Transcription: Segment 5
Paul Winkler: This is the Investor Coaching Show, and I am Paul Winkler, your host. We talk about the world of money and investing right here on the Investor Coaching Show. All right, so one of the things that I wanted to talk about—this is a conversation I’ve had with a couple of people this week, and it happened to be that there was something in MarketWatch.
Election season nerves
All right, so one of the things that I want to talk about is the move. Some people are desiring to go more toward fixed income and bonds in a portfolio. And it’s often when you go into an election season that people get a little bit nervous, and I taught a whole workshop on this, and it was about different presidential contenders and who took the office and what happened to the market.
One of the things that I talked about is how when we have an election and it’s a fairly close election, what often happens, and what people forget, is that information is constantly flying around as to who might win the election. And we don’t live in a vacuum where we can actually see what other investors are doing. We can hear what they’re hearing. We can take the information that they’re getting and handicap stocks based on what we think might happen. And there was a study that was done over in Europe, and it was looking at how polls affected the stock market.
And that’s one of the things that I talked about in the workshop on Thursday this week, I talked about how polls can affect the stock market. And the way they affected is, let’s say, if an election is fairly close, then information will come out and say, Well, this person right here just came pretty good in a poll. They did pretty well in the poll. And let’s say that that person happens to be very good for the stock market. And then the market looks at what their policies are and says, Hey, they’re pro growth.
They really are good at keeping out of the market’s way. They don’t like a lot of regulation. They try to keep taxes low. They try to make it easy to run a business. Economic freedom. Indexes are out there to determine where people stand and what their policies are likely to be, what they’re likely to do with different companies in different sectors and sections of the market. And this is if that person is friendly to the market or friendly to business, and they start to show up well in polls, then stocks will go up in anticipation that they may win.
If the poll says that they may win. Now, if all of a sudden, there’s another poll that comes out and says, Hmm, it didn’t come out so good for the market friendly presidential candidate. And then the stock market will go down into space and you don’t have to wait until the election happens for markets to actually respond. And that’s what people don’t realize. It’s futile to go and make changes in your portfolio in anticipation of who might win and who might not win and what they’re going to do because the market’s already handicapped us.
And this is really particularly important for people that are older. When you’re getting toward retirement, you ought to have a good, significant amount of money in fixed income, if you are going to be drawing income from your investment portfolio. So you’ll have stocks in your portfolio, but fixed income. When I say fixed income: bonds, think cash type investments, short, intermediate term bonds, high grade, really high quality AA, AAA rated bonds, A-rated maybe a little bit much, but mainly very highly rated bonds.
What happens after the election?
And I don’t want to see a bunch of junk in the portfolio and a BB and B rated bonds, and certainly not see or anything like that, but I don’t even want BS. I don’t even want to see that in a portfolio. I want to see really high grade bonds, because if somebody comes in and has a business unfriendly stance, or they surprise us with a business unfriendly stance, maybe they come in and they say something that sounds really, really great when the election’s happening. And then all of a sudden they do something different when they get in, and they can go the other way.
You can have somebody going out there and saying, I’m going to do this and do this. And it’s terrible. I mean, it sounds awful. And then all of a sudden they get in and they can’t get anything past that they wanted to get past, or they back off because they realize that it’s unattainable. And I’ve seen that so many times before where somebody’s coming in campaigning for office says, I’m going to do this. I’m going to do this because their base really wants to hear that stuff. I’m going to tax the living daylights out of the rich, I’m going to tax the corporations. It’s unfair. I’m going to have jobs for all or I’m going to give insurance to everybody and their brother.
And we’re going to make the rich people pay for it. And then they realize, you could tax rich people a hundred percent and take all their money, and you wouldn’t be able to pay for all this stuff. You guys just said you want it.
Once they do this, they realize, Oh my goodness, this is unattainable. I get this isn’t going to work. I can’t do this. Then all of a sudden, they back off and they say, Well, I guess maybe all that stuff I said on the campaign trail, I’m not going to do it. Cause I can’t, it won’t work. And then all of a sudden stocks shoot up like crazy because all the things that people worried about don’t happen, so it can work both ways. And that’s the funny thing about markets.
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A move toward fixed income
Now, one of the things that people have been thinking about is moving toward fixed income because they feel safer there. And one of the things I like to point out is that’s not safe either. If you look ten, fifteen years in the past, you would see where inflation ran significantly lower than interest rates back then, that has flip-flopped. If you look now, there was a great graph that I had. One of my guys was actually listening to a workshop an economist, Fritz Meyer, was doing
And he shared a graph that was just beautiful visually. And it showed a bar graph of interest rates versus inflation rates. And in the early years, interest rates were significantly above inflation rates. And then in the past, like ten to fifteen years, it’s been the other way around, so interest rates have been below inflation rates. So it’s literally a guaranteed loss of money. Number one. But here’s the other thing to think about. There was this article in MarketWatch, and it says “Powell to speak next Thursday on Fed’s new inflation friendly strategy.”
