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An investment advisor is a lot like a mechanic. They help you diagnose any problems in your portfolio and recommend the best action to take. 

If an investment advisor is like a mechanic, then our economy is like a car with a broken windshield and chipped paint. But the engine still works as good as it ever did. 

In this episode, I’m sharing some of the key economic indicators. And how understanding these indicators reduces your stress and anxiety about the future.  Listen to the episode now. 

Show Highlights Include:

  • The top 3 economic indicators that help you understand where our economy stands (even if you’re not an economist) (4:23) 
  • Why longer period loans aren’t as affected by the Federal Reserve as shorter term loans (9:42) 
  • 2 ways you can get higher yields from your bonds (10:24) 
  • How understanding economic indicators calms your anxiety and fear for the future (18:44) 
  • Why the economy is like a beat up car right now (and why you shouldn’t worry about it) (18:58) 

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/ or call us at 805-409-8150.

Read Full Transcript

Welcome to Pension Attention, the best show for first responders who want to take control of their finances.

After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]

Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are. At whatever stage in your career you are in, in order to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you not only take control of your finances and build the life you deserve. Before we get started today on this week's episode of Pension Attention, to find out more about myself or my team here at ONE Fire and Police, you can go to our website PensionAttention.com or give us a call. You can call us at (805) 409-8150. And for those listening right now who have not already subscribed, please do so. You can go to our website again, PensionAttention.com. You can click on the media tab and there you can download and subscribe the weekly Pension Attention podcast and leave us a message. Leave us a comment, let us know how we're doing, it's always good to get feedback. And at the end of the day on each and every week, if you'd like to show share with someone you like, if you don't like to show, I guess, share with someone you don't like. [01:32.5]

But today we're going to talk about economic forecast and the explanation of what they mean. The economist J K Galbraith once wrote, faced with a choice between changing one's mind and proving there is no need to do so, almost everyone gets busy with the proof. In fact, further Leo Tolstoy was even bolder. He said, and I quote, the most difficult subjects can be explained to the most slow-witted man, if he has not formed any idea of them already, but the simplest thing cannot be made clear to the most intelligent man, if he is firmly persuaded that he knows already without a shadow of doubt, what is laid before him. It's interesting when you think about those quotes, especially in today's world. [02:23.0]

Now, when I talk about economic forecasts, we all have heard them in either small, tiny forms or some of us that want to read further, get a whole host of other aspects when it comes to what economists are forecasting for markets for our economy, for the world economy, things like GDP or GDC, items we'll talk about today. And Randal Curtis, our Resident Deputy Chief Investment Officer here at my firm, One Capital Management told me one time that an economist's job in general is be less wrong, more often. And I always thought that was an interesting way to say it because as we all know; we don't know what tomorrow holds. In fact, when you read a forecast, these are mathematical assumptions based on statistics and data that they are receiving, but just as an investing historical performance does not reflect future gains. So, a forecast is just that. It's something we are projecting as a potential high probability sometimes even in the future. [03:31.6]

And although advisors and investment managers and our team here, One Capital Management, we look at these all the time. We read them, we study them, we then implement them into our own strategies for designing and managing our client's deferred comp plans. And I thought it'd be really good to take this subject matter and talk about some of the main, the key ones I should say that we go through and then really more let's, you know, what we're seeing and how we're seeing it. Each one of these topics I'm going to bring up today, you can further explore a great website or resources, I've always said before for very easy to understand economic and investment jargon have you will is www.investopedia.com. So, any one of these aspects, you can go through further, but I can buy old a notes page here over the past couple of weeks of some of the items that I sit with, with our team here, our portfolio management team, and really put together my breakdown of some of the key economic indicators. [04:28.2]

And we're going to start out with number one, Gross Domestic Product. Now, first and foremost, we know this as GDP gross domestic product is essentially it's the broadest indicator of the economy. It measures the value of final goods and services produced here in the U.S in any given time period. So again, it's probably the most closely watched indicator as well, because it serves as a guidepost almost for the federal reserve interest rate policy. And really for budgeting for both government and private industry. As an example, here at One Capital Management, we're always examining the trends that are driving GDP, either up or down and understanding the forecast is able to depict in a sense the future direction, quarter by quarter. So gross domestic product, otherwise known as GDP. The next one I want to talk about is employment. This is a big one. We've heard this one probably the most in the past year and really over the past couple years, because coming into Trump's administration, or actually I should say through Trump's administration, we had the most historically low unemployment rate in United States history, which is an astonishing feat. [05:35.2]

