Welcome back to another episode of Protect Your Retirement! This week we will be discussing how bankers and brokers can hurt you along with the dividends in your portfolio that can be devastating as you plan for your retirement. Listen in and enjoy!
The following is a transcript from the Radio Show “Decker Talk Radio – Protect Your Retirement. The following comments are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone. K-V-I listeners, we are excited here for a wonderful round two of what we were talking about last week with the IBM Apple. And now…
BRIAN: We’re going to talk dividends today on Decker Talk Radio, one hour of commercial free radio that focuses on financial planning and money management, and how to protect your retirement.
MIKE: That’s right, we-we don’t just beat around the bush. We really do get into the details here. The things that, I-I, is it safe to say brokers and other people might not want you to know? [LAUGHS]
BRIAN: Right, we are going to hammer bankers and brokers continually, every time we are on the radio.
BRIAN: We are Brian Decker and Mike Decker of Decker Retirement Planning out of Carillon Point in Kirkland. Our website, www.deckerretirementplanning.com, is full of incredible content. So go there, find out who we are, you will see that we are no friend to the banker or broker, and we will have a lot of proof of that in all our radio shows. Uh, Mike before we get started, last show was a good one.
BRIAN: We talked about how Apple earnings came out better than expected, when in fact they were 40% year-over-year drop. So go back, go to our website, hit that, um, what do you call the…
MIKE: It’s the first podcast, the first show.
BRIAN: Yeah, the first podcast. And, uh, you will see, KVI listeners, how deceptive quote-unquote pro-forma earnings are. How did they do that? Well, they did a stock buy-back to cover up an earnings shortfall. And then we rotated right into IBM. IBM did the same thing. Um, and then we talked about the S&P 500 earnings.
BRIAN: So, we’re not going to, uh-uh, we had a great discussion last time. Today, um, I think KVI listeners, you’re going to love the discussion. We’re going to talk about dividends. A lot of retirees say they buy dividend producing investments and they ride the markets up and down, and that’s their investment plan, is to seek out income with dividends in stocks, master-limited partnerships, uh, or other LP limited partnership companies. So that’s what we’re going to talk about today. Ready to dive in?
MIKE: Let’s dive right in. And just to be clear, dividends, when he said retirees that want to do this, they just want to have an income from these shares. It’s just pulling it in there. Uh, we ended last week on the 7% versus a smaller percent here. Uh…
BRIAN: Let’s start there.
MIKE: I-I feel like that’s a great place to start, because you almost tricked me with that question. You want more money, it’s-the 7% might be more appealing, but…
BRIAN: Okay, so KVI listeners, think of what you-how you would answer this. Um, tenured treasuries are at two, uh actually less than 2%, 1.5% right now. If you could get a-a 1.5%, uh, income stream per year for ten years, that is the benchmark for what is called riskless investing.
MIKE: So no risk?
BRIAN: No risk, is the benchmark is 1.5% on tenure. So Mike, um, I’m going to throw you under the bus, these are, uh, these are questions that I know are, uh, kind of silly, but 3% is better than 1.5%, right?
MIKE: Yeah.
BRIAN: So if you, as a retiree, can get 3%, that’s better than 1.5%?
MIKE: If we’re just talking numbers, absolutely.
BRIAN: Okay, if you could get 6%, that’s better than 3%, right?
MIKE: I just want to say, so I’m not totally dumb, if it’s just numbers, that’s-that’s a no brainer.
BRIAN: Okay, and if you could get 9% on your money, I can tell you a lot of smart retirees would say, um, I would rather get 9% on my money for dividend investments than 6%.
MIKE: I think it’s safe to say that, but there’s got to be a catch for something so good.
BRIAN: There is a catch. There is a catch. But-and the last one I’m going to do, which is a ridiculous 10, well, I’ll say 12%. If you can get 12% when today’s riskless market on a tenured treasury is at 1.5%, that’s better than 9%. Okay, what I want to show you is that that’s half, that’s half of the information. Now let me give you the other half.
MIKE: Okay.
BRIAN: Now let’s see what your decision is. I’m going to give you the risk of default. Would you take 1.5% with a zero risk of default, or would you take a 3% return with a 20% risk of default? Or would you take a 6% with a 40% risk-percent risk of default? Or would you take a 9% return with an 80% risk of default? Or would you take a 12% risk, uh, return, with a 95% risk of default? Now you have the full picture.
MIKE: Uh, that, I mean, that’s a game changer right there.
BRIAN: Right.
MIKE: Too good to be true is really what they’re advertising with these high dividend numbers.
BRIAN: Right. Okay, true story. Um, now you have the full picture. Had a client come in, gosh, years ago, fifteen years ago, very smart guy. In fact, KVI listeners, if I mentioned his name, you would recognize him. Um, very smart man, widely known in the United States, very wealthy. He has a house on every continent. He’s a client.
