Archive for February, 2015

POND: ACHIEVABLE RETIREMENT PLANNING TRANSCRIPT

February 20, 2015

Despite widespread warnings to the contrary, veteran financial planner and investment advisor Jonathan Pond believes no matter what your age or circumstances you can take steps to get your financial house in order and achieve a comfortable retirement.

Jonathan Pond Author and Financial Advisor

CONSUELO MACK: This week on WEALTHTRACK, some call him “America’s financial planner”. Jonathan Pond has been a fixture on Public Television over the years with his seminars on getting your financial house in order. This week he joins us with his “Smart Planner” approach to building a secure retirement. Personal finance fixer Jonathan Pond is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. How prepared are you, or your loved ones and friends for retirement? We have all heard about the impending retirement crisis. We recently devoted a program to it with Financial Thought Leader, Charles Ellis who co- authored a short and excellent book on the topic titled Falling Short: The Coming Retirement Crisis and What to Do About It.

It provides both a history of how retirement benefits have evolved and now devolved in this country, as well as providing some straightforward remedies for both the nation and individuals. But how critical is the health of Americans approaching or now in retirement? Headlines to the contrary some recent research suggests that the dire warnings are overstated for the general population.

There are some segments in serious trouble.

Not surprisingly the biggest differentiator between the haves and have nots is work history. 73% of people without access to employer-sponsored retirement plans have less than $1,000 in savings and investments. A sporadic work record also means lower Social Security benefits, or none at all for those with less than 10 years employment. However lower income Americans who have been working steadily typically can maintain their standard of living because of Social Security and Medicare.

For middle to upper income Americans who have a higher standard of living that is not always a realistic goal. A rule of thumb has been that retirees should aim to replace 75% of their average annual pre-retirement income.

However, many of them are living on less.

Rowe price surveyed recent retirees with 401ks and median household assets of close to $500,000. The average couple was living on 66% of their pre-retirement income. 85% said they didn’t need to spend as much as they did before they retired and 89% said they were somewhat or very satisfied with retirement so far.

This week’s guest has spent his entire professional career helping Americans prepare for retirement. He is very well known to Public Television audiences.

He is Jonathan Pond, a financial planner, Registered Investment Advisor, prolific author, and host of 23 prime-time Public Television specials. His customized financial review reports have been among the most popular self-help thank-you gifts in Public Television history.

His most recent product is Smart Planner, a comprehensive financial online planning tool for the general public, which he says is the culmination of 25 years of work refining all of those financial review reports. I started the interview by asking Pond how concerned he is about the financial health of Americans.

JONATHAN POND: Less concerned than many. I think people are tending to know what they need to do more than they have in the past.

CONSUELO MACK: Really?

JONATHAN POND: They’re taking action, and I have found through some of the work I’ve done that you don’t need a huge amount of money to be able to retire comfortably. If you can have about $200,000 saved … Now that’s a lot of money for many people, but it’s not like some publications say that if you have $5 million, you’re only beer-and-pretzels rich. Imagine how that makes people feel. But if you have $200,000 saved, you pay off your mortgage, arguably other than putting money away for retirement, the most important thing you can do. You’re mortgage free. You have $200,000 saved. You do not collect Social Security early as roughly three quarters of the people are and should not be. You’re not going to have a lavish retirement, but you’re going to have a pretty good retirement, and more and more people are starting to get religion about this. Some of the statistics we’ve compiled indicate that now 50 percent of the people … Now this may be a relatively educated and somewhat affluent cohort, but 50 percent of them are saving more than 10 percent of their income which is one of the key issues. So I’m not sure it’s as bad as many people portray, and part of our role as educators is to show people a path to be able to achieve what they want. There’s nothing to be served by saying, “It’s hopeless for you. You’re 50. You have no savings. What can you do? There’s nothing you can do.” There are a number of things you can do. Delaying retirement. Let me give you a statistic. This has been questioned many times. I’ve shown the math to the people who question it. If you delay retirement by one year and you earn enough just to support yourself…

CONSUELO MACK: Without going into any savings assuming you have some.

JONATHAN POND: Without going into any savings but without contributing to any more retirement plans, one year will increase your lifetime retirement income by 10 percent.

CONSUELO MACK: Wow.

JONATHAN POND: Do that for three years, it’s 25 percent. Do that for five years, it’s 40 percent. People say, “Well, what happens if the market’s down?” It doesn’t matter. I mean, the main issue … I hate to be maudlin about it, but if you work five more years beyond when you had planned to retire, it’s five less years you’re going to have to support yourself in retirement. These make dramatic differences. Delaying retirement can have a tremendous impact on those who aren’t happy with where they are at their normal retirement age, and another aspect of this that I see is quite an interesting trend based upon our data is that now most people expect to retire at 65 and many, 15 or 20 percent, expect to retire later. Ten years ago everybody wanted to retire early. So I think they’re starting to get a little more serious about their financial life, and so I am mildly optimistic about people’s preparedness. Now certainly…

CONSUELO MACK: Compared to most people that I talk to, you are wildly optimistic.

