Business Innovators Radio - Interview With Jeff Brummett Financial Advisor with Greenline Financial Services – Inflation and the Fed Rate Hikes

Episode Date: November 21, 2023

Jeff is an Amazon #1 best-selling author, past two-time Inc. 500 Company president, public speaker, popular radio talk show host, and a 25-year executive management and entrepreneurial leader. He is one of the most prolific and sought-after financial public speakers for tax-efficient retirement planning.“My team and I take the time to educate each client as to how the game is played. We customize that educational process to fit your individual goals, concerns, and financial capacity. No smoke and mirrors. Only hard facts and proven financial strategies have weathered even the most volatile of hard times.”Learn More:https://www.greenlinefinancialservices.com/Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-jeff-brummett-financial-advisor-with-greenline-financial-services-inflation-and-the-fed-rate-hikes

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of Influential Entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us Jeff Brummet, who's a financial advisor with Greenline Financial Services, and we'll be talking about inflation and Fed rate hikes. Jeff, welcome back to the program. That's good to be back, Mike. You know, inflation, all of a sudden now my blood pressure is inflated and rate hikes,

you know, same thing here. And it doesn't matter what day, month, year that we're talking about this, that is always either a current factor or a looming factor under the surface. So I think this is such a timely topic, whether we are currently in inflationary times or, you know, coming past it, we know it's going to pop up and then come back down and up and down. So I'm excited to learn about this. So where do you begin your education with your clients and prospects when you talk about inflation and Fed rate hikes? Yeah, so it's a great question.

You know, inflation affects everyone and it's kind of the silent tax. We live with it. we, in fact, we expected the Federal Reserve as a mandate has inflation built into their responsibility, right? Part of their mandate is to limit inflation to 2%. And everybody, you know, that's great, wonderful, whatever, but it's still, it's like a hidden tax. 2% inflation equals your dollar not purchasing 2% of what it purchased last year.

So leakage in that you hadn't really calculated. Yeah, that's right. That's right. And so it's always a topic that, you know, you got to address when you, particularly really when you look at heading into your fixed income life, you know, where when you're working as a, you know, professional, if you're successful to any degree, as you age through your working life, you know, you make more and more money, right? you get promotions, you get raises, and they help to offset inflation.

And hopefully, for most people, they, you know, more than outpace inflation. But that changes dramatically once a person, you know, hits that point where they're now looking at retirement because the income sources that we have are not, you know, there's not going to be promotions in fall. I mean, you know, Social Security doesn't promote anyone who's, you know, they might have an increase, but over most of my life, as I looked at, you know, family members and friends who went on Social Security, they complained about the lack of increases that they got. It's not consistent. Yeah, yeah.

And even when it's there, a lot of times it has not always equal to what true inflation is for the average consumer. So, yeah, it's a big deal. And you've got to address it for sure. And I think the other side of things is, isn't it true? and you're the expert, but it's kind of like a seesaw. When you push down on one side, yay, it went down, but then the other side is up. So one of the ways to combat or deal with inflation is those Fed rate hikes. So there's a correlation there, right?

Oh, there absolutely is. I mean, not just a correlation. You couldn't have a stronger correlation, really. And the seesaw really is a great analogy, Mike. because when you look at historic results of the Fed's monetary policy, specifically when it comes to interest rate manipulation, right? What you find is that as interest rates have increased over historical periods of times, it slows economic growth because interest rates,

they have an impact on our ability to borrow. money and our entire economy runs, whether we like it or not, runs on credit. I mean, when credit flows freely, economies will grow. When credit flows restrictedly or, you know, trickles, economies come to crashing halts because all of the modern economies are built on the ability to have credit within them. So, yeah, interest rates as you increase interest rates. And here's the thing. You talked about the seesaw.

So the impact of interest rates is a, it's a two-edged sword. And it depends on which side of the, you know, the sword you're on. For instance, if I'm a saver, right, I love high interest rates because now it gives me a place where I can go and park my money and get a decent rate of return. Yeah. I remember when I was. was for studying, you know, financial systems. And I didn't get serious about this as, you know, I know we've talked about in other episodes when you've had me on the show. But I really didn't get serious about studying and understanding financial markets until, you know, I was in my mid-40s.

