Interest Rates

Janet Yellen: Today the Federal open market committee decided to raise the target range with the federal funds rate by 1/4% point bringing it to 3/4 to 1%. Or decision to make another gradual reduction in the amount of policy accommodation reflects the economy’s continued progress toward the employment and price stability objectives assigned to us by law.

David Scranton: Could it be that we finally become into normal economy again. Well, the Federal Reserve raising short-term interest rates for the second time in 3 months is one sign yet that it just might be. Don’t get me wrong rates are still historically low at 3/4 at 1%. However, the Fed quarter points hike on March 15th represents one more movement in the right direction. The question becomes will it continue? Can it continue? Janet Yellen expressed confidence in her speech on the 15th. The question becomes is she just feeling the same kind of hopeful optimism that’s kept the stock market irrationally high since the election? Or is there actually enough real evidence to support her confidence. More importantly, what could it mean for your retirement portfolio as interest rates to get back to a consistent upward trend? What might it mean if they stall or start sinking again? Are there opportunities that you can take advantage of or hidden risk that you should know about? It’s time to tune out the hype and focus on the facts. Facts that matter to you the Income Generation.

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David Scranton: Hi everyone and welcome to the Income Generation. I am David Scranton your host and today we are taking an interest in interest rates. It happens to be a timely topic with a lot of potential importance for your retirement money. In my experience, most everyday investors don’t really know as much about interest rates as they probably should. They are aware of some of the very general basic rules but they don’t really understand how interest rates work. They don’t understand how they can impact different investment tools or strategies. It shouldn’t really be surprised though because after all, it is somewhat of a complex subject. Some brokers and advisors like to speak about it only in terms of general rules. Why? Because I believe it suits their business model to do so. In fact, often times sharing too much information about interest rates might cause you to realize that you actually have more options than just the one they are trying to sell you. Let’s break it all down for you based upon what’s happening right now with interest rates. My aim is to earn you with the information that you need to make decisions that are right for you because that’s what we are all here for. Helping us today will be our special guest Peter Tchir, a well-known Interest Rate Guru. As always I’ll be joined by some fellow thought leaders in another edition of my financial advisor roundtable. But first, let’s take a closer look at what’s going on right now with both long-term and short-term interest rates.

 

George W: Many banks have restricted lending. Credit markets have frozen and families and businesses have found it harder to borrow money. We are in the midst of a serious financial crisis.

 

David Scranton: You’ve just heard George W during the Financial Crisis of 2008. One of the actions the Fed took was to lower short-term interest rates who 0 for really the first time ever. The goal behind the Fed strategy overall was to artificially stimulate the economy to get it moving again. But in the end, they became too reliant on that particular method of stimulating the economy. They overused it and because of that it never really worked nearly to the extent that they or the Obama Administration for that matter wanted it to. Which is one of the reasons that Donald Trump is now President? It’s also one of the reason that short-term interest rates are near 0 for 7 years and are still below 1%. The Fed needs to see solid economic growth indicators before they can change their policy. And even now economic indicators could be stronger. Janet Yellen, for example, want to see inflation at 2% by the end of 2016. Although it’s finally moving up its still a bit shy of 1 1/2%. The GDP is also improving but at 1.9% for 2016. Still a long way from the 4% annual growth that President Trump is promising. Another thing that used to happen for the Fed to hike short-term rates is that long-term rates must increase first. The Fed doesn’t set long-term rates. Those long-term rates are driven by the markets and determine primarily by forces of supply and demand in the bond market. The 10 year Treasury t=rate has been stocked below 3% and frequently below 2% over the last 6-8 years. Now granted that’s better than some countries like Switzerland for example which have actually fallen into negative interest rate territory. Thankfully things never got quite that bad for us but they also never improved enough to handcuff the Fed. That is until November is election. The main reason the Fed needs long-term rates to rise first is that they simply cannot risk flatten out the old curve. When short-term and interest rates are the same that’s called flat old curve and banks don’t like to lend in that type of environment. If the gap between short term and long term interest rates is too narrow then they have no incentive to lend. That becomes counterproductive to a growing economy. If you think about it that gets to the very heart of why the Fed lower short-term interest rates near 0 in the first place so many years ago and why the strategy hasn’t worked so well. The stated goal was to give consumers and businesses an incentive to spend and borrow. In the wake of the worse financial crises since the great depression, it was simply never enough incentives. Most Americans have been focused on saving and paying down their debt during these last 8 years or so, not on spending and borrowing just because interest rates were low. What low short-term interest rates have done instead is influence how people are saving. In short, it’s driven many Americans up the risk curve. Meaning in the stock market and in other risked base assets by making other investment options look less appealing. That’s one reason the stock market has managed to keep rising since the great recession. Even though the economy hasn’t really recovered as much as the regulators and so on would have liked. Banks, CDs, and Treasury Bills seem like poor options in a near 0 interest rate environment because the returns are based upon the short-term interest rates that are set by the Federal Reserve. Most people erroneously believe that bonds are also a poor option in a low-interest rate environment. Why? Because they believe that their values will decrease when interest rates inevitably start rising again. Let’s face it is it most things in the financial world. None of it is really that simple which is why I have always believed first priority of a financial advisor should be to educate his or her clients. A bit later we are going to help you test your own knowledge of interest rates and how they affect your investments. We will do it with a good old fashion game of true and false. You might actually be surprised and I promise that you’ll learn a lot so stick around. First let’s jump into it our first guest, columnist, and market analyst Peter Tchir. A noted authority on the subject of interest rates. Peter started his career at Bankers Trust and later at Golcher Bank. He specialized in fixed income investments both has a seller as well as a market maker. As a portfolio manager and fixed income hedge fund, during the financial crisis, he ran United States credit default swap index for the Royal Bank of Scotland. You probably know something about the credit default swap index if you saw the movie the Big Shark. Peter thanks for joining us.

