Female Voice 1: There are fears of bubbling bonds right now there are guys who won't sell this to their clients who want them, explain what this is all about?
Russell Pearlman: Well, we've seen there are three bubbles here. We started with Tech Stocks in the 90s, we had real estate here in the 2000s and now people are worried that we're going to have a bubble and bonds, particularly with individual investors.
David Scranton: Even though that conversation took place seven years ago, believe it or not, analysts are still talking about it, but why? If the bond bubble hasn’t burst by now the question becomes, was there really ever a bond bubble, to begin with? Should you be worried if you have retirement money in bonds or bond funds? Is this great bursting of the Bond Bubble still inevitable? Those are some important questions for any investor near retirement that, have shifted their priorities to investing for income. Let's face it, bonds are income generating investments and can be important tools for an income-based portfolio. But will that change if the so-called bubble bursts. It's time to tune out the hype and focus on the facts, facts that matter to you The Income Generation.
David Scranton: Let's get started. Get ready to separate reality from myth.
Male voice 4: David Scranton says: ‘Hey, not so fast.’
David Scranton: How does it affect the market? How does it affect the economy? Thanks to efficiencies and new technology and a staff of veteran analysts and portfolio managers. Sound income strategies strive to set that new standard and bring institutional style investing to your portfolio.
Hi everyone and welcome to The Income Generation. I'm David Scranton, your host. When the stock market started soaring in November, right after the presidential election. The 10-year treasury rate also spiked in the face of a bond sell off, jumping from 1.8% a day before the election to 2.6% by the middle of December. The 10 year Treasury is considered to be the most liquid and widely traded bond in the world and as it goes so goes the bond market. Right after the election, we saw an old-fashioned flight from quality with money coming out of government bonds and going into the stock market causing the stock market to soar as bond prices dropped and bond yields went up and that's fairly typical. But what happened after was anything but typical. As the stock market continued climbing all the way through March, the bond market stabilized, but each time it's gotten close to or just above 2.5% it's dropped back again fairly quickly. Now that's unusual because the bond and equity markets tend to move it almost opposite directions. A flight from quality and bonds normally continues in conjunction with the stock market rally driving up long-term interest rates and driving bond values down. That's how its so-called Bond Bubble might burst for example. But that's not what we've seen. And to me the reason is obvious. It's because we've never been in a Bond Bubble in the first place. Instead, what we're seeing is a bond market adapting to unprecedented new realities in the global economy. It's adjusting to a new normal. That includes perpetually low-interest rates and investors who are more influenced by artificial influences like quantitative easing rather than by economic realities. But just as importantly we're seeing interest rates and that's the bond market influenced by an enormous demographic shift. Baby Boomers, Baby Boomers who are focused on investing for income. What does it all mean for you if you're part of this huge demographic aka a member of the income generation? Today I'll talk to Joseph Hogue the author of Step by Step Bond Investing, a beginner's guide to the best investments and safety in the bond market. Later in the show, I'll be joined by some fellow thought leaders among financial advisers for another edition of my financial Adviser's Round-Table. But first, let's talk more about this so-called Bond Bubble. The idea behind the Bond Bubble is pretty simple. You see, when Treasury yields and interest rates dropped after the financial crisis many analysts predicted that the market would have to move in the opposite direction. They’ve looked at the situation with interest rates the same way, when the Fed lowered short-term interest rates to near zero following the financial crisis, the most popular wisdom was hey, since they can't get any lower they eventually have to get higher. But here we are now eight years later and short-term rates are still less than 1%. Economic conditions have not improved enough to give the Federal Reserve the confidence to hike them any higher and as we discussed on a recent show with long-term interest rates remaining low, raising short-term rates could flatten out the yield curve which is detrimental for the economy. Japan is a great example of this, and a counterpoint to the idea that low-interest rates must eventually climb. Their story is very similar to ours. You see, Japan had a financial crisis brought on by a collapse and the real estate market that was then followed by a period of slow growth and also a period of Central bank policy of near-zero interest rates and quantitative easing. Subsequently, there ten-year government bond yield, drop below 2% back in 1997 and hasn't surpassed that mark over the last 20 years. Not once. On top of that, the huge demographic shift we're experiencing right now in the United States started in Japan 20 years ago. That's when their Baby Boom generation started nearing retirement, started