We do get questions about why do we own a certain company over another company and it appears that one has more sales than others or something on the surface would make it look like one was better than the other. But most of the time folks aren't digging into the actual ones underneath. They're not looking at the denominators. Welcome to Keenan Retirement, a show dedicated to helping you thrive before and during your retirement years.
If you are looking to grow and protect your wealth and want to make the second half of your life the best half, then listen in as well advisor Bill King and his host sort through the key issues that you need to know in a lively and candid way. Hello everybody. Welcome back to Keenan Retirement. I'm your co-host Steve Sandesky and joining me today.
Is Bill Keenan and Matt Wilson. Gentlemen, how you doing? We are good here Steve. We're just recently back from the annual Barrens Top Advisor Summit in Salt Lake City.
We're taking in the information we learned there. Good. Well, hey, I know this probably isn't on our agenda for today, but since you mentioned that, is there anything that you picked up from the conference that you want to share? Any idea that may have come out of that that you thought, hmm, I like that.
That's something that I can use as I work with my clients. A key theme at the event this year was really focusing on the client experience and it was about execution, which you put simply is do you do what you say you're going to do? The second piece was making sure that we are making it easy for clients to work with us through technology and advancements. And then the last one was making sure that we are creating a positive experience.
I mean, how do we make the clients feel emotionally? And it doesn't mean that there's always positive solutions and positive outcomes because we deal with a lot of different factors. To clients lives. I mean, as people get older, there's health issues and there's even death in some cases and those aren't positive experiences.
But how can we shepherd along our advice and our counsel in a positive way? That speaks to really having our advisors and ourselves trained to have empathy with folks. Wouldn't you agree? Because we're going through a lot of things that life throws at us, throw some curveballs at folks and just being there listening, being very present, very empathetic.
Like Matt mentioned, people lose spouses. Folks have to, in some cases, cut backspending. I mean, I know that's not as dramatic as losing a spouse. But there are things that we have to advise folks.
We have to be empathetic and people hire us to tell them the truth about their situation. And again, it's not just bad things. It's through all things that folks are going through. And that technology piece, Matt mentioned, you know, I think the last house that I purchased a number of years ago, I didn't even see a paper contract.
I signed everything online, initial, initial, initial, sign, sign, sign by clicking a mouse. And in the financial world, we're not up to that level yet, are we? Not quite. There's still a lot of paperwork floating around and we're trying to make it as easy as possible and folks to engage.
But, you know, there's a little ways to go. So, and you know, Steve, this event, as you know, you've been to the Barons' conferences before. It's truly some of the very top advisors in the world getting together, sharing best practices, comparing notes. We try not to miss that event.
It's an invite-only event. I think that's about the 10th year that we've been to that event. Yeah. Well, it's always good to hear some of the things that you're picking up from that.
And I know you guys are one of the top firms there and getting that invitation. And yeah, I'm so happy to have you guys be able to share that. All right. So on today's conversation, we are going to talk about some numbers.
But before we get to that, I thought I've got three trivia questions for you. So I don't think these will be too tough. You may not get the answers correctly. I think we'll have a little fun.
Okay. All right. So with that as a setup, okay. First question is, who was the first billionaire in the United States?
John D. Rockefeller. Yeah, I was going to say Rockefeller. Well, that's what most people would say.
And I think for a long time, the information was that it was John D. Rockefeller. But more recent information says that it was actually Henry Ford. Oh, wow.
Okay. Okay. Question number two is, which US bill has the shortest lifespan in circulation? So would it be the $50 bill, the $20, the $10 or the $1 bill?
One, the 20. You would both be wrong. It would sure seem like the $1 bill, wouldn't it? You think they'd wear out?
Yeah. Well, according to the internet, which is never wrong, it says it's the $50 bill, which has a lifespan of 3.7 years. Okay. So that is very counterintuitive, at least to me.
I have a theory for that. Okay. People get a $50 bill. They go save it.
So they put it in the bank. So it takes it out circulation. Now, that could be true. Yeah.
Maybe that's the answer because that's positive thinking on people saving money. We see that's just not that many people say money, man. Yeah. Okay.
Well, I'm going to go with that. That's not possible. Yes. Okay.
Third question is, how many times would you have to fold a bill before it tears? I thought you asked us this about three years ago at one. Yeah. So check in your memory.
Eat might have. Four hairs. Something like a hundred. Yeah.
I mean, I had an outrageous guess of a thousand popped in my head. Times format. Four times four. Four thousand.
Four thousand times. Wow. This is some really interesting information. I'm sure for our listeners that we're logging into a financial show to learn about money.
Yeah. Yeah. Yes. So one thing I have on my desk, most people don't notice it, but I do have a jar for it.
I'm a couple of shredded dollars on my desk. Got it from the Federal Reserve. They take my circulation. They shred them.
