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The following is a transcript of Episode #57 of the Retire Happy podcast with Roger Gainer.
All episodes of the podcast can be found at Apple Podcasts, Google Podcasts, and Spotify.
Roger: Sometimes the best offense is a great defense. This is not a time to be super aggressive. Things that are gonna work have to have solid fundamentals. Businesses that are gonna succeed, that are being formed right now aren\’t gonna be goofy ideas. They\’re gonna be solid products, solid ideas that make people\’s lives better.
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. In this episode, Roger describes the year 2022 as \”The End of an Era.\”
On previous episodes on this show, Roger\’s been talking about his thoughts about where things might be shaping up, and on this episode, he confirms many of those predictions. So, what does this all mean for you and your strategies to retire happy? There\’s a lot to cover, so let\’s dive in. And don\’t forget to head on over to gainerfinancial.com for more content like this. Enjoy the show. Alrighty, Roger, it is so nice to be reconnected. How are you doing?
Roger: Doing well. And yourself, Clark?
Clark: I\’m doing great. I\’m doing great. We actually have an interesting episode planned for today. And looking at the year 2022, you\’ve described this as a watershed year for a variety of reasons. And I want to hear a couple of those reasons, and I especially want to hear, how does this impact the future where, you know, someone might be listening to this, you know, a couple months into 2023, maybe beyond. We wanna keep this as evergreen as possible and learn from the lessons of the year 2022. But why do you use that word, watershed? And then why does this matter for the future for folks who are trying to retire happy?
Roger: Well, it\’s a great question. Years from now, maybe 2, 3 years, maybe 10 years, we\’re gonna look back just like we look back at 2008 as a watershed year for the mortgage industry. A lot of stuff changed, right? Up until now, we\’ve lived for the last 40 years with low inflation and low-interest rates. In fact, interest rates have been going down steadily until they bottomed in March of 2020 for 40 years. So, back, you know, when we could get money market rates in 18%, 19% in 1980, those came down to where in, you know, 2020, 2021, you were lucky if you got 0.25% or 0.5% on a money market fund. The other part is we had low inflation. So, the Federal Reserve could seemingly do whatever and print money, and it didn\’t create inflation and we could spend money and run up deficits and it didn\’t create inflation.
Clark: See, these last couple years when we\’ve been talking, I\’ve heard you hint at things like there\’s a lot of things happening right now, but it\’s gonna catch up to us. Is that accurate?
Roger: That\’s absolutely accurate. I\’m glad you noticed.
Clark: Well, yeah, of course.
Roger: You could see the forces gathering, you know? So, the prescription, every time something\’s gone bad in the last 40 years, the Federal Reserve cuts interest rates and they print a bunch of money. And it\’s gotten so bloated that they made a commitment when inflation started to jump earlier this year, that, A, we\’re gonna keep raising interest rates. We\’re not gonna stop until we raise them enough and we\’re sure that we\’ve beaten inflation. Okay.
They\’ve been very clear about that intent even though people keep thinking, \”Oh, oh, the report got a little better. Maybe they\’ll stop.\” They\’re not gonna stop. They\’re not gonna stop anytime soon. They\’re going to keep rising, increasing those interest rates. And a lot of people, you know, I read all kinds of stuff, probably too much, are thinking, \”Okay.\” And as soon as they see inflation going down, they\’re gonna stop raising \’em and they\’ll start cutting them, and they\’ve made it very clear they\’re not gonna do that.
The other thing that has made money, what they so-called easy money, is they keep printing more of it, right? I mean, when they sent out those trillions of dollars when COVID first hit, that money was essentially created, right? It just added cash to the system. So, we were awash in liquidity, trillions of dollars of money being spent on roads and sent to each individual. You got some checks over those couple of years, right?
Clark: That\’s right.
Roger: We all did.
Clark: Yep.
Roger: Just about. And so, you know, that money was used to make investments, to buy more properties, to bid up the price of stocks, etc., etc. And so all of that, and it was easy to borrow, so people were buying things because, you know, I couldn\’t just buy a CD, I was not even gonna make 1%. So, I had to buy stocks, I had to buy real estate, I had to invest in this, that, or the other thing. And there were lots and lots of strategies that were created that really counted on these low interest rates and low inflation.