Peter Tchir: Thanks for having me.

David Scranton: Let’s get right into it. You wrote an article in which you ask a question how much of the recent post-hike rally was short covering and investors buying into a Goldilocks scenario. Can you talk about what you mean by that?

Peter Tchir: Yeah I think what we have seen is the Fed hiked on March and short-term interest rates went higher but by and large longer-term interest rates. Let’s focus here on the 10-year treasury it got as high as 2.6% but it’s at 2.4%. There’s a belief right now that we might be in this good part of the economy where growth is good and it’s reasonably strong but it’s not so strong as to scare the Fed so we can actually get growth without being forced to slow the front envy of the Fed. That would be the so-called Goldilocks economy.

David Scranton: What do you think about what’s going on with long-term interest rates? Long-term interest rates had a nice jump about 100 points or so right after the election and since then if anything the trend has been slightly downward. As you mentioned it was kind of surprising that the Fed raised rates to 1/4 point short-term rates but long-term rates since then have actually come down a bit. Are you concerned as I am that long-term rates might act as a governor kind of sort of to prevent the Fed from being on the short-term rates much more?

Peter Tchir: Yes because I think we can all agree that the Fed really is on mass as they want to raise the front end and they want to raise those short-term rates. At the back end this longer-term treasury it’s not budging and it’s a growing concern to a lot of people because it’s almost like the bond market is telling something different than the equity market. The equity market seems to want to go higher, seems to want to bleed the grow story and yet there is that 10-year bond market that seems to be saying hey maybe this growth isn’t really coming, maybe we are once again doom for some sort of holdback. That’s concerning and I would be much more comfortable seeing yields rise showing growth and belief in the future rather than this ongoing concern.

David Scranton: That is a concern because you believe what people often say that the bond market is smarter than the stock market in terms of predicting economic growth.

Peter Tchir: I think there is a different profile for a bond investor. If you spend your whole life in the bond market, all you ever really plan to get is the money you gave. There is no real upside and yet if you don’t get paid there is a lot of downside so I think we are trained to look at the downside. My only hope here is that people have been praying so long the past 8 years to always see the downside and then being rewarded. Maybe the bond market we are getting too pessimistic and we are actually ignoring some of the real signs of growth and optimism that we should be having.

David Scranton: Ok, How can long-term rates go up at a time when the 10-year Swiss bond is slightly negative, even the 10 year Italian and Spanish bonds are paying less interest than ours and theoretically at least have a much higher risk of defaults. On a world economy don’t some of those interest rates act as kind of sort of a governor that keeps our long-term rates from getting much higher?