spending less, therefore, generating less economic growth and also in their personal investments focusing more on investing for income-generating investments options like bonds. The point is that simple concepts like the one behind this idea of a Bond Bubble are rarely sufficient in today's financial world and are oftentimes it extreme over simplification. So here's another simple but misleading concept about bonds. When interest rates go up bonds values go down and vice versa. Now based upon that idea so might try to argue that right now is a terrible time to buy bonds again why because interest rates are so low that hey, after all, they must go back up again. But we've already debunk that myth. But even if it were true, let's just say for a moment that it is true. There are other factors to consider factors that many analysts’ advisers and unfortunately investors for get or ignore. For example, this thing called the risk premium but this concept is defined as the amount of additional interest that any rational investor would require to move from a theoretically default free US government bond to a corporate bond or a Preferred. So why is such an important concept hard to understand? Stick around and find out, but right now it's time to get some insights on this topic from a very knowledgeable source. My guest today, Joseph Hogue is a chartered financial analyst who has worked as an economist since 2008. He provides research and analysis for small and mid-sized firms in the investment management industry and also manages a consulting firm focusing on emerging in frontier markets. He is also a guest panelist for Bloomberg and an author whose latest book is called Step by Step Bond Investing, a beginner's guide to the best investments in safety in the bond market. So Joe, tell us why you wrote your book, The Step by Step Guide to Bond Investing? What, what motivated you to do so?
Joseph Hogue: Well, mainly by just the fact that the average investor is, is very under-invested in bonds. All you hear about on TV on the internet is a stock investing and obviously we've seen over the last two decades leaves investors at risk leaves their portfolios at risk and leaves their retirement at risk to a 50% sell-off. So investors need to know what kind of exposure, they need to, to bonds and how to invest in bonds.
David Scranton: But Joe, why do you think that is? Why do you think that you know the media doesn't talk about bonds that much advisers, don't talk about bonds Wall Street doesn't talk about bonds. Why do you personally believe that is?
Joseph Hogue: Bonds aren’t sexy. They are the safety investment that the angel investments and they don't draw viewers. They don't draw a Lot of page views for the web and those page views ends up being advertising income. So most, most analysts, most programs focus on what draws the most viewers and that just happens to stock.
David Scranton: Yeah. No, I did see your pure so fun you're preaching the choir I oh, I believe the same 110% and you know I know you mentioned, you know, bonds, I know from your book that you're really a fan of individual bonds, but it's so funny because it seems like most advisers today when they when they put somebody in bonds. They do it almost as an afterthought in the use of bond funds. And yes bond funds have a niche, although you and I are both bigger fans in most cases of individual bonds. So when you think bond funds make more sense versus when you think individual bonds make more sense for a particular investor?
Joseph Hogue: Well, there's, there's a reason why most, most shows and most media pushes bond funds. It’s because again, that's where the eyeballs are. The the vast majority of mainstream retail investors are going to be invested in bond funds, just because of the fees involved at now I will say that I prefer direct investment in bonds, but it may not be appropriate for people with less than around $150,000 to, to put two bonds and that's just because the transaction costs involved in by an individual bonds. Bond funds can be bought, just like stocks For, for a $10 commission, but they don't give you that customization that you get from buying directly in bonds, they don't give you that income that lathering approach that you can use with direct investment and bonds. So there's a lot to be said with for direct investment if you have those, those means.
David Scranton: Yeah, and it's, it's you, I believe, part of the reason also is that a lot of advisers today really are don't understand bond. I think they should frankly, I think they should read your book you know it's absolutely today if you're out on the water. We get so we get so used to having GPS technology and everything else that nobody knows celestial navigation anymore. In some ways, financial advisers think of bond analysis as celestial navigation and its, its kind of sad isn't it?
Joseph Hogue: Sure well, it is and it's because I think investing has become more of an entertainment than about good, good analysis and good advice. It's…
David Scranton: Don't go, don’t go, and don’t go knocking door knock and financial television shows. Now when you say it's become a man. Okay. Just be careful there. I'm just, I'm just teasing. Joe what do you think about…I’m sorry.
Joseph Hogue: It’s more about you know the easy route rather than what people really need to do, the detail and the work that's involved in investing.
David Scranton: What do you think are the most common misconceptions that investors and advisers alike have about bonds?
