Motley Fool Money - “Since When Has The Fed Known Anything about The Economy?”

Episode Date: August 6, 2024

Jeremy Siegel, a professor at Wharton and the author of Stocks for the Long Run is ready for an emergency rate cut. (00:21) Jim Gillies and Ricky Mulvey discuss: - Being a buyer of stocks when others are forced to sell. - Signs that the economy is fraying, and reasons not to panic. - Celsius’s quarter. Plus, (17:51) Alison Southwick and Robert Brokamp answer listener questions about bond ETFs, asset allocation, and Social Security. Companies/tickers mentioned: KTB, AAPL, CELH, SCYB, USHY Learn more about the Range Rover Sport at www.landroverusa.com Epic members: Here's where you can to access Epic Opportunities and link your premium Motley Fool account with your Spotify account to access these episodes. And here's the show's home on Spotify. Got a question for the show? Email us at [e-mail] Host: Ricky Mulvey Guests: Jim Gillies, Alison Southwick, Robert Brokamp Producer: Mary Long Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Since when is the Fed known anything about the economy? You're listening to Motley Full Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, good to see you. Good to be seen, Ricky. When the markets go a little nuts, I like chatting with you. Yesterday, we had a large drop due to this currency trading nonsense going on between the Japanese yen and the U.S. dollar. Now the markets seem to be back. Things are in the green. Things are getting better. So, you know, I got a mission accomplished banner in my trunk. I got a Markets in Turmoil lawn sign in my basement. What should I be putting up right now?

Well, I can play the selfish game. I would argue for turmoil. And that's not because I'm channeling Heath Ledger's Joker from The Dark Night and some men just want to watch the world burn. There's a reason for this. And that is, you know, argue for turmoil because that's when you get better prices in aggregate. You know, the old adage of the stock market is the old adage of the stock market is the The only place where people head for the exits when the half-off sale starts.

It's cliche because it's true, you know, stealing from Buffett, right? You know, you know you're going to be, at least you should be, a net buyer of stocks over the course of your life. All in, when you're buying, when you're in a buying mood, you want lower equity prices because you're a net beneficiary in your later years. Now, of course, you know, at some point it has to go up, but you know, that's not historically been a problem for the US stock market and other world stock markets. Now, US is 10 to 12 percent annualized with dividends reinvested.

Canada is about 8%. You want to be a net buyer of stocks over the course of your life. You want to be a net investor because it guarantees you a better retirement and better years later and maybe better wealth and generational wealth even for your offspring or to be able to support the causes you believe in. you get there and you can do more and you have better outcomes when you are being a net buyer at lower prices. So I am team turmoil. So yesterday I did a little buying. I can't say what they were due to our internal restrictions. Can't tell you what on the air. But I'm curious to hear from you.

When you see this forced buying going on, this sort of forced liquidation as these trades unwind, what are you looking for if you're looking to pick some stocks up? Well, I too have been a buyer both yesterday and today. The Canadian markets were closed yesterday for a civic holiday, so I had to get in some of my Canadian stuff today. And like yourself, can't say what I've been doing. But I'm going to challenge the point. For selling for who? I'm not under any obligation of forced selling. I'm not in the Yen-carry trade, which has been blamed pretty widely for last few days. I'm going to wager a large amount of money that probably the number of listeners to this who are in that probably rounds to approximately zero.

So it's forced for selling for someone else. And I'll give my little parable, which is probably a little silly. So my wife claims she doesn't like to shop. This, by the way, this is a lie. But she's not the fancy purses or jewelry or clothing or whatever kind of girl. But she does very much like treasure hunting. And so she came home yesterday with six large tubes of our preferred toothpaste brand, right? My tooth brushing needs are now filled for the next year.

But we know we're going to be net brushes of teeth over the next year, or I guess we're going to have an expensive dentist bill. And so she did this on her little treasure hunt yesterday. She did this because this particular brand and the brand and size and features, you know, it's about five bucks a tube usually. At the store she was at, there was a sale $2 a tube, limit six per family. So she filled her boots.

