On this week’s show, Karl discusses the biggest threat to your portfolio in 2018, inflation. Also, what did we learn in 2017 that will make us better investors in 2018? That will be revealed.
Karl Eggerss: Hey everybody, welcome to the Eggerss Report, it’s your investing playbook. Post-Christmas, pre-New Year’s edition the last Eggerss Report of the year. For those of you that are fairly new to the podcast, welcome aboard. For those of you that have been with us, whether it’s just this year or years past some of you have been with us for more than 10 years and we appreciate it. We thank you for your feedback, we thank you for spreading the word, and we try to make this fairly interactive so, if you want to reply to any of this and ask questions, firstname.lastname@example.org is my email address and we’ll try to answer it on the podcast. I may email you straight back.
So, we appreciate the listens the views and opinions, and really because what we try to do is we try to answer things that you’re thinking about or are concerned about. We generally know that based on talking to a lot of people throughout the week and throughout the month. So for those of you, again that have been with us the last few years we thank you for your support and we look forward to a good 2018 on the Eggerss Report and we’re always trying to improve. Some new things we did this year, were things like we established an Instagram page for charts, for really just pictures of things that we see. Whether, its economic pictures, stock chart pictures, ETFs, we established @etfcharts Twitter page, of course we’ve always maintained @karleggerss. We’ve always had the Facebook page for Eggerss Capital Management, and of course we’ve been doing the podcast for a number of years. So there’s lots of ways to get all this information. Probably the easiest thing to do is to go to eggersscapital.com, E-G-G-E-R-S-S, capital.com.
Of course, you can always call our telephone number, 210-526-0057, 210-526-0057. And of course, we are a registered investment advisory firm. We are fee only, we don’t work on commissions, we are just a flat fee so that makes it … Really takes out a lot of the conflicts of interest that might be present in our field, and we’ve seen some movement of that with the fiduciary role the last couple of years, and you’ll probably hear more about that in 2018. So, if you ever need us, we’re here to help. It’s really in regard to financial planning, it’s in regards to investment management, just to learn some things. There’s a lot of different things that we do at Eggerss Capital Management.
And throughout the podcast you will probably hear me clearing my throat, coughing and because well it’s December, and that’s what I typically do this time of year. I apologize in advance, I’ve got my water here but of course, and my coffee but, I can only do so much. It’s just that time of year. And I know a lot of you, probably have seasonal allergies and colds going around, of course, flu is going around, so we will try to minimize the coughs and the clearing of the throats but, you know we’re human so what are you going to do? All right, well what I wanted to spend this hour talking about is a few things. Number One, I wanted to talk about one of the biggest things I see in 2018 as a risk to your portfolio. The stock market and the bond market, really what’s that risk? And so we’re going to talk about that. Also, what are some things we learned in 2017? And I don’t have an exhaustive list, it’s just something kind of off the top of my head but we’ll start with that.
A couple of things that I think are interesting in 2017 that we learned is that, Number One, the economy is actually good. There are, of course, always going to be things that could be better, we know that. And there’s things that are still really bad, but generally speaking you can’t say things just got less worse. And that’s really what happened the last few years. We kept saying, hey things are improving, things are improving. They’re still bad but improving. This year in 2017 it was actually a good economy and that’s a change. Now, with that change comes some of the risks that we could see for next year in 2018. So we’ll get to that in a little bit. But that was one of the things we learned this year, that the market and the economy are actually good. The other thing that we learned was that the market doesn’t always do what you think, right? And this was especially the case … I think probably the biggest example of this would be, the North Korea news that continued to come out that they were launching a missile capable of doing this, capable of doing that.
And every time that news came out, you would have thought the stock market would fall. And it’s a good example that, while sometimes the news in the short term can dictate market movements because it’s based on kind of emotions in the short term. In the long run, it is more about the underlying improvement or not, of the economy and the profits of the companies. That’s what you’re buying when you invest in the stock market. You’re buying profits, and sometimes news headlines are distraction, they cause short term volatility but you know whether it’s a political event, or geo-political events, or even terrorist events, some of these things can effect it on a very short term basis. But in the long term it’s about profits of the companies. And what we saw was many folks saying hey, I’m nervous about this market. This guy is a nut job in North Korea, and I don’t see how the market could be going up.
