Money Rehab with Nicole Lapin - A Hot Take on the Right Investing Moves for This Economy

Episode Date: June 16, 2023

This is an inflection point for investors. Treasury yields were looking amazing, and now some famed investors are casting shade. Stocks, on the other hands, were not doing so hot but now pros are saying we’re in a bull market. And many investing experts had told us they were expecting a recession, and now they… aren’t. To pick apart these opposing takes, Nicole calls up Gary Kaminsky, former Vice Chairman of Morgan Stanley Global Wealth Management, and investing expert. So, let’s untangle the economy, shall we?

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Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. This is an amazing inflection point for investors. Treasury yields were looking awesome, and now some famed investors are casting shade. Stocks, on the other hand, were not doing so hot,

but now people are saying we're in a bull market or a cycle of upward movement for stock prices. And many investing experts had long told us they were expecting a recession. And now, not so much. So there's a lot of opposition in the economy right now. And to help us pick it apart, I called up Gary Kaminsky, formerly the vice chairman of Morgan Stanley Global Wealth Management, experienced investor, friend of the show, someone I've known for a long time since my CNBC days. So let's untangle this economy, shall we? Gary Kaminsky, welcome back to Money Rehab.

Great to be here and great time for Money Rehab. All right, well, I'll try not to call you Gear bear as I call you offline. Let's dig right into it because so many headlines right now, super confusing. You are the guy to break it down. U.S. treasuries have had some pretty significant yields over the last six weeks, as you well know. Right now, you can get a six month T-bill for like five point three percent. Ray Dalio, very famous MVP investor, says that government bonds are becoming more and more risky. That headline just came out. Why is that? Can you break it down? Well, let's just give a little context to what the comments were. I wasn't at the conference. It was at a conference yesterday that Dalio made these comments. And a couple of things to remember. Number one, as you know, as well as I know,

when investors speak at these conferences or they go on the business media, they're told in advance, you know, make some headlines, make some big predictions that are going to grab headlines. So that's the first thing that you should remember. Dalio is worth $16 billion, reportedly. I'm not. So maybe you want to listen to him instead of me. But Dalio is also the same person who said in early 2022 that anybody who held money in cash was a fool. And obviously, cash way outperformed everything else last year. So again, remember, keep these big predictions in context. But what I believe the comments were, Nicole, was that it wasn't about the ability for those that purchased Treasury bonds, bills of getting paid back. That was an issue that many people were concerned about vis-a-vis a potential default by the Treasury.

I think the comments were more in line with the fact that we're now at a point with the U.S. balance sheet that we're going to keep having to issue more and more bonds to pay off the interest. And the question is, are there going to be enough buyers of the bonds? Yes, as you pointed out, yields have moved up meaningfully. A one-year T-bill yielding almost 500 basis points more than they were 18 months ago. That's 5%. Should find attractive buyers. I think the comments were that we have to now be rightfully concerned about the ability for the Treasury to continue to issue debt at a time where the balance sheet just continues to explode. Right. Because the idea of the U.S. defaulting was wackadoodle, really. It makes great headlines. It gets people to watch cable news. The ability

for the U.S. to continue to finance its economic plate needs to be able to access the credit markets. And if you don't pay your interest expense, you're not going to be able to sell bonds. It's as simple as that. It's headline grabbing, but it was not anything that if I owned treasury bonds and treasury bills, I would have been concerned about getting my principal and my interest payments back. Yeah. If the U.S. defaults on its debt, like we have bigger problems. This is zombie apocalypse vibes. Yeah. OK, so let's play translate the investor.

Dalio said, quote, the valuations of money, the printing of money and supported equity market relative to a bond market devalues money. Can you put that in plain English? I don't think I really can. I mean, I think I think that is some fancy linguistics to basically say that it's not sustainable in the long term to keep issuing debt to pay off interest. Because ultimately, if you continue to do that, you devalue the currency to such a point that similar to the effect of inflation, the purchasing power continues to get eroded. Okay, so to put this in context, before the debt ceiling agreement was reached, when investors talked about this risk of treasuries, The risk was really this perceived risk, right, of the US government defaulting on its debts, which was not gonna happen, as we said. Worst case scenario, the government would have shut down,

