The Retirement Success in Maine Podcast Ep 064: Understanding the Impacts of Inflation on Retirement

 

 

Transcript:

Ben Smith:

Welcome everybody to the Retirement Success in Maine Podcast. My name is Ben Smith. I'm joined by my Ben Bernanke to my Janet Yellen, Curtis Worcester,. How are you doing today, Curtis?

Curtis Worcester:

I'm doing well Ben. How are you?

Ben Smith:

Good. Well, for those that are not up on the FED Reserve Bank shares from previous years, a couple of those during the last decade.

Curtis Worcester:

That's right.

Ben Smith:

We, of course, are recording here in early May and a few things we've been, of course, receiving from clients and a lot of concern around things. As I know with our show, we've covered lots of different topics. Actually the next show we're going to get into Medicare a little bit.

Curtis Worcester:

Mm-hmm.

Ben Smith:

We're turning 65. So when you turn 65, you'll become eligible for Medicare.

Curtis Worcester:

That's true.

Ben Smith:

So we got to do a podcast on that.

Curtis Worcester:

That's true.

Ben Smith:

But before we get to that, we got to start worrying about showing up our portfolios and thinking about things that are keeping our cost of living intact.

Ben Smith:

And one of those things that I think is the topic that's happening a lot is inflation.

Curtis Worcester:

Right.

Ben Smith:

So inflation is, I think, a topic where we just want to understand a little bit more and in a few ways. One is we, obviously, are seeing it being in Maine and in the Northeast where our heating oil has gone crazy. We've been putting more money into our pumps, into our homes to keep it warm, but also from just everyday living, going out to eat or groceries.

Curtis Worcester:

Sure.

Ben Smith:

So if I retire and I thought I had so much money that I was going to live on and all of a sudden my cost become higher, what should I be doing to kind of shore up my financial plan-

Curtis Worcester:

Mm-hmm.

Ben Smith:

... my portfolio? What are some things I should be thinking about?

Ben Smith:

So we want to understand inflation a little bit better was the topic we wanted to cover today,

Curtis Worcester:

Mm-hmm.

Ben Smith:

... was really about combating inflation that might be impacting your retirement. So our next guest is actually an investing consultant with our team Guidance Point Advisors.

Curtis Worcester:

Right.

Ben Smith:

So over his 27 years in the financial services industry, he's provided capital market expertise to some of the world's largest money management institutions. Prior to Guidance Point Advisors, he began his career at Goldman Sachs, initially as a fixed income research liaison, analyzing portfolios, optimizing security selection, calculating option valuations, and going back to school, that boy T graphs, just when you say calculated option evaluations, man, and constructing relative value trading strategies. He advanced to become a vice president as securitized product salesman, covering large institutions with assets under management up to two trillion dollars. His clients's comprised of mutual fund managers, separate account managers, insurance companies, hedge funds, banks, sovereign wealth funds, reits and pension funds. Over the course of his career, he's transacted in multiple types of fixed income securities, securitized US treasuries, agencies, corporates and municipals. He's spent 15 years at Goldman Sachs, six years as a director at Deutsche Bank and six years as a managing director at Nomura Securities. He lives in Wellesley, Mass. with his wife, Leslie and three children. So at this time, love to welcome our colleague, Chris Del Col to the Retirement Success in Maine Podcast.

Ben Smith:

Welcome Chris.

Chris Del Col:

Well, thank you, Ben and Curtis. It's great to be here and looking forward to talking about a hot topic of inflation.

Ben Smith:

Mm.

Curtis Worcester:

That's right. So Chris, I'm sure as you know, with our show, obviously we have that key topic of inflation to talk about today. But to start, we just want to take a minute and really introduce you to our audience. So obviously, Ben just read off your very in depth background there. So could you just take a minute and just talk about your career and your path towards working here at Guidance Point?

Chris Del Col:

Sure. I know you guys always like to say, "What's your connection to Maine?"

Curtis and Ben:

Mm-hmm.

Chris Del Col:

I attended college in Lewiston, Maine Bates College.

Curtis and Ben:

All right.

Chris Del Col:

I was a Math major at Bates College and then found my way to Goldman Sachs. I'm a people person and wanted to get into sales. Didn't know that opportunity existed on Wall Street. This is dating myself back in 1988, but I was fortunate enough to get a job in sales and trading within the Fixed Income Department at Goldman Sachs way back when and I had a nice long career on Wall Street, selling mortgage bank securities, primarily during my time.

Ben Smith:

Mm-hmm.

Curtis Worcester:

Mm.

Ben Smith:

Well, Chris, I'd love look here a little bit about your childhood experience, building up to going to school in Maine here, a little bit. But also what was the interest about, again, the numbers into math, math into investments? What was it about here? You are a people person, but of course we have the quantitative side, the other side of the brain leading you towards that. So how, how was that thread for you there?