And if we can do this as for toothpaste, right? This is standard behavior in this house. We load up when prices are compelling. That it should make sense for equities and investments that you know you're going to be using later in your life. You know you're going to need in your retirement and post-working years or just for generally happy life kind of thing. So look, when you have a forced selling period, remember, unless you've done something personally

in your own personal account, maybe playing a little too much leverage or questionable option strategies, which of course is leverage as well, or whatever. If the force selling isn't on you, that's a time to go, what I'll call toothpaste shopping. You know you're going to need these things in the future. Now you're getting better prices. And I have a story if you want one. Sure. You can't set up a story without telling you. Well, you know, sometimes. Ah, Jim, you've gone too long. Let's go on. I think we might have talked about contour brands in the past. But I'll, if I haven't, I'll give you the basic, just contour brands is the parent company of Lee and Wrangler jeans. Okay?

I mean, who doesn't love, you know, Lee and Wrangler jeans? Oh, most people. But anyway, it's a really interesting story. It came out. It was spun off from VF Corp May 2019. They know they're not a high growth story. So their whole road show when they were going to be spinning off was to pitch this as a total shareholder return thing. In other words, we're going to give you a big fat dividend, say, 5% a year.

And if we get 5% a year in equity appreciation from things like, you know, 1 or 2% revenue growth and gradually getting more efficient, you know, and operationally efficient or whatever, maybe you get 5% there. So get 5% dividend yield, 5% capital appreciation, get 10% total shareholder return. What do you want? That sounds pretty good. That was their whole pitch. And then COVID happened.

And then the pandemic happened. And again, remember, half of their return, part of their, their total shareholder return thing, was this big fat dividend. And COVID happens, and we all get locked in our homes, and everything shut down. And the world just panicked. And in the middle of all this, Contour brand says, you know, the world has changed. This environment looks scary. We are going to cut our dividend temporarily.

We're going to shelve the dividend. We're going to bring it back. They were very clear. It's going to come back. But we're taking it to zero. And at that time, because they had marketed themselves as this dividend story in large part, they were held largely, they had one ETF. A lot of these dividend ETFs had massive stakes of contour brands.

And some of these ETFs, and the one I'm thinking of in particular, owned, I think, between 15 and 20 percent of contour at this point. They have a mandate. If you don't pay a dividend, they can't own them. So that's a forced selling event. They had to gas their entire position, even though management said, this is temporary. Pandemics pass. We are going to bring the dividend back sooner rather than later as soon as the All-Clear starts.

So as we think there's an All-Clear. Didn't matter. Force selling. Stock goes from $45, bottoms at 15. I think it might have bottom below 15. But the point is, I purchased around 15. I recommended that to my members around 17 because I'm under no obligation just because you have a force-selling. selling event. I'm under no obligation to forsell. In fact, I'm going to provide you some exit

liquidity. I'm going to buy the shares. And when you do that, flash forward to today, the stock price has gone from 15 to 70. They indeed brought the dividend back. So you're now getting about two, I think it's $2. Yeah, $2 a year, 50 cents a quarter. So on your original, if you paid $15, $15, what is that? 11.5, 12 percent yield on cost. I mean, you know, Because you are not, if you are not required to be part of the group that is for selling, you can exploit that situation to your benefit. And I'm going to humble, Schwarz Shwap shuts down and then you can't swell.

Well, sure. I'm not a Schwab user. But the point is you and I both also kind of caveated this, that we were both net buyers yesterday and today. Right. So, I mean, this is inherently understood. And I hope a lot of the listeners, too. This doesn't mean the bottom is in, you know, No one knows and anyone who claims they can is lying to you.

Oh, we've got calls for an emergency rate cut right now. Well, let's go there. Author Jeremy Siegel. Let's go for it. The Wharton Professor goes on CNBC calling for an emergency rate cut saying, quote, since when does the Fed know anything about the economy? End quote, looking at the labor market, slowing growth, all of this. Seems like things are really dire, Jim, and you're sitting here so calmly.