JONATHAN POND: I might be. I might be. I want people to think they can do it and to know they can do it. Certainly many will fall short, but there are things that you can do which are within your control.

CONSUELO MACK: Let me ask you about different age cohorts. So 20 and 30-year-olds, they come to you and say, “What can I do, number one, to pay for my first house? If I’m married, to put my kids through college and to prepare for retirement?” What are the things that a 20 or 30-year-old can do?

JONATHAN POND: The main thing is to prepare for retirement.

CONSUELO MACK: Really.

JONATHAN POND: Contribute as much as you can. Yes, because every year you forego contributing to a retirement plan is a year you can’t make up. It’s use it or lose it with retirements. If you can contribute to a Roth or, for those who are viewing who are parents or grandparents, if you can help your kids out a little bit with Roth IRA contributions or maybe even helping them with their 401(k) and 403(b), that sends an important message to the child about the importance of saving for retirement early. If you can save five, six, seven, eight percent in retirement money starting in your 20s, you will retire in fine fettle at 65. So I think that’s the key issue. Buying a house I think is a major positive in people’s financial lives.

CONSUELO MACK: And this is so interesting because, of course, a lot of people have seen, especially after the real estate bubble burst, that a house is really not necessarily a good investment. It is a place you need to live. Treat it as that, but it’s not a good investment. What’s your view?

JONATHAN POND: I couldn’t disagree more with that, and I was fascinated. I was looking at some statistics again we’ve compiled. Ninety-three percent of the respondents over the past few years either own a home or aspire to own a home, so only seven percent roughly are content being a renter. I mentioned about the issue of paying off your mortgage by the time you retire. If you do that, you’re not going to be at the mercy of a landlord or a lender and it just …

CONSUELO MACK: Or a rent increase or of course taxes go up and everything else.

JONATHAN POND: Precisely, and so those are very desirable. My kids are saying who are in their 20s now, “I’d like to buy a house but I don’t know whether I can afford it.” I say, “Since you’re the preacher’s daughters, you’ve been required to put money into Roth IRAs. The reason for putting the money into a Roth IRA is for a down payment on a house because you can take the money out tax free after five years, and what a great thing to do with your Roth.” I’d rather that they keep it, but if it’s for a down payment on a house, that’s great.

CONSUELO MACK: That’s okay. I’m in my 40s or 50s. What’s the most important things I should be doing?

JONATHAN POND: Well, if you’re a late starter, start to build up your retirement savings. You need to go beyond 10 percent. One thing I talk about a lot which I don’t whether it gets a great response, but I feel strongly about it, and I refer to that as investing in your career. That’s the single best asset you have, and continuing your education, working hard, being a dedicated employee as unusual as that might be these days, can make a difference, a big difference in your financial future. If you want to change careers, make sure that you’re going to be able to thrive in that new career. Don’t throw out years if not decades of experience. An example I like to cite is just because I like sushi doesn’t really qualify me to open a Japanese restaurant as much as I’d like to sometimes to think about it. So it’s the investment in the career and, if you own a home and can afford it, although you want to continue contributing as much as you can to your retirement plans, start making extra payments against the mortgage. It will dramatically shorten the time it takes to pay it off. Don’t add to debt. You’ve really got to get serious about eliminating debt.

CONSUELO MACK: Sixties and seventies.

JONATHAN POND: Well, at that point decisions made with respect to when you’re going to retire, preparing a retirement budget. Not all the statistics we have are positive. Nine out of ten people have not prepared a retirement budget. Maybe their heads are in the sand, although this is interesting. Those that have, have a retirement budget which is only 60 percent of their income, and that’s one thing I hear people say. It’s got to be …

CONSUELO MACK: Sixty percent of their annual income.

JONATHAN POND: Of their annual income is what they feel they can retire comfortably on which I concur.

CONSUELO MACK: You do concur.

JONATHAN POND: I concur with that, and I …

CONSUELO MACK: Without hugely reducing by 40 percent your standard of living.

JONATHAN POND: No, no. Maintaining your standard of living because if you look at Social Security taxes go away. A lot of taxes go away. You may need one less car, the clothing, but you add all that up, and it’s very, very easy to retire on 60 percent of your pre-retirement income, and that’s what people seem to be thinking about based upon our data. But 60s and 70s, one of the key issues at retirement when you finally decide to retire…and we have to remember that many people can’t dictate the time they retire. You have to run your numbers assuming that you may retire involuntarily which 40 percent of the population is compelled to do.

CONSUELO MACK: When you say that 40 percent of the population, there’s a statistic that says that they’re compelled to do because they have to retire at 65 or whatever or they’re losing their job.

