On this week’s show, Karl discusses the escalation of the trade war and the impact on the stock market. Is it even possible for President Trump to “order” companies to move back to the U.S.?
Plus, all eyes were on Jackson Hole this week to try and get any clue from the Fed as to the next move regarding interest rates. Instead, all we got was confusion. Is any of their public speak helpful?
Welcome to Creating Richer Lives, where living a richer life goes beyond the balance in your bank account. In fact, it’s about what you do with your dollars and how the choices you make with your money, not only define your lifestyle now, but impact your legacy for years to come. Whether you’re working towards retirement or seeking ways to make philanthropy your goal, there is a road to get you there. It’s time to redefine what it means to have a richer life. Welcome to Creating Richer Lives. Here’s your host, Karl Eggerss.
Hey, good morning everybody. Welcome to the podcast. My name is Karl Eggerss. Creating Richer Lives is brought to you by Covenant. Lifestyle. Legacy. Philanthropy.® If you need more information, go to creatingricherlives.com. Don’t forget the website will continue to be updated. Pretty shortly, we’re going to be putting a lot more information on there. Audio, video, text, you name it. Keep you informed on what’s going on. A lot of financial planning, helping you become better investors and really accomplish your goals and help you with some of that through some of these tips. So using all of our collective resources, putting them on the site. I’m really excited about that. It should be coming in the next few weeks. So very excited. Stay tuned for that. In the meantime, continue to visit creatingricherlives.com and you can see the updates in real time. Don’t forget our telephone number. 210-526-0057. 210-526-0057.
Grab yourself a cup of coffee. This was a doozy this week as usual. It was a strange week. Was it not? We are seeing just, I don’t really know how to describe it. We’re seeing a tweet fest, which isn’t anything new in the last few years, but causing major gyrations in the market. So let’s do a quick recap on really what was going on this week in the financial markets and then we will get to what to or not to do about it. So Monday we got off to a pretty good start and the Dow Jones jumped 250 points about 1%. This really completed what I was looking for in a turnaround. Because remember the week before we had really overwhelming supply, meaning everybody, one-sided days, everybody’s selling. Get me out and I’ve always said what you look for is that followed by in pretty short order overwhelming demand. Get me back in. The prices are too good. I need some of that.
And we really got that. We got that on Monday. It was a very strong day. Kind of showed the capitulation and then it showed, followed by the overwhelming demand. So it checked that box. Good. Let’s move on. Let’s get this market going back up, right? Well not so fast. We saw the markets kind of trade down on Tuesday. Not real intense at all. Not a big day. Pretty light day as far as the news was concerned. And then we got some really interesting data on Wednesday. The Dow was up 250 points. So look, we were headed for a good week. Right? What was interesting was we had some good economic data. Existing home sales was good and more importantly I think we got two good reports, earnings reports from Target and Lowe’s. Now if those aren’t consumer oriented companies, I don’t know what is and remember we’ve had a good report from Walmart, good report from Lowe’s, good report from Target.
I will repeat the consumer is 70% of our economy and our thesis has been good but not great. We did not see and still do not see a recession, although we are more vulnerable today than we were a couple of years ago. But we still don’t see a recession and it’s very, very helpful to see that the consumer is still in good shape and we know that by looking at Target and Lowe’s as a proxy. So I thought that was a very good report. Now one thing that was interesting also that kind of went under the radar a little bit is Germany issued a bond, a 30 year bond with a zero coupon. What’s a coupon? A zero interest rate. You say, “Okay, I’ll lend you my money for 30 years. What do I get paid?” This one said, I tell you what, “We’ll pay you nothing and you’ll like it. ”
And guess what? Nobody liked it. It was kind of a flop. And maybe that’s the beginnings of people saying, “You know what, this negative interest rate world we’re in, this zero interest rate world we’re in, probably a not a great deal for my money.” And so we didn’t see an overwhelming demand for that. So we’ll see. You remember the week before you heard me talking about, I think there’s a high likelihood at some point we do see 40 year or 50 year bonds in the United States because the appetite has been so good, especially for US bonds. But at some point does this flip around? Now you guys that have been with me awhile and have listened and have seen, I’ve shown you, I’m going to describe it now, but I’ve shown you the bond market PE ratio. So remember in the stock world, you take the price divided by the earnings and it gives you a ratio and that determines how much you’re paying for a year’s worth of earnings.
