Indicators, Interest Rates & Inflation

November 18, 2017

Join Steve and Ken while they discuss the current state of the market on the Your Money, Your Wealth show.



Steve: Welcome to the Your Life, Your Wealth show. I’m Steve Cordasco. Joining me now is Ken Berman. He has an interesting story. He’s the creator of Gorilla Trades. I’m sure you heard of him, but he’s got a little bit of a back history where at the age of thirteen he took over his family investments at Washing Company where he discovered and invested in in biotech stocks when they were maybe less known; Amgen, Biogen, Immunex, and then Ken later became a stockbroker and ultimately created a trading system, which today is known as GorillaTrades. Hey Ken, welcome to the Your Life, Your Wealth show.
Ken: Thank you Steve, thanks for having me.
Steve: Yeah, thanks for being here. You’ve been doing this for quite awhile, about forty years or so?
Ken: Yes, I started like if you like you just said at a young age actually started GorillaTrades almost twenty years ago and has been doing that ever since.
Steve: You know it’s interesting because you and I probably you know aren’t far off, you may have ten years on me in playing in the markets. But I remember during the course of my time, I started with a company called Butcher and Singer and I remember some of the more seasoned guys there, you know the ones that we’re towards the end of their career, saying, “You know kid, you’ve never seen a bad market.”
Steve: And then we got into a bad market and someone said said, “You never seen a raging bull market.”. So, I guess we’ve seen we’ve seen both my friend.
Ken: We have.
Steve: The best of times and worst of times. Tell me where you think we stand today with regards to the markets.
Ken: You know, I mean what’s interesting is that, you know as you mentioned, it’s been going a long time, eight plus years now. And the funny thing is we’re not hearing any headlines about it. We’re about not hearing talk in the barber shop about which stock our barbers mine. Things that we’ve typically heard at most market tops. So it leads me to believe that we still haven’t had that euphoria. We still haven’t had that top.
Steve: So, is that one of your indicators? It’s individual stock talk?
Ken: It is. They always call it a media-type indicator that follows typically your major publications will have some type of story about the raging bull market on the cover of their magazine. We haven’t seen that. Nobody’s talking about this bull market.
Steve: See, I love your granular approach the barber shop talk, right. I used to have an indicator that I used for the economy. You know what my economy indicator was?
Ken: What was that?
Steve: Porta-Potties.
Steve: The more Porta-Potties being distributed, the more construction that was going on, the more building that was going on, the more permits that were being filed. See, you got to get Porta-Potties before you can get a permit filed. And so, interesting stuff because we’ve come way away from the fifteen, twenty years ago when I used to use those granular indicators that are you’re using. But you’re saying, “Hey they still work today.” I think is what you’re saying.
Ken: They still work.They still work.
Steve: So where do you think we are within the market? Because, again, the media, which has just come full force now with social media giving people a point of view. I mean, I just, I was scrolling through just my regular news feed last night and you know I read eight stories on how the market os at a top. It’s going to crash. When I get to the root of where those stories being generated it’s usually by somebody’s trying to sell something. I think in a annuity or something. And then, you know, there’s, you know, some type of of pessimist out there who, you know, was doing that type of work or trying to sell something. And then I get a refreshing story where it says, “Hey this thing could keep going.” And you know, it’s coming off of the desk of like a Warren Buffet. So, tell me how you see things playing out? Is the is the media bullish or do you find them to be relatively bearish?
Ken: It’s funny how you phrase that because, you know, back in the seventies very, you know, if you know as well as I do they used to have a quarter point eight point increments when you quoted stocks. And then it seems like the changes made to the decimal system and those [unintelligible] were limited could you can no longer make those [unintelligible]. Then came online investing. And the commission, I remember the broker charging $4-500 on a single trade. Now they’re down to $6.95.
Steve: Right.
Ken: So, online investing has helped, but now let’s talk about the other end of it that you’re talking about. The evolution the Internet has made it so readily available information that it’s very difficult to tell who can be a trusted source. And you’re hearing one end, you’re hearing the other end. I’ve been hearing these talking heads on CNBC now for all these years saying, “Where’s the market top? It hasn’t happened yet.” So, who do you believe? And I think it’s a question you have to get a sense for yourself. You’ve got to be a little defensive in the market right now and be prepared in case there is a pull back.
Steve: So, tell me how this market is different from other bull markets you’ve seen over your forty year history?
Ken: Obviously, it’s the longest one that we’ve seen without a major correction. Which, you know, you have to look at interest rates. Once I was taught as a young individual is earnings drive individual stocks. Interest rates drive the market. We have historically low interest rates. I mean so low, let me ask you this, Steve. I had a CD in the late 1970s, a $10,000, 24-month CD. What do you think the interest rate on that CD was?
Steve: 24-month CD back in, what year was it?
Ken: Seventies.
Steve: Late seventies I bet your CD, because the Delaware Cash Reserve was paying almost 21%, I bet your CD was paying 17 1/2 to 19.
Ken: Very close, 18%.
Steve: Wow.
Ken: So, what point was there to take the risk investing in the stock market when I was basically guaranteed 18%?
Steve: Well Ken, I bet you agonized over locking it up for that long at that rate, right?
Ken: I did. I was very young at the time [unintelligible], but my God 18%! How can I go get the stock market? But today one, you’re gonna get one percent and a CD? There are no real attractive options in stocks right now. So until you get to see interest rate really begin to rise. I’m not talking a quarter point or half a point until they are start getting back to the main. I don’t think you’re going to see the end of the stock market.
