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Roger: So what do you do? Do you freeze? Do you become a deer in the headlights and you just look and hope that that car doesn\’t hit you leave everything the way it is? Well, no. The message I was trying to get across is this summer, the market is giving us an opportunity to reposition.
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. Many people are nervous about investing in the stock market and it can be hard to know if the reward is worth the risk. At the same time, moving over to cash can be difficult because you don\’t make additional money like you might with other assets. On today\’s episode, Roger, we\’ll talk about some alternative assets and lower risk investments that can help you get to a defensive position and reduce your exposure to risk. As always, for more content like this, head on over to GainerFinancial.com enjoy the show,
Roger, I\’m so happy we\’re back on the line together because there\’s been some dialogue and feedback you\’ve been hearing from our last podcast. Your last blog posts you just released about concept of cash and what do you do right now if there\’s uncertainty and I\’m really eager to jump back into this, not a part two, but really just continue the conversation and go a bit deeper and to what we do when there is this uncertainty and especially when things have been going so well lately in the stock market in so much. But let how we just kind of continue the dialogue. How\’s that sound?
Roger: Well that sounds good. It\’s been a very interesting response to my last podcast and blog post. What are you hearing from people? Well, a lot of people are just scared to death and that was not my intention. It\’s not ecstatic or totally depressed and there\’s no in between. What I was trying to get across to folks is that valuations are incredibly rich in a number of markets and unfortunately they happen to be the biggest markets out there. So when we look at stock market valuations by virtually any longterm measurement, stocks are incredibly expensive right now. So yeah, we\’re hitting some all time highs. We\’re kind of off the all time highs right at the moment, but it\’s reacting more to headline news. So we saw a rally last week because, oh, we\’re going to talk to the Chinese. All right, that doesn\’t mean we\’re going to get anything done with the Chinese.
We\’re just going to talk to them and whether or not anything gets done. But when markets want to go up, people interpret everything is good news and when people are depressed, the same stuff is bad news. So if this was 10 years ago and we were back in 2000 and and we were announcing trade talks with the Chinese, the market would probably have gone down more because people said, Oh God, you know the Chinese are just whatever. And people just tend to look at everything negatively when markets are going down and put on the rose colored glasses when markets are going up. But you know, you look at how low interest rates are, for example, in the bond market interest rates or the price of money, and if interest rates are really, really low, that means that bonds have rallied, right? If bonds go up, the yield goes down.
If the yield goes up, the value of bonds goes down. We\’ve talked about that with bond funds before. And so you know, you look at valuations today and then you look around at those interest rates and you say, well, what\’s the driver? What could push interest rates lower? Well, people being very afraid of the stock market, people being afraid of the economy turning down or recession, that sort of thing would tend to push down interest rates for a little while. But we have this issue and it\’s these record deficits that we\’re starting to experience. So just last week we had that the Treasury Department announced that it was going to borrow over $420 billion. That\’s with a B, just this quarter. Now, just a few short years ago, that was the annual deficit, not one fourth of the annual deficit. So that puts us on a pace for one point $6 trillion annual deficits.
That\’s ridiculous. It\’s not sustainable. I know a lot of people think, well, we can just borrow our way out of everything. That\’s only if we have willing lenders and so with the federal government looking at a one point $6 trillion deficit, it\’s amazing. And how fast these deficits have gone up since the tax cut happened in 2017 and that\’s because we increased spending at the same time. You know that if you take a pay cut, you don\’t go out and buy a bigger house. Right. A more fancy car. That doesn\’t make any sense, but that\’s exactly what we have done as a country. We\’re basically just assuming that we can spend indiscriminantly. A week ago we saw congress suspend the debt ceiling. Eventually the folks that lend us money, the international community that\’s been propping up our economy, they may just say, you know, you guys don\’t show any financial responsibility.
