Monthly Archives: March 2020

By Justin Pawl, CFA, CAIA

In this week’s edition:

  • Last Week Today.
  • Economic Coma.  Out of options, the government is putting the economy in a regulatory-induced coma to curtail the virus.
  • Imagine.  How will the response to the virus change society?


Last Week Today.
Risk assets rallied forcefully, though equity market performance comparisons to the largest three-day gain since 1931 are unsettling.  The amplitude of the rally was not all that surprising as the biggest daily gains in equity markets occur during bear markets.  Predicting the beginning points of market rallies and selloffs is a different story, which is why market-timing tends to be a money-losing strategy in the long-run.  From here about the only thing that can be said with great certainty is that markets will remain volatile, characterized by face-ripping rallies and disheartening selloffs.  For context, Goldman Sachs published research showing that during the Financial Crisis between September and December 2008, the S&P 500 experienced six periods (ranging in length from 1-6 days) in which the index bounced 9% or more.  The largest sustained rally was 19%.  However, in between and around those periods of investor ebullience, the market declined, and it did not ultimately bottom until March 2009.  Such is the nature of financial markets during periods of economic dislocation.

During the Financial Crisis, investors reacted to news of bank closures, government-brokered mergers, and stimulus packages to counteract massive deleveraging from the real estate bubble.  In the current dislocation, investors are responding to news about virus infection rates and government programs to ward off the effects of shuttering large sectors of the economy.  History never repeats, but it often rhymes.

For detailed weekly, month-to-date, and year-to-date asset class performance, please click on the table below.

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Economic Coma.  In response to the COVID-19 virus, government agencies are putting the economy into a regulatory-induced coma.  Medically induced coma, though widely known, is not commonly used by doctors.  It’s the last resort when other treatment options have failed.  A rolling economic coma on a global scale is a novel idea, borne out a lack of effective treatments for COVID-19.  China started the process, shutting down the epicenter of the outbreak, which also happens to be the manufacturing heart of the country.  Policymakers around the world reached a similar conclusion – temporarily shutting down all but essential economic activities is a price worth paying to contain the virus.

In the U.S., the Federal Reserve and Congress are attempting to mitigate the effects of the coma with the most powerful “drug” in their arsenal, money.  The Federal Reserve committed to “Quantitative Extreme” (aka, unlimited Quantitative Easing), expanding their purchases beyond US Treasuries and mortgages to include investment-grade corporate bonds and short-term municipal bonds.  Congress passed a bill providing $2+ trillion in loans, grants, and tax forgiveness programs.  Though a historically sharp decline in economic activity is a foregone conclusion (indeed, it is the goal), the government’s actions are intended to keep the economic patient alive.  The hope is that when the virus threat passes, the economy can be brought out of a coma and quickly recover.  I’ve written a lot about the great central bank monetary policy experiment coming out of the Financial Crisis, but this is next-level stuff.

The hoped-for recovery won’t begin for months, but in the meantime, economic “vital signs” indicate the economy is slipping out of consciousness and into a coma.   Purchasing manager indexes, especially in the services sectors, are plummeting in response to social distancing measures adopted across the country. Consumer confidence is understandably weak.  The University of Michigan’s consumer sentiment index fell from 101.0 to 89.1 in the final March survey – the most significant drop since October 2008.  The labor report released last week showed 3.3 million workers filed for unemployment insurance.  The labor market EKG looks like it’s malfunctioning as the spike in jobless claims (on the right of the chart) is unprecedented.

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Sources: FHN Financial and Covenant Investment Research.

It’s heartbreaking, but the unemployment number understates the actual number of people out of work as unemployment insurance systems were overrun with applications and crashed.  Moreover, since the March 21st filing date, at least 16 states have issued social-distancing restrictions, so next week’s claims numbers will climb relentlessly higher.  Estimates on where unemployment will top out vary, but an unemployment rate higher than 10% is extremely likely.  Only one month ago, the official unemployment rate was at a cycle low of 3.5%.  The swiftness with which the economy is shutting down is tragically remarkable.

Some estimates indicated GDP will drop by 14.2% in the second quarter alone, equating to a $3.1 trillion reduction in output. Suddenly the $2 trillion government CARES Act doesn’t look so generous.  The government will have to do more and do it quickly if they hope to pull this economy out of a coma and avoid permanent impairment.

In terms of recovery, its anyone’s guess at this point. We are still dealing with imperfect information about the spread of the virus, and until we have a better handle on the rate of infection, specific forecasts for recovery are mostly moot.  The lack of reliable data hasn’t prevented educated guesses, and now mainstream media is introducing the general populace to economists’ descriptions of potential recovery shapes in the form of letters (V, U, and L).

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Hopes for a “V” shaped recovery, in which economic growth quickly rebounds to the pre-crisis trend, are waning.  Once government agencies adopted economic comas as policy, a V-shaped recovery relies on a miracle vaccine discovery in the next couple of months.  On the other extreme is an L-shaped recovery, which is not much of an economic recovery at all.  In an L-recovery, economic activity declines rapidly and may never recover to P.V. (pre-virus) levels – in other words, permanent economic impairment.  In between these extremes, lies the U-shaped recovery.  The U-recovery can be thought of as an elongated “V” in which recovery to P.V. output levels is eventually reached after a period of sluggish growth.  Similar to a patient coming out of a coma, our expectation is the economy will struggle to find its footing adjusting to the new normal of the P.V. world, but that it will eventually recover.


Imagine.
  I’ve been thinking a lot about the P.V. future.  Global events that force what is believed at the time to be a temporary change in social behavior, often lead to permanent changes. These behavioral shifts will be lauded by some, criticized by others, and there will be unintended consequences, good and bad, from all of this.  There will also be winners and losers in terms of economic sectors and businesses.  But change will happen because the human race is adaptive, curious, and ambitious.  Here are a few changes I’m thinking about:

  • Education.  With elementary, high school, and college students forced to learn remotely, academic institutions across the country are quickly adapting curriculum and adopting technology to educate students.  Will this event usher in a new era requiring fewer physical schools, and studying from home becomes a viable and common option?  The impact on colleges could be profound.  Aside from currently enrolled college students learning from home, a whole generation of future college students are now training in the art of remote learning.  Might traditional colleges begin to compete for students by expanding their degree programs such that physical attendance on campus is not required, or is severely reduced?  For example, can students earn general education requirements at home and complete their degrees with two years of physically attending college?  What will that mean for college tuition prices and colleges as a business?  How about the impact on dormitory and off-campus housing rents?  What would the long-term social implications be for college graduates and society, since some of the most enduring relationships (personal and business) form in colleges and graduate schools?
  • Commercial Real Estate.  Home officing is required for many businesses now to comply with local government ordinances designed to prevent the spread of Covid-19.  Office buildings have emptied “temporarily” as workers across numerous corporate sectors grabbed their laptops and set-up shop at home.  How many companies will figure out that employees can be equally productive at home as they are in “the office”?  Or, even if the employee isn’t quite as productive, do the savings from eliminating expensive triple-net lease payments, office furniture, and operating a physical office offset the decline in productivity?  Will this event lead to an increase in home offices that negatively impacts demand for office commercial real estate?
  • Environment.  Reduced commuting in cars and airplanes is leading to decreased air pollution and improved air quality already.  Will encouraging people to work from home and conduct interstate and international meetings via the web become a category in the Environmental portion of the ESG investing movement?  Moreover, will employees and employers come to realize that commuting to work every day is a waste of productive hours, especially in crowded cities where commute times can easily exceed an hour each way?  Would a reduction in commuting time lead to richer lives in which laborers reclaim 2+ hours a day of their lives that can be dedicated to family, art, music, innovation, etc.?
  • Auto industry.  Will this event accelerate the demand for autonomous vehicles?  If fewer people are required to drive to work every day, the economic benefit of owning a car will decline for a large swath of the population.  This will be especially true as autonomous vehicles come online, and competition between robotic taxi service companies makes the cost per mile fee competitive with, if not cheaper than, owning a vehicle.  Is this the next step in transitioning from an “owning” society to a “sharing” society?
  • Family structure.  All over this country, indeed, all over the world, family schedules have been upended.  Parents are no longer hurrying kids off to school or rushing to get on the road for work to avoid traffic.  College students are at home.  In many respects, families are returning to the days of the American West settlement.  Due to social distancing and shelter-in-place measures, there is less physical interaction with the outside world and a greater reliance on each other for entertainment, personal conversations, learning, and advice.  Though not without its challenges, might this event lead to closer family relationships?  If an increasing portion of a college education is earned online, will it delay the point at which children permanently leave home and parents achieve “empty nester” status?

This virus and efforts to combat it are already changing our lives.  At first glance, many of these changes, including restrictions, seem like a burden.  Some changes truly are a burden.  But what if, in the aggregate, these changes create a tectonic societal shift for the better?  Quoting John Lennon, “Reality leaves a lot to the imagination.”

Let me know what big changes you see coming (justin.pawl@covenantmfo.com).  I’ll put together a list and share it in a future 5-Minute Huddle.  We can then vote on the most likely (or out there) changes, and collectively track how good we are at predicting the future.  Consider it a social experiment in the wisdom of crowds.

Keep your chin up, hands clean, and, to do your part in curtailing the length of this economic coma, please stay home.

Justin

March 29, 2020

On this week’s podcast, Karl discusses some of the boxes that got checked that helped the market rally.  Volatility continues and Karl shares what investors will be looking for next for the uptrend to continue.

 

Hey, good morning everybody. Welcome to the podcast, Creating Richer Lives. My name is Karl Eggerss. Thanks for joining me as usual. We do this each and every week and we’ve been doing this for a long, long time. I think I started podcasting probably in 2009 or 2010, just after the financial crisis, the GFC, they call it, the great financial crisis. And so, I’ve been podcast in a long time. I don’t know if I’ve ever… I may have missed a week or two, but pretty much every week for the last 10 years, I have been doing a podcast.

The name has changed over the years, but the type of show we do hasn’t really changed. I try to bring you what’s moved the markets in the previous week and the things that really stand out to me, not only that drove the markets, but really trying to help you think through what you should be doing or not doing. And again, as we’ve said before, this isn’t an advice show, this is an information show. This is a show to give you tools and to help you look at things from a different angle.

And a lot of you have given feedback over the years and saying, “Thanks, I didn’t think about this or I didn’t think about that.” And your comments are appreciated and your listening so constantly, the last several years, is appreciate. And of course, we have tons of new people that join the show each and every week, every month. And so, welcome aboard, interesting time to be joining the show. We certainly are continuing to see a history being made literally.

Before we get started, this show’s brought to you by Covenant Lifestyle Legacy Philanthropy. We help people with financial planning, executive compensation structures, family office help. We help people with 401K locations, help them through their taxes if need be, tax planning, cashflow planning, retirement planning, looking at your 401K, should I do a Roth conversion? When should I take social security? These are all things that come up and, of course, helping people navigate their investments.