Peter Tchir: Yeah I think that’s really important to know because the short end is what the Fed control. The Fed can raise and lower that and it will respond as it should. The longer end is tricky. You have got the European Central Bank continues to do this q year quantities easing so they continue to buy bonds and the Italian bonds and French bonds and that drags lower and that causes foreign demand for our bonds so it’s definitely squeezing our interest rates. Think that’s another one of these problems that we go through is they did all these alternative financial policies to help us through and now we are mirrored in some of them. We are no longer buying treasury but the Fed still has I think its 5 trillion in treasury and mortgage box on their book. Germany or the ECB is still buying bonds, the Bank of Japan is buying bonds so they have distorted this free market picture. I think that’s troublesome and that’s another reason it’s taking us so long to get a true picture of hey let’s do growth and what are the risk we want people to take.

David Scranton: its funny everybody thinks that quantitative easing ended in October of 2014 but you are absolutely correct. All we did was stop buying more bonds. The Fed Reserve stop buying more bonds. But they haven’t unraveled yet because the bonds haven’t matured nor have they sold them back on the open markets so Peter please stay with us we need to take a commercial break. We’ll be right back. For those of you at home please stick around too we’ll cover a lot more about interest rates. You are watching the Income Generation.

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David Scranton: Welcome back to the show. We are here today with Interest Rate Guru Peter Tchir. Peter thanks for staying with us.

Peter Tchir: Thanks for still having me.

David Scranton: You know of course Janet Yellen wants to raise short-term rates. So she has more ammunition, more bullets in her gun so to speak, whatever you want to call it next time we get into recession. The question is how important you think it really is for her to be able to raise short-term rates?

Peter Tchir: At the end of the day short-term rates went from 5 down to 0 and we were barely able to get the economy moving.

David Scranton: So is it really that important or is the Fed going to have to rely on other strategies next time we have our recession to get the economy moving again?

Peter Tchir: I think they are going to have to rely on other strategies. In my opinion, we should have already moved to higher rates, we should be at much higher rates. I think the economy can function with higher rates. The fact that we are so slow really gives us very little window of opportunity if we have another problem. If there is some sort of a pullback whether it’s something we do or something the rest of the world does they don’t have much ammunition. Three rate cuts isn’t going to do very much so they are going to have to do alternatives and whether it’s QE or even beyond that and that’s something I am uncomfortable with. One of the real concern I have is Central Bank seem to love this idea of negative interest rates. You see it still in Europe, you see it in in Japan and I think negative interest rates are one of the worse things that can happen. Clearly, I am not an economist so I don’t buy into that. I just see what happens in the real world. I would love to avoid negative interest rates. I think that’s the direction we head next time it scares me.

David Scranton: It scares me also. I completely agree. For our viewers you start talking negative interest rates it’s like 10-year Swiss bond right now where literally for the Swiss Government for you to lend money to them you are literally paying them a little bit interest every year for 10 years and making nothing and you are paying. I want to change topic for just a little bit though. I agree with you completely Peter but since you are the credit default swap expert you help create that index with Bank of Scotland. I really want to pick your brain about this because that credit default swap problem was one of the things that really helped the economy and the financial institutions really start the financial crisis helping things cascade downward. Have we regulated those? Have we really fix that problem or is that still in a way of smoking gun that’s lingering out there?

 

Peter Tchir: I think we have done a decent job. What the government try to do through Frank was they try to put a lot of these things on an exchange so there is much more clarity between who the buyer and seller is and it’s more centralized. They have also reduced the amount of leverage that’s available for these types of products. I think it’s reasonably controlled. I do think that given the amount of problems and this really started with Barry Sterns back in 2008 when J.P Morgan was forced to rescue Barry Sterns. There were known concerns about the counterparty risk what was going on the default spot market and yet it took years and years for things to come in place. I think its most of the way there it still could be better.

David Scranton: Are you concerned Peter then that if President Trump goes in the way of deregulation that maybe we can undo some of those safeguards that had been put in place?

Peter Tchir: I think when he looks at deregulation and getting rid of some of this I think they should pull back on things like the rule. To me, the rule doesn’t solve anything. Thanks making markets and trying to provide with customers was never where the problems were. Creators run those books with reasonable risk and sometimes they lose money but they are never going to lose much money. It’s not going to bring down the bank. So things like that that we are kind of throwing on hazard and actually have hurt the overall market should be repealed but I do think there are something’s that really go to health and safety of the economic system and they should be careful to make sure those stay in place. It’s going to have to be a very thoughtful look at what went in with Frank that’s good and try to keep it and look at some of the stuff that was over their top, isn’t helpful and pull back on those.