BRIAN: Uh, actually he’s passed away now, but he came to me fifteen years ago and said, Brian, I’ve put together this dividend portfolio, what do you think? They had four, five, it was a utility portfolio, a master limited partnership portfolio, and an LP Limited portfolio. So I said, Bob, um, do you want to have a K-1. Do you know what a K-1 is?
MIKE: I was just going to ask, what’s a K-1?
BRIAN: K-1 is where, instead of being able to do your taxes on April 15th, you won’t be able to. Because when you invest in limited partnerships or in master limited partnerships, you get a K-1.
BRIAN: And they’re typically issued after April 15th, so you have to delay your taxes, and, uh, file in August or September, because it’s just a pain. So, heads up number one, if you’re going to invest in limited partnerships, you’re going to get a K-1. Heads up. But, he-he put together a portfolio of utilities and energy partnerships, that was 80% of the dividend portfolio. So what we did was we went through one by one and we find XYZ utility that paid a dollar per year in, uh, dividends.
BRIAN: And we found out their coverage. Key word, KVI listeners, if you’re, uh, an investor in dividend producing investments, you have what’s called coverage. If they pay out a dividend of a dollar, but only make fifteen or twenty cents for the company…
MIKE: Mm-hmm.
BRIAN: They’re borrowing to pay the dividend. How long do you think that’s going to happen?
MIKE: Seems like a bad situation.
BRIAN: It is a bad situation, and by the way, those are the ones that yield 8% or 9%. Why? Because the expectation on Wall Street is that they are going to cut their dividend any-any-any moment.
MIKE: Now, we’re-we’re talking about a lot of dividends here, I mean, are these red flags you’re seeing something that’s common in a lot of people’s portfolios?
BRIAN: Great question. And Mike, um, another way to say high dividend is high risk. The higher the dividend paid out, the lower confidence that Wall Street has in the ability of that company to pay the dividend. So there’s a third way, a third measure of dividend producing investments. So when you have, uh, something that’s paying the typical 2% to 4%, you have high confidence that those dividends are going to get paid.
BRIAN: Sadly, sadly, sadly KVI listeners, you know who you are out there, who you got sucked into thinking 8% or 9%, when it’s a huge red flag, that the confidence in the, in-in-in that company’s ability to pay the dividend is low, so the yield is high, and the expectation is that they will break that, um, will have to lower that, um, they’ll have to lower that, um, dividend.
MIKE: Okay, yeah.
BRIAN: Okay, so I’m-so I’m going to continue. So what, um, there’s three parts to the dividend producing investment. One part is the yield, where typically us humans, we think the higher yield, the better. The second part is to know that, um, the-the default rate goes up when the dividend rate goes up. And the third is the confidence level. So the higher the dividend, the lower the confidence that Wall Street has in their ability to pay you that.
MIKE: Now, why would someone have a higher dividend? Is it because they need more investors? I mean, is there a reason they jack up the price? Or…
BRIAN: Okay, so let’s say that a stock is trade-trading at twenty dollars and it pays a one dollar, uh, one dollar a year dividend. So what is that? That’s 5%.
MIKE: Mm-hmm.
BRIAN: 5% is pretty good these days.
MIKE: Yeah.
BRIAN: Um, but let’s say that the company’s earnings-per-share is a $1.20. Are they covering it?
MIKE: Mm-hmm.
BRIAN: Yes, they are.
MIKE: Yeah, it seems like they are.
BRIAN: Yeah, they’re covering it. Um, but let’s say the expectation, let’s say that it’s an energy company. By the way, this is classic of what’s happened in the last eighteen months.
BRIAN: Let’s say that it’s Exxon Mobil. Um, now they’re earnings go down because what’s happened to the cost of the price of oil? It’s gone from $120 a barrel down to $26 a barrel, and then it went-went all the way up to $52 a barrel, and right now today, it’s around $45 a barrel.
MIKE: Is that kind of volatile for…
BRIAN: It is pretty volatile.
MIKE: For something that… [LAUGHS]
BRIAN: But when-with earnings going down, the ability to pay that dividend goes down. And the share price goes down.
BRIAN: So if they’re a dollar, if they were 5% payout, hand me that calculator there. If they were a 5% payout at 20, um, they-at $15 a share, they’re at 7%. So the stock goes down because earnings goes down. Exxon Mobil goes down in share price because the, um uh, the earnings drop. Now they’re paying 7%, Mike. That’s a better deal, right?
MIKE: That’s-that’s an incredible deal. Well…
BRIAN: But now they’re making $.90 and they’re paying out $1. How long will that happen?
MIKE: It’s not a good situation.
BRIAN: It’s not a good situation. And so now, Mike, um, er-the, let’s say that price-per-per, price-per-uh-barrel of oil goes down and settles in at $30-$30 a barrel. Now they’re going to make sixty cents on the dollar. Now the share price goes to, um, $12. Now you’ve got an 8% yield, and now the coverage on that, uh, is less and less. So the yield goes up because the risk goes up.
