#7 – Future Interest Rates In A Larry David Economy, NVIDIA, Behavioral Finance, and SWAN

Wes Moss [00:00:59]:
It’s totally done. And you know what? Talking about the Super bowl seems like we shouldn’t even be talking about any sort of football because it seems like it was like a year ago, even though it was only last Sunday. It took up a lot of the day though, didn’t it?

Jeff Lloyd [00:01:12]:
No, it really did. And it was a great Super bowl. It was a great Super Bowl Sunday classic, overtime finish. We’re done.

Wes Moss [00:01:20]:
It’s like talking about the World cup. How many years ago was that?

Jeff Lloyd [00:01:23]:
Okay, what about Atlanta’s own usher? Did we like the halftime show? Probably the biggest pop star in the show.

Wes Moss [00:01:30]:
Which halftime show was that? How many years ago was it?

Jeff Lloyd [00:01:32]:
It was a long time ago. We’re ready to move on.

Wes Moss [00:01:35]:
Yeah, we’re ready to move on. And obviously you had this horrible thing that happened at the Kansas City parade, which is just, the world just continues to deliver us awful headlines no matter how good things are. And that’s just a horrible situation. But what I do want to talk about today, and we will do some Super bowl numbers because the numbers are interesting when it comes to the media. We’ll get a revisit very briefly on what those numbers look like from viewership, et cetera. I think to your point, what’s next in the world? Football is over. The Valentine’s day is over. What else is over? Is that pretty much it?

Jeff Lloyd [00:02:14]:
Hopefully winter is almost winter. I am so ready for some spring and some sunshine and no cold.

Wes Moss [00:02:21]:
We had a little bit this week, but I think what you look forward to next is always this super bowl of economic data and what was in the headlines this week again and what moved markets? Inflation. It’s funny that the headlines were all about this hot inflation report as though it was so bad, meaning that it was so high, but the overall annual rate of inflation still dropped to 3.1%, and we’re getting closer to that 2% target. But the expectation, and this is what’s so interesting about markets and the economy, is that we build these expectations because you have hundreds of people modeling out what the numbers should be or supposed to be. And then when it’s different than the expectation, even though it’s better than it used to be a month ago or the month prior, that certainly the trend has continued to get better and better. The market all loses itself for the day. And the hot inflation turned the market, quote, ice cold because we had a big reaction negatively. So we had, quote, hot numbers, meaning that inflation wasn’t as low as expected. The interest rates went up because the prevailing thought, of course, is if inflation stays high, then the Fed can’t calm down on rates.

Wes Moss [00:03:40]:
And we all want interest rates to come down because even though I fortunate to own a home, there are millions of Americans that just can’t afford a home because of, a, prices and b, interest rates and mortgage rates are so high. So you want to get some sort of relief around that. And in order to do that, the Fed’s got to feel comfortable that they can lower rates. And we’re not going to get there until we get at least some softer economic data. Our outlook this year was for a pretty good economy. Maybe we call it the Larry David economy pretty good. We called it the Goldilocks economy instead because we think it’s not going to be too hot, not too cold, somewhere in the middle, which we get a little bit of growth, gross domestic product, maybe it’s one, maybe it’s 2%. We don’t see it as negative.

Wes Moss [00:04:25]:
We don’t see it as this three or four hyper robust. And by the way, that doesn’t even sound like a lot. But a three or 4% growth rate for a $27 trillion mature economy is almost too much. If we have that much growth, you’re going to see even higher inflation. So the economic numbers this week were concerning only in the respect that it makes the Fed wait longer to lower rates. Not bad economic news. More of a good news is bad news situation because a little bit of inflation means that the economy is still working and pushing itself further, hence creating inflation. Now, on the other side, I think the next day, this past week, we get softer than expected consumer spending.

Wes Moss [00:05:12]:
So we’ve been waiting for the consumer to calm down. We know that they have excess savings all the way back since the early pandemic days and that hasn’t really, quote, come down or been spent. The cushion is still there. But in January, we did see some calming and lower. Again, this is all relative. It was still relatively strong, but lower than expected consumer spending. And then rates went back down, the stock market went back up. So it’s just been this roller coaster around.

Wes Moss [00:05:42]:
And it’s ironic that good news leads to bad news in stocks and then bad or less good consumer news, economic news leads to good news in stocks because it means that the economy’s slowing down. The Fed can calm down on rates. So the market went up. So it’s this churn and this whirlwind. And those are the cross currents of economic data. I’m not going to say the Fed governor here, one of the former Fed governor many years ago. Once these guys retire, I think they get bored and they go around and they do dinners and they go on CNBC.

Jeff Lloyd [00:06:17]:
They like to hear themselves talk.

Wes Moss [00:06:19]:
They go on CNBC. As a former Federal reserve governor, what do you think the Fed should do? Well, we were lucky enough to have one of these more intimate dinners. And speaking to a past big time fed person, let’s just say it was funny the way they remarked about the economy. They said, we have very little understanding about how the US economy really works.

Jeff Lloyd [00:06:45]:
And those were the people in charge.