This isn’t an exaggeration, this is a fork in the road that can really change your financial picture for the next several years for good or bad. You look back, and this is something I ask everybody when they come see me for the first time or really anybody at covenant is tell me what you did during dot com bubble and the subsequent collapse, and tell me what you did in the financial crisis, 2007, 2008 et cetera?

And oftentimes, what you did, not how you felt, but what you did tells you a lot about what you may be doing now or not doing now or things you’ve learned back then. And of course, all of these situations in the dot com bubble, market fell 50% ish, 2008, the market fell 50%, and of course, this market maybe, hopefully not, but maybe on its way to doing the same. We don’t know.

Right now, markets are down anywhere from 20 to 30% depending on what you’re looking at. Value stocks are down 36% year to date based on a basket of them. Standard and Poor’s 500 is down 21%. Blue chip dividend stocks, down over 29%. Small caps, down over 31% year to date. So, the losses are big so far, but as we’ve seen this week, the gains can be big too.

And so, what are you doing during this time? I’ve asked it before and I’m going to continue to ask it. Some of you have sent me your recent moves or just how you’re positioned in general. And I can tell you what, in general, we’ve been doing, is not making huge, massive changes in terms of out of the market, in the market, but I would call it giving the portfolio a tuneup. It’s like giving your car a tuneup and what that means is looking for opportunities. What’s the world going to look like after this?

And we don’t know exactly, but we do know there are certain areas that might do better than others. If you’re somebody that is working right now, you’re working from home, and you’re probably, I’ve been doing it this way literally for over 10 years, off and on, using technology to its ability here, which is video conferencing, Skyping, Zoom, VPNs, virtual private networks. All these things that some of us have been doing, now the whole world’s doing it. Is that going to continue?

But technology, in general, is really helping us through this. It’s what’s allowing us to keep ourselves entertained through this, through streaming services, through internet connectivity, some people are gaming. But we’re also looking at all these other companies that are providing behind the scenes, the cell phone coverage, the networks.

So, technology is a great area that is going to continue to do well in my opinion going forward. So, you start thinking about, “Do I want to own specific stocks, industries, sectors, whatever it might be, versus just owning the market?” And again, that’s very different for everybody, what that might look like. But think about that.

We’ve been fine tuning. You think about what’s going on in the healthcare industry. I think this situation we’re going through in the United States, in the healthcare world, is very akin to what happened to travel and security in 9/11. You Remember the talk back then was nobody’s ever going to fly again and we’re going to have security all over the place. And part of that was true. Security got ramped up, tons of money was thrown at that area. Those stocks did very well over the next few years because everybody agreed we have to up our game when it comes to security and we’re not going to choose to go on the cheap. We’re going to make it better and, whatever it cost, we are all in agreement on that.

Now, what you’re hearing is nobody’s going to go to the office, everybody’s going to work from home, nobody’s going to want to go to movies or restaurants. Those things will come back. We know that, over time. But things are going to change a little bit, but what I do think money’s going to be thrown at are particular areas in the healthcare industry. People are going to be trying to find more cures

So that this doesn’t happen in the future or minimize it in the future. The supplies, we know has been a big issue. Not enough masks, not enough gowns, not enough respirators, not enough ventilators, not enough beds. Right? We know all of that. We hear all of that, at least. I don’t understand how that can be the case when we have the flu every year, which is a lot more people going to hospitals and doctors during that time and we get through it without hearing anything about that. But I’m not saying it’s not correct. I just don’t understand that, personally, how we’re coming up with that much shortage with the numbers we’re seeing. But regardless, if there is a shortage, that’s going to get fixed and addressed over time. We’re going to be overstocked in all this stuff. Right? And so there’s opportunities in that as you look forward. By the way, (210) 526-0057. Forgot to give our telephone number.

Our website is creatingricherlives.com. Putting a lot of commentary on there. There’s a lot of things going on with taxes and so forth that’s changing, which I’ll get into in just a minute. But getting back to the portfolio here, again, making huge wholesale changes can be great or it can really hurt you long-term. If you get very, very defensive on the lows and the market rebounds… If you go back to November of ’08 or March of ’09, which was when things were at their worst, and you got into 50% cash and it made you sleep well at night only to see the market go up 300% the next several years or whatever it did, those are the things I’m talking about. And I don’t know how long this will last. The economic damage right now is going to be real. It will also… A lot of things will recover quickly.

And so the market has a funny way of sniffing those things out and anticipating that. And I’ve been saying, I don’t know if it was on here, but definitely to a lot of people recently, that the drop was so drastic and so extreme and the volatility was so high, that we would not be surprised to see a breathtaking, literally breathtaking rallies as well, and that’s part of this type of market. This is what’s going to happen, but it’s not going to be a V in my opinion. It’s not like in a month from now when we’ll be back to where we were, I don’t believe, but it’s going to be sloppy and choppy and there’s going to be days of continued big move. What we need to watch is the volatility needs to come down on the volatility index.

The first part of this was the monetary reaction by the federal reserve by the treasury has been amazing to watch. 2008, 2009, it took them months to do literally what they’re doing in days, and that’s helping a lot because, and I mentioned it last week, the bond market, the credit markets had to heal. And you saw a tremendous amount of healing this week of investment grade bonds bouncing back a little bit of just all types of bonds that were really getting hurt bouncing back. That is huge because companies are tapping their credit lines. They need to go borrow money. The credit markets have to be healed first. That’s number one. Number two was the fiscal response, which took a little bit, but finally got done. The president signed it yesterday, on Friday, and that got done. Little messy, bunch of crap… Pardon my French, but a bunch of crap pushed in there, but that was negotiating. Some stuff had to get done in there, but it’s sad to see the types of things that have nothing to do with helping Americans get through this that got put in there, but it got done.

Some of the things that got in there were interesting. How it came, for example, money that’s coming to families that still have a job but make a certain amount of income are going to get a check, while those that maybe have a higher amount of income don’t get a check if they don’t have a job, they may not get a check. And so I don’t know if the means testing is the proper way to do this, because some people are going to be double-dipping. And I haven’t looked through all of it. That’s what I will spend this weekend doing. Also, what I heard and looked in there was that the payroll tax holiday was just on the employer side, not on the employee side.

So, social security, Medicare, you pay half, your employer pays half. If you’re self-employed, you pay both halves. Just the employer side was getting a holiday and it was going to have to be paid back over time or the employees don’t get that holiday. So ,some of these things I didn’t really understand and still don’t, but we needed fiscal help. That is coming. So, we have the monetary help. We have the fiscal help. Markets reacted favorably to those things. What are we looking for next? Obviously, a peak in the new cases, the active cases, the deaths. And will that come in the next couple of weeks? I don’t know. But when we see that start to crest and head down, that’s good, right? Not only is that good for humanity and health, but that is going to be good for the markets as well because you can start calculating and potentially start estimating when companies will get back online.

Now, the big number of the week was 3.28 million. 3.28 million. That’s the number of people that filed for unemployment this week. And I kept hearing it’s going to be over a million, and I was telling people in private, “This is going to be a two to three million number.” And it was. It was over three-million, but yet the market rallied strongly. Why would that be? One reason is because there’s a known. We now know what that number is and we can work off of that and start making estimates on things. But that’s a huge number. We were averaging in the 220,000 range each week of people filing for unemployment. Very big number. So, when people get the money from the stimulus, how they do it, it’s going to take time, right? Now, with any type of crisis comes people looking to take advantage of that crisis.

And I saw an article this week. I’m not going to read it to you, not going to go through it with a fine tooth comb, but I did want to mention it because I’m shocked that I see this, but at the same time, nothing surprises me anymore. So, apparently, a man… And this has happened a lot over the last few couple of weeks here. There’s people that are seeing that the cruise lines and the airline industry are going to get bail out money. So, there’s a man out of Indiana named Rodney, and guess what he did? He launched an airline company. He called it Bailout Flights, and he said the mission of Bailout Flights is simply to collect a portion of the $54-billion of bailout money, and he’s on record stating that he’s confident they’re going to collect about $10-million. He said, “I’m pretty darn sure…” This is a quote, “Bailout Flights will be able to collect at least $10-million from the government.” He put, “You see, the government isn’t very smart. I highly doubt those government officials will even check to see how long Bailout Flights has been in business.” He’s not alone.

There’ve been 25 new airline companies started in the past week and over 50 cruise ship companies. Half are headquartered in Boca Raton, Florida, the other half in Bermuda. And this came from Eloise Williams on a website called thestonkmarket.com if you want to go look at that. So I thought that was interesting and thought you’d want to know that, that you know people are going to try to gain the system. And of course, whenever there was a big bailout package like this, just like an ’08 and ’09, you’re going to have people that take advantage of it. You’re going to have a winners and losers and the government’s going to pick who they’re going to give money to and who they’re not. And that’s happening. So a lot of businesses are going to be applying for different types of loans. Some will be forgiven, some people will be applying for the loans that don’t really need it, and some will need it and not be able to get it. We know all of that.

What we need to know is when is America going back to work and the president’s getting criticized on one half and applauded on the other because they use those exact words. And somebody long ago told me, “When you hear the government use those words, you go buy stocks.” Let’s put America back to work. Those are the keywords. And when you hear that, that means money is going to be thrown in the system. Infrastructure spending and bail bailout money. It’s all going in the system and it usually works. Don’t fight the Fed. You’ve heard that one. [inaudible 00:17:30]. This is the Fed on steroids, the stuff they’re doing and it was needed by the way.

But when is American going to go back to work? And now you’ve heard hints in the last few days, the Trump administration saying, “We’re going to label high risk areas, medium risk and low risk.” And you know why they’re doing this. They’re calling the governors telling them, “We’re rolling this out.” Because if you’re in a low risk area, you’re going to be able to do x, y, and z. If you’re in a medium risk area, you’re going to have to do x, y, and z. And if you’re in a high risk area, you’re still under quarantine. And that’s their way of walking that fine line, the tight rope of not spreading this anymore, but not having our economy go into a depression.

And again, we don’t know the economic damage yet, but it’s going to be big. The question is how fast do we ramp back up? We know we will go back up. How fast? And as I mentioned earlier, things will change. Some people will continue to work from home for many weeks. And people may not go to the restaurant. They don’t want to sit next to somebody who’s sneezing, right? We’re going to have a bunch of germaphobes as we move forward. And nobody’s going to want to sit next to somebody in a theater. But people are going to go back to their office, people are going to go get their car washed, people are going to go to Home Depot probably. Those are the types of things that probably will come back very, very quickly. But international travel, maybe not. Right?