And yet, how many headlines did we get over the year from North Korea? I mean, literally it was probably over a dozen wouldn’t you say? And as that happened, every time the market would go up. I mean, it was completely counter intuitive and I hope that’s a good lesson in that sometimes the market doesn’t do what you expect. Another good example would be after the tax legislation passed and the president signed it, we had a few people reach out to us, and call us, and email us saying hey can we look for those particular companies that may repatriate cash over here. Can we … I like the stock market better now because of this new tax law. You know, I’ve got more confidence in our economy and everything because of that.
The response to that would be that, remember the stock market for the most part is a forward looking indicator. The reason that the stock market kind of made another run into the end of the year, remember it kind of paused in August and September a little bit. It wasn’t dramatic, but it paused it looked like It could start to roll over and then we got the run up in October, November, December. The run up was because the market was anticipating that this was going to get done. They had the votes, house was going to be fine, the senate was going to be fine, the versions were slightly different but they were going to come together, President said this is going to get done we’re going to sign it before Christmas, which he did, and so the market was anticipating that.
So what a lot of people learned was that sometimes the market doesn’t do what you think, not only because of the news but because it’s already priced in. That’s not to say it can’t go higher, but a lot of the news … Remember when you know about it, everybody else already knows about it, right? What we’re trying to do is anticipate where that puck is going to be, to use an old Wayne Gretzky quote, we want to go where the puck is going to be, not where it’s been. And a lot of investors look at the puck down on the ground and say, ah I can make all kinds of predictions based on this. No, it’s about where it’s going to be, anticipate that. So if you think the economy is going to get better and the profits of the companies are going to get better, and people are going to be willing to pay more for those profits then you can feel comfortable that the tax law is going to help.
But if you just say hey, I think it’s passed, it’s good so now we should go buy stocks, that’s not the case. And furthermore, reading the newspapers and thinking you know what the market’s going to do doesn’t always help either. I mean, we can go back really the last several years, if you think about it, you know the last several years we had the market … The market’s going to do this if Hillary Clinton gets elected or it’s going to do this if Donald Trump gets elected. You know, you had people on both sides of the isle thinking the market was going to go one way or the other based on who got elected. I still believe, not in the long term, but in the short term, the market was going to bounce with either candidate getting elected, because it was selling off in advance.
There was a lot of fear, pessimism and just unknown about which direction the country was going to go in, that lead up to the election in November of 16. I mean, look we got off to that horrible start in 16, 2016, and then really coming into election the market was selling off, there was just this fear, this unknown, and I felt like the market was going to bounce regardless of who got elected. Now again, I had my feelings and thoughts on depending on who got elected what it would do in the longer term, but in the short term I thought it would bounce. And so we saw the immediate sell off in the futures the night Donald trump got elected, down 800 points that night, only to reverse and finish slightly down and of course went on this big November of 16 run. So it’s just again stand back and say, maybe I don’t know everything about where things are going all the time, and I have to go with a diversified portfolio, an action plan, and use indicators and things other than just news headlines. Because, news headlines are often a very big distraction, unfortunately.
So, that was another thing that we kind of learned in 2017. The last thing, and probably the most recent thing that we’ve learned, is that manias still exist. And bubbles still exist. Yes, we’re talking about Bitcoin and cryptocurrencies. Now, regardless of your thoughts on where these things will be in the long term, there’s no question when something goes up 17, 1800 percent in a year, and everybody wants it, it’s a bubble and bubbles tend to pop. That doesn’t mean that when it pops it’s over, remember, technology stocks are still around, right? They were a bubble in the .com era. That was a .com bubble and it burst, but look at where we are today not only with technology, but the stocks in these companies are dramatically higher.
The question is, where’s your entry point and, which companies exist today that existed in the .com bubble? Remember most of those companies went out of business, they don’t exist anymore. I think it’s very analogist to the cryptocurrencies, is there something there? Yes. But do you know, which one is the one to buy, or a couple of them? Do you know, which ones are going to exist? There’s about 1400 different cryptocurrencies that exist. I believe next year legislation will be tighter, we saw just this week, South Korea come out and say we may ban some exchanges. That caused another sell off in these. We’ve seen multiple crashes in these, but does that mean it’s a bad long term investment? I don’t know, I can’t answer that because I don’t have enough evidence or data to suggest that. There is no earnings, there aren’t any dividends, there really isn’t any history so you can’t say it’s under valued or I know it’s going to be a good long term investment, which I hear people say all the time. You don’t know that.
