Financial Fortress Radio May 30 2010 with Richard Jordan and Patrick Dougher
Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. Richard Jordan, you are the Chief Investment Strategist for DFW, and it’s always good to hear from you and hear the things that we’re going to talk about. I know we’ve got a great show lined up to talk about an area that is – well, a lot of people think it’s real conservative investing, but you have a different opinion. Richard.
Richard: Thank you, Pat. We’ve got a bond bubble going on out here. Pat, it’s just a lot of fear that has driven people out of the market the last three years, and a record amount of money has been poured in the bonds, and the rates are 25-year low and these folks are set to be whipsawed by the market big time. They could lose as much or more than they lost in the 2008 stock market crash, and they’re not hearing about their brokers because their brokers are driven by commissions.
Patrick: Well, I know that there’s also a ton of just “stay where you’re at, hunker-down; don’t move because you’re afraid of making a decision anyway” is already out there – a lot of fear. Wouldn’t you agree?
Richard: I agree, but buy and hold quit working in the 1990s.
Patrick: Right, you’ve got to be a little bit agile now with everything is going on, don’t you?
Richard: You need a professional.
Patrick: I agree. Well, while we’re talking about, it’s always good to say, why are we doing the show, Richard?
Richard: Well, we do this show for a number of reasons. First, of course, it’s a way to get the message out there on how we’re different. So, let’s talk a little bit about Fortress’ mission statement.
Our mission statement is to demonstrate leadership investment advisory practices for clients driven by the golden rule standard – to treat others like you who’d like to be treated. What an idea.
Patrick: Yeah, really, go figure. I thought that was – it sounds like though that’s part of even the whole registered investment advisory format.
Richard: It is.
Patrick: In the 40s, it was set up as an alternative to the brokerage system, wasn’t it?
Richard: It was set up in 1940 by Congress because the wealthy people said, “We do not want to deal with stock brokers who are driven by commissions; it’s a conflict of interest. We want someone who will act as our fiduciary.”
Patrick: And that’s the big part of what Fortress is all about, wouldn’t you agree?
Richard: Exactly. So, we act as a fiduciary and a trusted advisor for all our clients, always putting their interest and needs ahead of ours. We advise clients on how to maximize their financial opportunities with the appropriate levels of risk and taxation that each client needs and no more, and how to avoid the common practices in the stock brokerage industry that result in poor performance and unnecessarily high fees and taxes.
Patrick: That’s good, having somebody on your side of the fence rather than conflicted opinion.
Richard: And we believe that all investors, but especially seniors, deserve advice that avoids these conflicts of interest. We believe all clients deserve factual information about the brokerage industry’s primary areas of conflicts of interest.
For instance, collecting both investment commissions and fees on investments from the clients is how the industry operates. The confusion comes in here because 95% of the Registered Investment Advisers also carry brokerage licenses creating this conflict of interest.
But, at Fortress, we don’t allow our people to carry both. We do not have that conflict of interest. Second, from recommending proprietary investments that are only available at the brokerage funds and that results in higher compensation and commissions for the brokers and their managers. Does that sound like a fair game to you?
Patrick: Well, it’s always good. It’s one of those things where if you’re not basically saying one thing out of, one side – well, let me back up and say this way: it’s consistent with what people really want and that’s someone that is on their side to do them good, not do them in – and I appreciate that.
Well, I know that we started off with talking about the bond market and I want to get back to that. I know there’s so much information available now in the bonds and in the bond market. Let’s get talking about that. What are you looking at there?
Richard: Well, we’re looking at a market where people have poured record amounts of money into the bond industry the last three years because they believe it’s safe, but we now have such extremely low interest rates and an oversupply of bonds compared to the history that, simply put, we’ve got too much cash that went into this and the bubble is getting ready to burst.
So, let’s look first at the bond is considered the safest – US treasuries. The average yield on five-year US treasuries this year is only 1.9% – the lowest rate in the last 25 years and the rate is going down the last three years.