the treasury payouts would have been delayed a little bit. So this perceived risk is really the operative phrase here. The risk is more nuanced. It was the idea that it could happen and not like the reality of it actually happening. When you buy a bond, if you hold the bond to maturity and the bond is money good, you get your principal back. But during the period of when you buy the bond and when that bond matures, could be one year, could be 10 years, could be 30 years, that selling of that bond, if you need to sell it in that interim period, you can lose money. And so I think you have to remember that the default risk is gone. But if there is a need for interest rates to move significantly higher

in order for the treasury to be able to issue bonds and find buyers. And one owns a one-year T-bill, and they need to sell that T-bill in the interim period. There is a possibility of capital loss if interest rates are higher. Maybe you want to come back at me. Kind of, because essentially what this is all saying is that it's a risk for personal investors, but also a risk for the economy. Another loser is the Fed, right, in the treasury market. One of the things that I think, reading the commentary from the Dalio presentation yesterday, was that the Fed is sitting on significant unrealized losses in their bond portfolio, like many institutions, like many individuals who bought bonds and then interest rates went up. And those bond prices, if they sold them today, they would lose money because rates are higher.

But in the case of the balance sheet, the Fed doesn't the Fed can't hold to maturity. balance sheet, the Fed can't hold to maturity. And so these are losses, but not necessarily realized losses, unrealized losses. And again, that gets back to anybody who buys a bond. There's a misperception sometimes out there in the world that stocks are risky and bonds are not risky, but bonds are also risky because if you buy a bond and you don't hold it to maturity, you can lose money. And you can lose money two ways in a bond, not holding it to maturity and an interest rates have moved against you. And by the way, if you had bought a bond and interest rates are going down and the Fed is cutting rates, you actually have an unrealized profit. A lot of times traders will sell the property, sell the bonds because you can make money or lose money. And then obviously you can lose money if the issue would default, be it the government or a corporation. So that's the important thing

about remembering unrealized losses and realized losses in terms of owning a bond. Well, that's a really super important point that I want to underscore, because this idea that bonds are safe and stocks or equities are risky, you know, is typically the case, right? Like we can assume that generally speaking, but now is a really nuanced time with bonds. So I'm glad we're digging into it. So as the MVP investor yourself, I know we've been touting Dalio and his $16 billion. I know he's just trying to keep up with you. What do you think about treasuries right now as an investment? Well, it's funny. I actually purchased some T-bills earlier this year, like many Americans, when the banks were collapsing back in March and you had to spike up in terms of interest rates where banks were not willing to pay account holders anything, despite the fact

that rates were moving higher. And that's where money moved out of various savings accounts and checking accounts or checking plus accounts, money market funds. I had bought some treasury bills. And again, from an asset allocation standpoint, the reason I did that, I guess, you know, sort of going into the mind of an investor is I needed to keep the cash liquid. One year was enough of a duration risk in my mind where I was picking up some yield, where the bank was not paying me anything to keep that cash there. And so despite the fact that those are partially taxable, I did buy T bills again. I think it was probably the first time I've done it, you know, going back to, you know, 2007, 2008. I think treasuries are attractive right here. I think municipals are

even more attractive. I always have felt that fixed income, and I'm going to go back and put my PM hat on, you know, fixed income is an important component of every investor. PM is portfolio manager, not prime minister. Well, and so as a portfolio manager working with individuals for many decades, it's important to remember that it's not because bonds are less risky than stocks. It's because to have a balanced portfolio, you should have some fixed income. You should have some alternatives. You should have equity.

You should have a balanced portfolio. I've always believed in having an asset allocation for bonds. So essentially, you're talking about this idea that bonds should be in any good asset allocation. There should be some percentage of fixed income, which is another term for bonds, essentially, and equities, which is another term for stocks. Sometimes people will think of taking their age in bonds. So in other words, like you're 30 years old, of course, your portfolio should be 30% bonds, the rest in stocks, 70%. If you're 70 years old, your portfolio should be 70% bonds, 30% stocks with the idea that as you get older,

you want to take on less risk so you don't lose your money when you need it most. Do you agree with that for a new investor? Yes. Well, the data that you just provided is the backbone of most of the, if you go meet with a wealth advisor, financial advisor, financial planner, and they present to you a nice PowerPoint presentation and they give you a bunch of asset allocation recommendations. We've actually spoken, you and I, to various wealth advisors who talk about these, what they're called is Monte Carlo scenarios. Monte Carlo, like you've probably been to Monte Carlo. I haven't been there in about 30 years, but you know, San Tropez, Monte Carlo,

places where you hang out, any else? I am going to Monte Carlo actually next weekend. Very nice, right? But no, that's like, I'm glad you're bringing this up because it's, you know, what a bunch of Wall Street bros, douchebags, you know, bring up to sound really smart. Yes, because they'll say, we're going to run the Monte Carlo scenario, which is we're going to take your, we're going to say how old you are, what your cash flow is, what your expected savings will be.