Nice. Another great piece of information. I'm going to give you a bonus question. So a lot of the listeners here are either nearing retirement or they are in retirement.
And some of you are interested in starting a new business once you retire from your career job. So what is the percentage probability that a new business will still be around five years later? Less than five percent. I had five percent in my mind.
Since Matt said it, I'm going to say four and go for that price is right. Well, you guys are both way off. Oh, okay. One.
You're going the wrong direction. Okay. According to the Small Business Administration, 48.2 percent of new businesses will still be around after five years. Wow.
Wow. That's promising. Yeah. I guess they're happy they're getting paid back.
Yeah. I'm still concerned. Right. That's their maybe I'm still concerned about maybe that data set because what I've learned over the years is most small businesses to fail.
Yeah. So I'm not sure about that, but I'll go with it. Okay. And here's another one from the Small Business Administration.
So this is a bonus bonus question. What are the top three reasons why a small business closes? Well, I mean, it seems like some of the obvious ones lack of revenue would probably be one of them. That's the number one reason.
Yeah. We're thinking this idea. Yeah. You know, then you can go into the marketing and everything else.
Well, that would be low sales. We'll include low sales. Yeah. So number two was the owner retires.
Okay. And number three is they sold the firm. So there you go. So two of the three were actually insinuating success of some sort.
What weren't they? I guess there was an exit. I guess. Yeah.
Yeah. Kind of along the same topics. I saw this on social media and someone was asking about starting a restaurant and the response. Was you're better off lighting your money on fire than to start a restaurant.
Well, that wasn't very encouraging. Just go to the restaurant. Yeah. The difference is starting your money on fire, I think, is against the law, isn't it?
I guess. I guess. All right. Well, enough with trivia, guys.
So yeah. Today we want to talk about numbers. And we hear numbers in the media all the time, whether it's statistics, whether it's other numbers that the media throws at us to try and grab our attention or maybe make us think, Oh, wow, things have never been that bad before or maybe the reverse things have never been this good before. And so what we really want to do is help each of you think about what these numbers mean, how to put numbers in context and how to understand numbers so that they make sense.
So if you hear somebody say, Oh, you know, debt has never been higher than it is today. Well, that may be true on the surface. But when you compare it to something, then it may put it in context and it may not be nearly as bad and it may actually be a good thing. So anyway, just a little bit of a context there and Matt, I know you've got some things along those lines that you want to start us off with.
You know, the thought about this podcast was around an article that I came across on CNBC back at the end of February. And the headline was consumer debt hits $4 trillion. And it was the first time it's ever been that high. And there was a mountain chart, right?
That just looked like major drama. Oh, yeah. So they have a chart looks like it goes back to 1965 or so and it just, yeah, it looks crazy. The debt and the different sources of debt and how much it's grown since that period.
You know, I look at that. My first thought is, well, this is completely out of context because all we're doing is talking about one component of the balance sheet. There's no mention of assets, no mention of income, no mention of growth of the economy and everything else. It's just what's the debt level?
The other thing that you'll notice if you see this chart, maybe we'll link to it in the show notes is that it never has gone down because debt is a function of assets in most cases. And so as assets go higher, generally that goes higher. As economies grow, the numbers get bigger and the debt levels get bigger and the asset levels get bigger. I mean, everything gets larger.
So we have to take it a step further and look at them in a ratio analysis. We have to compare it to something. And the reason we want to compare it to something is because then we can look at trends over time and we can then even compare against, like specifically if we're looking at investments, we can compare against other companies within an industry. And so when the media talks about these things and they don't give you any context, I mean, that's a red flag right there if you're ever looking at stuff like this.
They give you the numerator and never a denominator. That's right. Trying to look at things with perspective, which we always talk about perspective. We've been talking about it for, I have for 27 years.
We've been talking about it for nearly four years on the podcast. And yet here is another example of incomplete information and data. So you mentioned this four trillion of consumer debt, but Matt, I'm curious, do we know what the actual net worth of households is? Because I'm kind of curious if this four trillion is a big fraction of the actual net worth of households or maybe that would help put it in perspective too.
Yeah. And this is data that I looked at on a pre consistent basis. So right now, the end of Q4 2018, total assets held by consumers is over $124 trillion. So we have four trillion in debt, consumer debt.
Now, that's not all debt that consumers hold because you have mortgages, you know, and their student loans and there's some other things. So total debt is about 15 trillion. Consumer debt is mainly credit cards, unsecured loans is what the bulk of those are. And so that gives us a net worth of over $106 trillion.
So when you net those out, you know, these articles like that, though, they make you believe that we've been going backwards. That's what the debt is just compounding and growing exponentially and consumers are getting farther and farther behind. And the reality is that's not true. I mean, the previous high before the financial crisis in away to nine, we had net worth of $69 trillion.