Joseph Hogue: Well, right now there's a there's a huge misconception about, about rates and about the outlook for bonds, you know, we've had we've had a 30 plus year bond bull market where rates have come down from double digits in the 80s to two and a half percent on the 10 years US Treasury and people who are looking out into the future and predicting that rates have to go back up to those points and which of course would be would be bad for, for bonds. And it's just not the case. There are several factors pointing to a flat or very slowly rising yield curve for rates and bonds should be should be a very good investment over the next 10 and 20 years.
David Scranton: That's interesting to hear you say that because what our viewers need to realize, first and foremost is that you know we've gotten in here via Skype technology and you really haven't seen the rest of the show when we've actually talked about just that. So, my friend, you are like, as they say, a brother from another mother I swear, but stay with us if he can we need to take a commercial break but I'd like to have you back for one more segment we have many more important things to talk about bonds that you are Income Generation numbers must know, so stay with us. We'll be right back.
This is fun. This is 3, 2, and 1. I'd like to take a few seconds and tell you why I decided to write the book entitled Return on Principle. Basically, it all boils down to this, let's face it, you deserve to live a happy retirement. It's as simple as that. But for many the subject of money, finance and Math is complicated. Here's a fun fact many American claim that they'd much rather clean a toilet than calculate tip in a restaurant. The thank you I, I guess, but it doesn't have to be that complicated using the seven core values I outlined in my book that you too will be able to build a life based upon the right core principles. To turn that principle isn't just a book about financial investing. It's about investing in your life. I know for a fact that you're going to love it. Ok, now, now it's just getting a little weird here.
Welcome back to The Income Generation. Now let's bring back our guest Joseph Hogue, a chartered financial analyst who wrote the book called The Step by Step Bond Investing, a beginner's guide to the best investments and safety in the bond market. Thanks for sticking around Joe.
Joseph Hogue: My pleasure.
David Scranton: What do you think about what's happening right now with interest rates in the markets and so on, you know the, the 10 year Treasury rate went up a lot right after the election but yet it seems like a lot of other interest rates on a lot of other investment grade or mid-grade bonds haven't really increased in the bond markets haven't really taken a hit, in your own words why is that?
Joseph Hogue: Three things really that investors need to remember about the rate outlook for interest rates, both on the on the US Treasury and the government bonds as well as on corporate bonds because they are over the longer run and there, there are trying to move more in tandem a global demographics, the aging population, not just in the United States, but across the world and productivity is going to be a National limiter on inflation and rates. The oil boom in the United States that it's given us that fight that oil independence is keeping a lid on oil prices and then the possibility that Washington wants to see a more dovish or a lower rate Federal Reserve and we've got quite a few certain members that including a joint Chair Janet Yellen that are coming up for, for reelection or changing and the pro-business, government and Washington might just want to see lower rates for longer. So, so there's a good chance they're going to…
David Scranton: That begs the question, what do you think is the new norm for interest rates over the next five or 10 years or so?
Joseph Hogue: I was, the new norm is clearly lower is the US 10 years two and a half now, I'd say three and a half, maybe four at the most. Over the next 10 years and you've got several changes in the business cycle over that period that are going to require the Fed to, to lower interest rates and then you just have those natural limit, limitations on inflation and on economic growth that, that are going to act to hold inflation or interest rates down so, so…
David Scranton: Now are you of the people that think that by the end of this year, we could actually have a 10 year Treasury Under 2% or do you think this year it's going to stay in the two to three, range?
Joseph Hogue: I would say it will probably stay within the two to three, range. There's still a lot of pro-growth business policies that were waiting on in Washington that are even if we don't see them enacted this year, or even early next they'll, they'll act to increase business confidence and investor confidence, which will help push the economy so, so that's going to that's going to act to keep, keep interest rates bound between two and 3%. I would say over the next few years, there is the chance that the business cycle will turn and we will see lower economic growth, which may push further but, but, but there are a lot of factors pushing and pulling that the right outlook.
David Scranton: So, so 4% in 10 years but they can go lower before they go higher. So where are you, telling people now the best opportunities are in the bond market?
