Podcast: Preparing for the Unknown

The following is a transcript of Episode #56 of the Retire Happy podcast with Roger Gainer.

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Roger: Past performance is no guarantee of future results. The future really is unknown. And right now we have two opposing forces of inflation and recession. People are concerned, and the key is to be prepared for what’s coming, whatever that is.

Clark: You’re listening to “Retire Happy” with Roger Gainer, president of Gainer Financial and Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner. With so much uncertainty in the world today, it’s more difficult than ever to make decisions that can help you progress toward your financial goals. So in this episode, Roger shares his thoughts around how to prepare for the unknown. He also shares his perspective on what we’ve all been hearing in the news recently, talks about a recession or a prolonged inflation, even a stagflation. What is all this? How do you even prepare for it? Will it impact your retirement plans? What opportunities should you be thinking about? Well, as Roger often says, “There’s no such thing as luck. Luck is when preparation meets opportunity.” There’s a lot to cover. So, let’s dive in. And don’t forget, head on over to gainerfinancial.com for more content like this. Enjoy the show. Roger Gainer, it is great to be back. How are you?

Roger: I’m doing well. It’s been a hectic summer, but a fun one. So, you know, the days are getting shorter pretty rapidly now, and you always get to feel that urgency at the end of summer to make sure everything’s going…

Clark: Yes,

Roger: You know, am I going to get it all in before the summer’s over?

Clark: Well, I’m glad you’re having a good summer. And of course, every topic we bring on here to the show on “Retire Happy” is pretty much long shelf lives, whether we’re talking at any season of the year. We really try to keep these conversations pretty much as relevant as possible. And you mentioned that word hectic, and this has been a hectic couple years. And we’re starting to see…the dust seems to be settling a little bit where we can think, “Okay, what’s going on?” I mean, we’re looking at a possible, in case of recession, maybe an event with prolonged inflation. There’s a lot of people asking you questions like, “What does this do to my ability to not only retire but retire happy?” So I thought this could be a good pivot point to jump off of, hey, how do you help someone stay calm and also look at what we’ve known from the past? Can that help us think about the future?

Roger: Well, you know, as they used to always say, “Past is prologue,” right? Those that failed to learn from history are doomed to repeat it, and all of those kinds of sayings. But we also say in our industry that past performance is no guarantee of future results,” and so we want to make educated, forward-thinking decisions. But we also know that throughout history the backdrop changes, right? We have technologies today that are accelerating the rate of change. So the prescriptions have to be able to adapt in order to be successful. It’s kind of like COVID, right? We have all these different variants, and some of the stuff that worked against variants a few years back aren’t working right now.

Clark: That’s a great way to think about it. Wow.

Roger: Okay. And it’s the same sort of thing. You know, I’m double vaxxed and double boosted, and I had COVID three months ago.

Clark: You had me worried.

Roger: And I took a test this morning because I was worried. I had…you know, my allergies were kicking up, and that’s what happened last time. But I’m happy to say I got my results and I’m negative. So, onward and upward, right? So, I have been getting calls from clients and they want to know if the plans we have for them to retire, how will they be affected by recession? And then usually that’s followed by, well, what about inflation? Because if you listen to the news, or you go to the store, you know that things are costing more than they did.

Clark: Oh, it’s bad. What’s one or two examples, Roger, specifically that you’ve seen?

Roger: Well, one or two examples, you know, you’ve seen the price of gas go up, and now it’s going back down, right? And around here, the price of gas…I mean, I’m in California where we have the most expensive gas in the country, they say, and the price was up very close to $6 a gallon where I buy my gas, and now it’s about $4.75. So, it has come back down, but a year-and-a-half ago it was $3.50.

Clark: Absolutely. No, but also in the grocery store.

Roger: Oh, the grocery store, you know…

Clark: I’ve seen eggs, milk, there’s about a 13% increase. I just found an article on Forbes. I mean, you know, your fruit, vegetables, 5% to 10%, frozen food, dried prepared food, 14%, beef 16%.

Roger: Yeah. And certain parts of the country, it’s even more. And I saw a story this morning on NBC News that the big increases are around the side. If you ever walk into your grocery store, all grocery stores have the fresh stuff around the edges, and the canned and processed stuff are in the aisles in the middle. Okay. And the stuff in the aisles in the middle has gone up a little bit, but not that much. This was all part of a story that in some ways you can dine out for less than you can go out and buy food, and put a dinner together. I still question that a little bit. But, anyways, yes. So, inflation. Now you’re starting to hear a word that really I haven’t heard since the ’70s called stagflation.

Clark: Stagflation.

Roger: Stagflation, yes. I grew up in a period that was called stagflation. And in the ’70s, stagflation meant that the price of everything was going up, but the economy was stagnating.

