The Income Generation: Market Segment
David Scranton: Onward and upward for the most part that has been the story of the stock market so far in the New Year 2018. As I said in my 2018 forecast show a few weeks ago, this froth on what I consider this overvalued market could yes, continue to build up for quite some time, but beneath the froth the story also remains much the same, and an economy on demand but still not quite not strong enough to justify Wall Street for you. Will that change they once president Trump’s tax cut really kick in? Can the market make fundamental sense again without a major correction? And most importantly what might the answer mean for your retirement plan?
David Scranton: Hello everyone and welcome to ‘The Income Generation.’ I am David Scranton your host. Now, most of you probably remember Bill Clinton’s famous line “Is the economy stupid?” And you know usually it is the economy more than anything else that determines the approval rating on a President, it has some pundits wondering why President Trump's numbers are still at 40% at a time when the economy is supposedly booming. Well, just like almost everything else having to do with President Trump's presidency, old rules and formulas don't seem to apply. The explanation probably has a lot to do with Trump himself but I might also have something to do with the economy’s supposed strength. We’ll get to the bottom of it today and much much more with the help of our guest, David Hightower of ‘The High Tower Report an Investment Specialist Paul Leonovich. Let’s take the economy a closer look first and why Wall Street is so excited about today's economy.
Clipping from President Trump’s speech: “A new national pride is sweeping across our nation, and a new surge of optimism is placing impossible dreams firmly within our grasp. What we are witnessing today is the renewal of the American spirit. Our allies will find that America is once again ready to lead.”
David Scranton: Yes, the economy is, the American economy is roaring back. That’s what President Trump told leaders at the Economic Forum in Switzerland recently and he reiterated that on his message in the state of union address just a week later. And by some measures, one could make that case, consumers’ spending has increased. The unemployment rate is a report 4.1%, the best it has been since the great recession.
David Scranton: GDP growth hits 3% and two of the last three quarters and a lot of pundits are banking on President Trump's tax cuts to make everything even better. All those factors appear to be painting a rosy picture, but yet not every Economist is sold. They're certainly not sold on the idea that the stock market shy-high numbers make sense compare to the economy’s numbers or that the former is a direct result of the latter. President Trump himself like to talk this idea in speeches and his tweets, like this one, “Economy growing! Stock markets at a new high, unemployment at a low. We are winning and TAX CUTS will shift our new economy into a high gear!” And it’s just not experts who aren’t sold on the idea that the economy is as strong as President Trump and Wall Street says it is. A lot of everyday Americans aren’t sold either haven’t seen two other major market boom go bust since the turn of the century. And may explain at least in part by President Trump's approval numbers are so low despite the economy’s relative health. And they also partly explain why GDP growth in the fourth quarter of last year was lower-than-expected, 2.6% actually according to the Commerce Department after hitting 3.2% in the third quarter. And yes consumers’ spending was up but that's generally given in the fourth quarter of every year due to holiday shopping. But, beyond the natural cautiousness created by two major stock market corrections since the year 2000, there are other details riding the skepticism about the so-called roaring economy.
David Scranton: Take these two charts for example; unemployment is at its lowest level since before the great recession. But as you can see unemployment has been dropping steadily at the peak of the recession in 2010. This isn’t really a new development per say of the Trump era. By the same token if you look at this chart you can see what other analysts point out many times about the high-flying stock market. Like unemployment, it too has been on a steady tier, since long before the President Trumps election, and upward course marked by occasional small downturns for lasting typically no more than just a few weeks. And, that's partly because the economy has been improving steadily or very slowly over all that time. But, it's also due to the fact that following the recession, artificial stimulus measures like quantitative easing became more of a driving force for stock market, than actual economic factors. That hasn't changed, as I pointed out many times on the show the impact of President Trump so far in the markets has been far more artificial and based on hope than genuine. It changed mainly on his promised to deliver 4% growth over the long run and we are really nowhere near 4% yet. And many Economists remain skeptical that his tax cuts can get us there. That’s why I characterize all the growth we've seen since the election and are continuing to see as froth; basically a huge had a foam on a glass that was already full. But, what are some other details about the economy that illustrate why it can't really be the driving force behind the soaring market. A number of them were highlighted in report in the publication called ‘The Week’ recently. The report used a metric, that I believe is critically important to any good analysis and that is history, among its findings.
