On this week’s show, Karl discusses what the bond market is telling us regarding a recession. Is the bond market right? Karl explains. Also, there’s a bubble, but it’s not in the stock market.
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 everybody. Welcome to the podcast. My name is Karl Eggerss. Thank you very much for joining me. Just a reminder, this show is brought to you by Covenant, Lifestyle, Legacy, and Philanthropy. If you need help from Covenant, anything financial in your life, you can go to creatingricherlives.com. Our telephone number, 210 526-0057 and just a reminder, creatingricherlives.com will continue to evolve.
You know, over the years, you’ve been accustomed to me bringing you information in different ways, articles, podcast and audio, some video. We’re going to expand that and do more of that. We’re going to bring on more guests just like we did last week. Last week, we had a lot of positive feedback when we brought on David Akright, CFP to discuss the SECURE Act, which probably is going to affect almost everybody listening at some point, if it goes through.
So that’s something we’re going to continue to do. So over the next few weeks, continue to watch for that. We’re very, very excited about that. Well, let’s jump right in here. What an interesting week it was, despite all the gyrations this week. The S&P 500 finished down less than 1%. We’re still near all-time highs, but it feels much worse.
Why? Well, number one, the media, “800 point down day for the Dow Jones on Wednesday, the third or fourth worst point day ever,” something like that. Those are eye-catching headlines until you look at the percentages, and while a bad day, we’ve had a lot worse days than that over the years. But let’s get right into how we kind of got there.
Remember this started a few weeks ago, well really, this started in January, February of 2018. We’ve been going a year and a half now with this tariff talk and this trade war. That is a trade war and it’s been going on for a year and a half and we really have not made any meaningful progress in the stock market since, but a lot of volatility.
But this week it was more of what we saw last week, which was, kind of a, depends on what day and time you’re looking at the market to feel what kind of mood you’re in. You know, in other words, do you look at it at 4:00 in the morning, which I do occasionally and did. Futures are way up and then there’s a tweet or there’s a comment from a Chinese newspaper and all the sudden the Futures moved three or four hundred points.
But this all is about trade. That’s still the most important thing. Now, interest rates did get a lot of publicity this week, rightly so, but it’s still about trade. But Monday we come in and see there was an election in Argentina, didn’t go the way many thought. Their peso dropped 17%. Their stock market fell over 30% in one day. That’s not something you see very often.
And, of course, we have the Hong Kong protest shutting down the airport. Again, not a driver of our stock market, but certainly doesn’t help. But we started to see, the Trump administration said, “Hey, you know what? We’re going to hold off.” On, you know, Monday the market was down and then we come in Tuesday and the administration says, “We’re going to hold off. We’re going to hold off on the September 1st deadline,” that we heard about a few weeks ago.
And so the Dow went up 400 points, wasn’t the strongest rally in the world. In fact, we commented a little bit on that. That it didn’t have the oomph. It didn’t have, the internals weren’t that great. It just felt like a relief rally and that’s what it was.
And, Wednesday we get weak economic data out of China, weak economic data out of Germany and for the first time since 2007, yes, your ears are going to perk up when you hear that because anything… The first time since ’07, we go back to that financial crisis and say “What was going on then?”
The first time we had a yield curve inversion on the twos, tens they call it on the street. Now before you turn off the podcast, what does that mean? Well, all that simply means is treasury bonds in the U S that are two year maturities are paying more than a 10 year maturity. That’s not normal.
And the problem with it is that when it inverts like it did, it’s called inverted, it sometimes leads to recession, not all the time. That’s key. Not all the time, but sometimes, and it did it this week. So naturally the naysayers, the recession people, the bears are coming out saying, “Aha, we’re going into recession.”.
And the economy continues to slow. We’ve been saying that. We’ve been saying it’s good but not great and it’s slowing for months and that hasn’t changed, but let’s not extrapolate and assume it’s going to continue to go down, down, down.
Why can’t it just turn around later in the year? It very well could. And even so, this is the other thing, you look at when this yield curve inverts and everybody’s panicky, and by the way the Dow Jones was down 800 points, which is about 3% on Wednesday. If you look at the stats, the stock market is typically higher a year later when you have that inversion.