Joseph Hogue: Well right now you know investing has always been a much more personal idea than most people realize that start from your own returnees and your tolerance for risk. That said, there are opportunities in callable bonds, bonds with call options so if interest rates go down companies can buy the bonds back and reissue bonds at lower rates. Well, the odds of interest rates going down are much lower slower bonds, which you get a little bit higher premium most likely aren't going to be called. So, so there are opportunities and bonds to have those call options on them for investors in the higher tax bracket 25, 28% or higher, there is there are also opportunities in those municipal bonds. Those are federal income tax-free and local and state tax-free as well if you live within those jurisdictions. And of course, as always, you want to hold those municipal bonds were tax-exempt bonds within your taxable account and your taxable bonds, bonds and other bonds in retirement accounts to, to get the most, best of both tax advantages.
David Scranton: So in the 30 seconds or so we have remaining, you know, what do you tell younger folks that aren't members of The Income Generation that are under the age of 50 that say oh bonds are for babies. Those are for older people, I don't need bonds what, what do you tell them you know about balancing out their portfolio?
Joseph Hogue: Sure well, you always need bonds. If anybody that's been investing over the last two decades can tell you that bonds offer an excellent opportunity, considering the Wild Ride stocks. Bonds have returned just over 5% annual every last 20 years stocks 8% but bonds did it with about a fifth the volatility of stocks. So when you look at that risk-adjusted return bonds are actually a very good bet and, and they provide the kind of safety that, that investors need or when stocks don't, don't play nice
David Scranton: Of course, of course, best advice I give to our income generation viewers is if they're interested in bonds at all and hope people watch your shows regular viewer you are going out and by Joe's book Step by Step Bond Investing. It's a great user's guide. So Joe, thank you so much for being here on the show today. I hope you'll come back.
Joseph Hogue: Thank you Dave, My pleasure.
David Scranton: Now let's talk more about bonds in this Bond Bubble so to speak in the bond market overall. One of the most important factors when looking at investing in the bond market is this concept of risk premium. I mentioned this earlier, but risk premium is again defined as the amount of additional interest that a rational investor would require to move from a theoretically default free US government bond to let's say corporate bond or a Preferred stock. Here's why risk premium matters to you. You see before the entire financial industry began collapsing about 10 years ago, the 10 year Treasury rate was about 4.76% a triple be rated preferred though for example, was yielding about six and a half percent that means that the risk premium for Preferreds was less than an additional one and three quarter percent, meaning that a rational investor would have been willing to risk moving from a government bond to a Preferred for a gain that small. Now that may seem outrageous based upon today's standards but there's a simple explanation for that. If you remember people at that time back towards 2007 were overly confident about the economy. They were convinced that we'd recovered permanently from the Dot Com crash and that the worst days are over. That misguided optimism led them to require such a low additional risk premium for going from government bonds to Preferreds. Today, of course, the 10 year Treasury rate has dropped from 4.76% to below two and a half percent yet the dividend yield on a Preferred let's say, is now about five and three quarter percent that means the risk premium has now almost doubled to three and a half percent but at the end of the day, the interest rate on the Preferred dropped only three quarters of a percent over that 10 year period compared to nearly a two and a half percent drop in the Treasury yield. So what does that mean it means that when interest rates dropped the price on the government bond went up a lot more than the price on Preferreds. Why? Because the growing risk premium absorbed a lot of that change. So the question becomes why has the risk premium nearly doubled over the last 10 years? Because that misguided optimism is now gone. The crash of 2007 to 2009 was a wake-up call that the worst days weren't really over that pessimistic feeling resonates among investors still to this day, despite what the record-breaking Trump rally might suggest in the financial mark. Here's the most important thing to keep in mind this same phenomenon could actually play out in reverse in the opposite direction. If the Fed does raise short-term interest rates and the rate on the 10 year Treasury increases, it will likely be because our economic confidence has finally returned. And with that, the risk premium should shrink again, which would mean that the interest rates on government bonds could very well increase more than those on Preferreds and therefore the price of treasury bonds, this time could drop a lot more than the price on Preferreds. The opposite of what we saw between 2007 and that now, now is there a guarantee that the risk premium factor will always offset the changes in the value of corporate bonds or prefers due to changes in interest rates? Of course not, but support and understanding that it's typically a mitigating factor. Here's the bottom line. Cause and effect concepts may be easy to grasp and might be simple, but when it comes to the market, things are rarely that simple, when it comes to bonds and bonds like instruments remember, the effect of interest rates is really only part just part of the big picture. Coming up in just a bit, I'm going to talk more about bonds and today's markets with fellow advisers at my Financial Advisers Round-Table. But before that, Miranda is going to break down some of today's most important financial headline, so stay tuned. You're watching The Income Generation.
