What's up everyone? Well of course the answer is the stock market.
All three major market indices are still riding record highs. Most analysts agree the driving force behind the rally is still President Donald Trump. Liberals may hate him, but Wall Street seems to love him. Specifically they love his corporate friendly economic and regulatory policies; and they're still optimistic that as a businessman he can make good on his promise of four percent annualized GDP growth. So far though. It's still just that, a promise. We still don't have many details about just how he's going to do it, or know the true potential for its success. So why is this so important in relation to the stock market rally? Simply because it means that if you're committed to riding this rally all the way to the end, you may possibly just have a lot more to lose than you have to gain. It's time to tune out the hype and focus on the facts; facts that matter to you, the Income Generation.
David Scranton: Hello everyone and welcome to the Income Generation. I'm David Scranton your host. It's a day we're revisiting the Trump Bump. It's a topic we haven't really addressed head on since before the inauguration. Has the nature of the post-election rally changed now that the Trump administration is past the halfway point of the first hundred days? Is this something more than typical honeymoon between a new President and the financial markets? Is it a good idea to hang in there for a while, if you haven't yet started minimizing your market risk or focusing on retirement income?
Those are some extremely important questions for anyone over age fifty with money in the market. As always we've got some great minds to help us find the answers. In just a bit, we'll talk to Jon Najarian. Later I'll sit down with some fellow thought leaders in the financial advisory field for another edition of the Advisors Round Table. But first, let's take a closer look at the Trump Bump phenomenon.
As you probably know, between Election Day in the end of February all three major market indices hit new record highs several times. The Dow Jones Industrial Average for example rose from eighteen thousand three hundred thirty two on November eighth to twenty thousand eight hundred twelve on February twentieth. During that same time span, the S. and P. five hundred climb from two thousand and one thirty nine all the way to two thousand three hundred sixty three, while the Nasdaq went from fifty one ninety three to fifty eight twenty five. Those are some huge gains as President Trump might say. But it's important to remember that the size and duration of a rally isn't always indicative of its strength. And there is certainly evidence to suggest that's true in this case. For example, hard economic data since the election has been hit and miss at best. At the same time the ten year Treasury yield has stabilized at just under two and a half per cent which means that investors aren't really fleeing the bond market and betting only on stocks. To me that's a clear sign that their optimism is actually cautious, despite the hyped up record highs in the stock market. But here's another important point to keep in mind about this rally, when the Dow first surpassed twenty one thousand on March first, analysts agree that spike was a direct result of Trump's first speech to Congress one day earlier. But the speech itself didn't really contain any new details about Trump's budget, his tax plan or his party's new version of Obamacare. Those things are all central to the success or failure of his economic goals; and we still don't know a lot about any of them. We do know the basics of the Trump tax plan. That we covered in detail on last week's show. In fact you can watch it on the Income Generation dot com (incomegeneration.com).
The reality though is that these record breaking highs reflect a market that is wildly irrational and over inflated with stock values that are out of whack with current corporate growth rates. This is why I say that investors potentially have very possibly much more to lose than to gain by trying to ride this rally to the bitter end. To put it simply, the positive impact of Trump's plan has already been priced into the market, even though very little impact has yet to be felt. That means if and when we do start seeing signs that President promises are coming to fruition and positively affecting the economy, the markets probably aren't going to climb much higher than they already have, because of course it's already priced in. They might actually have to let actual growth catch up to the lofty heights that they've already reached based upon this optimistic hoping for that growth. A good analogy is the think about your furnace, on a cold day you might be reluctant to turn your thermostat up if you know your oil tank is almost empty. But let's say for example that you call the oil company and they say they're coming. Well then you might just decide to crank the heat because you know that your oil is actually on its way. Of course you can't know that for sure, you're just hopeful and optimistic that they're coming. But once the tank is full, you're probably not going to turn the heat up much higher if at all. Because you've already said it high based upon your optimism and confidence in your oil company delivery. So the upside of your confidence is only status quo.
Ah, but what if the truck breaks down? What if there's a sudden snowstorm and it can't get to you until tomorrow? And what if turning the heat up in the advance burned your last few gallons of oil in the meantime? Well obviously in that case the potential downside to your optimism ends up being much more severe than the upside was rewarding.
I believe that's a similar situation with Trump's impact already being priced into the financial markets. It creates a situation with a lot more downside than upside for buy and hold investors. I'll talk a lot more about that downside potential a little later in today's show. But for now let's bring in our first guest for a national profile. He's a man who definitely knows a thing or two about stock market ups and downs.