Wes Moss [00:06:47]:
Yeah, but they’re no longer there, so they can say it. We have very little understanding of this economy. And it makes sense, because if you think about the economic stew that you need to understand, think about you’re putting together grandma’s chili. And it’s not a three ingredient recipe. It’s not beef, beans and broth or red sauce. It’s the complicated family recipe that has 100 ingredients and it changes over time. And the US economy is so complex. It’s got services, it’s got goods.

Wes Moss [00:07:25]:
And then within goods, you have this massive list. And within services, which is 60% of the economy, you have a massive list. Then you look at consumer savings, consumer activity, consumer sentiment. Imagine all of those ingredients all trying to be figured out all at the same time. And they’re always changing and evolving. Something that the CBO just came out with a couple of weeks ago is population growth. That’s another variable. For years we’ve been reading that us population growth is not strong.

Wes Moss [00:07:55]:
Births minus deaths. We’re not really expanding. A as far as I’m concerned, when it comes to fundamental economic principles, if you had to pick a few pillars, what do you want to invest in? You want to invest in an economy that’s growing in people. Hard to argue that point. Do you want to invest in an economy that is shrinking when it comes to their people, or do you want to invest in economy that is growing with people? And we know as we look around the world, demographics have an enormous impact on how any given country or region is growing. You think about China. They had one child policy for a very long period of time. Well, now they’re hit with a population crisis.

Wes Moss [00:08:38]:
They have less people to have less children. So now they have a population issue. Well, the United States has continued to shrink because we continue to get married later. And if we get married later, we typically have a few less kids than our parents did and our grandparents did. When I was a kid, having being one of four, not that big of a deal. Oh, yeah? How many brothers and sisters? I have three. So you’re one of four. Sounds good.

Wes Moss [00:09:04]:
Me too. I’m one of five. My sister has six. That’s a conversation in the 1980s. What is it today? How many kids you got? I have four. What are you, Amish? When I tell people I have four kids, what are you crazy? How can you have four kids in this day and age? So we just don’t have as many children. So we have had a slowing of population growth. It’s been a concern of mine for a long time.

Wes Moss [00:09:30]:
We’ve done shows all about demographics. Fortunately, the United States population, and this is measured and written about very often, births minus deaths. We continue to have more births than deaths. So the population is still growing, but that rate of growth has been getting lower and lower and lower to the point where it’s been, quote, less than half a percent. Well, what did the CBO just come out and say? Only a couple of weeks ago, they started looking at immigration. Now we’re not touching the topic of immigration. Legal illegal border. That’s not money matters.

Wes Moss [00:10:06]:
We’re not here to argue the policies of the United States Congress, which only 16% of Americans think that have trust in the government anyway. We know that from Gallup and Pew. We already know that nobody likes the government, so we’re not going to even enter into those conversations. However, CBO comes out and says, wait a minute, there’s actually more population growth going on here in the United States than has been reported by other measures. And instead of a 0.4% growth, we’re probably growing at somewhere around 1%, which is a big difference. And I don’t think it’s a coincidence that this economy has stayed ahead of itself to some extent or not dipped into recession. You start counting that much population growth, whether it’s immigration that we like or dislike, those are the real numbers. So think of, let’s go back to that recipe.

Wes Moss [00:10:57]:
Well, grandma’s recipe just changed again. Like, wait a minute, we have three new ingredients that we just hadn’t quite calculated at the time. And that’s why we’ll go back to the Fed. It’s almost impossible to fully understand the US economy because the variables are ever changing. And that’s where we stand today. I still think, all of that said, I still think the prevailing trend here in the United States is for a pretty good economy, not robust, not spectacular, not the roaring fifty s. This is not happy days in America. But the economy seems to be very resilient in chugging along, moving forward, almost grinding or bulldozing its way to economic growth.

Wes Moss [00:11:47]:
And we get back to that, that means that it’s an environment for companies to do a little bit better every single day. Maybe they increase their earnings a little bit. And guess what? The market cares about? Earnings. Net income. Jeff Lloyd, you and I were talking this week about energy. Let’s talk about companies and profits for a minute. You were running some research around a giant technology company that has a market capitalization of, I don’t know, take it away. How big?

Jeff Lloyd [00:12:16]:
We’re talking about Nvidia here. And remember, this is not a buy or sell or hold recommendation, just a company that you hear a lot in the news being one of the magnificent seven. But today they have a market cap of about $1.8 trillion. Pretty staggering.

Wes Moss [00:12:33]:
Staggering number.

Jeff Lloyd [00:12:35]:
And if you were to take the 23 companies that comprise the S and P 500 energy sector.

Wes Moss [00:12:41]:
So every big energy company in America.

Jeff Lloyd [00:12:43]:
Yeah, energy. And you know these energy companies, Exxon, Chevron, Schlumberger, Conoco, Phillips, Exxon. You go there to Philip, the big boys, the big ones. If you were to combine their market cap, all 23 of them, it would still be less than the market cap of Nvidia.