David Scranton: Let’s talk about some of those directly tangible to our Income Generation members, or viewers. I get really concern with a lot of the financial advisory world that offers fixed incomes, they offer bonds but they still trust the rating services and of course the movie the Big Shark you saw the famous scene they came in and said why are these still triple-A rated and the lady sitting there at the desk well because I have to feed my family and they can go right down the street and get a triple-A rating from the other service. You think that the rating services have tightened up enough or do you share my concerns that they still need to tighten up a little bit more when it comes to valuing the ability for companies to repay bondholders?

Peter Tchir: I am a big fan of you really I think wanted some outside help with this and really I like the idea of even mutual funds or even ETS but I think you want an outside manager really kicking the tires. I think the rating agencies particularly for cooperate credit so individual companies the Gas of the world do a pretty good job on it but still I think you would like someone who does nothing but look at this all day. Again as we spoke about earlier from a bond investor standpoint your big risk is losing your money not getting it back so I like the idea of having people kick the tire for you. I think you should incorporate outside money managers in your fixed income because you want that extra level of caretaking.

David Scranton: Wow that’s almost like I paid you money for viewers. I want to let you know that I did not pay Peter any money to give that commercial for our company sound income strategies but Peter you’ll probably be happy to hear that I hardly even consider the rating services ratings. To me whenever we look at fixed income we go right to coverage ratios and the numbers behind it.

Peter Tchir: That makes sense because when I am talking to my institutional investors rating rarely comes up.

David Scranton: That’s right and the ratings are important for the reserving requirements for a financial institution but for your average investor it’s not so much letter rating they just want to know that their money is protected. This company can pay them back. Anyway Peter thanks so much time flies when you are having fun and unfortunately we are out of time but thank you for being here today.

Peter Tchir: Thanks for having me. It was fun.

David Scranton: It’s always great to have an Interest Rate Guru here on the show like Peter and again I want to promise all yawl that wasn’t a paid commercial but the question becomes…Are you ready now to put your interest rate knowledge to the test? I hope so because the more that you know about interest rates the better equip that you are going to be to work with your advisor and to make investment choices that are right for you. So here we go, true or false. Short-term interest rates affect long-term interest rates. The answer is False. If anything its closer to the other way around as we just talked about with Peter. But even that isn’t precisely accurate. In fact, as I explained earlier short-term rates are set by the Fed Reserve and one of the main factors in determining where they are set is the position of long-term rates. Long-term rates are driven by the markets. Short-term rates don’t do anything to influence long-term rates but when long-term rates rise it can allow the Fed to adjust short-term rates upwards. Again though that’s just one influencing factor. This relationship is actually somewhere to a misunderstanding that people often have about inflation. With inflation, for example, it’s not that your dollar becomes worthless because prices have risen. Instead, it’s that prices appear to increase but what’s really happened is that the value of the dollar has gone down. True or False. When stock values rise long-term rates also rise and bond values fall. The answer is true in theory but it doesn’t necessarily happen in equal measure and frankly, it hasn’t really happen in the current market rally. The stock market is already climbing right after the election and is setting new record high several times over. As for bonds Peter just mentioned the 10-year treasury value dropped and long-term interest rates spiked right after the election. Since then if anything there has been more upward pressure on bond prices, more downward pressure on interest rates. The rates are basically levelled off right around 2 1/2% or so on the 10-year government bond even as the stock market has kept climbing. As I discussed on our recent show this could be a sign that investors may not be as optimistic about Trump’s economic revolution as they appear on the surface. Their optimism is driving up stock values yes but the same time they are not fleeing bonds to buy stocks. In other words, it’s not a flight from quality. They could just be edging their backs. In other words, just in case the Trump Bump gives way to the next big slump. Think of it as having one foot on the accelerator and one foot on the break when you are in traffic. Not quite sure in the traffic ahead is going to let you floor it or force you to put it in park. The bottom line is that investors have had a lot of money sitting on the sidelines for years now. Which is now flooding into all markets. The stock markets and yes the bond market proving up prices, proving down yields. True or False. When interest rates get too low they must go up again. False. Economic rules are influenced by changes in societies and governments and those things are always changing. Ours is certainly changing demographically has baby boomers age. In fact, a lot of economic impact comes with that change of aging baby boomers. It’s just one reason that some analyst and some economist believe that low-interest rates may just be our new normal. I often use Japan has an example. Face it they have been in a low-interest rate environment now for about 25 years and that’s important to keep in mind whenever you hear someone saying that we are in a bond bubble and the bond bubble is about to burst because interest rates inevitably have to go up. We’ll get some more helpful insights on this topic from my guest on today’s financial advisor roundtable coming up in just a bit. So stay tuned. You are watching the Income Generation.

