the trade war for China<\/a> could end up being what the cold war was for Russia. Our audience, The Income Generation members, those baby boomers who are either retired or kind of on that final descent into retirement, what should they do? What’s your best advice for them? I love you because like myself here a fixed income guy, but you are also in equity as individual managing international portfolios in the past, global portfolios. What would you tell those viewers that are looking at lower yields on fix income, looking at a stock market that’s going up for over 9 years in running now, what would you say to them?<\/p>\n <\/p>\n
Mohamed El-Erian:\u00a0<\/strong>I would say recognize that we are changing landscape. You see it already in higher volatility, higher short term interest rates, and understand that we are entering a world of greater divergence in economic performance and greater dispersion in asset prices. So just first understand that this is a very different landscape that what we have seen in previous years. Otherwise you are going to become completely unsettled and the risk of a mistake goes up. That’s the first critical issue. The second is ask yourself what mistake can you afford to make and what mistake can you not afford to make. That’s really important when the landscape changes. Thirdly, make sure that you have some dry powder because in this volatility some good names, strong balance sheet, good business models will get temporarily depressed.<\/p>\n <\/p>\n
David Scranton:\u00a0<\/strong>In the 40 seconds or so we have left tell us what you think. I’ve said this recently that today is a buying a 500 index which is trade who are probably not going to be ideal. It almost seems now like individual stock selection if you are going to be in the equity market or you start to look at certain companies exports. It almost seems like that\u2019s what people have to do if they want to make money in the equity market versus buying a mutual fund or an index. Your thoughts.<\/p>\nMohamed El-Erian:\u00a0<\/strong>Yes in capital letters and that is the outcome of greater dispersion in asset prices.<\/p>\nDavid Scranton:\u00a0<\/strong>So it’s a different world. It’s the new normal I think is the phrase that you helped us coin 10 years ago, the new normal. The new normal is treading forward. Mohamed thank you so much for being on our show once again. It’s been my pleasure.<\/p>\nMohamed El-Erian:\u00a0<\/strong>Thank you.<\/p>\nDavid Scranton:\u00a0<\/strong>Alright stay with us we’ll be right back here with lots more on the Income Generation.<\/p>\nDanielle DiMartino Booth<\/strong><\/h2>\nDavid Scranton:\u00a0<\/strong>With the TARP program develop the banks, the FED reserve instituted and unprecedented effort not only to manipulate the economy and financial markets but to manipulate yes, you and me. Americans, quantitative easing was not just an effort to jump start the economy mathematically but also to jump start it emotionally. There was an attempt to quickly erase all the fear and uncertainty prompted by the bank in crisis in the stock market crash and replace it with trust and optimism. But, by enlarge it hasn’t worked. Yes it’s true that some everyday investors were eventually forced up the risk curve as I like to call it back into the stock market based upon the mistaken belief that low interest rates made other investment options less attractive. But, they weren’t tricked again into spending and borrowing just because interest rates were low. Instead they focused on paying down debt and trying to rebuild their savings. To a large extent many baby boomers are still focused on those things particular those of us in the Income Generation. Here’s why, as I explain many times economic recovery since the financial crisis has led so far behind the stock market\u2019s recovery, created in unprecedented age of again as I like to call it economic uncertainty.\u00a0Danielle DiMartino Booth is a global thought leader sought for insights on the financial markets in monetary policy both in the US and abroad. She’s founder of the Economic Consulting Firm, Money Strong LLC, and a fulltime columnist for Bloomberg View and author of the Amazon Best Seller FED UP: An insider\u2019s take on why the FED reserve is bad for America. Danielle welcome to the show.<\/p>\nDanielle DiMartino Booth<\/strong>:\u00a0Great to be here. Thank you for having me.<\/p>\nDavid Scranton:\u00a0<\/strong>Now I have to confess. I know you told me that you are actually in Idaho right now and I have to confess I have never been to Idaho but obviously the Skype doesn’t work too well in Idaho from what I understand, is that correct?<\/p>\nDanielle DiMartino Booth:<\/strong>\u00a0Clearly we’ve had some technical difficulties indeed.<\/p>\nDavid Scranton:\u00a0<\/strong>So listen, you say you are a FED insider, in what way?<\/p>\nInsights From A Former FED Insider<\/h3>\n
Danielle DiMartino Booth:<\/strong>\u00a0A former FED insider and I actually like to say reform. I advised Richard Fisher when he was president of the Dallas FED reserve for the better part of a decade throughout the financial crisis. He and I had one thing in common, neither of us were PhDs in economics. Both of us were MBAs in finance would come from Wall Street.<\/p>\nDavid Scranton:\u00a0<\/strong>I see. I actually had interview with him 2 1\/2 years ago when the FED first started raising interest rates we were on a show together, smart man can argue with anything Mr. Fisher says.<\/p>\nDanielle DiMartino Booth<\/strong>:\u00a0I intend to not argue with the boss.<\/p>\nDavid Scranton:\u00a0<\/strong>That’s right. What prompted you to write the book?<\/p>\nDanielle DiMartino Booth:<\/strong>\u00a0In the years that followed the financial crisis there was an internal recognition at the FED, something had gone seriously wrong. That part was good and they determine what the gages that they use to follow prices and inflation had really failed them. They had failed to capture the runaway home crises, the runaway prices in the stock market and they determine that they needed to come up with a new inflation. I was very excited when the determination came down and then they promptly chose to do nothing. Their inflation gages gave them license to be lower for longer and that’s what they chose to do. They chose to keep their blinders on and as a result I became very fed up.