In fact, if you’ve been buying five-year treasuries the last years, your average yield right now is 2.28% less than inflation. Does that sound like a great way to lose your money?
Patrick: Well, I don’t think anybody really expects that. They’re trying to live by the adage, “don’t lose your money,” but aren’t they really setting themselves up to be hammered with returns that are much worse than the stock market’s volatility in the last few years?
Richard: Exactly. Well, in the first place, they’re losing purchasing power because the inflation rate is higher than this for most people. The inflation rate that Uncle Sam publishes excludes food, energy and it limits all healthcare costs to 4% of your income.
Now, for seniors, those are the three largest spending categories in their budget. So, for seniors, when the government says the consumer price index is 3%, seniors are paying between 5% and 7% inflation.
Patrick: Well, that’s because the value of the dollar, I know, against those commodities, which they are, has weakened which means that it’s taken more of that to buy the same thing. And we all see it. Nobody’s pulled any wool over anybody’s eyes. It just sounds like funky numbers.
Richard: No, but when you’re only making 2% on US treasuries and you’re paying 5%inflation, you’re essentially losing 3% a year. So, these treasuries look safe, but look what’s happening with our budget deficits. We have record budget deficits and, sooner or later, the market is going to quickly push these rates back up and they’re going to go up to about at least the average for the last ten years’ historical average at 3.48%.
In fact, the Chinese and the Japanese, it was announced about a month ago, cut back about 50% on what they were going to invest in our US treasury bonds and the Federal Reserve is out there buying them for us. It’s robbing Peter to pay Paul. It’s absolutely crazy.
So, let’s just say that you’re buying these things at 1.9% this year and they get pushed back up to the ten-year average of 3.48% or the 23-year average which is well over 4%. But, just at 3.48%, if you have to sell one of those 1.9% bonds, the market value in a 3.48% market is 56%. You’ll take a 44% loss in about a year worse than you did with the 2008 stock market.
So, why won’t you hear about this from your bond broker? Because he’s only cared about making his commissions. He has no interest in acting as your fiduciary, and he’s not required to.
Patrick: Well, the other thing is that a lot of people have bought these treasuries in a position of kind of a buy and hold. They don’t like to mess with them. A lot of folks that invest in this area are older. They just don’t want to be bothered by it.
Richard: They think they’re avoiding risk. But, right now, if you’re reading a lot of things about bonds, you’re reading two extreme points of view; that whether they’re going to see hyper inflation soon because of budget deficits or, because of record unemployment and underemployment, 25% of the people are working for zero or for way less than they used to just two years ago. The discretionary income is drafting. We’re going to see deflation or hyper inflation.
So, the volatility on bonds, the potential volatility in the next year is going to be extraordinarily high. It’s going to make the stock market volatility of the last few weeks look like a calm sea.
Patrick: Well, I know, also, with the problems that we’re seeing internationally with things like Greece, England and some of the others that are out there, we’ve got some real problems when it comes to attracting buyers to our debt.
Richard: Yeah, the Chinese and the Japanese, like I said, have already cut back 50% and the only reason that we’re still seeing Europe investing is because a lot of the countries over there look worse, but we’re heading in the same direction. We’re the next Greece in about two years.
Patrick: Right. And what I’m saying is this that in order for us to attract someone to buy our securities, our debt securities, we have to raise our rates.
Richard: Exactly.
Patrick: So that we stay at least competitive in the overall market, right?
Richard: Right.
Patrick: So if we do that, that’s going to push it even faster and farther and a lot of these people are even going to be able to get out of this until the damage is done.
Richard: Exactly.
Patrick: Wow. That really is scary. If you’re listening, we’re not trying to scare anybody. We’re trying to say, look, somebody needs to tell you the truth. And the truth is that this area that seems to have been conservative, well, it’s not as safe as it used to be. one of the things that I really encourage you to do is make sure that you come to Richard’s workshop this Wednesday night, isn’t it?
Richard: Yes, it’s at Southlake Timarron Country Club this Wednesday night at 6:30 p.m.