Right? 15 times. 20 times, 10 times. Well, you can do it in the bond market, right? Because the bond market pays you so much interest on a bond, on a 10 year bond, guess how many years it takes back to get that interest if you invest that money? How many years of payments does it take to get back that money? The PEs around 63. 63. So the bond market PE ratio is about 63. so stocks are very expensive, especially relative, excuse me, bonds, take the back. Bonds are very expensive relative to stocks and that’s one reason why we think the stock market will continue to go up. But it’s been a fantastic year for bonds and it’s a great lesson in diversification because if you looked a year, two years ago, you said there was no way, and I’ve had people tell me there’s no way that you can make any money in bonds because the interest rates so low. How could you make any money?
Well, the reason you could make money is because the interest rates could go further down, which they have, which has surprised a lot of people. So bonds have had a fantastic year, a better year than the stock market and in a lot of different aspects, which is amazing. So that’s a good lesson in diversification. Now am I advocating for you to run out in an overload on bonds? Absolutely not. In fact, this is a really good time to look at the overall portfolio in terms of stocks and bonds. But don’t forget there’s a whole other category called other and that other includes real estate, private equity, other types of maybe lending commodities. Or just a tactical piece of some funds that move and investments that move differently than the stock market. There’s a lot of things that may have been up yesterday when the stock market was down so much and owning some of those things can really smooth out the ride.
And that’s a whole other animal. So let’s get back to kind of how we finished the week here because it was pretty quiet most of the week until we got to Friday. Thursday the market was up about 200 but faded after we had these hawkish comments by two federal reserve presidents at Jackson Hole. Remember Jackson Hole? They’re all getting together, going fishing, right? All these people talking about the Federal Reserve’s there, all these people talking about the economy and interest rates and they all go fish in the Jackson hole and they do this and they talk and guess what they do? They have CNBC there or Bloomberg or whoever, and they’re interviewing all these federal reserve presidents, some voting members and some not. Meaning some don’t have an impact on rates they just want their opinion. And some do literally vote if they’re going to cut rates or not.
And they’re interviewing all of these people and they all have different opinions and it serves no purpose at all. They should be muted, but they’re not. And it causes the market to go up and down. It causes there to be tremendous volatility and it really serves no purpose but they do it. And so two of the federal reserve presidents said, “You know what? We wouldn’t have raised rates in this last meeting and we don’t think we need to … or excuse me, lowered them and we don’t think we need to lower them again.” One of them said I wouldn’t have lowered them and I wouldn’t lower him again. The other one said I didn’t think we needed it, but I would went along with it, but I don’t think we need it going forward. That’s not what the market wants to hear. Wall Street likes lowering interest rates, you know that by now. So does that serve any purpose? Because if they really do lower rates in September, were those comments helpful to you? No, but that 200 point gain we had faded because of this public opinion.
And we also saw Thursday one of the manufacturing reports a little less watched than than ISM but a Markit manufacturing report came out M-A-R-K-I-T and it was below 50. First one we’ve seen that shows contraction. So again, some of these warning flags that the economy has been and is slowing and that doesn’t, that doesn’t surprise us. We’ve been saying that all along that it is slowing, but is it grinding to a halt and we don’t see that again because of the consumer, which holds the key. Watch the unemployment. Watch their wages, which unemployment’s been low. Wages have been up and watch to see are they spending or not. Now, Friday. Friday was the interesting day. We saw the Dow futures up around 100 points and the pre-market. We get a report that China says, Hey, we’re going to put on some more tariffs.
Whoa, where did this come from? We just heard Larry Kudlow on Thursday talking about we’ve had good meetings. So this took what seemed to be the president and his staff by surprise because they were in meetings all day and the market sold off about 150 points. But then Jay Powell came out at Jackson Hole with a speech that essentially was pretty dovish, meaning he left the door open to more cuts, kind of saw his mistakes in the last few months cause he’s had some blunders and the market recovered. It was up. Everything was going fine until mid-morning when president Trump tweeted and essentially said, “Hey, expect a response to this. These Chinese tariffs, these new round of Chinese tariffs. Expect a response from us later in the day.” That’s it. Market starts selling off because who knows what he’s going to say. And this was really interesting as well. He also responded by basically “ordering” American companies to come back home. Come back home. Make your stuff in the United States. I am ordering you to do this. As if he’s King.