Wes Moss [00:13:01]:
One company is bigger than the entire one tech company that makes semiconductors, and they’re great semiconductors. The chips they make are fast, you’re telling us is bigger than all the US energy companies combined. Now what is staggering to me is when you look at the output of those companies and collectively, Nvidia is certainly a profitable company. They have about, we’re looking at net, we looked at net income here, correct? Yeah.

Jeff Lloyd [00:13:31]:
The trailing twelve month net income.

Wes Moss [00:13:32]:
So we look at net income. Nvidia posted about 19 billion. 19 billion. This is not a small number. This is cranking out cash. 19 billion. Now, they’re bigger than the whole energy sector. What do we think the energy sector cranks out in cash? What does their cash machine look like? They, at the end of last year, collectively made $150,000,000,000 in free cash flow or net income? Not free cash flow, net income.

Wes Moss [00:14:01]:
So that just on the surface is fascinating. One company versus one sector literally powers the world. Energy sector in America is still kind of a big deal. Yeah, they still use fossil fuels. I just put gas in my car this morning. But I can’t think of a better example, in retrospect looking at this, of why you do not want to shun these other areas of the market. We’re in a world that has looked at technology as the only place to invest, and they are the darlings of artificial intelligence. And artificial intelligence is going to change the world.

Wes Moss [00:14:37]:
We don’t know how it’s going to change the world, but it’s going to change the world. Is it going to translate to profits? We don’t know. We still don’t know. So you’re looking at one company that’s trading at this giant multiple of what it earns, and a whole entire sector. That, as companies have real profits here. And really, if you think about this, you have almost eight times the net income from the energy sector as the one company. But the one company is bigger than the whole sector. And that, to me, is a nice way to try to remember we don’t want to ignore the rest of the marketplace just because one area is in favor today, or, quote, hot today.

Wes Moss [00:15:17]:
And this is just a good reminder. The numbers show to me some value in one area that’s getting short shrift, guess would be the term. But really, a fascinating data, b, a nice analog to, let’s not ignore the rest of the market just because tech seems as though it’s going to grow to the sky with no fall. I think it’s a good lesson for investors.

Jeff Lloyd [00:15:43]:
Yeah. And there was just one more stat with those 23 energy companies compared to Nvidia that I just wanted to talk about briefly. If you look at their headcount and employee, the employee count of those 23 companies, energy companies, you have about 420,000 energy employees. Nvidia is about 26,000. So you got almost 16 x the headcount in the energy space. And we kind of always.

Wes Moss [00:16:13]:
Relative to tech, right?

Jeff Lloyd [00:16:14]:
Relative to tech. And we kind of always like to talk about the army of american productivity. I think that shows you two things. You got almost half a million people in the energy, space, hard workers going out there day in and day out.

Wes Moss [00:16:28]:
Pushing the ball forward.

Jeff Lloyd [00:16:29]:
But you also want to talk about productivity. Like those Nvidia workers are doing something creative and special at that company as well.

Wes Moss [00:16:36]:
Only Jeff Lloyd would couch. He doesn’t want to offend the Nvidia people, but he also wants to give credit to the energy folks. Are you running for office now? The hard work, the energy sector, hard working Americans, the energy sector employees that drill for oil are the backbone of this economy. And then you go talk to the Nvidia folks and you say the semiconductor makers of this in America are the backbone of this economy. You’re just right out of the campaign with Will Ferrell. Hot dog stand. Corn dog stand. Employees are the backbone of this economy.

Jeff Lloyd [00:17:14]:
What movie is that?

Wes Moss [00:17:15]:
The campaign.

Jeff Lloyd [00:17:16]:
The campaign.

Wes Moss [00:17:17]:
That’s the campaign with Will Ferrell. Every place he goes. They’re the backbone of the economy. No matter where you go, bowling pin operators are the backbone. Not that they’re not, but anyway. All right, so inflation was the big number, and I knew you wanted to go back to that. So that to me is, there’s so much to glean from that one example. And thank you for running that this week.

Wes Moss [00:17:42]:
That was awesome. Now with that, let’s go to inflation. By the way, I think most people know. The other thing is, I think a lot of people know this by now, but the Super bowl numbers were crazy. It was a record of all time, 123.4 million viewers watch. Obviously, the game. The statistic that I love, that find fascinating here is that we say that it was the most watched event all time. Of all time.

Wes Moss [00:18:12]:
But really, when it comes to a percentage of Americans, the Apollo moon landing still crushes it. Still crushes it. Because as far as the percentage of America, what was the percentage? 37% of America watched Super Bowl, 58, 64%. Almost, well, almost double. Not quite of Americans watched the Apollo moon landing, which was, by the way, midsummer dream, July 20, 1969, Neil Armstrong, Michael Collins, who you don’t hear about as much. And then Buzz Aldrin. Did I pronounce that correctly?

Jeff Lloyd [00:18:51]:
You did. And you told me Buz Lightyear, that’s where I was going. You told me a stat today. Like think of all the characters named Buzz that came out after the moon landing. And I was like thinking about Buz Lightyear and Toy Story, and I never made the connection until today when we were talking about.

Wes Moss [00:19:08]:
I never made the connection that why every giant hedge fund and money management firm wants to be named Apollo.