And now since that\’s changed quickly, we\’re seeing all kinds of changes. For example, you know, banks historically would underwrite a bond issue for a company, for example. We just saw this with Elon Musk buying Twitter. There were a bunch of banks that said, \”Yeah, we\’ll help finance that purchase.\” And those banks usually turn around and sell those loans off their books. Okay? They don\’t wanna keep \’em, they wanna create \’em and then turn around and sell \’em, and then they make a profit by doing that.
Well, because interest rates are going up and the value of bonds goes down when that happens, they haven\’t been able to sell those bonds. So, the banks are kind of stuck with them and they\’re losing value because interest rates continue to go up. Okay. And if Twitter goes into bankruptcy, there\’s some talk about that.
Clark: I\’ve been hearing that. Yeah.
Roger: They may not even pay those bonds back at all. They may go into bankruptcy just to get rid of that debt. Okay. So, that\’s why they\’re not able to sell it, because people are worried like, \”What is this guy gonna do next?\” Now, that\’s not an isolated case. Then you look at a lot of commercial property. You know, we\’ve talked before about how values of real estate have been going up, and up, and up. They\’ve gone up by hundreds of percent just in the last 10, 12 years in this country and in other parts of the world even more. And, of course, a lot of that\’s based on people borrowing money to buy those properties. Now it\’s harder to qualify for a loan and you\’re paying a whole bunch more.
Clark: Yeah. It\’s a lot more… It\’s like triple the interest rate.
Roger: Right.
Clark: Right?
Roger: They\’re not gonna be… They\’ll double the interest rate.
Clark: Double?
Roger: You know, a year ago, yeah, you could borrow a 30-year fixed mortgage for 33%, and now it\’s a little over 6%.
Clark: Okay. Okay. Those are a lot of shifts you\’re describing here.
Roger: So, there\’s a lot of shifts, right? So, affordability, we\’re hearing stories from developers that are selling brand new homes and where, you know, they take deposits while the house is being built and they set up the financing, and then when the house is completed, these people have to go close the deal. And because interest rates have gone up, a lot of people can\’t qualify for those mortgages anymore, so they\’re just walking away from the deals. You know, you\’re seeing this all over the place where deals are falling apart.
So, it\’s slowing down economic activity. That\’s why a lot of people are talking about a recession. But what I\’m talking about is, you know, that saying that says past performance is no guarantee of future results. So, a lot of those businesses that have done very, very well because of low interest rates and easy money and low inflation, so they could go out and borrow money short-term, lend it out long-term and make the spread in between, now those short-term loans are coming due, they have to refinance them. The rates are much, much higher, and suddenly, they\’re underwater on those deals.
Banks are notorious for borrowing short and lending long. So, you know, that puts a squeeze. You\’ve made this long-term commitment at 3%, and now you\’re paying 4% on your short-term money that you use to lend that money out and if you default, then all kinds of bad things start to happen.
Clark: So, when you think about all this, when are you finding yourself wanting to encourage your clients with? What do you think all this is gonna translate to you?
Roger: Well, I think, you know, we don\’t know for sure, but I know I\’ve had conversations with a lot of folks in the last two, three years encouraging them maybe to sell their houses, but not by another one. Wait for the dust to settle, let those prices go back down. I think in many parts of the country, we\’re gonna see real estate valuations stop going up, and, in many cases, go down.
I can tell you, according to Zillow, my house has dropped over 20% in value since February of this year. That doesn\’t mean it has, and I\’m not selling, so I don\’t really care. But that\’s some indication of what the analytics are saying, you know, valuations in real estate are. And I\’m in one of the most desirable areas of the country that has very, very little in the way of inventory, but even here, it\’s going down. I\’m reading about some states that went way, way up in the Sunbelt, like the Phoenix area where we\’re seeing valuations drop dramatically. In New Zealand. I mean, we\’re seeing this stuff all over the world, and that\’s just one symptom. We\’ve seen a real debacle in many tech stocks this year.
Clark: It\’s been a pretty bloodbath situation with a lot of tech stocks, right?
Roger: Right. We\’ve all seen that.
Clark: And you would talk about FANG, you would talk about the FANG stocks, like, it would pretty much outperform traditionally, historically.