Chris Del Col:

Yeah. It's interesting the way life takes you down certain paths. I had a proclivity for math and numbers. It is what I pursued at Bates, as I said, and Wall Street fascinated me. It's a numbers game, but it's capital markets, developing financing for the growth of all different parts of the economy and businesses. I have to say, I often say to anyone who's in college, it's very hard to know what it means to actually work at a job.

Curtis Worcester:

Mm.

Chris Del Col:

But there was something about it that intrigued me. From the first day I sat on a trading desk, which is an exciting part of Wall Street in the days when it was lots of shouting, lots of activity and you had to react to things that were happening in the market, react to your clients' needs, react to what the traders were trying to get done. It was all fitting with who I was as a person. And so I really enjoyed that and looked back and said, "Great, I'm glad I chose sales and trading over other paths that I could have taken like investment banking.

Curtis Worcester:

Mm. That's really great. So fast forward to today, obviously, you're working here at Guidance Point Advisors. Can you just talk about what you like most about working here?

Chris Del Col:

Going back to my statement of saying, "I'm a people person", being in the private wealth management space, there are lots of different groups that work in private wealth management. And I like the nature of the fact that Guidance Point Advisor is a small group that works very closely with their clients. We're not buried in a large organization with a lot of bureaucracy.

Curtis Worcester:

Mm-hmm.

Chris Del Col:

It's a terrific group of people and that's important to me. And so we work closely with our clients and have direct frequent dialogue. That's really what I like the most about Guidance Point Advisors.

Ben Smith:

Well, I think that's well said. And I think it's also one thing to really enjoy working with the clients that we all work for. But to enjoy working with the people that we do on a daily basis too, it adds that layer of... I think a lot of people in their corporate careers don't get that a lot. Going back to what we heard a couple episodes ago about being grateful and having gratitude, I'm personally very grateful for that is, been in a few spots is you don't always get to choose who you work with in your life and how you spend your time. I think we've all been very blessed and lucky to have a really good, dedicated, well educated, caring group of individuals that we all can help our clients with.

Ben Smith:

I want to switch to the topic about inflation. So I think the first part is we always like to just start off with. Let's build the foundation of the topic. And one thing I want to just read off, so the definition of inflation. This is coming from Investipedia. I want to bake that into the conversation right out the gate. So looking at the definition of inflation, it's defined as the decline of purchasing power of a given currency over time, a quantitative estimate. I'm sorry about the words here, quite a few estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices often expressed as a percentage means that a unit of currency effectively buys less than it did in prior periods.

Ben Smith:

So it's going to that basket, right. The government looks at what do people buy on a daily or weekly or monthly basis. So whether it be bread and eggs and milk and oil and all gasoline, all those things and say, "Well, this is the basket of things that people typically buy." And then what's the change in price from point A to point B, to just put that simply as a definition. So, Chris, my first question for you here is, what do you think the larger impacts are of inflation on our lives and our financial assets?

Chris Del Col:

Well, it's a great question. When I'm talking amongst clients and friends lately, what is the first thing that they mention when they talk about inflation. It's the price of gas.

Ben Smith:

Mm-hmm.

Chris Del Col:

And it depends on where you are on the income stream. But the price of gas can have a large percentage impact on your disposable income or less so, but the most important thing is that we drive around our communities and we see the price of gas. We'll notice that it's 4.25 yesterday and 4.35 today, and who knows where it's going to be tomorrow. And like you said, with the definition, inflation is a basket of goods. So I think that hitting us on a daily basis is the price of gas. Yet it might not be as important to our lifestyle or impact in our lifestyle.

Chris Del Col:

I think probably one of the biggest spends in our lives are rents or our mortgage, right?

Ben Smith:

Mm-hmm.

Chris Del Col:

And that cost of living is, if there's a rise there on that component of inflation, it's going to probably be the most impactful on our own personal balance sheet. And again, we don't go to the grocery store on a daily basis to know what the price of milk is, or we don't go to a restaurant to know that the price of the food that we're eating is changing. I think that the most impactful on our private lifestyle is rental income-

Ben Smith:

Mm-hmm.

Chris Del Col:

... or mortgage payments, and that'll get into kind of how interest rates and so forth.

Curtis Worcester:

Yeah. So I like that Chris, and obviously Ben just laid out there or read out that definition of inflation for us. So naturally thinking of this, the opposite direction. Right? So the opposite of inflation would be deflation, which I think people hearing that would say, "Oh, it's the opposite." Wouldn't that be a good thing? Doesn't that mean prices are declining, right? Making things less expensive if inflation is leading to things being more expensive. So can you just expand on that, maybe. Is it really a good thing? Do we want deflation or inflation or what's going on here?

Chris Del Col:

Right. Well, without going deep into what the Central Bank tries to achieve, which an ideal level of inflation is a slight positive level of inflation over time.

Curtis Worcester:

Okay.

Chris Del Col:

And we'll get into, because too much inflation makes things too expensive and you need to spend money early or, I'm sorry, you need to spend money today because it's going to be worth less tomorrow.