Maybe it's just because you had your civic holiday. yesterday. What's going on? I worked on my civic holiday, man. You know, I think with the fullness of time, Professor Siegel is going to want that one back. There are signs that some things are fraying. I'm not going to say otherwise. The restaurant sector is not great right now. They are seeing some valuations in other places looking at you, Apple, that are not commensurate with the growth that's being delivered. You know, five years ago, five and a half years ago, you were paying 10 times operating profit for Ibada, 10 times free cash flow roughly. Today, you're paying about 25 to

27 times. Arguably why we don't know, obviously, but you could make the argument. It's probably why Buffett sold a bunch, sold about half of Berkshire's steak over the last quarter. But I think Siegel's wrong here, and I recognize the arrogance of calling out, you know, Professor Emeritus and Warden, but you know, I'll do it because I'm dumb. First off, what does the Fed known anything about the economy? That's literally their job. You know, they're watching the economy. Specifically, their job is to set the economy up where it can be a nice kind of, you know, just kind of percolating nights. You want Goldilocks.

You want, you know, your primary mandate is to fight inflation and balance the economy for that particular outcome. You know, the famous target range, one to three percent, you know, aiming for a target of 2 percent. We're not heading there yet, but we are in that direction. And that, you know, like, but you've already signaled. The Fed has already signaled. We are going to start doing, you know, small measured rate cuts.

And then you have Professor Siegel coming out and kind of throwing his hands up in the air and waving them around like he doesn't care. And I have seen, I have seen personally what 150 basis points of emergency rate cuts does. And so I'm going to give you, I don't know if the benefit of that wisdom is what I want to say, but I'll say that anyway. In March, Aprilish of 2020, the Bank of Canada, because I do live in this country, even though I greatly admire your country, of course. The Bank of Canada did three 50 basis point cuts within about five or six weeks of each other. What was going on in March and April of 2020, Ricky,

that necessitated that? Don't make me answer that. We know. We know. We know. Right. Like, the world was shut down. The economy, you know, GDP fell 15 or 20 percent or whatever it was. People had no idea what's going like, the world was panicking. Is Professor Siegel asking us to mimic what happened in the very early days of the pandemic? Because some people did bad things, you know, to their own accounts with the yen carry trade, or that he's worried that maybe the Fed has not yet caught up with the economy going down. With all due respect, I saw that clip on CNBC. And it, to me, it just looked like.

naked panic. And it did not look like the Jeremy Siegel I followed for the better part of three decades. Let's go to a little bit of earnings. Sure. Because there are earnings coming up this week, despite what is going on with the yen carry trade. And I also, you know, I take the motley part of this show seriously. And today, Celsius Holdings reported it is a growthy company that makes energy drinks that got absolutely walloped after some Nielsen data suggested that it was losing market share. Today, we learned that the revenue hit about $400 million for the quarter, beating analyst estimates by a scosh. Revenue growth is up more than 20 percent, earnings growth up more than 60 percent, and in its earnings presentation, Jim, we're learning that Celsius is contributing about half

of all-energy drink category growth year over year. I'm becoming more interested in the company as it's just getting beaten up, but I wanted to see where are you at on Celsius? Well, I mean, far be it for me to suggest that a company would spin data in their investor presentation to put themselves in a good light. I mean, Lord knows, that never happens, right? Where I am on Celsius is, look, this is a growth company. And so, yeah, you start arguing about, well, all companies are growth companies. What's the level of growth?

And we tend to shorthand a growth company is one that's kind of, you know, 15 plus percent revenue growth and where we go from there. But I'm looking at this one, and I am interested. I mean, it has a couple of things that I really like. Awareness of the brand is increasing. It's very hard for me to not see it when I go out now. If I walk in my local Costco or my local grocery store, even my local Circle K down the street, you know, there's Celsius as far as the eye can see.

So it is definitely that they have really benefited from the deal. They struck with PepsiCo for the whole distribution deal. And that I'm going to betray where I think this is going to go when I use the word Pepsi. Their numbers are good. You know, 23% revenue growth is good. The earnings growth is good. I know that there's been a couple of people on Twitter who are, you know, saying about how, oh, it's 27% ROE.