In fact, one that was overlooked sadly in his four years in office, but employment, so if, if gross domestic product is the broadest indicator of the economy, as I mentioned, employment is one of the most personally felt. I think we all can agree with that. So, these are people's jobs that we're talking about. So, although we hear them as a number and as a stat, there's actually a real, more emotional and personal aspect to this number. Now two distinct metrics make up the employment forecast. And this is items that we don't necessarily go through when you just hear unemployment's up or down, but there's two distinct metrics. The more important one is the payroll report. It's essentially a summation by the Department of Labor, the DOL of how many jobs the economy has created or lost each month. And this data is broken down and broken out by sector, such as like manufacturing, mining, healthcare, things like that. [06:27.5]

Now it's good to note here that simply to keep up with population growth, the economy needs to add, and this is a rough number, but it needs to add over or more than 100,000 jobs every month, essentially around 1.2 million jobs per year. Otherwise, the unemployment rate will rise. And that right there is the other rate that is closely watched the unemployment rate. It's a simple division of a number of people who have looked for work in the prior four weeks prior month, but who do not have a job by how many people are currently in the labor force. So that simplicity, bellies some underlying concern about the unemployment rate. Now, one key, one potential workers who aren't actively working or actively looking for work aren't included in the calculation. Now we can go further in depth on this because there are certain different types of unemployment rates, but I want to give the highlights broad stroke, essentially that it's, again, it's a simple division of the number people who have looked for work in the prior four weeks, but do not have a job and that's divided by how many people are currently in the labor force, which brings us to number three, our next one, which is interest rates. [07:40.3]

This is obviously another one that's been largely talked about lately. And you can see why I thought this week would be really good to go through some of these common economic indicators and forecasts that we see, because I think more than ever before in the past, probably 18 to 24 months, we have been pushed a lot of these forecasts like on all the news channels. And it's good to know first and foremost what they are and why they matter, but interest rates, this one is of tremendous interest to all of us, largely because we tend to be borrowers, okay. And lenders, banks who are lending us the money and typically for mortgages, this is a very key indicator. So, interest rates, again, they're hugely interest to borrowers and lenders, because again, the includes individuals on the lending side, trying to get some return on their bank savings. I've said this before, but sometimes I break it down of what is a bank and how does a bank make money? Believe it or not, I've asked that question before. And it's kind of looked at sometimes with the deer in headlights and we all know the answer, but it's somewhat hard to explain. [08:43.8]

But what a bank essentially does is takes your money, gives you a rate of return, let's say, on a CD or a money market or a checking account, which obviously we know right now is super low. And they lend that out at a higher rate. So as an example, and then we wish this was the case right now, but if a bank hypothetically, it's going to give you 1% of your checking or savings account and they'll go lend it out for 4%, they make a 3% spread. That's the way interest rates work. So again, it's why it's hugely popular for lenders and also us as consumers, because we all want the lowest rate on our borrowing costs. And typically, almost everyone is either in one of those camps, either a borrower or a lender. So, the level of short-term rates, and this is such that are used by banks when loaning each other money overnight, this is also known as the overnight lending rate. This is set by the federal reserve through its what's called open market committee. You've probably heard that word before FOMC - The Federal Open Market Committee. So usually this is at a regular scheduled meetings. [09:42.2]

Now market interest rates, which has includes those in money markets and offered on consumer products again, such as CDs, these follow the Fed's lead, if you will, but they're also subject to other influences. For example, risk transaction costs, expectations of inflation. So generally, the longer period of the loan such as with a ten-year treasury bond or mortgage, the more important market factors become compared with the federal reserve’s actions. So, we forecast both what we expect the federal reserve to do in the near term. And to what extent that will affect the direction of long-term interest rates. And for those clients listening, we talk about this a lot when it comes to our fixed income or our bonds, because the more we should be able to get a higher yield for two main things, either it's a more of a risky company, which is considered high yield. We've also heard that term in the eighties called junk bonds, but we don't need to get into that necessarily. But if you think about it, logically, if we're going to take on more risks, we would require more rate of return, right? More interest rate. [10:45.4]

Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the DROP program? Go to www.pensionattention.com to find out how we can help. [11:01.0]

Now conversely, the second piece, and we just mentioned it here, why interest rates are so important is that the longer we go out in terms of duration, we would expect to get somewhat of a higher return because we're more susceptible to interest rates being increased, which as I've said before, many times when you look at a fixed income or a bond is a really good example, think of it like a Seesaw, okay. When the interest rates rise, your bond price will go down. And people will ask this sometimes as to why that is. And I want to just stay one more step into this, and we're gonna go into the other economic forecasters, but I want to talk about this today as we're talking about interest rates, when you look at a Seesaw and the reason why when interest rates rise, which by the way, when we're at historically low rates like we are now, we most likely will see a rise in interest rates. Also, with regards to inflation that we might be seeing, which is the next topic I'm going to bring up when it to economic forecast. [11:54.6]

But here's the reason why and think about it logically. If I bought a bond last year and it was paying me 2% and this year prevailing rates are more up towards two and a half or 3%, I'd want to liquidate my bond or my bond is worth less because I can go out on the open market and get a new bond for higher interest rate. That's why you have, what's called a discount and a premium when it comes to fixed income, a much broader topic to discuss, but that's why interest rates is one of the more intense subject matters, if you will, when it comes to economic forecast. GDP employment, interest rates, those are the top three. So, I want to bring them up first. Let's go into a few more. [12:32.5]

And the next one, as I mentioned is inflation rate. So, inflation is generally, and this is something I talked about a few weeks ago, on the episode I call it Inflategate. Inflation is generally the rising price of goods and services or why things cost more. We know it that way most, right. And it's measured by the Department of Labor, the DOL using a sample and it's dubbed a market basket quotes, of what people in the urban areas in the U.S actually buy each month, most people don't realize that. Then each month data collectors check on the prices of those items. Now from that research right there is where we get what we know as, and you probably have heard this a lot as the CPI, the consumer price index. So, a component of that index, which is the core inflation rate, something that's been talked about lately, which includes the more volatile prices of food and energy. So, in economics, we learned that there's two different types of the bigger, broader topic here, but there's headline inflation and core inflation. And core inflation, which includes, again, the prices of food and energy, those are really closely watched. And we actually hear one capital management look at both. We need to understand both types and different types of inflation. [13:44.0]

Now economists generally believe that moderate inflation of around 2% is the best for an economy. Prices that are rising too quickly because consumers, frankly, heartburn of course, but prices that are flat or falling are also a problem too. So, this condition is actually known as deflation, which actually makes debts more expensive to pay back and actually can lead to declining business investments. And again, I said this a couple weeks ago, but inflation not always is a bad thing. We want to have some sort of steady inflation, and we need to understand that inflation number relative to your GDP for your country, your interest rates, those all are intertwined. So, inflation rate is the fourth subject matter we want to bring up when it comes to economic indicators. Now I want to get into a few lesser knowns here, but really important something we look at, okay. [14:32.4]

Business equipment spending sounds crazy, right? How much businesses are laying out in the investment is actually critical to other businesses in guiding their own spending. So, in making our forecast for the direction of business spending in the quarters and years ahead, we actually followed two indexes from the census bureau, durable goods, shipments and orders and business inventories reports. These are really good items to look through something we do here at the firm, and just want to bring that up as another indicator that we see as business equipment spending. The next one is energy. So, like it or not petroleum and natural gas remain incredibly important to the U.S economy. So, knowing where oil prices are headed is actually critical to businesses of all stripes and colors from, I mean, shoot from airlines to manufacturing companies, plumbing companies, I mean, make it up, right. You realize to all of us. So, consumers planning, their family budgets and vacations, like all of us too, that matters when we talk about you know, what it costs at the pump for gas. So, we're always looking at the department of energy reports looking at what commodities traders are looking at petroleum engineers. These are all really good indicators to help us with the forecast around energy. [15:40.3]