Jon Najarian started his highly successful career as an options trader at the Chicago Board Options Exchange in nineteen eighty-one. And this is immediately after following a stint as a pro football player with the Chicago Bears. Jon and his brother Pete are the co-founders of Option Monster dot com (OptionMonster.com) who is a provider of market intelligence, commentary and strategies. He's a regular on CNBC's Fast Money and is always in demand as a very informed and insightful market analyst. Welcome back Jon.
Jon Najarian: Great to be with you David; thanks for having me
David Scranton: I don't know if you remember, last time you were on, two, three months ago you actually schooled me. I was concerned if you recall about all those Hillary Clinton supporters that were vehemently opposed to a Trump presidency who might start a major sell off during the first hundred days because of concerns of some of Donald Trump's policies during those first hundred days. Now do you remember what your response to me was what I said that?
Jon Najarian: Well I hope it was that I thought that they roll back regulations and knock taxes down which are some two things the markets really like. But you tell me Dave.
David Scranton: That was part of it. But what you said, kind of tongue and cheek where you said, Dave, even Democrats are capitalists also. And look what's happened since then, right. The market's up nearly fifteen per cent since Election Day and so on. Janet Yellen was able to raise rates a quarter point, twice now. What do you think? Do you she's gonna be able to continue raising rates two more times that she hopes to throughout two thousand and seventeen (2017).
Jon Najarian: I think so. I think the economy is gaining some strength. I think the regulation rollback and the likelihood that we're going to see taxes decreased as well for individuals and corporate Dave. I think those are pretty powerful drivers and the fact that we've got housing starts highest level since two thousand and seven (2007) today. I think that also is a significant increase in optimism for the market.
David Scranton: Now you know it's funny because it said that the bond market is smarter than the stock market in terms of looking forward. Of course the bond market, the yield on ten year treasury went up significantly right after Election Day, but it's levelled off right now. In fact it dropped ten basis points yesterday after Janet Yellen's announcement, which leads me to believe that it's not so much a flight from quality into risk, it's not a risk on trade per se. it gets me concerned that maybe it's just that money that's still sitting on the side lines from two thousand and eight (2008) that's going everywhere. It's going into the stock market; it's going into the bond market. What are your thoughts on that?
Jon Najarian: I would agree. I think that money is looking for homes in various assets. Although some of those assets are getting kind of inflated right now. So I'm focused on the ones that haven't moved as much Dave. But yeah, I think you're exactly right. The big pop in interest rates that we saw after the election, we've never gotten higher than that over the past two interest rate increases. So in other words, Janet Yellen has increased fifty basis points and we're still where we were right after the election before she moved on interest rates, tells me the bond market got ahead of Ms. Yellen.
David Scranton: Yeah, and there's a chance that if there's some bad news that comes out in the tenure goes back down twenty thirty fifty bits; it's completely possible that that alone may preclude her from being able to raise interest rates any more for fear of flattening out the old curve, correct?
Jon Najarian: Yeah; and we have all these elections. I mean so far we have one that's gone the way that Europe preferred it to go and that was it didn't go to the Nationalist or the Populist Party, Guert Welder over in the Netherlands; but, you still have France with Ms. Lappin, you still have Germany and you still have various elections in Italy. So those could also be things that cause Ms. Yellen to maybe hit the pause button rather than getting more increases rapidly heading our way.
David Scranton: What do you think oil prices are trying to tell us right now about the economy or the financial markets? What's your take on it? That's not my specialty so give me your take.
Jon Najarian: Alright, I'll say supply and demand Dave. So because we've got a RAM back on and even though we've had some problems in Libya and they've gone offline a little bit. Nonetheless, the US shale producers have ramped up production virtually every week for the last twelve or thirteen weeks. And that is you know quick spigot turn it on and that has caused there to be more supply than demand so prices have to moderate. We've already seen that moderation. I think forty nines in area that if it holds, forty nine per barrel, then we can go back up over the next three and six months.
David Scranton: And what's your best crystal ball say about the stock market moving forward? You think is more upside than downside? You think is more downside than upside? What are your thoughts? Can the Trump Bump still run?