Roger: Well, then what my concern was is the FANG stocks were so concentrated and so overvalued, and we talked about this on more than one occasion, that when they came down, they were gonna come down hard. And that\’s what we\’ve seen. I mean, and then you can throw in a couple of others like Microsoft, and Tesla, and companies like that, you know, who dropped 40%, 50%, 60%-plus in less than a year. So, that\’s what I\’m talking about.
And people…you know, I know people like, \”Oh, I don\’t wanna sell it now. I would lose money.\” Well, you didn\’t make money before because you didn\’t sell then. And sometimes, you know, you can make money by taking a loss, but mostly, you can avoid losing more money by selling and recognizing the loss and maybe moving somewhere else. Because a lot of these companies, a lot of these businesses will never, ever be valued again anywhere near what they were valued just a year ago, and they\’re just not going to.
Clark: Definitely. Wow.
Roger: That\’s what I mean by this is the end of an era, this is a watershed time where different businesses will lead with different capital structures than what has worked out in the past. And so, if you are stuck following 10-year-old strategies, and you\’d be surprised, maybe not, how many people are in that boat where they, you know, everything you look at what they\’re invested in, and it\’s all the stuff that they bought 15 years ago and never even looked at again. And now those companies are gone, or, you know… Companies come and go.
I think I\’ve mentioned before that the S&P 500 was first published, I believe, it was 1957, and only about 80-some-odd stocks that were in the S&P 500 in 1957 are still in the S&P 500 and only about 130 of those companies even exist anymore out of those 500 companies. So, yeah, the market goes up, but the companies come and go, and that\’s something to always remember.
The economic cycles move, and that\’s why they say past performance is no guarantee of future results. So, I always get a kick out of, you know, when you turn on the radio and somebody goes, \”Oh yeah, you know, we\’re targeting 10% to 12% because that\’s what this did for the last 10 years.\” Well, I don\’t care about that. Let\’s look forward at how likely it is to do that in the future, you know? And then we have societal changes. Would you wanna buy office buildings right now? Would you invest in office space?
Clark: Yeah, no, definitely not. Just because the hybrid work, it\’s a whole…I mean, that\’s been completely changed.
Roger: That\’s right. It\’s a whole new thing. So, here in San Francisco, they\’ve got, like, 25% vacancy rate.
Clark: Wow.
Roger: And that really understates how bad the vacancy rate is. The entire financial district that I worked in for 13-1/2 years my career, restaurants are closing, gyms are closing, you know, the…because people aren\’t going to the office just like you just said. So, we\’re gonna start hearing about office buildings being repurposed for housing, but they have to get cheap enough to be able to do that because it costs money to convert the properties.
Shopping centers, we\’re starting to see big regional shopping centers because of Amazon. You know, some of \’em are being bought up and repurposed and turned into multi-use real estate developments with apartments, and retail, and office, and parks, and all kinds of stuff. We got a big old shopping center not far that they\’re doing that with. So, you\’re gonna start to see people looking at things differently. And usually, where there\’s carnage, that\’s where the opportunities will be created. Does that make sense?
Clark: Wow. Wow. We\’ve also talked often about emotion and how that influences people when it comes to all of this. And this seems like the most ripe time for emotion to come into play with things getting flipped upside down, going through the watershed year. How does that…?
Roger: That\’s why scams are gonna increase too.
Clark: Really? What kind of scams?
Roger: Yeah. All kinds of, and you name it. Come on, if you get email or have a phone, you\’ve been…somebody\’s tried to scam you in the last 24 to 48 hours. I mean, you know, it can be phishing emails, it can…you know, something from your bank. It can be somebody calling and telling you we\’re gonna shut your power off. So, you gotta get…send us, you know, a payment to the power company, say, \”Here\’s a link we\’ll send you to your phone and you can bring your bill current.\” Well, you know, and stuff like that. And people panic and they go ahead and do these things. If they didn\’t, the scammers would stop.