Well, if you understand how that sausage is made, you know, maybe not terribly impressed by that, but five-year revenue growth of 80%. Yeah, that's fine. That's built into the shares. And certain market share. These are all backwards-looking things, which are important to frame the company in your understanding of it. What matters for the purchase price is going forward.

And so, you know, at 42, 43 today, obviously it's much better. And to go back what I said earlier, you're a net buyer of stocks. I'd rather be a buyer at 42 probably with this growth story than, you know, at 52 week high was 99 or whatever when there's all that euphoria about the Pepsi distribution deal and what have you. But, you know, if you think, and I'm a cash flow guy, right? I know we've done a couple of valuation talks, so I'm going to kind of trundle over there for a bit. If you think that they're trailing cash flow, which is about $245 million, trailing free cash flow,

if you think that's a reasonable number, and it may or may not be, by the way, but if you think that's a reasonable number, then you can kind of back in and say, okay, this is just shy of a $10 billion company. Okay. What does that free cash flow? We're going to do a very basic kind of a 10-year, what's called a reverse DCF. Okay. What does that free cash flow have to grow at for the next decade and then say it grows at 3% annually like the roughly GDP or whatever for time immemorial past that 10 years? But over the next 10

years is an explicit forecast period. What rate does that free cash flow have to grow at such that, you know, discounted about 11%, such that it justifies today's stock price at about 4243? And the answer is, it has to grow about 17.5% annually for the next decade. Now, is that reasonable? And that's the question you need to start asking yourself. Is that reasonable? It's actually probably not that bad, to be honest with you. If you believe that the current level of free cash flow is indicative,

like they didn't get a big working capital boost and it's going to trend down in the next little while. But that's probably not that bad. I might be a little bit interested, at least starting and doing a starter position there. Because, and that as well as Celsius, I think there's a logical natural outcome that's coming down the pipe at us. And that is Pepsi will buy them. And so, you know, maybe not today. Maybe not two or three years from now. But frankly, I'd be a little shocked if the stock is still publicly traded in 10 years.

Because success will breed one of the big beverage companies or another big consumer product companies to probably take them out. And my bet would be Pepsi. But, you know, so I actually look at this and go, yeah, you know, the price is, you know, probably not bad for at least a starter position and then kind of watch and add on other opportunistic dips that we'll call it. It's got some international expansion plans and definitely one that I am keeping an eye on. Jim Gillies, appreciate you being here. And thank you for your time and your insight.

Thank you. As we wrap up, just wanted to note that our latest premium podcast launched this week. It's called Epic Opportunities. And this is available to members of Epic. the Motley Fool's advanced investing services. You can catch the show on Spotify by linking your Motley Fool account or through the Motley Fool app. We'll also put links to all of those in the show notes for today's episode. These days, I'm all about quality over quantity, especially in my closet. If it's not well made and versatile, it's just not worth it. That's

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happy he raised this issue. All right. So Martin says that you said, Social Security is one of the best, if not the best source of retirement income. Yet, that's what you said. That's what you said. Now we're to Martin here. Yet, it is subject to a mandatory 21% cut in a decade. How can it be a great source of retirement income with cuts coming? So again, Martin is raising a good point. I don't remember exactly when I said what context was when I said that. But I still believe Social Security is one of the best, if not the best sources of retirement income for current retirees, as well as those who will soon get the benefits. Because it is backed my uncle Sam. It adjusts for inflation every year. And it's at least partially tax-free. But,

But what Martin is pointing out is that Social Security is funded mostly by payroll taxes, and people will still keep working, but it's also partially funded by the trust funds. And according to the latest report from the trustees, that trust funds will be depleted in 2033. And at that point, there'll only be enough money to pay 79% of scheduled benefits. So for those who in their 40s are younger and maybe even mid-50s, I think it actually does make sense to assume that you'll get, less than what is currently projected.