So we don’t know. We don’t know. Again, going back to 9/11, nobody’s ever going to fly again. And of course everybody was as of a few weeks ago. So that’s what we need to know and the market’s trying to figure that out. So don’t expect the market to just run back up because we don’t have those answers yet. And the market will go up at some point once it knows those answers because you can start modeling things and you can start figuring out how much a company will ultimately make or lose, and do they have enough cash and loans to get through that in bailout money. That’s all we’re trying to figure out here.

So as I mentioned at the very top of the podcast, this is a time for fine tuning, knowing what type of bonds you own in your bond funds, knowing what types of stocks you own and sectors and industries in your ETFs and mutual funds. And also, did you own any types of investments that do things that are different than the market? What I mean by that is, liquid alternative types of funds, alternatives, things that are mint, had structured not to necessarily move opposite of the market, although some did, but to move differently than the market. Some of those have done very well during this time.

And if you’ve been listening to me the last several years, you know I’m a big proponent of what I call real diversification. What made this challenging, and it’s not much different than ’08. Is that when things started to get tough for the stock market, what happened was the correlations went to one. What does that mean? That means everything moved together. Stocks, bonds, gold, commodities, cryptocurrencies, marijuana stocks, anything you can think of was going down at the same, pretty much the same speed in the same direction. So diversification didn’t help unless you had cash.

But there were some types of funds that moved differently during this timeframe. And so some people having added that to their portfolio may have navigated a little better than people that didn’t. So it is good to understand that and look at portfolio asset allocation. But here’s the thing, it was very challenging and still is because when the credit markets are freezing up, your conservative investments, the things you have on their conservative side of the ledger are going down almost as fast as the stock market and then diversification breaks down.

So again, these are all lessons, these are all things to fine tune to figure out do I want to get more safe now? Because we know when markets bounce and you saw it this week, the things that get hurt the most are the things that bounce back the fastest. So you have to weigh that. Do I risk this company got on a business versus the fact that it can literally jump 70% to 100% in a week? And that’s what happened this week.

So the initial bounce we got was not a huge surprise. It was good to see. It was a good start. We got some really high quality days, but they’re still a reluctancy as I look into the numbers of people are still selling into the rally and we’re trained now and we got charts to go back and look. We all know that these are dead cat bounces, right? Everybody knows that you bounce and then you kind of may test the lows. Well, that’s generally true. But what if it doesn’t do that this time?

So again, take a balanced approach. Stay focused on your plans. You may have to modify your financial plans a bit. But stay focused on that because none of us know exactly how this is going to play out. So just again, assess your risk and you have to ask yourself, especially if you’re making moves right now, if the market went up 30% from this point, how would my portfolio probably act? How would I feel? And on the flip side, if it goes down another 30%, what would I do? How would I feel? And if you play through that, now that you’ve been through some of these market moves, I think it will help you structure your portfolio a little differently or maybe the same. Maybe it stays exactly the same.

But I would use this time to just fine tune the things you’re doing, really swapping out of something that didn’t do what it was supposed to do or you are upgrading to higher quality. There’s a lot of good quality stocks out there. In fact, when you see the correlations of the stock market go to one, as we did, everything sells off very hard. The good goes down with the bad. That’s the time to say, get rid of the bad and swap in something good because if they bounce back again, assuming that it’s, as I mentioned earlier, you don’t have a company circling the drain that could move very violently, but just upgrading your stocks. This is a great time for that. You can harvest the tax losses

… and upgrade the portfolio without changing your equity position. So those are a couple of things. I’m going to spend the weekend looking at some of these tax changes and what was in this bill. There’s a lot of stuff in here. Maybe we’ll put a report together. Maybe we will have somebody on next week to talk about it. There’s a lot of different things going on here. Most of them are going to affect you one way or the other. We know of course you have until July 15th to file and pay your taxes. But there’s some changes with donations. There’s changes with who’s getting money, loans, forgiveness of loans, small businesses, large businesses, employees, self-employed. We will be going through that. I’m sure you will hear a lot about it as well, but a good start to a bounce, a good start. But that’s about all we can say at this point because we don’t have enough evidence.

We’re not in the middle zones, if you will, from the high to the low. But we’ve had a significant bounce but not really shocking to be honest. Many of us, and you that have been here in ’08, and here during the dot com bubble know, big selloffs lead to big rallies and a lot of those just continue downward. So we need to watch that over time. But certainly as you noticed, the moods of the market can change very quickly. It went from despair on Monday to happiness and hope and I should have bought more perhaps the other day by Thursday evening.

But it’s good to see some of the unknowns are becoming knowns. We know what the unemployment number looked like this week. We know what the bail out money at this point looks like and there’s probably going to be more stimulus down the road guys, 2 million right now, 4 million from the Fed and Treasury, $6 million or 6 trillion, I should say $6 trillion probably going to be bigger. We know that, but we know what the Fed and Treasury are doing and so we have some things we’ve checked off so far.

What we don’t know is still with this virus spreading, very hard to start saying, when can we come out of our bunkers and start consuming again and getting our lives back to normal. Very surreal still, praying for you and your family that you are healthy and safe. We are here in my Eggerss family, our Covenant family is is healthy and safe. We’ve been doing a lot of Zoom meetings, touching base with everybody internally. We’re all functioning. We’re here to help you. If you need help looking at your financial plan, looking at your portfolio, we’ll evaluate it. You need to understand some of the new tax ramifications. We’re here. This is what we do. We’re continuing to work.

I’ve been putting in long days as has the whole Covenant team here. This is a tough time, but we will get through it and we’re here to help you. So if you need our help, (210) 526-0057 and our website as usual is creatingricherlives.com. I hope you pass this podcast onto a friend, somebody that needs it. Somebody that says I need some help. I’ve never gone through a market like this. I thought I could just hold stuff and it would just go straight up because that’s what it’s done in the last several years. This is when it gets real, investing money is not always easy, especially the behavioral side of it, right? We know what to do sometimes, but our emotions get really in the way and we’re all guilty of it. We’re all human. I feel better on updates than down days, right? That’s my human emotion. I’m telling you that and you probably feel the same way. It’s normal reaction. We got to control that though.

So if you know somebody that needs our help, again, send them the phone number, have them reach out to me and share the podcast. And if you would do us a favor, go on iTunes, we’re on Spotify too, but iTunes or Apple podcasts, they call it, give us a rating, give us a good comment on there and whatever feedback you want, always looking to make the show a little better. Always looking to refine it, going to continue to do that and we always appreciate you listening and without you listening there’s no reason to do this, so appreciate it guys. We’ll continue to pray for one another and we’re going to get through this. All right, have a great weekend everybody. Take care.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices, LLC, Covenant, or any non-investment related content will be profitable. Equal any corresponding indicated historical performance levels be suitable for your portfolio or individual situation or prove successful.

Moreover, you should not assume that any discussion or information serves as the receipt of or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at creatingricherlives.com.

 

Karl Eggerss was interviewed by Sharon Ko of CBS discussing the current recession and how to manage a portfolio through it.

Sharon Ko: The Coronavirus pandemic is doing a number on the economy. Many industries are taking a hit and the U.S. is facing a historic surge and unemployment.

Karl Eggerss: I do think we’re already in a recession. I think we weren’t prior to this, but when you literally cut off demand and nobody’s purchasing anything, it doesn’t take long for you to go into a recession. It will get worse for a while. Obviously, a lot of this depends on the fiscal package that the government’s putting together.

Sharon Ko: If you’re invested in stocks, your gut reaction may be to cut and run, but financial advisor Karl Eggerss says do not make sweeping changes.

Karl Eggerss: That is the natural human reaction. The time to do that unfortunately it was a month ago when the markets were at an all time high and so right now what you have to do is, if you’re not a forced seller, meaning you don’t have to sell, usually you get big moves to the upside and that’s the time when cooler heads prevail where you can lighten up if you want to.

Sharon Ko: He adds, this also depends on your age.

Karl Eggerss: If you’re younger, you should be taking advantage of these dips. If you’re older and you’re trying to protect principle, yes, you may need to reevaluate your plan, but making wholesale changes is never a good idea.

Sharon Ko: With that advice in mind, it’ll be an uphill battle for the U.S. economy to rebound. Just like this week, expect volatility in the market. So for most people, Eggerss says, doing nothing may just be the best strategy.

On the Trey Ware Show, Karl Eggerss discussed how Congress is holding the country hostage.  Karl is seeing some positive signs out of financial markets, but he says we have to get fiscal stimulus package passed.

Trey Ware:                         The latest information includes what’s going on with the stock market, what’s going on with the economy. We’ve got to go to The Stevens Roofing Newsmaker Hotline from creatingricherlives.com. Karl Eggerss joins us every Monday at this time, and more frequently during a crisis like this. Karl, we of course have the information that the stock market went down over 17%, Dow did over 17% last week. Over a 4,000-point drop as of last week. Overnight futures not looking good. Democrats killed the plan that had been voted on yesterday in order to backstop the economy with some cash in a hurry, backstop businesses and small businesses with some cash in a hurry and send about $3,000 on average to families of four. Democrats killed that plan late last night. As a result of that, what do you expect the stock market to do when it opens up this morning?

Karl Eggerss:                      There’s optimism that that will get done. I did see some encouraging things late Friday, meaning in all of the stuff, the Treasury, Steven Mnuchin and the Federal Reserve are doing to unfreeze the credit markets. I mean, right now when people need access to capital to draw on their lines of credit, we need to make sure that companies can do that. We weren’t seeing that early in the week. We did see some of that on Friday. That’s encouraging, but look, at the end of the day, these Congressman and women need to understand that they’re still getting their paychecks and the restaurant owner and people that are being forced to stay home are not.

Karl Eggerss:                      I know the issue of, “Hey, we can’t bail people out without any conditions because that reeks of ’08”, but I think what’s going to happen, and you heard Larry Kudlow talk about it last week, the U.S. government… the taxpayers are going to end up with a portfolio of stock positions in some of the best companies in America. That’s going to happen I think, and if that happens, remember with GM it was a good return on investment. As opposed to bailouts, they take investments in these companies. Instead of just giving them money, they’re investing in them, and then when things turn around down the road, they can sell those shares and it’s good for the taxpayers. That’s very different than a “bailout.” By the way, President Trump mentioned it. If these big companies can’t pay their bills and they go bankrupt, guess what? All of those employees can’t pay their bills and go without a job as well.

Trey Ware:                         This is a point to make, Karl. We need to stop right there because this point is important. People say, and I heard Ben Crenshaw on Twitter saying this. People say, “Well, we don’t want”, and this was the Democrats’ big argument. “Well, we don’t want to give any money to the big companies because the big companies don’t deserve it. They don’t deserve any money. We don’t want to give them a chance to have any more money.” They’ve got all of the money that they need is what the Democrats were arguing about yesterday. Well, let’s just think about that for a second, and all I’m saying is that people in this country need to use a little common sense and think beyond their nose for just a second.