Steve: Now, let me play the other side of that. And I’m not look, I’m not a pessimist in this thing, right. I’m not here to say that we are over valued, I happen to think that the market is, to me, in a fairly healthy, so I’m not seeing, you know, an un-healthiness, right. I’m not seeing euphoria in certain sectors, right. I think that’s right but what you reference before individual stock talk that comes from a certain sector, right. So, this seems to be a pretty broad, you know what, I shouldn’t say that because somone is going to come back and say, “That’s not really brought there’s X amount of stocks that are driving up the, you know, the whole thing.” But you know what I’m saying here. It’s across board. Now, if I go back and I look at where the majority of the returns from the S&P 500 has come from, percentage wise, it’s inflation. So, it sounds counterintuitive. Low interest rates means no inflation, therefore the biggest return of the market that, you know, there’s different functions going it, right. You have dividends and cash flow, right. You have earnings and, but at the end of the day, you have inflation which is the biggest piece of the return of the market if you go back decades. So, with no inflation, hence that means low interest rates, how does that correlate with the theory that low interest rates is what’s driving the market?
Ken: It’s a good question. Do I have an answer for it?Probably not. I mean, you know as well as I do, you’ve been in it long enough that the stock market doesn’t make sense.
Ken: So, with that I will say this, I don’t get into the economic end of it as much because I’m into more the technical analysis of individual stocks. So inflation, how do I want to put this to you? I’m looking, I guess I should say, you’re looking at one side and I’m looking at the other. I’m looking at the fact that, Steve where would you put your money right now to get a return to you potentially could get a stock market? Which alternative?
Steve: You know, there’s real estate, and there’s hard assets. A liquid-type of investment. So, it’s not a fair answer to your question. So, there’s a liquidity function, but you know there’s non-traditional type stuff that of course….
Ken: I mean, the bonds today again very low yields and if you’re comparing inflation, are you not getting hurt worst of the bunch then you are in the stock market right now?
Steve: So, they can be just as as vicious on the downside, but you know owning an individual bond, as one would say, I mean look about a bond investor versus a pure equity investor, they’re just two different breeds of folks, right. And will argue that, you know, they do better than the other, but you can capture any period of time, right. What we do mostly for clients is, you know, try to match up who they are as individuals, you know. What their wealth means to them and how they tie it to their life and then, you know, we diversify. So it’s not so much trading, right, which is facinating becuase I love talking to someone like yourself, who when dealing with individual clients, kind of comes through with that side of it. I think that overall the industry in general has seen, you know, trading from individuals go out of vogue. And it seems and, I don’t know the reason for that, is it because trading by machines and you know flash boys that are out there forcing the average everyday little guy not to be able to compete in the trading environment today? You would know more than about that me.
Ken: Yeah, I thought about this the other day and it dawned on me that, you know, years ago was so attractive with all the stock splits that were taking place. Why are they not there anymore? It’s very difficult for the average Joe to go out and buy a hundred shares of Apple right now. Let alone a hundred shares of Google or Amazon. Why are they not putting their stocks?
Steve: Gets costly, you know. It’s just like a member used to be able to buy, I guess the single, I used to do this in my class I taught at temple, you know. What is the most popular single share of stock? And you know, people would say Disney because you could buy one share and you could be part of their club. It was actually compared to the time, I don’t know if you know this but Playboy, you know that, Playboy is pubically traded.
Ken: Yeah.
Steve: You know why that was popular?
Ken: Why?
Steve: Every bar owner wanted to frame a share of Playboy because it had a well-endowed bunny on the front of the certificate. You know most of us have those.
Ken: I know. I know back when I owned shares in Wrigley, they’d send two of them every year.
Steve: Right, at least you got something.
Ken: To their shareholders.
Steve: A good dividends. How do you see this bull market ending?
Ken: You ask some tough questions here, don’t ya? You know, is it possible that we see a war involving the US or any other countries or recession? That could derail the market and cause a bear scenario. Let’s talk about Trump not being able to get his politics, especially if tax reform passed. That could disappoint investors and create a pull back or a correction. But short of one of the external events happening, I don’t see this happening without interest rates beginning to really ramp up. Could there be a pull back? Sure there could be a pull back. Do I see a bear market? Nothing seems really changed. The economy is actually improving. I don’t see a bear market improving the economy.
Steve: So, what you’re saying is, although we have somebody in the White House, who many are saying are not very predictable and a loose cannon, the market runs on predictability, right. And you can see, we talked a little bit ago about how the market is this, you know, this thing that, you know, nobody can figure out. But one thing I know over time is that when there’s predictability, the market likes that. It’s, you know, certainty is…
Ken: Right.
Steve: Is an indicator of the fact that this market is where it is shows that the market’s got confidence in some certainty. Hey, appreceiate the time spent with us and…
Ken: I thank you for having me.
Steve: We’ll have you back. Love talking about the markets and maybe when you come back and talk some individual stocks.
Ken: All right Steve, appreciate it.
Steve: Hey, Ladies and Gentlement, that’s Ken Berman. He’s founder of GorillaTrades. He’s also a guy who helps individual investors understand the market and find places to invest. I’m Steve Cordasco, it’s the Your Life, Your Wealth network. We’ll be back. Oh, we’re also broadcasting on 990 WNTP. Don’t forget every Saturday 10 to 11. And you can also find us on Facebook, Facebook dot com /cfnplan. We’ll be back in just a moment.
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