a late-cycle chart and that’s right where we were before things came down in ‘08 and before things came down in 2000, ‘01 and ‘02. Now, let’s talk about the economy. Asset mangers are increasingly convinced that we are the late stages of an economic cycle. This shows household net worth, share of personal disposable income, when people feel “rich”. They have a 600 percent household net worth of personal share disposable income when the markets peaked in 2000.
BRIAN: Then we went down to below 520 where the feeling was, “I’m poor.” Then it went up to 640 percent in the peak before the ‘08 drop. They went down to 500 percent in ‘09, at the bottom. Now, we are above that. We’re at 680. The biggest peak net worth, household net worth as a percentage of disposable income. The higher the ratio, the more wealthy and confident you feel. And if you’re anywhere near average, many aren’t of course, now the net worth to income ratio is above where it was in the last two cyclical peaks. It could go higher, but not much.
BRIAN: Now, let’s talk about commodities. The current cycle in commodities… I’m sorry, the current economic cycle is the second longest in postwar history. Every time you get late-cycle going into the front end of a recession… I’m going to say this very carefully. Every time you get the late-cycle going in front of a recession, you have a massive rally in commodities. This is according to Jeffery Gundlach, CEO of DoubleLine.
BRIAN: He says there are no exceptions. What I mean by massive is not a 30, 40, 50 percent gain, it’s 100, 200 percent even 400 percent gains in the commodities cycle when you go in from expansion to recession. Now let’s talk about debt. There is two and half trillion of outstanding US debt that’s rated BBB.
BRIAN: BBB to AAA is called investment grade. Anything below BBB is called junk bond status. According to Morgan Stanley, two and a half trillion is up from 1.3 trillion that we had five years ago, 686 billion a decade ago. Let me tell you these numbers again. 10 years ago, BBB corporate debt was 686 billion. Five years ago, it went to 1.3 trillion and then… so it’s doubled from 10 years ago to five years ago.
BRIAN: And it’s just doubled again to two and a half trillion dollars. That’s the most ever for BBB rated debt, which is the lowest rung for investment grade before it goes to junk bonds. American corporations have never carried so much debt relative to GDP, gross domestic product, ever before. The overall quality of this debt has never been lower. So the size of BBB rated corporate debt, one notch above junk is twice the size of the entire junk bond market.
BRIAN: That is most American businesses that have ever issued junk bonds are either… I’m sorry, have issued bonds are either already junk or within one downgrade of becoming junk. Trust me when I tell you that the next default cycle we have in this country will be the most devastating financial crisis in our history. Far worse than the events of ‘08 and ‘09. For now, we don’t see any signs of stress. I mention this on the front end of the program. But watch for this to happen.
BRIAN: Because of artificially low interest rates the Federal Reserve has taken, we had one market bubble that burst. It was the tech bubble in 2000. That caused a 50 percent drop in the S&P 500. We had one bubble burst in 2008. That was the huge mortgage bubble that burst. Because of artificially low interest rates we have four bubbles that will burst when interest rates go back up. Number one, is the corporate debt, personal debt, and country debt.
BRIAN: Right now, we have seven, all G7 nations for the first time ever with debt above 100 percent of their GDP. That’s never happened before. So, we have a debt bubble that does burst when interest rates go up. Right now, we have 20 percent of the United States budget that’s relegated to pay interest on our debt. If that interest goes up we’ll now have 30 or 40 percent of our budget that’s set aside to pay interest credit.
BRIAN: The second bubble that exists is the bond market bubble. We have an insatiable worldwide craving for interest to try to get bond interest. And now common sense has been thrown aside. For example, you have the comparison of the 10-year Treasury with the United States, 2.7 percent. But 130 bases above that is the 10-year for Greece. Greece is in a disaster situation and their 10-year is at four percent.
BRIAN: Not even one and a half percent above of where we are. That shows no common sense and the desire for putting money wherever there is any yield, irrespective and in disregard of the risks is what’s happening today. The bond market’s issuing what used to be debt that had covenants where you would have your debt linked to some securitization. Now, that’s not the case. We call it covenant-lite debt.
