Corporations Are they Too Focused On short-term results? Marc Faber And David Scranton

Marc Faber 


David Scranton: Welcome back to The Income Generation, the show where we provide information for the critical period in people’s lives when you’re either in or approaching retirement. Each week I help you discovering useful actions that serve to make this journey, much easier.

I’m David Scranton, your host. I look forward to this opportunity each Sunday to share with you insight and expertise that I use in my own investment management practice. Insights that you can either use as food for thought or decide to act upon while building or managing your finances, as well as the money you will need during retirement.

Today on The Income Generation, we’re focusing most of our attention on whether corporations, including those that you may be invested in are too focused on short-term results, at the expense of long-term shareholder or investor value, and how this can affect you, The Income Generation.

First, let’s discuss what’s meant by shareholder value. To most analysts, myself included is the overall worth delivered to investors as a result of steps taken by management to grow earnings to pay dividends and to create corporate cash flow. In other words, investor or shareholder value is the byproduct of management strategic decisions. These are steps, they’ve implemented that have affected the company’s success in producing net income and affecting share price. So how does a company’s management impact its value and why is it important to The Income Generation? Well, the best leaders are part visionary and entrepreneur, part risk taker and part negotiator. They know when to be hands-on and they know when to delegate. The right balance determines whether a company is incredibly successful or whether it even survives. For The Income Generation focused on retirement goals, whether you’re still in stocks or made the decision to rely on income based investments, you don’t have a short-term view. So it’s best if the companies in which you are invested don’t have a short view either. A company making decisions today that may steal from their strength and later years is not what’s best for you. The problem CEOs face even the best, is that many investors are short-sighted. So its CEO managing with an eye on long-term value at the cost of immediate stockholder gratification may see a decline in the price of the company stock. The CEO has to contend with the idea that the average holding period of stocks 20 years ago was five years. Today, the average holding period is only five months, so managing to the long-term value when he has short-term investors may cost the CEO his job. The problem this creates is that corporations are ongoing concerns. If they’re only focused on each quarter’s numbers then their decisions may not include important investments and things like equipment, short-term advertising versus long-term branding. Decisions that will make for a much brighter, year after year, but will negatively impact profits this year. It affects whether they borrow to build or spend retained earnings instead, it also affects whether they paid dividends or buy back their own stock or make many other decisions, knowing that they’re being measured on how well they’re doing today not tomorrow. This is a real dilemma for corporate management, if the decisions they make today still greater profit from tomorrow, which road do they take? The answer very often lies and their incentive plans and other compensation, which helps guide their behavior. On today’s show, we’ll discuss the importance of this and even how to figure out which companies have a long-term focus. You’ll discover why some companies are busy buying back their own stock shares and others prefer to reward investors with larger dividends, and most importantly, which is my advice for you The Income Generation. These subjects are of particular importance to today’s guest and they should be important to anyone who owns stocks, bonds or mutual funds.