Trey Ware:                         If Toyota, I’m just going to use them as an example. They seem to be perfectly healthy and everything is going to be perfectly fine. I just need to use an example, so I’m choosing Toyota. If Toyota were in bad shape because of this crisis, not because of anything they did and not because people in 2008 were buying up useless paper, but in this case because of this, because people are not buying vehicles right now, if Toyota got into bad shape and they needed help from the government, the government should provide that help. How many people here in San Antonio does Toyota employ? Thousands, and then, “Well, okay, so Toyota can afford to take care of those people.” Really? Can they afford to take care of the guy who makes the dashboard? How about the guy who makes the odometer that goes in the dashboard? How about the guy that makes the little light that goes in the dashboard to light the dashboard up?

Trey Ware:                         It’s all connected. We’re all connected. We’re all in this together and this is the absolute wrong time for them to be playing politics with this. Yes, make sure that Toyota stays alive, make sure the little pizza joint down on the corner stays alive. That’s what we need to do right now. It’s what we need to be focused on right now, not politics.

Karl Eggerss:                      Well, you’re absolutely right, and the speed, we have to do this quickly because people are laying employees off and if they know they have money coming in to pay the employees, they will not lay them off. That is happening right now. They have no choice, so the speed of this getting done is critical.

Trey Ware:                         Well, I’ll give you an example. I’ve got a friend in the floral business, all right. He had to go in Saturday and do all of the termination paperwork for a bunch of employees because people aren’t buying… the last thing you’re going to buy right now are flowers. What are you going to buy flowers for right now? He had to lay a bunch of people off on Friday and Saturday and had to go in on Saturday and do all of the termination paperwork. That’s how we’re all connected, and if you throw these guys a lifeline and say that, “Yeah, keep the door open and keep things going”, then at least they’ll be able to keep people employed and we can keep some semblance of an economy. Otherwise, you just trash the whole economy and it’s over with.

Karl Eggerss:                      Well, that’s right, and that’s what’s different about… People say, “Boy, this is like a shock like 9/11.” No it’s not, 9/11 [crosstalk 00:05:20]-

Trey Ware:                         Well-

Karl Eggerss:                      I wasn’t directly impacted. Yes, I couldn’t fly for a couple of weeks, the stock market was closed for a few days, but this is something we’re all impacted by. Everybody’s impacted by this and the speed of getting this done is critical. Again, they’re getting paychecks. They’re taking their sweet time and I think there’s a lot of positive things happening right now, but at the end of the day, people are going to try to cram their own agenda into this bill and that’s the problem.

Trey Ware:                         Yeah, that’s right. Karl, thank you, As always, Karl Eggerss with us every Monday at this time, or more frequently if necessary, creatingricherlives.com. It’s creatingricherlives.com, and I would be… Thank you, Karl, have a great day. I would be in favor of saying to the members of Congress, “You’re not going to get a paycheck right now.” I would be in favor of that.

 

5-Minute Huddle: Together

March 23, 2020

By Justin Pawl, CFA, CAIA

Economic data released over the last couple of weeks is relatively useless, as it mostly reflects P.V. (pre-virus) data. This week, A.V. (after-virus) data will start to hit the wires and begin to show the economic damage inflicted on the economy, beginning with initial jobless claims this Thursday. Estimates are scattered, but we should prepare for an ugly number which could be more than two million new jobless claims. Unfortunately, this is just the tip of the iceberg as demand interruption meets an economy that is rooted in consumption.

The Federal Reserve and government are rallying to the cause, but they need to move faster and do more than what is currently on the table. The Federal Reserve cannot help with demand, but they can help settle financial markets, beginning with the credit sector, which is clearly stressed. Last week the Fed announced they would begin purchasing municipal bonds, and I hope that corporate bonds are not far behind. Currently, the highest quality companies are forced to borrow money at elevated interest rates at a time when revenues are declining. There can be no sustainable equity market rally without credit market stabilization.

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The government can lay the groundwork for improved demand, but we must first get the virus under control. Since, in the absence of a vaccine, social-distancing and sheltering-in-place are the most effective ways to stop the virus, the government needs to quickly figure out a way to keep businesses solvent and people on payrolls. Perhaps we will see a new version of the Troubled Asset Relief Program (TARP) that was rolled out in October 2008. Under that program, the government lent billions of dollars to financial institutions on the brink of insolvency. In addition to a lucrative interest rate, the loans included warrants (i.e., rights to purchase stock in the companies), which ultimately generated substantial profits for the U.S. Treasury. That type of program may be a way out of this mess. A new TARP could stabilize companies and keep people on payrolls, while the loan interest and future value of the warrants could help reduce the enormous amount of debt that will be required to assist the country through COVID-19. Hopefully, the government remembers the success of the original TARP and runs that play again to prevent a liquidity crisis from becoming a solvency crisis.

Currently, investors are pricing in a solvency crisis. Global assets experienced a liquidation last week as investors confronting unknowable variables sold just about everything. Liquidation events are relatively rare and typically associated with bear markets, which is what we’re currently experiencing.

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Meanwhile, virus infection numbers and economic data will get worse before they get better… but they will get better. Using the Financial Crisis as an analog, the Great Recession began in 2007 and ended in the second quarter of 2009. The economy (as measured by Gross Domestic Product) did not reach pre-recession levels until 2011, i.e., two years after growth bottomed. However, what’s often missed in those data points is that the recovery began in 2009 when the economy bottomed out and began to expand. In other words, the economic recovery starts long before growth and unemployment rates return to pre-recession levels. Importantly, financial markets typically recover in advance of the economic data turning favorable.

It’s worth remembering that financial markets are forward discounting systems. Which is a fancy way of saying current market prices are based on future cash flows, whether the investments are bonds, stocks, real estate, or timber. A standard but straightforward valuation model illustrates this point. The dividend discount model consists of three variables:

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Currently, investors are uncertain about what future cash flows, i.e., dividends, will look like and are, therefore, selling just about everything they can. We have often written about how markets hate uncertainty, and what we are experiencing right now is as uncertain as any period markets have faced. But investors don’t stay uncertain for long, and they will shift from sellers to buyers before many expect.

Indeed, markets will turn bullish not when the economic data improves, but when it gets less bad. Said differently, if bear and bull markets are like night and day, investors will begin getting bullish when it gets a little less dark, well before the actual sunrise. The chart below from Capital Economics illustrates how the S&P 500 has recovered in previous Bear Markets. I share this chart, not as a specific template for recovery from this event, but to illustrate that markets have a long history of recovering.

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In the meantime, we can all do our part.

  • Practice social distancing. We need to flatten the infection curve to reduce the strain on our healthcare system.
  • Be a good neighbor and check-in. If they are short on something, see if you can help without putting yourself at risk. If you think you might need to put yourself at risk, figure out another way to help, but let your neighbors know they are not alone in this. Lend a cup of sugar, a bottle of wine, even a roll of toilet paper. We are not living in a Mad Max world, where gasoline, food, and water are currency. Grocery stores are open, and they continue to receive deliveries daily. One day, all of the items we’ve come to take for granted will be available again, so share what you can and what is needed now.
  • If you are reading this and need something, contact Covenant. We will help you physically if possible, or with remote resources if necessary.

My hope, my prayer, is that this global event draws Americans closer. Unlike WWI and WWII, the enemy is not human, nor is it visible. There is no one to direct our anxiety, our fear, or our frustration. Our enemy is a virus. The fact is, we will beat this enemy virus whether we draw closer together or not, but we will defeat it faster by working together. Both during and in the aftermath of world wars, American ingenuity, entrepreneurialism, and pride rose to new highs. I do not doubt that while the road ahead will be rough, America will emerge stronger than ever.

Keep your chin up and your hands clean,

Justin

On this week’s show, Karl discusses the continued sell off in the financial markets and how diversification isn’t helping at the moment. Plus, Danny Simmerman and Holly Veenker of TIA Group join Karl to discuss the skyrocketing insurance rates.

Karl Eggerss:                      Hey, good morning everybody. Welcome to the show. This is Creating Richer Lives. The podcast with Karl Eggerss. I’m your host. If you’d like to get ahold of us, (210) 526-0057 or our website. It’s CreatingRicherLives.com.

Karl Eggerss:                      In just a little bit I have an interview that I recorded a couple of weeks ago and it’s with a gentleman that owns a insurance company in South Texas. And they’re seeing some really crazy rate increases, just at the time we really don’t need to see that right now, both on the commercial and the and the personal side. And so, I had him come in.

Karl Eggerss:                      I’m going to have him discuss really what’s going on on the commercial side primarily, especially for those of you owning in your own business. What are they seeing? What are some things that you can do to mitigate some of those costs? So I’ve asked him to come in. Danny Simmerman and Holly Veenker are here to discuss that.

Karl Eggerss:                      But before we get to that, of course, let’s talk about what’s going on in the financial markets. Obviously, a lot of you’re paying attention to what’s going on. So there’s not a bunch I can add to some of the news events that’s happening this week. I will tell you this, and this is probably the most encouraging thing I could say right now, is that we’re seeing, at least late in the week, we’re seeing some stability in the bond market.

Karl Eggerss:                      You may be focusing on the stock market, but the bond market is really the reason that the stock market, part of the reason, that it continues to struggle. The federal reserve came out a week ago Sunday and essentially said, “Hey, we are going to lower interest rates to zero and we’re going to do quantitative easing,” and you saw the market really just go down after that.

Karl Eggerss:                      And then we saw a pretty bad press conference with the president, who hasn’t really helped himself with some of these press conferences, kind of downtrodden, talking about this could go to July or August. Those types of things just really didn’t get the market in a good mood.

Karl Eggerss:                      If you’re wondering why the market didn’t initially react positively to the fed, it’s because this is a demand shock that our economy is going through. There is no demand for stuff. And so, for the fed to lower interest rates, that doesn’t really do anything right. Yes, they probably had to do that, but that wasn’t a fix.

Karl Eggerss:                      Since that time, the federal reserve has done all kinds of things really in very short order. I think the government’s doing everything they can regarding monetary policy as quickly as they can. You’re seeing them really address the mortgage market, all types of things. A trillion here, a trillion there. It’s pretty amazing how much money is being thrown at this.

Karl Eggerss:                      The fiscal part, of course, we’re still waiting on. There’s different versions of it, but it’s going to involve some sort of helicopter money. Literally getting money to people. Directly deposit it in their account to pay their bills. We already know that foreclosures are being postponed. We heard that not only do you have to not pay your taxes till July 15th now it is actually, you don’t have to file your taxes until July 15th that was something that came out Friday.

Karl Eggerss:                      So there’s a lot of things that are fluid here. But this all goes back still to, and this has been a really just a whirlwind of not only information but a whirlwind of cascading stock prices. This is something that none of us have really seen before.

Karl Eggerss:                      This is my third professional financial crisis. The first was the dot com bubble, second was the global financial crisis, and the third being this Corona crisis. And they’re all very different, right?

