China Has An Arithmetic Issue (Audio Podcast)

February 15, 2020

On this week’s podcast, Karl Eggerss explains why the rest of the world is just figuring out what we already knew about China.

Hey, good morning everybody. Welcome to the podcast. My name is Karl Eggerss and this is Creating Richer Lives, the podcast version. Of course, if you want the other version, the website version, just go to creatingricherlives.com. And you also can give us a call at (210) 526-0057. And a just a reminder, the show is brought to you by Covenant, lifestyle, legacy, philanthropy. I had somebody this week as a matter of fact, I had a meeting with them.

We were talking about different things, and one of the things regarding social security, I’ll mention in just a minute, but they said, “We always like talking to you because we always realize or learned something that we didn’t know before.” And I said, “Well that’s our goal.” Because yeah, it’s easy to say Covenant does financial planning or does investment management or does tax preparation, but at the end of the day we are a financial advisor really helping you extract value any way we can.

In fact, this particular client didn’t know that they could claim their ex husband’s social security and nobody was going to tell them that except for us, and so we did that. And also speaking of social security, that same individuals got confused about the tax ability of social security. And it got me thinking how many other people out there have this same concern?

And here’s what it is. If you’re single, you can make, I believe it’s $25,000 a year and your social security is not taxable. And then between 25,000 and 34 and change, it’s taxed at half. And then above that, 85% of it’s taxed. She thought that the tax on her social security was 85%, like the tax rate. And I said, no, no, no, 85% of the social security is taxed. So when you look at your tax return, there’s a box that says, what did you get on your social security?

They look at the rest of your income and then a portion of that is going to be taxed and that number gets added to the rest of your income before your deductions and so forth. So big clarification there. And again, she might’ve filled out her tax form incorrectly if she was doing it herself. So watch that. That is something that, I don’t know. Did you think that, and it’s interesting because I’ve had people over the years tell me, my social security is, almost all of it’s taxed.

And I’m wondering if they’re thinking that it literally, we don’t get almost all our social security because it goes away to taxes. That’s not the case, it’s how much of it is taxable. So I wanted to clarify that. Hopefully, you don’t think that. Anyways. All right, well let’s jump right in to the week here, because we had another interesting week, didn’t we?

We had really, we thought Coronavirus was kind of in the rear view mirror and it kind of was, it seemed like at least Monday and Tuesday we saw the market pretty strong on Monday, pretty strong on Tuesday, and really the big news Monday and Tuesday was Jay Powell, head of the Fed of course saying, “Hey, we’re monitoring the Coronavirus.” And the market kind of sold off a little bit, but nothing major, right?

And I was, by the way, I was watching these politicians ask Jerome Powell these questions, and they’re kind of comical because they ask questions that sounds like a third grader asking questions, where they’re trying to ask a question about the economy or interest rates, and they just don’t know what they’re talking about, but they’ve got their time and they’re trying to sound smart, and unfortunately they don’t, and I was literally laughing listening to some of these questions.

So, but he testified and nothing major there. And then of course, Wednesday we had another strong day up almost 300 points for the [inaudible 00:04:53]. So we’re rolling along during the week. And then it got interesting. After the bell, we get some “updated numbers” on the Coronavirus from China. And they said, there’s actually a few more cases because we’ve been, we changed the way we calculate it.

And I had to laugh because the rest of the world’s like, “Oh my gosh, China change their numbers on something? How could they have been so wrong?” And I had to laugh because in the finance world, and you guys know this, because most of you have been listening for a while, China changes their numbers all the time on stuff, and a lot of people don’t believe a lot of the numbers coming out of China, right?

Do you trust the growth rate? Do you trust some of the earnings coming out? Do they use the same accounting methods? Do you trust all of these things? And most of the finance world has always taken some of their data with a grain of salt and now the rest of the world says, “Yeah, maybe we should take all of their data with a grain of salt in terms of the Coronavirus.”