They run these numbers. And at the backbone of this software is basically what you just said. is basically what you just said. If you are 30 years old and I am 60 years old, they're going to recommend something like 60 or 62% of my money, 65% of my money on fixed income. And for you at 30 years old, it'll be 28% or 30%. And it's basically your age, you know, 100 minus your age. And then they'll now compared to say a decade ago, flavor in within that other percent. So Nicole, you being 30 and the 70% that might have historically been in equities, they're going to now suggest maybe 50% in straight equities. That means listed stocks, names that you've heard of, Disney, Home Depot, Exxon, Facebook.

And then they'll suggest now that maybe 10% to 15% are in other type of assets that are equity linked. And that would be something like alternatives, hedge funds, private equity, venture capital. And a lot of that has to just do with the fact that those assets are able to, again, given when markets are very volatile, like last year, when S&P stock market was down, many private equity holdings were able to be out of the public market and they actually

rose in value. So that's the basis of 90% of the Montelo scenarios that are frequently talked about yeah so you could have basically done the same thing for free by listening to money rehab and just taking your age and putting it in fixed income period and have a nice day correct no need to talk to a wall street douchebag for this yeah and now we're going to have a lot of financial advisors that are going to you know not like us for sort of peeling back the curtain there. Add him to the list. It's a very long list. But it's reason like 537 of why a bunch of this jargon makes no sense at all. Hold on to your wallets. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash,

but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high-quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when

I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com. Host. And now for some more money rehab. So, yes, you were on the show exactly a year ago. We were talking about whether or not we were headed for a recession.

At the time, you thought we were in a recession, but not at the same level as the 08 recession. So same question. One year later, Gary, are we in a recession? Well, let's just say that from a reported standpoint, I was wrong because GDP has remained positive and we have not printed negative GDP, which is technically the definition of a recession. However, what we've had is a rolling recession in various different parts of the economy. As a total economy, we've been able to continue to grow despite the significant move up in interest rates.

As you pointed out, I said basis points. You said close to 5% move higher in short-term rates. So we continue to be in a recession in various different parts of the economy. So, again, going back to how we opened the show about making bold statements. You know, if I want to make a bold statement, well, we'll definitively be in a recession later this year. There's a possibility we may continue to have this rolling recession. If you work in commercial real estate, you're in a deep recession right now.

If you were in travel and hospitality, you were in a depression two years ago, and now you're in a massive, you know, double digit type of growth rate given the dynamics of what's happening in the economy. So I think I'll answer that question by saying to you, I believe that we'll be in a double negative GDP recession, official, later this year, early next year, given that the higher interest rates will have an impact on the economy. But we're in a rolling recession right now in many areas, and that will continue. But I do think, I continue to believe, and the market was quite excited when we're doing this show here today, that CPI is now back down to 4% annualized, half of where it was a year ago.

That's inflation. Consumer price index. You cannot maintain a growth stable economy with that type of inflation. The purchasing power gets eaten away. And so I think that the Fed will continue to raise rates. And so I think that the Fed will continue to raise rates. This is my opinion later this year, because they're going to have to their attempt to get back to two percent inflation CPI, which is a stated goal, which is a sustainable level for economic growth without losing a purchasing power. That's the stated goal. And we're not there now.