Jon Najarian: Yes. Trump Bump can still run; however, I think that if you give me an eighteen month time frame I'll say definitely were higher. In the short term there are going to be those bumps that you already addressed Dave, that could cause either Ms. Yellen or the economy to pause and when we hit those I don't think we see ten per cent corrections, but I do think that we could go up another seven to ten per cent this year. So again with eight or nine month time frame, I'd say more upside than downside.
David Scranton: You know momentum is a powerful thing in the markets as you well know. And we need to commercial break. When we come back though John I want to talk a little bit about your area of expertise which of course is the options market and get your best take upon our return about what you think the options market is trying to tell us about the upside versus the downside and you know, if they are agreeing with you with that eighteen months. So stick around if you don't mind John. We have a few more minutes we'd love to spend with you here on the show. And for our viewers you to stay around we're right back with a lot more from options legend John the jury. We'll be right back.
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Janet Yellen: Today the Federal Open Market Committee decided to raise the target range for the federal funds rate by one quarter percentage point bringing it to three quarters to one per cent. Our 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. The economy continues to expand at a moderate pace. Solid income gains in relatively high levels of consumer sentiment in wealth have supported household spending growth. Business investment which was soft for much of last year, has firmed somewhat. And business sentiment is at favourable levels.
David Scranton: Welcome back to the Income Generation. You've just heard from Federal Reserve chairman, Janet Yellen discussing the Fed's decision to raise interest rates by just one quarter of one per cent. So for four months now we've had a stock market riding on hope and optimism that President Trump will be able to do what he says he'll do. It's like big investors have set their thermostats on high with the complete confidence that the oil truck is indeed on its way. If it does arrive, they're not likely to raise the thermostat much higher. They have already priced its impact into the market essentially burning fuel they expected will get there. But what if it doesn't get there? In other words, what if in the coming months we start seeing signs that the execution of President Trump's economic plan really isn't viable?
Or what if encounters a major setback of some kind or simply takes much longer to implement than Wall Street was hoping for. The question becomes, could we suddenly see the optimism that fuelled this record rally, turn into an equally strong feeling of pessimism? And if so could that fuel not just the rally reversal but start off a new major sustained market plunge? Don't forget that plunge is already overdue according to the hard earned lessons of stock market history. We've had just two major downturns in our current long term secular bear market cycle so far. Every other secular bear market throughout history has had three or more, often times with each one being steeper than the previous. Therefore, history tells us the next drop could be as steep as seventy per cent but should exceed at least thirty five per cent. Speaking of history, I couldn't help be struck by the interesting footnotes related to two recent Trump rally milestones. In the days leading up to President Trump's congressional address, the Dow Jones industrial average rose steadily for twelve straight days creating record highs. The last time this happened was in January of nineteen eighty seven. But what most people remember about that year is that October nineteenth nineteen eighty seven, the stock market experienced its biggest one day crash ever with the Dow Jones Industrial Average losing twenty two points. Twenty two per cent of its value on this day known as Black Monday. And when the Dow top twenty one thousand for the first time following President Trump's speech, it marked a fastest thousand point run up in the index since nineteen ninety nine. But when most people think of that year however, they're more likely to remember that by the end of the year that is the bursting of the dot com bubble. That's when the markets began a plunge that eventually surpassed fifty per cent. And of course is what I believe to be the first major drop of this current long term secular bear market cycle. So the question becomes, I believe for every day investors is, with Trump's impact already priced into the market, is it really worth it to hang in there for another possible five or even ten per cent gain if it means potentially risking thirty five to seventy per cent downside in your portfolio? Question is the upside reward comparable to the downside damage? If you're a regular viewer you may have heard me talk about this before, the imbalance between the potential payoff of an overvalued market compared to the potential price lag.
I think of it like walking into a casino and finding a game that pays you ten dollars if you win but cost you thirty to thirty five dollars if you lose. The question becomes, would you play that game? Hopefully not. But that's essentially what investors are termed to ride this rally to the bitter end may be doing. And it's especially risky game for investors who are retired or within ten years of retirement. Let's face it, at that stage of life you don't have the luxury of time to recoup a major loss. That's why protection and defensive strategies are so incredibly important and those strategies start with risk reduction.
The other thing I encourage investors near retirement to think about, is whether a stock based strategy really alliance with their retirement goals at all. I urge them to identify their goals if they haven't yet already, to make them specific and to write them down. In fact, I find in my experience working with clients that most goals for retirement are fairly common. People want to travel, they want to dine out more, they want to go to more plays and concerts, they want to do more golfing or fishing or whatever their passion might be. They want to spend more time with their grandchildren, spoiling the grandchildren which sometimes requires travel. All this is great stuff of course and it all takes money. But the next thing that I encourage you to ask yourself is, how exactly would you prefer to pay for those goals? Would you want to have to sell investments each and every time you want to spend a day doing one of these things that you love? Or would you prefer to be able to pay for them from income?