Jeff Lloyd [00:19:15]:
That’s right.

Wes Moss [00:19:16]:
Because they’re the first to land. I don’t know if I ever thought about that until we were doing a little bit of research around it. But it makes sense. Apollo. And that just goes back to the media landscape changing in the United States, which is still fascinating to me only a few years ago. If you go back to was it 20? Let’s see, 2022 was 82 the year, but it was five years ago. Let’s go back only five years ago, 61 of the biggest broadcasts of the top 100 were NFL football. 61.

Wes Moss [00:19:51]:
Even my, by the way, I told this statistic to my twelve year old, who is a football nut, he’s a data statistics nut. He was shocked at these numbers because I said back five years ago, Jake, there were 61 of the top hundred. Then we got to, I said what do you think it was this past year? And he said 75 were 75 of the top most watched broadcasts in the United States foot NFL football. He would be wrong because it was 93. And then throw in three others of the top 100. Those were college games. Three college games. So 96 of the top 100 broadcasts in 2023 were football.

Wes Moss [00:20:35]:
It’s just so different than it now. The question then is that that doesn’t count. A show like Reacher, which is a top show on prime that you just tune into whenever because it’s not a broadcast, it’s streaming.

Jeff Lloyd [00:20:49]:
Yeah, no, that’s right. But that’s how the entertainment industry is shaping up to be right now. Live sports, particularly NFL, is just, that’s the one reason these cable companies are kind of holding on. It’s like that live access that you get to sports and predominantly.

Wes Moss [00:21:07]:
And this past Super bowl. Well, look, we don’t need to talk about Taylor Swift anymore. I think we’ve had enough. We have had enough. I know producer Mallory doesn’t think so. All right, latest inflation numbers. So for the month, and again here we are in February, we get the numbers for January. So they’re somewhat rear view mirror numbers, but the trend that you watch from month to month to month is very informative.

Wes Moss [00:21:35]:
So these are not, this is, I think of the ultimate lagging indicator is something in economics. We look at leading, lagging and coincidence. So leading is May. Tell us something about next month. Lagging is, well, that’s old news. Technically CPI is a lagging indicator, but if you string inflation numbers together, you’re getting an idea of where we’re headed. What we’ve seen. By the way, the ultimate lagging number is GDP because it takes a couple of months to figure that number out because there’s so many calculations.

Wes Moss [00:22:08]:
So by the time you get a GDP number for that last quarter, we could already be in a whole nother economic environment. That’s the ultimate old news, real time economic data. That couldn’t be more old inflation, though. Here we are up 0.3% for the month. Why do we look at the month over month? And how would you look at that? I think it’s hard when you get these numbers flashed. Inflation joint two, inflation is up 0.5. Okay, big deal. Well, wait a minute.

Wes Moss [00:22:35]:
You’ve got to look at that as a monthly number. So if you end up with a half a percent rise in inflation in just a month, if you were to extrapolate that out, that would be 6% or more in a given year. So that’s when those numbers get really scary. And of course we had some months that were more than that. We ended up at over 9% where we got to last month. We’re getting to the point where we were only up a 0.2 in a given month. And if you do 0.2, obviously times twelve months, you get a pretty easy number, right? You get an inflation. If it were to stay at that, you’d be at two, two and a half percent.

Wes Moss [00:23:10]:
Inflation this month was a 0.3. Again, what’s the big deal? 0.2.3, it’s a 50% increase. 50% increase. So that’s why the market took a big step back, like it had touched an electric fence. Wait a minute, 0.3. If we’re going at zero three, that’s now three times zero. Three times twelve is three and a half to four. We don’t like that number and that’s why the market didn’t like it.

Wes Moss [00:23:39]:
And the expectation was that we’d be at a 2.9% annualized rate year over year. And we weren’t. We were a little over three, so we’re 3.1. The good news is that inflation has gotten markedly better. It keeps getting better month after month. The single biggest contributor, and we’ve also remarked a lot about this over the past year, is shelter. We still see rents higher, still growing or not declining to the level we would like to see. And that is a huge part of this inflation number.

Wes Moss [00:24:20]:
So shelter was the largest contributor in January in terms of making that number not get back to what the Fed wants to see, which is a closer to 2% number. We saw. If we’re looking at where the inflation was, some of the big numbers, I don’t know how many of these were baby food and formula is still up 9% year over year. Juices and drinks. I think that has something to do with bad weather and orange juice.

Jeff Lloyd [00:24:46]:
And actually it’s like sugar, frozen orange.

Wes Moss [00:24:49]:
Concentrate and sugar, I believe has gotten expensive or has not come back due to weather in producing areas. And we have juices and drinks up almost 30% year over year. Yes. And sugar up seven. Food from vending machines. I love that this is even a category. How much do we really eat from vending machines? 10.6%. Maybe you’re headed to, let’s see, where would you do that if you were headed to an indoor volleyball or cheerleading tournament? You might say, wes, I’m eating from a vending machine today.