Curtis Worcester:

Right.

Chris Del Col:

And the contour of that is deflation, where you are going to choose not to purchase things or you're going to save today because something is going to be less expensive tomorrow. And those two forces you're trying to balance out and get to be at a more moderate level. You don't want too much, you don't want too little. And so to answer your question of specifically deflation, no, you don't want too much deflation because it would force people not to spend. Therefore, it won't drive the economy. Then we won't end up with a positive growth to the economy or a positive GDP, which is the goal that we're looking for to sustain employment and full employment.

Ben Smith:

Chris I think that's a really great definition too, because he said it's like the one is, we slowed the economy so much that again, prices start falling, but then prices fall. And then essentially the economy doesn't grow at all. So then we could have economic collapse because everybody just stops spending all together because everything's always going to be cheaper than next day and the next day and the next day. And then you have inflation. Actually in our Bangor office, we actually have a framed story. It's actually a Zimbabwe currency. And it was in 2007 I think is the first $1. So it actually just follows the denomination of the Zimbabwe currency as basically they go through hyperinflation.

Curtis Worcester:

Right.

Ben Smith:

So hyperinflation, I think, is anything over a 10%, right?

Chris Del Col:

Mm-hmm.

Ben Smith:

It's over that. So Zimbabwe privatized their land and they allow everybody to now get their own crops and farm their own property, which many of them are not equipped to do and the economy collapses.

Curtis Worcester:

Right.

Ben Smith:

So the economy's collapsing and as that's happening, inflation is just going rampant. And I think at one point at one month there was like over a billion percent inflation happening-

Chris Del Col:

Mm.

Ben Smith:

... from 2007, 2008. So essentially they started making larger denominated bills.

Chris Del Col:

Mm-hmm.

Ben Smith:

So I think one year later, they got to a $1 trillion dollar bill.

Curtis Worcester:

I think it's even higher than that. Now you're making me want to go get up and go check in our conference room. I think it's like 100 trillion. We have a printed $100 trillion bill.

Ben Smith:

Yeah.

Ben Smith:

So it's the largest denominated bill in human history. And, but it essentially, if you look back to the previous one year, it was equivalent to the previous years, like $2 and 20 cents.

Curtis Worcester:

Yeah.

Ben Smith:

So they over inflated their currency so much that it completely devalued it. And it took a whole lot more of their Zimbabwe dollars to buy what was originally just $1 the year before. So they just kept printing and printing. And again, as soon as they printed the dollar, it was devalued so much that they had to make it even more denominated. So they eventually just went away from their currency and just embraced Euros and US dollars as their currency. So I bring up that example because I think these conversations comes up with our clients about...

Curtis Worcester:

Yeah.

Ben Smith:

"Hey, I heard inflation is 4% or 5% and all that. And well, what's a bad level inflation. what's a bad level of deflation and what's good." So I guess my long-winded question to you, Chris here is, what do you find are the pros and cons here of inflation now that we've established deflation and inflation?

Chris Del Col:

The pros and cons of inflation... Like we said, if inflation is maintained at a reasonable level and we'll say that a reasonable level, the Central Bank Federal Reserve has looked at the 2% level of positive inflation as being the optimal inflation point. And their mandate is to get the economy to be centered around 2%. And with it, you would have a resulting GDP, a positive GDP growth. So the economy is growing. People are being employed. The unemployment rate, presently is 3% or so. And you're looking to try to have a growing economy where assets will appreciate over time and they won't appreciate uncontrollably where it'll cost. You'll have to earn that much more to purchase those assets down the road, because there's a separation too, where the price of goods could rise at one point and your wages won't necessarily keep up with inflation.

Curtis Worcester:

Mm-hmm.

Ben Smith:

So, said it another way. So if you're saying, "Hey, the Fed Reserve Bank, which is, one of our core institutions of keeping an eye on our money policy and where our economy is, they're saying, "Hey, a 2% is their target of inflation.'" So they're essentially looking at using tools to keep that 2%. So if we get out of bounds a little bit, we're going to the breakdown lane that they want to steer the economy back in towards that 2% target. Like right now we're hearing seven and 8% inflation numbers, right?

Chris Del Col:

Mm-hmm.

Ben Smith:

In that range. So they want to do something that then causes inflation to get lower, to get closer to two. And if they did too much, so if they go from 2% down to one to zero to -1% inflation, closer to deflation, they do something to speed the economy back up in a way or try to implement more forces to stabilize inflation.

Ben Smith:

It essentially what the role is. And as you described, I think from our end as advisors, is to help. Well looking at matching what costs are, which we don't have control over, we don't control what the prices are, but we can have a little bit more influence maybe over if folks are retired or they have savings. It's trying to keep your savings and long term money to keep up with inflation as well. So that I think from our job, is keeping an eye on both together. What's your lifestyle to what is the income? And, and I think neutralizing inflation, wherever you can, long term.

Chris Del Col:

Yeah.

Ben Smith:

Right?