The majority of people I speak with say that they'd prefer to pay for them from income. So the next question I always ask is, well does your answer aligns with your investment strategy or perhaps are they in conflict? Odds are if you're chasing capital gains and trying to squeeze every last dime out of an already overvalued market it probably doesn't. But how do other financial advisors view the Trump Bump and what are they hearing from their clients about that?
Now let's bring back our national profile guest, Jon Najarian. Thanks for sticking around Jon.
Jon Najarian: Great to be here Dave.
David Scranton: So again as the person who's really known as of late at least as the options expert you know what's the option is the market telling us is there more upside or more downside in terms of premiums on puts versus calls?
Jon Najarian: Believe it or not the options market is saying that the markets are a little nervous. People are covering with some puts, but that's a positive thing. I mean the actual movement Dave in the market has probably been about four tenths of a per cent, maybe half a per cent on an average trading day. And that means we should be seeing a VIX or a volatility reading from the CBOE of about eight instead we're seeing eleven. So what that tells me eleven and twelve, tells me that that extra three or four points that's put into the VIX is because people are protecting. That's a positive sign rather than people saying, well the VIX is only at eleven. True. But the market's only at an eight. So when you see that it tells you that rather than people being overly optimistic, they are somewhat cautious and that's a positive sign especially for contrarians like me.
David Scranton: That is a positive sign you're right, when people become irrationally exuberant that's when we all get nervous. But if you had to say is there is there twice as much premium on the put side than the call side is it fifty per cent more, or is it just a little bit more?
Jon Najarian: It's only a little bit more. But the people are making speculative bets on the upside with call options of course. And a lot of the big portfolio managers are snugging up a put underneath the market to act like an insurance policy, in case the market makes a six or an eight per cent correction but, unlike two thousand and eight and two thousand and nine we're not seeing any of those big downside bets coming into the market in particular from the hedge fund so, it seems like the market's pretty calm.
David Scranton: Yeah and it's interesting because you know our viewers, Income Generation members most of all, if they're using options or they're writing covered calls or maybe they're buying puts to protect their downside just as you indicated, is that change, I'm sure you're talking about the shorter term option expiration at this point, is that change when you go out twelve or eighteen months and if so how and what does that tell us?
Jon Najarian: OK. So if I push it all the way out to about September October where we don't get much volume past that day, but in other words out let's call it six months or more, the volatility for the S. and P. is closer to sixteen than it is to the eleven number that I detailed earlier. So again they're saying that a little more risk the further we get out and then once we get towards twenty eighteen the risk drops down a little bit and maybe that's because they think we're going to get some of that tax reform that you want I talked about at the top of the show.
David Scranton: I see. OK. Great that's great insight John we really appreciate you being here with us today. Our viewers very much appreciate that. If any of our viewers want any more information they can go to investitute dot com (investitute.com); again that's investitute dot com. And when we were return Miranda Khan will give us an update on the financial stories from this week and after that we'll bring in our financial advisors round table.
Miranda Khan: Welcome back to the Income Generation. I'm Miranda Khan with your Newsmax finance update. Here's a quick recap of the stories that move the markets this week.
- The Federal Reserve raises its benchmark interest rate by one quarter of one point due to the quickly growing U.S. economy. This is the third time the Fed has raised rates since December of two thousand and fifteen.
- Brexit is coming. Britain's parliament tells prime minister to Theresa May that she can file for divorce from the European Union. At the same time the British and Scottish leaders are trading barbs over Scotland's desire to hold a vote on independence.
- And state officials say the Republican health care overhaul that's working its way through Congress, could leave them with a very tough choice. Either find a way to pay for federal cutbacks or see millions of Americans lose their coverage.
For more on these stories visit Newsmax dot com slash finance (newsmax.com/finance). I'm Miranda Khan; now back to David Scranton and the Income Generation.
David Scranton: Thanks Miranda. Now that you're all up to date, let's bring in our financial advisors round table. Joining me now we have Jeff Small, the president of Arbor Financial Group and joining us via Skype we have Jay Carrier my right hand of Scranton Financial Group up in the great state of Connecticut. Thank you all for joining us today.