Patrick: And I know the last Wednesday, I’m sure it was absolutely fabulous. I’ve been to this and I will tell you, it’s at least an hour of solid information, no sale speech and then a wonderful dinner afterwards. I know that people will enjoy it. They’ll get a great deal of information. Just register.
And the way that you register is just you call 972-325-1700 or if you want to get a hold of Richard direct, it’s just 972-758-4484. In the last set of numbers, I just want to make sure that if you’d like to join the call today or join the conversation, just call 972-299-5759 in the Dallas/Fort Worth area.
Join the conversation and make sure that you get your questions answered by a Registered Investment Advisor, Richard Jordan on Financial Fortress Radio. This is Pat Dougher. And we’ll be right back, Richard.
Richard: Thanks, Pat.
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Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan and we just heard a great commercial at the break there about the veterans and, of course, this is Memorial Day weekend and we want to make sure that we honor them, that we thank them. I am so thankful. My son has just become a graduate of basic, so he’s on his way to becoming a ranger and I couldn’t be more proud of him.
I just want to say it’s one of those things where, for a lot of the veterans that are out there, my dad was a veteran and a lot of people in our families have served in the military one way or the other. And what they do is beyond a belief good for the country, beyond belief, in my opinion, thankful for the way that they serve all over the world. Many of them are spending years away from their family to serve this country, and it would be a benefit and a blessing. And we’re so thankful for that.
Richard: [18:34 inaudible] where the people that have served over there in Iraq actually came out of the Reserves and National Guard and had to do three tours of duty just to maintain the forces over there. That kind of a sacrifice for somebody that just thought they were going to be a weekend warrior to end up being over there for three years or more, it’s incredible.
That’s why we do this community service announcements for the vets every week on this station because we want to say thank you. And thank you was said back in 2006 by the Bush administration when they created a special piece of legislation and they funded it with about $25 billion, and it’s to help vets that are either disabled or over 65 with their high medical expenses, with the costs of home healthcare, assisted living, and nursing home care. And they can get up to $2,300 a month tax free.
Now, think about that. We just talked about US treasury bonds paying 2.28%. So, that would be like having a million dollars in the bank if you could get – over a million actually – compared to putting a million dollars into US treasury bonds.
That’s the kind of potential asset this means for vets, but they don’t know about it because the current administration is not advertising it and they’ve added a whole bunch of forms that make it difficult to apply for the program.
On top of that, if you apply and you’re not approved because you forgot to fill in a blank, or cross a T or dot an I, you cannot reapply for another year, and that’s the current administration’s stance on taking care of our vets. So, I think it’s insane and I think the word’s got to get out and Memorial Day is a good day to talk about it in great detail. So, I did want to talk about that a little bit today, Pat. It’s a passion of mine. Freedom is not free.
Patrick: It’s right, and it never has been. The other thing though is that folks can connect with you and get more information about that program, right?
Richard: They can call my trading desk directly and I will talk to them about the program, 972-758-4484. Keep in mind that I am busy with the market until it closes at about 3:00 p.m. Central, so I don’t return calls often till after 3:00, but I’ll be happy to continue to try and catch you until I catch you, or you can just try and catch me after 3:00.
Patrick: Sure, and it’s just 972-758-4484. That’s direct to you and, hey, can get a lot of real help on getting those forms filled out making sure they’re qualified and all that, correct?
Richard: We work with an affiliated company that has an over 95% success rate in getting the forms filled out correctly and getting the checks off to the veterans within 90-120 days, which I know doesn’t sound quick but….
Patrick: In the government’s kind of way, that is pretty quick.
Richard: That is lightning.
Patrick: Yeah. My son talked about that. He goes, “The military doesn’t move fast.” So, unless they’re in an operation, then it’s a whole different program.
Richard: Exactly.
Patrick: Well, that’s really good. I hope that people will take the advantage of that and come and visit with you, connect with you on that and just dial at 972-758-4484. We really want to say thanks to all of veterans for all that they do. I’m so honored to have them in my family. My dad was one, my son is one and it’s an honor. So, thank you.