Wes Moss [00:25:26]:
So it does matter. And it’s up almost 11% year over year when we get back, there are some places where we saw not just slowing inflation but deflation, where prices have actually come down pretty significantly. We’ll look at those numbers when money matters returns. Thinking about retirement in 2024? Well, you’re not alone, and I’ve got just the thing to help guide you on your journey. What the happiest retirees know, my most recent book that shares the ten habits of the happiest retirees, meant to help you land at a place where work becomes optional for a limited time. Get 25% off@westmossbooks.com. Simply use the promo code. Our treat, all one word at checkout.

Wes Moss [00:26:14]:
That’s westmossbooks.com. We never got to deflation. I wanted to revisit some of that. Yes, we’ve talked about what is going up. Electricity is up almost 4% still year over year. Of course, the dreaded vending machine, which is such a big part of our lives if we’re stuck at a convention.

Jeff Lloyd [00:26:37]:
I just don’t think some of these categories just crack me up.

Wes Moss [00:26:40]:
They go frozen veggies. Frozen veggies up 5%. Crackers. Bread up 5%. Food in general only up 2.6%, and the food at home only up 1.2. So we’ve seen that. Calm down. I think that’s the good news.

Wes Moss [00:26:54]:
Then you get into some of the other things that really move the meter. Motor vehicle insurance up 20%, motor vehicle insurance up 20%. And I’m trying to think why that would be so bad. And maybe that’s why we see so many allstate commercials.

Jeff Lloyd [00:27:12]:
Could it be because coming out of COVID there was a huge demand for buying, like used. Remember, prices of used cars shot up. You couldn’t find new car but people with the stimulus were buying new cars. So, like, maybe they’re buying all the new cars and the insurance is more.

Wes Moss [00:27:29]:
No. Well, that could be it. Here’s what it is. I think. I don’t know if we covered this on the show or the retire sooner on money matters or retire sooner traffic, I think it really just probably goes back to traffic because we had this giant dip in traffic in 2020, of course, when the world shut down and it slowly recovered over the last four years, it took a little bit of a dip. We had a big price surge in gasoline. It was at 22, we had $5 gas. So we saw miles traveled, come back down a little bit, and then it’s finally just in the last, I think, month or two, we’ve gone beyond 2019 traffic.

Wes Moss [00:28:12]:
So miles driven in the United States is finally, after four years back, above where we were before COVID So we get more miles driven, more cars on the road, more vendor benders, higher prices for insurance. Maybe that’s why we like looking at these numbers. It’s not the numbers themselves. It’s to try to figure out why we have inflation in these particular areas. Veterinary services up 10%. Again, look and blame that on Covid. What did we do during COVID We hung out at the house and we got puppies. Those puppies are four years old.

Wes Moss [00:28:48]:
Those puppies now need lots of work because those puppies are now dogs and they’re starting to have some problems. Now, it makes total sense that veterinary prices are up and through the roof. And what about deflation? To your point, I don’t buy any of these. Yes, I buy. Eggs are down. I buy eggs that are down 30%. That’s still because it was off a high base. Remember, eggs doubled.

Wes Moss [00:29:14]:
Lettuce is down 12%. Apples down nine, fresh bread, and, I’m sorry, fresh fish and seafood has come down about 3% in price. Breakfast sausage. And this maybe makes some sense because remember last, go back two years when we were regularly, we were doing breakfast, lunch and dinner inflation. Remember how crazy breakfast numbers were?

Jeff Lloyd [00:29:37]:
That breakfast sandwich got really expensive with bacon, sausage, egg, even bread.

Wes Moss [00:29:42]:
Part of this is just coming back down to earth for some of the prices that got wildly too expensive when it came to inflation, that we see a little deflation, we see energy still, because energy prices have still remained moderate, we’ve really been in the $75 to $85 barrel range. That’s where oil has settled in for a long time. So we still see lower energy prices from this time last year, as a group, energy was down almost 5%. Gas, fuel oil, gasoline all lower. And then some of the big areas for deflation. Health insurance down 22%.

Jeff Lloyd [00:30:20]:
I think that’s the one I had. The biggest one wrapping my brain around. I just don’t think that health insurance is down by that much. I know these are government numbers, but.

Wes Moss [00:30:32]:
You don’t trust the government.

Jeff Lloyd [00:30:34]:
Maybe I’m not falling in that 16%. You’re not one of americans that trust. Not for this statistic. I don’t.

Wes Moss [00:30:41]:
One of the 1.6 people out of ten that trust the government.

Jeff Lloyd [00:30:45]:
I just don’t think I’m paying 23% less for health insurance than I did this time last year.

Wes Moss [00:30:52]:
Car and truck rental down 13%. Laundry equipment down twelve. Well, thank goodness for that. Laundry equipment. We actually saw those numbers from. Remember whirlpool was talking about that same thing. That one makes sense because we loaded up on appliances. Let’s call that dishwashers.

Wes Moss [00:31:15]:
I know that’s not laundry. And washing machines and dryers during COVID Here we are a few years past, you’re seeing less people have to go get a brand new one. Those are the inflation numbers. And in general, even though the market didn’t like what it saw, we’re now at a 3.1% CPI consumer price index inflation number that continues to be better than where we were over the last several months. The trend is still in the right direction. There is a little bit of worry that shelter just still is sticky and won’t come down. We know that’s a problem. We know housing is a problem and we know rents are a problem.