Karl Eggerss:                      Back in the dot com bubble simply stocks were too expensive. That’s all that really was. 2008 was of course caused by the financial system, by the excessive leverage and the lending for houses and all of that really led to that.

Karl Eggerss:                      This was a demand shock. This was a stop in your tracks. You’re not buying anything right now. And that’s causing a lot of people to not be able to work and we’re going to see some very large unemployment numbers next week. It could be over a million and a half to 3 million people. Remember this was averaging 200,000 or so unemployment claims. You get that each week. This is going to be a large, large number.

Karl Eggerss:                      Now some of those people are being told, “Go file for an employment, get your stuff, and then when all this is over you come back and have a job.” So that’s part of what’s going on. But the government’s really trying to prevent people from doing that because they want to get people money in their pockets so they can feel comfortable staying at home and still be getting paid not to do anything. Very interesting. We’ve never seen this before, right?

Karl Eggerss:                      And we also haven’t really seen where the government is going to bail out as many people as they are. We know what happened in ’08 there were people that were chosen to be bailed out and the government chose not to bail others out. A lot of theories on why that happened, who got bailed out, who did not.

Karl Eggerss:                      Maybe the same this time, right? You have a restaurant that may get bailed out. What about the food supplier? So where does it stop? Where does it end? We don’t know. For anybody who tells you they know what this is going to look like, they don’t.

Karl Eggerss:                      How you treat this is you have an allocation coming into this based on your life, right? That’s what you based on fairly normal circumstances with some variables thrown in there to take into consideration drops in the stock market. But no financial planning software, no advisor has ever had to deal with a virus like this that causes the country to essentially shutdown for who knows how long and what that does to the demand side. So stock market obviously is selling off to reflect that.

Karl Eggerss:                      Here’s the thing though, and again I’ve said this in the past few weeks and it’s very, very important. I don’t know and you don’t know exactly what the stock market has priced in. The stock market does not always go hand in hand with the freshest, newest information being released. So we could see the news continue to get worse and the stock market go up.

Karl Eggerss:                      Now, I mentioned earlier, this is my third financial crisis professionally. They’ve all been different as I said, but one thing that has been similar is that regardless of how far stocks fall, ultimately number one, we’ve always come out the other side. Number two, they don’t go down in a straight line. You have big spurts of rallies, which I think will come.

Karl Eggerss:                      I wish I could tell you when, but when you have those rallies that makes you feel as if the worst is behind you and that’s when people relax and that’s when people say, “Oh okay, I’m glad I didn’t sell.” And then, sometimes it has a, usually has, another leg lower or at least a retest or something like that. Very likely this time to do the same thing.

Karl Eggerss:                      So we’re likely to get a very strong rally at some point that’s going to make you think it’s over. That’s the time you have to really assess, do you want to take some risk off the table or not? Personal decision is going to be playing a part in that and also just a tactical decision as well. So those are a couple of things to take in consideration.

Karl Eggerss:                      Now really, again, if you want to, I’ll shine the bright light on this in terms of what I saw later in the week. All the things the Fed’s doing hopefully are helping the bond market. As I mentioned, we saw Friday inflation protected bonds up considerably actually erasing the last six, seven days worth of losses. That was a big, big deal. We saw corporate bonds up about almost 2% for investment grade corporate bonds.

Karl Eggerss:                      Now, the thing is you have to remember the reason corporate bonds are getting hits the hardest because a lot of corporate bonds are going to become junk bonds. And so, you’re seeing that pressure, but we have to get the bond market stabilized and the pipe flowing again and that’s what the Fed’s attempting to do.

Karl Eggerss:                      The issue is prior to the financial crisis, the fed could do some of these things without congressional approval. The treasury could do some things without congressional approval. That isn’t the case anymore. So we have to have the Congress working with the fed and the treasury to be able to get these things done so they can go in and buy corporate bonds.

Karl Eggerss:                      You also heard, and by the way, we also saw despite the drop in the market on Friday, we saw a drop in the volatility index still at 65 which is a really high number, but down from this thing was was was sitting at, I don’t know, 80 something earlier in the week.

Karl Eggerss:                      So the fact that volatility index has come down, 85 was the high, the fact that it’s coming down was a good thing Friday. Let’s not discount that. So we saw volatility come down. We saw small caps hold up relatively well. International hold up relatively well. There were some green on the screen even though the Dow Jones was down over 900 points on Friday. So those are little nuggets to pick up on.

Karl Eggerss:                      And actually the market was hanging in there and really until oil sold off late in the day on Friday as well. But we need to watch for those little nuggets of positive because those are the things that can indicate that we may be getting to a point where we can stabilize. And so this wild extreme volatility that we’ve never seen before nor lifetimes, once that calms down a little bit, then people can start cherry picking on things that make sense to own and so forth.

Karl Eggerss:                      And again, if you don’t want to change your equity position, you could at least be tax loss harvesting, meaning sell something and buy something else so that you still have equity in the market. You just get to capture that loss for tax purposes. Or it could be upgrading, right? You’re moving from one type of ETF or fund or stock to another one, and it’s a better quality or it makes more sense in this new environment.

Karl Eggerss:                      By the way, in terms of things that you can be doing now, if you go to CreatingRicherLives.com our CEO, John Eadie, did a post an article on there early in the week, we posted it on there, called Making Lemonade Out of Lemons. It’s all the things that people can do in this environment from a planning standpoint. Let’s not lose focus of that because if you abandoned all your plans in ’07, ’08, you still had 2009, 10, 11, 12 and so on to deal with this. This isn’t the end. This is a part of the process,

Karl Eggerss:                      But this is a challenging part of the process, and part of the reason it’s challenging, and I mentioned the credit markets earlier, is because the bond market, not only the stock market, but the bond market is moving well out of its normal range for things. Things that maybe move a half a percent in a day are moving three and four and five percent in a day in the bond market. So, the bond market has been hit just as much as the stock market.

Karl Eggerss:                      In fact, interesting chart by Jason [Geffert 00:12:34] describing that when you look at stocks, government bonds, corporate bonds, gold and commodities, that’s a diversified basket, right? Well, right now that basket is losing pretty much as, not quite as much as that basket would have lost in ’08, but very similar to ’87, very similar to late 1979, early 1980 and in the late ’70s, and most of those were getting close to a bottom for the market. And I don’t, I’m not telling you that’s a timing tool. I’m telling you that this does show all-out panic where everything is being sold and diversification isn’t helping you in the short run. cash helps. And there’s things obviously moving differently or up than the market because they’re direct hedges or something like that.

Karl Eggerss:                      But in terms of the normal, asset allocation hasn’t really been helping during this environment, and that just tells you there is panic and it rarely pays to sell into that panic. Generally, you like to wait for that panic to abate a little bit and then readdress. Very challenging, though, guys. I’m not going to sugarcoat it. Very challenging right now because we don’t have a template for this type of environment. Continue to manage the portfolio, though. That doesn’t mean make drastic wholesale changes, but manage it, tweak it, take advantage of tax loss harvesting, upgrade the portfolio. Get ready for the time when you will play offense and not be on defense.

Karl Eggerss:                      Some of you want to play offense right now, and that’s fine. We haven’t been rewarded for playing offense thus far, but at some point, we will. We will be rewarded for that because that’s how all of these have ended. Great depression, you name it, the ’87 crash, the ’08 financial crisis, dot-com bubble, all of these ultimately were great buying opportunities. It’s just you don’t know when and how far down, but ultimately, I have confidence it will be. That’s my personal opinion about that because we’ve seen crisis before.

Karl Eggerss:                      All right. As I mentioned at the top of the show, we’ve got some guests in studio today. I have Danny Simmerman and Holly Veenker from TIA Group, and they are an insurance company out of San Antonio, Texas. I asked them to come in because we have a lot of costs going up around us. There’s some costs going down, but we have costs going up around us, especially we know with health insurance and so forth.

Karl Eggerss:                      But I also want to talk about today what’s happening on the business side of insurance because we have a lot of listeners who own their own companies, small business owners, and their costs are going up. When I talked to Danny off mic couple of weeks ago, I was really surprised how fast some of these rates are going up, and so I wanted to bring them in to talk about that and bring Holly in to kind of just elaborate on what they’re seeing and why and maybe what you can do about it if you’re a business owner.

Karl Eggerss:                      With that said, Danny, Holly, welcome to the podcast.

Danny Simmerman:         Karl, thanks so much for having us. It’s great to be here.

Holly Veenker:                  Yes, thank you so much.

Karl Eggerss:                      I have to admit, I’ve been doing podcasting for over 10 years, this is the first time I’ve had two guests at the same time, so we’ve got this cool little round table. Appreciate you guys coming in.

Karl Eggerss:                      Danny, I’ll start with you. When you told me some of these rates going up, I was kind of surprised, but then I know what’s happened with health insurance the last several years. Tell me a little bit on the commercial side, kind of what the lay of the land is and what you’re seeing.

Danny Simmerman:         Sure. What we’re seeing, we’re continuing this edge towards what we would call a hard market in the insurance space, and so that hard market just continues to drive prices up for consumers. Really, what’s happened over the last really five to … If you look at the five to 10-year charts on insurance, pricing losses have just continued to go up. And losses, when I speak to losses, we’re talking about losses on the property side, we’re talking about losses on the commercial auto side, and then we’re also seeing losses that are continuing to go up on the liability side. They’re going into what are called the excess or the umbrella layers.

Danny Simmerman:         What that means is two things. One, the existing insurance companies are seeing higher loss ratios and, two, these losses are going into the reinsurance layer, which is driving up reinsurance costs. And so-

Karl Eggerss:                      Wait. Let me stop you there. Reinsurance is basically getting a second or third company to help with that insurance to spread the risk, right?

Danny Simmerman:         That’s correct. Typically, what will happen is the insurance company will carry reinsurance over a certain attachment point. It could be over a $5 million attachment point, $2 million attachment point, or anything like that. It’s the insurance company’s insurance that they’re buying, and when they do that, those prices are going up, and so we saw a lot of reinsurance contracts that were renegotiated at the first of the year that saw significant pricing increases. Insurance companies have a choice. They either take more risk themselves, pass that cost along to the consumer, or they lay off that risk to the reinsurance company and then still turn around and pass that cost back to consumers.

Karl Eggerss:                      We’ll get to the jumps that you’re seeing in a minute, but why would losses be going up? Are we talking about distracted drivers? I mean, is that-

Danny Simmerman:         Yeah.

Karl Eggerss:                      Is that what we’re talking about on obviously auto side?

Danny Simmerman:         Correct.

Karl Eggerss:                      But why would losses be going up just in general?