Richard: And that’s why we’ve run those commercials ever since we’ve gone on the air. It was our way of saying thanks, but we just want to put a little more emphasis on it because it’s Memorial Day weekend and we want to thank the soldiers again.
Patrick: Well, one last question on that – does it cost anything to do that program?
Richard: No, there’s no charge. We’ll be glad to help you without charging you anything. It’s s an information service and we can explain how it works. It’s more time than we’ve got on the air, but we’ll be happy to set you up an appointment and talk about it or just give you some time over the phone.
Patrick: That’s great. Well, let’s go back to bonds – the most conservative investment in the planet.
Richard: US treasury bonds.
Patrick: Not.
Richard: Not looking good.
Patrick: Not anymore.
Richard: You could get whipsawed one way or another.
Patrick: You’ve been telling us about how the rate right now is so low and that in the next year…
Richard: 1.9%.
Patrick: In the next year, it could almost double which would mean that the value of your current bonds that you have, your current bond portfolio, if it’s relatively new, could get smashed to the tune of 44% of the principle, right?
Richard: Yeah, you could lose 44% to over 50% of the principle in one year.
Patrick: And most people don’t see them because treasury – I mean, you can’t get any safer in treasuries, right?
Richard: Well, yeah, but we’re at the 25-year low on the rates and you don’t want to be buying bonds when you’re at a low point. So, a lot of people, Pat, have decided, “I’m going to protect myself against that kind of inflation, I’m going to buy TIPS.” These Treasury Inflation Protected Securities.
And the five-year TIPS, oh boy, they’re paying 0.5% as a base rate and the inflation rate that the government is quoting for this is 0.9%, which means your combined rate on a five-year TIPS, or Treasury Inflation Protected bond, is now only 1.4%.
Patrick: So, it’s less than just buying a regular treasury.
Richard: Yes. Way less.
Patrick: Okay. And what’s the benefit if you can say it that way?
Richard: Well, the benefit is that if the government measurement for inflation, which is different than the CPI rate that gets quoted in the papers every month, it’s a more conservative rate. It’s lower. If that rate goes up, then you would get an additional percentage added to your check every year.
The problem is we’re in a really strange market. We’ve got over $3 trillion in cash sitting on the sideline still. We’ve got high unemployment, even though we’re supposed to be in a recovery. We’ve got high underemployment. We’ve got all these people that used to make $80,000 or $100,000 a year as engineers, CPAs, etc. in large companies now running Starbucks or McDonald’s for $30,000 or $40,000 a year.
So, that combination means that we have a tremendous risk for deflation. And what happens with the deflation is that the effective rate on the TIPS will actually drop below 0.5% and could effectively become negative.
Patrick: So, what would that mean for investors?
Richard: That means that not only will they not pay you any interest, the value of the principle on the bonds you’re holding could decline.
Patrick: So, is there any way to protect against that?
Richard: No. What you’ve done is you’ve protected against inflation, but you have not protected yourself against deflation.
Patrick: Deflation, right. So, again, the thing that I keep saying is that if you’re thinking that you can park yourself anywhere and ride out the storm that’s coming without proper advice, you will probably get your head handed to you financially.
Richard: Exactly.
Patrick: Man. Well, I hope that people will come to your Wednesday night workshop.
Richard: You bet. Southlake Timarron Country Club, 6:30 p.m. Just call 972-325-1700 to register, and we will talk more about the bonds and the market and how to make intelligent decisions, and how to get a professional advisor on your side that has your best interest at heart, not just a commission salesperson like you get with the insurance guys and the brokers.
Patrick: That is awesome, 972-325-1700 to register for this excellent workshop on ways that you can protect yourself from this coming financial tsunami that’s going to hit – and hit really soon. Thanks so much for this part of the show. We’ve got so much more to come in just a few minutes.
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Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan, the Chief Investment Strategist in the DFW area, and we’re so thankful for what you’ve been saying because, quite honestly, I think a lot of people do not understand the volatility of the bond market. They think bonds, treasuries, all is good, and then you were talking about TIPS. What is it, Treasury…
Richard: Inflation Protected Securities.