David Scranton: From 1948 to 2006, inflation-adjusted GDP growth was 1.91% per year according to the Bureau of Economic Analysis. But in the following 10-year period from 2007 to 2016 adjusted gross was a terrible .61% on average. Now that’s partly the result of the great recession early years of the decade, but even without that an average growth from 2010 to 2016 would have only equalled about 1.4%. And that actually support another point that I made many times that even as recently as 2016 we hadn't really completely recover economically from the great recession. All of the Feds tinkering with quantitative easing all it did was really to create an artificial asset recovery but not an economic recovery. Though has that all changed since president Trump's election? Full data for 2017 isn't in yet but preliminary estimates are only modestly better than an average 2.6% for the first three quarters. What about productivity growth which measures the hours put in by U.S workers? Well, from 1948 to 2006 that increased by an average of 1.96% per year, but then from 2007 to 2016, the average just a 1.23% annual increase with 2016 marking the worst individual year at an increase of 0. That increase to only 1.1% again in 2017, better but still far from great. How let’s take a better look at jobs, you know you saw by the charts earlier that unemployment has risen over all since the last 10 years, but the question becomes, how the actually numbers compared to historical averages?
David Scranton: Well from 1978 to 2006, America average 1.04 new jobs per 100 employable workers per year. But from 2007- 2016, it averaged just .38, .38 new jobs in the same metric. An estimate figures for 2017, are right in line with that average. So, what's my point? Well as the article in this publication call ‘The Week’ points out, “A decade in which per capita GDP growth clocks in at less than one-third as previous average, productivity less than two-thirds, a job creation just over one-third unquestionably qualifies what’s going on right now as a Japan-style lost decade. (And) 2017 has been about average compared to the past few years.”
David Scranton: The author rightly goes on to weigh in that what’s really needed to break America out of this rut is a huge surge and all of these indicators sustained over many, many years. Instead, one can argue we’re already well into a second loss decade and could stay there indefinitely. But the question becomes, what about those corporate tax cuts which President Trump talk about a lot about during the State of the Union address and that we wilful expected? Will those tax cut change everything and help the economy quickly catch up with all that froth on overvalued market? Well, not everyone is sold on that idea either as we’ll talk about a little bit on the show.
David Scranton: Right now, let’s welcome our first guest for today, David Hightower. David David Hightower is a Founding Principle of the well-known Commodity Research and Information Firm- The Hightower Report. He publishes one of the most widely read daily commodity wires in the world, which is used mainly by brokerage firm as primary source of research. He examines financial, agricultural, geopolitical situations around the world which allows his company to provide analysis and commentary on a wide variety of the market. This includes grains, livestock, precious metals, currencies, bonds and of course the stock market.
David Scranton: David welcome to the show
David Hightower: It’s good to be here.
David Scranton: Most people at least have heard about Hightower Report, but for those who are not familiar with it what should they know?
David Hightower: Well we do a lot of hard work and we do all what I think is real market analysis. We core through the details, we listen to the markets, we have a tremendous amount of experience; 36 years myself, and I think we’re the blue collar economist, we look at the basic principles of the market, we also seek verification by the hard nuts and bolts on the ground.
David Scranton: So tell me, in 36 years have the financial markets changed in any fundamental way since you been doing this and if so, how?
David Hightower: Well defiantly, well logically the globalization's is obvious, the other fact all the other markets are much quicker now. The markets look further forward, they have a lot more geo-political and just the wide varsity of information to adsorb, but they also have a much more potential or what I call boom and bust, so the rallies are bigger the brakes are steeper!
David Scranton: Yes, part of that is that people being not as long-term basis they had been years ago, so you think that is that a good thing or bad thing for everyday investors?