MIKE: Goes up.
BRIAN: And the price goes down.
BRIAN: So how are you doing? You locked in, Mike, to $5, five-five, I’m sorry, 5% yield buying Exxon at $20 a barrel. You follow?
MIKE: Yep.
BRIAN: But the share price has gone from twenty down to twelve. You’ve made, in the first year, 5% on your dividends, but you’ve lost…
MIKE: Uh, is that 40?
BRIAN: You’ve lost 40%. So total return on your investment, on your dividend paying and investment, is 5% minus 40. It’s, you’ve lost 35% in, keyword, total return. So any one of you KVI listeners thinking that you’re so smart in going after dividends because they pay a higher rate, you’re taking higher risk, and with-when it comes to energy, you have been shellacked in the last 18 months, because the price of oil has gone down.
BRIAN: And you’re thinking that you’re getting a good flow of dividends, but your total returns in the last 18 months is hugely negative.
MIKE: Now, for those just tuning in KVI, this is Decker Talk Radio. Brian and Mike Decker with Decker Retirement Planning. We’re talking about dividends today and red flags, smoke and mirrors, things you should be aware of that could be in your retirement portfolio. Bottom line, what the show is even called, is Protect Your Retirement. That is what we are trying to do today. So let’s keep going with this. This is just incredible information.
BRIAN: Okay. All right. So Mike, just to finish up dividends. I would recommend if you’re managing your own money, or even if your broker or banker is managing your money and put together a dividend portfolio, I’m going to give you some key, very important information, KVI listeners. I hope you type-write this down. Go to bigcharts.com, B-I-G-C-H-A-R-T-S. Bigcharts.com. And type in your symbol of your dividend paying in investments, and go to financials, and under financial summary, you will see the earnings per share and the dividends per share, and you can see if your dividend is being covered by earnings.
BRIAN: If it’s not, you have risk. You need to see this. This is what I do. I go through and I want to see how risky your portfolio is. Once you take-you can take risk, KVI listeners, in your 20s, 30s, and 40s, when you’re getting a paycheck. You can take a hit. Once you take that last paycheck you’re ever going to take, and you cannot make back losses, you can’t be taking risk like this. And the banker and broker who is a salesman, not a fiduciary. We are fiduciaries.
BRIAN: A fiduciary is someone who is required by law to put your, our clients best interest before our company’s best interest. A banker or broker is a salesman. We have to unf-we have to unwind so many horrible investments. I am very sick and tired of the horrible advice that goes out and gives our financial industry a black eye from these bankers and brokers who will tell you to put a dividend producing portfolio together for retiring clients that are yielding 6% and 7%, and they explode. And I’m so tired of cleaning up their messes.
BRIAN: So this-I’m going to summarize this dividend strategy one more time and then we’re going to move on. If you’re a dividend prod, uh, a dividend investor and you’re retirees, it’s all about total return. And if you’re tying your-if you’re hitching your cart to energy, you’re in for quite a ride. Um, and so, there’s a better way. There’s a better way to do this, and in the next offer, Mike, uh, let’s go with, um, a f-uh, the retirement planning that we do, so we can show a better way.
BRIAN: But I just want you to know, there’s a better way than dividend red, uh, dividend investments. Uh, there’s three parts to it. The yield, number one. The higher the yield, uh, should be a better deal. Number two is the risk of default goes up with the yield and the lack of confidence, and the confidence goes down as the yield goes up. Go to bigcharts.com. It’s a free service. Type in the stock symbol, look at financials, and look at two things. Look at earnings-per-share and dividends-per-share, and see if you’re at risk. Enough said.
MIKE: That’s, that’s really it. Um, you said something, I don’t want to go down a rabbit hole here on this, but you said brokers, bankers, that they’re salesmen, but then you just glossed over that. How-how would you, or why would you consider them salesmen? And again, I don’t want to go down a rabbit hole here.
BRIAN: Okay.
MIKE: And we-we are going to give you a-a great thing here to protect your retirement, which we rarely do on the show, but we will do that, but I feel that you-you-you might have glazed over something that might have been important for you to understand when you do see your broker next.
BRIAN: Okay, I’m-I’m-I get passionate about this. Let me tell you of at least six ways that bankers and brokers hurt you. If you deal with a banker or a broker, you’re dealing with a salesman. Number one, they put you in an asset allocation pie chart. A pie chart to diversify you among stock components and bond components. You know what I’m talking about?
MIKE: Yeah, it makes sense.
BRIAN: Okay, totally appropriate in your 20s, 30s, and 40s, that is called an accumulation vehicle.
BRIAN: If you use a pie chart when you are more than 50 years old, you are hurting yourself. You are hurting yourself because the rules have changed once you turn 50, the focus needs to be not on accumulation. The rules change to be on distribution. We are distribution planners. And Mike, I-uh-I cranked my knee skiing a couple years ago. I wouldn’t go to a dentist to have my knee redone. I needed an ACL reconstruction and a meniscus repair.