Patrick: Treasury Inflation Protected Securities.
Richard: Commonly called TIPS Bonds.
Patrick: And a lot of people are moving in there. In fact, we’ve got trillions of dollars moving in there.
Richard: Over the last three years, there’s been an overabundance of money put in that market. Anytime you’ve got an oversupply of money in a market, well, you know the lots of supply and demand.
Patrick: Exactly. The thing is this that there’s so much fear pent up in that money. They’re like, “I don’t want to lose any, I don’t want to lose any,” and yet, they’re about to get just slaughtered like sheep in the next year. Isn’t that true?
Richard: Just like they did in the stock market because the brokers have put them in in ‘07, knew the market was going to drop in ’08, but all they care about is their commissions this year.
Patrick: Well, you’ve got bills to pay, right?
Richard: Yeah, you’ve got to pay for the club, and the yacht, and the home in the Hamptons and the apartment overlook in Central Park. I mean, the guy’s got to live, right? That’s the way brokers live.
Patrick: I remember years ago, Donald Trump was given $400,000 a month to live after bankruptcy – wow!
Richard: Tough. How do you buy flowers for the apartment?
Patrick: I just don’t know how you survive in that; somebody could. But anyways, the point though is you’ve got a group of people, and a lot of people that are very afraid. You’ve got interest rates at an all-time low.
Richard: 25-year lows, absolutely.
Patrick: What is it?
Richard: 1.9% for five-year treasuries, 1.4% for Treasury Inflation Protected Bonds.
Patrick: Okay. And now, we’ve got the scenario where there’s a lot of volatility coming up – a lot of unsure people that when you look at what’s going on in Greece and Europe. You’ve got the Chinese and the Japanese going, “We don’t want this much of your debt as we used to carry.” That’s going to force the interest rate to come back up, isn’t it?
Richard: Right. So, guess what the bond brokers are pushing now?
Patrick: No clue; what’s next?
Richard: Because the rates are so low on the US treasuries, they’re talking about the next safest category historically – municipal bonds.
Patrick: Tax free.
Richard: Hey, they’re tax free, right.
Patrick: But, isn’t there a little bit of trouble in Dodge City.
Richard: Oh, my God. Let’s take a close look at this. Over 40% of the workforce in the city, state and federal government jobs, basically the baby-boomers, are set to retire in the next five years and collect their pensions. Do you think that’s going to put any stress on the system?
Patrick: Oh, absolutely. In fact, we were looking at our stuff the other day and we noticed that the tax rates for our home had actually properly evaluated our home which was, that was actually appreciated if they had actually said instead of inflating it by 30%, they actually stated about what the houses were selling for in our neighborhood.
Richard: And so, your value dropped over 20%.
Patrick: No, it was over 30%.
Richard: Wow.
Patrick: It was over 30%, as far as the tax basis, what they wanted to charge for taxes. Okay, so that means they’re going to get 30% less income as in the municipality.
Richard: So, let’s talk about where else they get income – sales tax. And sales tax collections are down 10% -30% across the Dallas/Fort Worth Metro and we’re one of the healthiest metropolitan areas in the country.
Patrick: Well, isn’t that directly related to the amount of available revenue to spend?
Richard: Yeah, it’s directly related to unemployment and underemployment.
Patrick: Right. People don’t have as much money, so they’re not spending as much. They’ve tightened their belt more than a few notches. So, they’re not buying the car, they’re going out to eat as much and that’s generating a lot less in tax revenue, right?
Richard: A lot less. So, that’s causing anybody that’s in this industry that’s got any brains to forecast that we’re going to have record amounts of defaults in the municipal bonds – record amounts compared to any time in the last 50 years, any time since the Depression.
Patrick: Now, historically, and I mean like since the Depression, there has not been many municipalities that have defaulted in their bonds.
Richard: No, take a look at California right now. Would you buy a California bond?