David Hightower: I think it might be a bad thing for everyday investors. I try to look at the bigger trims, I try to daily action too kind of confirm whether my thinking is accurate than what the market thinks, that’s always important.
David Scranton: How about so far since the turn of the century, how have you seen the markets change fundamentally since January 1st 2000?
David Hightower: Well, logically we had two major negative events that really injured sentiment. At one point the markets were expecting some depression of sorts and so was probably the worst economic situation in 50/ 60 year. But, all things considered I think they has rebounded really quickly and as Goldman said today I think we're maybe beginning to see a reflation.
David Scranton: Reflation, wow!
David Scranton: Hey David, I know you are on a time crunch today but can you stay with us for just one more segment? We need to take a quick commercial break!
David Scranton: Great and you too, I want you all to stay with us too, we have a lot more with David Hightower as soon as we come back. We'll be right back!
David Scranton: Welcome back to ‘The Income Generation.’ You know as we talk about market performance since President Trump’s election as been based much more on hope and optimism over his ability to grow this economy, than an actual economic growth. The cornerstone of course of the economic plan is massive tax cuts, but it wasn’t approved about a month ago. Now, well plenty of pundits and politicians including President Trump himself expressed confidence tax plan will deliver the kind of growth needed to eventually justify the optimism we seen across Wall Street. There are many others that are sceptical. But, what does history tell us about President Trumps approach? Which is basically the same time of trickle down economic policy put in place by President Reagan and later by Georges W. Bush. Many historians maintain that Reagan’s plan know as Reaganomics worked and helped end 1980 recession. Regan cut the top tax rate from 70% to 28 % and reduced corporate taxes from 46% to 40% at the same time however President Reagan increased government spending by two and a half percent per year and almost triple the federal debt.
David Scranton: According to recent analysis by the balance, that's spending increased probably had much to do with ending the recession as President Reagan's tax cuts. As for George W. Bush, he uses tax cut to help address the 2001 recession. It seems to work but don't forget that at the same time the Federal Reserve lower and federal funds rate all the way down from over 5% to 1%. So, from a historical perceptive it’s unclear whether the tax cuts or mandatory policy was what was driving the force behind the recovery or a perhaps a combination of the two.
David Scranton: As for President Trump vowed again in the union speech to increase spending for infrastructure in the military. But that may be easier said than done in light of our current $440 billion Federal deficit and rather than lowering short term interests rates, this time the Feb is eager continue raising them. So eager in fact that I’ve talked of this as another potential head win for the economy. If they should hike rates to all time high soon, a new high we can end up with a flat yield curve, which as we’ve discussed before could be a major setback to growth. In fact one can argue that the flat yield curve is happening based upon current treasury yield. The two year treasury yield is just shy of 2.2 %, the 10-year treasury yield is up now over 2.7% and the 30-year is still shy of 3%. Meanwhile the federal funds rate is still at one quarter to one and a half percent. So, that already pretty flat. Don’t forget that six years after Presidents Bush pull us out of the 2001 recession, the houses crisis hit and stock market experience second down turn for the century, and almost 60% drop. Now if you are a regular viewer of the show you already know I that I believe a third major drop is overdue.
David Scranton: Although we may not see it in 2018, investors with 10 years of retirement should keep in mind that the potential does exist, and should weigh the risk of another 10% market gain against risk of another 50% or greater market drop. Now if you saw my 2018 market forecast show a few weeks ago, you may recall my forecast to the stock market and have a double digit year. The catch is it could double digits on upside or on the downside if the tipping of point should occur. There is also one little more red flag that could spell trouble for the economy and force the market to make fundamental sense again with a major pull back. This one has relevance for the income generation particularly so make sure you stick around.
David Scranton: Right now I like to welcome back David Hightower. David before the break you mentioned something about reflation, the term that I'm sure a lot of our viewers have heard of but might not understand completely what it means, can you give us a quick cliff notes definition?