Miranda Khan: And welcome back to The Income Generation, I'm Miranda Khan and here’s our News max finance update a quick recap of the stories that move the markets this week. President Trump tells Wall Street Journal that he won't brand China as a currency manipulator. The President also argued that the dollar is getting so strong that it's actually harmful to the US economy. US 10 year bonds slumped and the dollar fell following the President's comments as blunt remarks signal a departure from most presidents who usually steer clear of commenting on the value of the currency and in order to avoid jolting financial markets. The calm and the stock markets may be over as American and European investors rush to hedge against declines. This comes after the Credit Suisse fear barometer hit an all-time high this week that barometer measures the constant buying protection against declines, and the SMP 500. Amazon CEO says: ‘artificial intelligence will fuel his company's future success.’ According to the company shareholder letter Amazon also plans to enhance its voice-activated Alexa assistant and create new tools to sell through its cloud computing division for more on these stories, please visit News max.com/ finance. I'm Ryan Khan, now back to David Scranton and The Income Generation.
David Scranton: Now that you’re all up to date. Let's hear from some financial advisers in the field, other than myself and get their thoughts and insights on bonds and Bond Bubble. It's now time for another financial Adviser Round Table joining me today are Mark Falter, Jim Lineweaver, and Jay Carrier. Please welcome back, Mark Falter a mid-American tax advisory group in Kansas City Missouri. In addition to working with clients, Mark shares his expertise on his own weekly radio show and as a frequent guest on financial news outlets like Fox Business News. Good to have you, Mark.
Mark Falter: Thanks for having me, Dave.
David Scranton: We're also happy too. You're very welcome. We're also happy to have a very close friend of mine here, Jay Carrier of Scranton Financial Group in Westport, Connecticut. And if the name sounds familiar Scranton Financial Group, it's for a very good reason because Jay is my partner at Scranton Financial Group and Jays has been in the business now for over 15 years specializing in personalized retirement planning and comprehensive portfolio management. Welcome. Jay,
Jay Carrier: Thanks Dave, welcome.
David Scranton: And also joining us is Jim Lineweaver founder and CEO of Lineweaver Financial Group in Cleveland, Ohio Jim and his team they've been providing sound retirement strategies and financial solutions, since 1993. Jim welcome to you also.
Jim Lineweaver: Hi guys, how you doing.
David Scranton: We're doing great. Now listen, Jim, I, can you guess besides your wealth of knowledge and your nearly 25 years of experience. Can you guess what other reasons we invited you on the show today by any chance?
Jim Lineweaver: It could be, let's see the Cleveland Cavaliers it could be the Cleveland Indians who won their home opener. There are a lot of reasons to get me on the show today.
David Scranton: It's none of the above. And you wouldn't be late to the question is kind of unfair because you can't see your other your other guests. But of all of our guests today, let's just say you're the only one that has hair, ok. So that’s the other reason I wanted to put you on the show to, to break up the theme, a little bit. So with that in mind, you know, let's talk about the stock market for a minute. You know, this show is about bonds and interest rates and all that, but I'd like to get your feedback for where the stock market is now. Is it high? Is it due for a crash? Do you think there's more upside in the market? Do you think the Trump rally can continue? What are you telling your clients when, when that question is posed to you?
Jim Lineweaver: Well, I think we've had a decent run here and we have a little bit of a pullback but I think we're going to have more volatility going into the summer. I don't think the market thought it, it would be so easy. You know, they thought it would be so turbulent to get these things passed and because they're getting hit with some headwind. I think that's causing some investors to pause pullback rethink and I think that's going to lead to some volatility until something concrete can get past.
David Scranton: And that's the toughest thing when it comes to handicapping you know it's easier to handicap the success of the Cavaliers or the success of the Indians than it is the markets because of that uncertainty. But if, if you're if you if I put your feet to the fire. If I said ok is the market good and higher or lower on December, 31 this year relative today, what would you tell me?
Jim Lineweaver: Well, I’d have a clause in there it says; if he can get at least one thing past, lower taxes they came deregulation something I would say we're going to be higher than we are today. However, the other half of the games in the market are relying on speculation that some of these things are going to come to fruition in the next few years. And I think that's the risk that we might give up if something isn't concretely done and passed by the end of the year.