I’ll be sitting down for a little QA during the news and views segment for a conversation discussing the investor is most affected by corporate myopia and even those who stand to benefit the most we can’t really change what’s going on in corporate boardrooms and corner offices, but we can change what we do to benefit from their decisions. Now I want to be fair, most heads of corporations are under immense investor pressure a bright spotlight has been put on stock market value so managers who don’t excel under these tests tend to wash out. That is to say, a manager who gives up short-term gain for long-term results may simply find himself out of a job. It’s the tortoise and the hare story only with chief executives and the tortoise gets fired partway through the race. Think for a moment about how it got this way. In 1792 when stocks were first traded on the New York Stock Exchange, few people were trying to build wealth by focusing on the business of others. They were focused on their own businesses, family farm or their jobs. Information moved at a slow pace almost unfathomable today. The fastest transfer of information was word of mouth, followed by letters delivered by rudimentary postal service. And for those who can get their hands on a newspaper, they saw only whatever the printer deemed worthwhile, business information wasn’t at the top of that list. Even a century and a half later, and with the advent of telephones, radio and television, the news reports were not about the stock market. This allowed room for managers back then to manage the business with the goal of long-term growth and to maximize return on the resources. It’s only been the last 40 years or so that technology and information has changed that focus. Today even the average person is aware at some level of what the stock market’s doing day by day. It was in the 1970s when people begin paying more attention to the markets in part because traditional pension plans are being replaced by 401K plans and the introduction of mutual funds allowed easier access to, many markets. Then when cable TV provided us with more than just 13 channels, new shows that focused only on business were created. At that point, the average Joe developed an appetite for knowing what the companies were doing. Following stocks and movements were suddenly main stream, and for many became a hobby. Then the speed at which information was transmitted accelerated even more the internet allowed on-demand access to information. No longer did anyone have to wait for tomorrow’s newspaper to learn where their Favorite stock traded that day. This cause greater participation and even broader interest, in fact, the 1990s when tech companies were creating millionaires out of stockholders. It became very common for people to discuss stocks at social gatherings and many people became like, the Monday morning quarterback engage and heated discussions as to which management should be doing what and why not. If you trade the stock you essentially had skin in the game, for many owning a stock in a company is like having a bet on a football team. That seems to give permission to question every play the quarterback calls. What followed was online investing and day trading. The News decided to make celebrities out of CEOs and tell us when they miss quarterly earnings estimates, or they make other comments on how well they were doing their jobs. All of this attention affects day to day trading in the price of their company shares. So, average investors may also be culpable when it comes to pressuring CEOs to think and act short term. We’ve now reached a point with smart phones, where we can watch the market tick by tick from almost anywhere at any time. We’ve learned as a society become very impatient. That’s a lot of stress and pressure on management, no matter how much they get paid. With an ongoing intense spotlight on share price it would be difficult and perhaps career suicide for a CEO, not to at bare minimum straddle the fence between good long-term management and short-term stock moving. Some t,o this point well coming up next in the market breakdown CEO compensation and why are so many companies buying so many of their own shares back, are what we’re going to be discussing, state tuned.

For many years now I’ve been writing a monthly newsletter article for my client.  A few years ago in that newsletter, I wrote that,: I believe we’ve entered a new age of uncertainty with our economy and financial markets. I still believe that to be true. In the wake of the 2007 financial crisis, we’ve seen a lot of historic first take place from record market highs to record unemployment numbers. Some of these first have been planned and intentional, but others have been surprises. It seems that the only real certainty has been uncertainty. I mentioned this now because I believe the turmoil, we’ve been seeing in the financial markets since the beginning of this year is another byproduct of this new age of economic uncertainty. I also believe that could eventually lead to another historic first which is this an economic recession actually caused by the stock market collapse. Now if that sounds backward there’s a good reason, it’s because it is backward. Normally historically the market reacts to economic ups and downs. It doesn’t normally dictate them.  However, a market crash is one possible result of the recession, but not typically its primary cause but in the age of economic uncertainty, we may see a case where the tail wags the dog for the very first time.