JONATHAN POND: No, they’re compelled to retire before they want to.

CONSUELO MACK: I see.

JONATHAN POND: Losing your job but a close second is health issues, your own health issues, and a close third are health issues of a spouse or a parent, compelling you to leave the workforce. That can have in some instances draconian impacts on your retirement prospects, but you’ve got to look at those. You’ve got to run the numbers as they say. The main issue with those who are retired, and I see this as a ticking time bomb for so many retirees, and that is how much you start spending in your first year of retirement. Sometimes in the first year you spend a little extra. You want to take a cruise. You want to get some repairs made on the house, what have you, but if you start a pattern of taking out too much money, that is something that is very, very hard to undo. When you’re retired, cutting back on your expenses is extremely difficult. I’m not sure why, but I see it too much to not want to mention that as a big red flag for retirees.

CONSUELO MACK: It leads me to my next question. What are the biggest mistakes that people make, and obviously that’s one of them, is they’re taking too much money out initially when they retire.

JONATHAN POND: When they retire. Yeah.

CONSUELO MACK: What are some of the other biggest mistakes that we make?

JONATHAN POND: It all boils down to initially saving enough money. That’s certainly a big mistake.

CONSUELO MACK: So not saving enough money is the biggest mistake.

JONATHAN POND: Not saving enough money is the biggest mistake and it’s one that the earlier you start the better, and if you can’t afford to save very much, start small. I don’t care if it’s one percent. Most people sort of like the feeling. There’s an old eastern European saying that the difference between a rich person and a poor person is just two cents. The poor person earns a dollar and spends a dollar one, and the rich person earns a dollar and spends 99 cents. Now it takes a little more than that, but I think the sentiment is right on. It’s so important, and it’s so important to impress this on your children and grandchildren, setting an example even if you haven’t done very well yourself. Set an example for the children.

CONSUELO MACK: Another issue, and I was actually going to bring it up because you mentioned that helping your children and setting the example for your children is one of the things that is most … one of the controversial that you said in the past is that one of the biggest problems that retirees face is rapacious children. Why do you think that is such a big problem? Where are you seeing that?

JONATHAN POND: I would liken this to a national problem because it affects people of all financial circumstances. I use the word rapacious myself because one of the definitions is an animal who simply kills for pleasure, and I see children literally demanding money of their parents and the parents feel so guilty about it, and it’s good to help a kid through a rough spot, but there’s a thin line between that and enabling the children, and I can cite chapter and verse about children who are being supported by their families and can’t afford it. I’ll give you an example, a very sad example. I was doing a Q&A column for AARP. They sent me a letter from a woman. She says, “I don’t have much money. I only have $17,000 left, and I have severe tooth,dental problems, and I’d like to spend that money on that, but my nephews are demanding that I give them that money.”

CONSUELO MACK: Oh my goodness.

JONATHAN POND: And she really felt that there was an obligation to give them that money, and of course I disabused her of that notion and wish I had in words that I would like to have used. It didn’t make it into print, but that’s something to watch out for because I just see it a lot.

CONSUELO MACK: In the old days my grandparents for instance, they did all of their own financial planning, and the only time they brought a professional in really was a lawyer to draw up their wills for instance. So you had 60 percent as you know of stocks, and you had 40 percent bonds, and then you had more bonds as you got older. What’s wrong with that plan today? Does everyone need financial planning advice?

JONATHAN POND: First of all, 60/40 is not the right thing. Your age doesn’t determine the amount of money you invest in stocks. It’s how long you’re going to need the money. A 65-year- old is going to need the money for 30 years so they’re a long-term investor, but that aside I think some people, many people can benefit from a financial planner. Sometimes they’re approaching retirement or maybe they’re younger and they’re just wanting to get their ducks in a row to buy a house at some point. I’m not sure an ongoing relationship is necessary. Sometimes that’s very helpful, but you need to think about the whole area of financial planning. There’s investing. That’s the focal point. That’s the moving target but then you have getting the right kind of insurance at the right price, making sure your estate plan is up to date which is another crisis we have. Forty percent of the people in this country do not have a will, the adults.

CONSUELO MACK: Which is frightening.

JONATHAN POND: Making sure you minimize your taxes, managing your credit before it manages you, preparing for retirements. All of these, Consuelo, are kind of one-time a year things. You make those decisions. You decide you’re going to bump up your savings rate another percent. That’s done. You have an insurance review once a year. That’s done. You get your will done and probably needs to be reviewed every few years, but that’s done. So a lot of these are kind of fixed, and one of the things I’ve been trying to get across is get that lined up and then you can concentrate perhaps on investing, but just get your ducks in a row on those matters once a year and then you should be in pretty good shape. It’s not necessarily an ongoing relationship that you need.

