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Payne Points of Wealth Podcast

Don’t fight the Fed? Or, don’t trust the Fed. Ep#109

By January 24, 2023No Comments

It’s episode 109, the first podcast of the year and there is a lot going on right now. Europe, emerging markets going through the roof. Interest rates dropping like a rock. Yet the Fed says they’re going to keep rates higher for longer.

Who’s right? The bond market or the Fed? Every economist telling you we’re still going into recession. Yet employment is strong. Inflation is coming down. Well, we’re going to give you our 2 cents on everything today, give you a blueprint for how to look at the economy, and how to look at the stock market this year. And we got tons of questions from you, the listener over this holiday season.

We’re going to answer your questions today to make sure you’re on your path to financial independence.

Don’t fight the Fed? Or, don’t trust the Fed.

The oldest adage on Wall Street is don’t fight the Fed. But it seems like everything they say the opposite is of what’s happening or they’ve done the opposite. Or, they don’t always follow through on what they say they’re going to do. 

The Fed has been reactionary

In the face of good inflation data, the Fed says we’re going to raise rates and keep rates higher for longer. Analysts and strategists are believing it is gospel. A year ago they didn’t believe anything the Fed said.

I’m not listening to the Fed. I'm listening to the bond market.

Bob Payne

Prices have been dropping. Oil, copper, and corn prices have come down a lot. Inflation is dropping. And we somehow believe that the Fed isn’t going to capitulate and lower rates?

Look at the markets, it’s the difference between reality and expectation. That’s where prices are. And misery loves company. So when you have 60% of the economists predicting a recession, it’s comfortable to be there. You don’t want to be the outlier.

It’s not just the Fed. The strategists and analysts talking about recession. I think we’re being a little harsh to the Fed. They’re not the only ones. They’re in good company. Let’s talk about the strategists, the analysts, and the economists that have said that we’re going into recession. But what does the data say? 

Positive signs for the economy. We’ve got a strong labor market. We have inflation coming down, Wages are staying strong. But it is remarkable with all the economic data being relatively strong, professionals and experts are coming to the same conclusion…Recession.

The experts were wrong about Europe. Look at the best-performing part of the portfolio year to date. And the last six months happen to be in Europe and emerging markets. 70% of the markets around the world outperformed the U.S.  We’ve heard the conventional wisdom, “Oh, don’t put your money in Europe, don’t put it in China. China is never going to come out of lockdown.”

The experts were wrong about China. The second-largest economy in the world, and they’re never going to come out of lockdown. They are coming out of lockdown and it’s very good for the global economy. Who would have thought that? And if you read the news last year, nobody was talking about that.

The Tipping Point:

We Answer Your Questions

Question #1

If you have a large portfolio and can comfortably live off the dividends, do you have to have any bonds? I’d rather leave a legacy for the next generation and don’t want bonds to get me there.

Payne Points Answer:

Consider your time horizon. As stated before, equities over time are how you grow wealth. However, if you’re in retirement you need to consider if you can withstand a volatile period. How many years do you have to make up a deficit?

A more balanced approach helps smooth the volatility Having bonds in your portfolio can create a buying opportunity when stocks drop and prices are low. If all of your portfolio is made up of equities what will you sell to buy the dip?

Tax advantages with municipal bonds

A balanced portfolio “is about losing less in a down market.”

Ryan Payne

Question #2

I’ve heard you say that you don’t like bond funds. What do you propose in their place, especially when stocks are down? If individual bonds are the choice, how do I invest in those by myself?

Payne Points Answer:

You don’t know what’s in your bond fund. They can sneak in lower-quality bonds by prospectus.

Yes to individual bonds. But they should not be purchased by an amateur. The bond market is fraught with risk. It’s a huge market and it’s not really there for the amateur or the neophyte. Use a professional at all times.

You can’t make money bonds. All you do is make interest in bonds because you’re making a loan, you’re lending money, and you’re getting your money back with interest. But don’t take a chance on investing in an individual bond that’s not guaranteed by the government. Stick with treasuries or certificates of deposit. If you can’t make money in bonds, why would you put yourself in a position to lose money in bonds?

You get your principal back. It’s a very cheap way to hedge your portfolio and you’re getting paid to do it. You get that cash flow and you don’t give up liquidity. If your bonds keep coming due, you never give up your principal and you protect your principal. Heads you win, tails you win.

Bond funds are like the Trojan Horse of the bond world.

Chris Payne

Question #3

What is considered a good P/E ratio? Anywhere from 1 to 10? Ford has a P/E of 5.7, is that considered a good value stock, or undervalued stock, to invest in? Tesla is at around 33 time forward earnings. So probably not the best time to buy?

Payne Points Answer:

P/Es are tricky. There’s no blanket number for cheap or expensive. They can be low or high for various reasons. There are several different metrics to use to measure the valuation of a company. The two main things are earnings and interest rates. It should be higher when rates are lower, it should be lower when rates are higher. You have to measure each company within the industry group.

“it's a waste of time analyzing individual stocks. It's a sucker's game.”

Bob Payne

Hidden Facts of Finance

The energy sector’s weight ended the year at 5.5% of the S&P 500.

That’s up from 2.7% at the end of 2021. The leadership and the dynamics of the market are changing. In the past energy was one of the dominant industry groups in the S&P. Typically 13 to 15% of the S&P 500. It’s not surprising that it’s doubled in the last year because energy stocks are doing really well.

Dividends on the S&P 500 were $1.15 per share in 1950.

Compare that to $60 a share today – that’s a compounded annual growth rate of 6% a year. The average inflation rate over the same time was only 3.5%

Large technology companies went on a hiring binge beginning around the end of 2019.

Right before the pandemic, Google added 57% more employees, reaching 187,000 workers, while Amazon nearly doubled its staff to 1.54 million people.

The Secure 2.0 act has bumped the RMD age to 73 in 2023, 74 in 2029, and 75 in 2033.

People are living longer, so that means that there’s going to be more time for those tax-deferred accounts to grow. This also creates a great opportunity for investors that are looking to save on taxes for the next generation. Also, a great opportunity to do Roth conversions, where you take your money out of IRAs at a discounted rate and move it over to something that grows tax-free.