Does that mean you shouldn’t invest? Maybe not, maybe you do take a portion of it, but it’s a portion that you can afford to lose but you have to pick … I mean, this is where you have to really do your homework, which I suggest you do at least several weeks of homework on these before doing anything with your money in cryptocurrencies, but do you know which one to buy? When to buy it? When to sell it, if you do? Which exchange to buy it on? How to store it? And, which one will exist in the next few years? And if you haven’t done that homework, it’s extremely difficult. But we do know this, that manias still exist. How do we know that? Go talk, go look around. Did you have any discussions over Thanksgiving or Christmas about Bitcoin? More than likely you did. I got asked to do at least three and maybe four interviews in the last few weeks specifically about Bitcoin. Some were on TV, some were on radio. People asking me to talk about it on the podcast.
I mean, again when you see that happening, you have to realize that it is a mania. It is a mania where I mean again, look at history and go look at something that has gone up in price in this trajectory where it’s literally going almost straight up. When’s the last time something like that happened and it continued at that pace? And that’s a good barometer. Now, those of you that are on the other side of the ledger and say this is a scam and it will never amount to anything. I think you need to re-examine that thought as well. There is some validity to cryptocurrencies. We know the Blockchain, which is the technology it’s built on is legitimate, we know that. But look, the reason we know this is partly a mania, or is a mania, is because look at the company specifically changing their names to include the terms Blockchain in their names or cryptocurrencies, and their stocks go up three, four, five hundred percent in a week.
Doesn’t that smell and remind you of the .com bubble, if you were around investing then? I was, and it reminds me just like it. Again, had you invested in a company that was sustainable at the peak of the .com bubble and you road it down 70, 80 percent, you may still be have a very good investment. It’s just, were you willing to ride it down 70 or 80 percent, and if you have a small amount of money then you can afford to do that. But I do hear about … And I don’t know anybody specifically so this could just be urban legend, rumors, but I hear about people taking out mortgages, taking out cash refinance mortgages on their properties to go and invest in cryptocurrencies. I hear about people putting money on their credit card to invest in cryptocurrencies. I hear about people cashing out IRAs to invest in cryptocurrencies. That is not a good thing.
So this is as I’ve said, the wild west right now. There are people profiting from cryptocurrencies, not only investing in it, but people that are kind of selling the picks and shovels during the gold rush. And they’re taking advantage of people and there’s people on YouTube and there’s a lot of stuff going on. You have to be extremely careful. So, that is a mania and we haven’t seen something like this probably since, probably since the housing bubble. Have we seen something like this where you hear about very irrational behavior and it’s just a topic that doesn’t go away. So is there something there? Yes. Do you need to invest in it today? No. Do you need to study it? Yes. That is the number one thing you should do is go research it, go see how this works. So those are a few things that we learned in 2017. I know there’s a bunch more and I’ll probably go and put a report together or an article about some of these things, but I wanted to cover those three main things.
Now, as far as 2018 is concerned, what are we … I’m not going to forecast where the S&Ps going to be, I’m not going to prognosticate on a lot of things. One thing I can tell you is as we move into the new year, one of the biggest risks in the short term is kind of a rotation of people saying, okay I’m in a new year tax-wise, now I can take some profits and I can go buy some of the beaten up areas. We could see that, but I think one of the risks, which is a good thing but a bad thing is, remember we have not had any substantial inflation in years and years and years. Now we’ve seen inflation in particular things like health insurance premiums, I know mine has been going up on average about 20% a year the last six years or so, but generally speaking when you compare apples to apples, the inflation rate has been pretty low.
The Federal Reserve is concerned about that because when you’re that low on inflation you run the risk of deflation, which we saw in ’08 where everything goes down in price, including your stocks and your real estate, or we could see stag-flation where we just don’t see the economy growing but we have inflation. What is it going to be? But here’s the thing, the market is starting to percolate a little bit and it’s had some false starts, don’t get me wrong, it’s had a lot of false starts. There’s big firms out there that have predicted higher interest rates the last five, six years in a row and have been wrong every year. But is 2018 the year that we finally see interest rates rise? And if we do, what pace will they rise? Because that’s really important, if they generally and gradually go up, because the economy is getting better great, all things will be fine.