CONSUELO MACK: One of the things that you’ve recommended over the years is to save for retirement even though you have high interest debt because a lot of other people say, of course, pay off your high interest debt first. It’s the most important thing you can do, but you’re saying no. Save simultaneously. Save first.

JONATHAN POND: No, it costs more to save for retirement because you’re letting high interest debt run. You’re paying more interest on it, but the reason is very simple. It relates much to the whole attitude of smart planner, and that is paying off debt is a bummer financially. You feel guilty about it. You wish you could have avoided it in many instances. Saving for the future is really uplifting, and it depends on someone’s situation, but I would say even though it takes longer to pay off the debt, I grant you that, take a third of the money and put it away. Put it into your retirement plan at work or into a Roth IRA or regular IRA. Just do it because you’ll just start to feel some hope for the future. Maybe that’s why I’ve been put on this earth is to give people hope, but it’s a kick. It’s a kick and sometimes I get into trouble. I have something I call the “Reverse keeping up with the Joneses”, and that’s very simple and doesn’t ingratiate me with the people in the government. I know that. “Reverse keeping up with the Joneses” is very simple. We need people to spend in our society, so what our objective is or at least what I consider my disciples is to encourage everybody else to spend. Envy their car and ask when they’re going to get a new car, but you don’t spend. Let them prop up the economy with their spending, but reverse keeping up with the Joneses says you’re not going to keep up with the Joneses.

CONSUELO MACK: That’s great. One investment for a long-term diversified portfolio, a question we ask everyone on WEALTHTRACK at the end of an interview. What’s the one thing we should all do or own in a long-term portfolio?

JONATHAN POND: One thing we should all own is something very innocuous and that would be a growth ETF, hopefully world growth ETF, both domestic and foreign stocks.

CONSUELO MACK: Growth. Why growth versus value or why not just in general ETF?

JONATHAN POND: Growth, you indicate you’re going to hold on to it for a long time. Do something like that. Growth tends to outperform over the long run, and a blend which is a combination of growth and value would certainly be acceptable, but I think that’s the one. If it’s a youngster, then it would be something like a micro cap stock fund or something I put my kids into which is horribly volatile, and that is an emerging markets micro cap stock fund.

CONSUELO MACK: Oh my goodness.

JONATHAN POND: And you talk about … They’re getting a good lesson on how fast you can lose money with that particular investment.

CONSUELO MACK: But long term you think it’ll pay off.

JONATHAN POND: Long term should pay off. Yes. You hold onto something long enough, and it’s going to go up. You do say the one investment, but the key issue is diversification. Picking investments is pretty easy, particularly if you stick with funds, mutual funds and ETFs, but the acid test is diversifying the money appropriately.

CONSUELO MACK: Jonathan Pond, such a treat to have you on WEALTHTRACK.

JONATHAN POND: Well, thank you very much. It’s been a pleasure for me.

CONSUELO MACK:At the close of every WEALTHTRACK we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s action point: review your retirement plan, and if you don’t have one get one. For starters, workers with a plan such as a 401k, IRA or a Defined Benefit or a Defined Contribution Plan are more than twice as likely to be very confident about retirement than those who don’t have a plan. Second, with so many opportunities to get a retirement plan check up on line, it is a no brainer. This week’s guest Jonathan Pond has been refining his Smart Planner online service with Public Television audiences for more than 20 years. Anyone can access it anonymously for a very low fee and either create a plan or check up on the one you have.

Another WEALTHTRACK guest, Sheryl Garrett founded the Garrett Planning Network which provides hourly advice over the phone or in person with a local financial planner vetted by her. You can get a plan or a check up with either one of these services founded and managed by respected professionals on a mission to make planning advice accessible and affordable for the rest of us.

Next week, as Public Television begins its winter fund raising drive we will revisit part one of our exclusive interview with two Financial Thought Leaders Evercore ISI’s star economist Ed Hyman and New York Life’s influential Chief Investment Officer, John Kim.

Have a great President Day’s weekend and make the week ahead a profitable and a productive one.

Sargen: Financial Game Changers

February 13, 2015

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SARGEN: FINANCIAL GAME CHANGERS TRANSCRIPT

February 13, 2015

What are the biggest financial game changers of this decade? The unprecedented cycle of global central bank easing and low interest rates? The dramatic decline in oil prices? On this week’s WEALTHTRACK, Fort Washington Advisors’ Nick Sargen discusses the economic and market moving shifts in energy, inflation and central bank policy – and what they mean for investors.