Chris Del Col:

Yeah, because there's the discussion of what is the proper real rate you should earn on your investment so that people understand it. A real rate is, if you have a long term bond that is earning you 4% and inflation over that long term holding period is 2%, your real return that you've earned is 2%.

Curtis Worcester:

Mm-hmm.

Chris Del Col:

That is, 2% inflation is eating away, that you're buying power per each year and you're earning 4%. So you're earning a positive, real rate of return.

Curtis Worcester:

Mm-hmm.

Chris Del Col:

And we've had an interesting environment for the last several years as interest rates have been so low that we have been at a negative, real return on investments in the fixed income space.

Curtis Worcester:

Mm-hmm. Got you. So I have another question for you, Chris here. And I just want to ask, how does the supply of money impact inflation?

Chris Del Col:

So the way to look at inflation is, it's going to come from two prevailing factors, supply of money. So if there's an inordinate amount of money chasing a certain amount of goods, you are going to get inflation.

Curtis Worcester:

Mm-hmm.

Chris Del Col:

And what that means is, if a lot of people have more money than they did yesterday, they're going to attempt to spend that money for the fixed amount of goods that are out there. And it's going to result in higher prices on those goods or inflation.

Chris Del Col:

And inflation could also come not necessarily from more money being printed, but you can have a situation where the goods that are being supplied to the economy are disrupted, all of a sudden. And that was what we witnessed with COVID.

Curtis Worcester:

Mm-hmm. Yeah.

Chris Del Col:

All of a sudden, because of supply chain disruption, employment disruption, the amount of goods that were normally supplied to the economy prior to COVID were disrupted. And so the same amount of money was chasing less goods. And therefore it was resulting in higher prices as well. Now because of what the United States government did and pumped in more money to make sure that people had food on the table and survived during COVID, because we didn't know what the situation was going to be, you had a combination of both, a supply side disruption of the goods and more money into the system. And that's why we're at seven and a half percent inflation at the moment.

Ben Smith:

And also as you're describing Chris this whole, where the Fed's trying to keep the inflation number and the economy growing and employment in a positive, so that again, they're trying to use the golf analogy down the center of the fairway or right in our lane, right?

Chris Del Col:

Yeah.

Ben Smith:

They don't want to go out of bounds and get on the breakdown lane. And so they really want to keep it in this. So you're talking about the tools that they have to keep it there. So I guess this supply part is interesting. They're making moves and we don't know how the economy's doing maybe until after the fact, right. We don't know how the economy grew from January 1st until March 31st, maybe well into May or June, or maybe even six months later when we get the data on how everything actually.

Ben Smith:

So we have estimates in real data in real time. So the Fed's looking ahead and saying, "Hey, if I make this move in six to 12 months, what do I think it's going to be at that point?" So they make moves that it take a while to go through the economy to get there, to see if inflation... I guess what I'm trying to say is, what you described as supply chain issues plus money supply of getting the economy back on track after this pandemic, people being out of work, they pumped all this money in. Now we have all this supply, but now maybe, we did too much in the time it worked through now. Maybe we did too much. We have to now ease and get back off of that. So it feels like a really tough thing for the Fed. It's a very tight rope act.

Ben Smith:

They don't know what it's going to be 12 months from now. And they can just make a decision what they think it's going to be. And meanwhile, I think what's tough from a being in it in a near term. We're seeing our lives impacted from interest rates, move up in bonds, stocks, wondering what the Fed's going to do. And is that going to cause recession? I know we're going to get into that a little bit, but I think those are the Fed and us, maybe have different timelines of how we're reacting to kind of the day's news.

Chris Del Col:

Well, I think that's a great point. And not only do we have a different timeline than the Fed in terms of our reaction, but the markets have a different timeline than the Fed in terms of the reaction and you bring up a great point of the pricing of goods. It takes time to work through the system. And so the actions from the Fed are not necessarily going to impact things tomorrow when we are driving by the gas station and seeing 4.50 a gallon. It's going take place down the road. And yet the stock market might be anticipating that already down the road and pricing in what is 12 months from now or two years from now.

Ben Smith:

I guess I'll add Chris is, it's sometimes hard too, because I think what we see as the most recent data, so for example, like we're seeing inflation at seven or 8%. It's easy to then go, "Hey, if I'm retiring today and I see seven or 8% inflation". It's very natural. I think for us to then put that in our minds and go, "Well, it's seven or 8% inflation. And that means for the next 30 years, I'm going to be experiencing seven or eight inflation as the number."

Ben Smith:

So all of a sudden we then put that pressure in ourselves off. Well, we have to do lots of different things to keep up with a seven or 8% rising costs of our lifetime. And I think what you just described is, the Fed's trying to figure out is, is this half of this supply chain issues where oil is maybe disrupted from Russia, Ukraine, and the geopolitical crisis there. And all the supply chain issues we've had, where people were getting sick as they're trying to deliver things across the Atlantic or Pacific, is that what's causing a lot of this or is it, "Hey, we just issued a lot stimulus money to people."?