Clark: Oh, no.

Roger: Okay. So, you know, why do prices go up? Why do we have inflation? Because that’s what inflation is, right? You pay more for stuff. And, you know, I know that there’s a lot of mysterious things in lots of newspaper articles and magazines and white papers, and I read a lot of that stuff. But at the end of the day, inflation is about more demand than supply, right? So last year we heard about supply chain issues and all these other things, and in big parts of the country we have drought, you know, here in California, Arizona, other areas of the country where we grow a lot of the food we eat. And so, you know, there is shortages of water. So, a lot of farmers are leaving fields go fallow because of the cutbacks in their water supply.

So, you know, we all got to eat. So, we’re seeing that pressure on prices going up because of this supply chain stuff. We saw it in the building materials world about a year ago. A lot of stuff was sitting on ships and in ports and on containers, and then all of a sudden all that stuff got delivered and it was, like, a flood of goods. So we’re seeing massive sales now in some retail operations, fashions, things that were stuck in ports. So, prices went way up. You know, if you bought face masks early on in the pandemic, if you could find them, you paid a lot of money for them. Now there’s plenty of them to go around. Okay.

Clark: It’s your classic supply/demand, is what I’m hearing. I can see the graph as you’re describing this.

Roger: Yeah. Well, it’s the same reason stock prices go up, right? Supply and demand, more people buying than selling. Why do stock prices go down? More people selling than buying. It’s the same in everything. Price changes are based on that supply/demand. There are things that can distort it or accelerate or change a little bit, but at the end of the day, it’s all about finding that equilibrium between buyers and sellers. And so we’ve charged our federal reserve with trying to keep that equilibrium. You know, their primary responsibility is employment and inflation. They want inflation to be around 2%, and they want full employment to be around 4%.

Well, we have better than that now. So that means there’s a shortage of workers and wages are going up as a result of that because we still have demand by companies to have more workers. We’re going to be looking at a worker here pretty soon. So, I totally understand that. So, that’s what puts that upward pressure on it. Recession, which is the big…our word is the biggest fear of our federal reserve because, frankly, we don’t have a lot of tools to fight recession. We have more tools to fight inflation. And I’m not going to go down into a lot of detail. But if any of our listeners are interested in expanding on this conversation, by all means, give us a call at the office. I’m more than happy to talk about it and bore you to tears.

But today we don’t want you falling asleep. So we’re going to kind of keep it high level here. And, you know, with the recession, people are losing their jobs, demand is going down, people don’t have money to spend. You know, it’s a very grinding situation. In 2008, you know, people’s homes were worth less, stocks went down 60% as measured by the Standard and Poor’s 500. You know, wealth was being disappeared, and all of that kind of stuff was going on. And really we had not experienced that to that extent, really since the 1920s and ’30s, late ’20s, excuse me, you know, the crash of ’29 and then on into the Great Depression in the ’30s.

Depression is just a really bad recession. So, you know, recessions, when they’re short and we let them work, really help keep our capitalist financial system functioning. That usually happens because there’s excesses, values got too high, like we’ve seen recently in the stock market, arguably in real estate, you know, that these assets are priced beyond their economic value. So they’re coming back and then economic activity goes down, and then these values tend to go down even more.

So we’re seeing, you know, properties stay on the market longer than they were a year ago, even six months ago. We’re seeing prices being cut for people selling their homes. We had a house, a duplex down the street, and I remember earlier this summer talking to the owner, he was very excited they were going to be selling it. He said, “Well, we’ll put it on the market for $1.6 million, $1.7 million, and I expect to get at least $2 million for it.” I ran into him about two-and-a-half weeks ago after it sold, and he said, “Boy, I feel lucky that it sold at all. If I had waited another month…

Clark: Oh, my. That’s a 180 turn.

Roger: …it might not have sold at all, and I got slightly below our asking price.” So, you know, considering how long he’d had it and where he was in his life, he still did extremely well, but he didn’t do obscenely well, right? So recessions tend to be followed by a drop in prices. So if we’re invested in things or other asset classes like stocks, real estate, the value tends to go down. Okay? Does that make sense?

Clark: Yeah. Recession value goes down.

Roger: Yeah. Well, nothing is bad for everything or good for everything. But what I’ve learned about recessions is recessions almost always are the gateways, that mantra that we’re all supposed to be following when we invest. So, when you invest in a perfect world, you buy low and you sell high, right? Okay. So, recessions, right?

Clark: High. Yeah. That’s the goal.

Roger: And last year in several of our podcasts, I talked about how high valuations were, and how…you know, for over a year, I’ve been talking about de-risking your portfolio and cutting that exposure because…

Clark: You have.