Patrick: No, I’d consider it more risky than a junk bond.
Richard: Well, exactly. And so, what we’ve got is muni rates are slightly higher than these US treasury rates, or Treasury Inflation Protected Bonds, and they’re tax free. And guess why they’re pushing them? Commissions.
The bond brokers don’t care about you. They don’t care if you get caught in a default and you’re, not collecting interest, but the principle that’s worth zero. They’re not going to tell you this information because they’re not required to. Oh, but it may be somewhere in the prospectus that you could risk and lose all your money. But, who ever reads a prospectus, Pat?
Patrick: Well, one thing about that, isn’t that the same – if you want to call it offense – that Goldman Sachs did?
Richard: Exactly.
Patrick: I mean, they were selling securities that they knew were garbage.
Richard: Well, the money that they were investing for themselves, for their company, they were sorting the mortgage securities that they were selling to some of the largest banks in the world and it ended up driving the eighth largest bank in Germany into bankruptcy, and another large bank here in the US.
Patrick: That’s what I’m talking about. So, when you look at the municipalities – I look around and I’m not a Registered Investment Advisor. I’m a host of a radio show’ I’m helping to make this thing more popular on the Internet and other things. But, my point is this that I can at least look around and go, “California is in a boatload of trouble.” You look at Florida.
Richard: All the states are. All the states.
Patrick: Well, you think it’s all? Because there are some that are like real key, like Arizona and Florida and New York.
Richard: Well, yeah, those are the worst. Those are going to have the lowest ratings, but all the states have this problem. You’re not seeing surpluses anywhere. The most conservative states, like Texas, are even having to cut their budget.
And when you start looking at budgets getting cut because sales tax revenues are down and property tax revenues are down, and now you’ve got record numbers of commercial properties going into default which means record numbers of commercial foreclosures coming soon, which is going to reduce the commercial property values, which is really a much bigger hit for municipalities, where are they going to get the money to pay for these bonds?
Patrick: Oh, absolutely. In fact, looking at the commercial real estate investments that are there and the adjustable rates that are – loans, mortgages, whatever – that are out there, those are sledded to go through a massive default in the next two years.
Richard: They are.
Patrick: Okay. So, just like you say, when those things default, they’re sold for dime on the dollar or whatever or a lot less many times, and then they get to where it’s a dime on the dollar.
Richard: it could.
Patrick: That’s horrible. So, what can they do about munis?
Richard: Well, I wouldn’t ask a municipal bond broker for advice. I would ask someone that has a fiduciary responsibility to you to be your trusted advisor which is what we are. We’re one of the few; we’re in that top 5% of the Registered Investment Advisors that don’t carry the brokerage licenses and we’re not driven by commissions. We’re driven by the desire to please you, to meet your needs and goals for your retirement and for your investments.
Patrick: Now, with that in mind, you’ve got a workshop coming up this week.
Richard: We do.
Patrick: And it’s at Timarron Country Club, starts at?
Richard: 6:30 p.m. on Wednesday, June 2nd.
Patrick: Okay, any cost involved in this thing?
Richard: No cost. It’s a one-hour educational-only seminar – no selling. We’ll serve you dinner for the trouble of you coming on out and if you’ve got some questions, we’ll be happy to answer them afterwards; just an opportunity to meet with me and some of our staff.
Patrick: Now, I will say that your clientele does tend to be, I would say, a little bit more affluent, so who should be here?
Richard: They’re either smarter than the average bear or they’ve got a little bit more saved than the average bear. So, our range of investors’ account failures are from roughly $250,000 up to $7 million. So, we would like to talk to people that have at least $250,000.
Patrick: Very good. And to register, it’s real simple. It’s just 972-325-1700, right?
Richard: Absolutely. No salesman will call. You will have the opportunity to hear me speak and we’ll talk a lot more about these bonds and smart ways to invest without getting so emotional about the market; smart ways that produce higher rates of return with lower fees and no commissions.
Patrick: I am really thankful for what you do because I’ve heard you speak and it was excellent. I was really surprised at how much information you cram into an hour, how valuable.