It's almost doubled net worth since that period. You know, that doesn't mean that everyone's doing well. Of course, these are averages. And, you know, again, with our kind of analysis, averages can be skewed by large numbers and small numbers.
You know, we talk about median sometimes as well, which takes out the impact of some of these large numbers. But by and large, consumers are doing very well here in the US. Now, to take this debt a step further is, yes, we have four trillion dollars in debt. But what is that as a percentage of their personal income, of disposable income?
Right. Because that is, OK, well, if we have all this debt, is it costing us much to carry it? And we are at some of the lowest levels in what we call the debt service ratio that we've been in the United States in the last 40 years. We talked about doing this episode really as kind of a conceptual look at these ratios and talking about having to have the denominator in these things when you're looking at top line numbers.
And we weren't necessarily going to make this occur in defense economic outlook, but actually it's pretty rational to think that some of these things Matt's talking about because he has to stay right on top of them. We're able to relate it to exactly what's going on right now. So I think that's helpful. You know, when we look at it from an investment analyst viewpoint, we look at it from a corporate standpoint.
And that would be if we're going to invest in a company, are they able to service their debt? I like to compare that to the economic side of things. What's happening here in the US economy? Because again, the media just wants to throw out one number in a point of time and it doesn't tell us the story.
You know, liquidity and solvency ratios are very common ratios that we look at when we analyze investments and its ability to meet short-term and long-term obligations. And that's the same thing the banks doing when they're underwriting a mortgage. You know, they're determining what's your ability to pay this back as an individual. The same thing with a corporation when they're issuing debt or when people are considering purchasing some of the common stock of that company.
It's what's the ability for them to maintain a profit in addition to paying back their liabilities. Because if those ratios aren't very good, that doesn't look good. You know, to your point earlier, Steve, about the small business association. I mean, if you can't meet some of these requirements, you're not going to be in business very long.
Well, man, I think one of the points that you make here is that in Bill, you touched on this as well, is we're not trying to turn the listeners into numbers junkies, but we want our listeners to be consumers, to be able to understand these numbers, and also understand that you have people like Matt, Bill, the rest of the team at Keenewalt Advisors, who do dig into the details and they do understand how to put these numbers in perspective. They do understand the appropriate ratios to put these numbers in context, and they know what numbers are good, what numbers are bad, and what numbers we don't really have to pay too much attention to. So just a good example here, I think, in this conversation of letting folks know that you guys are really on top of and understand how to put these numbers in context. So I think it's meaningful to hit a few of them here in the time we have remaining.
So much of when we look at investments, but then also with individuals in the financial planning, trend analysis is a big component of it. It's how are we faring over time? It's easy to just get focused on today and what's happening today, and is the market moving higher or lower? Is US debt higher or lower?
What's the apocalypse, do your speak? And when we can take a broader view and we can take these ratios and look at a trend analysis, we're able to identify, yes, what direction are we headed? Because yes, some bad data doesn't necessarily mean that trend has changed significantly. Some of the things that I think should almost always be quoted in a ratio format is the debt level in the United States.
Whenever we talk about debt, we should always compare it to GDP. And there's a few recessions here and there, the GDP typically always goes higher. That's right. So what are we comparing it to?
And so the debt to GDP ratio at least it allows us to compare it to history because there's so many quotes about we've never been here before. Yes, we've never had $4 trillion in consumer debt before, but we also have never had $126 trillion in asset value either on the consumer balance sheet. So Matt, you're talking here about the debt as a percent of our GDP. So do you happen to have those numbers?
On a gross level, right about 105% of debt to GDP, meaning we have more debt in the US than we have GDP. While that might seem surprising, we have been there before. After World War II, it was close to 120%. And then it came down to 70%.
But there's also some thoughts around, is there a level at which point that you can't go beyond? I mean, there are some countries in the world that are 200% and 300% debt to GDP. I had Japan on my mind. Do you have that number on your head?
Last numbers I saw it was over 300% debt to GDP. And it doesn't mean that we want to always have this unlimited spending that there's no consequences to it. But it's hard to say what the consequences are, especially when interest rates are as low as they are as well. So tell us why the interest rates being low is relevant to our debt service in the US.
Well, that's how do we pay for it? Well, you pay for debt via the interest rate that you pay on it. So debt service as a percentage of GDP is extremely low. So in a general sense, the US government isn't set to keep interest rates lower.
They are, they're supposed to be independent of the Federal Reserve, which controls short-term rates. It's not supposed to be subject to the whims of our current administration in Congress. We do know they're all interconnected. Forecasts are interest rates are going to go higher.