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David Scranton: Welcome back to the Income Generation. I’m David Scranton your host. Are you ready now to put your interest rate knowledge to the test? I hope so because the more that you know about interest rates the better equip that you are going to be to work with your advisor and to make investment choices that are right for you. Tre or False. Long-term interest rates strongly affect the value of all bonds. False. Long-term rates strongly affect mortgage rates, government bond and triple-A rated cooperate bonds which are deemed to have some different risk to government bonds. They have a lot less impact on things like single corporates or triple b corporate bonds. True or False. The 60% increase in the 10-year treasury rates since the election has been bad for all bondholders. It increase from 1.5 to 2.5 it’s about 60%. False. As I just mentioned if you are in government bonds and yes your bond values had seen some significant decreases. Yields on triple b cooperate bonds, for example, had hardly move because the risk premium on moving from government bonds to cooperate bonds. In other words, you might have additional interest that investors need to go from government to cooperate has actually narrowed that risk. Why because people are more confident. Meanwhile, investors and a lot of actively managed bond portfolios have been able to take advantage of opportunities to upgrade for higher yields and even more important for them any decrease they have seen in their bond values have been only on paper. As long as they plan to hold the bond to maturity. Even more important then they are getting their full investment back at maturity is that any increase in interest rates have had 0 impact on the actual income, their bond is generating. Tre or False. Bond funds are a safer option for investors in a low-interest rate environment than in a diversified portfolio of individual bonds. False. You just heard our national gest Peter talk about that and says first he is recommending a change traded funds or bond funds. When you really get through it the real reason was because he thought bond should be professionally managed. When we manage individual bonds or we coach our advisors to manage individual bonds we focus on just that individual bonds, not bond funds. For investors who prioritize protection and income as most retirees and near-retirees believe they should. Individual bonds can satisfy those priorities in a way that bond funds can’t regardless of market conditions. To a large extent regardless of the direction of long-term or short-term interest rates. Some advisors may tell you that bond funds are the best way to mitigate risk and maximize returns when interest rates are low. Most of them probably just lack the expertise necessary to do that management of individual bonds themselves. Bond funds are their default option because they are not income specialist. Unfortunately, in most cases it means you the Income Generation member is paying two sets of fees not one because that management is being outsourced. So how did you do on our quiz? Hopefully, you learned a little bit or more. Ultimately the most important thing to understand about interest rates is that the so-called rules around them are certainly not hard and fast. The different investment vehicles and strategies are affected by interest rates in all different ways.

It’s important that you understand as much as you possibly can about those differences when working with your advisor to build your own personalized strategy. We’ll get some more helpful insights on this topic from my guest on today’s financial advisor roundtable coming up in just a bit. Before that Miranda is going to be breaking down some of today’s most important financial headlines.

Miranda Khan: Hello I’m Miranda Khan. Now is time for your Newsmax finance update. Here is a quick recap of the stories that move this markets this week. American aren’t buying homes at the same pace as they did during the beginning of the year according to the National Association of Realtors, home sales fell 3.7% last month with the decline may represent just a temporary slump from a sharp increase in January. According to a Bank of America Maryland survey, a record number of fund managers say US stocks are the most overvalued they have been in nearly 20 years. Meanwhile fund managers also so the emerging market and 0 zone equities were undervalued. An Analysis as Morgan Stanley say a drop in the sale of state and local government death may have been a culprit other than rising interest rates. According to one analysis, the rising cost of the retirement system has made government more of running up new debts. For more on these stories visit Newsmax.com/finance. I’m Miranda Khan now back to David Scranton.