And it took a pretty dramatic loss to knock me in the head and get me serious about understanding these things. And so as I studied, I remember one of the very first things, the kind of stuck out in my mind. I said, hmm, wow, that's interesting. And that is this idea that in, if you go back to 19801, 82, okay? And this, if people who lived during that area or during that era, we'll remember, we had some pretty high inflation, right? Still had some pretty high inflation. You could go, the Federal Reserve or the Federal 10-year Treasury note, you could go, and by the

way, this is supposedly the safest place on the planet to park your money, right, in the United States Treasury. You could go to that treasury note and off the shelf, you and I, anyone could buy a 10-year treasury note that yielded almost 16% for the next decade. Wow. Now, I mean, we've just come out of some of the, not some of, we've come out of historically the lowest, prolonged. interest rate period, I think, in the history of recorded, you know, humanity. And these rates

went all the way. So think about this. In 1982, we had rates that topped out somewhere close to 16 percent for the safest place on no risk, right? Yeah. This is, this is risk-free, what is considered risk-free. If you took a little volatility risk, you might be looking at some big numbers there. But yeah, the risk-free at 16 is amazing. Almost 16%. It's just hard to wrap your brain around that we actually had that at one time. So, so that was the case in 1982. If you pull up a chart and go to Yahoo Finance, Google, whatever, pull up a chart, you'll see if you track that 10-year treasury note, you'll see a chart that starts high and just bounces all the way down to zero. It was a 40-year race, marathon.

to zero. And we finally hit zero during the COVID shutdowns where that 10-year treasury end up bottoming out at about 0.5 or so. Wow. And so you literally saw 40 years of declining interest rates. And it didn't matter. Mike, it didn't matter when along that line. You could, you could have bought a treasury note and think of it like a corporate bond.

I mean, it works very similar, right? only it's backed by the United States government instead of a corporation. But even the corporate bonds, they are going to follow the risk-free, you know, plum line, right? Because if I could, think about this, if I can get 16% risk-free from the United States government guarantees, why would I want to give Ford Motor Company my money? I mean, it's a great company, but good grief.

You know, great companies go out of business all the time. History's full of them, right? So Ford's got to, they got up the Annie a little bit, right? because they're not risk-free. So the interest rates, they impact everybody along the way because it impacts society's ability to borrow. But it's a great thing if you're a saver. I mean, think about, you know, if you're now retired and you're looking for places to park your money where you're trying to live off that asset without depleting and cannibalizing the asset,

Do you want higher interest rates or lower interest rates? Well, you know, that's an easy question. I want higher interest rates because the interest rates, the higher the interest rate, the more easy it is for me to live off of the asset without depleting the asset. So it's great today for savers. These rates, we haven't seen them in a long time. They're great for savers, right? If savers know how to leverage them, and that's a separate conversation we may want to get

into here a little bit. But let's go to the other side of the coin. Because your question was, you know, both sides of the coin. How do these higher interest rates affect economies? They are a death knell for stocks and bonds. I mean, if you look historically when we've seen the Federal Reserve increase interest rates over, you know, sustained periods of times, they have inevitably. caused both stock markets and bond markets to tremble. And why?

Why is that? Because they then know that society will have trouble borrowing, which then doesn't put money into the economy, which then has another trickle down effect. That's right. It's like you're shutting off that spigot. And there's, you know, at one time water was gushing out. Now it's not going to be gushing out anymore.

And so it's kind of like, you know, if you keep blowing up a balloon and you're, and you know, you're huffing and puffing and you're putting all kinds of air into that, that balloon gets bigger. Well, that's the economy getting bigger. When credit goes into the economy, it's like air going into a balloon. But when credit stops going in to the economy, when you stop, you know, you're putting in less air, that balloon doesn't get bigger as much.

And at some point, when you close it off and shut it down completely, now you've got an economy that begins to contract. So you just, you see the. long term over long periods of times, you see these cycles where as interest rates increase, inevitably the end result, recession, sometimes depression, and stocks and bonds are both effective at it. Stocks, because let's just talk about that. So since 2008, our last big, big, long-term crash, right? We saw the stock market from its top in 2007, which was a, in the month of October, if memory serves me, right, all the way to its bottom, which,

you know, took a little bit of time, actually. It didn't bottom out until 2009, but we saw that market drop over 50 percent, well over 50 percent. And it was the stock market that did that, right? And so how did we recover? Think about this. You had millions of people out of work, And these people were out of work for many, many years, weren't they? I mean, it's not like, I mean, we still had, in fact, it wasn't until probably 2016, 17, after the Trump administration had taken a position that the employment reached those pre-2008 levels. So it took the better part of a decade for those jobs to come back. But it didn't take that long for the stock market to come back, did it?

How does that work? Right. You know, how does that? And hope, I guess. Well, I mean, you know, I just, the math, you know, here's the things that a lot of times Wall Street doesn't want us to think about, simple math and logic. But how do you have millions and millions of people without a job? Where, who fuels the stock market?

Well, people do, right? Mm-hmm. There are people out there buying stocks. I've always said, you want to see the stock market crash. Just, you know, watch the next. time aliens show up and decide they're going to wipe us all out. What's your word? And they've got some kind of laser that zeroes in on DNA and wipe everybody out.