But what if we start to get some really hot economic reports, which we’ve seen some really good economic reports lately. Just Thursday the Chicago PMI, which is a regional manufacturing kind of Purchasing Managers Index, kind of a regional view of the economy, it’s at the highest level it’s seen since 2011. Six years ago, six and a half years ago. What if we start to get a lot of those things and all of a sudden instead of raising rates gradually, like the Federal Reserve has been doing, they raise them quickly because they feel that they’re behind the curve because … Remember, they raise interest rates to slow inflation down. You want some inflation, you need some inflation, but you don’t want it too much. It’s a very fine line of growth and some inflation and prices going up without overheating, and when they get overheating, they jam on the brakes by raising interest rates quickly.
If they do that, and the market senses they’re behind the curve and they’re going to be more aggressive and tightening, you have some real issues. Not only because the stock market would not like that, but the bond market would not like that, so you’re safe investments, your utility stocks, which have been hurt lately, your real estate investment trusts, your public ones that move on interest rates would be hurt. Your income stocks, your dividend stocks in some areas like that don’t have a lot of growth but are paying a high dividend consumer staples, tobacco stocks those types of things would get hurt. So that’s one thing, but also what about just your personal finances? What if inflation picks up and your costs literally start rising too fast and you’re on a fairly fixed income? Remember, a lot of people in this country live off of social security and maybe some type of pension and neither one of those things go up a lot because the government controls how fast those things go up, right?
That’s why people believe the inflation rate is artificially low because the government wants it to be low so they don’t have to pay you more on your social security check. So, you’ve got your income kind of fixed and then your costs are going up and so not only could that be a problem for your portfolio, it could be a problem for your personal finances. I would say, look in your portfolio right now and say if, and this is kind of the stress tests that we talk about, if inflation is a bigger deal in 2018, what does my portfolio look like right now? Do I have everything that’s really designed to benefit from falling rates? Or do I have some investments that benefit from rising rates and rising inflation? I mean, commodities, which are an inflation fighting investment, because they are the inflation, those things have been under performing for several years. They’ve been serial under performers, they’re still down 40, 50 percent from their high, it’s been awful.
If the market senses the economy is overheating a little bit, we could see a big rotation into commodities because they look like a value and because the economy is heating up and because people want to shift out of some other things. So do you own anything like that, and how do you own that? Do you own companies that are in those areas? Do you own an actual commodities? Do you own ETFs? Do you own some that maybe aren’t as efficient as others because they produce K1s and things like that? I mean, there’s all these things to think about when looking at your portfolio. That’s how we look at portfolios. A lot of people look at our portfolio and we’ll have clients sometimes that go, why do I own this? And we say, that thing is part of the whole package. In other words, it’s like looking under your hood and saying, why do I need an oil filter? Well, because it serves a vital role in the whole relationship between the engine, the car itself and how it functions.
It’s the same thing when building a portfolio. It’s real easy in a year like 2017, to look at a portfolio and say, why do I own any low volatility income producing securities? Why do I have that? That is the safety net because the market may not do in 2018 what it did in 2017, and it’s also a good source of funds. It serves a purpose, right? Your socks serve a purpose, do you need them every day? No. Do you need a raincoat every day? No, but you probably have one. Do you need an umbrella every day? No, but you carry one with you probably a lot of the time because a storm will pop up and you will need that and you whip it out from your car. That’s how these things need to be thought of and so, again it’s about the portfolio and the construction, which is highly under appreciated. We see people’s portfolios every week they bring them in, they show us what they own.
Some are okay, but when we look at a lot of them, there’s no rhyme or reason to them. There’s just real sporadic investments in there based on who knows what. And the size of those investments relative to the whole portfolio is all out of whack. There’s 20% of one stock and then 10% of one mutual fund and then a big chunk of cash or whatever it might be and you ask and you push back and say, how did you come up with this? What’s the rationale? What’s the formula here? And, I don’t know what it is, that’s the answer we get a lot. That’s what we do, we put portfolios together based on, we match what’s going on in the economy, what we thinks going on in the world, where the opportunities are and, again and, what’s going on in your personal life? Because your specific risk and the risk you need to take and can take, is very different then a different client we talk to.