Nicholas Sargen Senior Investment Advisor Fort Washington Investment Advisors

CONSUELO MACK: This week on WEALTHTRACK, financial game changers. They are coming at us fast and furious from plummeting energy prices, to lower interest rates, to deflationary forces. How should you respond? Veteran international economist and strategist Nick Sargen discusses the best investment course next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. If I were to pick the biggest financial game changer of this decade it would be the unprecedented cycle of global central bank easing that we are seeing. Ed Hyman’s top economic group at Evercore ISI has counted more than 500 of easing moves over the past three plus years, with no let up in sight. In recent weeks countries from India, to Egypt, to Peru to Turkey, to Canada to Denmark, to Russia to Australia have cut rates. Other central banks have eased credit in other ways including the European central bank’s intention to buy over a trillion dollars worth of Eurozone government and corporate bonds.

As we have reported numerous times on WEALTHTRACK, for better or for worse these low interest rates have been sending investors to the stock market, in the U.S. in particular, and other asset classes for higher returns. Hyman’s group believes they will continue to do so.

The other big game changer in the shorter term has been the dramatic decline in oil prices which have fallen more than 50% since the middle of last year. The last two times oil prices plummeted in 1986 and from 1997 to 1998, the U.S. economy experienced strong growth. Will that be the case this time?

Falling oil prices are a major contributor to another game changer, low to declining inflation rates. Inflation has slowed in virtually all of the developed countries, the U.S. Europe and Japan and in many developing nations including China, India and Mexico.

This week’s guest is tracking all of these trends and advising clients about them. He is Nicholas Sargen, Chief Economist and Senior Investment Advisor at Fort Washington Investment Advisors, the asset management arm of Western and Southern Financial Group with close to $50 billion in assets under management. A PhD economist, Sargen was the Chief Investment Strategist at Fort Washington until last year and has held many high ranking positions at major Wall Street firms.

I began the interview by asking him why he considers lower oil prices to be such a major game changer.

NICK SARGEN: Consuelo, throughout my career, the last four and a half decades, any major change in oil prices has a tremendous impact. We’ve had four periods of spikes, double or quadruple, four recessions.

CONSUELO MACK: Wow.

NICK SARGEN: We’ve had two periods where oil prices declined comparable to today and in both cases a better than expected growth. So I think just the odds are that this will be a plus for the global economy. I think the other thing I’d stress that’s different is in my career the U.S. has always been dependent on foreign sources of oil, and that’s led us to be vulnerable, and today now because of the shale oil revolution for the first time the U.S. is on the cusp of being energy self-sufficient.

CONSUELO MACK: And what difference is that really going to make in the economy and the markets, Nick, in the U.S.?

NICK SARGEN: Well, I believe again from my perspective the decline in oil prices is the equivalent to a tax cut for the consumer. So all of us when we go to the pump, we see that. That gives us more money to spend on other items. That’s the stimulus part of it, but what I was saying is then there’s the security implications for the United States. So often our economy has been vulnerable to developments in the Middle East, and my argument is if you’re energy self-sufficient there may still be an impact, but you’re not as vulnerable.

CONSUELO MACK: What about the markets?

NICK SARGEN: Well, the markets I think are less certain how to interpret things, and I think it’s human nature. One of the reasons is that the price move is enormous. So the markets, when you read the newspapers, you’re reading about the energy companies that now are suffering from corporate profits. They’re cutting back on capital spending, and so therefore people worry about that. But what I’m saying is, think about it again. My estimate would be that the price decline is going to boost consumer spending by about a full percentage point. So if you say that, then who’s benefiting? Well, there are some companies that it’s obvious, the airlines, the transports, but think of a lot of it goes into consumption. The analyst doesn’t know which firm. So I think, therefore, what happens is you get analysts marking down the companies that are hard hit but not marking up the companies that will benefit because they just don’t know.

CONSUELO MACK: Is there a way that you’re taking advantage of it, for instance, in your personal portfolio? It’s such a huge change and this is not a cyclical thing. It’s not a supply/demand thing. It’s a technological innovation. It’s going to be with us for a long time. Right? This new technology. It is a game changer.

NICK SARGEN: That’s correct. This is structural.

CONSUELO MACK: Therefore as a game changer…

NICK SARGEN: I agree with you 100 percent that this is what makes it so critical. At the same time then, I believe though that the market is still trying to figure out what’s the right price for oil, and you tend to get over actions on the way up and on the way down, and my call would be that near term we may settle where we are now.

CONSUELO MACK: In the 40s somewhere.

NICK SARGEN: Yes, 40s, 50, but I do believe over time oil prices will gravitate to what will it take to get that next barrel of oil, and what most experts would say, it’s probably closer to being in the $70 area. So for people such as myself, I didn’t have a lot of energy in my own personal portfolio. I’m saying, is this a good long-term opportunity? We can come back to that later.

CONSUELO MACK: All right. Other game changer is the fact that except for the U.S. we are seeing a global movement of central banks to lower interest rates. Interest rates in many countries are at historic lows. In some countries they’re negative. What is the significance of this as a game changer? First of all, what’s causing it?