<\/p>\nDavid Scranton:\u00a0<\/strong>You know the old saying figures don’t lie but liars figure you could make numbers pretty much with whatever you want. So you say in some ways you are better off without the FED reserve. But then we have come a long way from the days when J.P Morgan had to jump in and play the role of the FED reserve, what would we do without a FED reserve or what we would have in place of a FED reserve if they were to go away.<\/p>\nDanielle DiMartino Booth:<\/strong>\u00a0Well let me be really clear. I am not an advocate of ending the FED at all. In fact the last chapter through the blueprint of how I would reinvest the FED. For national security and financial stability purposes I’m a huge advocate of keeping the FED, it just need to be taken down.<\/p>\nDavid Scranton:\u00a0<\/strong>In the minute or so we have left in the segment, tell us what are the top one or two things that you think need to be done to fix the FED?<\/p>\nDanielle DiMartino Booth:<\/strong>\u00a0I think the lines of the FED need to be redrawn to represent the economy, the United States is today, not what it was in 1913. And it all should have permanent votes and do a mandate of maximizing employment and minimizing inflation should be taken back to what it was before 1977 and that is just minimizing inflation.<\/p>\nDavid Scranton:\u00a0<\/strong>You think that the FED reserve now don’t ask, don’t tell they won’t talk about this but really cares about what the stock market participants think?<\/p>\nDanielle DiMartino Booth:\u00a0<\/strong>I think that the onus of the FED to prove that they no longer care what the stock market thinks because since 1987 when Greens man came into office the tail wag the dog and FED stock market to dictate monetary.<\/p>\nDavid Scranton:\u00a0<\/strong>I agree with that 100%. Danielle thank you we’ll be right back with a little bit more so Danielle please stay with us and you stay with us also. We’ll be right back here with more on the Income Generation.<\/p>\nDavid Scranton:\u00a0<\/strong>We are back now with more with Danielle DiMartino Booth. So Danielle I agree completely. I think the FED reserve has gotten a little bit too concerned about Wall Street and I think now they have got their hands filled trying to prove that they really don’t care what happens with Wall Street with the stock market or what Wall Street thinks. Let’s switch gears with this a minute if we can. You like I had predicted the housing back in 2007. What do you see on the orison now? What risk exist now, you see any major fundamental collapses coming up in the future potentially? Talk to us about that.<\/p>\nDanielle DiMartino Booth:\u00a0<\/strong>One of the things I’ve been following the most closely it was one word on how they quickly, just because housing is not as overvalued as it was during 2006\/2007 does not mean that housing is not at a very high risk right now of undergoing major correction, but that is housing. The bigger risk I think is where the new sources of leverage are in the current area and that would be in the corporate bond market. I took a deep dive and look at what corporate bonds leverage look like. Because of the degradation of the quality within the investment university these are supposedly the highest foreseen quality bond but now we have over 50% of the investment grade bond market is triple in credit rating for just one notch above junk.<\/p>\nDavid Scranton:\u00a0<\/strong>They are barely invested grade.<\/p>\nDanielle DiMartino Booth:\u00a0<\/strong>Barely invested grade over 50% of the investment grade market today. Net leverage at these companies has doubled since 2000. Jim Crow pointed this out so when you look at the true investment grade market it’s about 2 1\/2 trillion dollars and I look at the other 5 trillion dollars of the market as being really what we should call junk. Speaking of the housing market and the crisis investors are blindly on fate taking the credit rating agencies diligent and not doing their own homework and these are the things that we are in.<\/p>\nDavid Scranton:\u00a0<\/strong>Danielle I agree with you 100%. It’s funny you are getting into what we do at our company really lots of corporate bond issues and I’ve been saying it for a long time that just buying triple these brokers are just buying triple across the board and not doing a deep dive on the credit and the financials are really not doing their clients a service. I have a bigger concern though and we only have about 20 seconds left to cover it, but you tell me in some ways aren’t these bonds even a bigger concern today.<\/p>\nDanielle DiMartino Booth:\u00a0<\/strong>I certainly think that\u00a0[unclear 42:29]<\/strong>\u00a0walking through a mine field because there are some involving states and in solving cities and we have to bear that only cities can declare bankruptcy, you should tie with the future but not Illinois as the future, the state.<\/p>\nDavid Scranton:\u00a0<\/strong>Fortunately President Trump taken away some of those tax deductions<\/a> of state and local income taxes. I don’t think it has help that very much. Danielle thank you so much. It’s been my pleasure. You stay with us we’ll be right back with more on the Income Generation.<\/p>\nDavid Scranton:\u00a0<\/strong>I’d like to take this opportunity to thank both our guest for joining us for another episode of the Income Generation. I also like to thank you our new and returning viewers. If you are close to retirement and really want to know how to protect and maximize your money, it’s absolutely essential that you stay informed and up to date. Right here is where you can do it on the Income Generation. I’m David Scranton, thanks again and we’ll see you next week.<\/p>\n","protected":false},"excerpt":{"rendered":"