MIKE: Makes sense.
BRIAN: It’s not that dentists are bad people. It’s just that dentists aren’t trained to fix my knee.
BRIAN: I went to, uh, an orthopedic surgeon who was trained to do what I needed to do. Bankers and brokers are well trained in accumulation planning. They are a perfect fit for someone in their 20s, 30s, and 40s. If you use them in an accumulation plan when you’re over 50 years old, that’s like tweaking your knee and going to a dentist. Just saying. When, uh, when clients, when KVI listeners come in and see a distribution plan, which is, picture a spreadsheet, Mike, that, um, that shows all your sources of income on the left side of the spreadsheet.
BRIAN: It shows your income from your portfolio, it shows your rent or real estate, it shows your pension and social security, totals it up, minus taxes, and with a cost of living adjustment, it shows how much money you can draw from your assets to age 100 for the rest of your life. Do bankers or brokers do that? No, they do not.
MIKE: Mm-hmm.
BRIAN: And then on the right side of the portfolio are laddered principal guaranteed accounts for your income for the next 20 years. So if markets go up or down, interest rates go up or down, uh-e-uh, economies go up or down, it does not hurt you.
BRIAN: Our clients sailed through 2008 unaffected, they didn’t have to go back to work because they were using a distribution plan. The market’s going to get creamed, we believe in the next 18 months, I’ll get to that in a minute, uh, on why that is, but if you are using a pie chart, you’re hurting yourself. So that’s point number one, I told you there were six things that bankers and brokers do. By the way, we’re going off script.
MIKE: I-I-I didn’t want to go down a rabbit hole, but…
BRIAN: That’s all right.
MIKE: I feel like, right there enough, is enough.
MIKE: Now, I-I don’t want to cut you off, because we’re talking about dividends, we’re talking about your portfolio right now, but that being said, the six points, if you want to read more about that, because we’re-what-we’re talking about different things today. Go to our website, deckerretirementplanning.com. There is an article specifically written about that. The six, uh, six ways that bankers and brokers could hurt you.
BRIAN: Oh, good point, Mike.
MIKE: But let’s, you know, come to our website, check it out. But let’s get back on track. We’re finishing up dividends, and you, we just got…
BRIAN: Wait, wait, wait. We finished dividends.
MIKE: Oh.
BRIAN: Now we’re on the six, this is off script, but this the six, and we could go more than six, but the six key ways that bankers and brokers can hurt. And by the way, there’s an article about this on our website.
MIKE: Yeah.
BRIAN: And you just said that. Okay.
MIKE: Yeah.
BRIAN: Um, number one, they use an accumulation plan when you’re over 50 years old, that’s strike one. Strike two is they put all your money at risk.
MIKE: Mm-hmm.
BRIAN: All of it.
BRIAN: Uh, bankers and brokers don’t get paid on money that is not at risk. So guess what? It is in their best interest to keep your money at risk. It is not in your best interest to have all of your money at risk. Bankers and brokers will tell you to buy and hold, hang in there, stay invested, why? Not because it’s in your best interest, because they do not get paid their fees by… if you have your money in safe investments, like CDs, treasuries, corporates, agencies, municipals, um, they need to keep your money at risk.
BRIAN: We feel strongly that you should have maybe, when you’re 55, 60 years old, you only need to have 25, 30% of your money at risk. The majority of your money should be at no risk. So that’s strike two. Strike one is they use an accumulation plan when you should have a distribution plan. Strike two, uh, is where, uh, bankers and brokers will have all of your money at risk when you don’t need to have all of your money at risk.
BRIAN: Strike three, and by the way, we should identify who we are. We are Decker Retirement Planning out of Kirkland. We’re in Carillon Point. Uh, our website, www.deckerretirementplanning.com, phone number 425-598-7000.
MIKE: We’d love to have you and put you in the schedule.
BRIAN: Okay.
MIKE: I mean, we’re-we’re here to-to help as much as we can and protect your retirement.
BRIAN: All right, so, number three. Number three is they will tell you, Mike, um, to use the rule of 100 to decide how much money should be in your quote-unquote safe money. The rule of one hundred says that, Mike, if you’re 60 years old, you should have 60% of all your money in bonds or bond funds. If you are 65 years old, you should have 65%, etc. So I’m going to say this very sarcastically to make a point. With interest rates at or near 100 year lows, or all-time lows for our country, bankers and brokers will tell you to put 60, 65% of all of your investable assets in investments that’ll earn almost nothing.
MIKE: Isn’t that the rule of 100?
BRIAN: That’s the rule of 100.
MIKE: Okay. Yeah.
BRIAN: Strike, that’s strike three. Strike four is that they tell you that bond funds are safe. They tell you that your safe money should go in bond funds. There’s something called interest rate risk that makes bond funds horribly unsafe. Bond funds, and interest rate risk, um, interest rate risk is how much money you lose on your bond funds when interest rates go up.