David Scranton: Thanks, Miranda. Now that you are all up to date let’s hear from some financial advisors in the field other than myself and get their thoughts and insights on today’s topic which is interest rates. It’s time for another financial advisors roundtable. Joining me today are Patrick Peason of Peason Financial Group in the beautiful little town of Staunton Virginia. He has been an advisor now for 31 years and I think he had to put that down there because I have been in business for 30 years so he is this guy I’m telling you he has always a 1 up me for some reason. He specialize in the unique challenges facing retirees and near-retirees in today’s uncertain economy. Good to have you, Pat.

Patrick Peason: It’s an honor to be on your show, Dave. I love your show and by the way, for our audience, it’s pronounced Staunton. When you Staunton we automatically know you know nothing about the area here.

David Scranton: And I don’t you are absolutely correct.

Patrick Peason: You would be lost out of this area in a moments times Staunton.

David Scranton: Thank you for that correction Pat. While we are at the handsome fellow that you see on the bottom of the screen is Sam McElroy. He is a partner at World Financial LLC in Chicago Illinois. He specialized in creating customized client focus strategies and solutions for individuals and business owners. In addition to holding several financial licenses, Sam actually has a Doctorate in Psychology. Sam welcome to the show to you also.

Sam McElroy: Hey Dave thanks for having me.

David Scranton: I guess my question to start off kind of a broader sense is how much do you focus on interest rates? Sam, how would you answer that?

Sam McElroy: I think it’s got to be really important. Anytime you are working with a client especially around retirement planning, the whole name in the game is really about generating, sustaining, maintaining income and to a large degree playing around with the old understanding what’s going to happen with respect to interest rates is one of the best ways to figure out how to create a stable income and also how to predict what you think is going to happen in the future.

David Scranton: So Pat what do you think about the importance of interest rates when you talk to your clients.

Patrick Peason: So it is very important. Here in the valley where I live it’s a big retirement community in a very small area. I have found over and again in my meetings with my clients the most important fear or most prevalent fear is not fear of death anymore its fear of running out of money before they run out of life. So paying attention to yields and consistent reliable income I find is foremost under my retiree’s minds today.

David Scranton: How about interest rates? Are you concerned about interest rates right now being so low? Are you concerned that Janet Yellen has finally gotten a little bit of a headed steam raising interest rates and how that might affect fixed-income investments?

Patrick Peason: Yes well you have to certainly keep your eye on the target. I’m interest in Europe Union she may raise it one more time this year. I mean the yield curve, the 10-year treasury is still hovering around 2.4%. When it comes to fix income it’s interesting even though in the recent past the treasury yield the 10-year notice gone from 1.5 to 2.5 and fix income such as that really hasn’t moved that much. I think the risk premium is something to consider when we talk about interest rates and how they may affect fixed income in the cooperate market.

David Scranton: Sam let me ask you. Chicago, of course, you live there you probably know this is a pretty conservative station Newsmax but in Chicago, we know that’s all a very liberal area and you probably get a lot of people coming in. Being a psychologist I want your take on what peoples thoughts are because you know a lot of people come in I’m sure they think that the world is going to end now Donald Trump is going to destroy the country and whether they are concerned about our death mushrooming out of control and us having interest rates out of control and having a bond bubble bursting or they are worried about the stock going down to a thousand. In their minds, Donald Trump might destroy the economy. What are the biggest concerns psychologically that these people are coming in with now over the last few months post-election and how do you address those?

Sam McElroy: I think you hit the nail on the head with the latter one which is post-election we are sensing and we are hearing a lot more anxiety and a lot more fear. Regardless of whether any of the policies are being proposed or put forth actually works the concern is that if increase in amount of people decide that the market is too much of a gamble for them and they start pulling out we all know that could start this next flight.

David Scranton: Gentlemen stay with us for a minute we have to leave it there for now in this segment. We have to take a commercial break and for Income Generation viewers stay with us where we have more words of wisdom from both Virginia and Chicago. We’ll be right back.

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David Scranton: Welcome back to the Income Generation. Let’s bring back in our financial advisor roundtable. Today we have from the great world city of Chicago, we have Sam McElroy. From the beautiful little town of Staunton Virginia, we have Patrick Peason. So, Sam, you were talking about your concerns right before the break that you still have majority of the population. You are right it’s not your Chicago but at the end of the day, you did vote for Hillary Clinton that are really concern whether President Trump is going to be able to get the policies that he wants to get through in Congress. Even if he can whether are not they are going to work. But there’s other things out there too. We have heard about Robert Shiller cape index certainly being the highest since 1929. We heard about the quickest thousand point jump on the dal that we’ve seen since 99. We have seen things like that so how about some of these other things that are out there that might cause our Income Generation viewers to push the pause button and just be cautious about the market right now Sam.