Danny Simmerman:         What we’re seeing, and really, if you kind of look at it from a micro standpoint in South Texas. In South Texas, traditionally we did not have a significant amount of property losses if you look over the last 10, 15 years. Really, if you go back to probably 2014, 2015, we started to see more hail losses than you’ve traditionally seen in South Texas. We saw some wind events, some tornadic activity. And really, when you look at San Antonio that wasn’t common over in the preceding years, and so we’ve seen a lot of those claims. And now what you’ve seen is the significant development in greater San Antonio. When you have that much development and then all of a sudden a hailstorm comes through, you’re talking about a $2 billion event to insurers, both on the personal side and on the commercial side.

Karl Eggerss:                      And it happens all at once, right?

Danny Simmerman:         That’s correct.

Karl Eggerss:                      These risks aren’t spread out.

Danny Simmerman:         That’s correct.

Karl Eggerss:                      They happen all at Once.

Danny Simmerman:         Yeah. Then you throw in the Harvey incident where we had massive flooding over in Houston, and while the flooding event kind of seems cordoned off to typically flood coverage, which is going to be excluded under property coverage, but again, you look, there’s comprehensive coverage covered under your automobile policy, so you have autos that were totaled, that were wiped out.

Danny Simmerman:         Again, what we’re seeing as … Whichever side of the aisle you’re on with regards to climate change and everything else, weather patterns are changing. It’s impacting insurance companies. There’s more development that’s gone on across Texas. Texas is one of the fastest growing economies in the country, and so insurance companies are just having a hard time keeping their pricing adequate for the losses that they are incurring.

Karl Eggerss:                      Either one of you can answer this, but what type of increases are you guys seeing across the commercial side, whether it’s workers’ comp, property, whatever it might be?

Danny Simmerman:         Yeah. I’ll speak to that a little bit. On the commercial side, kind of the standard starting point with auto right now is probably anywhere from 10 to really 15% increases on a fleet of trucks and autos. That’s if you’re doing well. If you’re not doing well and performing well, by that I mean loss ratios, if your loss ratio is anything north of 40 to 50%, which loss ratio is defined as your premium divided by your claims, figure out what that number is. If that number is in the 40 to 50% range, you’re probably going to get something north of that 15% rate increase.

Karl Eggerss:                      Wow. And you’re talking about … I mean, this is almost like preexisting conditions, right?

Danny Simmerman:         Correct.

Karl Eggerss:                      Because when you go to these companies, insurance companies, they’re going to look at your history.

Danny Simmerman:         Yep.

Karl Eggerss:                      Yeah.

Danny Simmerman:         That’s correct. That’s correct. Everybody has their thumbprint, their loss history that that’s unique to them, and so insurance carriers are reacting to that. Even if you’ve had a really good clean four-, five-year run and not had any losses, carriers are still coming back and asking for 10, 12, 15%. If you’ve had some losses, we’ve seen accounts with 30, 40, 50% rate increases on these. So that’s impactful to-

Karl Eggerss:                      And that’s one type of insurance. I mean, you’re talking about, too, worker’s comp?

Danny Simmerman:         Correct. Right.

Karl Eggerss:                      So …

Danny Simmerman:         Now, and I’ll get to comp in a minute. When we talk about property coverage, property coverage we’re continuing to see increases on that. As I mentioned with the property losses that we’re seeing with hail events and things of that nature, we’re continuing to see clients that had … We have a client up in Kerrville that had a large roof claim, and that was a half million dollar new roof that they had to get put on. Well, when you’re paying $30,000 a year for property premium, the insurance company’s going to react in this market, and when they react, it was, in this case, it was probably close to a 50% rate increase. But not only the rate increase was what frustrated the client, but they went from a $10,000 deductible to what was a 5% of wind and hail deductible. That for them was $150,000 deductible that they took on.

Karl Eggerss:                      Wow.

Danny Simmerman:         That was a very frustrating experience for them. We worked through different options on that, but that’s what we’re seeing as well is not only the rate increases on the property side, but the deductible changes and the deductible strategies that carriers are trying to bring to the table to increase the client’s participation in that.

Karl Eggerss:                      Yeah, and, I mean, this is a situation where you can literally … This can be the fork in the road, whether a company stays in business or not.

Danny Simmerman:         Agreed. Agreed. Yeah.

Karl Eggerss:                      Just to be clear for everybody listening, TIA Group, why I asked them to come in is because they’re not captive agents. In other words, they don’t work for one particular company, so what they can do is go out and actually shop insurance and compare rates and make sure everybody’s being honest out there and try to get the best deal for their clients. When we’re talking about these rate increases, obviously, you’re giving generalities, but this is not just X, Y, Z company telling you that the rate’s up. This is kind of across the board because you’re looking at this from a 30,000-foot view.

Danny Simmerman:         Correct. Yeah. I literally just had a call this morning with not somebody we work with, but a prospect, and his first … He’s like, “I just got hit with a 30, 40% rate increase. What can you do?” We talked through his auto rates and we were talking about numbers, and it’s $1,700 a unit that he was looking at. I said, “Honestly, if you’ve got that number, take it and run with it. You’re in a great spot.” Sometimes we can just provide a trust but verify. They may have a longstanding relationship, but this gives us the ability to build some trust on our end.

Karl Eggerss:                      What I think listeners need to understand, too, is when you’re talking about insurance companies, they’re getting hurt by these low interest rates we’re seeing, because insurance companies are kind of like banks where they benefit from long-term rates being higher than short-term rates. We don’t have that right now. We have interest rates almost zero across the board, so you’re seeing insurance companies are going to be getting squeezed

Karl Eggerss:                      … used the next several quarters perhaps. And so that can be another reason why they raise rates.

Danny Simmerman:         Correct.

Karl Eggerss:                      You know, I mean they’re not going to just sit there and operate at losses. So this could be a double whammy for people looking for insurance, which is obviously everybody in some form or fashion, especially on the business side.

Danny Simmerman:         No, and it’s a great point Karl. And the term that we use in the insurance industry’s combined ratio. And so combined ratio shows, how is an insurance company performing on the underwriting side and so what they want to do is they want to operate it with a combined ratio of 95 to 94. Really in the low 90s then they’re going to earn profit from the interest rates and from where they can invest that free cash. What they’re running at these days is in the 105 to 111 and you’re seeing specifically, they’ll drill it down by line of business.

Danny Simmerman:         So like Auto is running a 110 to 115 combined ratio. You can’t make money on that. So they have to react and ask money from the customers to say, “Look, I’m sorry but I have to go up because I have to be able to stay in business.” They have shareholders that they have to report to and expect results.

Karl Eggerss:                      Which you’re probably going to see some mergers and acquisitions happening over the next few months and quarters because insurance companies can say, “Look, we do this well. You guys do that well. Maybe there’s some synergies here because we can’t operate on just one line of insurance. We have to be more diversified.” Are there any areas that you guys… And I’m going to have Holly speaks more to the personal side and we’re going to do a second podcast in a few weeks on more of the personal side than commercial, but this is for both of you on personal and commercial are there any insurance across the board that you’re not seeing big increases?

Danny Simmerman:         The one… Holly, do you want to speak on the personal side if there’s any that were?

Holly Veenker:                  I’m not… I’ve been out marketing quite a bit and networking and I think one of the biggest questions that I get asked when I’m talking to people is my auto rates keep going up. So I think the auto rates, again they’re having the high rate increase also on the personal side. And what people aren’t saying anything about is like the dwelling coverages and stuff. They’re not too worried about that. I think that staying pretty level as of right now-

Karl Eggerss:                      Is it distracted drivers? Is that the kind of the main?

Holly Veenker:                  … yeah, it’s… I’m not really sure actually what’s causing the personal lines, auto rates to go up other than the fact that a lot of uninsured drivers and stuff like that. But yeah, I mean, as of right now, I think the only thing that people aren’t really complaining about are dwelling coverages.

Karl Eggerss:                      Wow! So on the commercial side, now that we know what the problem is and this is where you come in to try to help people as best you can, obviously you’re not a magician, but as best you can, what are some things business owners can do? I mean obviously shopping around, which is what you help them do, but what can they do where some practical things?

Danny Simmerman:         You know, there’s certain things, there are certain strategies that they can look at and again, we don’t want to beat up on on commercial auto, but there’s things that you can do where if, say you’ve got an older group of trucks and you may have a business that has 10, 15 to 20 trucks that they may be a 2008, a 2010 and a lot of folks just, they carry liability coverage and they carry comprehensive and collision.

Danny Simmerman:         A lot of times what we’ll do is we’ll sit down with clients and look at it and say, “Look, you’ve got this 2010 Chevy with 150,000 miles. You’re paying $2,000 for that truck and premium, but you’re also paying $400 in what we would call comp and collision coverage on that. Why don’t we delete that comp and collision because you’re carrying $1,000 deductible and you’re only going to get $2,000 back for that truck, so why don’t you just pocket that money and when that claim does happen, you’re just going to use that money to fund it?” And so we’ll look at that on a fleet size and say, “Let’s go ahead and put $10,000 of premium that otherwise you would pay on that. Put that in your pocket.” So there’s strategies like that. There’s things that you can look at. There’s valuation methodologies.

Danny Simmerman:         When you start looking at property rates, you know we talked about that and you can say, “Well, maybe we just went through a hailstorm and we’ve got a brand new roof. Maybe we want to go ahead and carry that 5% deductible now, because that makes sense versus carrying that low deductible, which increases your premium.” So there’s deductible strategies, there’s different coverages that you can look at. Maybe you carry the roof on a ACV basis. A lot of carriers are doing that now versus on a replacement cost basis.

Danny Simmerman:         So there’s different ways to structure the coverage so that you may not be able to find a better rate, but you can say, “Okay, well let’s look at how this coverage is ultimately going to respond at the end of the day.”

Karl Eggerss:                      It seems like too, I mean, what consumers need to watch out for is another option for insurance companies if they can pull it off. Well not the insurance companies, but the businesses that are getting insurance as the businesses end up raising their prices to consumers.

Karl Eggerss:                      So company A premiums went up 15% and they say, “You know what, we’re not getting squeezed.” And they’re selling a widget. Right now that widget cost 15% more and we’re seeing very low inflation in today’s world. But that is an area where you could see where inflation could rear its ugly head if they can pass it along, which maybe they can, maybe they can’t.

Danny Simmerman:         Yeah. And the other thing that I would comment on Karl is, is these increases, these really started probably first part of Q3 of last year. And so they’re just now starting to impact the business owners where a lot of them had created their budgets and pricing and said, “Hey, we think insurance costs are going to be X.” And then the renewal comes in and it’s just a really big shock.

Karl Eggerss:                      Sure.