I will explain why in today’s market breakdown. There are a lot of factors contributing to this new age of uncertainty, but the main one I believe is quantitative easing. Even though you don’t hear about it being talked about much anymore in the United States, it’s hard to overstate just how radical, the Federal Reserve’s monetary policy has been since 2008. Now you could definitely argue that initially, a radical approach was necessary. Back in 2008 desperate times call for desperate measures and we were certainly in desperate times back then, as a country, following the 2008 financial crisis. The government bailouts that were part of the TARP program or what’s called QE 1 may have saved our entire banking system from collapse. That’s how bad things were back then. And the idea behind the TARP program or QE 1, wasn’t necessarily radical, it was simply to rescue the banks and then implement steps to help get the economy moving again. The key parts of the strategy involved lowering short-term interest rates to near zero and purchasing hundreds of billions of dollars and mortgage-backed and government bonds. Now the US government has taken other extreme measures in the past to help the economy. Some economists would argue that the Fed use the form of quantitative easing after the crash of 1929 to help us get out of the Great Depression. This was another desperate times call for desperate measures. But what made quantitative easing something truly radical and potentially dangerous was not its initial use in 2008, but it’s eventual over use and I actually forecasted that danger in my newsletter to clients in May of 2008 before this QE 1 was even launched. Knowing what The Fed had in mind I called it caffeine for the economy. That’s because just like any other drug that acts as an artificial stimulus quantitative easing carry the danger of addiction from the very start, but the Fed show no sign that recognized or cared about this potential danger. It launched QE1 as an open-ended policy with no set completion date. To me, that was a sign that they were prepared to continue using artificial stimulants indefinitely, which they proved in 2010 with a launch of QE 2. That’s when I became really concerned because radical is one thing but reckless is something else and I don’t use that term lightly. I believe the Fed’s use of quantitative easing was reckless because it became too focused on short-term impacts it failed to consider the possible long-term side effects or to recognize potentially dangerous side effects already taking place. Now as I’m sure you know whenever a pharmaceutical company creates a new drug. It puts the drug through years and years of clinical trials. The goal is to identify potential side effects. That’s important because whenever you introduce a new chemical or biological agent into a system as complex as the human body, you can ever be completely sure what’s going to happen. The same could easily be said for a complex system like the economy here in the United States, but the feds started prescribing then overprescribing quantitative easing without conducting clinical trials first. As time went on I realized that my drug analogy when I called it caffeine was actually fitting, but it wasn’t nearly strong enough. By the time QE 3 came along 2012, I changed the analogy to something more appropriate, economic steroids, because in addition to being psychologically addictive steroids are notorious for their dangerous side effects. The most striking side effect of quantitative easing was its impact on the stock market. Wall Street loves the policy because not only created cheap money but also drove everyday investors up the risk curve. With short-term interest rates near zero, a lot of people simply felt that their only hope of getting any kind of decent return was to put their money into the stock market or into mutual funds. The result was that the markets soared to new record highs. Now you could argue that this was a side effect the Fed anticipated in that it was actually an unstated goal of quantitative easing from the very start. Because what happens in theory, when the market soars is it creates something which I refer to as the wealth effect. In theory, when your investment accounts and you’re 401K or doing well. You feel wealthy, even if that’s only on a subconscious level that feeling, combined with artificially suppressed interest rates is supposed to make you more inclined to spend money and maybe even borrow money which, of course, long term is supposed to be good for the economy. The only problem is that the wealth effect really didn’t take hold this time. People weren’t fooled by the artificially inflated stock market instead of spending their money they used it instead to pay down debt and try to rebuild the savings that many of them lost in the 2008 2009 market crash. That’s why the Fed is frustrated now by the economy’s lack of so-called healthy inflation. Rising prices are a sign of increasing demand a sign of spending. Instead, we’re teetering on a deflationary environment and that’s because people haven’t been spending and borrowing based upon the wealth effect. They’ve been saving and paying down debt based upon economic realities and the main reality is that after three reckless rounds of overuse quantitative easing never really did lead us to an economic recovery, at least not to the extent that the Federal Reserve might have hoped, which is why you’re actually starting to hear whispers about the possibility of a QE4, unfortunately, that wouldn’t surprise me. What easing did achieve, however, is an asset recovery and whether that was an unintended side effect or unstated goal. The result is that it may now have us on the brink of that next historic first which I talked about, a recession that’s actually caused by a prolonged stock market drop. In a way, they shouldn’t be a surprise. It’s a classic live by the sword die by the sword situation and attempting to create an economic recovery based upon the wealth effect. We’ve created a situation where we could spur an economic recession based upon the same thing only this time in reverse. If people feel wealthier or inclined to spend more money when they’re 401K’s investment accounts are doing well, then it stands to reason that the opposite is also true. And even though the wealth effect didn’t work like it was supposed to when the markets were climbing. I wouldn’t count on that being the case when the markets are falling. The reason the wealth effect failed when the markets are moving upward is that people trusted their gut instincts and those instincts didn’t line up with the illusion of wealth being created by some soaring stock Market. Unfortunately, those same instincts will be in sync with the markets as a spiral downward and probably have been since the beginning of 2016. Again if you live by the sword you risk dying by the sword that at least one thing that probably still holds true in the age of economic uncertainty.

Let’s welcome Marc Faber, editor, and publisher of the Gloom and Doom Report. You can check out his website at Mark what a terrible start to the markets this year, absolutely horrendous. You think this is the beginning of something that’s much, much bigger?

Marc Faber: Well, first of all. Yes, it is true that the indices are down year today some by 10% some a bit more some a bit less but I like to pay attention. First of all, if we look at all the markets in the world emerging markets some peaked out actually already in 2006 2007 and then most of them peaked out in 2011 and the most European markets never made a new high. And in the US, whereas the indices were still rising or were flux in [inaudible, 18:42] the average stock was already down substantially the strength in the indices came from just a few stocks, the bond stocks and maybe another 20 shares, but obviously now the market is adjusting to reality.