BRIAN: So for example, in 1994, the tenure treasury went from six to 8% in one year. That was a big move. According to Morningstar, the average bond fund in that year lost 20%. In 1999, the tenure treasury went from 4% to 6%. The average bond fund that year lost 17%. If we go from where we are right now at 1.5% on the tenure treasury, back to just 4%, where we were just not too long ago, that Mike, represents about a 25% hit to principal on what bankers and brokers call safe money.
BRIAN: It is financial malpractice to tell you that, as a financial professional, that you, KVI listeners, should put your safe money in bond funds. I’m passionate about this because it’s mathematically provable. That’s like a math teacher standing up and teaching Johnny and Suzy that two plus two is seven. It is ridiculous. So that is, that’s-that’s point number four. Point number five is where I get frustrated and passionate, because it is the cine qua non ultimate worst piece of financial advice out there.
BRIAN: And by the way, in my opinion Mike, it’s destroyed more people’s retirement than any other piece of financial advice. And it’s called the 4% rule. Have you heard of it?
MIKE: I’ve heard of it. Um, and it-it’s pretty simple. It’s 4%, it’s just all based around that number. But, I-I feel like, you’re-you’re the one that should explain it here.
BRIAN: So let’s talk about it. The 4% rule goes like this. Bankers and brokers will say Mike, uh, stocks have averaged, um, around 8.5% for the last hundred years, and that’s true. Bonds have average around, um, 4.5% for the last 36 years, and that’s also true.
BRIAN: So let’s be really safe, Mike, and just put 4%, let’s draw 4% from your assets for the rest of your life in your-from your pie chart portfolio, and you should be fine. The problem with that, and that works beautifully, Mike, when stocks are trending higher. However, in the last 100 years, stocks cycle. They don’t trend, they cycle. It’s called the 18-year cycle chart. Go to our website, www.deckerretirementplanning.com, you will see a 100 year chart of the Dow Jones, and you will see for yourself that stocks don’t trend, they cycle in 18 year increments.
BRIAN: Approximately 18-year cycle chart. So from 1946 to ’64, stocks were in a bull market. ’64 to ’82, stocks were flat. ’82 to 2000, that 18-year period, the biggest bull market we’ve ever had. Since January 1 of 2000, I don’t know about you folks, KVI listeners, but most people haven’t made much money in 16 and a half years. So, the problem with the 4% rule is that, if bankers and brokers… let’s say, Mike, that you and your wife, Alex, had, um, $4 million.
BRIAN: You retired at 65, January 1 of 2000. Sounds good, right?
MIKE: Yeah, I mean, $4 million seems like a safe cushion.
BRIAN: Okay, so KVI listeners, track with me on this. Mike and his wife have $4 million January 1 of 2000. That’s the good news. The bad news is stock market loses 50% in 2000, ’01, and ’02. So your stocks take a hit.
MIKE: That’s a big hit, by the way. It doesn’t matter how much you have. That’s a huge hit.
BRIAN: 50-50-that’s-50%, but you do worse than that, because you’re drawing 4% a year, you’re down 62% going into ’03.
BRIAN: But the good news is, from ’03 to ’07, stocks double. So you make that back.
MIKE: Okay.
BRIAN: Bad news is you don’t, because you’re drawing 4% a year for ’03, ’04, ’05, ’06, ’07. So you don’t make that. And then you take that hit in ’08 plus 4%? And you are done. And by the way, KVI listeners, you watched it. We watched it. The grey-haired that went back to work in 2009 to Wal-Mart, banks, uh, they went back to fast food, it was a tragedy. They had to sell their home, move in with the kids. They had to go to Plan B, because the 4% rule destroyed their investments.
BRIAN: And the guy, hold on just a sec, the guy who invented the 4% rule publically, publically declared that it doesn’t work when interest rates are so low. And he said quote-unquote, that it’s dangerous and he doesn’t use it. And yet the banks and the brokers still use it today. I’m passionate about jumping up and down and warning people about the banks and brokers using a publically discredited strategy. They knowingly use this. And this is something a fiduciary can’t do. Horrible, horrible, horrible. It’s financial malpractice to use a publically discredited distribution strategy and yet, they all do it.
MIKE: Uh, I just want to comment real quick. It seems like it’s not just the number, the 4%. But it’s also, you’re taking your income from an account that fluctuates.
BRIAN: Right. There’s a rule that says that you never, never, never draw income from a fluctuating account. Why? Because if the-if your portfolio goes up, you’re drawing on an increasing portfolio and compromising the gains. And when the portfolio goes down in value, you are pulling money out and accentuating the loses. And you are committing financial suicide.
BRIAN: It’s-it’s financial roulette, where you… all you need is another 2008 and you’re drawing money in those years, and you are hurting your ability to stay retired. Does this make sense?
MIKE: Yeah, it makes perfect sense.