Infrastructure is still in place. But your DNA somehow had, you know, some kind of immunity to this weapon. You wake up the next day and you and your immediate family are the only ones on planet earth. What's your stock worth? Yep. You know, stocks are bought and sold by people. So if you've got millions and millions of people,

that don't have incomes, well, who's buying the stock? Well, the answer, right, end up being companies. During the Great Recovery post-2008, and this is well, well documented today, stock buybacks were the primary tool. And when we talk about buybacks, we're talking about corporations who are buying their stock. It's not people buying the stocks. It's corporations buying the stocks that drove the stock market recovery during the post-2008 recovery. And why were they able to do it? They were able to do it because interest rates fell to historic lows.

And virtually they could borrow unlimited amounts of money that we had now, you know, declared in existence through Fiat printing. And they were borrowing those funds at record low rates to buy their own stock back and prop up so that their board of directors and CEOs could continue to get these bonuses. That's right. So interest rates, impact everything on both sides of the fence. So you've got to take them seriously. Yeah. Well, it's, it's very similar to, you know, the Seesaw thing. Like when, when Reitz go up,

someone's throwing a party and then someone's crying in their, you know, so yeah. So let's talk about the people who are crying today because they're, they're out there in droves. And most of them are either in the banking industry itself or in the bond industry. And why is that? Well, so let's take them one at a time. So the bank. industry, we saw earlier this year in March, first quarter of this year, we saw three huge major banks. And let me tell you, this is how huge they were. Those three banks represented more in terms of collapse and draws against the system than even we had during the banking collapse of 2008. People don't realize that. But it's true. The difference is we bailed those banks out

in time and nobody felt any pain this time. Nobody was. was allowed to fail, right? And we backstopped all of the credit or the depositors 100%, but why did that happen in the first place? What was it that caused those banks to fail? Well, it was interest rates going up. How does that, how does that negatively impact a bank? Well, banks, you know, they're regulated and they just can't go out and buy anything in terms of the, the assets, that they hold with regard to reserves, their cash reserves. And so most banks are holding an enormous amount of government treasuries and or maybe corporate-rated, a-rated bonds.

And we're talking about billions and billions of dollars of them. And what happened to those rates? Well, we just discussed that. They went to zero. They went to zero during COVID 2020. And so banks have still got to store deposits that are coming in. And so they're buying these risk-free, you know, products because they, you know, they got to have your deposit on hand when you go, you know, and ask for it.

So they bought it zero, long-term, medium-term, short. It didn't matter. Everything was zero in those days, right? Pretty much. And now all of those rates have gone from zero to just here recently. They were as high as 5%. Now, they're bouncing around, but the trend has been they're bouncing around as they go up. And the problem with holding bonds is if you bought a bond, let's just take this down to the personal level.

Mike, you bought a bond. And let's say you bought it three years ago and it was at zero. And now you need to liquidate that bond because something has happened where you needed emergency. You need that cash. So you have to liquidate that bond. And the only way you can liquidate it is to sell it. Right. Sell it to somebody.

So you come to me and you say, hey, Jeff, I've got this great. treasury bond, I want to sell it to you. And I say, well, what's the yield on it? And you say, well, it's 0.5. And I look at you and I say, Mike, why would I want to buy your 0.5 bond when I can go out and get 4.5% from the treasury itself today on a 10 year note? I mean, you're out of your mind. The only way I would even consider that is if you discounted the price of that bond to make up for the loss in yield that I'm going to get. And that's exactly what banks had to do. And they had to do it.

They couldn't carry those treasuries to turn because people who had their money in the bank decided they were getting zero on their money in the bank still. And there were too many places where they could go out, the treasury itself, and get four or five percent yields. So they took money out of the bank and that created a liquidity crisis on the banks. and they had to sell those assets that were on their books being held as unrealized losses because they allow them to carry assets in an unrealized category from an accounting standpoint, as long as they carry them to term.

I mean, if they had waited 10 years, if they had a 10-year note, they get all their principal back, but they couldn't wait because they had deposits coming out. That outflow of cash created the crisis. So banking is directly impacted in a very negative way when interest rates go up, particularly when they go up over periods of time where there's, you know, two, three, four years of sustained higher interest rates because of liquidity. And it's the same way with corporate bonds, right? So we talked about who are the people crying today? Banks are crying today. You know, they're not very happy about what the Fed is doing. But the bond market is in the same boat for the same reason. The bond market is a disaster today. A lot of people would say, I don't care that the banks are crying. I'm about ready to retire or I just entered retirement. What can I do to profit during times that are inflationary?