So it got people thinking, is this a bigger problem? Again, is the slowdown that we saw with the Coronavirus, is that really not happening? So we saw a little bit of weakness on Thursday, little bit of weakness on Friday, kind of a flat day during the week. Now Friday, there was a huge divergence between growth, we’ll call growth momentum. We’ll throw that in the same bucket versus value.

And this is no, really nothing new under the sun, right? We continue to see that, but big big divergence on Friday and for the year, we’re sitting here with value stocks down on the year. Meanwhile, the NASDAQ is up quite a bit over 8%, and so what’s going on here? Well, I saw an interesting thing this week talking about previous bubbles. I don’t know if you think we’re in a bubble or not. I don’t think the market is in a bubble, but I do think there’s pockets of bubbles, but they called this particular bubble, the disruptors bubble.

And I think that makes sense. I think if you look at the companies that are getting rewarded. Amazon changing retail, that’s a disruption. They’re changing the way retail is happening, not new. They’ve been doing it for a while, but changing it.

Tesla, the stock that’s gone vertical as of late. Why now? Well, disruption, right? Changing the way automobiles are running from a combustible engine to battery technology. Google, right? I can look up any information in less than a second on Google, and the way they really have monetized advertising.

Microsoft, how much more productive has Microsoft made us. You see though that most of these are technology companies and that’s pretty much what’s been working, but they’re not cheap. That’s the key. Why don’t we just go and dump money in that if that’s the key?

Well they’re not cheap. I mean, I frankly think Microsoft is very expensive right now. And I understand why it got to this point, but very expensive and that’s… Microsoft is a fascinating and great company, all of these companies are, that’s not really the issue. It’s what are you paying for these companies. Had you overpaid for some of them during the dot-com bubble, you had to wait 15 to 20 years just to break even.

So I think that’s the decision as investors we have to make is, we want to continue to participate in the market. The market has been strong, we’re still in a bull market. The Coronavirus is for the most part being shrugged in terms of the financial markets. So we want to participate, but we have to continue to participate in a smart manner, because things are getting more and more expensive. And so you have to really continue to know what you own.

But look, let’s switch gears, why is the market continued to go up? Why is it shrugging off Corona, and it is. How do I know that? Because we were at an all time high just a few days ago. The reason why it’s going up, let’s go look at the Fed’s balance sheet, the Federal Reserve, go look at their balance sheet. They were trying to shrink it in 2018.

Now, yes we had tariffs, but they were trying to shrink it and they were shrinking it in the market through a tizzy, right? And the fed was raising rates, and we had that 20% decline in the fourth quarter practically of 18. Why did it turn around so dramatically? Yes, it was oversold. Right? But the Fed stopped raising interest rates and not only that, they started increasing their balance sheet. Go look at a picture, it’s a V-bottom.

I mean it literally turned around and now they’re increasing their balance sheet, doing these repo agreements and all of that. They are injecting money into the system and as they continue to do that, that’s all the market seems to care about. That is the main thing driving stocks right now.

Now, are companies going up in their stock prices because their profits are rising? Yes, there’s plenty of companies doing that, that’s why stocks go up. But when you look at the overall market and see the persistence it has had you wonder why this is. I mean, Morningstar put out a piece the other day saying that there has not been a 2% trading day up or down for stocks since August 23rd of 2019, 110 trading days. Why is that? The Fed’s injecting capital.

So, as investors it confuses us sometimes. We look and say, but what about the news? But what about world war three? Remember that a few weeks ago? What about politics? All of this trumps that. And that’s the key, is to understand what’s moving the stock market more than why you think it should be moving the stock market. A lot of people have been sitting out this rally because they don’t agree with it. You can do that, but at your own peril, because it has been going up and it’s been strong, and it’s primarily been because the Fed has been injecting more money in there.

Now let’s spend a couple of minutes. I got this question earlier in the week. How do politics factor in to the stock market? Well, we know over the next few months, things may get a little more volatile, especially if the poll numbers start to change a little bit. And the reason why is, nobody likes change, right? Even if you don’t like the current president or love the current president, or like the current policies or hate the current policies, you know what you’re dealing with.