David Hightower: We’ll we’ve come from a long period as you indicated in prior segment that hey, deflationary scenarios are real over the last decade. We pressure prices, we had demands that were so soft and prices would just favored the downside so we see very little inflation, we see very little upward pressure prices. But now we're going from holding the beach ball underneath water to seeing the beach ball rise back to the surface of the water that comes with wages, commodity prices and interest rates, energy prices, etc. It’s called reflation and I think this upon us and it will translate into more solid growth going forward.
David Scranton: So you’ve seen, have you seen the same disconnect that I've been seeing at least the last year-and-a-half between economic growth and stock market growth or do you think that the stock market is fairly value where it is today?
David Hightower: Well I don’t think it’s a disconnect I think we have the timing we expect, the timing to be immediate. The stock market and the futures markets, economic forecasts are forward-looking not backward-looking and the stock market is discounting the future. And, you know I've traveled 290,000 miles at three and a half months, I think I'm 23 countries, China extensively and is global synchronized growth is not something discounted, and I also, I verify that I look at how much Prudhoe do we seeing crude oil, what kind of consumption we have of soybeans? What kind of consumption of beef? So it's real, even though some people want to continue to doubt that.
David Scranton: Do you feel as though in a year or two the economy will grow into the forward-looking stock market values of today, then the question is how much more upside is the actual stock market really has? If the stock market's kind of already factored in this economic growth then do we see ourselves at least getting back toward normalize growth cycle in the stock market over the next year or two? What are your thoughts?
David Hightower: Well, not to be clipped about it but little keep going until it stops. I think that it depends, I think it depends on how strong and how long the government is is going to be and I don’t see an ending in the short term and today was a good example. You saw a treasury deal break down to the upside at the same time that the Dow may do high so the day. Now we at this inflection point now where yields are start to prewire, they could attract some money away from the stock market, but that doesn’t mean in the near term perhaps in another two or three month that the interest rates could go up and the stock market could continue to go up. So, I continue to watch every day to see if perhaps the situation’s coming apart for the bull camp but it doesn’t appear to be it.
David Scranton: We broke through a keries just this level on a 10 year treasury rate just in the last week and a half or so how high do you think the 10-year treasury will go on this level if you had a forecast that where would you put it 3, 31/4 before it backs up again, you tell me?
David Hightower: Yeah It's going to be a grudgingly go higher because of the central bankers are, they’re maybe not tapping on the brakes any longer but we haven't seen a concerted effort to begin to rapidly remove a quantitative easing, so I think it's going to be a very slow and gradual climb out when it comes to a yield. Sometimes though the market, the cash bond markets globally actually go do the Feds work for them, so it would do those 50 basis points as you indicated, if the trade begins to see that we have from the ECB baggage bond.
David Scranton: In the last 15 seconds or you we have left, are you concerned at all as I am that if we don't get the growth that the markets are predicting again forward looking, that we can up with a flat yield curve?
David Hightower: I think the flat yield curve has absolutely no credibility in the market place. We are coming off historical quantitative easing, a floating of debts, an artificial suppression of what's going on throughout the interest rate structure. So I think, but I also think that it's a U.S is not the primary game any longer and sometimes we infatuate with what is going on with our yield curve.
David Scranton: That’s very very true, of course a lot sovereign yield and other countries theoretically weaker than ours are actually even lower. So it’s great, that’s why I love having people on the show that have different points of view. David it’s has been wonderful! We’d love to have you again on the show sometime. So, thank you for being here!
David Scranton: If you're not using someone who's well trained in fixed-income and you’re born before 1966 it may just be time for you to break up with that advisor and move on. I would suggest someone who will care for you through these important years of your life. If you need help finding someone call or write us. I’d also like to remind you of the special report entitled” The Income Generation.’ This is available free to you are loyal viewers online, if you haven't downloaded your report pick it up after the show.
David Scranton: If you are near or in retirement, head over to ‘theincomegeneration.com’ and download your special report written specifically for the needs of the income generation again those born before 1966. I am David Scranton and you have been watching ‘The Income Generation.’
FINANCIAL UPDATE DURING BREAK
Miranda Khan: Hello, I am Miranda Klan, let’s that a lot at some of the stories that moved the markets this week. The Federal Reserve keeps interests rates the same but predict inflation will rise this year, it’s a sign that Federal are likely rise that boring cost next month under the incoming chairman, Jerome Pall. The Fed’s expects the economy to expand at a moderate paste to see gains of employment, household spending and out of and capital investments.