NICK SARGEN: I would say that certainly outside the United States, and I’m thinking particularly of Europe because that’s been the focus of late. Here we are seven years since the financial crisis, and the European economies looked for a while like they were beginning to lift out of a recession, and then last year they slipped back in to recession. And so when you go through a prolonged period of weakness then suddenly price pressures, instead of rising, start to come down, and I observed this in Japan after their bubble burst in the early ‘90s. People talked about deflation in Japan. Deflation really didn’t surface initially. It took about five or six years, but eventually then a deflation mindset set in where people… In other words, it’s not just that prices are falling. It’s people say, “Well, if prices are falling it’s going to be cheaper to buy tomorrow than today, so I’ll hold off my spending.”

CONSUELO MACK: Therefore, the consumer stalls. I mean, not the consumer. The economy stalls.

NICK SARGEN: That’s right.

CONSUELO MACK: Is that what happens?

NICK SARGEN: That’s correct. Both the consumer stalls and even businesses say, “Well, why should we invest in plant and equipment if there isn’t going to be the demand there, or if we can undertake those investments cheaper tomorrow?” So that’s the deflation mindset.

CONSUELO MACK: Right, and are we there yet in Europe?

NICK SARGEN: I don’t think we’re there, but I think that the risk was that we aren’t too far away. So for example, even before the oil prices came down very dramatically in the second half of last year, I was monitoring inflation throughout Europe and seeing that the inflation measured by the consumer price index or even if you took out food and energy was coming down. And that’s when the central bank Governor Draghi started to talk for the first time about buying government bonds, the quantitative easing program, but they didn’t do anything, and then I believe when he saw the steep decline in oil prices at the end of the year, he realized now Europe for a good part of this year will have negative inflation readings, and I think what he’s basically trying to do is say we’re here to act to make sure that this doesn’t get entrenched, and that’s the reason for their decision to embark on large-scale bond purchases.

CONSUELO MACK: Is there any evidence that it’s going to work to stimulate the economies and also to stimulate inflation?

NICK SARGEN: Yes. I would say, Consuelo, yes and no. Let me do the no first. How did these purchases help the U.S. economy? And I think the thing is that you have to realize in the United States we have a large capital market. If you’re a company, you go out and you borrow through bonds, and so what really happened was when the Fed went in and purchased government bonds but basically bond yields for corporations came down massively, and that gave them the wherewithal to refinance and that was stimulative to the economy. So the difference in Europe is their capital market or bond market for corporations is relatively small. The primary channel then they finance themselves is through the banks, and that’s been the problem. The banks have excess reserves, and for whatever reasons we’re not seeing credit grow through that channel. So that’s why I don’t think it will be as successful as U.S. the one thing …

CONSUELO MACK: Because the banks aren’t lending.

NICK SARGEN: That’s correct. The one thing that does work, though, is it has contributed, this program, to a significant weakening of the euro and currency depreciation there. What does that do? It does two things. If their currencies are cheaper, it means that their businesses find it’s easier to export. They’re more competitive. At the same time, when the countries go to import, their prices go up, their import prices, and that’s how they’re trying to counter the falling prices by seeing higher import prices.

CONSUELO MACK: Let me ask you about a phenomenon also that’s new to me and this is negative interest rates. So as a lender, I am basically paying for the privilege of buying government bonds in Switzerland or Japan, Germany, France, whatever. I don’t understand negative interest rates. Why would anyone buy bonds where you’re getting negative interest rates?

NICK SARGEN: That’s a good question. The way I think about it is that it comes back to your question of what’s causing it, and what I see say in Europe where we’re seeing these negative interest rates, think about some of the geopolitical developments. I mentioned you have Greece has a new left wing government, and we’re already reading reports about people taking their money out of their bank deposits.

CONSUELO MACK: Right. There’s been a run on the banks in Greece.

NICK SARGEN: Where does that money go? Possibly Switzerland. Take all …

CONSUELO MACK: Even with negative rates because they figure that the Swiss Franc is going to be strong. Right? Or safe.

NICK SARGEN: They’re saying if I keep my money in a Greek bank, I could lose it all because if Greece is forced out of the Eurozone they face a huge currency loss on those deposits, and similarly if you’re in Russia or the Ukraine and you have all this uncertainty where they’re actually experiencing high inflation as their currency has tumbled, so people are looking for a safe haven store of value and so you’re right. They’re in effect going to Switzerland and saying, “Listen, for the privilege of holding money in your currency which we think is a sound currency, we’ll pay you a modest amount for the safety.”

CONSUELO MACK: Well, how long can this last?