Wes Moss [00:31:55]:
But we’ve also seen, let’s call it more leading indicators that tell us a little bit more about the future. And that would be the cost of rents coming down. That doesn’t show up in CPI numbers because you sign a lease, you’re there for a year or two years, you don’t get to renegotiate the lease. So it’s a very sticky number, what we’re seeing. Well, because the shelter numbers in CPI deal with, they equate to what people think they could rent their homes for for the most part. But in the real world, rents have been coming down. It just hasn’t shown up in the actual CPI number. So we’ll see if that is.

Wes Moss [00:32:36]:
By the way, the Fed is clearly aware of that too. So that’s where we stand. Better news with inflation. But as we said in our 2024 outlook here on money matters, even though we see inflation moderating and we see a decent economy, it’s not going away quickly. The first 20 pounds, you want to lose 20 pounds. First ten comes off like butter. The last ten proves to be very, very difficult. And I think that’s what we’re seeing here, that last part of inflation getting back down at the Fed’s 2% target, it’s going to take a while.

Wes Moss [00:33:12]:
Hence, we have higher interest rates for longer. That’s the good news, by the way, for fixed income and for savers, we still have much higher savings rates, money market rates, bonds are paying more. That’s good news for income oriented investors. With that, I want to talk through, or at least start talking through. We’ve used this term on money matters for so many years. My predecessor, before the show even used this sleep well at night or swan. And the question goes back to how can, in a world where the Dow can drop like this week, 700 points in a day, because the inflation number was a 10th different than it was expected, how do we craft something? How do we create a financial foundation that we have little worry about? Because behavioral finance has such an impact on how we’re able to invest, and that’s a huge reason why we use asset allocation. Of course, we use diversification.

Wes Moss [00:34:13]:
And if you can combine areas together, some are riskier because we have to have risk in our portfolio in order to really outpace inflation, aka stocks. Do you have the full tolerance to ride markets all the way up and all the way down? Some people absolutely do. And if you’re younger, it’s much easier to do that. But as you get closer to retirement in your, you’re starting to pull money from your investments. It gets really nerve wracking to rely completely upon markets going up year after year after year because you need money. And we know markets go up over time, but it may be a three year period before markets do well, or a five year period or a ten year period. Meanwhile, you need money every single month. So there’s a timing mismatch.

Wes Moss [00:35:03]:
You need money today. Sometimes it might feel difficult to wait for your money to grow tomorrow. And that’s why we think about the bucket approach, where we can combine stocks or growth investments that also pay dividends. So creating some income, an income bucket that would be for a variety of what we call fixed income, or bonds that produce interest, another form of income, and then a third area called alternative income, areas that aren’t quite exactly stocks or bonds. Think real estate investment trusts. Think energy pipeline companies. Think preferred stocks, et cetera, which also should be paying a level of income or distributions or essentially cash flow. Now, you put all those together, take dividends from the growth bucket and interest from the income bucket and distributions from that alternative bucket, and now, collectively, you have what is really just a cash flow.

Wes Moss [00:36:04]:
And it is solving for half of the equation, or part of the equation, which is total return, which we’re all after, which total return, of course, is growth, which we have a lot less control over, plus income. We have a lot of control over that. So G plus I, the I is pretty consistent, if we’re diversified about it, because you get a little bit of income from every bucket, all of it together adds up to your portfolio yield, your portfolio, cash flow. And if you can, maybe it’s only 3% in a given year, no big deal. What’s 3%? But what’s that over five years? That’s 15%. What’s that over ten years? That’s 30%. It starts to have a big impact on the total return number while you wait for growth to happen over time. And that’s why putting the buckets together, to me, is a visual or analogous to well diversified investing.

Wes Moss [00:37:00]:
We’ll talk more about that and how it can help you sleep well at night when money matters returns. Before the break, we were talking about income investing in buckets, and cash flow and dividends and interest and distributions and how they all add up all these different buckets to this very simple, fun, not fun, this simple system that allows for cash flow to just be deposited, be deposited, drip, the steady drip, drip, drip of income investing, which may not sound like a lot in any given year. If a stock is only paying two and a half percent, what’s the big deal if bonds are paying five? Well, that’s okay, but I’m not going to get a lot of growth there. But then you start putting them all together and wait a minute. Now you’ve got this formula, which is total return equals growth plus income, and income is three. Maybe that starts to add up, at least if you start thinking about it over time. I was drawing out the buckets this week. I do a lot of bucket drawings and explaining this and thought it’d be good to bring it up here on money matters.

Jeff Lloyd [00:38:10]:
And you add all those things up and it turns out to be a big deal, because what does it allow people and your families that you serve to do?

Wes Moss [00:38:19]:
You add up all those inches and that’s going to make the difference between winning and losing, between living and dying.

Jeff Lloyd [00:38:29]:
And sleeping or losing sleep over money. And that’s what those buckets can help you do, is sleep well at night.