And when they’re stumped in changes coming, that’s when markets get a little unsettled. And that’s why you tend to get a weak stock market after there’s a change in the presidency, because there’s a change. Something is going to change. That president who got in there didn’t run on, “I’m going to keep everything in exact same.” Right? That wouldn’t get anybody elected. They say, I’m going to fix this and fix that and I promise this promise that.

And therefore markets tend to struggle in the first year after a change. So if we get a change, yes, could we see some, a weak market? Absolutely. But there’s other factors in there. Right? I just mentioned the big one, which is the Fed. What is the fed doing? And then right now the Fed is keeping rates very low and they probably will all through the election and look, another reason they’re keeping them low, by the way, is got some pretty crappy retail sales report on Friday.

So we need to continue to watch the consumer. Next week, we’re going to get housing coming out. Watch that. Watch the consumer here. Watch the hours worked, watched their wages. That could give you an indication on, yeah, the fed may not be raising interest rates, but if the economy gets too weak, is the Fed not lowering enough? So yes, the market’s loving the capital injection right now, it just may not love how slow the economy may get.

So let’s watch that, too early to predict, right now the market loves the Fed injecting money even though the economy is kind of cruising along. But getting back to these politics. Look, if you try to predict what’s going to happen in the election and drastically change your portfolio, you could get hurt.

Look what happened in the last election. People tried to bogey that, really really got hurt. What I would suggest, be proactive, not reactive. Have a portfolio that you automatically say, if the market fell 10%, 15%, 20%, if interest rates rose a little bit, how would mine react? And there’s ways to test that. But if you look at that and you build a portfolio you can sleep with now that’s built on not only can you sleep with it, but is it really accomplishing your goals for the long term?

If you have that portfolio, then you don’t worry as much about the election. Could it be stressful and bumpy times? Yes it could. But what you don’t want to do is say, “I’m going to be very aggressive right now while things are good and then when the election comes, I’m just going to sell and then I’m going to buy back in the low.” It doesn’t work that way. Again, go back and look when’s the last time you did that successfully?

So, have a portfolio that can withstand some of that. I hate using the term all weather, because that makes it sound like it’s bulletproof and that’s not what I mean, but an all weather portfolio that at the end of the day is diversified. A little tip here, as you get ready for tax season, you’re gathering your things, all of that. One of the best ways to do it, obviously make a file as the year goes along, but go ahead and make a checklist of things that you’re providing to your CPA or you’re doing yourself, and then next year you’ll have that checklist so you know what you’re waiting on.

Are you waiting on a K-1, are you waiting on a 1099? And that way it’ll be a little easier and you can check those off as they come in. So tax organization, big, big dealers, there’s portals to do it. If you’re working with a CPA, maybe they’re providing that list to you, but the more organized you get, the easier it will be.

And nowadays with everybody using the standard deduction, it seems like taxes are a little simpler than they used to be. At least that was the goal. And we got news late Friday that, speaking of taxes, that the white house is proposing that we may be seeing some tax incentives for Americans to buy stocks, that was the late news on Friday. Basically, who knows what it is, but outside of your 401k, maybe getting a tax deduction for investing.

So it almost work like an IRA, I suppose. I don’t know what all the rules are, they didn’t really say what all the particulars are tossing things out there. And you’ll probably see this as we move along the rest of the year, where you’re going to see all kinds of proposals being tossed out there, because tax cuts get votes, right? So we’re going to hear a lot about that. We’re going to hear a lot about, we’re going to get drug prices down. We know the usual game coming into the election season on both sides.

So let’s see that, but that was interesting, came out late in the week regarding taxes, but stay organized and don’t let it overwhelm you. We’re sitting here on February 15th, so we got a couple of months still. Hey, by the way, don’t forget Monday the stock market is closed in recognition of president’s day. You guys have a wonderful weekend and don’t forget creatingricherlives.com. Our telephone number (210) 526-0057, if Covenant can do anything to help you and your situation, don’t hesitate to reach out to us. Take care everybody, have a great weekend.

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