But when economic times get difficult, scams go up. It\’s just that simple. Fraud and scams increase. And when people are uncertain or nervous and they\’re worried and suddenly the siren song of easy money, you know, makes you wanna believe that story. So, you know, there\’ll be societal changes. We\’re already seeing, you know, the last 10 years kind of an acceleration of the elimination of our middle class. And that also is an extension of low interest rates, believe it or not, because middle-class folks don\’t wanna necessarily speculate in the stock market, but they\’ve been forced to.
So, they\’re very uncomfortable. They don\’t wanna lose money. But you couldn\’t go out and buy CDs. Well, you know, I had a client today who\’s interested in picking up a CD and we were able to get him something that works exactly like a CD, guaranteed interest rate, guaranteed principle 4.8% for the next 3 years. And, you know, he\’s thrilled because he just doesn\’t want his money in mutual funds and things like that going up and down. And the bank wasn\’t paying him much and his retirement plan was only offering him 3%. And so, we were able to get him, you know, almost 60% more interest. So, that\’s pretty cool.
Clark: Yeah, that\’s huge. So, there are options. There are ways to kind of…
Roger: There\’s gonna be other… Oh, yeah, there\’s always options. Nothing\’s bad for everything. Okay? 2009 was not bad for everybody. Everybody did not lose their job, you know, yeah, unemployment hit 14% and it was really bad. And if it was your job, unemployment was 100% for you. But at the end of the day, that meant 86% of the people were still working.
Clark: That\’s an optimistic way to look at it.
Roger: Well, this is the whole idea of past performance, you know, and I\’ve spent the last 18 months looking forward and trying to figure out, because I\’ve seen this change coming, what are the strategies? And if, you know, any of our listeners want to talk about options and alternatives that are gonna work going forward, you know, call the office, go to our website at www.gainerfinancial.com, and ask to set up a meeting. I\’m happy to talk to people. I\’m not gonna put it out on the airwaves here.
But I\’ve done a lot of research and, you know, my clients have made it through this year. Some have even made money, some made some pretty good money in a couple of investments, but we\’ve had nobody that lost 20%, 30%, 40%, 50% in the things that we\’re doing, nobody. The most accounts have been up slightly down slightly or stayed at zero. And, you know, that\’s the best we can hope for in this kind of upheaval. But we\’re well positioned for, you know, when those recoveries come and we continue to look for things that are gonna benefit from the upheaval. It\’s just that simple.
So, I wanna encourage people not to sit around and wait for free money to come back. Don\’t think that we\’re gonna see 3% mortgages again anytime soon. Maybe never. I mean, that was the lowest mortgage rates in history. I don\’t think we\’re gonna see the 10-year bond back, you know, at 1% at least in my lifetime, probably not in yours either.
Clark: Wow.
Roger: Since, you know, for the vast majority of the last 100 years, the 10-year treasury interest rate has been between 4% and 7%. Those are… We\’re just coming back to normal interest rates now. It feels funny because we\’ve been in this distorted situation, arguably, for so many years.
Clark: Man. Well, you know, I think that\’s a good place to end, with that optimism that you are sharing, that not all things are bad. There\’s gonna be… We\’ve seen some challenges. We\’ve seen challenges like this before, and there are ways to navigate this.
Roger: Absolutely. But it\’s this time, the difference is going forward, the background is gonna be very different. So, we\’re gonna have a different set of winners over the next 10 years than we had in the last 10. And that\’s what I want people to understand. It\’s really time to sit down, take a look at how you\’re invested, where are you invested, what are you anticipating for those investments, and then to reposition accordingly. Get down with your advisors, and if you\’re not sure what to do, hey, you can give us a call, of course. We\’re not gonna turn you away. But I can\’t encourage people enough to take a fresh look at things right now because as Dylan once said, the times they are, are changing.
Clark: Roger, thank you for another great conversation. Always appreciate your time.
Roger: Hey, it\’s my pleasure. I hope our listeners got a little something out of it today. You know, sometimes the best offense is a great defense, and now it\’s a good time to make sure that defense is in place.
Clark: Roger L. Gainer, RICP, ChFC, California Insurance License number 0754849, is licensed to sell insurance and annuity products in California, Arizona, Oregon, Washington State, Tennessee, and Georgia. Roger L. Gainer is an investment advisor representative providing advisory services through HFIS, Inc., a registered investment advisor.
Gainer Financial and Insurance Services, Inc. is not owned by 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.
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