Wes Moss [00:38:37]:
Here it is. How do you really think about something? And by the way, that’s a Pacino thing. Any given Sunday, life is a game of inches. You add up all the inches. That is what makes the difference. It’s a little bit like that. You add up all the drip, drip, drip of dividends. None of them may be seemingly that big of a deal alone, but if you put them all together as a giant, it’s not just one cow, it’s not just one head of cattle walking down the street.

Wes Moss [00:39:05]:
It’s a collective, it’s hundreds. It’s a giant herd. All of a sudden, you get 100 cattle. That really makes a difference. And every single dividend in its own right is part of that. What could eventually be a stampede in a good way. And this is the way we think about this. So you have really three different main investment buckets.

Wes Moss [00:39:27]:
You’ve got your. Well, really, we call it. There’s four. The first one is just the cash bucket. That’s your easy. That’s designed to have your emergency money. It lets you sleep well at night. You know, that money is totally safe.

Wes Moss [00:39:39]:
It’s in the bank. It may not be getting a whole lot of interest. Ironically still, the big banks pay very little in interest, even though the federal funds rate is over five and a quarter. And you can get a money market fund and you can get cds for 5%. It’s pretty easy to do. But if you leave your money in a big bank right now, that’s just in a deposit account, it can still pay you virtually nothing, even to this day. And the big banks just don’t have a. Because they are the big money centers in the United States.

Wes Moss [00:40:10]:
They don’t have the propensity to say, well, gosh, people are going to leave if we don’t pay. They can buy a CD from us, but if it’s just in a checking, we’re not going to give them much interest. So just be cognizant of that in that particular bucket. Then you’ve got the income bucket. Now, the next three are investment oriented buckets. We have the income bucket. It’s a variety of bonds. Think treasury, municipal, corporate, floating rate bonds, high yield bonds.

Wes Moss [00:40:34]:
Put them all together and you can have a continuum of very, very low risk bonds. Think treasuries all the way up to high yield bonds. And of course, those yields go up as the risk goes up the ladder. Imagine blending those together, and you have some that are three and four, some that are seven and eight, but that’s the range. You have a blend between three and 7%. And, of course, bonds pay interest. That means it’s ordinary income if it’s not in an IRA. So, yes, you don’t get to keep all of that money because you have to pay taxes on that interest at your ordinary income bracket, which means it’s as high as you’re going to pay in that given year.

Wes Moss [00:41:14]:
Next bucket. This is the growth bucket, in my opinion. This is the workhorse bucket. This is the real horsepower. This is the engine of the buckets. Now, yields here within stocks can be zero. Of course, there’s lots of stocks that don’t pay dividends at all, and the S and P 500 collectively is only at about one and a half percent. But then you start looking at more.

Wes Moss [00:41:37]:
Let’s say you start looking at stocks that do have a higher propensity to pay dividends. Think utility companies, consumer staples, energy. And now you’re looking at the 3% range, three to 4% in annual dividends that get paid out by those companies. Put all those together. Now we have another blended rate of dividends. And, oh, by the way, I think it was last week here on the show, we talked about how there’s much favorable tax rates when it comes to dividend investing. You get to keep much more of your dividend dollar than your bond or interest dollar. So that’s the workhorse.

Wes Moss [00:42:13]:
We expect some income and growth, of course, from that bucket, and that’s where we get our inflation protection over time. Then next up, alternative income. Alternative income bucket that fits somewhere in between pure stocks and pure bonds. Think energy pipeline companies. Think real estate investment trusts. Think preferred stocks. Think closed in funds. Put all those together, and we can see some reits are in the two to 3% annual income range.

Wes Moss [00:42:46]:
So not a whole lot. All the way up to the high single digits, eight and 9% for some of these categories. So that’s the range from three to eight or 9%. And that’s it. It’s that easy. Those are the buckets. Now, the tougher part, I think, is to figure out what the percentages you want in each. And that’s the pie chart.

Wes Moss [00:43:09]:
That’s the looking at the big picture and saying, well, I think I want, and let’s say you’re a 65 retiree. It’s going to be a lot different than a 35 year old person just getting going. When you’re younger and you’re just getting going, it’s hard to go anywhere, in my opinion, outside of the growth bucket. You want stocks, you want growth stocks, you want dividend paying stocks. You want to reinvest, you want to keep adding to that. You get to 65, and now all of a sudden, you’re starting to distribute, and you’re thinking, wait a minute. I’ve saved a lot. I’ve invested a lot.

Wes Moss [00:43:39]:
It’s grown a lot. Now I’ve got to live on this steady paycheck, and I’d like. And I need to be pulling money out. Well, it’d be nice to be able to just pull out the income so you’re not having to sell the principal. That can help with our behavioral. Our b fi, our behavioral finance, and make us so that we’re not worried about dipping into the reservoir, which in itself is a disconcerting feeling. So we want to try to avoid having to, as Ryan Doolittle would say, we’d rather not have to pull food out of the freezer. I don’t know if that analogy really works, because the freezer shouldn’t be growing anything, should it? Jeff Lloyd.