David Scranton: Ok all right, fair enough. Well, it's, you know, I have to tell you, Jim, I think you missed your calling as a lawyer, because you put that, that clause on the bottom of it. So maybe in another life, you can come back as Attorney, I'm not so sure. Mark talk to me about the markets. What you think, do you think about the stock market? Do you think its super high right now? Do you think it has more legs? We all know it's kind of close to a record high the pullback hasn’t been that big, but what you know, how do you answer that question when clients ask the pose it to you?
Mark Falter: Hey, what I think it obviously is at an all-time high. But I actually think it's got some ability to go further, I think, you know, don't, don't, not for the record here, but I think there's a good possibility we could be looking at a little bit higher market at the end of this year than now, mainly because optimism. A lot of optimism out there… Go ahead, I'm sorry.
David Scranton: I was saying you live in a pretty conservative part of the country, Mark, too. So my assumption is, you know, we are most of the people that you talk with on a regular basis, you know, pretty optimistic because of the new president. Is that what you're hearing also from them?
Mark Falter: People are optimistic about what Trump is going to do. It's kind of a new era that we're in. Don't have a politician in office anymore. I think there's a lot of optimism in there. I think we're going to have a correction, I really do. But I think the rest of this year. It's Very strong possibility we could be looking at a little bit more printing up.
David Scranton: Ok, that's great. Now, Jay, you know, it's…We share research all the time. So we tend to think a lot alike because of that, and we have to because our personal clients want to make sure that we're on the same page. But sometimes we differ a little bit, we don't always totally agree. So again, what are your thoughts about the market you know, we’re talking to Mark who comes from a very politically conservative area in Connecticut right we're not so much a politically conservative area. So when you meet with your client’s one on one, what do you, what are they telling you? Are they optimistic or pessimistic and, and what do you think?
Jay Carrier: Well, first off, it's tough to follow Jim, because I'm going to kind of piggyback on a few things that he said, but we see a little more pessimism right now than optimism and I would kind of agree with what Jim had said that, you know, the Trump rally was really based on perception at this point and he hasn't passed anything yet. And he's you know, whether you want to use the word flip-flop. Let me use a recent example of him coming out and saying: China is not manipulating interest rates or their currency. Well, that was a flip-flop from his rhetoric that was going on during the election.
David Scranton: Negative people questioning things and feeling perhaps a little bit less confident.
Jay Carrier: Right. So here he is, you know, providing all of this optimism going forward is in the past tax reform. He's going to have deregulated, he's going to put it put together a $1 trillion infrastructure plan. But the reality is, is that, you know, nonetheless, things have happened yet. And every time he kind of, I don't want to use the word flip-flop. But every time he does make a statement that's that contradicts his previous one. You know, we see the market pullback.
David Scranton: So in the 30 seconds we have left in the segment, tell me you know, best guess best guess, December 31 the market, the higher or lower than it is right now? Jay.
Jay Carrier: Fortunately, I think the the the political system is still to polarize. I think it's going to be lower.
David Scranton: Now wait a minute, wait a minute wait a minute. Jay, how many times have I told you we're not supposed to be making market productions to our clients, I'm just kidding. Stay with us. We have a lot more to cover with our Financial Adviser Round Table, so stay tuned, we'll be right back.
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 adviser 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 our loyal viewers online. If you haven't downloaded your report pick it up after the show. If you are near or in retirement, head over to The Income Generation.com and download your special report written specifically for the needs of the income generation, again those born before 1966. I’m David Scranton and you've been watching the income generation.
Welcome back to the income generation, let's jump right back into it. Today we have Mark Falter, Jim Lineweaver and of course my business partner and Westbrook Connecticut, Jay Carrier. Jay, I had to cut you a little bit short there for a minute and I apologize to that but I only apologize because, because he's a lot bigger than me, that's why I apologize to him for cutting him off. So here's, here's a good question bond, bond market, the whole purpose of our show today. You know, at the end of this year do you think bond yields are going to be higher? Do you think bond yields are going to be lower? What is your best guest to tell our Income Generation members over the next few months?
Jay Carrier: Best guess is stagnant bonds or lower and simply because now you've talked about…
David Scranton: Lower bond prices or lower bond yield?
Jay Carrier: Yields.
David Scranton: Lower bond yields.
Jay Carrier: Yes.
David Scranton: Ok, so higher prices.
Jay Carrier: And you've talked a little bit about the risk premium between corporate, government bonds and Preferreds.