BRIAN: Okay, number six. The last point on how bankers and brokers can hurt, and there’s far more than six, by the way. Um, is that they will tell you when it comes to your stock portfolio, and this just really bothers me, to buy and hold. Buy and hold. The reason they do that, in my opinion, is because they don’t get paid when they move to safe money. So they will tell you to buy and hold. John Vogel of Vanguard will tell you to buy and hold. Why? Not because it’s in your best interest, because it’s clearly not.
BRIAN: In your 20s, 30s, and 40s, you can buy and hold. You can ride it up or down. You can take a 30% hit, which by the way, usually takes five years to break even. You can do that in your 20s, 30s, and 40s. This is common sense, folks. You don’t need a finance degree or Wall Street experience to know that if you’re 55 or older, you can’t take those hits like 2008. And if you are being told by your financial advisor as a banker or broker to buy and hold, you’re getting bad advice. Because you take a hit of 30% plus, typically every seven or eight years.
BRIAN: So let’s talk about this, Mike. This is new information.
MIKE: This is good.
BRIAN: Track with me on this, KVI listeners. Every seven or eight years, the markets get hammered. I’m going to give you dates. 2008. 2008, October of ’07 to March of ’09. That was an over 50% drop. Seven years before that was 2001. Um, middle of a three-year bear market. Twin towers went down, over a 50% drop peak to trough. Seven years before that was 1994. That was a recession. Market took a hit.
BRIAN: Seven years before that was 1987. Black Monday, October 19th, 30% drop in one day. Seven years before that was the ’80, ’82 recession. 40% drop, sky-high interest rate, but a 40% drop in the market. Seven years before that was ’73, ’74, bear market and recession. That was an over 40% drop. And seven years before that was ’66, ’67, over a 40% stock market drop. And it goes on. It keeps going. For decades, every seven years, the markets get hammered.
BRIAN: March of ’09 is when the markets drop. Seven years plus that, Mike, is…
MIKE: Any time, basically.
BRIAN: It’s 2016. So, I don’t know at, and nobody knows what the markets are going to do, but it should be of no surprise that markets are propped up in an election year by the Fed, but that typically goes away October, September October, we should see a really tough next 18 months, where typically we see 20-30% plus drops in the market. How are you going to prepare yourself for that?
BRIAN: If your banker or broker are telling you to ride it out, you’re getting bad advice. You are, you have hired an accumulation planner to give you advice in your distribution years. And these are good people. They are honest people, nice people. I bet you’re friends with them and you’ve been with them for years. But you are getting dentist advice on someone that needs to fix your knee, it’s not a-it’s not a fit.
MIKE: I don’t know if this is a perfect analogy or not, but I’m thinking about this time we went white water rafting. Do you remember that? And a guide just bailed on us, and we floated down the river by ourselves?
BRIAN: Oh that was the S-Skykomish River, a class five for that.
MIKE: Do you remember that?
BRIAN: Yeah, we went over a-
MIKE: Our guide–
BRIAN: A boulder drop.
MIKE: Our-our guide ditched us when she realized we were in trouble. Just ditched us. And then we went down this class five rapid.
BRIAN: Sideways.
MIKE: And we, all of us flew off, and we now had to float down for the next 200 yards in class four rapids. That’s basically what’s happening here. I mean, they’re going to tell you to buy and hold, right? But they’re not going to be next to you.
BRIAN: Right.
MIKE: They’re going to-I just-that abandonment really is-is just striking me here.
BRIAN: Yeah, it-it’s not their money. Uh, in fact, it’s such hypocrisy. I bet their own money, they did move to the sidelines, and they tell their clients to buy and hold. Anyhow, don’t get me started. Those are just six ways that a banker or broker can hurt you.
BRIAN: I want to add just a couple more things, and by the way, none of this is scripted. I have a whole bunch more information that we haven’t got to yet. And we’re
MIKE: This is important, though.
BRIAN: Okay, Mike, only with a banker or a broker, a-a non-fiduciary will you be sold something so horrible as a variable annuity. Let me tell you how bad these are.
MIKE: That’s almost a swear word.
BRIAN: Yeah, a variable annuity.
BRIAN: A variable annuity is something where, um, you are told, hey, Mike, here’s a-a principled guaranteed way that you can invest in the stock market. It is such a slimy description. Here’s what just happened. The banker gets paid about an 8% commission up front on that variable annuity. He gets paid every year you own it. The insurance company gets paid every year you own it. And the mutual fund companies get paid every year you own it.
BRIAN: Three layers of fees that typically add up to 5% to 7% a year before you make a dime. We don’t like them. We don’t use them. We warn people about them, because when the markets go up, with all those fees, they lag. And when the markets go down, because of all of those fees, they go down faster. The reason that you have a principle guarantee on your investment is they, the insurance company is kind enough, sarcasm, to give you the-the high water mark back, uh, when you die. So when you-
MIKE: When you die, though.
BRIAN: When you-When you die.