NICK SARGEN: Good question. I think that again I wouldn’t be so concerned if it was one country but, as you say, when you start to see negative interest rates, I believe in Europe at the moment there’s more than a handful. Maybe there’s nine or ten countries that have these negative interest rates. That is concerning to me because the central bank has to figure out some way to normalize the situation, and so that’s why I say their tactic now is this bond-buying program to jumpstart the economy. I think that the currency depreciation is an effective way, but I’m just not sure. So we’re living in a whole new world and the big question is, how long does it go on? And the other big question is, how does it impact us in the United States?

CONSUELO MACK: Yes, well, also the other big question is, how does it impact me as an investor? Is there any way as an investor to take advantage of this situation, number one, and is there any way I can protect myself from getting negative returns on my bond portfolios?

NICK SARGEN: Well, again I think that my argument would be in the United States, as you’re saying, nobody is going to want to invest in those vehicles because we can buy our own bonds and at least we earn a modest yield. So I think that again part of the reason… The anomaly for me this past year was I think this U.S. economy has gained traction, and throughout my career if somebody said to me at the beginning of the year, “Nick, the U.S. economy is going to grow by four percent annual rate in the last three quarters of the year, and we’re going to create three million new jobs,” then you’d say, “Oh, of course, interest rates would go higher on a strong …” So last year they fall 100 basis points.

CONSUELO MACK: Right, a full percentage point. Yes.

NICK SARGEN: Yes, and so my explanation is because we are a global market, and overseas investors see our yields as looking attractive, and so as their yields fall they pull down our yields. We haven’t seen this very often in the past.

CONSUELO MACK: You have written a book that will be soon to be published, Ten Shocks that Shaped the International Financial System, and in that book you say… and you’ve had a long history at Wall Street … That the last 25 years or so that the number of financial crises has increased actually and that we are kind of in a new era of more financial crises. Why is that the case?

NICK SARGEN: First, so what am I alluding to? I think back to the first being the bursting of Japan’s bubble, the Asia financial crisis, the tech bubble.

CONSUELO MACK: Russian financial crisis.

NICK SARGEN: Yes, all of those.

CONSUELO MACK: Tech.

NICK SARGEN: And so what I think caught investors in the markets off guard was this was occurring in a low inflation period. It wasn’t the high inflation of the ‘70s and ‘80s, and everybody thought low inflation went hand in hand with financial stability.

CONSUELO MACK: Stability.

NICK SARGEN: And so actually researchers at the bank of international settlements in Switzerland, the central banks’ central bank, they’ve done a lot of research on this and said, well, that’s part of the problem is we haven’t experienced goods market inflation, but in this low-inflation environment central banks are injecting liquidity and creating credit. People go out and buy assets, real estate, stocks and the like. As those values go up, they get to unsustainably high levels. So the argument is that really two things happened in the last 25 years I’d say. Number one, the financial markets became deregulated, and then the second thing was globally there was the decline in capital controls around the world. So now money is free to move anywhere in the world.

CONSUELO MACK: And quickly.

NICK SARGEN: Yes. So the argument is I think on one hand that goes hand in hand with more efficient allocation of capital, but at times it can be associated with financial instability as too much money runs in, assets appreciate too much and then, once people realize that, the money goes out the door, and that creates the financial volatility.

CONSUELO MACK: If you ask any investor, one of the things that they’re most worried about is market volatility. It sounds, therefore, if we’re going to see more financial crises and more instability that we’re going to see more volatility. What do we do as investors?

NICK SARGEN: What I would simply tell you as a professional investor, what we try to do is say, okay, let’s look at some indicators to give us early warning signals about when markets may be getting frothy, and again the research at the Bank of International Settlements would say look for countries where there’s been very rapid expansion in credit, and property values are actually more risky than stock markets because the financial sector is more leveraged to those markets. So that’s kind of been an early warning signal, and I’m thinking today that’s why a lot of people focus on China. Could that be the next bubble? So whether it is or isn’t, I think just going in with your eyes wide open is helpful, but then the second thing I argue is because you don’t always capture them, but once a bubble bursts what’s the single most important decision an investor has to make, and to me it’s – do you believe that the policymakers understand what the cause of the problem is, and do they have the wherewithal to deal with it? So I’ll give you two examples. The Fed Treasury after the ’08 financial crisis. My call was they make mistakes before, but I think they realized what was called for to stabilize the financial system. So what we did at our firm was gradually work our way back into taking risk, first with investment grade corporate bonds, then with high-yield bonds, then with equities.

CONSUELO MACK: Now what? Now what do we do? That’s what we all want to know.

NICK SARGEN: So I would say what I’m struggling with today is Europe. On one hand I can say I’m grateful that Mario Draghi, the head of the central bank, has taken a page out of Ben Bernanke’s book, out of what the Japanese have done. It may be a hail Mary, but they needed to do it. So that’s what says to me maybe I should be considering European equities because they’re looking cheap, but the reason I’m not ready to commit is, as I say, I’m still not 100 percent sure that this is going to jumpstart their economies. So that’s an example of I’m not sure of the outcome, and in those situations hold off. Don’t rush in.