So what do you tell clients or people you're talking to some of the tips that they can do? Because this analysis you've given is the reasons why. But sometimes people sit there and say, great, thanks for the lesson. I appreciate understanding more, but what do I do? Yeah. So the first thing is, I would say, is, you know, don't listen to anything the Federal Reserve is saying because they never get it right. That's the first thing. In fact, a weather person. Yeah, right. It's just like if they say it's going to rain tomorrow, you better get, you know, put your umbrella away because it's not, you can almost guarantee it's not going to rain. I mean, it's the track record's remarkable, really. But to, to your. to your point, there are strategies out there that are designed to offset these types of periods of time.

We call them alternative, for instance, whether it's the banking world and or the bond world with higher interest rates. And we tend to believe that we are probably looking at higher interest rates for longer periods of time than probably what Wall Street wants to see. and that's probably a separate conversation, but I think people are going to be surprised at how long these interest rates are required to remain high because the Fed also has a responsibility to defend the dollar on the global stage as the reserve currency. We cannot afford to lose the dollar status as a reserve currency. You talk about a disaster. I didn't even want to think about that.

So I think they are going to have to defend the dollar with higher interest rates. But what we're looking at for clients, are what we call alternative bond strategies. Because for 40 years, you know, while interest rates were on their marathon race to zero, you could buy bonds and or treasuries, really, at any time along that, you know, there was a three year period, five year period, whatever, along that 40 year period. And the bond that you bought three years ago, you could sell for a profit, a handsome profit, three years later, five years later, if you needed income.

And this is how we in Wall Street balanced people's portfolio. As they got into retirement, we took and we shifted them out of stocks and into bonds. And so people have this really 40-year historical period where bonds were safe, relatively speaking, right? And they're conditioned to believe that. So they're sitting in portfolios today and thinking, I'm okay because I've got bonds. They don't realize. No, no, no. You got a liquidate.

And if you got an IRA, even if you don't need it, they're going to force you to liquidate, you know, you're going to have to start selling those positions. So we need to be looking at bond alternative strategies and they're out there. And that's one of the areas that we, for the last three or four years, particularly, have begun to really specialize in with our practice. You know, I think that's, I wanted to interject that, you know, when you're saying conditioned. You know, I think that we, for decades, 40 years, we were conditioned to go, oh, you know, here's the percentage of our portfolio.

needs to be this percent and bonds that and bond, bond, bond. And I think that when these times are now changing and turning and it's not going to be overnight, you don't just flip the switch. So it's like you said, you're foreseeing the defending the dollar is going to make sure that we have to stay in some of these times.

So what's the alternative? Just take it on the chin? No, because when someone is, is not happy with what it's doing to their investments, then that means we just have to find those alternatives. And when you are not going to succeed in retirement. today, Mike. You are not going to succeed.

The way we've always done. If you're doing the way your daddy did, it's not going to work. Yeah. Yeah, this is not your grandfather's retirement plan or you know, you hear that like, this is not your grandfather's Buick or this is not. And I think that you, people need to be aware that people like yourself that have studied this and said, okay, if this, then that, if this is happening, then here's what we need to be considering. Doesn't mean that we need to jump and go wall in on some strange theory. But if we can look at some alternatives that are proven and safe and have a, you know,

trend of historical safe return and whatnot, that's where we need to be looking at. And I think that the environment we're in that we've been discussing this, this conversation here, the environment is not like, oh, just give us 60 days and we're going to be fine. It's a big question mark with a lot of underlining underneath of it because no one knows. So given that, boy, people just need to say, hey, Jeff, take a look at where I'm at and what are some ideas? And Jeff, I'm sure you're not going to push them and say, do this and you must do it. You're just going to show some options and say, what do you feel best? So what's the best way that people should learn a little bit more about what you do and then also reach out and connect with you?

Yeah. So the main thing that we do with our clients is we educate and we help them understand the dynamics that are pushing the system one way. and the other. And once that, what we find is once they, somebody takes the time to walk them through that education process, you know, our clients are successful. They were, they were professionals. They, they are well

educated. They're smart enough. And really, if you just teach them how the game is played and what moves the ball up and down the, the field, so to speak, they will be, they'll become their own best financial advisor because they'll know the types of decisions that are going to be in their best interest versus ones that are

probably not. So it's really about an education process in terms of our process. As far as reaching out to us, probably the best place to do that is at our main website, which is greenlinefinancial services.com. And once you're there, you can get to my calendar, you can get to our radio shows, see the books that I've written, different things. But it all starts at greenlinefinancial services.com. Perfect. Well, Jeff, once again, Thank you for the education, the clear understanding of just what's happening beneath the scenes that maybe is not apparent to us. So really enjoyed your conversation today. It's been my pleasure again, Mike.

Always enjoy it. Thank you. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, visit www. www. influential entrepreneurs radio.com