Jeff Small: Great to be here Dave
Jay Carrier: Thank you David
David Scranton: You know it's funny because you know Janet Yellen was unable to raise interest rates through the really through the Obama administration except for once. And of course as I predicted after the first rate hike at the end of two thousand and fifteen, she'd be unlikely to be able to do it again in two thousand and sixteen. But all of a sudden under a Trump presidency, it seems like the floodgates have opened up and now she can raise rates. She's done it twice already you know, he's only been in office for a month and a half. Why is that?
Jeff Small: Well Dave this is a really confusing issue for your viewership. The reality is we're at the end of an eight year economic expansion with the weakest fundamentals in history and highest asset prices. So the Fed is being dovish at this point. They're preparing us for a recession at some point in the future. And when we hear the pundits on T.V. talk about these issues, they're really not being totally forthcoming because when you look at historical rate increases, there is usually some type of recession within eleven months to thirty quarters.
David Scranton: So you're looking at it saying there's probably going to be a pullback at some point; they're trying to get more ammunition as back-up in case they need it is basically the bottom line.
Jeff Small: Absolutely. They need some wiggle room to re-stimulate.
David Scranton: But Jay what do you think? Do you think that we you need this ammunition? Do you think that we have another pullback around the corner? Or do you think this Trump Bump as we call it can run for a while longer? What are your best thoughts?
Jay Carrier: Well Dave, you've talked about this in the past. Where we had long term interest rate; the ten year treasury for example, rate before the election was about one and a half per cent. Now it's trading at about two and a half per cent. So Janet Yellen was kind of in a hole for a little while where she couldn't raise short term interest rates because that would have flatten out the yield curve. Now that we have higher long term interest rates creeping up now two point four now they were two point six, we've seen a little pullback in the last few days. She now has as you call it ammunition to raise hose short term interest rates. So that was sort of the problem, the dilemma that she was in throughout most of the Obama administration. Whether that continues now she has that wiggle room. She announced yesterday there's probably going to be two more rate increases now here throughout the two thousand and seventeen. So whether this continues or not that's the gamble.
David Scranton: That's the gamble sure. So what's interesting though and I don't know if you picked up on this or are you picked up on it Jeff. But you know what I saw was that yesterday right after she made her announcement, the ten year Treasury yield went down by one tenth of a per cent, ten basis points. And you know if it hit the stock market with the Dow went up over a hundred points. So normally if the Dow went up, that would be due to a flight from quality of money moving out of Treasuries the ten year yield would have gone up not down. So it seems to me as though what's happening is just still so much money sitting on the side lines that flooding in the markets, that's still there from two thousand and eight that's going in. It's not total confidence is kind of like one foot on the accelerator, one foot on the brake. But I guess the question Jay becomes you know what happens if that changes? What happens if all of a sudden some bad news comes out? The ten year Treasury yield goes back down to maybe low twos, all of a sudden now does that foil Janet Yellen plan to raise rates two more times during the year two thousand and seventeen?
Jay Carrier: Yeah absolutely. I mean we're sitting here, you know, you talk about the Trump Bump which is all really good positive economic news. Lowering taxes on individuals and corporations. We've talked about a trillion dollar infrastructure plan; the stock market loved all of that. After the infrastructure, the Dow was up three hundred thirty five points the next day. So we heard a lot of great information coming out economically. But, the problem is the intangibles that Donald Trump's bringing. Is he going to tweet or say something that's going to rattle the stock market?
David Scranton: The famous Donald Trump tweets yes, yes of course. By the way for our viewers I want to let you know that I don't know if you know this or not but how we've chosen our guests for today is that you may not have heard this but this is true that March is indeed bald is beautiful month; yes the month of March bald is beautiful. So, OK you know what do you think the most important thing that Donald Trump really needs to do to keep this rally going? And do you think it will go or do you think there's more downside than upside right now in the markets Jeff?
Jeff Small: Even though we're hitting all time peaks on number different stocks Dave, there is some turbulence in the market right now. Right now fifty per cent of all the S. and P. companies are off their highs by ten per cent.
David Scranton: Sure
Jeff Small: And the top one per cent of S. and P. companies are within one to three per cent of their highs at the top end of the market is carrying the market so to speak. So if we don't get tax reform by August or they don't fix you know the Affordable Care Act, if they don't get the right stimulus plan in place, the market will see these are signs of turbulence and that could be a catalyst for a pullback.