This is how third world countries get into trouble. They over borrow, they don\’t expand their economy enough to pay the money back and they get into trouble and interest rates go up and the economy goes down and into recession. I mean, it\’s not unknown for this to happen to even strong economies. It happens regularly with weaker economies, but we are certainly weakening the underpinnings of our economy. So what does that mean for the individual? Right? Cause you\’ve got all these record deficits, you\’ve got trillions of dollars in an unprecedented amount of corporate debt that\’s going to be refinanced in the next five years. That competition, despite what the Fed does, could push up interest rates all by itself. And then we could end up back where we were during the Nixon administration in something called stagflation. So getting back to your question, because I have digressed, obviously people are nervous, they\’re nervous after what I wrote in our last discussion.
So what do you do? Do you freeze? Do you become a deer in the headlights and you just look and hope that that car doesn\’t hit you? Do you just leave everything the way it is? We\’ll know. The message I was trying to get across is this summer, the market is giving us an opportunity to reposition. So whether it\’s real estate or bonds or stocks, if you\’re in one of these vulnerable markets, it\’s time to look at what the values are, determine if it\’s as a good time to take some profits. I know it\’s funny when people say, I don\’t want to take profits. I\’ll have to pay taxes. Well, you can wait till it goes down. Take a loss and get a write off. That\’s not near as much fun as making money and taking a profit. Right. One of the first things I was taught in the old days when I was a broker is one of these goofy little sayings.
Nobody ever lost money taking a profit, but people forget. They say, oh, it\’s going to go higher. I want more, and they get greedy, or, oh, it\’s slipping, but it\’s going to come back, so I\’ll hang on and watch it go to further and further down. We talked about rotation last time that certain kinds of companies are getting attention from professional money managers. You can hang in these old trades, Facebook and apple and all that stuff, but just maybe it\’s time to lighten up. Some of those positions, you can still keep some money in that trade, but it\’s become a very, very crowded trade. And if you look at the stock market, there\’s fewer and fewer stocks setting new highs even as the market indexes or setting new highs. So how can that happen? It\’s because the s and p 500 the Nasdaq, the Dow Jones industrial average, these are what we call cap weighted indexes.
So you concentrate more and more of the upside price appreciation in fewer and fewer stocks. But because their market capitalization figure goes up when their stock goes up relative to the other stocks that are going down, those stocks have more and more influence over the movement of the index. So the index is become distorted and they\’re really not an indicator of the overall financial health. So I\’m looking at things like the Dow Jones transportation average. I\’m looking at mid cap stocks. I\’m looking at small cap that just frankly aren\’t doing very well at this point in the cycle. So the same thing with real estate. You look around here, we talked about this in some recent blog posts and podcast, the rate of return that people are getting from rents around here in, in northern California, and frankly in most of the state of California, is it worth tying up your money in an illiquid asset to get 3% or less?
Probably not. So if you\’re taking stock of your cash flows, your free cash flow, that would be I own a property and after I pay the property tax and the insurance and the maintenance and the utility bills and anything else I have to pay. How much net cash flow am I really getting? And you know, if I\’ve owed that property for 30 years, I\’m probably getting no tax shelter. And my rate of return based on the current value of the property is quite likely less than 4% which historically people just don\’t buy these properties at that. But there are some people buying, so you might want to think about selling and doing something called a 10 31 exchange into more conservative asset classes. So it\’s not that all real estate is overvalued and it\’s not that all real estate is vulnerable. Think about this, Clark, if you\’re in a city like Atlanta or Nashville or San Francisco or New York, and you\’re a young person working in an up and coming tech related field and making a nice big juicy income, you\’re going to want to live in a nice place, right?
So you\’ll go look for a class, a apartment building. Does that make sense? Okay. But the economy slows down and you get laid off. Can you afford your rent in that class a building anymore? Heck No. But there are niches in residential real estate and income properties that don\’t have that kind of risk. So we look at things like trailer parks. You know, manufactured housing is, is very stable. You\’re dealing with people who have stable income, not fancy, but you know, making money I think has its own sex appeal, if you will, especially when everybody else is losing money. So we\’re looking for those little pockets around the economy where if we do see a significant downturn in the next two or three years, like I said, it could start as early as this fall. But it\’s common. I\’m sitting here talking to you, Clark, it\’s coming. And so you\’ve just repositioned to where first and foremost you won\’t get hurt if that happens or the amount of pain you receive will be very, very minor.