David Scranton: Yes,
Jay Carrier: Well let's talk a minute about the risk premium between US government bonds and other countries government bonds.
David Scranton: We haven't talked about that in the show yet. So that's…Go right ahead.
Jay Carrier: So here we are the United States, the safest still the safest government or safest currency and bonds, bonds in the world.
David Scranton: At least in theory, right?
Jay Carrier: Yes and our yield is still paying higher than everybody else. So you have Spain, Italy, Portugal, Germany, Japan, really the only countries that have yields higher than us are India, Britain, excuse me, India, Brazil, and Russia. So we have countries all over the globe with less bond yield, than our ten-year government Treasury.
David Scranton: So theoretically higher risk of default but yet they're paying less interest. So something doesn't make sense you're kind of saying that that's going to act as a governor to keep our interest rates from going up too much if I understand you correctly.
Jay Carrier: Correct.
David Scranton: Ok, smart answer, actually I’m the smart one that made him a partner in Scranton Financial Group, Jim. Talk to us about your thoughts on interest rates in bonds over the rest of the year.
Jim Lineweaver: Here we think we'll get about two maybe two more optics and interest rates. I think with what Yellen came out with last week and just said it's going to be slow moderate really get a gauge of what our economy is doing so that she doesn't you know put the brakes on too fast. And I think that would be pretty well received by the overall market.
David Scranton: Ok, great, great. Ok, Mark your thoughts on the bond markets throughout the rest of the year and interest rates. What do you see?
Mark Falter: I think interest rates readily could drop a little bit you know something we've been implementing a lot in our portfolios is Preferreds, Preferred stock, and the higher ends…
David Scranton: Now, of course, Mark, Mark you're talking about long-term rates dropping, you're not talking about Janet Yellen reducing short-term rates you're just talking about long-term correct?
Mark Falter: Correct yeah I think she’s, she's probably going to rise a little bit this year. Yeah, but I still think, you know, like I said, I still think we got some legs in this market for the remainder of this year.
David Scranton: Ok, so you think legs in the stock market but Mark you think you think the legs in the stock market are going to come from a flight from quality so that your government bond prices drop and government bond yields go up as money flows into stocks? Or do you think that, that there's enough money sitting on the sidelines after 2009 that, that bond prices could go up and stock prices could go up at the same time?
Mark Falter: That's exactly what I think. I think there's been a lot of money sitting on the sidelines that's ready to go in and is going in. People want to make some money.
David Scranton: Yeah and Jay you, the same thing, here you see that, too. I know we see it in Connecticut, a lot, a lot of people just sitting there waiting, waiting, waiting, you know, even some people who were vehemently opposed to a President Trump are still getting the point where they're just saying, hey, let's just let's just let's just get in. We can't afford to make zero money on the market for any, any longer. So in the last 30 seconds or so, tell me, what, what do you what are you hearing from people you know in a place like Connecticut a slightly more liberal state. What are you telling them?
Jay Carrier: Still hearing that pessimism and they may have jumped in. They just critical as you would say capitulated and, and finally gave in and jumped in somewhere. There their fingers over the button.
David Scranton: So there you're thinking that because of that if anything we could see even lower interest rates toward the end of the year on the long-term side due to a flight to quality. And you know Income Generation members, that's what makes us so incredibly challenging is all kinds of different opinions from a bunch of people that are equally as intelligent. So we're going to take a break, where to come back and when we come back, we're to talk a little bit more about bonds and Interest rates and what you need to know as an investor. Stay with us, we’ll be right back.
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David Scranton: Welcome back to the income generation. I'm David Scranton, and we have with us, Mark Falter, Jim Lineweaver and of course, Jay Carrier, now, Jim you said that the sum of the sovereign debt from other parts of the world has worked well so far are you give us the cliff notes version of whether or not you're still recommending that today or do you think that's already run its course?
Jim Lineweaver: I think it still has some more opportunities. I think if you really look over the last couple of year’s they're, you know sometimes beat up tremendously. Just like the emerging market equities, war as well. So it’s something you have to monitor. It's not a big piece of our portfolios, but it rounds it out nicely and it's providing us with some additional yields and additional in additional returns that I think at this point in time and a rising interest rate environment and United States can really help the portfolio.
David Scranton: Still Good. It's still opportune Mark, what are you telling your clients who want income.