David Scranton: And maybe that's why Jon Najarian who is just on of course as you as you both heard indicated that the options market is pricing a little bit more down side in the markets than upside right now. So again that's probably having that one foot on the accelerator and one on the brakes. But what do you think of all those things Jeff, politically what's the most important thing Donald Trump could do to keep the markets happy? Is that reforming taxes? Is it deregulation? Is it infrastructure spending, you know what's the first thing that he would have to focus on in your opinion to keep the keep Wall Street happy and keep the markets moving forward?
Jeff Small: That's a great question Dave. And it's really what got the market started and that is tax reform. If they can reduce corporate taxes from thirty five per cent to twenty per cent good luck with that. But if they can do that that'll keep the party going.
David Scranton: So put so tax reform put the money back in the hands of the citizens
Jeff Small: Correct.
David Scranton: OK. Now Jay you know it's funny because we had this last week we had some guests on and we had a little controversy going on between our financial advisors about that, and people say, you know some people say put the hands right back in the money right back in the hands of citizens, let them have more money to spend. Other people say its trickle down. You know if you cut corporate tax rates, you get more money in the area of corporate America so they can hire more people, they can invest more in infrastructure, that that will find its way down over time and that'll be a better stimulus to the economy. Now as someone who in your own right is a tax expert, what do you think is the most important? Just to put it in the hands of the citizens or to put in the hands of corporate America so they can hire more people create more jobs and it will trickle down your best lots.
Jay Carrier: That's a tough one. I'm leaning more towards the individual citizen. And let them, not only that but also simplify the Tax code rate now is very complicated. So I would say a combination of simplification as well as getting in the hands of the citizens.
David Scranton: Now I know you didn't say trickle down now is that because you're sitting in Connecticut right now, of course which is my home state also a state that's fairly liberal, is that fuelling your comment at all or, or would you feel or would you be saying the same thing if you're here in studio in Florida which is a red state?
Jay Carrier: Well you know the new word for trickle-down economics is free market economics first off. So they have changed the name. And trickle-down economics really hasn't worked I mean Dave. There's been some experiments recently the State of Kansas for example has implemented very very strict trickle-down economics.
David Scranton: Yeah, but Jay I say and we have these debates in the office all the time. And Jay yes you are my right hand course what our viewers need to know is I'm actually left handed. But trickle down doesn't work. Trickle down doesn't work Jeff because it doesn't have time because the President puts it in; he's out in four years or eight years. In the last twenty seconds or so before we have to take a break what do you think, is trickle down work or does it not work do, you agree with Jay? Am I the odd man out?
Jeff Small: It's a short term solution but it increases the debt factor. So what we have to do, what Trump has to do is get the velocity of money moving in our country which means money is going to start circulating in a faster pace. And that's happening and there is no economic gauge to measure that
David Scranton: But trickle down is the thing that really does that, so let's leave it there for now we have to take a commercial break. Guests if you could stay with us we'd love to have you longer and for our viewers also, please stay with us we have a lot more from both Jay and Jeff as soon as we return.
David Scranton: Welcome back to the Income Generation. I'm David Scranton your host and we're here today with Jeff Small in studio and Jay Carrier via Skype. Jay, Jeff needs to leave us a little bit early so I'm going to focus on Jeff for just the next few minutes here and get his words of wisdom, his pearls before he has to go. You know what do you think about the markets here? Do you think there is more upside potential in the markets and if so how much? Or do you think we're so close to the top now if it doesn't make sense riding it anymore, trying to squeeze the last bit out of it. What are your best words of wisdom on that for our Income Generation viewers?
Jeff Small: Well especially for your viewership Dave, I think at this point with the market being at fifty two week highs pretty much across the board for the major players in the market it's time to really lock in some gains. And at some point, the three trillion of market value that's been created the last three months since the election, Wall Street's going to lock in those gains. That's already started to happen with insider trading.
David Scranton: But with all that money on the side lines, you know right now we have all this money sitting on the side lines, that's why the bond yields are coming down and bond prices are going up, the stock prices are going up all the same time, especially down here Florida we see real estate prices going up like crazy again almost like it's two thousand and seven all over again. So you know with all that though, could it be that there's so much money on the side lines that something really bad would have to happen to derail this bull market?
Jeff Small: Well we never know what the catalyst is going to be. It has to be a catalyst, but there's no doubt that there's much greater chance of a twenty per cent correction and there is a twenty per cent advancement in asset prices at these all-time highs Dave. We are at the second highest asset price valuation in history since the Great Depression.