Ben Smith:

We're all feeling welfare. And are we using all that money all at once? And to your point about chasing all the goods all at once, is that something that maybe was the monetary side? So we don't know the combination, when we look at long term kind of what we think inflation is. I think that's some of the reaction I'm hearing from the clients today is "I think that all of it's really permanent inflation and this is something I need to react to today." What are you hearing from your clients and what are you telling them when they bring that point up?

Chris Del Col:

The discussion on not reacting to what is in the news today is common. I don't know if you guys ran into this, but I do vividly recall in the spring of 2020, when the equity market had rebounded and all the people, all my clients were saying, "Why is the equity market doing so well when the world is completely shut down-

Ben Smith:

Mm-hmm.

Chris Del Col:

... and the equity market was pricing in after the pandemic?"

Chris Del Col:

And when it was going to come, who knew, but it had already fallen dramatically up until March, but everyone was scratching their heads saying, "Why is the equity market doing so well?" Unemployment was rising at that time. We weren't talking about inflation. It would be probably deflation, but it was looking down the road. So I think that it's always important to try to look long term. In general, our clients are long term investors, and we remind-

Curtis Worcester:

That's right.

Chris Del Col:

... them, as if something hasn't changed, we're planning your money for a 15 year, 20 year stretch of time. And we will make adjustments today that are really going to impact things over 15, 20 years, not what are going to affect things in the next six months.

Ben Smith:

And I think that's a good point because today, again, this is a podcast, where we're trying to illustrate long term thinking and where we're trying to go in retirement. Just using an example of a headline today, Market Watch top of the page, and of course they do it in full caps, like 40 point fonts. And it's yelling at you. It says, "BILL DUDLEYA FORMER PRESIDENT OF THE NEW YORK FEDERAL RESERVE BANKS, "It's very, very unlikely that the Fed contain inflation without sparking recession", and bill Dudley was the former New York Fed chief.

Chris Del Col:

Yeah.

Ben Smith:

So you get this, "Oh no, this is terrible."

Ben Smith:

But Chris, to your point, so when you hear that headline. This is got to mean something where I think we're looking at that, might mean something to us. I don't know what this means at all, but this sounds terrible.

Chris Del Col:

Right.

Ben Smith:

We're going to go into, "It's very, very unlikely", and he has to say it twice, that they can't attain inflation without sparking recession. So what, what do you take from that headline, Chris? And what does it mean to you in terms of what you just said, especially about long term thinking?

Chris Del Col:

Yeah. Well, CNBC loves to live off of hyperbole, right? And, they're going to go find that one economist or former Federal Reserve official that says "very, very," and that's going to sell eyeballs or I don't know what the term is. It's going to attract eyeballs.

Ben Smith:

Mm-hmm.

Chris Del Col:

The reaction to that though, is I think, Bill Dudley is just expressing the difficulty that Chairman Powell has right now. A lot of people like to say it's an aircraft carrier, the US economy, multi-trillion dollar economy. He's got an extremely difficult task ahead of him to try to, as we said, predict, what's going to happen six months from now. How much is the money that was put into the system versus the supply chain issues to turn the ship. And he has done a fantastic job of telegraphing, what his intentions are. And why does he do that?

Chris Del Col:

He telegraphs his intentions because at the end of the day interest rates that he is trying to control, what he's trying to control, is what the market participants of the bond market are going to price into the market.

Ben Smith:

Mm-hmm.

Chris Del Col:

Everyone thinks that they just set a lever and interest rates then follow that. All they're controlling are the front end of the yield curve, the Fed funds rate. What's really important to the borrowing out there and not to get into it too deep is what the longer term interest rates are. And longer term interest rates 10 year tipped around 3%, and that is going to control the borrowing for the entire economy, whether it's consumer or business related borrowing. That would slow things down. And basically that's what they're trying to do. They're trying to slow things down-

Curtis Worcester:

Mm-hmm.

Chris Del Col:

The demand side of things so that inflation comes more under control.

Chris Del Col:

Will it tip it into a recession? Going back to [inaudible 00:30:30]. It could. Is it the end of the world? Is it going to tip it into a long sustained recession? Highly unlikely, because they will use their tools if in the event they see it as becoming a long sustained recession to try to bring things back and get back to that equilibrium level of a 2% inflation target that they're trying to get long term.

Curtis Worcester:

Mm-hmm. All right.

Chris Del Col:

It's a slow moving process.

Curtis Worcester:

Now, that was a great kind of excerpt there from you and kind reaction there. So we've talked about, obviously, how we all manage our clients' money for the long term. And what we're doing may not affect the next six months per se, but I want to focus on right now. And obviously here in early 2022, I just want to ask you, Chris, how has inflation been impacting stocks and bonds right now? What are you seeing?