Mark Falter: Well, you know, honestly, we're looking at common stocks that actually pay dividends also, of course, like I mentioned earlier.
David Scranton: What, what kind of dividend yields are able to get with that strategy?
Mark Falter: You know typically in the 3 to 5% range and the biggest thing is a lot of these clients, we’re talking to still think you know, they want some growth, we don't want to do that with the entire portfolio, but they want to and you still get that steady income.
David Scranton: So and that's a great strategy if people think there's more upside in the market, why not. Now if you're in a more liberal state like the state of Connecticut and people don't think there's a lot of upside in the market. Now, what are you telling your clients our clients? Now I should know this before Jay comes on the show, just in case you're wondering what are you telling our clients about what to invest when they want income?
Jay Carrier: Well, our strategy now for the last 20 plus years is, you know, we're heavily into Preferreds we're heavily, heavily into individual bonds.
David Scranton: So the traditional, all the traditional stuff yeah and I we talk all the time about the fallacy like we talked about in the show about g interest rates going up in bonds going down, you know the reality of it is that this, this whole thing with this risk premium is a huge differentiating factor and with the demographic trends that we're seeing I agree I don't, I don't see a major, a major change anytime soon. Just a lot of money flooding in different places and people are looking for income. That’s why that's why we call all y'all The Income Generation because of a natural tendency that when people near retirement they realize that the futures become the president and the reality is that it's no longer about growth and crossing your fingers and toes, hoping to have more money in the future. It's really about, you know, as our clients know which really is about you know, income today or in the short term. So stay with us we'll be right back with one more segment with our Financial Advisers Round-Table but we are going to do a quiz we are to ask them a very difficult question. So you're going to want to make sure you stay with us. We'll be right back.
David Scranton: If you're near or in retirement, head over to The Income Generation.com and download your special report written specifically for the needs of the income generation again those born before 1966. I’m David Scranton and you've been watching The Income Generation.
Welcome back to The Income generation. I'm joined here today with Jay, Mark, and Jim and thank you for coming back gentlemen, as promised, I have a very difficult question to ask all y'all right now and that is this; the 10 year Treasury rate went up from 1.6 to 2.4 right after the election of course about five weeks. It's a 50% increase. Bond prices dropped I want to know what each of you told your clients on their bond portfolios? Mark.
Mark Falter: Well, we prepped clients in advance for this and told him and the biggest thing that we told them and reminded them, should I say is the income stayed the same. That's what they're really in this for, is the Income.
David Scranton: So the price drop but if they're in it for income, it shouldn't matter that much, great. Jim, what would you tell your clients?
Jim Lineweaver: Yeah, we actually you know, the way we structure our income portfolios with either individual letter bonds or some of these other you know international bond portfolios emerging markets or even some international funds their income was great, worked out well didn't see much of an impact as a lot of other fixed income portfolios did. So it was really a non issue for our clients.
David Scranton: That's the problem with your Clevelanders, you know, just because you got the Indians and the Cavs you think you're better than the rest of us. Jay, would you tell our clients when that happened?
Jay Carrier: We didn't have to tell him much through our portfolios, on average, lost only about 2 to 3% over that time period and you know this. And we've since recovered that and we're well back into the black.
David Scranton: We did that good of a job. Well, I didn't know that, that's great news, anyway, gentlemen thanks so much for staying with us. You've been great today thank you. Before we go, I'd like to thank all my guests as well as you our new and returning viewers. When it comes to financial planning in the financial markets, you hear a lot of different things from a lot of different sources, but it's always important to consider what your sources really are and to try to understand the perspective behind the information or opinions that you're hearing. That's certainly true anytime you hear an analyst or advisor talking about the bursting of the Bond Bubble or saying that bonds are always a bad investment when interest rates are low. As we've seen today, it's never that simple. In truth, there are many different factors to consider. There are emotional factors and the new realities of a global financial market that's unprecedented in so many ways. Any adviser or analyst, who ignores those factors, may have hidden reasons for doing so. It could be that bonds in general, simply run counter to his or her stock based philosophies and business model or maybe in the fixed income world and individual bonds in general, they just don't view them as being something that's important. But let's face it, bonds, always have been and always will be an important and viable tool for reducing risk and investing for income that hasn't changed in the course of two major stock market crashes since the year 2000 and I doubt that it will change after the next one. Thanks for watching.