And in a recession, even if it does occur, it doesn’t occur for several more months. All recessions have been proceeded by a yield curve, but not all yield curve inversions have led to a recession. So you might have to hit the rewind. I’ll repeat it. All recessions are proceeded by a yield curve inversion. So when you have a yield curve inversion, it doesn’t necessarily lead to a recession. But we’ve never had a recession where you didn’t have that.
And that’s a big distinction. So just because we have a yield curve inversion does not mean we are guaranteed and destined for a recession. Is it more likely? Yes. Is the economy susceptible to shocks and potentially recessing? Yes. Are we overdue for a recession? Yes. Are recessions normal part of the economic cycle? Yes.
But we saw the Dow fall 800 points. It was a 90% down day. That essentially means it was an all or nothing day. It’s the second one we’ve had. We talked about one the prior week. When you get those capitulation days, what you look for, and for those of you that have been listening 10 years plus, you know what you look for is, that’s scary, but you got to see the other side. You got to see the demand side pretty soon. You got to see the intense buying.
And we saw a good day on Friday. We saw a good high quality day. But it, you know, we’re not getting these 90% days. But could we get, you know, some good days strung together? Yes. And that’s good. So you need to see after the, get me out, you need to see the panic buying, trains leaving the station. And that’s usually, signals the bottom. And we saw it in December and we talked about in December and we saw it in early January. We got that combination.
So Wednesday was a big day and then Thursday more volatility, more trade news, up and down because you know this report came out, this report didn’t come out or did from another source on trade. And then Friday, of course, we did get the solid day really on no news. That was a big driver. So the Dow Jones finished up about 300. So for the week, we did see the markets down less than 1% after that crazy ride.
By the way, many of you asking how my voice is doing, you can tell it’s not 100% but it’s a heck of a lot better than it was a couple of weeks ago. So I will continue to sip my coffee. You do the same.
Now here’s what’s interesting, we heard late Friday, that there’s two things that jumped out. Well, number one, we have negative interest rates and in my estimation, a big bond bubble happening. I mean, bonds are being bought like there’s no tomorrow. So the U.S. Treasury, late in the day on Friday said, and this was a report that came out from Bloomberg, “The U.S. Treasury to do market outreach again on ultra-long bonds.”.
Remember there’s countries around the world that are doing 100 year bonds. Why not? I would say, why not? If the appetite for our bonds are so good for 20 year bonds and 30 year bonds and 10 year bonds, why wouldn’t you refinance that and go out a 100 years?
Why wouldn’t you do that? If I could give you a 50 year mortgage for not much more, think how much lower your payment would be. Who wouldn’t do that? Now, those of you that are opposed to debt, may not do that. But if the demand for our bonds are that good, why wouldn’t the Treasury do it. So this is something that looks likely that we would have 40, 50 year treasury bonds. Could we have 100 year bonds? Maybe. Every other place is doing it in the world.
So that was a late, interesting little report coming out late in the day on Friday. We also saw yesterday that apparently on Wednesday when the market was falling, President Trump called three bank CEOs and they briefed him about what was going on. This is interesting, right, because we’ve heard this before. The markets, I mean, imagine if this was ’08, the stock market fell 37% in one year. It fell 50%, around that, approximately from it’s high.
We’re down 3, 4, 5% off our high and he’s calling in executives to brief him on what’s going on. It’s pretty clear what’s going on. The economy’s slowing. The Fed is dropping rates now. They can’t fix everything. They’re trying. He’s hammering them, and we have a trade war going on.
So a trade war and an economy slowing and confidence falling, yeah, the market’s going to be a little volatile. I’m actually surprised it’s holding up as well as it is, given all that. But if we continue to get progress and there is continues to be rumors of a mini-deal, a partial deal, you know, excluding the intellectual property and the theft, if we get a mini-deal and not a comprehensive deal, that could be enough to keep us going in the right direction.
Earnings have been okay, but this bond situation is fascinating. These bonds look like tech stocks in the 90s. They’re going vertical, so, you know, that’s going to juice the economy in and of itself. People continue to borrow for real estate projects. I have friends that are CEOs, that are telling me and they’re in very industrial type of businesses saying, “Things are still hopping.”.