David Scranton:  But you think we’re going to see digger lows before we see highs again, in the US market specifically?

Marc Faber: Yes, my concern is that we may go much lower. In other words, my view has been that from May 2015 peak, S&P 2,134, which drops 20 to 40%. So for most stocks were already down from their highs by more than 20% as in the indices will go lower. As to when we will make new highs that I don’t know because I think we are in a situation where because of the continuous interventions with fiscal and especially monetary policies. Gross will be very, very difficult to achieve in future and that in this environment, the value of  [inaudible, 20:13] there is no growth and if corporate revenues are down and if earning start to go down and where will grows come from. In 2007 the emerging world was still growing rapidly and the debt level in emerging economies and in China was manageable, now they’re relatively high as well. So we have an even [inaudible, 20:44] than what the central bank’s created in 2007.

David Scranton:   Scary but true, absolutely. Our viewers always hear me talking about how I believe strongly that we’ve got to get below the high levels in the market from 2000 and 2007. In other words, the low 1500s on the S&P, but we could get as low as what we did back in 2009 which is you know under 700 on the S&P here in this country. What are your thoughts about…? I’m sorry.


Marc Faber:  It was 666.

David Scranton:   That’s right. 666, what are your thoughts about how low it could go on this downward slide?

Marc Faber:   Well, I don’t know, that’s the simple answer, but it could get ugly in the sense that inflated asset markets when they start to go down. They are [inaudible, 21:44] you see after 2009 the global economy was driven by asset inflation, and the so-called trickledown effect that helped the economy. If assets markets go down the economy may weaken actually more than is expected and certainly more than is expected by the incompetent central bankers around the world with very few exceptions.

David Scranton:   You know, it’s funny you touched upon the whole theme of our show today. I know you didn’t have the ability to watch the beginning of the show, per se, but we’re talking about how normally the stock market is a trailing indicator, the economy starts to slide into recession in the stock market starts to react and we said this is one of the first times we can actually see the tail wag the dog where the stock market drop reverses what I call the wealth effect and actually causes the economy to sputter and that’s exactly what I hear you saying right now.

Marc Faber:   Yes I agree, partially with that because the stock market is the better forecaster than all the clowns in the investment banks that tell you that everything is fine and that clients should buy equity and bonds and god knows what. I think the stock market is a discounting mechanism. And when you saw in 2015 many shares starting to weaken and especially economic sensitive shares. You have to ask yourself are all these rosy predictions by the analysts and strategies that economies that investment banks and especially also the rosy predictions of the Federal Reserve, the Federal Reserve in the last 20 years but pretty much everything wrong they could get wrong.

David Scranton:   Agree, Agree, Marc, we have to take a quick commercial break so stay with us we’ll be right back with more from Marc Faber in just a minute.

We’re here today with Marc Faber, publisher of the Gloom Doom and Doom report, you can check out his website Marc I agree with you that had it not been for the tarp programs that the S&P 500 could have dropped much lower than 666 possibly as low as the 500 that you had mentioned. But I talk all the time about my best guess is that without all the subsequent crunches of quantitative easing that the S&P 500 might have only gotten back up to 1500. Certainly not to the 2134 that it attained last May. What’s your best guess is how high the market would have capped out at reason recent years without all that unprecedented quantitative easing?

Marc Faber:  Well I think that the market would not have made a new high above the 2007 highs. But I equally feel that we would have less problems today, than what quantitative easing programs, not just in the US, but in Japan, and in Europe have produced. Let me explain this, the following way. Through the quantitative easing and [inaudible, 25:33] low interest capital spending in emerging markets, notably China, continued to expand in the wake of a weak global economy. In other words, the central bank’s desire and you have to question whether that is an objective that should be following, but the objective of the central banks was to essentially create inflation. Inflation is basically bad for everybody. But anyway, that’s what the central banks wanted to do and by wanting to do that, inadvertently and unintentionally. They created even more capacity expansion around the world which subsequently led to the collapse in commodity prices, the Baltic Dry index, zinc, iron or oil, everything. And so in a way, the monetary policies may actually have reinforced the deflationary pressures, we had before. And by keeping more companies alive because of zero interest rates instead of the recession usually does one thing well. It reduce capacities and liquidates badly managed companies, but because of the Feds and the other central banks action, all the bad companies were actually kept alive, especially the banking sector. Now the banks are all tumbling in price and rightly so because at zero interest rates it’s very tough to earn any money and the individual clients they don’t trust banks anymore because they know that the stock market is rigged by central banks and they lost so much money off 200 and off 2007. So basically the financial sector is now having to contract when it should have contracted in 2008 already.