It’s crazy. Well, first early in the week, obviously he said he’s the chosen one to take on China and then now he’s ordering companies to do this, which obviously you can’t do that. So the markets didn’t like that. And down we went about 600 points on Friday. So what was shaping up to be a reasonably good week ended on a very sour note. And then after the bill on Friday, we found out what most people probably thought is that he upped the tariffs a little bit. He bumped them up, put on a few new tariffs and so we are escalating the trade war. We meaning us, the United States and China are escalating. It’s going up and meanwhile the stock market’s taking the elevator down and that’s what’s happening.
Now, again, what does this do? Well, this trade war, which it is a trade war we’re still in negotiating back and forth, but the rhetoric goes up. They up the ante both back and forth and then you see it kind of market sell off. Then they kind of come back and say they had a productive meeting, they’re trying to work towards a deal and there’s a delay. I mean, we have seen this. I’m tired of talking about it and you’re probably tired of listening to it because it’s back and forth and it’s been this way for over 18 months now of the rhetoric increasing and decreasing and the markets going up and down. And again, they’ve made no meaningful appreciation really from the first time we heard the words tariff come out of president Trump’s mouth until now. We’ve had a lot of volatility, no meaningful progress.
And so, the longer this goes on, can we talk ourselves into a recession? Some people laugh at that and say that’s ridiculous. How could we talk ourselves into one? Well, I think we could. I mean if you just break it down, if those people, those same people that are shopping at Target and Lowe’s stopped doing that because they hear so much rhetoric and they hear so much fear and they stopped spending and their boss lays somebody else off because they’re worried about it, we could. We could talk ourselves into a recession. That could happen. So don’t think it can’t happen because again, a trade war is enough to shock the system. It’s enough to put us in recession. But again, I want to be crystal clear. Is there really a difference between a minus 0.001% growth rate or contraction in our GDP versus a plus 0.001% growth rate?
Because that’s the difference between a recession and not. A recession is two consecutive quarters where the economy went backwards. Not by how much, just it went backwards. You know, you taking one step back, two quarters in a row, are you really moving anywhere versus if you take one step forward two quarters in a row? No. But what we’re fearful of is really 2008, right? We’re all fearful of a financial crisis. We shouldn’t fear a recession even if it happened and we don’t see one right now. But you have that happening and then you have this, what’s really what I’ve called the inversion watch, which is every time the two year bond starts paying a tad bit more than the 10 year bond, the yield curves called inverted. Okay we know that. It’s been like that for a while now. Not officially, but every time it ticks up and it’s 0.001% higher than the 10 year people freak out, break in programming.
We’re inverted and then when it undoes it, okay, we’re not, everything’s okay again. Is that really the way the world works? Are you going to stop spending money based on that? No. You know, I mean all my friends, all the people I know that are CEOs are working for big companies. They’re busier than ever. Is the global economy slowing? Are there pockets in the United States slowing? Sure there are, but it does not feel like a recession to me. And furthermore, when we go to the stock market and we look at the stock market, we look at the supply demand figures, we are still not seeing any evidence of a bear market. Again, as we’ve said, corrections can come out of nowhere. I mean, we got the classic check boxes of capitulation two weeks ago and a turnaround Monday in demand.
We got that. We looked at the internals that looked really good, but none of that can trump Trump, right? A tweet from president Trump or something from China can overwhelm the markets in the short term. In the long-term it is about profits, and by the way this week, and this was something that didn’t get a lot of pub, but the leading economic index hit an all-time high going all the way back to the 60s. You’ve never entered a recession until that indicator has rolled over months in advance and it has not rolled over. It’s at a new high. Very, very important. Very important. And also let’s look around. So supply demand for the market looks good. Again, you’re seeing kind of a stalemate, which you can kind of feel. It feels like we’re just kind of sliding around in the mud, not going anywhere and that’s how it’s been and it’s that way.