BRIAN: So you, in your lifetime, don’t enjoy the principle guaranteed benefit, you have to die. It doesn’t benefit you in your lifetime. So the insurance company’s laughing all the way to the bank as they milk you with fees during your lifetime and will happily give you your high water mark back. It’s not good. Salesmen use these, and by the way, these are so bad that the D-O-L, the Department of Labor, came out with, um, new rules to warn and-and provide more transparency as a consumer advocate, so that investors can be aware of how horrible these are.
BRIAN: Variable annuities are one of the reasons that the D-O-L came out with the Elizabeth Warren rules that, uh, immediately went into court, shouldn’t have. Um, but will be coming out next year on requiring more transparency on commissions that the bankers and brokers charge on variable annuities. Okay, that’s one. The second investment that is so slimy and horrible that we have to unwind on a regular basis, that is a-a-a-a recommended investment by bankers and brokers is something called non-traded REITs.
MIKE: Mmm.
BRIAN: Non-traded REITs. Real Estate Investment Trusts, or REITs. Non-traded REITs, Mike, mean that they are not liquid. You can’t sell them. By the way, do I get 8% commission up front? No, I typically get 12%.
MIKE: Well, not you. We don’t-we don’t encourage these things.
BRIAN: We don’t-we don’t do them.
MIKE: But the banker or broker would get 12%.
BRIAN: But, yeah, yeah, the banker or broker makes about 12%, huge commission. And you get stuck with an investment that you can’t sell for many, many years, until the REIT company decides it’s in their best interest to allow you to sell.
BRIAN: So you’re a captive investor, and you were sold that this is a good thing. Was it a good thing in 2003, ’04, ’05, ’06, ’07? Yes. But in ’08, not so much, because those lost over 30% and you couldn’t get out. We don’t like them. We don’t use them. We warn people to stay the heck away from variable annuities and non-traded REITs because they’re a favorite of bankers and brokers to generate huge commissions.
BRIAN: And those two, those two investments are the reason that the D-O-L came out with new transparency rules for consumer advocacy, so that-sadly the poor, preyed upon investor can see clearly what kinds of fees they’re getting hammered with. And hopefully we’ll see the-the-the better disclosure.
BRIAN: All right, um, we have some time to talk about, um, one of the risks that are happening. This is one of the tell-tale signs of a market top is called the default rates in bonds. By the way, we have something happening right now I find fascinating. At the same time, this has never happened before in stock market history, we have the stock market making all-time record highs at the same time that the bond market is making all-time record highs. Those are two contrarian signs. The bond market making highs means that there’s an incredible flight to safety.
BRIAN: The stock market making new highs means there’s an incredible risk, uh, that’s being embraced. That the skies are blue, the economy’s great. Uh, the investing days are fantastic. Two totally contrarian, uh-uh, things happening at the same time. Mike, this has never happened. It’s fascinating. And I want to explain why that is. First of all, money is coming to bonds because of the G7 nations, we are the last ones that have a tenure treasury over 1.5%.
MIKE: Hold-hold on. Can you define what a G7 nation is?
BRIAN: Uh, the G7 nations are the-the-the-the largest industrial nations in the world. This is Japan. This is China.
MIKE: Is China one of them?
BRIAN: Yeah, China’s in the G7. The-the largest seven nations in the world, uh, their economies, uh, their interest rates, some of them, four of… four of the G7 nations have, um, negative interest rates now. So, there’s a flight to buy, worldwide, there’s a flight of capital to come into our country to buy our bonds, because it’s a chase for yield, uh, the-the yields elsewhere around the world are negative.
BRIAN: Um, so that’s number one. That’s why our bond market’s making new highs. Stock market’s making new highs because we are the least worst when it comes to debt, when it comes to GDP growth, um…
MIKE: The least worst.
BRIAN: The least worst.
MIKE: That-that doesn’t sound very optimistic.
BRIAN: Right, and this happened in 2008, by the way. There-Um-what the-there-there is a flight to capital to-to the United States for stocks and bonds. There’s many other, um, countries who year-to-date have negative, significantly negative year-to-date returns on their stock markets.
BRIAN: The United States is one of the few that is positive. So, uh, but it’s fascinating what’s happening. Okay, Mike, gosh, there’s only eight more minutes. Um, we should, I want to get this in. Um, should I just keep rolling?
MIKE: Let’s just keep going here and if we have to cut it off, then we’ll just pick it up on next week.
BRIAN: Okay, one of the indicators of a market top is, uh, the default rate. So we saw the most convincing evidence to date that a new credit cycle default has begun.
BRIAN: According to Standard and Poor’s credit monitoring service, global credit default hit the century mark. Over 100. Last week, that is since the start of 2016, over 100 different corporations around the world defaulted on their debt. These defaults put $154 billion worth of assets in jeopardy and they wiped out equity holders. The number of companies defaulting on their debts is 50% higher than it was in the same period last year.