Likely in the form of having to wait longer to claim the benefits, and maybe there'll be more means testing. In other words, if you have higher income, maybe you'll either get less in Social Security or more of it will be taxed. I'm 55, and when I run my numbers, I assume I'm only going to get 75% of my projected benefit. But once I start to receive it, I think it'll be safe because I've never seen a reform proposal that recommends cutting benefits

for existing beneficiaries. You know who's also 55 is Patrick who sent our next question in. All right, I am 55 years old and within 10 years of retirement. About half of my portfolio is in retirement accounts. My largest portfolio holdings are an S&P 500 index fund and a total market index fund. Additionally, I have individual holdings in all of the magnificent seven companies. What are your thoughts on trimming my individual holdings since I am already so heavily invested in these companies through the index funds? In light of the sentiment that some of these stocks may be overpriced currently, I thought this

could be a way of taking some money off the table now. Well, let's go over what is generally considered to be the Magnificent 7, the Mag 7 stocks. They are Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia. If you look at the top holdings of the S&P 500 or just the total US stock market, six of those are the biggest holdings, the only exception being Tesla, which floats around maybe number 10, depending on which day you look at it. So if you hold those index funds and you hold those individual stocks, you have a lot in those companies. Is it too much? Ask 10 different modelful analysts, and you'll get 10 different answers,

likely depending on their individual assessments of each of those companies. And if your assessment is that those companies will be the biggest winners over the next decade, as they have mostly over the last decade, then I'm not going to argue with you. But what I'll do is give you the answer you'd likely get from a certified financial planner, such as myself, and we CFB, professionals often approach these questions from the perspective of risk management. So start by seeing how much you have in each company, including the exposure you have in the funds you own. And you might need a spreadsheet to do this, or use something like Morning Stars, portfolio tool or X-ray tool, which factors into funds holdings to let you know how much

you have exposure to each individual company. A rule of thumb is that any time you have more than 10% of your portfolio in one stock or more than 30% of your portfolio in one sector, it might be time to take a closer look at your portfolio and maybe do some rebalancing. It doesn't necessarily mean selling your holdings, right? You could rebalance your portfolio by just making sure that you use future contributions to your accounts to bulk up other types of assets, you know, small caps or international stocks or different sectors. And also don't reinvest the dividends paid by those companies, and a few of them do pay dividends. Use that cash, again, to bulk up your other assets.

but if that would likely leave you still pretty over-concentrated in those companies, you also might want to trim those holdings a bit on top of that. Again, this isn't a commentary on those specific companies and their current evaluations. This is just good risk management, which based on how you phrased your question, sounds like something that might be important to you. The next question comes from Joshua. I have a bunch of individual stocks that have not been performing well. Ah, Joshua, I'm sorry.

We've all been there. and are in the negative since purchased several years ago. Should I sell all these negative stocks to get some tax benefit and then redirect these funds to a safer S&P index fund or use it to pay down a 40K car payment that has a high 7% interest rate? Also, I'm contributing 6% to my 401k to get the full match. Nice job, Joshua. I have lowered this from 15% so I can help pay off that 40K car loan.

Should I continue to do this or do I need to increase my retirement savings? Let's start with how much you should be saving for retirement. It depends on several factors, your age, how much you've already accumulated, but most people should be shooting for saving 15% of their income, and that would include the match you receive from your employer. You didn't mention your match. The average is about 3 to 4%. So I assume you're then saving around 9 to 10%. So you're a little bit behind there. Also, by contributing to your 401k, you get tax benefits. That said, 7% is not a negligible interest rate on that car loan. And paying that off sooner, it's a guaranteed return, right?

Whereas you don't know what return you'll get from the money you contribute to your 401K. Since the 1920s, the stock market is returning an average is 10% a year, but there have been plenty of stretches when it's been lower. So paying off debt is a guaranteed return. Plus, it often has a psychological benefit. And since you bring this loan up twice in your question, that tells me that maybe this is eating at you. So I can't make a firm recommendation, but if you want to sell the investments that you feel no longer have much promise, take the tax loss, which will reduce your tax bill, and then put that money toward the loan,

I wouldn't argue against it. Whether you should continue to save less in your 401k in order to pay off the loan sooner is a little fuzzier. If the rate were a good bit lower, I'd say keep the loan and save more, but 7% is kind of on the line where there's no clear-cut answer once you've taken full advantage of the match, which you're doing, which is great. So I think it really comes down to your preferences and how important it is for you to pay that loan off sooner. And if you go that route, Once you've done that, make sure you ramp up your retirement savings. Our next question comes from Admus. I've been approved for a new credit card.