There’s not a group leading. There’s not overwhelming demand for stocks and overwhelming supply of stocks. It’s pretty evenly balanced. It’s a tug of war where both sides have set the rope down and they’re just kind of staring at each other while the rhetoric is going on and on. We’re not getting any traction one way or the other. Therefore it’s important to be patient, not overtrade because again a tweet can change things. We can go to new highs very quickly and also be diversified. Because again, bonds have been your friend this year. Income oriented investments have been your friend this year. Gold has been your friend this year, right? Things that feast on volatility do well in this environment. That’s a well-rounded portfolio and again you are probably looking at the next 5, 10, 15, 20, 25, 30, 40 years for your money, not the next 5 minutes. If you did that money should be probably sitting around in the money market.
So that’s good that we have this supply demand still sitting there and again, we’re getting mixed economic signals, some weaker than others. They are weak, but there’s also some good ones coming out as well and building permits lately was good. That’s a leading indicator. I have to have building permits. That means they’re about to build something. They don’t have to build it, but they got the permit to. That’s a good sign, so we have some good stuff. You’re not hearing a lot of the good things. You’re hearing a lot of the fearful things and I’m not here to paint a rosy picture. I’m here to say let’s step back for a minute because there are still a lot of positive things going on. By the way, one of which lower interest rates. The interest rates plummeting right now are adding stimulus. There’s many research firms out there that see an economic upturn later this year because of the low rates. Gasoline’s cheaper. Interest rates are cheaper and again, let’s see if that shows up in housing, but the consumer should be in pretty good shape right now.
Now I will leave you with this. The tweet of the day, this came from Energy Credit One on Twitter. Funniest thing I saw and remember president Trump ordered I declare that these companies come back home and you will manufacture in the United States. So to his tweet Energy Credit One was Trump orders Panda express and PF Chang’s to immediately switch menus and serve only hamburgers, hot dogs and Apple pie. Classic, classic tweet. There’s some funny stuff on Twitter for sure. A lot of of course the president’s using Twitter in a lot of different ways and some good, some bad, but again, this is really, this week was not much different than what we’ve seen the past several months. I feel like if we can get past this and get, again, you’ve heard rumors and I mentioned them about a mini trade deal, something that just gets the nuts and bolts of it done, we could move on and keep this economy going.
And again, the longer it goes on, the more uncertainty there is, the more frustration there is, the more people start bailing on stocks. Companies start changing their patterns and you do get some manufacturing moving from one place to another. Those aren’t fast decisions, but if this keeps dragging on you might get that. So both sides have incentive to get it done. But there’s politics involved. There’s all types of things that go into this, but it certainly is a trade war and has been and that has not changed. And don’t forget a real value and something we do quite a bit is when you get this volatility in these markets, being able to quickly rebalance or cherry pick some things that you are under allocated in, if you were supposed to be in these particular stocks or mutual funds and the waiting has dropped or you have new cash, being very tactical and efficient in getting that invested quickly and buying dips if that’s your long-term goal is really important.
And most people don’t do that and it’s hard to do it because you’re kind of thinking, “Well I’ll just wait and see if I get a better deal.” But as I said, sometimes things can snap back very quickly. And we saw that. Again, had it not been for Friday, it was turning out to be a pretty good week and really the tariffs were interestingly enough, almost tossed aside. The market was positive until Trump retaliated. So again, as opposed to saying, “Let me talk to them over the weekend,” he said, let me increase the tariffs and again this is, this is negotiating. How do you negotiate? You don’t say, “You want to talk about it?” No, you say, “Here. I’ll up the ante a little bit.”
So we are seeing some collateral damage from that of course. And number one is volatility in the stock market. That’s what we see. But again, if you zoom out, if you were to go back 18 months and you just, again, I’ve said it, you fall asleep and wake up right now you’d say not much has happened in the last 18 months. But as we watch it day by day, minute by minute, and we get markets and turmoil specials on CNBC, as we get those things, it can drive you, number one, it can drive you crazy. Number two, it can drive you to make some really bad investment decisions. If you need help with those investment decisions, give us a call. 210-526-0057 and continue to go to creatingricherlives.Com. Have a wonderful weekend. We will see you back here next on Creating Richer Lives. Thanks for listening to the podcast, everybody. Take care.