Mirandah Klan: Apple is cooperating with U.S government's probe into the slowdown of older iPhones. The Tech Company apologized for 2016 software update that slow down the phones in an effort to keep them from shutting off, however Apple didn’t tell anyone until last month and has since cut the price of replacement batteries to nearly in half.
Miranda Klan: The NBC reports Sears is laying off more than 200 people from its corporate headquarters in Illinois the layoffs are part of the ongoing restructuring plan announced last month. Sears is attempting to streamline operations to start making money again. The retail chain hasn’t turns a profit in the last 6 years. As always for much more of these stories please visit ‘newmax.com/finance.’
David Scranton: Welcome back to ‘The Income Generation.’ You know we’ve already mentioned that consumer spending was up in December even though the overall GDP growth for the fourth quarter came in lower than expected. But less you're known detail about the spending increase, is that it came at the expense of savings. In fact according to a recent report by the Bureau of Economic Analysis, savings actually dropped to a 10-year low, which could be another bad sign for future spending in economic growth. Now, this might be seen as a potentially down side to the wealth effect, which I talked about many times before on the show.
David Scranton: The Wealth Effect theorised are that people are more likely to spend, when the stock market up and the 401k’s are doing well, why? Because psychologically they feel wealthy. The wealth effect was suppose to help spur recovery after the financial crisis in fact, but by lowering the interest rate to near zero, the Feb basically forced investors up the risk curve, meaning into the stock market by making other investment options appear less attractive. While that did help the market grow as we discussed earlier, it didn’t do much to help the economy itself because consumers were reluctant to start spending and borrowing again just because of low interest rates. Instead they focus on recouping savings that was lost in 2007- 2009 when we had the big market crash, and they focused on paying down debt also. The increase in consumers’ confidence since President Trump elections suggests that people are willing to spend again, but most of those same people probably haven’t seen their wages increase by much if at all. That means a lot of them are dipping into savings to increase their spending, much like we had back in 2006. According to that report, recent report by the Economics Bureau, household saving have falling to their lowest level since December 2007, when the economy slipped into the great recession. So if Americans have so far been going into their savings to increase spending that means that immediate income would have to increase soon in order for spending to continue and for growth to accelerate. Yes, the Presidents tax cuts will probably help that, but will they help enough is the question? And that remains to be seen!
David Scranton: What’s more concerning about all this from a Financial Advisor’s perspective is the idea that some Americans may be drawing down their savings in a time when they can least afford it. If you are retired or within ten years of retirement for example you shouldn’t have to be drawing from savings at all to make expenditures. For most people, your money should be invested in such a way that the principle secure and generating hopefully enough income through interest in dividends to satisfy all your spending needs throughout retirement. As I have discussed before on the show, spending down on principle when you are retired or near retirement can be a very slippery slope and should be avoided at all cost.
David Scranton: Now it's time to welcome to our show Paul Mladjenovec. Paul is a certified Financial Planner, National Seminar Leader, Author and Consultant. His specialty includes investing and home and Business issues and his books include with high level of Investing for Dummies and Stock Investing For Dummies, which was named one of the top 10 books for investors that bearings. He's appeared on all the major networks and his blog is called ‘ravingcapitalist.com.’ Paul Welcome to our show
Paul Mladjenovec: I'm thrilled to be on, thank you for having me.
David Scranton: You know I need to ask you a favor though when we start if that's okay, can I ask you a favour?
Paul Mladjenovec: Go on!
David Scranton: Can I just call you Paul Smith for the rest of the show please to make it a little bit easier for your friend to host here if that’s okay?
Paul Mladjenovec: Listen Paul or or hey you works for me. It’s just a pleasure to be on, thank you Dave.
David Scranton: You're very welcome it's great to have you.