BRIAN: Credit rating agency’s Moody’s now estimates that the default rate on non-investment grade corporate debt will reach 6% by the end of this year, confirming that a new default cycle has begun. If corporate defaults continue at this pace, Mike, more than 200 companies will go bankrupt by the end of this year. A nominal amount that will surpass the previous high, all-time set in 2009. And by the way, 2009 was a market bottom. We are on track to have more companies default than in 2009, and this stock market hasn’t even gone down yet. So this is fascinating.
MIKE: Wow. That’s-that’s terrible.
BRIAN: In other words, conditions in the market for corporate credit are now on track to be worse than they were in 2009, and there’s a contagion risk. Contagion risk, Mike, happens… it’s-it’s the domino theory. For example, if you-the risk of the Greek banks going broke, if they weren’t bailed out, it would have caused Italian banks to go broke. And Portugal banks to go broke. And that domino effect creates a contagion, because a lot of EU investors have assets or investments in Greek banks, and they can’t afford to, uh, see those banks go broke.
BRIAN: Okay, I’m going to continue. These default cycles typically happen, uh, every five to seven years. By the way, that sounds familiar, because that’s the market cycle. And they always disrupt the markets. If a company’s debt can’t be repaid or refinanced, the shareholders get wiped out. And given the extreme amount of debt that’s been underwritten globally since 2009, it’s not hard to see that a new default cycle is going to cause severe losses. Marty Fridson, the dean of corporate debt in New York, predicts that almost $2 trillion in losses in the world’s corporate bond markets will happen in the next three years.
MIKE: I just want to repeat that number back. $2 trillion.
BRIAN: $2 trillion.
MIKE: That’s a large number.
BRIAN: Right. So, continuing, um, so who do you think is right? Is it the equity investors, with the stock market at all-time highs, bidding up stock prices, despite falling earnings and rising, uh, and rising defaults? Or is it the cautious bond market investors who continue to view the markets with deep skepticism and caution? Over the last year, the Dow is up 5.5% while high-high yield bonds are down 1.5%. Two totally different signals on the U.S. economic direction.
BRIAN: U.S. industrial production has always been a canary in the coal mine. Um, that has suddenly begun to decline. Not suddenly, it’s been declining, industrial production’s been declining for the last four quarters, parting ways with the rising S&P 500. Industrial production has been falling in the last four quarters, and has declined 14 of the last 19 months. Why does that matter? This is the most important thing I can tell you.
MIKE: He’s saving the best for last, right?
BRIAN: Yeah. It’s an indicator. Why does industrial production matter? Going back to 1920, Mike, that’s almost 100 years. Every annual decline in industrial production, which we’ve already logged, has led to a recession. Let me read that again. Every, since 1920, every annual decline, four quarters in a row of industrial production, has led to a recession. Currently, industrial production is running, um, about 1% below last year. That might not seem as much, but it’s a bigger drop than the ones that preceded 16 of the past 17 recessions.
BRIAN: Then there’s exports. I’m going to-do we have time for this?
MIKE: Yeah, we’re good.
BRIAN: Okay. U.S. exports have been falling steadily since peaking in October of 2014, with sharp declines seen since July of 2015. Currently U.S. exports $182 billion in May, Mike, are down 5.2% since last year. Once again, a decline in exports is a strong signal of an approaching recession. I just talked about industrial production being an indicator preceding 16 of the past 17 recessions.
BRIAN: Now we’re adding to that and showing that U.S. exports are also a strong sign. The last two times we saw U.S. exports decline was in 2001 and 2008. Those were the bot-the-the market cycles that saw huge 50% drops in the United States. And by the way, is it just the United States that are having these warning signs going off? Heck no. Global trade has dropped sharply since 2014 and continues to decline, falling 1.1% quarter over quarter, in the first quarter of 2016.
BRIAN: Equally noteworthy are the large ongoing declines in China’s exports. China’s exports are down 4.1% annually. Remember, ours are only down 1%. China’s down 4.1% annually, according to the latest monthly data, uh, which is June. China’s GDP, gross domestic product, growth is tightly correlated with its export economy. I got to wrap this up. Dang, I’m not going to get there. Um, one thing about China’s debt. Mike, do you know that China’s debt has doubled from 2008 to present?
BRIAN: So in the growth, in the recovery that China has had in the last eight years, you would think that it’s debt would go down? Heck, no. Debt has gone up. Dang, I’ve got more here.
MIKE: Well, tune in next week. But if there’s one thing we can communicate, uh, I mean, the-the outlook of the financial world might look bleak. It might look like we’re going to have a hard 18 months. But this can be avoided if you understand how to protect your retirement.
BRIAN: How to protect you, yes.
MIKE: That’s, that’s what we’re trying to do. Just trying to warn you. Uh, you can get another, uh, view of this at deckerretirementplanning.com, we’ll post the show up again.
MIKE: And until then, we’ll see you next week. This is Brian and Mike Decker on Decker Retirement Planning,