CONSUELO MACK: To get down to brass tacks, your portfolio for instance and your personal portfolio, how defensive are you? Do you own any bonds? Are you overweight stocks? Are you overweight U.S. stocks? Again, I’m looking for just some guidelines.

NICK SARGEN: Where I’ve been is overweight stocks and predominantly U.S. stocks.

CONSUELO MACK: U.S. stocks.

NICK SARGEN: And it goes back, Consuelo…

CONSUELO MACK: And still. You still are.

NICK SARGEN: Yes. Yes, and it goes back to when everything bad happened in 2008, ’09. Actually at that time I sold some U.S. stocks and did go into high-grade investment bonds and high- yield bonds, and then as I say as I saw conditions improving, went back, and my motto then was if this portfolio is going down, it’s going down on U.S. soil. And the reason, I can chuckle, but really what I think for our country, the best thing of all our problems… we have many … is we’re very adaptable. We adjust.

CONSUELO MACK: Therefore, now is a good time to be U.S.-centric. Everyone says diversify globally, internationally, everything else, but now…

NICK SARGEN: And what I’m doing, though, at the same time is I’m trying to anticipate in saying our market has outperformed the other international markets. Is there a case to be made to begin to dabble in some of the international markets? The answer is I’m open-minded to that. I haven’t yet done it. The last point I’d make is how global the U.S. stock market is, the S&P 500, and one of the reasons it’s experiencing volatility over the last decade. About 40 percent of the earnings of U.S.- based companies in the S&P come from overseas operations.

CONSUELO MACK: And therefore, if you have an S&P 500 index fund, you’re going to be exposed.

NICK SARGEN: You do have international exposure.

CONSUELO MACK: You are diversified for better or for worse.

NICK SARGEN: That’s correct.

CONSUELO MACK: One investment for a long-term diversified portfolio. What would you have all of us own some of in a long-term diversified portfolio?

NICK SARGEN: When I think about it, I always like to go and say what’s mispriced, and I think that there’s been this huge decline in the price of oil. I think it will stay low for a while, but my estimate would be that in a couple of years time it’s going to begin creeping back not to 100, maybe to 70, something like that. So I want to then have something to take advantage of that. So what we actually like is oil services companies because they’re cheap, and I believe that the downside risk at this point is great but they have better upside potential than I think the integrated. So that would be the one investment theme.

CONSUELO MACK: All right, and I know you don’t recommend individual stocks, so there are some ETFs and one of them that your team looked at is the SPDR Oil & Gas Equipment & Service ETF, XES, that might be a way to participate in that particular sector.

NICK SARGEN: That’s correct. I think that’s for many investors where they’re not sure which company. Play the theme, and that’s a good way. It’s an efficient way to play the theme.

CONSUELO MACK: So Nick Sargen, thank you so much for joining us. As always, it’s great to have you from Fort Washington Investment Advisors.

NICK SARGEN: Thank you, Consuelo.

CONSUELO MACK: At the close of every WEALTHTRACK we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s action point: Know what you own, especially in your bond portfolios right now. Record low interest rates around the world mean that many bond portfolios are expensive and in some cases yields are extraordinarily low. For instance many European government bond index funds and ETFs are based on indexes with heavy weightings in French and German government bonds which have low to negative yields right now and are dragging down the yield in the funds themselves. These are extraordinary circumstance requiring extra vigilance. Being locked into a set bond portfolio might not be the best choice in these unsettled times.

Next week we are going to talk to a highly regarded financial advisor about retirement. Jonathan Pond has some simple steps to see us through, no matter what our circumstances.

In the meantime to see this program again and our extra interview with Nick Sargen go to our website, wealthtrack.com. Have a Happy Valentine’s Day weekend and make the week ahead a profitable and productive one.

SARGEN: DIFFERENT PERSPECTIVE

February 13, 2015

Last year, veteran international economist and investment strategist Nicholas Sargen stepped back from his full time, 11 year stint as Chief Investment Officer at Fort Washington Investment Advisors to become the firm’s Chief Economist and Senior Investment Advisor. Prior to that Sargen had worked in top investment positions at major firms including JPMorgan Chase and Salomon Brothers, as well as spending time at the Federal Reserve Bank of San Francisco and the U.S. Department of Treasury. He talks about how his perspective has changed, now that he is out of the daily money management business.

Watch the related WEALTHTRACK episode.

KNOW WHAT YOU OWN, ESPECIALLY IN YOUR BOND PORTFOLIOS

February 13, 2015

KNOW WHAT YOU OWN, ESPECIALLY IN YOUR BOND PORTFOLIOS

  • Record low interest rates
  • Bond portfolios are expensive
  • Yields are extraordinarily low

Watch the related WEALTHTRACK episode.

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