David Scranton: So Paul is a Raven Capitalist, I expect that you're pretty pleased about Trump's tax plan hasn't gone through. The question is you confident that can deliver the kind of growth that he has promised? And if so, how long you think it might take?
Paul Mladjenovec: Well here's the thing, when you're talking about a tax cut plan such as he has and you can add derivation you know some better, some worse, etc. The bottom line is that to keep in more of the capital in the economy, because what are we talking about when we talk about taxes those are basically corrosive payments that take money out of the private economy and put it into the public economy or the government infrastructure basically. So, if you want the government, if you want the economy to grow, the more capital you can keep in there the better, and in addition taxes, see a lot of people sometimes debate taxes from a mathematical point of view, ‘oh there's too little, too much, etc’, they forget that taxes especial tax cuts create a powerful incentive for production. And really the Cornerstone of success for the economy is production, the more you can grow the more you can incentivize that, the better. And with people know that you keep more fruits of your labor, that's another powerful incentive. So for me, I think tax cuts are typically unbalanced usually a good idea and in many cases a very powerful idea. So I like them and I think good long term effects that would be great across the economic landscape without a doubt.
David Scranton: So Paul we are distributing, redistributing wealth from the government pocketbook into the pocketbook of cooperative America and into the pocketbook of individuals. So the problem now is, how about the budget deficit has this become a bigger issue or do you really think that we can grow our way out of this expense?
Paul Mladjenovec: Believe it or not, I think if nobody else is tweaking this long time to come maintaining spending at or below the level of inflation, you could at some point down the road able to ironically grow out of it and even have yourself a surplus. You see what, a part of the tax debate before I do what I'm doing now for 25 years I did taxes; I know the impact that it for individuals and small business. And the point about tax rates, you're lowering tax rates many people including financial advisors and commentators on the networks, they confuse tax with tax revenues and many people think well you are going to lower tax revenues but no you're not
David Scranton: But short-term you will lower tax revenues, the question is long-term can you then turn it around and increase tax revenues?
Paul Mladjenovec: Oh no, absolutely, think about it this way. Whenever you have a corporation for example that needs more revenue, what do they intend to do because they can't force people to pay and buy their products and services so they tend to lower prices. So then all of a sudden they get more revenue, so this is why company like Wal-Mart tends to make more gross revenue then a company like Tiffany's or these kinds of venues. So tax rates, when you're lowering prices you get more of that activity, companies then tend to hire more people, they tend to expand their operations which mean you increase the tax space, ultimately you do increase in the long run tax revenue.
David Scranton: I like that analogy; it’s much like in a business very much the same. I want to break down two more things but we have to go on a commercial break in just about 30 seconds. So bottom line, what do you think about the stock market in 2018, you think it will end the year up or down? Give us the bottom line answer we can break it down in the next segment.
Paul Mladjenovec: I look forward to that, do you want me to tell you now or do you want me to wait until after the break?
David Scranton: Sure, the bottom line do you think the stock market is going to end the year higher or lower?
Paul Mladjenovec: I see being a flat range at the end of the year, but I’ll tell you more afterwards when I presume.
David Scranton: Alright sounds good, that's great. Stay with us Paul, thank you and you too stay with us our income generation members we have a lot more. We're going to ask Paul more about the stock market, bond market, interest rates; you're going to want to hear what he has to say!
David Scranton: If you are near or in retirement, head over to ‘the incomegeneration.com’ and download your special report written specifically for the needs of the income generation and those born before 1966. I am David Scranton and you’ve been watching ‘The Income Generation.’
DURING COMMERCIAL BREAK:
Speaker #1: Let me tell you Mickey's special today we've got steak and eggs served with some home fries and Mickey waffles
Speaker# 2: Will love me some steak and eggs
Speaker # 3: Ever since they found mad cow disease in the U.S. I'm not taking any chances. It can live in your body for years before in ravages your brain.