Richard: Bring your pen and paper.
Patrick: That’s really good too, 972-325-1700 to register for this workshop this week with Richard Jordan of Financial Fortress and we’ll just tell you, it is worth the time. 972-325-1700. We’ll be right back.
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Patrick: Welcome back to Financial Fortress Radio. This is Patrick Dougher, Richard Jordan, Chief Investment Strategist in the DFW area. I’m getting a little tongue-tied here at the end of the show. It’s been good. We’ve talked about a lot of different things. We talked about securities that have to do with – and I really should say treasuries and bonds.
Richard: Bonds; things called bonds.
Patrick: Things called bonds.
Richard: That are thought to be safe, but right now, you’re set to get whipsawed in one direction or the other with this volatility coming up in the bond market. It’s going to make the volatility in the stock market the last couple of weeks looked like a cakewalk.
Patrick: But, a lot of people are going to fight you on that. They’re going to say, “It couldn’t be that bad,” but you’re talking 40% plus.
Richard: Yeah, you could lose 40% or 50%.
Patrick: And that really has to do with where the interest rate is and where it’s expected to go for multiple reasons. And it’s not like it has to jump a lot; it’s just effectively doubling. It’s 1.9% to – what do you say?
Richard: Well, 3.48% I believe is the ten-year average. That would result in a 44% loss for you.
Patrick: And that’s in the principle.
Richard: Right.
Patrick: Okay. So, you take all this money that you think is safe, you drop a million dollars into the bonds that are out there and you could have potentially close to half a million next year. It could be pretty bad.
Richard: It could get ugly fast.
Patrick: Okay, and that’s the thing that we’re just trying to emphasize. Then the funny thing is this that we went on to look at what’s the next kind of safest investment, which are TIPS you call them.
Richard: Treasury Inflation Protected Securities.
Patrick: Okay, but they’re not much better.
Richard: They’re only paying 1.4%.
Patrick: Okay. And if we do have inflation showing up, fine, but the real risk is in deflation which we could have that for a year or two, and that would mean even more mess.
Richard: Yeah, the face value of your bond could actually drop while you hold it.
Patrick: Okay. Then we went on to the next most conservative investment which is…
Richard: Municipal bonds.
Patrick: Right. So, we’re looking at municipal bonds, but most of us look around and go, “Wait a minute. We’re looking at 30% plus in a reduction in the income to the municipalities just from the changes that have happened in the last few years in property valuations, in the amount of unemployment or underemployment that’s out there,” right?
Richard: Yes, and sales tax revenue is down 25% -30% around the country as an average and in the very best municipalities in the Dallas/Fort Worth Metro, which is one of the healthiest, they’re still down over 10%.
Patrick: But, the point that that really amounts to is this that when these bonds are offered in the marketplace, they’re going to become increasingly more risky.
Richard: A lot of municipal bonds were rated AAA a year ago are going to end up being junk bonds in the next two years.
Patrick: And that’s because there’s just not any income coming in, or not enough to even service the debt that they’ve created.
Richard: Until the unemployment rate drops fast and the underemployment rate, what I call the hidden underemployment rate, we’re not going to see these sales tax revenues come back, we’re not going to see these home values come back, and these municipalities are going to be hurting. And they’ve got huge pension cost coming with over 40% of the baby-boomers set to retire in the next five years. So, imagine that – what do you think that’s going to do to city services? They’re going to drop while costs go up.
Patrick: Absolutely. It’s going to be one of those things where cost continues to rise and the only way that they’re going to be able to pay it, essentially, is print the money.
Richard: But cities and states can’t print money; they just go bankrupt.
Patrick: They just go bankrupt and, at that point, we’ve got all kinds of services that are falling out. It could be a rough ride.
Richard: Remember the Orange County bond default.
Patrick: Right.
Richard: It’s going to happen all over the country.
Patrick: Well, the thing that’s so important that I’m seeing is that if you don’t have a good advisor that really understands this, well, I would say they should be talking to you.