Now, some of that could be geographical, but the point is, is that those low interest rates don’t hurt. But we still don’t see any signs of a recession yet. And again, when you have some of these little warning signs, stock markets, the statistics show, there’s several sources out there showing that the stock market has done very well over the next 12 months when we’re in these same conditions.
So step back for a minute and exhale, because again, if you get too pessimistic here, you know what can happen. You get days like Tuesday, Dow up 400. You get days like Friday, Dow up 300. Things bounce back.
Again, quality as we move along, knowing what you own is very, very important. Not only knowing what you own in terms of quality and there’s good deals out there right now, also avoiding things that are not good deals, and having a diversified portfolio, including things that may not have done well the last couple of years.
You know the things that have not done well are things that could do extremely well going forward. Return chasing and getting out of things that haven’t done well in the last couple of years and getting into the things that have done the best is one of the worst things you can do. And be very careful about doing that and that’s what a lot of 401k investors do. “Well this fund’s done very well.” Well it has, but that doesn’t mean that you get to buy those old returns. You get to buy the forward returns and you don’t know what it’s going to do.
So look at the strategy and see if it makes sense. And again, it’s part of a comprehensive plan, which speaking to that, switching subjects here, this is interesting, I had an email from a client who in his 401k, you ever log into a 401k and it, kind of, has this little calculator like, “Hey, we know your salary because you work here and you’re this age.” And it tries to do some kind of light retirement planning without knowing anything else about your other assets. Well, we have a client that has all of his 401k money, which is a small, small part of his net worth, is all in stocks.
And he got a letter, an email from the 401k provider, automated, of course, that says, “Greetings,” doesn’t, say “Salutations.” “Greetings. During recent plan reporting, it was determined that a number of planned participant’s equity allocation in the 401k is at a point that is considered quote, age aggressive. You have been identified as part of that population and we are reaching out to you to inform you of this.”.
And it talks about, “You should go to our website and put a portfolio together that makes sense.” Do they know that this is a small portion of his 401k, like his advisor knows? Do they know that he has kids in college? Do they know that he gets stock options given to him? Do they know that his wife works or does not work? Do they know any of this stuff? No. They don’t know anything. They’re using one of the dumbest tricks in the world, which is age to determine your risk.
I know people that are 100 years old and 100% stocks because they don’t need the money. They’re investing for the next generation. And this is the type of information, now, fortunately, he sent it to us and said, “Hey, look at this I got.” And we said, “Yeah, we know you’re a 100% stocks in your 401k or the majority of stocks because guess what? All the stuff outside of your 401k is more conservative.” Do they know that? No, they don’t know that.
The problem is when people get these emails, they dialed it back because the age aggressive, and now their allocation does not match what it should based on their plan. Because this 401k Consulting Company, they’re not doing any financial planning. The little calculator on their website doesn’t help. So be very, very careful about this. When people don’t know the full pie, they’re just looking at a puzzle piece or a pie piece. They’re not getting the whole picture.
And this is why it’s important to work with a financial advisor that knows your situation and knows the last three years, five years, 10 years, what’s been going on with your family, knows your income, knows what your legacy goals are and knows your risk. To use age as a risk barometer is silly. It always has been. That whole thing about 100 minus your age is how much percentage you should have in stocks. You know, if you’re 80 you should only have 20% stocks, without taking anything else in consideration is ridiculous.
So, careful with that. And I had never seen this before. This was a new one. I had not seen somebody emailing saying, “You’ve got the wrong allocation, based on your age.” So be very careful because your 401k has to be allocated in conjunction with your IRAs, your Roth IRAs, your joint accounts, your trusts, your family, limited partnerships. Put all those together. That’s how you start putting an allocation together. The 401K’s just a piece.
All right, everybody have a wonderful weekend. Another cup of coffee going down the shoot for me. Don’t forget 210-526-0057, our website creatingricherlives.com and our sponsor is Covenant. Thanks and have a great weekend, everybody. Take care.