David Scranton: Oh yes we all remember We all remember Debbie Downer, and believe me I realize that I and other advisor to focus on protecting and income can sometimes come across as Debbie Downer when we talk about stock market risk in the midst of a rally like the one we’ve seen over the last couple of years. But the reality is there is a certain level of risk in virtually any type of investment and the factors that can increase risks aren’t always known or apparent to most investors. That's why it's especially important in times like this to focus on the right details or if you don't know what all those details are, then make sure that you have a financial advisor who does. We've examined a lot of relevant data and details related to risk on today’s show and when you put them all together the bottom line is the soaring stock market in my opinion still doesn’t make fundamental sense. It's kind of like the old magician trick, where the magician levitates a woman in midair and runs a ring over the length of her body to show that there is nothing holding her from above or holding her supporting her from below. The market might start to at least makes more sense if the froth were to stop building for a time so the modest improving economy will catch up to it. But guess what it hasn't happened yet! This is still a market influence more by hype, hope and emotional factors than by fundamentals and that yes increases factors, especially for investors close retirement. And that's why I myself and other Retirement Income Specialist are going to continue sounding like Debbie Downer, until things start to make fundamental sense again. That will happen through either an economy that suddenly soars proportionately with the stock market or a market that corrects itself to align with economic realities
David Scranton: But now, let's welcome back my new friend Paul Mladjenovec. Paul, I have to ask you now, are you are you of Polish descent is that your last name
Paul Mladjenovec: Yugoslavian
David Scranton: Yugoslavian
Paul Mladjenovec: More specifically Creasian. I was born in a communist country that's why I refer myself as raving capitalist. That's actually how you become a raging capitalist.
David Scranton: The reason why I was asking is that I thought you were of Polish descent. I'm 3/4 Polish and I was going to say I thought that it was just perfect that a Pollack like myself will be writing a book about investment for dummies, but I guess my whole joke is going now because you're not Polish, but that's okay.
David Scranton: So you think the market….
Paul Mladjenovec: That works for me you're a brother to me. We are Eastern European. Go get him Dave!
David Scranton: That’s right, that’s right!
David Scranton: So you think the market going to be fairly flat this year? And it's interesting because our last guest, David Hightower thought that the market was going to keep roaring along yes the market forward-looking so the markets is a little ahead of the economy. Do you think the economy is going to grow so much that market is going to continue to grow. It sounds like you're saying that the economy might grow into the market but in 2018 that's about it. Is that what I'm hearing you saying as far as the stock market are concerned?
Paul Mladjenovec: Well yeah here is the thing, here's my concern with the stock market. Obviously it's a great stock market, I can consider myself bullish, could go to 27,000 or 28,000. I think there's a strong chance for that, but I see a lot of things that are worrisome to me, because I feel like the stock market is going to have a scrapple effects from some other market; the bond market is going to be a huge problem in rising the interest rates, and that's going to start tempering things in my estimations. So, it should be a good year for the stock market, but there are dangers that are out there that could prevent it from going some people, when everyone start talking about 30,000 and beyond we have to be careful because things coming to play, where people borrowing on their stocks than ever before. There are a lot of things that will really be of importance
David Scranton: Now if you're saying 27,000, went up a couple percentage points above where we are today, so the question then becomes, what are those things that concern you about the market? What’s the biggest one, what’s the biggest one right now that has your concerns about the market for 2018 or maybe even into 2019?
Paul Mladjenovec: Well I think the bond bubble personally. I think there is a tremendous amount of debt and the point is I don't know how is going to be paid, and if the interest rate starts to rise that's going to cause some real problems in those venues. I went that starts to occur, then in many cases that will have crucial effect on the on the stock market; because I think the stock market in itself was inside the bubble. I have to be careful how I use the word bubble, but inside of itself it has strong potential because the main point that's going to giving it support is the economy. The economy, I think will do well with the stock market. I tend to feel to a lot of extent what a financial advisor might expect, but I think a lot of things tempering it going forward and the bond bubble is one of my biggest concerns going forward and rising interest rates.
David Scranton: It’s interesting as historical, when you have a bond bubble per say then money flows in today stock market what the stock market is so high right now that I can see your concern; people get fearful and running for the hills completely. So stay with us, we have one more segments with lots of great questions. And you too, our income generation members, you stay with us too. We have a lot more from our good friend Paul Smith. We'll be right back!