Sam McElroy: I think there is a number of things to think about and it actually reminds me about an article that I read maybe a week or two ago. It was kind of comparing what’s happening in the stock market right now with what was happening leading up to the crash in early 2000s. The point that they were making is that a lot of economic indicators were actually a little bit worse than they were then. If you look at the Orleans growth for the SNP 500 3 year or the 5-year earnings growth. It’s a little bit flatter now. It’s been a little bit slower than it has been back leading up to the crash. In addition to that, you are looking at the cap ratio which doesn’t look that great. We know that Fed dead, consumer dead is a lot higher now. We know that GDP is a little bit slower now than it was back then so idea is that there is just a lot of things that are going on. If you look at the economic indicators at best you could say it’s maybe a mix bag. As we are starting to see more nervousness, more people with their finger on the trigger the concern is that any incident that can be kind of exacerbated or increased now is putting us closer to being able to trigger that next slide in the market and when that happens our concern is that it could be as large or larger than the last slide that we have.

David Scranton: So Pat what do you think. I mean are most your clients coming in also having concerns about the market? Are they coming in optimistic about what’s going to happen now? With President Trump are they sharing some of those same concerns? What are your thoughts on that?

Patrick Peason: I live in a more conservative area than Sam and as much as I hate to agree with him even here there is  a lot of concern and a lot of fear about the market conditions today.

 

David Scranton: In a politically conservative area there is still a lot of market concerns you are finding.

Patrick Peason: Yeah which is kind of surprising. People that are within 5 years to retirement or in retirement as you teach on your show they really can’t afford to take a major loss at this time in their lives. When it comes to retirement planning. I find over and over again when I ask people what’s the most important goal they have in retirement? Is it income for the future? Is it leaving money to their kids? Is it a lump sum purchase? 9 out of 10 times they say income for the future.

David Scranton: That’s important you bring a good point. Every person that you talk to if they are brutally honest they want to get maximum return with minimum risk. But you are saying it should depend upon for what purpose they want to get maximum return whereas the money going to be spent in a lump sum like a second home. Is it going to be used for income or people trying to get a maximum return really for their heirs? That’s an interesting concept.

Patrick Peason: I am finding a different trend over the last 2 or 3 years in my practice here that more and more people coming into retirement are less concerned about taking care of their children and more concerned about retirement income for themselves. I think that’s a healthy thought actually and I think we should gear more toward retirement and take care of our children while they are growing up, while they need the money and income is the key. More and more people are concerned about income so therefore what you and Sam said earlier about interest rates in yields fixed income types of investments give you those 2 guarantees. If you have number one a guaranteed rate of income to depend on and most of them have maturity deeds that you get your principal back in the future. A lot of those investments where you talk about earlier Sam about the market conditions is strangely enough. The more the market rises I’m finding people concerned that this is a certain type of bubble that we might be building up sooner or later when they burst.

David Scranton: Real quick Pat in the 30 seconds we have left what age do you tell people that they should start focusing more on income based investments and less on growth based investments?

Patrick Peason: Really within 10 years to retirement because that’s the time they can’t afford to take. When you see two 50% drops since the century and if that happens within 10 years to retirement they may have to work several more years to get the income to where they want it to be at retirement till they have an income to count on.

David Scranton: Most people don’t retire so they can unretired and go back to work. So very good point. Gentlemen stick around again we have to take commercial break and for our viewers, we’ll be right back with a lot more words of wisdom from both Sam and Pat about interest rates and investing for income. We’ll be right back.

[Break]

David Scranton: Welcome back to the Income Generation. I am David Scranton your host. Sam McElroy and Pat Peason thanks for sticking around. So, Sam, you heard our good friend Pat there who has should we say World Series envy. Who said 10 years before retirement? How do you answer that question has to when clients should start going from more of a growth or ancient mindset for more income-oriented mindset. Same thing, 10 years? Does that sound right?