David Scranton:   Well I completely agree that we would never have hit record highs in the stock market after 2007 had it not been for all this quantitative easing and you’re right deflation is a major concern out there today by many. It’s been a concern of mine since 2008. How long do you think we can go through a deflationary cycle here in the United States? How would, what do you think?

Marc Faber:   I want to tell you something about deflation. First of all, why it is that house wives anxiously expect the month of [inaudible, 28:33] when department stores have sales and prices are lower. They expect and hope for the sales to come because they’re looking forward to buy goods at lower prices and I can tell you the housing market in the US would be much sounder, much sounder if prices were low enough for the typical how to [inaudible, 29:05] but many households and especially young people that just finish their education. They’re excluded from buying a property because the prices are unaffordable. It’s an affordability issue and you want to stimulate an economy. Nothing works better than low prices.

David Scranton:   Right so deflation in some ways, you’re saying could actually be healthy for the economy, at least for a period of time ahead?

Marc Faber:   Well, we had throughout the 19th century in America deflation. And during that time real incomes grew much more rapidly than in the 20th century and the economy in real terms expanded much more rapidly.  The central bank’s wants to mislead the public into believing that inflation is good. You know for whom the government because with zero interest rates and interest rates that are negative in real terms. The governments can keep on borrowing and with the borrowed money that they can hire more people to control you and to impose regulation on you and do have new that restrict economic development. That is precisely the goal that essentially it moves into a centrally planned economy that is of course very bad, extremely bad for economic growth, and if you look at government spending as a percent of the economy. In 1913 in the US, it was still only less [inaudible, 31:04] we’re now at over 40%. In Europe, it’s even worse its over 50% and as the government has grown like a Cancer what has happened is that economic growth slows down.

David Scranton:  Marc. You’re right, we really need to get a handle on this and stop treating the symptom and start treating the problem and Marc, unfortunately, we need to leave it there. As they say, time flies when you’re having fun. Thank you so much for being on the show I very much appreciate it and stay with us. We’ll be right back after a brief commercial break.

Morgan:  David can you talk to us a little bit more about the cause and effect relationship between the stock market and the economy? For example, most people think that The Great Depression was caused by the stock market crash of 1929, but that’s not entirely accurate. Is it?

David Scranton:  No, it’s interesting because as we talked about that earlier in the show. Most of the time the general terms, the economy starts to fail and then the stock market comes down or vice versa. But sometimes because the information that comes from the government about productivity and our economy and so on sometimes it takes so long to get disseminated. That on anticipation of a negative report the stock market might drop a little. For example, might only drop 10% 15%, but then when the actual bad news comes out. Then that’s when the real sell-off begins in the financial markets.

Morgan:  So overall the market serves as a reflection of the economy’s health not necessarily a driver?

David Scranton:  That’s absolutely correct.  And that’s why this really truly will be the first time in the history of our stock market where the tail wags the dog, where the actual stock market drop has the potential to drive down the economy itself.

Morgan:  Okay, now is this where the term irrational exuberance comes from would that’s when investor confidence is high and it’s not really justified by economic realities, or is this the opposite of what we’re seeing?

David Scranton:  Well irrational exuberance is a phrase that was coined by somebody much, much smarter than me. Alan Greenspan back in 1996, who started talking to them about how people who are driving up the stock market when the stock market, he thought was already at pretty much a high level. But what happened was the market went up for four more years.

Morgan:  Wow. Is that because people were shopping they felt good. They thought money was coming in so the party goes on.

David Scranton:  Irrational exuberance is very contagious and yes the party does go on oftentimes longer. I would have thought, for example, we were experiencing irrational exuberance back as late as 2013, but the reality of it is we still had two more years of uptake in the stock market.

Morgan:   Okay. Well, I should explain in the market breakdown the market’s performance has been pretty consistently irrational and I love this term throughout the quantitative easing.