Chris Del Col:

Well, I think that the important thing to understand about the equity market and the impact of inflation on the equity market is, inflation brings upon monetary policy by the Fed that has to change interest rates to try to draw down that demand side of the equation. The equity market values the companies that make up the S&p 500 based on that long term rate that we talk about the 10 year rate. There's earnings from company, and they are projected out over time, five years, 10 years forward. And the equity analysts that help determine where people are going to buy stocks and sell stocks, they use the rate on the tenure for valuing those companies.

Curtis Worcester:

Mm-hmm.

Chris Del Col:

And if higher rates come, those values have to come down. It is the simple math of discounting the cash flows, those five tenure cash flows forward. They have to come down.

Curtis Worcester:

Mm-hmm.

Chris Del Col:

And that's part of the equation of bringing... The Fed isn't trying to reduce asset prices. They're trying to reduce the demand side of things, but a corresponding reaction of higher rates is going to be lower equity valuations.

Curtis Worcester:

Got you.

Chris Del Col:

And have we lowered them enough at this point for 3% tenure? We don't know. It could be. Maybe we settle in at a 4% tenure. We don't know, and it might imply, or maybe the equity market's already pricing in at a 4% tenure. We don't know, but equity valuations are being determined a lot to do with what interest rates are doing in terms of the movement. What is happening with bonds? Bonds are going from where they were at one and a half percent on 10 years to 3% and not to get mathematical, but that's duration yields rise by 150 basis points on a 10 year asset.

Chris Del Col:

It implies that the price is going to drop a certain amount for 150 basis point move. That's just the way it works.

Curtis Worcester:

Yeah.

Chris Del Col:

But the bond market, for example, if you look at the short end of the curve, 272 year is pricing in those anticipated seven moves by the Federal Reserve. And if they end up doing 10 moves, if they do, maybe that rate needs to be higher. But at this point, it's pricing in the seven that Federal Reserve chairman Powell has said to the market, "we are going to do seven moves of 25."

Ben Smith:

So Chris, I guess you want to make a point about bond and interest rates too, right? So what you just described here is, "Hey, over the next two years with Fed, Powell and the Fed Reserve raises that short term interest rate that eventually this pricing, and that the bond market believes that those rate increases are going to happen to get the rate up to 2.7." So that's why it's already priced there, even though they've not done that yet-

Chris Del Col:

That's correct.

Ben Smith:

Right? So the market is [inaudible 00:34:39] Fed, doing this. The market when looked at, what do we think interest rates are going to be over the next two years to compensate people for what will happen? So the market then reacts and makes it then straight what they believe that average rate will be over that timeframe.

Ben Smith:

So elongate this now, right? We've been talking about inflation a lot, and we've thrown out like a seven or 8% inflation number. So if inflation was going to be more permanent, this is just in my mind how I'm thinking about this, if inflation was going to be sticking around over the next 10 years, you just described an interest rate of 3% for the 10 year, right? That it went from one and a half to three, not one and a half to seven, not one and a half to nine, one and a half to three. So what does that say to you about what the bond market's thinking about? Where inflation's going to be over the 10 years?

Chris Del Col:

Well, the bond market is the best predictor of where inflation will settle in over the long term in a normal environment. I don't know if we have the time to go into the Federal Reserve balance sheet that has put interest rates, long term interest rates at an artificially low rate over time. But in normal times, independent of that Federal Reserve action of buying bonds, the bond market is the best predictor of where long term inflation will settle in. And so if you look at it that way and ignore the balance sheet factor, it would be saying that a 3% tenure is implying that inflation would be somewhere probably in the two and a quarter percent long term.

Ben Smith:

And so, to get to that point, that would be assuming, it's again outside of the Fed buying bonds and causing pressure in industries to go down. But say, that 3% level, well, you get compensated for holding your money longer, right? So the longer I go out, I get some level of maturity risk and holding on to debt for longer. So, that plus inflation, again, depending on what the issue is, if it's not a treasury, maybe credit risk on top of it, all that leads to that rate, right, that 3% rate that's happening there. So I think an important point is, the Fed is keeping rates a little bit lower, maybe by 1%. Maybe there's additional on top of that if they weren't holding into these other bonds and another bond buyer in the market to, but my larger point is that the bond market today is really not saying in total, that inflation is a structural resident, I guess, in interest rates here, going forward over the long term.

Chris Del Col:

Absolutely. Yeah.

Ben Smith:

Right.

Chris Del Col:

Then the tenure would be trading at 9%.

Curtis Worcester:

Right.

Ben Smith:

I guess that's my larger point when we've been receiving these questions from people like, "Oh my goodness, inflation. We got to do all this today. We got to be more aggressive with our investments because I need to earn 10% because inflation's [inaudible 00:37:58] eventually going to be eight and nine. And I got to earn more that I'm going to have for cost to keep up over my entire retirement." And I guess what we're saying here is, what we're seeing in prices today says, really, that we don't need to change our investment strategy because of what we're seeing. Maybe in more temporary terms for inflation numbers today, would you agree with that?