Jeff Lloyd [00:44:17]:
I think we can come up with a better one than that.

Wes Moss [00:44:20]:
We want to be living off the apples that are falling off the tray, as opposed to having to cut branches off to harvest the apples. And that’s what dividends really should be doing for this, for us. So if you’re 65, maybe it’s very different than the 35 year old. Maybe it’s 50% in the growth bucket, maybe it’s 10% in the alternative income bucket, and maybe it’s 40% in income. And now we have that balance, and now we have areas that are helping both the g and the I, the growth and the income, so that we do get some total return. And you put all of this together. Now, that in itself should create a foundation that helps us sleep well at night with our investments. But before we were ever to do that, how do we know how much to put in each? How do we know what our expected return should be? Because it would be very different if we’re 100% in stocks versus 100% bonds.

Wes Moss [00:45:18]:
Well, we need to start out with a plan, and that’s this boring power of a plan. It’s so important to do. And it, by the way, can be fun. It doesn’t need to be a 75 page financial plan. It can be a one page retirement timeline. We love to draw it out. I love to draw this out in one page. So if we have the power of the plan, helps us map out the years and how much we want.

Wes Moss [00:45:41]:
Starting in X year, we look at all the different income sources, and we say, we know that Social Security and for me, and Social Security for my wife. And if there’s a pension in there, we know that’s going to get us, let’s say, half of the way there. We need ten a month, and this gives us five. Well, where’s the other five come from? Well, now we have to go to step two. Well, not step two yet. We stay with this plan and figure out how much money we need in order to generate that. I think the easiest money accumulation rule to use. That just makes it super easy.

Wes Moss [00:46:14]:
Again, this is a rule of thumb, which I love in financial planning, and that’s the 25 x rule. And if you need $10,000 a month, you simply say, that’s $120,000 a year. I take my $120,000 times 25. It was supposed to be an easy rule times 25. And I know I need $3 million to do that. It solves for the 4% rule. How much can we take out, plus inflation over time, if we need $5,000 a month in addition to our Social Security, times twelve is 60,000 times 25. Very simply, million and a half dollars.

Wes Moss [00:46:54]:
Coincidentally, that is close to the average happy retiree savings amount. Jeff Floyd so it’s power of the plan two is really the power of understanding cash flow. And that’s what the bucket does. The buckets help with number two is understanding the power of that cash flow thinking. And going back to that total return is just growth plus income. The I part, it’s like a steady stream of water. It’s only additive. Think of it this way.

Wes Moss [00:47:26]:
Growth can be up or down. It can be up 10%, down 10%, up 20%, down 20%. Income is only additive. You can’t have negative. I guess there’s probably some way with financial derivatives, you could have negative income, but cash flow is cash flow. It’s only positive. And the drip, drip, drip of three or 4% every single year may not sound like a lot, but think about that now over time. So think five years, five years later, and your drip, drip, drip of 3% is now more than 15%.

Wes Moss [00:48:00]:
Well, that starts to add up. That’s a real number. Ten years later, it’s hard to ignore the drip, drip, drip of 3%. Now it’s over 30%. It’s added to your total return equation. So the longer we stay income investors, the more the I or the income helps. And the buckets do that. It gives us that financial foundation.

Wes Moss [00:48:20]:
We’re working from a plan that’s one and then two. And now we go back to this is just investing 101. The power of diversification. If we’re doing the buckets, we’re automatically getting diversified from different areas of the world. And then within those buckets, we end up having, we don’t want a handful of stocks, we don’t want one stock, we don’t want five stocks. We want multiple etfs. And within those etfs or individual companies, but with an ETF that has 50 stocks, 100 stocks, 500 stocks, and then we get massive diversification so that we can take away the single stock risk of something going wrong with any one given company, or for that matter, one given sector, if we’re highly concentrated to that. So put those three together, and I think we do as much for our behavioral finance as we can.

Wes Moss [00:49:15]:
We insulate ourselves knowing that over time, we really shouldn’t be worrying if the market’s up 1% in a given day or down percent 1% in a given day or a week or month, because we’re relying on the income. Let’s give it time to let the G eventually outpace inflation like we’d like. That’s it. Jeff Lloyd three steps to swan sleep well at night.

Jeff Lloyd [00:49:42]:
Not only sleep well at night, but just kind of ignore the daily headlines and the hourly and minute and second by second ticks of the stock market, and to sometimes just take a step back and realize how useful a power of a plan is, diversification, and just kind of understanding how all that works.

Wes Moss [00:50:01]:
Together with that, your host, Wes Moss. If you’d like to get a hold of me and Jeff Lloyd, easy to find us@yourwealth.com. That’s Y-O-U ryourwealth.com. Have a wonderful rest of your day.

Mallory Boggs [00:50:21]:
This is provided as a resource for informational purposes and is not to be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. The mention of any company is provided to you for informational purposes and as an example only, and is not to be considered investment advice or recommendation or an endorsement of any particular company. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. The information provided is strictly an opinion and for informational purposes only, and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing.

Mallory Boggs [00:51:09]:
This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. Investment decisions should not be made solely based on information contained herein.