David Scranton:  The only thing you can learn to expect today is the complete unexpected reaction of the stock market. You know, it’s amazing because in September the Federal Reserve said that they were going to not raise rates which normally, would be a good thing in the market dropped. So then this time they went ahead and raise rates in December and what has happen the market dropped again. So the reality of it is, it just all the old rules are kind of off the table and that makes people who manage stock portfolios. It makes their job a lot tougher.

Morgan:   So really you can’t predict what’s going to happen with any degree of accuracy. It’s kind of a free for all.

David Scranton:   That’s right and I believe, like Alan Greenspan said, you know, with rational exuberance the market is due for a drop. He was four years too early. Well, in the same token, when I said this back in 2013. I was also a couple years too early, but now it feels a lot like 2007 all over again in the stock market. So it feels like now is the time. And the market could fool me one more time. But, but, but it just feels a lot like 2007 all over again.

Morgan:   Well, let’s talk a little bit more about the wealth effect, and how the term live by the sword die by the sword applies to it.

David Scranton:   Wealth effect is really interesting. In fact, our guest today, Marc Faber talked a lot about that how people feel affluent they feel wealthier when their portfolios are worth more and 401ks are worth more. So, at least in theory should help people go out and spend more money and that, of course, will stimulate the economy indirectly as opposed to directly. The problem, however, is that that really didn’t happen very much since 2008. People were taking extra money that was put into circulation by the Federal Reserve and they’re using it to pay down debt and to invest because they realize that they can’t count on the stock market anymore as the only tool for investors.

Morgan:   Well at least we’re learning. So what are some of the other potentially dangerous side effects of quantitative easing that might still be causing us problems today?

David Scranton:   The biggest side effect is really just exacerbating this irrational exuberance, really causing it to go on and on and on, you know historically the stock market shouldn’t have gotten over, even as our guest today. Marc Faber said shouldn’t have gotten over 1500 on the S&P 500, but it went all the way to 2134 and that unprecedented level of irrational exuberance in the middle of a long-term or what we call secular bear market cycle, occurred primarily because of all the unprecedented levels of quantitative easing that our country has seen since 2008.

Morgan:   So what we’re looking at here is really just an inflated economy, sort of like the dot-com bubble. It’s not a real system it’s over-inflated.

David Scranton:   Yeah. Right now it’s all smoking mirrors, nothing, we see today is in reality. And just think about what’s happened. We talked about the corporate buybacks for example; you know if corporations cannot get earnings growth, then they attempt to manufacture it by buying back their outstanding shares. Just one more example of where nothing is real. That’s why that’s why I call it so much I refer to. I used to refer to it as caffeine for the economy and now I refer to it as steroids for the economy because when somebody at the gyms on anabolic steroids nothing is real, you know.

Morgan:   It looks good but its all- fake.

David Scranton:   That’s right you wonder how big that guy really would be if it weren’t for the anabolic steroids and that’s what I think with our economy in the stock market today. I always looking ask where our stock market would be today if it weren’t for all those economic steroids.

Morgan:   So any other problems we should be looking for that you’re seeing?

David Scranton:   Well, the problem that I see right now that really that concerns me is that we’re kind of bucking the trend with the world when it comes to interest rates, you know the world right now is actually lowering rates trying to have what’s called easing policies to stimulate the economy. We started raising rates although, just a little. So now it’s like us with a tug of war against the entire world. And in this global economy today that’s not going to work for us. And that’s what’s happening right now is even though short-term interest rates came up by a quarter points. Long-term interest rates at the same time dropped by a half percent since the Fed message on February 16th and when that starts to happen when short-term long-term rates get too close together. That’s a sign that banks are not going to want to lend anymore and that could cause our economy to come to a screeching halt.

Morgan:   So we’re almost out of time, but really quickly. What should you do to protect your investment to protect your nest egg?

David Scranton:   It’s a great question and to me, with the goal for Income Generation members to protect their nest egg. You know, it really comes to focusing on things that are conservative and especially in a potentially deflationary environment, as we talked about all time on this show, focusing on fixed income. There’s a reason why we started Sound Income Strategies back in 2013, because we realized that with this type of environment that we’re in at this point, due to impressing levels of quantitative easing that it makes sense for people more and more to invest in fixed income and especially for The Income Generation members to shy away from the stock market, at least for the majority of their money.