Danny Simmerman:         And so they’re having to react. So you may be starting to see some of these potential cost increases flow into the marketplace, into business, into consumer products that people are buying. And so that’s going to be a real impact on people. And the one thing that I would say is if you look back over the, really, up until again, probably the middle to end of last… Middle to end of probably ’17, we would tell you the… If you’ve got a bunch of insurance people in a room, they would tell you we were in a soft market, prices were going down, rates were very competitive. We could bring decreases to customers and they were just like, “Oh, this is great.” Or it was flat. Those days are over and we continue to move into this hard market. The interesting thing, if you go back to ’08 and a lot of us remember ’08 what happened.

Danny Simmerman:         Very few times if you look, have we had a hard market in insurance and a declining economy. Anytime there’s typically a hard market, you’re going to have a robust economy, because insurance companies are saying, “Okay, this is my time to pass off these increases to the consumer.” And they’re making more money. They’re having more money in their pockets so they could pass that on. What’s going to be very interesting as we go through and see the market change right now, how long can the insurance companies hold up a hard market in a declining economy if we move that way? We’ve been… The dough has been running so well and so fast for so long. If there is a correction, can that hard market survive with a soft economy?

Karl Eggerss:                      Yeah. And it’s kind of how long it lasts. We know the market’s corrected. The question is, is it long? And more importantly, how long is… How slow does the economy get for how long?

Danny Simmerman:         Correct.

Karl Eggerss:                      Because people don’t make changes in over a couple of weeks, but couple of quarters, all of a sudden they’re making some real changes. So I think that you brought up a good point about as opposed to just shopping other companies, which you help them do, really understanding what the client’s trying to do and looking at the age of their fleet, that’s a really good example. And figuring out what other things can we do that to try to help offset some of that increased premium as opposed to just go into price. Cause if you just go to price, you may be getting subpar insurance.

Danny Simmerman:         Correct.

Karl Eggerss:                      D is there… And we’ll talk more in another podcast on the personal side about obviously the way insurance is purchased nowadays, but on the commercial side, is it still primarily through an agent or a company as opposed to… There’s no such thing as direct for commercial. Is there?

Danny Simmerman:         There’s actually been some carriers like travelers or like a… Sometimes [inaudible 00:32:24] had done this where you can buy a small commercial policy direct from the insurance carriers and not work with an agent. What we’ve seen is… And that was something that the insurance industry as a whole became, from the agent’s perspective, became concerned about. You know, how was the internet going to change how a consumer bought insurance? What we always found is that most people will tell you they don’t like insurance, they don’t understand insurance. I want somebody who’s going to understand insurance and I’ve got to have that. I’ve got to like them, I’ve got to value them and I’ve got to trust them. And that’s where we as the insurance agents have continued to maintain a place in that buying process.

Danny Simmerman:         And so we believe that people will still continue to buy business insurance through agents. It just makes sense because it’s such a large purchase. And to not have the advice of somebody to go, “No, you really need to have this coverage or you really need to consider this.” To lose that trusted advisor would be something that would be very… It would create a difficult process and would leave the potential for gaps of coverage, it would become significant on that side.

Karl Eggerss:                      We see that in our industry as well. There’s a lot of things advisors do outside of just managing somebody’s portfolio. It’s trying to find social security strategies or should you be doing your 401k in a Roth versus pretax. Those are all things that computer’s not necessarily going to tell you. And so it’s about a relationship.

Karl Eggerss:                      That’s interesting. So I mean, I guess the bottom line is people need to… And I would imagine when they see rate increases like that, they’re going back and looking at what they’re doing. But if you’re kind of stuck with the same insurance company and you’ve kind of been doing it the same way and you just kind of accept what’s going on, I mean that’s I think where you guys come in to say, “Let us take a look. We can at least provide some analysis and see if there’s something that can be done.” And if there’s not, I’m sure you’ll tell them, “You know what, you got the best deal going right now. But if there is, let me work with you.”

Danny Simmerman:         Yeah, I know. And that’s exactly what we see a lot of times. And what we try to do is, there’s some in our industry that will come in and try to be the white knight and say, “Oh, well we can do this and we can do that.”

Karl Eggerss:                      Yeah, right.

Danny Simmerman:         Honestly, that’s not what we try and do. We try to come in and lay a realistic groundwork for people and say, “Here’s what’s going on in the market. If you’re not happy with this, we understand.” We have a lot of clients that aren’t happy with it. The best thing we can do as agents is be proactive. And when we know that a rate increase is coming, get out there early and talk to the client and set the expectation because it’s never fun when you tell somebody, “I’ve got to take another 30, $40,000 from you this year for the same product that you’ve purchased in the past.” That’s frustrating. Where people really get frustrated with it is when you do it five days before it renews. That’s when we get people that are just like, “Wait a minute, hold on. This isn’t… You can’t bring this to me five days beforehand.” That’s where we try and do our best to get those renewal information out in front as best we can. Sometimes the market doesn’t allow that, but we try to do that as best we can.

Karl Eggerss:                      That reminds me, I had a stress test actually yesterday, and you’d think that they would say, “Okay, now when you come back, here’s what it’s going to cost. We’ve already talked to the insurance company.” They didn’t do that unfortunately. And so I’m about to go in there to do it and they say, “Okay, how

Karl Eggerss:                      Would you like to pay for this at $1,600? So to your point, a little bit of advance, right? Fortunately, I was able to pay it, but what if somebody wasn’t able to pay it? They may have had to cancel their appointment. So again, transparency is very helpful.

Danny Simmerman:         And like I say… we always try to do that with as many customers as we can. Sometimes what happens, and again this is an informational piece for the listeners, sometimes the carriers will wait and wait and wait, and not give us, the agents, the quotes until six, seven days before.

Danny Simmerman:         And we’ll tell customers, “Look, we’re beating on the carrier to obtain the quote,” and what the carriers are doing is, they’re trying to leverage their place in the market because we know we have others, so they’re going to bring a quote last minute… to back the client into a corner.

Danny Simmerman:         And it stinks, it really does. But unfortunately, those are the messages we have to deliver sometimes.

Karl Eggerss:                      So the reason I brought you guys in is because you are independent and that’s how we operate. We don’t work for a company, we’re truly independent. That way, we can give our own advice and we can put our client’s assets at different places, depending on their situation.

Karl Eggerss:                      And it’s the same with you guys. So anything else that either one of you would like to add? Holly… You’re sitting over there very patiently, but we’re going to get to the personal side on another podcast, which…

Karl Eggerss:                      Little secret for the folks listening. We’re going to record it after this one, but she’s not actually having to come back. But is there anything you’d like to add?

Holly Veenker:                  No, I just that every customer is unique, they all have their own story. And I think us, as an independent agency, we’re able to ask the questions that are needed to find out that story, just to make sure that everybody’s insurance needs are met, their assets are covered, whether it be personal, commercial. And I think that’s why it’s just so important to use an agent, versus the online.

Karl Eggerss:                      You guys are like referees, right? We don’t really want to talk to you, [inaudible 00:37:54] I’ll see you when I pay those premiums. But when we need you, and the referee doesn’t get any accolades until they make a bad call, or nobody really notices they’re there.

Karl Eggerss:                      I mean, I think people don’t take in consideration, when you’re looking at somebody’s situation, whether it’s me on their personal finances, or you guys, risk is a risk, and a lot of people neglect that. They’re under-insured.

Karl Eggerss:                      Obviously, in the life insurance world, sometimes people are over-insured because there’s life insurance salesman just cramming stuff down people’s throat. But again, sometimes we will look and say, “You have the right amount of insurance. You have the wrong kind of insurance,” and I’m sure it’s the same thing with you guys.

Danny Simmerman:         Yeah, we see a lot of those instances where somebody, their intent was good, but… what they purchased was different, and we see that a lot.

Danny Simmerman:         And unfortunately, there are some times where competitors, they may not craft the program the way the customer really needed it, they crafted it the way they thought it should be set up. And it’s unfortunate sometimes, but we do see that.

Danny Simmerman:         And that leads to uncovered claims situations where client expects to have coverage, but they don’t. And so we get into a lot of those different scenarios where it’s unfortunate that a commercial policy may be 85 pages long, and there’s this endorsement that changes coverage, or this or that.

Danny Simmerman:         And we just had a conversation with a client the other day where a former employee made a claim of wages not being paid, in accordance with the Fair Labor Standards Act. Well, there’s a sublimit on the policy for that specific type of claim.

Danny Simmerman:         We show it, we talk about it, client didn’t recall that. And so we get into those situations. We just try to craft everything, as best we can, to those specific businesses, but…

Karl Eggerss:                      Before we wrap it up, what’s the biggest increase that you guys have seen recently, and on what, specifically? On what type of insurance?

Danny Simmerman:         So the worst one that we saw was auto, and it was a company that was delivering fuel, and it was in the neighborhood of 400% increase.

Karl Eggerss:                      400?

Danny Simmerman:         Mm-hmm (affirmative). And it was driven, based on losses. They had purchased companies over time, and then kind of caught up to them and so they had a significant increase. So we’re seeing some of those. That was an anomaly, I would tell you.

Karl Eggerss:                      But you’re seeing stuff, consistently 15 to 30%?

Danny Simmerman:         Oh, easily. Easily, yeah. I mean, we’re seeing some that are 15 to, or excuse me, 50 to 75%, there’s some increases. Again, with loss activity, see stuff like that, so yeah, there’s a lot of unfortunate stories out there and-

Karl Eggerss:                      And you don’t hear a lot about this on the news. You hear more about coronavirus, but you don’t hear a lot about this on the news, and this is something that… That will pass, in my humble opinion. This probably won’t.

Danny Simmerman:         Yeah, and what really needs to happen… and I always say, “Don’t bring me a problem without a solution.” I mean, we talk a lot about the problem of what’s going on with rate increases.

Danny Simmerman:         But as long as the plaintiff’s attorneys continue to pursue auto claims the way that they do… and everyone sees the billboards out there. As long as those claims continue… and I would tell you the frivolous claims that continue to come in.

Danny Simmerman:         Saw one the other day. A client sent us a… One of their trucks cut off a car. I believe he clipped their front bumper, paid to have the bumper repaired, and then, all of a sudden, an attorney’s demand shows up for a million dollars a claim. It’s like, what are you supposed to do about that?

Danny Simmerman:         Now, think about it. Even though it shows up, you have to defend it. The carrier’s going to spend-

Karl Eggerss:                      Oh, there’s cost, yeah.

Danny Simmerman:         … probably $20,000, $30,000, they’re probably going to want to have a race to the courthouse to settle this thing and just say, “Look, if we give you a hundred grand, will you go away?”

Karl Eggerss:                      And usually they do, which is why that continues.

Danny Simmerman:         And so this is kind of the unfortunate cycle that we’re on, on something like this, and it has to stop at some point. And until there is tort reform on that, I just think we’re going to continue going down that path.

Karl Eggerss:                      Hey, those billboards aren’t cheap.

Danny Simmerman:         No, no, and…

Karl Eggerss:                      All right, Holly Veenker and Danny Simmerman from TIA group. If you want more information from Dan, if you’re a small business owner who said, “Hey, I need somebody to help me look at my stuff and just take a fresh set of eyes on it from the business side,” tia-group.com. And how about a telephone number?