Chris Del Col:

Absolutely. Yeah.

Chris Del Col:

I was going to bring this up earlier and during the initial stages of inflation, rearing its head over the last year and a half. The question kept being asked, "Is this sustained inflation?" But nobody was really saying, "Well, what's the definition of sustained inflation?" Are we talking, is it going to be around for two years?

Ben Smith:

Mm-hmm.

Chris Del Col:

Is it going to be around for six months? What is short term for those? Janet Yellen was saying, "I think it's temporary. The supply chain issues will go through". But even she wasn't saying in six months, or maybe she did comment on some time frame. But to your point, we're dealing with an inflation issue that is addressable by the Fed. And it's a temporary, right? When we look over a hundred year span, it might be a little in terms of time. The level of inflation that we're witnessing today of seven and a half percent is, there's really no little to no chance of it being sustained over a long period of time. And I'll define that to say, "beyond a year". Forget about being a 10 year five year problem.

Curtis Worcester:

Yeah.

Chris Del Col:

No way.

Ben Smith:

Yeah. I think this is a good time to rotate into. Again, there's a lot of people in 2022, January 1st. Maybe I'm going back to October, November of 21 till today, and clarify today as being, say end of April early May here in 2022. A lot of what we've heard is, "Hey, inflation has impacted lots of things, maybe from stocks with recession risk, but also interest rates are going up, so a lot of bond investors have lost money." Stocks have lost money in 2022. You've had bond investors lose money here in 2022. It feels like we're losing both ways. And I think that's where it's a little alarming from an investor perspective, because in other environments we've typically seen it in the 2020 pandemic when stocks went way down, everybody went to the more risk-averse investment and we went towards bonds.

Ben Smith:

So bonds actually went up in price and investors made money in bonds as a generality in that time period when they had lost money in stocks. So you see a counterbalancing that's happening. So I guess my question here is, is it easy for a lot of clients or any investor out there to look at this and go, "Well, [inaudible 00:40:52] inflation's this now. And in rates went up and the interest rates go from three to four, four to five, five to six, six to seven, seven to 8, 8 to 9. Oh boy, man!. I just lost a lot of money just with the 10 year Treasury going from one and a half to three. What would it be if I went from three to nine here?" And I think that's where a lot of people start really getting very concerned, very fearful, very upset.

Ben Smith:

So I wanted to ask you maybe about what's been the history, because again, this is something like inflation's never happened. Right?

Chris Del Col:

Right.

Ben Smith:

So when we've had rising rates over time, so I want to ask you about what have you seen happen in stock and bond returns over time during those time periods?

Chris Del Col:

Yeah. Well, you look at this space and time from 1930s to 2010 and you have a great example of where over the sustained time period, there was a shift in interest rates that occurred as you can see from the thirties to the eighties of 3% to 10% for the average 10 year yield. Yet over that time period, you had positive bond returns and positive equity returns. And it is within that time frame, there would be shorter segments that would have negative bond returns, but over sustained time. The cash flows coming off of bonds generated a positive return. And that's important for people to look at despite the fact that interest rates went from three to 10 and a half. I think is the peak that it shows on this particular graph or...

Ben Smith:

Yeah.

Chris Del Col:

... table.

Ben Smith:

And just so for the people that are listening on the audio version here. So we actually brought up a blog from it's A Wealth of Common Sense.com. Ritholtz Wealth Management does a really great blog here. And we wanted to show this table, so we'll have a link to it on our show notes as well. I think Chris, what you're pointing out is that from a bond side is that obviously price is moving, right? So that part of it, is you're seeing interest rates move and our bond prices move within streets on a daily basis. But because coupons maybe for a lot of bonds happen on a semi-annual basis, you don't actually get this kind of big income payment until six, maybe even six months later after that move happened.

Curtis Worcester:

Maybe at the very worst.

Ben Smith:

Right. So you'd get half of that coupon six months later than the other half, one year from it. So it might take a while for you to get that income to offset some price change if interest rates are going up. But I think your point is obviously with bonds. They're repricing their interest rates as well. If in rates are going up, then over time, you are getting a higher coupon. So you're getting higher income payments as they go as well.

Curtis Worcester:

Right.

Ben Smith:

I think it's important that you gave us this context here because I think it's easy to look at this and go, "Hey, we've just experienced last four months or five or six months losses on stocks and bonds with inflations have been there." And to your point about, "Hey, we need to look longer term." And just because we're seeing something in the moment, even a year or two, maybe completely different than what we've experienced here so far in the first few months of 22, right?

Curtis Worcester:

Right.

Chris Del Col:

Right.

Ben Smith:

1. So again, we'll put that linked in the show notes to this table for you guys to check out. But I think the important part is by decade, again, longer term investors, you have been rewarded by continuing to stay invested in stocks and bonds, even in spite of inflation, even in spite of rising rates. And I think that's the important piece to know, because I think there's a lot of fear out there that we've been hearing from our clients and perspective clients. "Well, just go to cash, don't take the losses, the near term". Isn't that better than losing money on a daily basis forever in bonds. So Chris, what would be your counsel to the people that are just saying, "Time to go to cash time, time to get out, just get out of the whole thing and just lock in what I have."