The next one is housing. So, in addition to the roof over our heads, housing is an important sector in the economy. So, there's three statistics from the core of the coverage on housing. Sales of existing homes and the prices that those sales fetch quite honestly. And that's a big one nowadays currently. Sales of new homes and housing starts, which actually reflect new construction that is counted in GDP. You see how something as simple as housing can actually have a lot of impact into things like GDP. So, because housing is a diversified and I would say highly regional industry, our reporting and what we want to look at, and the forecasting are really informed by other research, as well as I would say, conversations within the firm here within our traders, but also within certain reports that we're looking at that have to do with other aspects like energy and inflation, interest rates and where housing comes into play there. [16:35.6]

The next one is retail. So, consumers us, we are the engine of our economy and when our spending lags businesses, they feel it wouldn't you agree? We saw that most notably last year. Now we examine trends. We want to look at trends when it comes to retail, that influences habits such as falling gas prices to forecast, you know, what they'll be buying in the future. And there's a lot of details that we can go through inside retail, but that's a key indicator that we look at as well. The next one is trade. So, all nations of consequence trade with others. That's the beauty of our global economy nowadays. So those that buy more from other countries than they sell in turn, have a trade deficit. We've heard that term before. And that that's been the story frankly for the United States since the mid-1970s. Now how big that deficit will be and whether the changes will result from more or maybe fewer imports or more or fewer exports is really the crux of any kind of forecasting when it comes to trade. So, we always want to look at specific sectors, let's say agriculture and see where the United States is doing, which are doing well, selling abroad, as well as what items such as maybe smartphones as a great example, we buy from overseas. So, there's different types of sectors and different types of products that we have in the United States, excel on importing versus exporting and vice versa from other countries. So, we also want to discuss when it comes to trade the strength of the dollar, which is another aspect to how our dollar versus foreign currencies and how that affects the trade trends. [18:08.0]

So as a quick recap, today's Pension Attention podcast was really focused on talking through on a high level, the main economic indicators and forecasts. Everything from, and I'll go through the list here that we talked about, gross domestic product, employment, interest rates, inflation rate, business equipment spending, energy, housing, retail, and trade. And for all you listening right now, for more information on each one of these, you got to reach out to an advisor, find that good, experienced professional who has an economics degree maybe, or really understands these things to go more in depth, because I'll tell you what the reason, I want to bring it up today on this show was because these indicators, when you know what you're looking at, it's really important because it actually calms some of the fears that we see. I actually related this a lot to a mechanic, as an example. For someone who knows the engine of a car, when they open up that hood and they look at that engine, they know exactly what they're looking at. They know what's wrong, they know what it needs to be changed. They know if it's good or bad, if it's even salvageable. And that's a lot like what an investment manager, someone who designs, portfolios with experience and knowledge should be doing for you to look under that hood and say, Hey, you know what? The windshield might be cracked. The paint might be chipped, but this here's a good engine. That's a lot of like what we're seeing here in the U.S economy and really the economy as a whole, we want and see the car as damaged. [19:29.3]

We went through COVID, you know, in the past year, we've gone through a bunch of stuff where governments putting money out there. So, these indicators, when you look at them and know what you're looking at and really study them, actually helps us say, you know what, it's not as bad as I thought, or maybe in some aspects it's worse than we thought and we need to understand how that relates to other areas. So again, finding that advisor to help you walk through, although we may not want to go through the minutia of each one of these, but find someone that you can build trust in because that's their job to be able to do that. [19:57.3]

And if you haven't found that person and you want to reach out to us, you absolutely can do so. You can give us a call here at the firm at (805) 409-8150. You can also go to our website at PensionAttention.com and you can actually click and set some time right there with myself or Toby Rodriguez, my advisor partner, or any one of our advisors here at ONE Fire and Police to help sit with you to make sure we go through your deferred comp plan. On today's show how some of these economic forecasts can actually help paint a picture for you not only for this next year or two, but also into the future when it comes to your planning, how your pension is involved with these kinds of things. I mean, a lot of these economic indicators we talked about has a lot to do with how pensions being funded for example. Everything from your Cola, your cost-of-living adjustments, your MOUs that are being signed, there's a lot of economic indicators that the city uses to understand the same way we are trying to understand it from a market perspective. So, find that advisor and build that trust in them to help you set your plan in place. [20:55.1]

I want to thank you for listening to this week's episode of Pension Attention. Before acting on anything discussed today, remember speak with a financial advisor near you about your specific situation, or again, if you'd like our help, you can visit us at PensionAttention.com, give us a call (805) 409-8150. [21:13.9]

The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [21:37.4]

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