Danny Simmerman:         Yeah, phone number’s (210) 428-2500, is the main line.

Karl Eggerss:                      All right, very good. Thank you guys very much. We will have you back very shortly, talking about personal insurance. Thanks a lot for joining me.

Holly Veenker:                  Thank you.

Danny Simmerman:         [crosstalk 00:42:52].

Karl Eggerss:                      All right, I hope you enjoyed that interview. Of course, at a time where we don’t need costs going up, that’s what we’ve been seeing, so I wanted to report that to you.

Karl Eggerss:                      Hey, just a reminder. Keep the faith, everybody. Very important to continue to pray during these times for health, wellbeing, all of that, and your fellow neighbor and so forth.

Karl Eggerss:                      And do what you can. I mean, there’s older people in our neighborhood we’re getting groceries for. This is the time to help each other. We saw a lot of that really coming together after 9/11. I don’t think this’ll be any different at all.

Karl Eggerss:                      So have a wonderful weekend and we’ll see you back here next week on Creating Richer Lives, the podcast. Don’t forget, (210) 526-0057, or creatingricherlives.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. And there can be no assurance that the future performance of any specific investment, investment strategy or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices, LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation, or prove successful Moreover, you should not assume that any discussion or information serves as the receipt of, or as a substitute for, personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request, or at creatingricherlives.com.

Karl Eggerss was interviewed by Trey Ware & Sean Rima discussing the major dislocations in the financial markets.

Trey Ware:                         And now what they’re doing is trying to say, “Okay, now you can’t go out. What are you going out for? There’s nothing to go out for.”

Karl Eggerss:                      Right.

Trey Ware:                         There’s every reason in the world to stay at home. Now over here on the Stevens Roofing News Maker hotline, we’ve got Karl Eggerss from creatingricherlives.com. He’s on now, to talk about what people have been watching in the stock market. All of the gains that have been made in the past three years, the Trump administration, that’s all gone out of the stock market now. We’re under 20,000 and they are going to close the floor at the New York stock exchange coming up starting on Monday. And the federal reserve has launched a third emergency lending program, the money market, mutual fund liquidity facility, and that’s to help money market funds unload assets like commercial paper and things of that nature. So let’s talk with Karl about that and see how he’s feeling this morning. That’s the first thing. Karl, how are you feeling this morning after watching what happened yesterday?

Karl Eggerss:                      It’s quite surreal to see the change not only in our world and our financial markets in the last three weeks. I did want to clarify one thing. The New York stock exchange is closing the trading floor.

Trey Ware:                         Right.

Karl Eggerss:                      Electronic trading will remain open. The NASDAQ will-

Trey Ware:                         Oh, was I not clear on that? Yeah, the floor. Yeah. The floor is going to close, but the electronic trading is going to continue. Right. Exactly.

Karl Eggerss:                      Yeah, and a lot of people have said, “Look, why don’t we just close the markets right now as well.” I’m not a fan of that, personally. We did that after 9/11 for obvious reasons. I think we need to keep the markets open to function and some would say it’s not functioning right now, and I’ll tell you the main reason. Part of the reason the stock market’s falling as much as it is, is because the … and you alluded to it, the credit markets are clogged right now. In other words, people aren’t wanting to take any risks. People are liquidating and there’s simply not there somebody to buy those things that people are selling. After, 2008 financial crisis, what happened is the treasury and the federal reserve, they can’t do as many things that they could before. They need congressional approval to literally go in there and buy certain assets. I think in the next day or so you’re going to see that approval. That’s going to allow the treasury, Steven Mnuchin to go in there and literally say if somebody’s selling commercial paper and things of that nature, they will be able to just go buy it. Right now they’re trying to flood the market with money and then rely on everybody else to buy it and nobody’s really wanting to buy it.

Trey Ware:                         Okay.

Karl Eggerss:                      That’s a big …

Trey Ware:                         All right. So if you’re an investor of any kind and you have, let’s just say your retirement on a 401k, you’re getting killed, just killed right now. What are you telling people?

Karl Eggerss:                      Here’s the thing Trey. I mean it’s very easy right now to say, put me in all the money market because not only are stocks going down, bonds are going down, gold has been going down. There’s no diversification that’s worked other than the money market. Having said that, we’ve seen times like this before, not exactly like this obviously, but we’ve seen some times where usually you will get a very sharp rally in the net very quickly here. That’s going to make you really question you put it in the money market and it’s going to go up enough to where I think you will see people say, I shouldn’t have done that. Maybe I should have bought the other day instead of selling. That’s the time to reassess after you get that release bounce, that’s the time to assess and say, “Do I want to put some in the money markets, spread it out a little bit?” But it rarely pays to sell in these types of vortex selloffs.

Trey Ware:                         So what you’re saying is, is that V bounce-back that we hear about is a real thing and you’re still anticipating the V curve hitting, right and going back up.

Karl Eggerss:                      I am but usually you’re going to see something where it may bounce a third of the way back up, maybe even half. This is not going to be a V-shaped recovery in the stock market. I don’t believe, and I don’t believe you’re going to see a V shape recovery in the economy either, however you’re probably looking at some estimates came out today probably a seven to 10% drop in the second quarter in GDP, which is massive. However, the estimates for the third and fourth quarters are things like maybe three and a half percent up for each of those quarters. So it could be more of a U, we’ll call it as opposed to, people are thinking this was an L, the economy drops and it never comes back. That’s not going to be the case. I don’t believe we’re going to see this ramp up over time. What we don’t know is when can we go out and consume products. We can’t see that yet, but that’s why the stock market continues to sell off.

Sean Rima:                         Brother, this is Sean. I wanted to, first off, I’m a financial idiot, so I’m going to, I’m going to ask the question that maybe …

Karl Eggerss:                      I’m an idiot also, there you go.

Sean Rima:                         All right, we’re a couple of idiots.

Karl Eggerss:                      Yeah.

Sean Rima:                         Being someone who doesn’t really follow the stock market and things of that nature, when we hear the president say, once we get clear of this, the economy is going to rebound very quickly, which is what he says repeatedly. Is that something you agree with and what exactly does that mean? How does that happen?

Karl Eggerss:                      These press conferences he’s done have not helped him or his administration at all and not exuded confidence. And they’re doing a lot of things really quickly. I mean, compared to 2008 they’re compressing this today, it’s pretty amazing how fast things are being done. But the press conferences haven’t helped. Having said that, I do agree with them because we have to have this economy ramp back up. People are going to be really quick to want to go do things because of the fact that we’ve been cooped up. Companies need to make money. They’re going to want to make money and spend money. So I agree with that. Here’s the problem though, Sean, when you look at a company, if a company can’t project what they’re going to make the next week, two weeks, six weeks. Then they tell Wall Street, “We don’t know what we’re going to make.” Well how do you value a company?

Karl Eggerss:                      And we’re seeing that home builders are coming out right now and saying, “Things were great up until now, but we can’t give you guidance. We can’t tell you what’s going to happen.” So that’s why you see the stock market go down, you can’t value a company unless you know the profits and there we simply don’t know what they will be. And until companies start saying, “Okay, we know how much we’re going to lose, we know how much we may make.” Then you may see things start to stabilize. But it’s really tough right now. But I do agree with them because it has to ramp up. It’s just not going to be a minus 7% GDP and then all of a sudden a plus 7% went backward work. That’s not the way it works, unfortunately.

Trey Ware:                         Yeah, I don’t know about the 20% unemployment rate that Mnuchins been talking about. The president said yesterday, that’s the worst case scenario, but I do know this. We have shut down large segments of the economy. All you got to do is look on the streets and you can see in New York city in particular, you look up there and you go, “Oh my God, where did everybody go? Did the rapture happen? And everybody was taken except me.” But you see that in major cities all across this country. Even in San Antonio, I had to go out for a couple of appointments yesterday that I just had to go to and the streets were basically, it looked like a weekend day yesterday driving around San Antonio. You just don’t refire … When you shut down major sectors of the economy like this, you just don’t refire that overnight. That takes some time to get the workforce back. These companies that are going to die, there will be companies that are going to go away completely. Now you’re going to have, to have new startups come back. You’re going to have to train people, new employees as you get things going. It’s going to take at least through the end of the year and probably more like 18 to 24 months before we get this thing rocking and rolling again.

Karl Eggerss:                      Yeah, it’s going to look almost like a check mark. Went down really sharp and then over time it just gradually comes back because how many people are working from home for the first time and trying it, using technology and saying this isn’t all bad. I mean I can actually do my job without having to go to [crosstalk 00:07:43].

Trey Ware:                         We were talking about that off the air a minute ago, Karl. And that is that a lot of people who are doing what we’re doing, we’re in a bunker right now, are going to say, you know what? This is safer. And a lot of companies are going to say, you know what? This is safer. Maybe going to contract employees who are off site. That alleviates a lot of liability for those who can do that. And of course obviously a Toyota car manufacturer can’t do that. But a lot of the service industry can go to that type of business model. So this is going to be a complete change, I think a C change for the economy.

Karl Eggerss:                      Well you’re right and we’re fortunate in one regard that we are much more of a service economy than we used to be.

Trey Ware:                         Right.

Karl Eggerss:                      However, if we’re not going to work driving to work, we’re probably not going through the Starbucks drive through even. So you can see the domino effect here, and then Starbucks obviously doesn’t have as many employees that they’re making calls.

Trey Ware:                         Well and you’re not buying gasoline and that hurts the oil and gas business right here in Texas. So I mean there’s a lot. We’re all connected in one way or the other and with that we got to hold it there. But Karl, we will do some more of this because this is just absolutely necessary. Let our people know what’s going on. Thank you for your time this morning.

Karl Eggerss:                      Thanks guys.

Trey Ware:                         As always, Karl Eggerss from creatingricherlives.com. Now coming back, my friend [Jimmy Haslacker 00:08:53], at Jim’s restaurants, [inaudible 00:00:08:55], of course, magic time machine and all that. Are they going to continue to serve? You bet. And we’ll tell you how when we get back in just a couple of seconds. Ware and Rima KTSA.

 

It was announced on March 17, 2020, that The Treasury Department is pushing back the April 15 deadline to pay taxes owed related to the 2019 tax year until July 15. It’s important to note, the deadline to file and extend returns is still April 15th.  In regard to tax payments, Individuals can defer up to $1,000,000 of tax liability without being subjected to interest and penalties on the later payment.  As of now, the administration is also considering delaying the timing for payment of estimated tax payments related to 2020.

While the stock market and the global economy look like they are in for a bit of a rough ride, these conditions provide some wonderful opportunities to focus on other parts of your financial life. Consider how one or more of these strategies may fit into your personal plan and then take action to make them come to life.

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