Chris Del Col:

Yeah. Well, cash is not going to get you there in terms of your long term targeted returns and trying to time the market of getting out today then get back in at some point is also not going to get you there. It's too difficult. So I think that remaining invested, and when it comes specifically to bonds, you can target certain instruments that would be more favorable on the unknown interest rate environment that we might be looking at, staying shorter in duration for example.

Chris Del Col:

Like the yield curve is a, it's not a curve, it's a line today, right? We're basically a 271, 2 years out to a 3%, 30 year that is not much of a curve. And so if you can earn that two and three quarters type of yield on a two year asset versus taking the price risk of a longer instrument, earning the same 3%, two and three quarters, then you'd be better off on the shorter duration. And that's something we're recommending for example.

Ben Smith:

Mm-hmm.

Chris Del Col:

But not cash, right. The two and three quarters on the two year is already pricing in the Fed moves that we have and cash is at zero still or effectively zero.

Ben Smith:

Right

Curtis Worcester:

Yeah. That's great. So we've reached the end of the conversation, Chris. I do have one more question for you not inflation related. I promise. Well, it might be a little bit,

Ben Smith:

Maybe it is.

Curtis Worcester:

Yeah. You never know.

Ben Smith:

Yeah, it is.

Curtis Worcester:

So obviously the name of our show here is Retirement Success in Maine Podcast. I know you're not directly located in Maine here, but I still want to ask you, how do you plan to find your own personal retirement success when you get there?

Chris Del Col:

Personal success in retirement. I think one thing that we always talk to our clients about that we can't control the returns on the markets on our assets for sure. And having a good understanding of the money that I'll need to live a comfortable lifestyle in retirement is finding that number, finding the tolerance level around that so that I can go and do the things in retirement that I want to do.

Curtis Worcester:

Mm-hmm.

Chris Del Col:

All within the parameters of what it is that I can spend. And I think that's so important because then you can just comfortably live in retirement.

Curtis Worcester:

That's great.

Ben Smith:

Well Chris, thanks for that answer. And I appreciate you coming on. Obviously folks that have listened to our show, they've seen you a little bit through our round tables and our discussion on where things are, but very specifically into inflation. Really appreciate coming on. Really educating everybody about kind of some of the levers that are at play, where we are today and some things that we could be doing to keep up with where things are with our keeping our retirement to last. So thanks for coming on. We really appreciate it. And we'll, we'll catch you next time.

Chris Del Col:

Well, thank you very much for having me. As you can probably tell, I love talking about this stuff. So if anyone wants to follow up on the discussions like this and what have Fed has to do, it's very enjoyable to me. So thanks for having me.

Curtis Worcester:

All right. Appreciate Chris.

Chris Del Col:

All right, bye.

Ben Smith:

So now everybody's been introduced to Chris and some of his previous segments. But good to have him be a dedicated guest today for the first time. Again-

Curtis Worcester:

Yeah.

Ben Smith:

... he's such a really great resource for our entire team, especially around his knowledge around fixed income.

Curtis Worcester:

That's right.

Ben Smith:

Hopefully we're able to convey that to you and his expertise and how he really informs a lot of our thinking at Guidance Point Advisors,

Curtis Worcester:

Yep.

Ben Smith:

... and our knowledge on fixed income. But one thing I want to point you to is, we will have, obviously we talked a little bit about a chart and some returns and stocks and bonds over time.

Curtis Worcester:

Yeah.

Ben Smith:

We want to source those things, of course, and make sure you can see that. So if you go to our website, if you go to blog.guidancepointllc.com/64, because we're episode 64,

Curtis Worcester:

That's right.

Ben Smith:

... you can check out that link there. We're going to have a little bit of Chris's contact there if you want to reach directly out to Chris.

Curtis Worcester:

Mm-hmm.

Ben Smith:

So that you can find as well. I want to tease, we have a really awesome episode and a guest coming up on episode 65. I said in the intro, we're going to talk Medicare. Right?

Curtis Worcester:

Yeah.

Ben Smith:

So Medicare and we become eligible at 65. Well, our episode's 65. So it's good time to put that together.

Curtis Worcester:

That's right.

Ben Smith:

So that was our long plan on episode one, as we got to wait for 65 episodes to get to Medicare.

Curtis Worcester:

We actually recorded it three years ago and we've just been working.

Ben Smith:

Yes, exactly. You're right. Yes, so we have a really great guest coming on. Jeanie Alexia that will do a great job walking us through that. So look for episode 65,

Curtis Worcester:

Mm-hmm.

Ben Smith:

But appreciate everybody tuning in, catch us. You can catch us on YouTube and, of course, the additional audio links too. But appreciate everybody's viewership and listenership and catch you next time.