David Scranton: You know there's a statistic that I want to share with you recently that that I learned about that Calvin Coolidge took over office I believe was in nineteen twenty three and he came in with policies much like Donald Trump. He came in with policies that were very much geared toward building infrastructure, helping our trade balance become more favorable, cutting taxes, giving money back to citizens and deregulation, that was his platform, sounds familiar?
Jeff Small: Very familiar
David Scranton: And then that started of the best bull market in U.S. history. Can that happen here?
Jeff Small: Well is a possible to grow the market in the second best bull market of all time with the least amount of economic growth the last eight years at the market top? I think you need an active financial Moses to keep the market going up from here for another eight years, that's going to be next to impossible, no matter what happens.
David Scranton: You're saying President Trump is really good but he may not be able to walk on water quite yet, so, is that that what I'm hearing you say?
Jeff Small: That's exactly what I'm saying.
David Scranton: OK. Now the other thing too is when you think about it the amount of national debt, the amount of the deficit we had back in the nineteen twenties was nothing compared to the records that we have today. So with that in mind, how much of a factor do you think is the deficit, is the national debt today that makes it very difficult for President Trump to do the same thing that a President Coolidge was able to do?
Jeff Small: Well it's a huge factor. But going back to nineteen twenty-nine, we had that six year expansion with Coolidge. We also had to put up money and borrow from ourselves the same way we did in two thousand and nine. So we had a central banking intervention to get us out of the Depression and we did the same thing in two thousand and eight two thousand and nine. So now we're coming out of that now so it can be very hard demographically to shift massive amounts of consumerism without dramatic expansions in credit and we've already expanded credit to its peak. We're in a credit facilitated stock market value right now; we're not in a productive stock market value.
David Scranton: If you think about it, we've been in this credit bubble, we mention this on a previous show, we've been in this credit bubble now for pretty much thirty years. If you go back to the invention of automobile leases, back in the nineteen eighties. People get in the mind-set every two three years I need to have a new car. The first liar loans were actually in the nineteen eighties when it comes to mortgages, so that's, that's a big part of it.
Jeff Small: It really is. But I think the tip of fire for me is now that the Fed is taking an active movement and raising rates, that tells me that we are anywhere from twelve to thirty months away from the potential for a recession because they are taking a dovish approach. She said some things yesterday that were completely ignored by the massive financial media.
David Scranton: Yeah, she did. Go ahead and highlight what you think is the major thing that she said that people missed.
Jeff Small: The biggest thing is that she said that these employment numbers can't continue and she's very concerned about global growth. And there's lots of uncertainty geo-politically. There could be trade wars; we have the rise of nationalism across the globe. We don't know if that's going to pan out in Germany and France and Italy and how those elections are going to go. It went good for the Netherlands I guess for the E.U. they're still together so to speak but we have to wait and see.
David Scranton: You know if she can get short term interest rates up to really what may be two and a half per cent will be the target that would be great. But again as I asked Jay that that can only really happen if long term rates are able to move up more, you have a flat yield curve. So you're concerned with the fact that she's going to limit how much she can raise rates even though she might have some ammunition left it may not be as much ammunition as she needs for the next economic pullback.
Jeff Small: Well you know that that's a very interesting question you know. We thought the global banks were sort of working in concert so together globally for the global community economically. But if she raises rates it completely imbalances the globe. You know that's why we've got these big problems.
David Scranton: Yeah absolutely. Jeff, I know you have to go. Really thank you so much for being here today. We very much appreciate it.
Jeff Small: Well thank you for having me Dave. It's great to be here.
David Scranton: And Jay stick around. We'll be right back with more from the financial advisors round table. Stay with us.
David Scranton: Welcome back to the Income Generation. I'm David Scranton your host and re-joining us we have Jay Carrier my right hand from Scranton Financial Group in the great state of Connecticut. Jay thanks for your patience as we spend some time with Jeff over the last few minutes.
Jay Carrier: Sure; absolutely.
David Scranton: You know it's funny you always get seems like the short end of the stick around here because in our office we always have great intelligent water cooler conversations between the two of us. You're one the sharpest guys I know in the financial field, but because I'm the television hog you just don't get too much screen time. So I'd like to ask you, what are your thoughts about what would Jeff just said. Do you agree with some of the things about the dovish comments that Janet Yellen made? Do you share the same concerns? Are you bit more optimistic, a bit more pessimistic? Give me your thoughts after yesterday.