But moving to cash and making nothing that\’s uh, that can be a difficult position as well because you might need to make a rate of return to hit your financial objectives. So, you know, one of the things we do with clients that want to be in cash as we explore alternative for that cash, where instead of earning less than 1% and the savings or money market fund, there are alternative asset classes that we\’re using instead of savings accounts. And instead of bonds, frankly, that are paying a three, 4%, 5%, they\’re liquid. You can get at your money, your principal is guaranteed. And, uh, you know, at least you\’re getting compensated while you\’re waiting to use that cash on some bargains. You know, the funny thing about bargains is people have got a Nordstrom\’s when there\’s a sale, but they sure won\’t go to Wall Street when there is the, the fear is too high. People don\’t like to buy when it\’s on sale. But one of the things we\’ve been doing with clients for the last year and a half or so, two years is raising cash because there will be easy money to be made. It\’ll be hard emotionally to make that money, but it will be lower risk. You know, the s and p 500, around 3000 it sure would be more fun to be buying stocks with the s and p 500 and 1500 wouldn\’t, don\’t you think?
Clark: Right? Certainly. So I\’ve heard you say that more or less people will want to borrow money all at the same time. And I\’ve kind of heard you talk a little bit about how that could impact stocks, bonds, real estate. I\’d like to, can I continue this around? Just what happens when people want to borrow money all at the same time. And how does that influence the way you\’re thinking about the future?
Roger: Well, that\’s a great question. I think it\’s important for people to understand this. There\’s supply and demand and everything. We had a bad avocado crop here in California this year. And with the trade disruptions in Mexico, what are we seeing? We\’ve seen the price of Avocados go up dramatically. Now, it doesn\’t matter if it\’s Avocados or bonds, there\’s this supply and demand element to changes in prices. It really doesn\’t matter if there\’s more buyers than sellers. Prices go up if there\’s more sellers than buyers, prices go down. So if I\’m refinancing a bond or I\’m the federal government and I\’ve got to finance my deficit, I\’m a borrower. Borrowers are buyers. If I have money to buy a bond, I\’m a lender. Right? Right. So if the number of people competing to borrow money buyers outweigh the number of sellers, people willing to lend money, what\’s going to happen to prices?
They\’re going to go up, right? Right. Okay. Now, can I guarantee that? Of course not. But logic tells us when we have that kind of imbalance with more people trying to buy a relatively finite amount of supply, there\’s going to be a tendency for prices to change. And if the price of money goes up, that means the interest rate goes up. And when interest rates go up, there\’s an adjustment period. Companies have to adjust their models, they have to adjust their research and development and business plans because the cost of money has gotten higher. It eats into their cashflow. And it\’s the same thing for the federal government. If the price of money goes up and they keep refinancing this huge amount of outstanding bonds that we have out there, the debt service, the amount of money they pay an interest. If I pay money in interest, I don\’t have money to invest in filling potholes or supporting schools or securing the border or whatever kind of government expenses that there are, I\’ll just have less money available to do it.
And so our answer to that in the last several decades is just borrow more money. Right? So what happens to you when you\’re borrowing money to pay off your credit cards? So you take out a new credit card, you get a cash advance to pay off the old credit cards. Is that a deal that can last forever? No, not so much. So that\’s what I mean by prices are very, very high by almost any measure. And getting in a defensive posture means putting yourself in those positions. Figuring out what are the areas of the economy that aren\’t going to get beat up really, really bad in a recession. So that\’s last time we talked about things like consumer, non durables, Proctor and Gamble. People are still going to take a shower. You\’re going to wash your hands, you\’re going to do laundry, you\’re going to wash dishes, you\’re going to need some deodorant, you know? Right.