And debt levels are going to go higher and probably faster than GDP. Now, these are forecasts, but that's where some of the concern does come into play. If we don't make some changes, at what point are we going to have to stop spending as much? Maybe we don't ever have to, but it's just there's a fear out there that maybe we shouldn't continue to spend as much as we have if our economy isn't growing as fast as it used to.
It doesn't mean it's contracting. It's just maybe not as growing as fast as it used to. Right, and that makes sense. What it boils down to is are we preventing our standard of living from increasing as fast as it could have by spending more today than we should be?
Additional percentages that we look at too is around the employment markets, unemployment rates. And those are good to quote on percentages. And typically the media is very good at that because it does help us at least compare it to history. But sometimes where you can take those percentages and not dig into the underlying components.
One thing with the labor force that is widely quoted as a potential issue is the labor force participation rate. We had nearly 70% participation before the financial crisis in 2008. We're now at about 63%. And that is an argument that some, what we would say more bearish people would use to say, well, the economy is not doing well because there's, even though we're saying there's all these jobs, they're not very good jobs.
There's not that many people participating as there has been in the past. Well, when you look at the components that make up the participation rate, do you know what the number one reason why the participation rate is lower? 10 years hence the financial crisis? Probably going to be baby boomers like me retiring.
It's aging. Aging is the number one reason. It's not because the jobs got outsourced. So when do they take somebody off of that?
Is it 65 years old or do you know? The participation rate looks at folks that are 16 up to 75. 75? Okay.
Yeah. And that's a very wide range. We have a lot of people that retire in the 50s and 60s. And so they're considered not participating because they're retired.
You know, these things, you know, when taken out of context can be extremely misleading when they're just quoted in a vacuum. We've talked about the big picture economy. Are there any ratios you think we can bring to our listeners today that we apply in our portfolio management to specific companies? Because we do get questions about why do we own a certain company over another company and it appears that one has more sales than others or something on the surface would make it look like one was better than the other.
But most of the time folks aren't digging into the actual ones underneath. They're not looking at the denominators. It just keeps being the theme of our program today. I mean, when we analyze businesses for investment, I mean, it's almost all ratios that we look at.
And it's because we have companies of all different shapes and sizes. So unless you're using a ratio, it's extremely hard to compare one business. You might be small from a public company standpoint to a very large public company. Like Apple, Apple's a trillion dollar business nearly.
How do you compare another tech company to that that might only have a hundred million dollar market cap? We have activity ratios, which looks at how well a firm uses its assets. You know, as we talked about liquidity and solvency ratios, which just indicate what's their ability to make their short-term and long-term obligations. And then there's profitability ratios, which helps us identify how well companies are generating operating income and net income.
Are they generating more of their income from core operations? Or are they from other business activities? Then we can take that all and look at different valuation ratios. And that's how we can compare their value of their stock compared to some of their different asset balance sheet components to determine how are these compared to each other within the same industry or how have they trended over time.
I think a lot of folks that come in and stretch the surface on analysis of securities always have that PE ratio in their mind, the price of the security over the earnings per share. But there's a ratio that you like a lot better than just that price to earnings ratio. You know, one that we look at a lot is the earnings yield. So, you know, it's a little bit more comprehensive.
I mean, price to earnings ratio is pretty simplistic, which is fine. It doesn't mean that it's bad, but it doesn't necessarily tell you very much. And earnings yield ratio is going to look at the earnings that a corporation makes over its total enterprise value, which includes its assets and its debt. So it's how well are they managing their business to generate their earnings.
And companies with high earnings yield are more attractive than companies with low earnings yields. Well, Steve, have we ratioed you out today, sir? I think we're good to go. Okay.
Yeah. Okay. Yeah. So lots of good numbers here.
So, Bill, if you want to take us home here and wrap up. I think that it was important for us today to respond to some of the questions that we're receiving in the firm. And that's what I just love about our podcast is that we can take things that are coming up throughout the weeks and months in the firm and answer the questions here on our program. And today, I think, again, it was about perspective.
Yes, we talked about some of the current state of affairs. And we don't want to be just all Pollyanna. We just want to put things in perspective for folks. But we also talked about some of the analytical thinking around how we look at the broader economy and then also the individual holdings in our portfolios as well.
For those of our listeners out there that had an interest in some of this, I think we've given them some information that they can use and work with. And for those that maybe didn't have an interest in it, but maybe they do now or at least they know what's happening behind the scenes on behalf of them with their clients, their firm, or their investors in general. All right. Well, thanks for the wrap up there.
And Bill, Matt, thanks for another great show. And we'll have all the details, the show notes and links at keenonretirement.com. So please be sure to check that out. If you have any questions, you can go to the website and fill out the little form there.
And we'd love to answer one of your questions on a future episode. So thanks all for listening. And guys, appreciate it. We'll talk to you soon.
All right. Thanks, Steve. Thanks, Steve. The opinions expressed in this podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
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