Sam McElroy: It does but I would add another to it. I definitely think that within 10 years of retirement you have to start to move into a different type of investment strategy. I think the part that a lot of people sometimes miss is that it also depends on the economic environment that you are in, what you expect the market to do. Even if you don’t need yield or interest or dividend to be able to support you from an income standpoint you can still incorporate those into what we would call organic growth? If you are in a market where you think the returns aren’t going to be that great that doesn’t mean that you shouldn’t be looking at interest or dividend strategies even if you are greater than 10 years out. I definitely think that once you are in that 10-year window you can’t really afford to risk the potential for loss if you are in a market as the one that we have been in for the last 16 years.

David Scranton: Let me ask you, I don’t have time to talk to my shrink about this because believe me when I go there we have much more bigger fish to fry but as psychologist tell me why you think it is that so many investors today don’t get that they have to be educated. Why is it they have a mental block about investing for income and they are still heavily growth-minded? Do you have any insight as psychologist as to why that might be?

Sam McElroy: Yeah I think if you look at a lot of the research that comes out of the field of Psychology of Personal Finance and Behavior Economics and stuff like that a lot of it goes back to just the way that we as humans basically utilize and look at relevant information. We tend to have short memories when it comes to the bad things and we tend to overestimate the good times are. Part of this is really just tied into the evolution or the history of the market itself. The average investor didn’t really start following the market or being so heavily influenced by the market until we started having IRA and 4O1K and things like that. All the way from the 70s, 80s, 90s but that also happen to coincide with one of the best long-term markets we ever had. So I think people became overindulging in the market that greed factor kind of kicked in where they thought that the good times were always going to be good. When the market flipped into what we would call a longer kind of bear market where the market has really just been dancing around since 2000 I think they looked at it as first like it was a fluke and they were waiting for it to end and get back to the good times. Anybody who really studies stock market history kind of anticipated this. When we saw the bubble rising in the late 1990s we kind of could see the writing on the wall that we were getting ready to flip into another one of these longer and more volatile markets.

David Scranton: We did too being in the business but it sounds like what you are saying, in a nutshell, is its our earliest paradigms in life that tend to shape our experiences and that’s why right now we have a generation of investors that became investors in the 80s and 90s and they paradigm became growth in the stock market which makes sense. We need to leave it there for now. We need to take a commercial break. Stay with us again many more great words of wisdom from Virginia and Chicago, we’ll be right back with you.

[Break]

David Scranton: Welcome back to the Income Generation I’m David Scranton. Now let’s bring back Sam and Pat to finish out our discussion today about interest rates.

Patrick Peason: Dave I have a question for both of you. Especially from a psychological point of view. We’ve learned on your show how history tells us that there is three at least three drops in every cycle and they typically last about 20 years a secular markets. If the Chicago Cubs can win the World Series I suppose the both of you isn’t anything possible and can’t this be the first time in 200 years that we break what Dave calls the Three Guinness book world records. Did the Cubs won their old series? Sam, you tell me.

David Scranton: That’s a great question so Sam in the 30 second or so we have left. How would you answer that? Can the stock market be as lucky as the cubs or maybe not?

Sam McElroy: Yeah I want to say maybe not. For everybody who is not aware of this, we kind of had it coming. It was a lot of hard work and stuff so we are very proud of Chicago Cubs here and just so that you guys know we are going to do it again this year and it’s going to be fantastic.

Patrick Peason: The Washington Nationals are loaded for bear Sam and you know that’s your main competition.

David Scranton: Well in case or Income Generation viewers haven’t quite picked up on this. A small town in Virginia, quiet, subdued place clearly packed and grew up there. He grew up in the great state of New Jersey which is why he is a little more boisterous and outgoing but Pat.

Patrick Peason: We are used to winning the World Series.

David Scranton: That’s right man. We love you being on this show you guys. Pat thank you so much. It’s always great to have your insight and Sam it’s great to have the insight from the standpoint of Psychology so thank you both, thanks for being here. Thanks for staying with us till the end of the show. Before we go I’d like to thank all my guest as well as you are new and returning viewers. I’ll admit it today’s topic was a tricky one. It’s hard to fully explain the importance of interest rates and investing without getting overly technical. In fact, it’s one of the reason financial planning is a specialized field and why guys like me go to school for a very long time to study it and study just one little piece of it. Hopefully, your own financial advisor has done the same. Hopefully, he has made an effort to share more than a few basic rules or supposed truism about interest rates with you. Has we’ve seen those rules aren’t always ironclad and even the truisms can sometimes be false. Thanks for watching.