And maybe some of it is the lingering effects of the COVID bounce, post COVID bounce, maybe some of it just the demographic and structural changes that have happened in the economy since, but they're not going to be able to get CPI inflation back where they want it without a continued raise in interest rates, which will inevitably at some point cause a recession. Yeah, the market was pretty stoked about the inflation news. We're in a bull market territory right now. Do you think that's going to last? Well, we're in a bull market again, much like the definition of a recession. You're in a bull market if you own a handful of stocks, large cap mega stocks, the technology stocks that

were down so significantly last year. The average stock in the S&P, the average stock on the NYSE is basically flat this year. And so arithmetically, the index is up because of these mega cap stocks. So again, it's important to remember that we've seen periods like this in the past. And it's not the healthiest sign of the overall, you know, if you want to call it now, we're back in a bull market. We're in a bull market because of the average, because of the S&P 500, the index, but the average security is not back in a bull market. And so we're at this sort of crossroads. Yeah, we were shooting the shit yesterday about the market.

And you brought this up, which I thought was a really important point that I think brings all of these things together, where large cap equities, so like big companies, big stocks, are leading the way, which is a harbinger for bad things to come, historically. One thing that humbles all of us in this business is that we say past performance is never indicative of future results. But, you know, past patterns are never guarantees of what's going to happen. And we certainly had since 2000, since 2020, so many things that have never happened before that we're not exactly sure. But in the past, if you go back and look at the last 30 years, sure. But in the past, if you go back and look at the last 30 years, rallies that have been led by a handful of very big, liquid, large names typically is not the type of healthy breath that one would

say there's an all clear signal to get back in the markets. And some of that could be, some of that could be as a result of what I spoke about, which is that equity managers have to be invested. They feel that they have to be invested. They're not exactly sure. Maybe they go on TV and they say, oh, the Fed is done. It's time to get fully invested. Maybe they're not exactly sure if they truly believe that. And the ability to have money in large liquid names, if you want to quickly change your portfolio from being 100% invested to 90, that gives you the ability. That's why these names have had multiple expansion. For the most part, other than the darling of the month right now, Nvidia, Chipstock, most of the other

companies have not seen the massive guidance increase in earnings. So the stock price moves off of the lows from the end of last year is multiple expansion. Multiple expansion would typically be happening if you thought interest rates were being cut. So again, maybe the market is ahead of itself. Another bad cliche, ahead of its skis or something like that. Over its skis or something like that. Over its skis? Over its skis. We'll see as the summer progresses whether or not these large cap names were showing the correct momentum.

Maybe you should ask Ray Dalio. As I said, he may be smarter than I. Hey, Ray, if you're listening, please come on the show. I would love that. Thank you. But I think there's an important point, which I know you've mentioned many times, which is that this is why owning an index fund for the

great majority of people makes a lot of sense. Because if you're not a professional investor, and you're not going to be able to spend the time and allocate the resources necessary to try to figure out how these market mood swings work, the index gives you the capability so that you don't have to decide what you're going to put into these seven or nine stocks. Yeah, for sure. And also most fund managers that are professionals that are supposed to do this all the time do not beat the S&P 500. that are supposed to do this all the time do not beat the S&P 500. And yes, and that's why, you know, that's why the infamous or famous phrase of closet indexing is so important to understand because many managers really just mimic the index, but they charge you significantly more than it would be to buy a cheap index fund. Now, again, I was fortunate when I was part of the portfolio management team

at Neuberger Berman from 99 to 2008, where over that time period, we significantly outperformed the index. And that's not to sort of, you know, brag or... Yeah, it is. No, it's not. It's to say that while many managers, their objective is to try to beat the index and only a handful do, you know, a lot of it has to do with timing. A lot of it has to do with market style. A lot of it has to do with discipline. I've also been, Nicole, part of short term periods where we've had relative underperformance. If I was I can tell you this and I can tell the viewers this. If I was running a fund this year, I would I can tell the viewers this, if I was running a fund this year, I would for certain be underperforming the S&P 500.

I end all episodes by giving listeners a tip they can take straight to the bank. So what's one piece of money advice listeners can use today? The most important thing is to respect dividends and distributions. What does that mean? It means it's just as important if you invest in a stock, how much money they're returning to their owners through dividends and distributions that you can reinvest as it is for how much that stock price goes up or down every day. 60% or 65% of the return when you invest in stocks is dividends and distributions reinvest not just

capital appreciation so when you're buying anything an index fund an individual stock when you go on to the brokerage and you purchase it there's a little toggle usually like to reinvest dividends click that absolutely reinvesting the dividends and letting the power of compounding work for you is the same thing as having a disciplined approach to putting money into a 401k. Compounding works. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehabatmoneynewsnetwork.com to potentially

have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.