Clark: And of course we hear about, you know, these different, you know, startups and different folks trying to disrupt some, these large players. However, the end of the day they have the distribution set up. They have. There\’s just a lot of stability. Not going to vanish like a lot of these higher risk places. That makes sense. You
Roger: Exactly. So is it a sexy company? Heck No. Soap isn\’t sexy. Wow. Some people think soap is sexy, but
Clark: So it makes money. If it makes money and sexy. Right.
Roger: There you go. You know people are going to still shave so you\’re going to buy more razorblades. All that kind of stuff tends to continue. These are consumable items that we will continue to consume. You know, we\’re going to continue to eat. So there are these niche areas. One of the real estate asset classes on the retail side that I\’m pretty comfortable with at grocery stores. People are still going to go to their local grocery store. The Internet\’s not going to kill your local grocery store if you order delivery from Safeway or whole foods. Where does that food come from? It doesn\’t come from a warehouse. It comes from your local, whole foods or Safeway, you know? That\’s the only way they can deliver fresh. Even a Walmart who\’s delivering their advertising like crazy around here to deliver groceries. You know and that talk about how fresh it is.
Well, it\’s gotta come from your local Walmart. It can\’t come from the next state over a hundred miles away. You know that stuff sits in the back of a hot van. It\’s going to be dead by the time it gets to the consumer, so there are these little niche places. Storage units are really wonderful housing. These are just a few of the things that we\’re looking at these days. Some alternative cash strategies and then very, very conservative kind of old line, big cap, boring old stocks that tend to be stores of value and tend to compensate you with things like dividends along the way. It\’s not a lot of sex appeal, but this is a time to reduce your exposure to risk. I can\’t say that any clearer to our listeners and the opportunity, how long it\’ll be here to do this. I really don\’t know. Today everybody is tuned into the Federal Reserve and if the Federal Reserve doesn\’t cut rates, I think people are going to be very upset if the Federal Reserve cuts rates.
A lot of that is already priced into the market. People might take profits. I mean we could literally see this market get what it wants out of the Federal Reserve theoretically and still be unhappy. This is the kind of turning points that we look for and we try to anticipate and position ourselves. It\’s not that we want to get the very top or the very bottom. That\’s kind of a fool\’s game. We just want to catch the biggest chunk of the middle, so locking in those profits. Now I would really encourage our listeners to sit down with their advisors and if their advisors look at you and say, well you know you should always be invested. You don\’t want to reduce your exposure to the stock market at this moment because you know it always comes back. I\’ve got plenty of statistics and history and charts, anybody that\’s listening get a hold of us through the website at GainerFinancial.com and the contact us and I\’d be happy to share all this data that frankly underscores really where we are sitting here in terms of valuation and risk.
Clark: Love it. Well, that is a great way to wrap this up. And of course a thought organizer, something we regularly talk about and make sure we always want to plug that is the free assessment anyone can take and they get that from your website and it just helps them really think through where are your priorities. Take a lay of the land and then that will then help guide the conversation with you and your team.
Roger: Well, exactly. Or even the inner conversation with yourself. If you nervous about calling us once you know what that money is for, you know, is it going to send your kid to college in two years? Is it going to fund your retirement and three or five years or in 20 years when you know what the money is for, it helps you to make better decisions, especially under stressful conditions like we have right now. So that\’s why I do encourage people to download the thought organizer and go through the exercise. It only takes about 10 minutes and it\’ll help clarify your thinking about why are we doing this? Why am I saving money? Why am I investing? What\’s the point of all of that? I mean, after all, isn\’t money more fun than saving money? Right. Good stuff. And that\’s the other thing to remember. I\’ve seen it like back in 2008 people were like, wow, I\’m just going to lose money anyways. I might as well just spend it. What\’s the point in saving anyhow, please, whoever\’s listening to this do not adopt that mentality. It\’s not gonna serve you well. Alrighty Roger, as always, thank you for taking the time. I always enjoy these and glad we can kind of keep that conversation going.
Clark: Thank you. Roger L. Gainer, RICP®, ChFC®, California Insurance Lic #0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, Nevada, and Oregon. 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 by or affiliated with HFIS Inc. and operates independently.
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