Jay Carrier: Yeah. Well going back to my comment were question that you asked Jeff and Jeff answered and I agree that what's the next thing that Trump needs to do in order to keep this this bull market going. And Jeff had mentioned tax reform and I agree. That is going to be a big one. But really it's getting something passed. At this point right. Yes he's only fifty or so days into his presidency so he has a long ways to go, but you know he's working Affordable Care Act repeal and replace. But yet you know all of these wonderful things that he's talked about none of those things have been passed yet and so I think that's his issue is having to deal with Congress, the Senate and you know this isn't a monarchy. He does have to work with other people in order to get his economic policies pushed forward.
David Scranton: Yeah and I know you know we were primarily with people who are retired or close to retirement, you know so for our clients it generally doesn't make sense to try to squeeze ten per cent more out of the market. But what you say about somebody who's younger, who's more aggressive you know, you think it makes sense for them to try to squeeze a little bit more out. Because you know let's face it these this momentum can be powerful you know that as well as I do, markets tend to go up further than we think and down further and we think. What if somebody can afford to take the risk? You think there's enough of, more upside to make it worthwhile?
Jay Carrier: Well I'm of the camp I don't see it and you are as well, you don't take risk if you don't think that you're going to be rewarded. Certainly if someone is contributing to an asset, to dollar cost averaging, but that might be a little different circumstance but for the most part no, I don't think the upside is there enough for really anybody to take the risk. I don't care if they are a new-born or if they are ninety years old. Don't take risk in which you don't think you're going to be rewarded.
David Scranton: That's right. Even a twenty one year old investor doesn't want to deal with another downturn in the market recovery that takes six or seven years to drop and recover like the last. You know even a twenty-one year old doesn't want to get zero return for six or seven years so. It's interesting when Jon Najarian said that the options markets pricing and more downside than upside that was surprising, as you know that's unusual. But Jay stick around. We need you for just a bit longer I hope you're not too busy you have a minute more. Stick around we'll be right back. And for Income Generation viewers, you stick around too we have many more words of wisdom from my right hand Jay Carrier. We'll be right back.
Welcome back to the Income Generation. I'm David Scranton your host. Now let's bring back Jay Carrier to finish this out today. Jay, I agree with you. People don't want to take risks for which there's potentially no reward. But you know you and I were surprised by this whole twelve fifteen per cent market recovery. So is there anything new in your research that you found that would lead you to be bearish? That would lead you to say you know the market really truly is overvalued? Something that we haven't talked about since I was with you in Connecticut last week.
Jay Carrier: Yeah; right here on our back yard, Robert Shiller. His capital asset price to earnings ratio is now flipped! He's gone from a buy index now down to a cell. So you know another kind of economic indicator showing that now there are some cell signals here in the stock market.
David Scranton: So you're saying that just because Robert Shiller is professor emeritus at Yale that he's a pretty smart guy. Is that what I'm hearing you say?
Jay Carrier: Yeah. Not too bad, not too shabby guy with hair.
David Scranton: You get a research right from twenty minutes down the street, I agree completely. Well that's great Jay and thank you so much for your words of wisdom as usual. We appreciate you being here and being part of our bald is beautiful month. And I promise I'm going to try not to be as much of a television hog and will get you a little bit more air time in the future.
Jay Carrier: I appreciate David; thank you very much.
David Scranton: You're welcome, good having you Bud. Before we go I'd like to thank Jon Najarian as well as this week's guest advisors. I'd also like to thank all of you our new and returning viewers. I hope we helped to put the Trump Bump into perspective for you today. You know, the hype around any market rally can be confusing and often conflicting. It's hard to sort out the hype from the real facts and information which is why we devote this entire show to this particular topic. There's more than enough hype on all those other shows. We don't want to give you any more here and hopefully you understand now why this rally can be deceptive in many, many ways. And why you may have much more to lose than to gain by trying to ride it out to the bitter end. Especially if you're retired or within ten years of retirement. And hopefully you've taken some time to think about your own retirement goals and whether or not they really align with your financial strategies. If not I strongly encourage you to do so. I'm David Scranton and thanks for watching the Income Generation.
If you're near or in retirement head over to the Income Generation dot com (incomegeneration.com) and download your special report which is specifically for the needs of the Income Generation, again to those born before nineteen sixty-six. I'm David Scranton and you've been watching the Income Generation.