I want to try this one out since it seems to be a better cashback option than the one I have now. I was wondering what to do with the one I already have. I've heard it's not good for your credit score if you cancel an account like a credit card. Do I just leave it in my wallet and not use it? The quick answer is yes. Let's talk a little bit about what determines your credit score. And this comes from FICO. The biggest factor, 35 percent, is your pay.

So just make sure you pay your debts on time. 30% is the amounts owed, and I'll get a little bit more into that later. 15% is length of credit history, 10% credit mix, 10% new credit. So with that 15% of length of credit history, if you cancel an older card, you might be shortening your credit history. So that could have a harmful effect on your credit score. The other factor is the amount owed. And here you need to understand something called credit utilization.

They look at all the credit that is available to you. you. Every credit card has a limit, and then how much you're using as a percentage of that overall limit. You want to keep it definitely below 30% and better 10%. By having two credit cards, you have more credit available to you. And if you're only using a little bit of it, that keeps your credit utilization ratio low, which again can help your credit score. So I would say, generally speaking, yes, keep the other credit card. Next question comes from Craig. I'm thinking about adding some more bond ETFs. I've been looking at high-yielding bond funds, S-C-Y-B and USH-Y. They have a yield of more than 7% and seem like a good idea. The risk seems spread out since there are a bunch of different

companies in the funds. Are there any other categories I should consider when I'm putting together the bond side of my savings? Well, Craig, when it comes to choosing bonds, I think it makes sense to start with the goal for that investment, because different types of bonds have different risk, reward, and tax characteristics. In fact, the bond market is actually bigger than the stock market. So for money, you want to keep super safe, stick with short-term funds that invest in investment-grade bonds or even just treasuries, such as the Vanguard short-term bond fund, BSV, or the I-share zero-to-three-month treasury ETF, ticker of SGOV. If you're willing to take a little bit more risk and are looking just for some overall diversification to your portfolio, a good intermediate term or total bond market fund that

invest in investment, great funds is worth considering. A couple possibilities here are Dodge & Cox income, Ticko DoD IX, and the Vanguard Total Bond Market ETF B&D. A couple of other things to consider are target date bond funds issued by Invesco and I shares. If you want to invest in bonds that all mature in the same year, maybe you're creating a bond ladder in retirement. So definitely check those out. Now let's talk about the two funds you mentioned. These are high yield bonds, otherwise known as junk bonds. So these are below investment grade. The SCYB is a Schwab high yield bond fund. It's actually pretty new, but it follows an established index, so I'd be comfortable with that. And then the other one with the ticker U.S. H-Y as the I shares broad. USD, high-yield

corporate bond, ETF. And they do both own hundreds, actually, almost 2,000 bonds. So if you're going to invest in high-yield bonds, this is the way to go, very diversified. The problem is some of these bonds will definitely default, even in a good economy. But during a bad economy, when the next recession comes, I don't know when it's going to come, but there will be one. you'll see more defaults, and these funds will drop 15 to 25%. Junk bonds are very sensitive to overall economic conditions. They're actually considered a hybrid of stocks and bonds. And so that's very surprising to people.

They invested in bonds. They thought they were safe, but you're going to see big drops in these during tough times. So if you're investing in bonds so that a portion of your portfolio holds up much better than stocks during a downturn, then I would say stick to short or intermediate term bond funds that invest in investment-grade corporates or treasuries, these can and do drop in value, but not nearly as much as stocks. If you want to invest some of your portfolio in junk bonds, that can be okay, but I would limit it to no more than a few percentage points of your portfolio. If you've got a question for Allison and Bro, email us at Podcasts at Fool.com.

That is Podcasts with an S at Fool.com. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy yourself anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.