Richard: Absolutely. We take the clients’ needs and we treat them like our needs. We put the clients’ needs ahead of our own needs because we’re fiduciary.
Patrick: Well, as a Registered Investment Advisor, there is a huge difference between an RIA, Registered Investment Advisor, and a broker.
Richard: A broker is driven by commissions. The SEC thinks you know what, but a lot of people don’t realize that brokers are driven by commissions first and it’s caveat emptor, buyer be aware, that’s what the SEC says. And the category of Registered Investment Advisor was created in 1940 for the wealthy and the smart people – the educated people – and that’s all they use.
And 95% of the registered advisors, unfortunately, also carry brokerage licenses which creates the conflict of interest. At Fortress, we do not carry the commission-based licenses because the only purpose to carry those licenses is to collect commissions.
So, if you’ve got a Registered Investment Advisor and he’s got a Series 6 or a Series 7 license, it’s only to collect commissions. It’s real simple, folks. If they’re operating under a conflict of interest, you don’t have the most trusted advisor you could have.
Patrick: Very good. I know that you’ve got this workshop coming up this week. I want to make sure that people know about that early, that you’ve got a – it starts at 6:30 – about an hour of good information and I will say I’ve listened to it and it is excellent, it’s a ton of information when it comes down to it.
And it’s not a sale speech which is really unique. I really was actually taken back by that. I thought, “Wow. This is not a sales pitch.” It’s a presentation of information that will help investors make better decisions.
Richard: Absolutely.
Patrick: I know that they can connect with you just by calling the 972-325-1700 or they could connect with you at your desk, correct?
Richard: Yeah, the 325 number is to register for the seminar. So, to register, call 972-325-1700. If you want to call me direct, try my desk 972-758-4484 and, of course, I’m busy during the day with the market, so I would recommend you call after 3:00 or wait for a returned call after 3:00 if you want to leave a voice mail.
Patrick: Very good. Now, I also know that you’ll have time for question and answer afterwards, and then if somebody wants to meet with you, they can do that as well after they’ve been to the workshop.
Richard: You can schedule an independent objective evaluation of what you’re holding anytime you want by calling my desk or coming to the seminar, and if you decide you like me, you can do with that.
Patrick: Great, it’s awesome. And again, it’s at Timarron Country Club over in Southlake. It’s just actually about a mile off 114 on 1709. You go that way typically to get to Timarron.
Richard: Yes, where 114 and 121 come together, just west to the airport.
Patrick: Very good, so people from all of Dallas and Fort Worth could be a part of that. 972-325-1700 to register. No salesman will call; they’ll just get a confirmation, and then if they want to connect with you, 972-758-4484. As we’re going into this next few weeks, what should people be looking for with the interest rates and bonds?
Richard: Well, again, there is so much material out there from the analysts that the bond market could head either direction fast. The volatility is going to be going up in the next year. I’m not sure it’s going to change much in the next two weeks.
Patrick: Now, I just figured to look for, what should people begin to do?
Richard: I would pay attention to the US treasury rates. They’ve been dropping, but I think they’re going to bottom again. The only reason they’ve dropped is because the Federal Reserve has chosen to buy our own paper, which means we’re robbing Peter to pay Paul.
Sooner or later, we’ve got to toss that money into the budget deficit and pay for it. It’s absurd to think that we’re doing that. That’s never a long-term strategy, and the Chinese and the Japanese are just going to weight us out.
Patrick: I understand. I know that next week, one of the things we do want to cover is the whole Roth IRA conversion. That’s such a big decision. There’s so much money that it has been coming out of the 401Ks in retirements. People just don’t know whether to taken that or not. I know that’s coming up.
I would encourage you that as we move into this next week, go to Richard’s seminar. It’s Wednesday night. It starts at 6:30, ends at about 8:00ish; great dinner, great information. 972-325-1700 to register or 972-758-4484 to connect with Richard at his desk. Thank you so much, and we’ll talk to you next week.
Transcript by:
Lainie Lord
www.magiscript.com