Roger: …things were just too expensive relative to their economic value. It wasn’t rocket science. It was just, that’s the way it is. Now, it’s so funny the way people behave because that’s what everybody wants to buy, okay, is when we’re charging too much. Now, you wouldn’t go into Macy’s or Nordstrom’s and say, “Hey, could I pay 20% more than this pair of pants that you’re asking for?” No. It goes on sale and you get excited, and you’d say, “Wow, I’m buying this pair of pants for 40% off. Maybe I’ll buy two pairs.” But when we do that with investments, everybody goes and runs away, “Oh, I don’t want to invest now. We might not have found the bottom.” Yeah. But you’re all excited to pay 25% more than you’re paying today. You were ready to buy. In fact, you did buy in most cases, and now you’re wondering if you should sell or should I hang on for the long run?

Clark: Well, that brings us to the question of…I mean, of course, no one knows the future. But based on what you’ve been saying, try to de-risk, try to protect yourself as much as you can. And you were just talking about, in the ’70s, the stagflation. I mean, what does someone do with all of this? How do you even begin to protect, you know, your retirement, everything you’ve worked so hard for to get ready for the unknown?

Roger: Well, this is kind of what we’ve been talking about and working towards in our discussions is this easy to say, hard to do buy low, sell high concept, and to have the patience to do this. So I get calls all the time. A guy last year is like, “Oh, I’ve got all this cash and I’m nervous about the market, but, you know, I want to do some short-term investing because I got to make more money than I’m making in my cash.” And, yeah, cash is paying a little bit more today. You can get savings accounts at 1.5%. It’s still well below the inflation level, but it’s better than it was. And so, if I go out and I buy cash and I’m getting 1.5% and inflation is at 8%, that means I’m only losing 6.5%. So, I have limited my downside, but I’m still in a losing position. Okay?

Clark: On that theme, buy low, sell high, that’s the goal. That’s what all this is about. So, what I’m hearing from you is being careful with where things are. What are some tools or some ways that your office is approaching this?

Roger: Well, first and foremost, when we help somebody figure out retirement, one of the ways we protect that retirement is to make sure the income streams are coming from reliable sources. Now, everybody is out there nodding, “Well, of course I want my income coming from a reliable source.” Well, what are those? Social Security is a reliable source because the government’s going to cut me a check, the government backs the money supply, and I know that’s a reliable source.

And if I’m counting on selling properties to live off of, well, I don’t know what the future of those properties are going to be when I need the cash. So, generally speaking, the first thing we build on is we build income streams that are based on cash. Okay. These are pensions, Social Security, annuities. Things that give us guaranteed lifetime income that we cannot live…that we don’t have any risk of what we call exchange rate risk, right? When we buy something that’s not in cash, we don’t know what the exchange rate’s going to be when we need it to be back in dollars.

Think of it like if you’re going on a vacation overseas and you got to exchange your dollars for pesos or euro dollars or something like that, and the exchange rate, you know, determines how much you can actually spend on that vacation when you’re in somebody else’s economic environment. Well, it’s no different here. You own a house, you want to go to the Piggly Wiggly or Safeway and buy dinner tonight, and that’s all well and good. But you can’t knock a couple of bricks off the porch and run down to the grocery and say, “Here’s 150 bucks worth of my house in exchange for this basket of groceries.” Does that make sense?

Clark: Yeah. So, reliable sources. As we’re starting to wrap up with our time today, are there any other suggestions of ways to try to hedge against…?

Roger: Well, so, again, if we’re going to have an income stream, and that income is dollar-based, that’s a way to prevent a recession from destroying your financial security. All right. If demand is going down, and prices are going down, that means every dollar is going to buy more. So automatically, I’m gaining value because my dollars now buy more because other people don’t have them. Other people have assets that are losing value, so they can’t afford to buy.

So I have clients that we spend a lot of time creating capital, big chunks of capital for just periods like we’re sitting in right now, to go out and buy stuff when it’s cheap. And that’s how you counter the other side of this, inflation. We’re not going to spend a lot of time on inflation today, but we will in a future podcast, I promise. And, you know, by allowing a certain portion of our assets to recover as the economy recovers, as the stock market or the real estate market, or anything that has sold off that still retains a value…that’s the key, right? If a stock is selling off because that’s a business plan that’s not going to work anymore, you know, it was overvalued and now the demand has gone down, some people might say that…Like, Facebook lost participants over the last few months. Less users. That’s the right terminology there.

Clark: Yeah. Less users.