Inflation strategy
So there’s a new inflation friendly strategy that is being put out by the Fed chair. What does that mean? Well, Jay Powell is to speak next Thursday on how central banks plan to achieve twin goals of stable prices and maximum employment. Once the coronavirus pandemic has ended. So in essence, what they’re looking at, the things that they want to do, the Fed wants to do their job at stable prices, making sure that the currency is stable.
That’s one of the jobs that they have, to make sure that the dollar remains stable, because we depend upon that around the world for buying and selling. And if you don’t have a stable currency, you don’t have anything. You know, if I sell cars, for example, and you give me a dollar and one day it’s worth so much. And you can be $20,000 in one day, it’s worth $20,000 in the next day, it’s worth, you know what? It has the purchasing power of previously what $10,000 had. I’ve just lost half my money.
I’ve got a problem. If we don’t have a stable currency, then commerce doesn’t work very well because nobody trusts what the currency is going to be worth. So it’s very, very important to keep the currency stable. Now, if we look at that one thing right there, that’s very important, but also maximum employment. So they have these two things. They want to make sure that you have maximum employment and maximum loan. It can be kind of funny. My son and I were talking about this and he goes, “This person’s saying this, Paul.” I’m dad. He couldn’t call me by my name. Dad, what do you think dad? And I said, “Well,” I said, “here’s the deal.” You know, because he was talking about various presidents and what the unemployment rate was.
Unemployment rates
And I said, “Well, the issue is this, your employment rate is a hard thing to make any political arguments about.” Because let’s say that you have ten people out there that live in America, you know, just ten people. And I’m just going to make this super, super simple. And imagine that only five of them are actually looking for work or want to work. The other five don’t want to work. Let’s say now of the five that want to work, let’s say that one of them is unemployed. I said, what is the unemployment rate? And he goes, “I don’t know, what is it now, 20%?” I said, “Exactly, it’s 20% because there are only five people that want to work. And one of them is not working. So the 80%, the other four that are working, the 80% are working, one isn’t.”
So it’s 20% unemployment rate, but let’s say that all of a sudden there’s a change. And now all of a sudden, now we have an improvement in the economy and all 10 people want to work. And let’s say that just three of them are out of work. Now, what is the unemployment rate? And he goes “30%.” Exactly. So you have 30% unemployment, which sounds worse than 20% unemployment, right?
Yeah. I said, but how many more people do we have employed three, instead of four people, employed, we got seven. So actually you’ve had an improvement on how many people are working, but a higher unemployment rate. And that’s, what’s really, really tricky about this stuff. Cause you know, you hear people say that figures lie and liars figure, that’s how they can do it. You can really mess people up with numbers.
The inflation target
So what’s going on here is the Fed has spent the past year reviewing monetary policy framework and the results were expected earlier this year. But the process was derailed by COVID-19 which pushed the economy into a deep post-war recession, right? Really, really deep, you know, just a huge, huge recession. Cause you’re telling everybody to shut their businesses down. The Fed officials want to move forward and codify changes to their strategy. So apparently that’s what they’re going to be talking about. The Fed has always wanted a 2% inflation target, 2% inflation. That’s what we want to have because that’s a good price increase level. We don’t want too low of an inflation rate because that can be a big negative.
If you have too low of an inflation rate, then what happens is consumers will hold off their purchases because they’re just figuring that prices are going to be lower in the future. And you’ve heard me say that many times and that’s what they say in this article as well. So that is the issue with inflation or deflation, if prices are going to be cheaper or things are going to be cheaper in the future, I’m just going to wait, Hey shoot. You know, the car’s $20,000 this year, next year, it’s going to be $16,000. I’ll wait till next year and I’ll buy it. Why, why would I go and waste $20,000 now when it’s going to be $4,000 cheaper?
So what happens is that this is the direction that they’re looking at. And they’re thinking about actually increasing the inflation target. They’re saying not as much as 4%, but they’re looking at an increase in the inflation target, letting it run a little bit more than before in years past. In other words, letting a little bit more inflation be in there. And the reason is really interesting. They’re saying let’s let inflation run a little bit because we need to make up for past years when it was less than 2%, because our target has been 2%, we’re going to actually set it up so that it’s a little bit higher to make up for lost ground. Now, if that’s the case, that means that you’re getting a greater depreciation in the purchasing power of your dollar. Your fixed investments are going backwards faster if that’s the case.
Investing is a balancing act
So really, you gotta realize folks, investing is a balancing act. It’s a balancing act. You know, in reality, you’re dealing with the balancing act of markets fluctuating, but you’re also dealing with the balancing act of the dollar fluctuating more silently downward in value based on inflation. So it’s really important to realize that diversification across asset categories, large small growth value, US international, all different areas of the market, but also diversifying between fixed income and equities and stocks to make sure that if the dollar drops in value, you have some fighting chance to outpace that because companies will raise the price that they charge for stuff.
If the dollar drops in value and you own the company. So it’s very, very important to understand that. All right, that’s it for the Investor Coaching Show today. Hope you enjoyed it. I am Paul Winkler.
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