So think about that as we go into 2018 as do some, what if’s. What if technology stocks are down 20% next year and nothing else is. Are you vulnerable there because you own too many text stocks? This is the time to examine all of that. We spent the last month or so doing a lot of tax loss harvesting, selling some things that were down to offset capital gains to minimize tax implications for 2017 as we move into 2018. Again, what we do know is that the biggest risk we think might be inflation and real pick up in the economy and the market really hasn’t seen rates spike a lot, really since I would say 2013 when they kind of doubled from 1.6 to three percent on a ten year treasury, and the market kind of freaked out during that time. We haven’t really seen a spike like that. So that’s the biggest risk.
But the other risk is simply that volatility returns. Because this was the most calm year we’ve seen on record in, that I can, on record and because if something is that unusual, it probably means it’s not going to last, right? And so, not that we expect a horrible year or anything like that, but what will you do when the market drops 5%, which is going to feel really big if that happens, because we haven’t seen a 5% drop in so long. What are you going to do, if anything? Will you buy more? Is that your threshold for selling? And furthermore, what if we get a typical correction, which is more like 14 to 15 percent, boy that’s going to feel like a crash! Are you prepared for that now, not then, now? Those are all the things that portfolio management are based on and what we take into consideration when we look at somebody’s portfolio we figure out what do they need to earn, how much income do they need and then how do we get from A to B.
When you put the portfolio together, yes there’s always going to be some things you don’t like in there, right? There just will. But sometimes you have to have those things as a part of a portfolio and it’s real easy for people to look at the current situation and base their portfolio on what’s going on right now. Go to where the puck is going to be. And if you’re basing your portfolio right now off of low interest rates, low volatility and a great stock market you’re probably very vulnerable. That’s what I would say to do, that’s your homework over the next few days as we enter the new year and then watch in the new year for potential inflation. There are many people who think this might be the year we start to get a real tick up, in inflation and interest rates. And you go, hey my savings accounts going to pay more.
If your savings account starts paying a lot more, there’s some bigger issues going on because more than likely, the ten year treasury’s going up real fast and because of that, your bond portfolio is going down and probably your stock portfolio. This is not just a bond market that’s overvalued. There are some things in the stock market that are very over valued and they’re all based on low interest rates. So what are your assumptions, what does your portfolio look like? Review that, review your needs and then again, try to make sure that your portfolio is not only doing what it’s supposed to be doing in the big picture, but each account is appropriate for what it should be. In other words, do you have a Roth IRA, an IRA, a joint account or individual account, a trust? Those things may need to be invested differently based on the taxes that come along with those different types of accounts, okay?
So, those are my recommendations for you, not knowing your specific situation obviously, not giving you advice but really some things to think about as we go into the new year to consider and really the bottom line is to look over that portfolio and make sure it makes sense for a different scenario that could pop up in 2018. Well, Happy New Year everybody! My coughing wasn’t too bad, was it? A little clearing of the throat, few coughs here and there, but I did all right. Just a reminder, every Monday, not this Monday but every Monday typically I go on the Trey Ware show, which is a south Texas radio show and we talk about what’s going on in the markets. We try to post that, so you can always go to our website at eggersscapital.com, and don’t forget to share the podcast. Give us some reviews. We’re on iTunes, we’re on Spotify, we’re on Stitcher radio. Tell your friends about this show, we go to a lot of effort to put all this information out there, so the bigger the audience the more we appreciate it.
Then don’t forget, we’re on Facebook, you can like our Eggerss Capital Management page on there. We have an Eggerss Capital Management Instagram page as well, and of course we’ve got two Twitter accounts. One’s @karleggerss, which is a lot of stuff on there, and one’s @etfcharts, which is just ETF charts. Those are all the different ways you can look at our information. Again, eggersscapital.com or the phone number, 210-526-0057. We look forward to a great 2018 as we wrap up 2017. Happy New Year to you and your family, we appreciate it. Take care everybody!
Speaker 2: This show is for entertainment only and information provided by the host, guests and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As President and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in this show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment, or get yourself a trusted advisor.