BRIAN: That’s the typical case now. And we have the bond market is in bubble territory worldwide. The third bubble we have is real estate. That’s seen by the affordability index with a gap that’s broken records from the peak of the market in 2008. And then we have the stock market valuations that’s showing that trailing price earnings ratio have only hit 25 times earnings three times ever.
BRIAN: One was in 1929. 10 years after that, the market still hadn’t made up what it lost. The other one was 1999. 10 years later the market still had not recovered what it lost. And the third and final time of the markets trading at such a rich valuation of 25 times trailing earnings was the third week in January of 2018. I hope… and I’m going to talk about this here in a few minutes. I hope you have downside protection if you’re retired.
BRIAN: That’s what our company is all about. I’m talking about the canaries in the coal mines here and want to continue. So, when it comes to US Treasury debt, the Treasury Department is expected to issue over a trillion of debt each year for the next four years. This is in addition to the 21 trillion debt load that’s currently outstanding and must be refunded when the bonds mature. Even more troubling is the growth rate of forecasted debt for the United States is almost twice the size of the CBO, Congressional Budget Office’s most optimistic economic growth forecast.
BRIAN: We’ve argued on many occasions that such a divergence between the debt burden and the means to pay that debt cannot continue indefinitely. So, do we have a disaster bubble with debt? Absolutely, absolutely. The CBO is projecting that the coming explosion in debt doesn’t even presume a coming recession. The debt issue becomes a problem even if we continue the expansion of two or three percent GDP growth.
BRIAN: Okay, I want to finally end with demographics. Demographics in the United States is that the things that are getting better economically are getting better for the few. The top 10 percent of the United States median family net worth has received tremendous benefit in the last 10 years. They have exposure the stock market via their 401(k)’s and their investments. But the other 90 percent don’t have those savings. The gap… The income and net worth gap in the United States has never been this lopsided.
BRIAN: That historically has created problems for any country in the world. And then when we talk about income growth where your wages are growing. Since 1980 income growth has been relatively flat to down when you take into consideration inflation. So, we haven’t had the wages to grow and expand out the benefits of this economic gain in the last 10 years to other people in the United States.
BRIAN: Those are the problems. Now, I mentioned at the very top of this podcast that right now the Advance-Decline Line is positive and the stock markets are trading above the 200-day moving averages. As long as that happens you can be long and strong and have your investments continue to grow. But we warn you, at Decker Retirement Planning, the way we do it is we have about 75 percent of your investable assets in laddered principal guaranteed accounts that in the last 10 years have averaged over six percent.
BRIAN: So, when the markets crash every seven or eight years it does not send our clients back to work. It doesn’t require you to sell your home, move in with the kids. And of the money that is at risk, we’re using two-sided computer algorithms for our risk managers. And we diversify them among managers that are long/short or cash in the S&P 500. In the Nasdaq 100, we have two Nasdaq mangers. We have a long/short manager with gold.
BRIAN: A long/short manager with silver. A long/short manager in oil. And a long/ short manager with treasury bonds. That gives us diversification and the benefits to where these six managers that we’re using at Decker Retirement Planning have combined, never lost money in the last 17 years. And they have combined beat the S&P 500 16 out of the last 17 years. So, we hope that if you’ve got downside protection you’ve got your income plan in place, four things you should focus on.
BRIAN: Number one, make sure that you are taking the appropriate level of risk and you have risk minimization measures in place if the markets do fall apart, number one. Number two, we want to make sure that you have the income that you need and want for the rest of your life. Number three, that taxes are minimized. And number four, that your assets are protected. So, this is your umbrella policy for liability coverage. Make sure that if you do have insurance you have the right amount for income replacement or long-term care.
BRIAN: These are all very important parts of your income plan. Any questions, you can give us a call at Decker Retirement Planning. We’ve got offices in Seattle, Kirkland. We’ve got offices in Salt Lake. And we’re opening offices in the next month in San Francisco. Have a good day. Thank you.