Roger: So if I have less users, there’s less value here and the stock goes down. Okay? Will those users come back, and the stock come back? Who knows, right? In a way, Facebook’s kind of a fashion, if you will. Large chunks of the population have gone off to Snapchat, or Instagram, or TikTok, or wherever. Okay? It’s kind of like a fashion. And this is not necessarily in fashion. Will we know? We won’t know for a while. But if the user base continues to shrink, I would expect their share price could continue to shrink. Does that make sense?

Clark: All right. It makes sense.

Roger: So, just because it’s on sale doesn’t mean it’s worth buying. You know, the grocery stores put meat that starts to brown, manager special, right? That doesn’t mean it’s necessarily a great buy for you. It is less expensive and it still is, you know, a steak. But, you know, it may not be what you’re looking for for dinner, right? Anyways, it’s just a way of saying that if we have that nice balance when we get to retirement of things that are in dollars to begin with, even if I’m not earning a rate of return because whatever, interest rates are low or…my buying power goes up because I have dollars.

I found out years later, my grandfather, who became a fairly wealthy person in the ’30s, was able to buy Manhattan real estate. Because he was scared of the stock market, he just saved dollars, and he used…In fact, it’s a strategy that we still use with folks today to accumulate wealth in a tax advantage circumstance where your money’s in cash and you’re earning a very reasonable rate of return. And he turned around one day and he said, “You know, I can buy these real estate assets here in Manhattan for 35, 40 cents on the dollar.” So he went out and made, you know, lowball bids, and people were desperate enough to take his money because he had dollars.

And of course, recessions, just like inflation, doesn’t last forever. When the recession was over, the depression was over, post-war era, values went up, people came back. We saw, you know, the price of real estate going up and up, and he did extremely well because he bought low and he was able to sell high.

Clark: There you go.

Roger: But in the meantime, he was prepared. He had…So, if you’re in the accumulation phase of life, you know, somebody in their 30s, 40s, even 50s, you’re looking for that kind of growth when odds are you’re going to see it, right, where we had risk a year ago because things were so highly valued towards the end of last year, and we talked about it and talked about it. Today, they’re cheaper. So, your downside, even if we go down further from here, is much reduced.

Clark: Very interesting. So, Roger, what is a good way to keep this conversation going with your team? Someone’s thinking about maybe what stage they’re in, or what’s coming up, or how they’re trying to protect, you know, the unknown? What’s the next step for somebody?

Roger: Well, we always want to make educated guesses. Be clear on what you’re trying to accomplish and when. Last year we did a five-part series towards the end of the year and then at the beginning of this year on how to retire in uncertain times. And certainly, where we have a risk of either recession or inflation, right? The Fed over-raises interest rates, and suddenly nobody can afford to buy anything and we get thrown into a recession. That’s what a lot of folks are talking about now. That’s why the clients have been calling me.

You know, it’s not that they think inflation’s going to be around a long time. It might be. Who knows? But what the Fed is doing is going to cause a recession, and how will that affect me? So, right now, it’s a great time to make rational decisions about things that are on sale. So don’t chase markets. I mean, it always feels good to buy something that’s going up as long as it continues to go up. But if you stop and think logically, I’m asking for everything to work perfectly at those higher valuations like we saw at the end of last year, like we’re seeing in certain real estate sectors currently, where the prices are just frankly too high, and we’re going to run out of buyers. If we run out of buyers, what happens? Prices are going to come down to find more buyers.

So, I want to encourage people to not turn their back on cash. If you don’t have cash, then, you know, maybe this isn’t the recession for you to make profits out of. Maybe the next one. Start putting a strategy together to get ready for it, because it’s common. You know, we have good times and bad times. Twas ever thus, will always be that way. And, you know, there’s that whole saying, “You want to make hay when the sun shines.” Well, because you can’t make it in the darkness.

Clark: Yep. No. You can’t get to it in the winter.

Roger: And that luck…And this is one of my favorite. Luck is when opportunity meets preparedness. Luck is when opportunity meets preparedness. So, if an opportunity came along like it did for my grandfather, and you had a bunch of cash to buy great assets for pennies on the dollar…He wasn’t lucky. He was ready.

Clark: That’s good. What a great note to end on. Thank you, Roger. As always, I really enjoyed it, and I’m looking forward to your next conversation.

Roger: Excellent. See you then.

Clark: Roger L. Gainer. RICP, CHFC, California insurance license number 0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. Roger L. Gainer is an investment advisor representative providing advisory services through HFIS, Inc, a registered investment advisor. Gainer Financial Insurance Services, Inc is not owned or affiliated with HFIS, Inc and operates independently. The contents herein are the opinion of the speaker, and should not be considered as tax or legal advice. This podcast should not be considered a solicitation for investing or advisory services. Strategies mentioned are not a recommendation to implement or purchase those products or strategies. You should contact your own advisors as to the appropriateness for your specific situation.