David Scranton: Welcome back to the income generation. I am David Scranton and we are still here talking with Author and Investment Specialist, Paul Mladjenovec aka Paul Smith. Paul thanks for sticking around one more time. So you struck a nerve with me here now so when to push back with you here a little bit and have some fun. I agree with concerns about the stock market and I think if interest rates go up then the stock markets on its own could drop cause interest rates effects valuations; the higher the interest rates are, the lower stocks are valued on a present value of cash flows. But I'm not expecting a bond bubble, so tell me more about why you see that happening?
Paul Mladjenovec: Well when I take a look at the across the landscape, a lot of areas are at great heights right now. The auto subprime is at a high level, consumer debt; corporate debts are elevated debts, etc. To me debts could be a real problem or issue. Now, if the economy grows and people can be able to be in services, to me maybe we can model through it. But in the meanwhile if the federal reserve's feels stock market the economy are doing just fine, they can start and giving them rationalization for increasing interest rates and to have really a systematic effect in many respect. So, and the thing is this, can we go through 2018 without a bond bubble popping? It’s a possibility, but I just feel that it's a heightened area that people should be concerned about, that’s why the stock investing, I prefer dividend investment stocks rather than regular stocks.
David Scranton: Well, I agree completely on the stock side, absolutely. But when you start talking about spending going up or debt going up personal debt; if you're talking about 2006/ 2007 prices even if it’s not financial crisis, its recession, then ultimately the Fed’s are going to have to lower interest rates again and that creates a tailwind for bonds. So, I guess I've looked at it saying, gosh if that happens we have a tailwind for bond, if things keep going up so much money is still on the side lines that's going into the stock market and going into bond market it's really keeping the stock market artificially overly inflated. And it's keeping the bond market from really having bond bubble, because to be a bond bubble it has to be burst at some point, your thoughts?
Paul Mladjenovec: Well this is what I think for example like the real achilles heels is going to be junk bond areas, and those are started to show some cracks.
David Scranton: Especially in the stock market, absolutely.
Paul Mladjenovec: So, there is plenty of junk bonds out there and people looking for heels, and so for me there is some worries there. Now don’t get me wrong, if the interest rates stay flat for the year and the economy starts to grow, then I would take, would be much less concerned about the issues of the bond market and for me the stock market. But keep in mind even if it causes a pull back in the stock market I see it as buying opportunity, I think very long term stock market can keep on going unless there's massive policy changes at the federal level that will start to denigrate and pull back.
David Scranton: I agree completely. If you're going to be in the stock market, dividend paying stock with the option, unfortunately a lot of people whether investing for income, you can’t get the income you need from that. Thanks for being on the show today we're going to run, it's been my pleasure.
Paul Mladjenovec: Thank again Dave
David Scranton: I would like to thank both or guest for joining for another episode of the income generation, and I also want to thank you our new and returning viewers. As expected in president Trump's first state of the Union address last week, he devoted a good deal time talking about his tax cuts and how it's going to kick economic growth into high gear. And that could actually happen, there is no doubt the economy is been moving in the right direction or that they pace of growth have been picked up since the election. But there's also little doubt at the stock market post-election growth out- paced the economy's growth by pretty significant margin. And it's a given that at some point the market have to make fundamental send again. As we saw on today's show, compared to historical norms, this economy is far from booming. In fact it’s not even back to an average level of growth; it still has a long way to go. And while there's a chance that his tax cuts and factors could get us there, here is by no means a certainty. What is certain, is that with froth building, the market and the market still up now is the ideal time for investors within 10 years of retirement or who are currently retired to consider if they haven't done so reducing their risk; in other words take some chips off the table while the pile is still big, to protect them and to put into work generating the income you need to enjoy retirement.
David Scranton: Thanks for watching, the bottom line is if you are close to retirement and you really want to know how to protect and maximize your money, it's essential that you stay in informed and up-to-date and right here is where you can do it on ‘The Income Generation.’ I'm David Scranton and thanks again. We’ll see you next week!
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