Morgan:   So go with what’s real and not what’s smoking mirrors.

David Scranton:   Go with what’s real and what’s predictable, absolutely.

So stay with us. We’re going to take a commercial break and we’ll be right back to talk a little bit more about what’s going on right now in the markets and what you can do to protect your assets.

Each and every week you welcome me into your living room as host of The Income Generation and I provide my best answers and insights and many of the financial issues confronting you The Income Generation. Your feedback is overwhelmingly been one of gratitude and appreciation. I personally find it very satisfying that many of my viewers have described what I call; aha! Moments when I discuss today’s economy or when I explain the logic of investing for purpose not performance. But I have to admit there will always be things that I, myself, find confounding. Things like why were the pundits, not as quick to point to the federal rate rise that occurred in December as the culprit for disturbing stock market selloff. You can’t blame everything on China and I have a hard time making a case that low gasoline prices are bad for the economy. These were the first two places the talking heads pointed to after the rate hike on December 16th. On December, 16 day of the Fed’s decision to lower rates. I wondered publicly on national television how the Fed expected to orchestrate a healthy economy, moderate rates of inflation, while they were tightening while other major economies we’re making easier monetary policy. How could the Feds manage to steep a yield curve while taking steps to weaken the economy? The impact on the dollar alone would hurt our exports. With a rapid double-digit decline in stock prices, the market sure seemed to be suggesting that the Fed made a mistake.   Adding to this is the nature of the recent economic recovery asset prices rose, even though it did a poor job of expanding economic activity or job growth. Without the prices’ coming down one has to seriously question if we’re headed toward recession. The bond market seems to be taking the feds stated intentions with a grain of salt as well. Remember, Janet Yellen said the Fed was targeting a 2% inflation rate, well longer-term bonds are suggesting that the markets really don’t expect inflation to be that high for the next 10 years or more and commodities traders, especially those who trade oil seem to be expecting inflation to be flat and by some measures down in the future. The feds plan was to create a little bit of inflation and develop an upward sloping yield curve. Well, the markets seem to be pricing themselves as though a recession is imminent. When will Fed officials act on the data they say they’re paying attention to? Ironically, the stock market has always been a lagging indicator that is to say after the economy has already weakened is when we’ll see lower stock prices. This time I think the double-digit sell-off will be leading other economic activity and leading it downward. Anecdotally, I’ve already heard from Real estate brokers, for example, that said that at the very start of the year, there seemed to be an instant shift from a seller’s market to a buyers’ market suddenly people who were only thinking of selling wants to list immediately and get out. I’ll be watching to see if the official numbers backup that source. Another thing I find confounding is why older Americans are still investing like it’s 1995 stock market history suggests the 1990s were a rare event unlikely to repeat soon. What I do believe is likely to repeat is a third huge cyclical bear market in our existing secular bear market cycle, a shakeout that cannot easily be recovered from and perhaps disastrous, if you’re counting on your investments in retirement. At my company Sound Income Strategies, for example, we developed client portfolios, where the income is known in advance and the Return of principle is considered dependable. This investment type is what The Income Generation has had far too little knowledge of, it’s simply hasn’t been trumpeted as the stock market has. Sure, it’s a little boring not waking up scared that you might go broke. But for many, it makes much more sense. That’s one of the reasons I agreed to do the show in the first place. To be a voice for those who are only hearing from magazines, TV, and advisors who are beholden to their sponsors. I’m here for the purpose of giving my best advice for everyone born before 1966. There is an important section starting on page 19 of the special report entitled The Income Generation that we’re giving away each week after the show. Look for the heading the most important period of building and preserving your nest egg. If you’re only going to read a few sections of the report I urge you to read pages, 19 and 20. You can get your report by logging on to

I’d like to thank today’s guest Marc Faber, his expectations may not be very pleasant and he and I may not agree on everything, but I will say to smaller investors burying your head in the sand is not going to change anything. If you need to take evasive action in your retirement accounts procrastination may turn out to be the biggest thing for you to be concerned about. I also want to thank Morgan and her interesting insightful questions. Hopefully we both covered the questions you at home, we’re wondering about and if you’re nearing retirement, head over to and download your special written report specifically for the needs of The Income Generation. You were born before 1966. I’m David Scranton, and you’ve been watching The Income Generation. I look forward to seeing you next time.

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